diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/filing.txt b/raw/filings/0000874499/2014/0001628280-15-001182/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..4875a334971ff93011ab8ba2353c64a34aee6293 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/filing.txt @@ -0,0 +1,7323 @@ +10-K +1 +gpor-12312014x10k.htm +10-K +GPOR-12.31.2014-10K +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2014 +OR +¨ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corporation +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of +Incorporation or Organization) +(IRS Employer +Identification Number) +14313 North May Avenue, Suite 100 +Oklahoma City, Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +(405) 848-8807 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 30, 2014 , based on the closing price of the common stock on the NASDAQ Global Select Market on June 30, 2014 , the last business day of the registrant’s most recently completed second fiscal quarter ( $62.80 per share), was $5,369,083,865 . +As of February 20, 2015 , 85,684,604 shares of the registrant’s common stock were outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +21 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +44 +ITEM 2. +PROPERTIES +44 +ITEM 3. +LEGAL PROCEEDINGS +50 +ITEM 4. +MINE SAFETY DISCLOSURES +50 +PART II +51 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +51 +ITEM 6. +SELECTED FINANCIAL DATA +52 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +54 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +67 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +68 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +68 +ITEM 9A. +CONTROLS AND PROCEDURES +68 +ITEM 9B. +OTHER INFORMATION +71 +PART III +71 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +71 +ITEM 11. +EXECUTIVE COMPENSATION +71 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +71 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +71 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +71 +PART IV +72 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +72 +Signatures +S-1 +Index to Consolidated Financial Statements +F-1 +Exhibit Index +E-1 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in the “ Risk Factors ” and “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and interests in entities that operate in Southeast Asia, including the Phu Horm gas field in Thailand. Until November 2014, we held an equity interest in Diamondback Energy, Inc., or Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and natural gas interests in October 2012 immediately prior to Diamondback's initial public offering, or the Diamondback IPO. At December 31, 2014, we did not own any shares of Diamondback. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 13, 2015, we held acquired leasehold interests in approximately 188,000 gross (184,000 net) acres in the Utica Shale primarily in Eastern Ohio, including approximately 8,200 net acres acquired from Rhino Exploration LLC in the first quarter of 2014. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2014 , had spud 151 gross wells, 101 of which were completed and were producing. In 2014 , we spud 85 gross (67.2 net) wells, of which 36 were completed as producing wells, two were non-productive and, as of December 31, 2014, 41 were in various stages of completion and six were still being drilled. We commenced sales from 63 gross wells (47.4 net wells) in the Utica Shale during 2014. During 2015 (through February 13, 2015), we had spud five gross (four net) wells. As of February 13, 2015, three of these wells were in various stages of completion and two were still drilling. In addition, 110 gross (13.3 net) wells were drilled by other operators on our Utica Shale acreage during 2014. +We currently intend to drill 46 to 52 gross (28 to 32 net) horizontal wells, and commence sales from 49 to 53 gross (42 to 46 net) horizontal wells on our Utica Shale acreage in 2015 for an estimated aggregate cost of $400.0 million to $430.0 million. We currently anticipate 11 to 16 gross (four to six net) horizontal wells will be drilled, and sales commenced from 50 to 64 gross (seven to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2015 for an estimated cost of $125.0 million to $140.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2014 was approximately 32,513 net million cubic feet of natural gas equivalent, or MMcfe, or 353.4 MMcfe per day, of which 80% was from natural gas and 20% was from oil and natural gas liquids, or NGLs. During January 2015, our average daily net production from the Utica Shale was approximately 345.6 MMcfe, of which 79% was from natural gas and 21% was from oil and NGLs. +In 2014 , at our WCBB field, we recompleted 91 wells and spud 29 wells. Of the 29 new wells spud at WCBB in 2014 , 21 were completed as producing wells, five were non-productive and, at year end, three were waiting on completion. In the fourth quarter of 2014 , production at WCBB was approximately 1,810 MMcfe, or an average of 19.7 MMcfe per day, 100% of which was from oil. During January 2015, our average net daily production at WCBB was approximately 19.0 MMcfe, 100% of which was from oil. +In 2014 , at our East Hackberry field, we recompleted 68 wells and spud 15 wells. All of the 15 new wells spud at East Hackberry during 2014 were completed as producing wells. In the fourth quarter of 2014 , net production at East Hackberry was approximately 640 MMcfe, or an average of 7.0 MMcfe per day, of which 82% was from oil and 18% was from natural gas. During January 2015, our average net daily production at East Hackberry was approximately 10.1 MMcfe, of which 91% was from oil and 9% was from natural gas. +In 2014 , at our West Hackberry field, we recompleted two wells and spud one well which was productive. In the fourth quarter of 2014 , net production at West Hackberry was approximately 66.3 MMcfe, or an average of 720.4 Mcfe per day, of which 91% was from oil and 9% was from natural gas. During January 2015, our average net daily production at West Hackberry was approximately 589.2 Mcfe, of which 97% was from oil and 3% was from natural gas. +2 +Table of Contents +Index to Financial Statements +We currently estimate our 2015 activities in our Southern Louisiana fields to be approximately $20.0 million to $25.0 million in aggregate for maintenance capital activities. +Effective as of April 1, 2010, we acquired our initial leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2014 , we held leases for approximately 5,900 net acres. During the year ended December 31, 2014 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2014 , net production from our Niobrara Formation acreage was approximately 27.4 MMcfe, or an average of 297.3 Mcfe per day, 100% of which was from oil. During January 2015, our average net daily production from our Niobrara Formation acreage was approximately 326.3 Mcfe, 100% of which was from oil. During 2015, we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2014 , we held approximately 864 net acres in the Bakken Formation of Western North Dakota and Eastern Montana with interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2014 , our net production from this acreage was approximately 74.4 MMcfe, or an average of 808.8 Mcfe per day, of which 93% was from oil and natural gas liquids and 7% was from natural gas. During January 2015, our average daily net production from our Bakken Formation acreage was approximately 609.0 Mcfe, of which 87% was from oil and 13% was from natural gas. +As of December 31, 2014, we had sold all of our shares of common stock of Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and gas interests in October 2012 immediately prior to the Diamondback IPO. See Notes 4 and 5 to our consolidated financial statements included elsewhere in this report for additional information regarding our prior investment in Diamondback. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2014 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 1,400 barrels of bitumen per day at its Algar Lake SAGD project during the fourth quarter of 2014. Grizzly has announced that it expects bitumen production to reach its 6,000 barrels per day peak production rate by the fourth quarter of 2015. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by mid-2015. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly is pursuing a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. +We also own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on Tatex III's concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III plans to allow the concession to expire in 2015. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, Stingray Cementing LLC, or +3 +Table of Contents +Index to Financial Statements +Stingray Cementing, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals, LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with a contemplated initial public offering, which it intends to pursue in 2015 subject to market conditions. See Note 5 to our consolidated financial statements included elsewhere in this report for additional information regarding these investments. +As of December 31, 2014 , we had 933.6 Bcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $1.8 billion and associated standardized measure of discounted future net cash flows of approximately $1.4 billion , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See "Item 2. Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10, a non-GAAP financial measure, and a reconciliation of our standardized measure of discounted future net cash flows to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2014 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells (2) +Non-Productive +Wells +Developed +Acreage (3) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (4) +34.52/41.46 +195 +80.85 +3 +2.66 +21,652 +19,340 +716,905 +5,412 +26,268 +906,982 +West Cote Blanche Bay Field (5) +80.108/100 +123 +123 +185 +185 +5,668 +5,668 +1,318 +2,968 +— +19,127 +E. Hackberry Field (6) +80.945/100 +39 +39 +107 +107 +3,931 +3,931 +516 +469 +— +3,331 +W. Hackberry Field +79.167/100 +6 +6 +7 +7 +1,192 +1,192 +— +402 +— +2,413 +Niobrara Formation +39.83/47.85 +6 +3 +— +— +3,502 +1,751 +135 +124 +— +878 +Bakken Formation (4) +1.51/1.83 +18 +0.3 +— +— +1,862 +163 +108 +121 +— +834 +Overrides/Royalty Non-operated +Various +384 +0.42 +— +— +— +— +24 +1 +— +33 +Total +771 +252.57 +302 +301.66 +37,807 +32,045 +719,006 +9,497 +26,268 +933,598 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Includes one gross and net well at WCBB that is producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 16% of our acreage is developed acreage and has been held by production. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 94 gross (7.57 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +4 +Table of Contents +Index to Financial Statements +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2014 , we held leasehold interests in approximately 185,000 gross (180,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of February 7, 2015, there were 740 producing horizontal wells, 335 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 273 horizontal wells that were being drilled and an additional 451 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2014 , had spud 151 gross wells, 101 of which were completed and were producing. In 2014, we spud 85 gross (67.2 net) wells, of which 36 were completed and are productive, two were non-productive and, as of December 31, 2014, 41 were in various stages of completion and six were still being drilled. During 2015 (through February 13, 2015), we had spud five gross (four net) wells during 2015 of which three were in various stages of completion and two were still drilling. In addition, 110 gross (13.3 net) wells were drilled by other operators on our Utica Shale acreage during 2014. +We currently intend to drill 46 to 52 gross (28 to 32 net) horizontal wells, and commence sales from 49 to 53 gross (42 to 46 net) horizontal wells, on our Utica Shale acreage in 2015 and anticipate 11 to 16 gross (four to six net) horizontal wells will be drilled, and sales commenced from 50 to 64 gross (seven to nine net) horizontal wells, by other operators on our Utica Shale +5 +Table of Contents +Index to Financial Statements +acreage during 2015. As of February 25, 2015, we had four operated horizontal rigs drilling in the play, but plan to release one of these rigs by the end of the first quarter of 2015. +Production Status +Aggregate net production from the Utica Shale during the three months ended December 31, 2014 was approximately 32,513 MMcfe, or 353.4 MMcfe per day, of which 80% was from natural gas and 20% was from oil and NGLs. During January 2015, our average daily net production from the Utica Shale was approximately 345.6 MMcfe, of which 79% was from natural gas and 21% was from oil and NGLs. The slight decrease in January 2015 production was the result of adverse winter weather conditions, partially offset by our 2014 drilling activities. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2014 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2014 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2014 , estimated field cumulative gross production was 196.8 MMBOE and 237.0 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2014 , 122 were producing, 185 were shut-in, one was producing intermittently, one was waiting on completion and six were being used as salt water disposal wells. The other 762 wells have been plugged and abandoned. +In 1991, Texaco conducted a 70 square mile 3-D seismic survey with 1,100 shot points per mile that processed out 100 fold. In 1993, an undershoot survey around the crest and production facilities was completed. We own the rights to the seismic data. In December 1999, we completed the reprocessing of the seismic data and our technical staff developed prospects from the data. The reprocessed data has enabled us to identify prospects in areas of the field that would have otherwise remained obscure. During the first half of 2005, we again reprocessed the seismic data using advanced seismic data processing. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2014 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, +6 +Table of Contents +Index to Financial Statements +can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, eight natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent and Future Activity +In 2014, we recompleted 91 gross and net wells and spud 29 gross and net wells at WCBB. Of the 29 new wells spud at WCBB in 2014, 21 were completed as producers, five were non-productive and, at year end, three were waiting on completion. As of February 13, 2015, we had recompleted seven wells during 2015 in our WCBB field. Of the 29 wells drilled in 2014, 22 were considered deep wells. The 21 productive wells, with total depths ranging from 2,500 to 10,501 feet, have approximately 894 feet of aggregate apparent net pay. +Production Status +In the fourth quarter of 2014, our production at WCBB was approximately 1,810 net MMcfe, or an average of 19.7 MMcfe per day, 100% of which was from oil. During January 2015, our average net daily production at WCBB was approximately 19.0 MMcfe, 100% of which was from oil. The slight decrease in average net daily production in January 2015 was due to normal production declines. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.945% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2014 , we held beneficial interests in approximately 4,512 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. We licensed approximately 54 square miles of 3-D seismic data covering a portion of the area and have received a processed version of the seismic data. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2014 was over 4,037 MBOE and 331.8 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2014 , 39 wells had daily production, 107 were shut-in and three had been converted to salt water disposal wells. The remaining 120 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, five natural gas compressors, dehydration units and salt water disposal systems. +7 +Table of Contents +Index to Financial Statements +Recent and Future Activity +During 2014 at East Hackberry, we recompleted 68 gross and net wells and drilled 15 gross and net land wells. All of the 15 wells drilled during 2014 were completed as producing wells. As of February 13, 2015, we had recompleted 11 wells during 2015 in our East Hackberry field. +Production Status +In the fourth quarter of 2014, our net production at East Hackberry was approximately 640 MMcfe, or an average of 7.0 MMcfe per day, 82% of which was from oil and 18% of which was from natural gas. During January 2015, our average net daily production at East Hackberry was approximately 10.1 MMcfe, of which 91% was from oil and 9% was from natural gas. The increase in production in 2015 is a result of our 2014 drilling and recompletion activities. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 79.167% NRI) in 1,192 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2014 was 426 MBOE and 140 Bcf of natural gas. As of December 31, 2014, 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2014, six of such wells were producing, seven were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent and Future Activity +During 2014 at West Hackberry, we recompleted two gross and net wells and drilled one gross and net well which was productive. As of February13, 2015, no new wells had been drilled in our West Hackberry field. +Production Status +In the fourth quarter of 2014, our net production at West Hackberry was approximately 66.3 MMcfe, or an average of 720.4 Mcfe per day, of which 91% was from oil and 9% was from natural gas. During January 2015, our average net daily production at West Hackberry was approximately 589.2 Mcfe, of which 97% was from oil and 3% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +8 +Table of Contents +Index to Financial Statements +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2014, we held leases for approximately 5,900 net acres. In 2014, no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2014, our net production from our Niobrara Formation acreage was approximately 27.4 MMcfe, or an average of 297.3 Mcfe per day, 100% of which was from oil. During January 2015, our average daily net production from our Niobrara Formation acreage was approximately 326.3 Mcfe, 100% of which was from oil. +Facilities +There are typical land oil and gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent and Future Activity +We have completed a 60 square mile 3-D seismic survey over our Craig Dome prospect and have received a processed version of the seismic. We do not anticipate drilling any wells in the Niobrara Formation during 2015. +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2014 , we held approximately 864 net acres, interests in 18 wells and an overriding royalty interests in certain existing and future wells. +9 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2014, our net production from our Bakken Formation acreage was approximately 74.4 MMcfe, or an average of 808.8 Mcfe per day, of which 93% was from oil and NGLs and 7% was from natural gas. During January 2015, our average net daily production from this acreage was approximately 609.0 Mcfe, of which 87% was from oil and 13% was from natural gas. +Facilities +There are typical land, oil and gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent and Future Activities +Two gross (.01 net) wells were drilled on our Bakken Formation acreage in 2014. As of February 13, 2015, no new wells had been drilled on our Bakken Formation acreage in 2015. +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2014: +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.694 +% +— +1 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2014 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 1,400 barrels of bitumen per day at its Algar Lake SAGD project during the fourth quarter of 2014. Grizzly has announced that it expects bitumen production to reach its 6,000 barrels per day peak production rate by the fourth quarter of 2015. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by mid-2015. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly is pursuing a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +10 +Table of Contents +Index to Financial Statements +Thailand . We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 million cubic feet per day. For 2014, net gas production was approximately 105 MMcf per day and condensate production was 415 barrels per day. Hess Corporation, or Hess, operates the field with a 35% interest. Other interest owners include APICO (35% interest), PTT Exploration and Production Public Company Limited (20% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +We own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on this concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III plans to allow the concession to expire in 2015. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure, Stingray Cementing, and Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk and Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Midstream which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with a contemplated initial public offering which it intends to pursue in 2015 subject to market conditions. See Note 5 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. Our production from WCBB is being sold in accordance with the Shell posted price for West Texas/New Mexico Intermediate crude plus or minus Platt's trade month average P+ value, plus or minus the Platt's HLS/WTI differential +11 +Table of Contents +Index to Financial Statements +less transportation charges. Shell is the purchaser of our Utica Shale oil and pays us WTI less a differential. MarkWest Utica currently markets our Utica Shale NGLs and remits to us a weighted average selling price less a marketing fee. We have NAESBs in place with various purchasers for our Utica Shale natural gas production. In 2014, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily trades. The majority of purchases are transacted at the tailgate of the plants with available pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "- Transportation and Takeaway Capacity," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2014 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica and 40%, 32% and 19% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2013, we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica and 32%, 31% and 17% of our natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. During the year ended December 31, 2012, we sold approximately 92% and 8% of our oil production to Shell and Diamondback O&G LLC (a wholly-owned subsidiary of Diamondback formerly known as Windsor Permian LLC), or Diamondback O&G, respectively, 91% of our natural gas liquids production to Diamondback O&G and 41%, 18% and 16% of our natural gas production to Noble Americas Gas, Hess and Chevron, respectively. +As of December 31, 2014, we had approximately 218,000 MMBtu per day of firm sales contracted with third parties. Of these sales, 33,000 MMBtu per day, 5,000 MMBtu per day, 30,000 MMBtu per day, 50,000 MMBtu per day, 50,000 MMBtu per day and 50,000 MMBtu per day expire in 2015, 2016, 2017, 2018, 2019 and 2022, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2014, we had entered into firm transportation contracts for 2015, 2016 and 2017 for an aggregate of approximately 619,000 MMBtu per day, 719,000 MMBtu per day and 719,000 MMBtu per day, respectively, and currently have agreements in place to transport and/or sell approximately 787,000 MMBtu per day of our gross Utica Shale gas production by year-end 2015. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional contracts to be limited in 2015. Our primary long-haul firm transportation commitments include the following: +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets, +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities beginning in April 2015 allowing access to Gulf Coast delivery points, +• +175,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities expected to begin in mid-2015 allowing additional connectivity to Gulf Coast and Midwest markets, +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2016 allowing additional access to Gulf Coast delivery points, and +• +100,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities beginning in late 2016/early 2017 allowing additional access to both Midwest and Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +Regulation of Gas and Oil Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is +12 +Table of Contents +Index to Financial Statements +under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically sensitive and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or relate to our owned or operated facilities. The strict and joint and several liability nature of such laws and regulations could impose liability upon us regardless of fault. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. However, we cannot assure you that the EPA or state or local governments will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally imposes strict and joint and several liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or +13 +Table of Contents +Index to Financial Statements +operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” may be subject to strict and joint and several liability for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. These laws and regulations also prohibit certain activity in wetlands unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on October 20, 2011, the EPA announced a schedule to develop pre-treatment standards for wastewater discharges produced by natural gas extraction from shale formations. The EPA stated that it will gather data, consult with the stakeholders, including ongoing consultation with the industry, and solicit public comment on a proposed rule for shale gas in early 2015. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gasses, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allowed the agency to proceed with the adoption and implementation of regulations that +14 +Table of Contents +Index to Financial Statements +would restrict emissions of GHGs under existing provisions of the federal Clean Air Act, including rules that regulate emissions of GHGs from certain large stationary sources of emissions such as power plants or industrial facilities. In response to its endangerment finding, the EPA adopted two sets of rules regarding possible future regulation of GHG emissions under the Clean Air Act. The motor vehicle rule, which became effective in January 2011, purports to limit emissions of GHGs from motor vehicles. The EPA adopted the stationary source rule (or the “tailoring rule”) in May 2010, and it also became effective in January 2011. The tailoring rule established new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On December 19, 2014, the EPA issued two memoranda providing initial guidance on GHG permitting requirements in response to the Court’s decision in Utility Air Regulatory Group v. EPA . In its preliminary guidance, the EPA indicated that it will undertake a rulemaking action no later than December 31, 2015 to rescind any PSD permits issued under the portions of the tailoring rule that were vacated by the Court. In the interim, the EPA issued a narrowly crafted “no action assurance” indicating it will exercise its enforcement discretion not to pursue enforcement of the terms and conditions relating to GHGs in an EPA-issued PSD permit, and for related terms and conditions in a Title V permit. In November 2010, the EPA expanded its existing GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. +The EPA has continued to adopt GHG regulations applicable to other industries, such as the September 2013 proposed GHG rule that, if finalized, would set New Source Performance Standards, which we refer to as the NSP standards, for new coal-fired and natural-gas fired power plants. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +In addition, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, as amended, or the ESA, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and prohibits taking of endangered species. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +15 +Table of Contents +Index to Financial Statements +We are also subject to the requirements of OSHA and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. The EPA, however, has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. In addition, on May 9, 2014, the EPA issued an Advance Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The public comment period ended on September 19, 2014. Also, the EPA is updating chloride water quality criteria for the protection of aquatic life under the Clean Water Act, which criteria are used by states for establishing acceptable discharge limits. The EPA is expected to release draft criteria in early 2016. Moreover, the EPA announced in 2011 that it was launching a study regarding wastewater resulting from hydraulic fracturing activities and currently plans to propose standards in early 2015 that such wastewater must meet before being transported to a treatment plant. As part of these studies, the EPA has requested that certain companies provide them with information concerning the chemicals used in the hydraulic fracturing process. These studies, depending on their results, could spur initiatives to regulate hydraulic fracturing under the SDWA or otherwise. +Legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. +On August 16, 2012, the EPA approved final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. The EPA intends to issue revised rules that will likely be responsive to some of these requests. For example, on September 23, 2013, the EPA published an amendment extending compliance dates for certain storage vessels. Also, on December 19, 2014, the EPA released final updates and clarifications to the NSP standards. In addition, on January 14, 2015, the EPA announced a series of steps it plans to take to address methane and smog-forming VOC emissions from the oil and gas industry. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. In addition, the U.S. Department of the Interior, or DOI, published a revised proposed rule on May 24, 2013, that would update existing regulation for hydraulic fracturing activities on federal lands, including requirements for disclosure, well bore integrity and handling of flowback water. The DOI announced its intent to finalize the rule in 2014, however, the final rule remains pending. +In addition, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources, with results of the study anticipated to be available in March 2015. The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices. The U.S. Department of Energy has conducted an investigation into practices the agency could recommend to better protect the environment from drilling using hydraulic-fracturing completion methods. Additionally, certain members of Congress have called upon the U.S. Government Accountability Office to investigate how hydraulic fracturing might adversely affect water resources, the Securities and Exchange Commission, or SEC, to investigate the natural gas industry and any possible misleading of investors or the public +16 +Table of Contents +Index to Financial Statements +regarding the economic feasibility of pursuing natural gas deposits in shale formations by means of hydraulic fracturing, and the U.S. Energy Information Administration to provide a better understanding of that agency’s estimates regarding natural gas reserves, including reserves from shale formations, as well as uncertainties associated with those estimates. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, in June 2012, Ohio’s Governor signed legislation mandating chemical disclosure for hydraulic fracturing fluids, pre-drilling testing of water samples within 1,500 feet of a proposed horizontal well, and increased well operator liability insurance requirements. In addition, in April 2014, Ohio’s Department of Natural Resources announced new permit conditions for drilling near faults or areas of past seismic activity. The Texas Railroad Commission, or RRC, and Louisiana Department of Natural Resources adopted rules and regulations requiring that well operators disclose the list of chemical ingredients subject to the requirements of federal Occupational Safety and Health Act (OSHA) to state regulators and on a public internet website. Additionally, on October 28, 2014, the RRC adopted disposal well rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced water and hydraulic fracturing flowback fluid to conduct seismic activity searches utilizing the U.S. Geological Survey. These searches are intended to determine the potential of earthquakes within a circular area of 100 square miles around a proposed new disposal well. The disposal well rule amendments, which became effective in Texas on November 17, 2014, also clarify the RRC’s authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well is likely to contribute to seismic activity. Also, in May 2013, the RRC adopted new rules, which became effective in January 2014, governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Effective August 27, 2011, Montana adopted hydraulic fracturing disclosure regulations under which well operators must provide information in drilling permit applications on the estimated volume and types of materials to be used in the proposed hydraulic fracturing activities. Upon completion of the well, well operators must provide the Montana Board of Oil and Gas Conservation with the volume and type of chemicals used, including the additive type, chemical ingredient names, and Chemical Abstracts Service, or CAS, number, subject to certain trade secret protections. On April 1, 2012, the North Dakota Industrial Commission enacted regulations requiring hydraulic fracturing well operators to disclose the hydraulic fluid composition, including the trade name, supplier, ingredients, CAS Number, and the maximum ingredient concentrations of all additives in the hydraulic fracturing fluid. Colorado enacted rules requiring similar disclosures on January 30, 2012. Also, in 2013 and 2014, Colorado approved regulations that require well operators to test groundwater quality before and after drilling and to install emission controls to capture 95 percent of VOC and methane emissions. In addition, on May 16, 2013, the DOI issued a revised proposed rule that seeks to require companies operating on federal and Indian lands to (i) publicly disclose the chemicals used in the hydraulic fracturing process; (ii) confirm its wells meet certain construction standards and (iii) establish site plans to manage flowback water. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +17 +Table of Contents +Index to Financial Statements +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation and sale for resale of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and oil and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +18 +Table of Contents +Index to Financial Statements +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services must be provided on an open-access, non-discriminatory basis at cost-based rates or at market-based rates if the transportation market at issue is sufficiently competitive. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane +19 +Table of Contents +Index to Financial Statements +related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $21.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $38.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. In the event of a loss under this policy, we have up to $12.6 million of business interruption coverage available after a 90 day waiting period. All of our insurance coverage includes deductibles of up to $500,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually each May. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2014 and 2013 were approximately $0.2 million and $0.7 million, respectively. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that serves as our corporate headquarters. Additionally, we lease approximately 25,200 square feet of office space in other buildings in Oklahoma City. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We also lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We own an approximately 5,700 square foot office building in St. Clairsville, Ohio that serves as our Ohio headquarters. In addition, we lease approximately 4,275 square feet of office space in St. Clairsville, Ohio. Each of these properties is suitable and adequate for its use. +20 +Table of Contents +Index to Financial Statements +Employees +At December 31, 2014 , we had 203 employees. An unrelated Louisiana well servicing company provides all necessary field personnel needed to operate the WCBB and the Hackberry fields. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +ITEM 1A. +RISK FACTORS +Risks Related to our Business and Industry +Market conditions for oil and natural gas, and particularly the recent decline in prices for oil and natural gas, could adversely affect our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including: +• +worldwide and domestic supplies of oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area; +• +the level of consumer demand; +• +the price and availability of alternative fuels; +• +technical advances affecting energy consumption; +• +risks associated with operating drilling rigs; +• +the availability of pipeline capacity and other transportation facilities; +• +the price and level of foreign imports; +• +domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +speculative trading in crude oil and natural gas derivative contracts; +21 +Table of Contents +Index to Financial Statements +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; and +• +the overall domestic and global economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $34.03 per barrel, or Bbl, in February 2009 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.82 per MMBtu in April 2012 to a high of $7.51 per MMBtu in January 2010. During 2014, WTI prices ranged from $52.87 to $100.54 per Bbl and the Henry Hub spot market price of natural gas ranged from $2.89 to $4.91 per MMBtu. On January 20, 2015, the WTI posted price for crude oil was $46.47 per Bbl and the Henry Hub spot market price of natural gas was $2.82 per MMBtu, representing decreases of 54% and 43%, respectively, from the high of $100.54 per Bbl of oil and $4.91 per MMBtu for natural gas during 2014. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit, the European debt crisis and the United States financial market have contributed to increased economic uncertainty and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition. +Our development and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2015 to be in the range of $545.0 million to $595.0 million and an additional $85.0 million to $95.0 million for acreage acquisitions in the Utica Shale. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; and +22 +Table of Contents +Index to Financial Statements +• our ability to acquire, locate and produce new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2015 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Our success depends on finding, developing or acquiring additional reserves, which requires significant capital expenditures. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made, and expect to make in the future, substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. We may not have sufficient resources to acquire additional reserves or to undertake exploration, development, production or other replacement activities, such activities may not result in significant additional reserves and we may not have success drilling productive wells at low finding and development costs. If we are unable to replace our current production, the value of our reserves will decrease, and our business, financial condition and results of operations would be adversely affected. Furthermore, although our revenues may increase if prevailing oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase. +Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including: +• recoverable reserves; +• future oil and natural gas prices and their applicable differentials; +• operating costs; and +• potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel +23 +Table of Contents +Index to Financial Statements +and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We may incur losses as a result of title defects in the properties in which we invest. +It is our practice in acquiring oil and natural gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. +Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals and/or permits; +• +unplanned increases in the cost of construction materials or labor; +24 +Table of Contents +Index to Financial Statements +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +• +market-related increases in a project's debt or equity financing costs; and +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2014 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Our total net investment in Grizzly was approximately $180.2 million as of December 31, 2014 . Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 1,400 barrels of bitumen per day at its Algar Lake SAGD project during the fourth quarter of 2014. Grizzly has announced that it expects bitumen production to reach its 6,000 barrels per day peak production rate by the fourth quarter of 2015. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by mid-2015. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly is pursuing a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. These are complex projects and additional financing may be required. There can be no assurance that such financing, if required, could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of Michael G. Moore, our Chief Executive Officer and President, Aaron Gydosik, our Chief Financial Officer, and our geophysicists or our lead operations personnel, could disrupt our operations resulting in a loss of +25 +Table of Contents +Index to Financial Statements +revenues . Our executives are not restricted from competing with us if they cease to be employed by us, except under certain limited circumstances prohibiting competition while making use of our trade secrets. We are party to an employment agreement with each of these executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production. +There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Ryder Scott with respect to our Utica Shale acreage at December 31, 2014, 2013 and 2012, (ii) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our WCBB, Hackberry and Niobrara fields at each of December 31, 2014, 2013 and 2012 and (iii) our personnel with respect to our overriding royalty and non-operated interests at December 31, 2014, 2013 and 2012. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. +Estimates of reserves as of year-end 2014, 2013 and 2012 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2014, 2013 and 2012, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. +The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2014, 2013 and 2012 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2014, 2013 and 2012, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. However, actual future net revenues from our oil and natural gas properties also will be affected by factors such as: +• +actual prices we receive for oil and natural gas; +• +the amount and timing of actual production; +• +supply of and demand for oil and natural gas; and +• +changes in governmental regulations or taxation. +The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. +SEC rules could limit our ability to book additional proved undeveloped reserves in the future. +SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit +26 +Table of Contents +Index to Financial Statements +our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe. +The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. +Approximately 51.4% of our total estimated proved reserves at December 31, 2014, were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. We are at particular risk with respect to oil and natural gas produced at our WCBB field and from our Utica Shale acreage. In October 2006, for example, a natural gas line in our WCBB field operated by our natural gas purchaser was ruptured by a third party contractor, requiring the field to be shut in for approximately seven weeks until the line could be repaired. Further, we are dependent on our oil purchaser to provide the barges necessary to transport our oil production from the WCBB field. With respect to our Utica Shale acreage where we are focusing a significant portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. If we are unable, for any sustained period, to have access to acceptable delivery or transportation arrangements or encounter compression or other production related difficulties, we will be required to shut in or curtail production from the impacted field(s). Any such shut in or curtailment, or an inability to obtain +27 +Table of Contents +Index to Financial Statements +favorable terms for delivery of the oil and natural gas produced from our fields, would adversely affect our financial condition and results of operations. +Substantially all of our producing properties are located in Eastern Ohio and Louisiana, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. +We have identified over 1,000 drilling locations on our Louisiana, Ohio and Western Colorado properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations. +Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including: +• +unusual or unexpected geological formations; +• +loss of drilling fluid circulation; +• +title problems; +• +facility or equipment malfunctions; +• +unexpected operational events; +• +shortages or delivery delays of equipment and services; +• +compliance with environmental and other governmental requirements; and +• +adverse weather conditions. +Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. +28 +Table of Contents +Index to Financial Statements +Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. +In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities. +We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities for spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws. +Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected. +We have entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management and, if we fail to comply with the conditions of the compliance agreement, all or part of our drilling and producing operations in the State of Ohio may be suspended. +29 +Table of Contents +Index to Financial Statements +In September 2013, we entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management, or the Division, concerning aspects of our operations at seven drilling sites in Ohio. We had previously notified the Division of brine contamination at these drilling sites. After receipt of this notification, the Division conducted an investigation and determined that certain contaminants were escaping from underneath the containment liners at these locations. In the compliance agreement, we agreed, among other things, to conduct our production operations in compliance with all requirements of applicable regulations, implement a remediation plan and make a payment of $250,000. We are continuing to work with the Division to fulfill our obligations under the compliance agreement and to enhance our materials handling protocols. If the Chief of the Division determines that we have failed to comply with the conditions set forth in the compliance agreement, the Chief may suspend all or part of our drilling and production operations in the State of Ohio for a period determined by the Chief, and we could incur additional penalties and costs. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as +30 +Table of Contents +Index to Financial Statements +attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +We have been an early entrant into the Utica Shale in Eastern Ohio. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2014, had spud 151 wells, 101 of which were completed and are producing. In 2014, we spud 85 gross (67.2 net) wells, of which 36 were completed as producing wells, two were non-productive and, as of December 31, 2014, 41 were in various stages of completion and six were still being drilled. As of February 13, 2015, we had spud five gross (four net) wells during 2015. As of February 13, 2015, three of these wells were in various stages of completion and two were still being drilled. In addition, 110 gross (13.3 net) wells were drilled by other operators on our Utica Shale acreage during 2014. We currently intend to drill 46 to 52 gross (28 to 32 net) wells on our Utica Shale acreage in 2015 and anticipate an additional 11 to 16 gross (four to six net) wells will be drilled by other operators on our Utica Shale acreage in 2015. While our costs to acquire undeveloped acreage in this emerging play have generally been less than those of later entrants into a developing play, our drilling results in this area are more uncertain than drilling results in areas that are developed and producing. Since the Utica Shale has limited production history and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the Utica Shale may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the Utica Shale or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. +Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following: +• effectively controlling the level of pressure flowing from particular wells; +• landing our wellbore in the desired drilling zone; +• staying in the desired drilling zone while drilling horizontally through the formation; +• running our casing the entire length of the wellbore; and +• being able to run tools and other equipment consistently through the horizontal wellbore. +Risks that we face while completing our wells include, but are not limited to, the following: +• the ability to fracture stimulate the planned number of stages; +• the ability to run tools the entire length of the wellbore during completion operations; and +• the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation +31 +Table of Contents +Index to Financial Statements +activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income. +A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. While none of our Utica Shale acreage leases are scheduled to expire until 2015, at that time 25% of our total Utica Shale undeveloped acreage as of December 31, 2014 will be subject to expiration, with 29% of such acreage expiring in 2016, 5% in 2017, 13% in 2018 and 10% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2014, leases representing 14%, 31%, 6%, 7% and 24%, respectively, of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2015, 2016, 2017, 2018 and thereafter. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. As such, our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or +32 +Table of Contents +Index to Financial Statements +pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities. +Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to protection of human health and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations have continually imposed increasingly strict requirements for water and air pollution control and solid waste management. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. We believe the trend of more expansive and stricter environmental legislation and regulations will continue. See Item 1. “Business-Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of the laws and regulations that affect us. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and natural gas commissions. The Environmental Protection Agency, or EPA, however, has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. In addition, on May 9, 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The public comment period ended on September 18, 2014. Also, the EPA is updating chloride water quality criteria for the protection of aquatic life under the Clean Water Act, which criteria are used by states for establishing acceptable discharge limits. The EPA is expected to release draft criteria in early 2016. Moreover, the EPA announced on October 20, 2011 that it is launching a study regarding wastewater resulting from hydraulic fracturing activities and currently plans to propose standards in early 2015 that such wastewater must meet before being transported to a treatment plant. Hydraulic fracturing stimulation requires the use of a significant volume of water with some resulting “flowback,” as well as “produced water.” If adopted, the new pretreatment rules will require operators to pretreat wastewater before transferring it to a treatment facility that discharges to surface water. As part of these studies, the EPA has requested that certain companies provide them with information concerning the chemicals used in the hydraulic fracturing process. These studies, depending on their results, could spur initiatives to regulate hydraulic fracturing under the SDWA or otherwise. +Legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. +In August 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA's rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. +33 +Table of Contents +Index to Financial Statements +The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. These rules will require a number of modifications to our operations, including the installation of new equipment to control emissions from our wells by January 1, 2015. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. The EPA intends to issue revised rules that are likely responsive to some of these requests. For example, on September 23, 2013, the EPA published an amendment extending compliance dates for certain storage vessels. Also, on December 19, 2014, the EPA released final updates and clarifications to the NSP standards. In addition, on January 14, 2015, the EPA announced a series of steps it plans to take to address methane and smog-forming VOC emissions from the oil and gas industry. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. In addition, the U.S. Department of the Interior, or DOI, published a revised proposed rule on May 24, 2013, that would update existing regulation of hydraulic fracturing activities on federal lands, including requirements for disclosure, well bore integrity and handling of flowback water. The DOI announced its intent to finalize the rule in 2014, however, the final rule remains pending. +In addition, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources, with results of the study anticipated to be available March 2015. The White House Council on Environmental Quality is conducting an administration-wide review of hydraulic fracturing practices. The U.S. Department of Energy has conducted an investigation into practices the agency could recommend to better protect the environment from drilling using hydraulic-fracturing completion methods. Additionally, certain members of Congress have called upon the U.S. Government Accountability Office to investigate how hydraulic fracturing might adversely affect water resources, the SEC to investigate the natural gas industry and any possible misleading of investors or the public regarding the economic feasibility of pursuing natural gas deposits in shale formations by means of hydraulic fracturing, and the U.S. Energy Information Administration to provide a better understanding of that agency's estimates regarding natural gas reserves, including reserves from shale formations, as well as uncertainties associated with those estimates. +Several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of state and local laws and initiatives concerning hydraulic fracturing, see “ Business-Regulation-Regulation of Hydraulic Fracturing ” above. Also, on May 6, 2013, the DOI issued a revised proposed rule that seeks to require companies operating on federal and Indian lands to (i) publicly disclose the chemicals used in the hydraulic fracturing process; (ii) confirm its wells meet certain construction standards and (iii) establish site plans to manage flowback water. We plan to use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties and any increased federal, state, local, foreign or international regulation of hydraulic fracturing or offshore drilling, including legislation and regulation in the states in which we operate, could reduce the volumes of oil and natural gas that we can economically recover, which could materially and adversely affect our revenues and results of operations. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +34 +Table of Contents +Index to Financial Statements +Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate. +Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. +In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy. +The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows. +35 +Table of Contents +Index to Financial Statements +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, and additional state taxes on natural gas extraction may be imposed, as a result of future legislation. +From time to time, legislative proposals are made that would, if enacted, make significant changes to U.S. tax laws. These proposed changes have included, but are not limited to, (i) eliminating the immediate deduction for intangible drilling and development costs, (ii) eliminating the deduction from income for domestic production activities relating to oil and natural gas exploration and development, (iii) the repeal of the percentage depletion allowance for oil and natural gas properties; (iv) an extension of the amortization period for certain geological and geophysical expenditures and (v) implementing certain international tax reforms. +These proposed changes in the U.S. tax law, if adopted, or other similar changes that reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows. +In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014 and was pending in the Ohio Senate. The Ohio State Senate held a hearing on the bill, but there was no further movement before the summer recess of the Ohio Legislature. +In February 2015, the Governor of Ohio proposed another plan to enact new severance taxes on the oil and gas industry as part of the state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would impose a 6.5% tax on oil and gas sold at the wellhead. +The adoption of climate change legislation by Congress could result in increased operating costs and reduced demand for the oil and natural gas we produce. +In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth's atmosphere and other climatic changes. These findings by the EPA allowed the agency to proceed with the adoption and implementation of regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act. Subsequently, the EPA adopted two sets of related rules, one of which purports to regulate emissions of GHGs from motor vehicles and the other of which regulates emissions of GHGs from certain large stationary sources of emissions such as power plants or industrial facilities. The EPA finalized the motor vehicle rule in April 2010 and it became effective in January 2011 and purports to limit emissions of GHGs from motor vehicles. The EPA adopted the stationary source rule, also known as the “tailoring rule,” in May 2010, and it also became effective in January 2011. The tailoring rule established new GHG emissions thresholds that determine when stationary sources must obtain permits under the PSD and Title V programs of the Clean Air Act. On June 23, 2014, in UARG v. EPA the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On December 19, 2014, the EPA issued two memoranda providing initial guidance on GHG permitting requirements in response to the Court’s decision in UARG v. EPA . In its preliminary guidance, the EPA indicates it will undertake a rulemaking action no later than December 31, 2015 to rescind any PSD permits issued under the portions of the Tailoring Rule that were vacated by the Court. In the interim, the EPA issued a narrowly crafted “no action assurance” indicating it will exercise its enforcement discretion not to pursue enforcement of the terms and conditions relating to GHGs in an EPA-issued PSD permit, and for related terms and conditions in a Title V permit. Additionally, in September 2009, the EPA issued a final rule requiring the reporting of GHG emissions from specified large GHG emission sources in the U.S., including natural gas liquids fractionators and local natural gas/distribution companies, beginning in 2011 for emissions occurring in 2010. +In addition, in August 2012, the EPA established NSP standards for volatile organic compounds and sulfur dioxide and an air toxic standard for oil and natural gas production, transmission, and storage. The rules include the first federal air standards for natural gas wells that are hydraulically fractured, or refractured, as well as requirements for several other sources, such as storage tanks and other equipment, and limits methane emissions from these sources in an effort to reduce GHG emissions. +36 +Table of Contents +Index to Financial Statements +The EPA has continued to adopt GHG regulations of other industries, such as the September 2013 and June 2014 proposed GHG rules that, if finalized, would set NSP standards for new and existing coal-fired and natural gas-fired power plants, respectively, which could have an adverse effect on our financial condition, results of operation and cash available for distribution to the extent we acquire working interests in the future. The EPA is also considering additional regulation of greenhouse gases as “air pollutants.” As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. The U.S. Congress has not adopted such legislation at this time, but it may do so in the future, and many states continue to pursue regulations to reduce greenhouse gas emissions. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. +Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry, and state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +In addition, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase. +Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by the Federal Energy Regulatory Commission, or FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore is exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress, which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, financial condition or results of operations. In addition, FERC has adopted regulations that may subject certain of our otherwise non-FERC jurisdictional facilities to FERC annual reporting and daily scheduled flow and capacity posting requirements. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations. +We face extensive competition in our industry. +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. +37 +Table of Contents +Index to Financial Statements +We depend upon a limited number of customers for the sale of most of our oil and natural gas production. The loss of one or more of these purchasers could, among other factors, limit our access to suitable markets for the oil and natural gas we produce. +The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. Our production from WCBB is being sold in accordance with the Shell posted price for West Texas/New Mexico Intermediate crude plus or minus Platt's trade month average P+ value, plus or minus the Platt's HLS/WTI differential less transportation charges. Shell is the purchaser of our Utica Shale oil and pays us WTI less a differential. MarkWest Utica currently markets our Utica Shale NGLs and remits to us a weighted average selling price less a marketing fee. We have NAESBs in place with various purchasers for our Utica Shale natural gas production. In 2014, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily trades. The majority of purchases are transacted at the tailgate of the plants with available pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "- Transportation and Takeaway Capacity," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. During the year ended December 31, 2014 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica, and 40% , 32% and 19% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2013, we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica and 32%, 31% and 17% of our natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. During 2012, we sold approximately 92% and 8% of our oil production to Shell and Diamondback O&G, respectively, 91% of our natural gas liquids production to Diamondback O&G, and 41%, 18% and 16% of our natural gas production to Noble Americas Gas, Hess and Chevron, respectively. +Our method of accounting for oil and natural gas properties may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2014, 2013 and 2012 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can give us a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. If prices of oil, natural gas and natural gas liquids decrease, we may be required to further write down the value of our oil and gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations. +Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical. +38 +Table of Contents +Index to Financial Statements +We are exposed to fluctuations in the price of natural gas and oil. Although we have hedged a portion of our estimated 2015 production, we may still be adversely affected by continuing and prolonged declines in the price of natural gas and oil. +We use fixed price swaps to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For the period from January 2015 through March 2015, we entered into fixed price swaps for 190,625 MMBtu per day at a weighted average price of $4.12. For April 2015, we entered into fixed price swaps for 191,250 MMBtu per day at a weighted average price of $4.05. For the period from May 2015 through June 2015, we entered into fixed price swaps for 201,250 MMBtu per day at a weighted average price of $4.05. For the period from July 2015 through August 2015, we entered into fixed price swaps for 216,875 MMBtu per day at a weighted average price of $4.04. For September 2015, we entered into fixed price swaps for 246,875 MMBtu per day at a weighted average price of $3.97. For the period from October 2015 through December 2015, we entered into fixed price swaps for 262,500 MMBtu per day at a weighted average price of $3.96. For the period from January 2016 through March 2016, we entered into fixed price swaps for 252,500 MMBtu per day at a weighted average price of $3.82. For April of 2016 we entered into fixed price swaps for 242,500 MMBtu per day at a weighted average price of $3.81 For the period from May 2016 through December 2016, we entered into fixed price swaps for 172,500 MMBtu per day at a weighted average price of $3.73. For the period from January 2017 through June 2017, we entered into fixed price swaps for 142,500 MMBtu per day at a weighted average price of $3.67. For the period from July 2017 through December 2017, we entered into fixed price swaps for 80,000 MMBtu per day at a weighted average price of $3.45. For the period from January 2018 through December 2018, we entered into fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.40. For the period from March 2015 through June 2016, we entered into fixed price swaps for 1,000 barrels of oil per day at a weighted average price of $62.25. For the period from March 2015 through December 2016, we entered into natrual gas basis swap positions, which settle on the pricing index to basis differential of MichCon to the NYMEX Henry Hub natural gas price for 30,000 MMBtu per day at a hedge differential of $.02 and for 10,000 MMBtu per day at a hedge differential of $.01. Under the 2015 contracts, we have hedged approximately 47% to 52% of our estimated 2015 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted. +Our hedging transactions expose us to counterparty credit risk. +Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the terms of the derivative contract and we may not be able to realize the benefit of the derivative contract. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Loss of our information and computer systems could adversely affect our business. +We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process +39 +Table of Contents +Index to Financial Statements +commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business. +Risks Relating to Our Indebtedness +Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects. +As of December 31, 2014, we had total indebtedness (net of associated accrued discount and premium) of approximately $716.5 million , including $614.7 million attributable to our senior notes. We had borrowing base availability of $306.4 million under our secured revolving credit facility after giving effect to an aggregate of $43.6 million of letters of credit and outstanding borrowings of $100.0 million. +Our outstanding indebtedness could have important consequences to you, including the following: +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indenture; +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on the Notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. +Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. +Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors +40 +Table of Contents +Index to Financial Statements +beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indenture governing the senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +Restrictive covenants in our secured revolving credit facility, the indenture governing the senior notes and in future debt instruments may restrict our ability to pursue our business strategies. +Our secured revolving credit facility and the indenture governing the senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to: +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets including capital stock of restricted subsidiaries; +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indenture governing the senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indenture governing the senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and the senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +41 +Table of Contents +Index to Financial Statements +Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $450.0 million. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2014 , we had $100.0 million of borrowings under our revolving credit facility. We intend to continue borrowing under our revolving credit facility in the future. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further if, the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indenture governing the senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2014 , our borrowing base under our revolving credit facility was set at $450.0 million and we had $100.0 million of borrowings outstanding under this facility. In addition, the indenture governing the senior notes allows us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indenture governing the senior notes also allows us to incur certain other additional secured debt and allows us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to the senior notes. In addition, the indenture governing the senior notes does not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with the senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of the senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. +Our borrowings under our revolving credit facility expose us to interest rate risk. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2014 , amounts borrowed under our revolving credit facility bore interest at the Eurodollar rate of 1.91%. A 1% increase in interest rates would increase interest expense by approximately $1.0 million per year, based on $100.0 million outstanding under our revolving credit facility as of December 31, 2014 . As of December 31, 2014 , we did not hedge our interest rate risk. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. +Risks Related to Our Common Stock +If our quarterly revenues and operating results fluctuate significantly, the price of our common stock may be volatile. +Our revenues and operating results may in the future vary significantly from quarter to quarter. If our quarterly results fluctuate, it may cause our stock price to be volatile. We believe that a number of factors could cause these fluctuations, including: +• +changes in oil and natural gas prices; +• +changes in production levels; +• +changes in governmental regulations and taxes; +42 +Table of Contents +Index to Financial Statements +• +geopolitical developments; +• +the level of foreign imports of oil and natural gas; and +• +conditions in the oil and natural gas industry and the overall economic environment. +Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. +We do not currently pay dividends on our common stock and do not anticipate doing so in the future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +A change of control could limit our use of net operating losses. +As of December 31, 2014 , we had a net operating loss, or NOL, carry forward of approximately $3.1 million for federal income tax purposes. Transfers of our stock in the future could result in an ownership change. In such a case, our ability to use the NOLs generated through the ownership change date could be limited. In general, the amount of NOLs we could use for any tax year after the date of the ownership change would be limited to the value of our stock (as of the ownership change date) multiplied by the long-term tax-exempt rate. +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC. Sales of these shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 20, 2015, there were 85,684,604 shares of our common stock issued and outstanding, excluding 358,079 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan and 5,000 shares issuable upon exercise of outstanding options to purchase our common stock granted under our Amended and Restated 2005 Stock Incentive Plan. +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult. +43 +Table of Contents +Index to Financial Statements +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Additional information regarding our properties is included in Item 1. "Business" above and in Note 4 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference. +Proved Oil and Natural Gas Reserves +SEC Rule-Making Activity +In December 2008, the SEC released its final rule for “Modernization of Oil and Gas Reporting.” These rules require disclosure of oil and gas proved reserves by significant geographic area, using the arithmetic 12-month average beginning-of-the-month price for the year, as opposed to year-end prices as had previously been required unless contractual arrangements designate the price to be used. Other significant amendments included the following: +• +Disclosure of unproved reserves: probable and possible reserves may be disclosed separately on a voluntary basis. +• +Proved undeveloped reserve guidelines: reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered and they are scheduled to be drilled within the next five years, unless the specific circumstances justify a longer time. +• +The ability to book proved undeveloped reserves, subject to certain exceptions, only if they relate to wells scheduled to be drilled within five years of the date of booking, as well as the requirement to write down proved undeveloped reserves if the associated wells are not drilled within the required five-year time-frame. +• +Reserves estimation using new technologies: reserves may be estimated through the use of reliable technology in addition to flow tests and production history. +• +Reserves personnel and estimation process: additional disclosure is required regarding the qualifications of the chief technical person who oversees the reserves estimation process. We are also required to provide a general discussion of our internal controls used to assure the objectivity of the reserves estimate. +• +Non-traditional resources: the definition of oil and gas producing activities has expanded and focuses on the marketable product rather than the method of extraction. +We adopted the rules effective December 31, 2009, as required by the SEC. +Evaluation and Review of Reserves. +Reserve estimates at December 31, 2014 were prepared by Ryder Scott with respect to our assets in the Utica Shale in Eastern Ohio (97% of our proved reserves at December 31, 2014 ), by NSAI with respect to our WCBB, Hackberry and Niobrara fields (3% of our proved reserves at December 31, 2014 ) and by our personnel with respect to our overriding royalty and non-operated interests (less than 1% of our proved reserves at December 31, 2014 ). +Ryder Scott and NSAI are independent petroleum engineering firms. Copies of their summary reserve reports are included as Exhibit 99.1 and 99.2, respectively, to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with Ryder Scott and NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale and our WCBB, Hackberry and Niobrara fields. Our internal technical team members meet with Ryder Scott and NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to Ryder Scott and NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our +44 +Table of Contents +Index to Financial Statements +Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 35 years of reservoir and operations experience and our geophysical staff has over 60 years combined industry experience. Our technical staff uses historical information for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by our experienced reservoir engineers or under their direct supervision; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; and +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments. +Further, during 2014, we implemented additional procedures in connection with our year-end reserve preparation and annual capital budget determination, including: +• +review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +The following table sets forth our estimated proved reserves at December 31, 2014 , 2013 and 2012 : +Year Ended December 31, +2014 +2013 +2012 +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Proved developed +5,719 +345,166 +12,379 +5,609 +94,552 +3,527 +5,175 +18,482 +44 +Proved undeveloped +3,778 +373,840 +13,889 +2,737 +51,894 +2,148 +2,931 +15,289 +101 +Total (1) +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +8,106 +33,771 +145 +Year Ended December 31, +2014 +2013 +2012 +Total net proved oil and natural gas reserves (MMcfe) (1) +933,598 +230,574 +83,274 +PV-10 value (in millions) (2) +$ +1,840.8 +$ +696.9 +$ +436.8 +Standardized measure (in millions) (3) +$ +1,427.2 +$ +578.5 +$ +348.6 +_____________________ +45 +Table of Contents +Index to Financial Statements +(1) +Estimates of reserves as of year-end 2014 , 2013 and 2012 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2014 , 2013 and 2012 , respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2014 , 2013 and 2012 . Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. +(2) +Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2014 , 2013 and 2012 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $94.99 per barrel and $4.35 per MMBtu for 2014 , $96.78 per barrel and $3.67 per MMBtu for 2013 and $91.32 per barrel and $2.76 per MMBtu for 2012 , and in each case adjusted by lease for transportation fees and regional price differentials. +PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows. The following table reconciles the standardized measure of future net cash flows to the PV-10 value: +December 31, +2014 +2013 +2012 +(In thousands) +Standardized measure of discounted future net cash flows +$ +1,427,167 +$ +578,466 +$ +348,641 +Add: Present value of future income tax discounted at 10% +413,671 +118,445 +88,206 +PV-10 value +$ +1,840,838 +$ +696,911 +$ +436,847 +(3) +The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. +The above table does not include proved reserves net to our interest in Diamondback, Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “ Business-Our Equity Investments .” +The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves, or PUDs, at December 31, 2014 , 2013 and 2012 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 19 to our consolidated financial statements included in this report. Also contained in the Supplemental Information are our estimates of future net cash flows and discounted future net cash flows from proved reserves. Additional information +46 +Table of Contents +Index to Financial Statements +regarding our proved reserves can be found in Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations ” and “- Critical Accounting Policies and Estimates ” included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2014 , our proved undeveloped reserves totaled 3,778 MBbls of oil, 373,840 MMcf of natural gas and 13,889 MBbls of NGLs, for a total of 479,844 MMcfe. Approximately 99% of our PUDs at year-end 2014 were located in our Utica field. PUDs will be converted from undeveloped to developed as the applicable wells begin production. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include delays in the availability of infrastructure, well permitting delays, changes in commodity price outlook and costs, and new data from recently completed wells. During 2014, we did not make any material adjustments to our development plan with respect to our PUD locations booked in our reserve report for the year ended December 31, 2013 and scheduled to be drilled during 2014. Changes in PUDs that occurred during 2014 were primarily due to: +• +Additions of 448.1 Bcfe attributable to 2014 extensions in our Utica field; +• +Conversion of approximately 37.8 Bcfe attributable to PUDs into proved developed reserves; +• +Acquisition of approximately 4 Bcfe from our Rhino acquisition; and +• +Downward revisions of 15.8 Bcfe due to the exclusion of PUD locations in our Southern Louisiana and Utica fields that were not expected to be drilled within five years of initial booking. +Costs incurred relating to the development of PUDs were approximately $68.2 million in 2014 . Estimated future development costs relating to the development of PUDs are projected to be approximately $221.0 million in 2015, $93.1 million in 2016, $215.4 million in 2017, $73.2 million in 2018 and $59.3 million in 2019. +All PUD drilling locations included in our 2014 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2014 , 2% of our total proved reserves were classified as proved developed non-producing. +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +47 +Table of Contents +Index to Financial Statements +2014 +2013 +2012 +Production Volumes: +Oil (MBbls) +2,684 +2,317 +2,323 +Gas (MMcf) +59,318 +8,891 +1,108 +Natural gas liquids (MGal) +86,092 +13,416 +2,714 +Gas equivalents (MMcfe) +87,719 +24,709 +15,436 +Average Prices: +Oil (per Bbl) +$ +92.18 +(1) +$ +96.74 +(1) +$ +104.46 +(1) +Gas (per Mcf) +$ +5.55 +(1) +$ +2.36 +(1) +$ +2.91 +Natural gas liquids (per Gal) +$ +1.09 +$ +1.27 +$ +0.98 +Gas equivalents (per Mcfe) +$ +7.65 +$ +10.61 +$ +16.11 +Production Costs: +Average production costs (per Mcfe) +$ +0.59 +$ +1.08 +$ +1.57 +Average production taxes and midstream costs (per Mcfe) +$ +1.01 +$ +1.54 +$ +1.90 +Total production and midstream costs and production taxes (per Mcfe) +$ +1.60 +$ +2.62 +$ +3.47 +(1) +Includes various derivative contracts at a weighted average price of: +Per barrel +January – December 2014 +$ +102.79 +January – December 2013 +$ +100.90 +January – December 2012 +$ +108.31 +Per MMBtu +January – December 2014 +$ +4.06 +January – December 2013 +$ +4.00 +Excluding the effect of fixed price swaps, the average price for 2014 would have been $89.88 per barrel of oil, $3.81 per Mcf of gas and $6.40 per Mcfe. The total volume hedged for 2014 represented approximately 62% of our total sales volumes for the year. Excluding the effect of fixed price swaps, the average price for 2013 would have been $104.51 per barrel of oil, $3.73 per Mcf of gas and $11.83 per Mcfe. The total volume hedged for 2013 represented approximately 48% of our total sales volumes for the year. Excluding the effect of fixed price swap contracts, the average oil price for 2012 would have been $106.11 per barrel of oil and $16.35 per Mcfe. The total volume hedged for 2012 represented approximately 46% of our total sales volumes for the year. +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2014 : +48 +Table of Contents +Index to Financial Statements +Year Ended December 31, +2014 +2013 +2012 +Utica Shale +Net Production +Oil (MBbls) +883 +315 +25 +Gas (MMcf) +58,919 +8,439 +365 +NGL (Mgal) +86,051 +13,384 +80 +Total (MMcfe) +76,512 +12,238 +525 +Average Sales Price: +Oil (per Bbl) +$ +78.63 +$ +83.67 +$ +78.21 +Gas (per Mcf) +$ +5.56 +$ +2.29 +$ +2.99 +NGL (per Gal) +$ +1.09 +$ +1.27 +$ +1.56 +Average Production Cost (per Mcfe) +$ +0.38 +$ +0.59 +$ +1.38 +Productive Wells and Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2014. +NRI/WI (1) +Productive +Oil Wells (2) +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage (3) +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (4) +34.52/41.46 +171 +63.29 +24 +17.56 +3 +2.66 +— +— +21,652 +19,340 +163,330 +161,051 +West Cote Blanche Bay Field (5) +80.108/100 +123 +123 +— +— +168 +168 +17 +17 +5,668 +5,668 +— +— +E. Hackberry Field (6) +80.945/100 +39 +39 +— +— +107 +107 +— +— +3,931 +3,931 +581 +581 +W. Hackberry Field +79.167/100 +6 +6 +— +— +7 +7 +— +— +1,192 +1,192 +— +— +Niobrara Formation (7) +39.83/47.85 +6 +3 +— +— +— +— +— +— +3,502 +1,751 +8,464 +4,149 +Bakken Formation (8) +1.51/1.83 +18 +0.3 +— +— +— +— +— +— +1,862 +163 +3,505 +701 +Overrides/Royalty Non-operated +Various +384 +0.42 +— +— +— +— +— +— +— +— +— +— +Total +747 +235.01 +24 +17.56 +285 +284.66 +17 +17 +37,807 +32,045 +175,880 +166,482 +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +(2) +Includes one gross and net well at WCBB that is producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 16% of our acreage is developed acreage and has been perpetuated by production. +(4) +In 2015, 25% of our total Utica Shale undeveloped acreage as of December 31, 2014 will be subject to expiration, with 29% of such acreage expiring in 2016, 5% in 2017, 13% in 2018 and 10% thereafter. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 91 gross (6.96 net) oil wells and 3 gross (.61 net) gas wells drilled by other operators on our acreage. +49 +Table of Contents +Index to Financial Statements +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +(7) +The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 14%, 31%, 6%, 7% and 24% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2015, 2016, 2017, 2018 and thereafter, respectively. +(8) +NRI/WI is from wells that have been drilled or in which we have elected to participate. +Completed and Present Drilling and Recompletion Activities +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return. +2014 +2013 +2012 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +161 +161 +150 +150 +92 +92 +Dry +— +— +— +— +1 +0.5 +Total +161 +161 +150 +150 +93 +92.5 +Development: +Productive +119 +100 +80 +63.8 +70 +57 +Dry +7 +6.8 +2 +2 +8 +7 +Total +126 +106.8 +82 +65.8 +78 +64 +Exploratory: +Productive +— +— +3 +2.7 +19 +6 +Dry +— +— +— +— +— +— +Total +— +— +3 +2.7 +19 +6 +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +ITEM 3. +LEGAL PROCEEDINGS +Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +50 +Table of Contents +Index to Financial Statements +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Price Range of Common Stock +Our common stock is quoted on the NASDAQ Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods presented: +Price Range of +Common Stock +High +Low +2013 +First Quarter +$ +47.19 +$ +35.24 +Second Quarter +54.07 +43.98 +Third Quarter +64.73 +46.85 +Fourth Quarter +69.81 +53.93 +2014 +First Quarter +$ +71.35 +$ +52.28 +Second Quarter +75.75 +58.90 +Third Quarter +65.18 +51.59 +Fourth Quarter +56.72 +36.56 +2015 +First Quarter (through February 25, 2015) +$ +45.54 +$ +35.00 +On February 25, 2015, the last reported sale price of our common stock on the NASDAQ Global Select Market was $44.09. +Unregistered Sales of Equity Securities and Use of Proceeds +None. +Repurchases of Equity Securities +None. +Holders of Record +At the close of business on February 23, 2015, there were 312 stockholders of record holding 85,684,604 shares of our outstanding common stock. There were approximately 28,487 beneficial owners of our common stock as of February 23, 2015. +Dividend Policy +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility prohibit the payment of any dividends to the holders of our common stock. +51 +Table of Contents +Index to Financial Statements +ITEM 6. +SELECTED FINANCIAL DATA +You should read the following selected consolidated financial data in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2014 , December 31, 2013 and December 31, 2012 and the selected consolidated balance sheet data at December 31, 2014 and December 31, 2013 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2011 and December 31, 2010 and the selected consolidated balance sheet data at December 31, 2012 , December 31, 2011 and December 31, 2010 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table. +Fiscal Year Ended December 31, +2014 +2013 +2012 +2011 +2010 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +671,266 +$ +262,753 +$ +248,926 +$ +229,254 +$ +127,921 +Costs and expenses: +Lease operating expenses +52,191 +26,703 +24,308 +20,897 +17,614 +Production taxes +24,006 +26,933 +28,957 +26,054 +13,823 +Midstream gathering and processing +64,467 +11,030 +443 +279 +143 +Depreciation, depletion and amortization +265,431 +118,880 +90,749 +62,320 +38,907 +General and administrative +38,290 +22,519 +13,808 +8,074 +6,063 +Accretion expense +761 +717 +698 +666 +617 +Loss (gain) on sale of assets +(11 +) +508 +(7,300 +) +— +— +445,135 +207,290 +151,663 +118,290 +77,167 +Income from Operations +226,131 +55,463 +97,263 +110,964 +50,754 +Other (Income) Expense: +Interest expense +23,986 +17,490 +7,458 +1,400 +2,761 +Interest income +(195 +) +(297 +) +(72 +) +(186 +) +(387 +) +Litigation settlement +25,500 +— +— +— +— +Gain on contribution of investments +(84,470 +) +— +— +— +— +(Income) loss from equity method investments +(139,434 +) +(213,058 +) +(8,322 +) +1,418 +977 +(174,613 +) +(195,865 +) +(936 +) +2,632 +3,351 +Income from Continuing Operations before Income Taxes +400,744 +251,328 +98,199 +108,332 +47,403 +Income Tax Expense (Benefit) +153,341 +98,136 +26,363 +(90 +) +40 +Income from Continuing Operations +247,403 +153,192 +71,836 +108,422 +47,363 +Discontinued Operations: +Loss on disposal of Belize properties, net of tax +— +— +3,465 +— +— +Net Income Available to Common Stockholders +$ +247,403 +$ +153,192 +$ +68,371 +$ +108,422 +$ +47,363 +Net Income Per Common Share—Basic: +$ +2.90 +$ +1.98 +$ +1.22 +$ +2.22 +$ +1.08 +Net Income Per Common Share—Diluted: +$ +2.88 +$ +1.97 +$ +1.21 +$ +2.20 +$ +1.07 +52 +Table of Contents +Index to Financial Statements +At December 31, +2014 +2013 +2012 +2011 +2010 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +3,632,393 +$ +2,693,136 +$ +1,578,368 +$ +691,158 +$ +319,693 +Total debt, including current maturity +$ +716,484 +$ +299,187 +$ +299,038 +$ +2,283 +$ +51,917 +Total liabilities +$ +1,336,097 +$ +642,898 +$ +451,960 +$ +58,808 +$ +108,637 +Stockholders’ equity +$ +2,296,296 +$ +2,050,238 +$ +1,126,408 +$ +632,350 +$ +125,051 +53 +Table of Contents +Index to Financial Statements +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. +Overview +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and interests in entities that operate in Southeast Asia, including the Phu Horm gas field in Thailand. Until November 2014, we held an equity interest in Diamondback Energy, Inc., or Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and natural gas interests in October 2012 immediately prior to Diamondback's initial public offering, or the Diamondback IPO. At December 31, 2014, we did not own any shares of Diamondback. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +In this Annual Report on Form 10-K, our oil and natural gas production is presented in cubic feet of natural gas equivalent, as compared to our production presentation in prior periods which was expressed in barrels of oil equivalent. This change in presentation is due to the change in our production mix from predominately oil and natural gas liquids to predominately natural gas and natural gas liquids that occurred during 2014. Certain changes have been made to prior year financial statements to conform to the current year’s presentation. +2014 and 2015 Year to Date Highlights +• +Oil and natural gas revenues increased 156% to $670.8 million for the year ended December 31, 2014 from $262.2 million for the year ended December 31, 2013 . +• +Production increased 255% to approximately 87,719 MMcfe for the year ended December 31, 2014 from approximately 24,709 MMcfe for the year ended December 31, 2013 . +• +During 2014, we spud 130 gross (112 net) wells, participated in an additional 112 gross (13 net) wells that were drilled by other operators on our Utica Shale and Bakken acreage and recompleted 161 gross and net wells. Of our 130 new wells spud during 2014, 73 were completed as producing wells, seven were non-productive, and, at year end, 44 were in various stages of completion and six were drilling. +• +In 2014, we acquired approximately 8,200 net acres in the Utica Shale from Rhino for a total purchase price of $182.0 million ($179.5 million net of purchase price adjustments). We are the operator of substantially all of this acreage. +• +As of February 13, 2015, we held leasehold interests in approximately 188,000 gross (184,000 net) acres in the Utica Shale. During 2014, we spud 85 gross (67.2 net) wells on our Utica Shale acreage and, during 2015 (through February 13, 2015), we had spud five gross (four net) wells. As of February 13, 2015, three of these wells were in various stages of completion and two were still being drilled. +• +In June, September and November of 2014, we sold shares of our Diamondback common stock in underwritten public offerings for an aggregate of $258.4 million in net proceeds. As of December 31, 2014, we did not own any shares of Diamondback common stock. +54 +Table of Contents +Index to Financial Statements +• +In August of 2014, we issued $300.0 million in aggregate principal amount of our 7.750% Senior Notes due 2020, resulting in net proceeds to us of approximately $312.0 million, a portion of which we used to repay all outstanding borrowings under our senior secured revolving credit facility. We used the remaining net proceeds for general corporate purposes, which included funding a portion of our 2014 capital development plan. +Critical Accounting Policies and Estimates +Our disc ussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and totaled $1.5 billion at December 31, 2014 and $1.0 billion at December 31, 2013 . These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development. +Ceiling Test . Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months of the applicable year beginning with 2009, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. For instance, as a result of the drop in commodity prices on December 31, 2008 and subsequent reduction in our proved reserves, we recognized a ceiling test impairment of $272.7 million for the year ended December 31, 2008. If prices of oil, natural gas and natural gas liquids decline, we may be required to further write down the value of our oil and gas properties, which could negatively affect our results of operations. No ceiling test impairment was required for the year ended December 31, 2014 . +55 +Table of Contents +Index to Financial Statements +Asset Retirement Obligations . We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities. +We account for abandonment and restoration liabilities under FASB ASC 410 which requires us to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates. +Oil and Gas Reserve Quantities . Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Ryder Scott Company, L.P., Netherland, Sewell & Associates, Inc., and to a lesser extent our personnel have prepared reserve reports of our reserve estimates at December 31, 2014 on a well-by-well basis for our properties. +Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following: +• +the quality and quantity of available data; +• +the interpretation of that data; +• +the accuracy of various mandated economic assumptions; and +• +the judgments of the individuals preparing the estimates. +Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Periodically, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2014 , a valuation allowance of $3.1 million had been provided for state net operating loss and federal tax credit deferred tax assets based on the uncertainty these assets may be realized. +56 +Table of Contents +Index to Financial Statements +Revenue Recognition . We derive almost all of our revenue from the sale of crude oil and natural gas produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals. +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. In accordance with FASB ASC 825 , "Financial Instruments," we have elected the fair value option of accounting for our equity method investment in Diamondback's stock. At the end of each reporting period, the quoted closing market price of Diamondback's stock is multiplied by the total shares owned by us and the resulting gain or loss is recognized in income from equity method investments in the consolidated statements of operations. As of December 31, 2014, we had sold all of our shares of common stock of Diamondback. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. At December 31, 2014 , we fully impaired our investment in Tatex III. There was no impairment of equity method investments as of December 31, 2013 . +Commitments and Contingencies . Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities. +Derivative Instruments and Hedging Activities . We seek to reduce our exposure to unfavorable changes in oil and natural gas prices by utilizing energy swaps and collars, or fixed-price contracts. We follow the provisions of FASB ASC 815, “ Derivatives and Hedging ,” as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using established index prices and other sources. These values are based upon, among other things, futures prices, correlation between index prices and our realized prices, time to maturity and credit risk. The values reported in the financial statements change as these estimates are revised to reflect actual results, changes in market conditions or other factors. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Designation is established at the inception of a derivative, but re-designation is permitted. For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. We recognize any change in fair value resulting from ineffectiveness immediately in earnings. +See "Item 7. Commodity Price Risk" for a summary of our fixed price swaps in place as of December 31, 2014 . +RESULTS OF OPERATIONS +Results of Operations +The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +57 +Table of Contents +Index to Financial Statements +2014 +2013 +2012 +Production Volumes: +Oil (MBbls) +2,684 +2,317 +2,323 +Gas (MMcf) +59,318 +8,891 +1,108 +Natural gas liquids (MGal) +86,092 +13,416 +2,714 +Gas equivalents (MMcfe) +87,719 +24,709 +15,436 +Average Prices: +Oil (per Bbl) +$ +92.18 +(1) +$ +96.74 +(1) +$ +104.46 +(1) +Gas (per Mcf) +$ +5.55 +(1) +$ +2.36 +(1) +$ +2.91 +Natural gas liquids (per Gal) +$ +1.09 +$ +1.27 +$ +0.98 +Gas equivalents (per Mcfe) +$ +7.65 +$ +10.61 +$ +16.11 +Production Costs: +Average production costs (per Mcfe) +$ +0.59 +$ +1.08 +$ +1.57 +Average production taxes and midstream costs (per Mcfe) +$ +1.01 +$ +1.54 +$ +1.90 +Total production and midstream costs and production taxes (per Mcfe) +$ +1.60 +$ +2.62 +$ +3.47 +_____________________ +(1) +Includes various derivative contracts at a weighted average price of: +Per barrel +January – December 2014 +$ +102.79 +January – December 2013 +$ +100.90 +January – December 2012 +$ +108.31 +Per MMBtu +January – December 2014 +$ +4.06 +January – December 2013 +$ +4.00 +Excluding the net effect of fixed price swaps, the average price for 2014 would have been $89.88 per barrel of oil, $3.81 per Mcf of gas and $6.40 per Mcfe. The total volume hedged for 2014 represented approximately 62% of our total sales volumes for the year. Excluding the effect of fixed price swaps, the average oil price for 2013 would have been $104.51 per barrel of oil, $3.73 per Mcf of gas and $11.83 per Mcfe. The total volume hedged for 2013 represented approximately 48% of our total sales volumes for the year. Excluding the net effect of forward sales contracts, the average oil price for 2012 would have been $106.11 per barrel of oil and $16.35 per Mcfe. The total volume hedged for 2012 represented approximately 46% of our total sales volumes for the year. +From 2013 to 2014 , our net equivalent gas production increased 255% from 24,709 MMcfe to 87,719 MMcfe primarily as a result of the development of our Utica Shale acreage. From 2012 to 2013 , our net equivalent gas production also increased 60% from 15,436 MMcfe to 24,709 MMcfe due to the results of our 2013 drilling and recompletion activities. We currently estimate that our 2015 production will be between 157,680 and 175,200 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. +Comparison of the Years Ended December 31, 2014 and December 31, 2013 +We reported net income of $247.4 million for the year ended December 31, 2014 as compared to $153.2 million for the year ended December 31, 2013 . This 61% increase in period-to-period net income was due primarily to $79.7 million of income recognized from our equity method investment in Diamondback, $84.8 million of income recognized from our equity method investment in Blackhawk, $84.5 million of income recognized from our contribution of investments to Mammoth and a 255% increase in net production to 87,719 MMcfe from 24,709 MMcfe, partially offset by a 28% decrease in realized Mcfe prices to $7.65 from $10.61 , a $25.5 million increase in lease operating expenses, a $53.4 million increase in midstream gathering and processing expenses, a $15.8 million increase in general and administrative expenses, a $6.5 million increase in interest expense +58 +Table of Contents +Index to Financial Statements +and a $55.2 million increase in income tax expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013 . +Oil and Gas Revenues . For the year ended December 31, 2014 , we reported oil and natural gas revenues of $670.8 million as compared to oil and natural gas revenues of $262.2 million during 2013 . This $408.5 million , or 156% , increase in revenues was primarily attributable to a 255% increase in net production to 87,719 MMcfe from 24,709 MMcfe, partially offset by a 28% decrease in realized Mcfe prices to $7.65 from $10.61 due to a shift in our production mix toward natural gas and NGLs, for the year ended December 31, 2014 as compared to the year ended December 31, 2013 . +The following table summarizes our oil and natural gas production and related pricing for the years ended December 31, 2014 and December 31, 2013 : +Year Ended +December 31, +2014 +2013 +Oil production volumes (MBbls) +2,684 +2,317 +Gas production volumes (MMcf) +59,318 +8,891 +Natural gas liquids production volumes (MGal) +86,092 +13,416 +Gas equivalents (MMcfe) +87,719 +24,709 +Average oil price (per Bbl) +$ +92.18 +$ +96.74 +Average gas price (per Mcf) +$ +5.55 +$ +2.36 +Average natural gas liquids (per Gal) +$ +1.09 +$ +1.27 +Gas equivalents (per Mcfe) +$ +7.65 +$ +10.61 +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $52.2 million for the year ended December 31, 2014 from $26.7 million for the year ended December 31, 2013 . This increase was mainly the result of an increase in expenses related to property taxes, compressor rentals, compressor repairs and maintenance, contract pumpers, environmental services, field supervision, location repair, rentals and salt water disposal. +Production Taxes . Production taxes decreased to $24.0 million for the year ended December 31, 2014 from $26.9 million for 2013 . This decrease was primarily related to changes in our product mix and production location. +Midstream Gathering and Processing Expenses . Midstream gathering and processing expenses increased by $53.4 million to $64.5 million for the year ended December 31, 2014 from $11.0 million for 2013 . This increase was primarily the result of midstream expenses related to our production volumes in the Utica Shale resulting from our 2014 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $265.4 million for the year ended December 31, 2014 , and consisted of $263.9 million in depletion of oil and natural gas properties and $1.5 million in depreciation of other property and equipment, as compared to total DD&A expense of $118.9 million for 2013 . This increase was due to an increase in our full cost pool as a result of our capital activities as well as an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $38.3 million for the year ended December 31, 2014 from $22.5 million for the year ended December 31, 2013 . This $15.8 million increase was due to an increase in salaries, stock compensation expenses and benefits resulting from an increased number of employees, increases in legal expenses, corporate fees, consulting fees, rent expense associated with office space, bank service charges, computer support and franchise taxes, partially offset by an increase in general and administrative costs related to exploration and development activity capitalized to the full cost pool. +Accretion Expense . Accretion expense remained relatively flat at $0.8 million for the years ended December 31, 2014 and 2013 . +59 +Table of Contents +Index to Financial Statements +Interest Expense . Interest expense increased to $24.0 million for the year ended December 31, 2014 from $17.5 million for the year ended December 31, 2013 due primarily to our issuance of $300.0 million of additional 7.75% Senior Notes due 2020 and increased borrowings under our revolving credit facility. On August 18, 2014, we issued $300.0 million aggregate principal amount of our 7.75% Senior Notes due 2020, a portion of the net proceeds from which was used to repay all outstanding borrowings under our revolving credit facility. Total weighted debt outstanding under our revolving credit facility was $22.8 million for the year ended December 31, 2014 as compared to no borrowings outstanding under such facility for 2013 . Additionally, we capitalized approximately $9.7 million and $7.1 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2014 and December 31, 2013 , respectively. This increase in capitalized interest in the 2014 period was the result of an increase in our undeveloped oil and natural gas properties. +Income Taxes . As of December 31, 2014 , we had a net operating loss carry forward of approximately $3.1 million , in addition to numerous temporary differences, which gave rise to a net deferred tax liability. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2014 , a valuation allowance of $3.1 million had been provided for state net operating loss and federal tax credit deferred tax assets based on the uncertainty these assets may be realized. We recognized an income tax expense from continuing operations of $153.3 million for the year ended December 31, 2014 . +Comparison of the Years Ended December 31, 2013 and December 31, 2012 +We reported net income of $153.2 million for the year ended December 31, 2013 as compared to $68.4 million for the year ended December 31, 2012. This 124% increase in period-to-period net income was due primarily to $220.1 million of income recognized from our equity method investment in Diamondback and a 60% increase in net production to 24,709 MMcfe from 15,436 MMcfe, partially offset by a 34% decrease in realized Mcfe prices to $10.61 from $16.11 , a $2.4 million increase in lease operating expenses, a $10.6 million increase in midstream gathering and processing expenses, an $8.7 million increase in general and administrative expenses, a $10.0 million increase in interest expense and a $71.8 million increase in income tax expense for the year ended December 31, 2013 as compared to the year ended December 31, 2012. +Oil and Gas Revenues . For the year ended December 31, 2013, we reported oil and natural gas revenues of $262.2 million as compared to oil and natural gas revenues of $248.6 million during 2012. This $13.6 million, or 5%, increase in revenues was primarily attributable to a 60% increase in net production to 24,709 MMcfe from 15,436 MMcfe, partially offset by a 34% decrease in realized Mcfe prices to $10.61 from $16.11 , for the year ended December 31, 2013 as compared to the year ended December 31, 2012. +The following table summarizes our oil and natural gas production and related pricing for the years ended December 31, 2013 and December 31, 2012 : +Year Ended +December 31, +2013 +2012 +Oil production volumes (MBbls) +2,317 +2,323 +Gas production volumes (MMcf) +8,891 +1,108 +Natural gas liquids production volumes (MGal) +13,416 +2,714 +Gas equivalents (MMcfe) +24,709 +15,436 +Average oil price (per Bbl) +$ +96.74 +$ +104.46 +Average gas price (per Mcf) +$ +2.36 +$ +2.91 +Average natural gas liquids (per Gal) +$ +1.27 +$ +0.98 +Gas equivalents (per Mcfe) +$ +10.61 +$ +16.11 +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $26.7 million for the year ended December 31, 2013 from $24.3 million for the year ended December 31, 2012. This increase was mainly the result of an increase in expenses related to property taxes, compressor rentals, compressor repairs and maintenance, contract pumpers, environmental services, insurance expense and salt water disposal. +60 +Table of Contents +Index to Financial Statements +Production Taxes . Production taxes decreased to $26.9 million for the year ended December 31, 2013 from $29.0 million for 2012. This decrease was primarily related to changes in our product mix and production location. +Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $10.6 million to $11.0 million for the year ended December 31, 2013 from $0.4 million for 2012. This increase was primarily the result of midstream expenses related to our production volumes in the Utica Shale resulting from our 2013 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $118.9 million for the year ended December 31, 2013, and consisted of $118.1 million in depletion of oil and natural gas properties and $0.8 million in depreciation of other property and equipment, as compared to total DD&A expense of $90.7 million for 2012. This increase was due to an increase in our full cost pool as a result of our capital activities as well as an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $22.5 million for the year ended December 31, 2013 from $13.8 million for the year ended December 31, 2012. This $8.7 million increase was due to an increase in salaries, stock compensation expenses and benefits resulting from an increased number of employees, increases in legal expenses, corporate fees, consulting fees and fees for auditing services and a reduction in administrative services reimbursements under the acquisition team agreement, partially offset by an increase in general and administrative costs related to exploration and development activity capitalized to the full cost pool. +Accretion Expense . Accretion expense remained relatively flat at $0.7 million for the years ended December 31, 2013 and 2012. +Interest Expense . Interest expense increased to $17.5 million for the year ended December 31, 2013 from $7.5 million for the year ended December 31, 2012 due largely to a full year of interest on our 7.75% Senior Notes due 2020. During 2013, we had no debt outstanding under our revolving credit facility as compared to total weighted average debt outstanding under our revolving credit facility of $45.0 million in 2012, which bore a weighted average interest rate of 2.85%. On October 17, 2012, we issued $250.0 million aggregate principal amount of our 7.75% Senior Notes due 2020, a portion of the proceeds from which was used to repay all outstanding borrowings under our revolving credit facility. On December 21, 2012, we issued an additional $50.0 million aggregate principal amount of our 7.75% Senior Notes due 2020. Additionally, we capitalized approximately $7.1 million in interest expense to undeveloped oil and natural gas properties during the year ended December 31, 2013 as a result of increased interest costs incurred on our 7.75% Senior Notes. We did not capitalize any interest costs for the year ended December 31, 2012. +Income Taxes . As of December 31, 2013, we had a net operating loss carry forward of approximately $4.2 million, in addition to numerous temporary differences, which gave rise to a net deferred tax liability. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2013, a valuation allowance of $4.7 million had been provided for state net operating loss and federal tax credit deferred tax assets based on the uncertainty these assets may be realized. We recognized an income tax expense from continuing operations of $98.1 million for the year ended December 31, 2013. +Liquidity and Capital Resources +Overview . Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and the issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production. During 2014, we received net proceeds of $312.0 million from the sale of our 7.750% Senior Notes due 2020. In addition, we received an aggregate of $258.4 million in net proceeds from the sale of shares of our Diamondback common stock in 2014. We also received net proceeds of $84.8 million from the sale of Blackhawk's equity interest in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC. In January 2013, we received $32.8 million of net proceeds from the underwriters' exercise of their option to purchase the remaining shares of common stock subject to the over-allotment option granted in connection with our December 2012 equity offering. In 2013, we received an aggregate of $733.8 million from the sale of shares of our common stock. In addition, we received an aggregate of $192.7 million in net proceeds from the sale of shares of our Diamondback common stock in 2013. +61 +Table of Contents +Index to Financial Statements +Net cash flow provided by operating activities was $ 409.9 million for the year ended December 31, 2014 as compared to net cash flow provided by operating activities of $ 191.1 million for 2013 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 255% increase in our net Mcfe production, partially offset by a 28% decrease in net realized Mcfe prices. +Net cash flow provided by operating activities was $191.1 million for the year ended December 31, 2013 , as compared to net cash flow provided by operating activities of $199.2 million for 2012. This decrease was primarily the result of an decrease in cash receipts from our oil and natural gas purchasers due to a 34% decrease in our net realized Mcfe prices, partially offset by a 60% increase in net Mcfe production. +Net cash used in investing activities for the year ended December 31, 2014 was $ 1.1 billion as compared to $ 664.3 million for 2013 . During the year ended December 31, 2014 , we spent $ 1,329.3 million in additions to oil and natural gas properties, of which $503.8 million was spent on our 2014 drilling and recompletion programs, $317.8 million was spent on expenses attributable to the wells drilled and recompleted during 2013, $7.8 million was spent on compressors and other facility enhancements, $7.5 million was spent on plugging costs, $257.8 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, and $179.5 million was spent on the acquisition of producing properties and non-producing leasehold interests from Rhino, with the remainder attributable mainly to capitalized general and administrative expenses. In addition, $ 18.8 million was invested in Grizzly and $45.2 million was invested in our other equity investments during the year ended December 31, 2014 . We also received $258.4 million from the sale of shares of Diamondback common stock during 2014. During the year ended December 31, 2014 , we used cash from operations and proceeds from our 2013 equity and 2014 debt offerings for our investing activities. +Net cash used in investing activities for the year ended December 31, 2013 was $664.3 million as compared to $840.6 million for 2012. During the year ended December 31, 2013, we spent $808.2 million in additions to oil and natural gas properties, of which $335.2 million was spent on our 2013 drilling and recompletion programs, $93.4 million was spent on expenses attributable to the wells drilled and recompleted during 2012, $5.8 million was spent on compressors and other facility enhancements, $2.0 million was spent on plugging costs, $340.4 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, and $5.2 million was spent on tubulars, with the remainder attributable mainly to capitalized general and administrative expenses. In addition, $33.9 million was invested in Grizzly and $13.1 million was invested in our other equity investments during the year ended December 31, 2013 . During the year ended December 31, 2013 , we used cash from operations and proceeds from our 2012 and 2013 equity and debt offerings for our investing activities. +Net cash provided by financing activities for the year ended December 31, 2014 was $ 410.2 million as compared to net cash provided by financing activities of $ 765.1 million for 2013. The 2014 amount provided by financing activities is primarily attributable to the net proceeds of $312.0 million from our 2014 debt offering and net borrowings under our revolving credit facility. +Net cash provided by financing activities for the year ended December 31, 2013 was $765.1 million as compared to $714.6 million for 2012. The 2013 amount provided by financing activities is primarily attributable to the net proceeds of $765.1 million from our 2013 equity offerings. +Credit Facility . On September 30, 2010, we entered into a senior secured revolving credit facility with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. On December 27, 2013, we amended and restated that credit agreement in its entirety. The amended and restated credit agreement provided for an increase in the maximum facility amount from $350.0 million to $1.5 billion, with an increase in borrowing base availability as of December 27, 2013 from $50.0 million to $150.0 million. The amended and restated credit agreement matures on June 6, 2018. +On April 23, 2014, we entered into a first amendment to the amended and restated credit agreement. The first amendment increased the letter of credit sublimit from $20.0 million to $70.0 million and provided for an increase in the borrowing base availability from $150.0 million to $275.0 million. The first amendment also made certain changes to the lenders and their respective lending commitments thereunder. +On November 26, 2014, we entered into a second amendment to the amended and restated credit agreement. The second amendment changed the definition of EBITDAX to exclude proceeds from the disposition of equity method investments and changed the ratio of funded debt to EBITDAX to be the ratio of net funded debt to EBITDAX. Net funded debt is funded debt less the amount of cash and short-term investments at the end of the relevant fiscal quarter. The second amendment requires the ratio of net funded debt to EBITDAX to be less than 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and +62 +Table of Contents +Index to Financial Statements +then less than 3.25 to 1.00 for the periods thereafter. Further, the second amendment increased the letter of credit sublimit from $70.0 million to $125.0 million and provided for an increase in the borrowing base availability from $275.0 million to $450.0 million. The Bank of Nova Scotia, as sole lead arranger and administrative agent of our revolving credit facility, as part of the regular spring 2015 borrowing base redetermination process, informed us that it will be recommending to the lending syndicate an increase in our borrowing base under this facility from $450.0 million to $575.0 million. We expect final approval and implementation of the borrowing base increase to be completed within the next 30 to 45 days by the lending syndicate. As of December 31, 2014 , $100.0 million was outstanding under our revolving credit facility and total funds available for borrowing, after giving effect to an aggregate of $43.6 million of letters of credit, were $306.4 million. This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility. +Advances under our revolving credit agreement may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. At December 31, 2014 , amounts borrowed under the revolving credit facility bore interest at the eurodollar rate (1.91%). +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts and forward sales contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges,(e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and 3.25 to 1.00 for the twleve-month period ending September 30, 2015 and periods thereafter; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2014 . +Senior Notes . On October 17, 2012, we issued $250.0 million in aggregate principal amount of our 7.75% Senior Notes due 2020, or the October Notes, to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act under an indenture among us, our subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee. +On December 21, 2012, we issued an additional $50.0 million in aggregate principal amount of our 7.75% Senior Notes due 2020, or the December Notes, to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The December Notes were issued as additional securities under the existing senior note indenture. We used a portion of the net proceeds from the offering of the October Notes to repay all amounts outstanding at such time under our revolving credit facility. We used the remaining net proceeds of the offering of the October Notes and the net proceeds of the offering of the December Notes for general corporate purposes, which includes funding a portion of our 2013 capital development plan. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act in October 2013. +63 +Table of Contents +Index to Financial Statements +On August 18, 2014, we issued an additional $300.0 million in aggregate principal amount of our 7.75% Senior Notes due 2020, or the August Notes, to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The August Notes were issued as additional securities under the existing senior note indenture. We used a portion of the net proceeds from the offering of the August Notes to repay all amounts outstanding at such time under our revolving credit facility. We used the remaining net proceeds from this offering for general corporate purposes, including funding a portion of our 2014 capital development plans. +In connection with the issuance of the August Notes, we and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers on August 18, 2014, pursuant to which we and the subsidiary guarantors have agreed to file a registration statement with respect to an offer to exchange the August Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the August Notes was filed on November 6, 2014, as amended on February 3, 2015, and declared effective by the SEC on February 4, 2015. The exchange offer for the August Note is expected to be completed on or about March 10, 2015. +Under the senior note indenture, interest on the Exchange Notes and the August Notes (which we refer together as the Notes) accrues at a rate of 7.75% per annum on the outstanding principal amount from October 17, 2012, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013. The Notes are senior unsecured obligations and rank equally in the right of payment with all of our other senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the Notes, provided, however, that the Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our revolving credit facility) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the Notes. +We may redeem some or all of the Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, we may redeem the Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, we may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding immediately after such redemption. +If we experience a change of control (as defined in the senior note indenture), we will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in the senior note indenture, we will be required to use the remaining proceeds to make an offer to repurchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. +The senior note indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. +Capital Expenditures . Our recent capital commitments have been primarily for the execution of our drilling programs, for acquisitions (primarily in the Utica Shale), to fund Grizzly's delineation drilling program and initial preparation of the Algar Lake facility and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities. +Of our net reserves at December 31, 2014 , 51.4% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities. +64 +Table of Contents +Index to Financial Statements +During 2014, we spud 85 gross (67.2 net) wells in the Utica Shale for a total cost of approximately $583.5 million. We currently expect our 2015 capital expenditures to be $400.0 million to $430.0 million to drill 46 to 52 gross (28 to 32 net) horizontal wells and commence sales from 49 to 53 gross (42 to 46 net) wells on our Utica Shale acreage. As of February 25, we had four operated horizontal rigs drilling in the play, but plan to release one of these rigs by the end of the first quarter 2015. We also anticipate an additional 11 to 16 gross (four to six net) horizontal wells will be drilled, and sales commenced from 50 to 64 gross (seven to nine net) horizontal wells, on our Utica Shale acreage by other operators for estimated 2015 expenditures of $125.0 million to $140.0 million. In addition, we currently expect to spend $85.0 million to $95.0 million in 2015 to acquire additional acreage in the Utica Shale. +During 2014, we recompleted 91 existing wells and spud 29 new wells for a total cost of approximately $70.0 million at our WCBB field. In our Hackberry fields, in 2014, we recompleted 70 existing wells and spud 16 new wells for a total cost of approximately $43.4 million. We currently expect our 2015 capital expenditures to be $20.0 million to $25.0 million for maintenance capital expenditures and recompletions in Southern Louisiana. +During 2014, no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2015. +During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2014 , our net investment in Grizzly was approximately $180.2 million. Our capital requirements in 2014 for Grizzly were approximately $18.8 million , primarily for the expenses associated with the construction of the Algar Lake facility. Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, of which $75.0 million has been borrowed to fund additional infrastructure relating to the Algar Lake facility and other future development projects. We do not currently anticipate any material capital expenditures in 2015 related to Grizzly's activities. +We had capital expenditures of approximately $1.2 million during the year ended December 31, 2014 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2015. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure, Stingray Cementing, and Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk and Timber Wolf with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Midstream which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon which owns and operates sand mines that produce hydraulic fracturing grade sand. See Note 5 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the year ended December 31, 2014 , we invested approximately $43.6 million in these entities. In 2015, we do not currently anticipate any capital expenditures related to these entities. We are currently evaluating strategic alternatives with respect to these oil field service entities. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its contemplated initial public offering which it intends to pursue in 2015 subject to market conditions. In January 2014, Blackhawk completed the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million, of which we received $84.8 million in net proceeds. Subsequent to December 31, 2014 , we received net proceeds of $7.2 million from the release of escrow from the Blackhawk sale. +Our total capital expenditures for 2015 are currently estimated to be in the range of $545.0 million to $595.0 million. In addition, we currently expect to spend $85.0 million to $95.0 million in 2015 to acquire additional Utica Shale acreage. Approximately 96% of our 2015 estimated capital expenditures are currently expected to be spent in the Utica Shale. This range is down from the $872.9 million spent in 2014, excluding Utica leasehold acquisitions and the Rhino acquisition, primarily due to current commodity prices and a desire to maintain a strong liquidity position. During 2014, we continued to focus on operational efficiencies in an effort to reduce our overall well costs. Further, due in large part to the significant decline in commodity prices, we have been able to negotiate reductions in service costs with our vendors. We continue to see +65 +Table of Contents +Index to Financial Statements +improvement in our service costs and expect that our operational efficiencies, combined with our service costs reductions, will lower our overall well costs by approximately 15% during 2015. We intend to continue to monitor pricing and cost developments and make adjustments to our future capital expenditure programs as warranted. +We believe that our cash on hand, cash flow from operations, the January 2015 escrow distribution from Blackhawk and borrowings under our revolving credit facility will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months. In the event we elect to further expand or accelerate our drilling program or pursue additional acquisitions, or Grizzly's oil sands projects require additional investments, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. +Commodity Price Risk +The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $34.03 per barrel, or Bbl, in February 2009 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.82 per MMBtu in April 2012 to a high of $7.51 per MMBtu in January 2010. During 2014, WTI prices ranged from $52.87 to $100.54 per Bbl and the Henry Hub spot market price of natural gas ranged from $2.89 to $4.91 per MMBtu. On January 20, 2015, the WTI posted price for crude oil was $46.47 per Bbl and the Henry Hub spot market price of natural gas was $2.82 per MMBtu, representing decreases of 54% and 43%, respectively, from the high of $100.54 per Bbl of oil and $4.91 per MMBtu for natural gas during 2014. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for information regarding our open fixed price swaps at December 31, 2014 . +Commitments +In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2014 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2014 , we have plugged 450 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation. +Contractual and Commercial Obligations +The following table sets forth our contractual and commercial obligations at December 31, 2014 : +66 +Table of Contents +Index to Financial Statements +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +7.75% senior unsecured notes due 2020 (1) +$ +877,127 +$ +46,500 +$ +93,000 +$ +93,000 +$ +644,627 +Revolving credit agreement +100,000 +— +— +100,000 +— +Asset retirement obligations +17,938 +75 +474 +852 +16,537 +Employment agreements +933 +400 +533 +— +— +Building loan (2) +1,826 +168 +1,658 +— +— +Firm transportation contracts +2,403,828 +83,871 +261,064 +289,120 +1,769,773 +Purchase obligations (3) +196,650 +52,440 +104,880 +39,330 +— +Operating leases +1,610 +615 +975 +20 +— +Total +$ +3,599,912 +$ +184,069 +$ +462,584 +$ +522,322 +$ +2,430,937 +_____________________ +(1) Includes estimated interest of $46.5 million due in less than one year; $93.0 million due in 1-3 years; $93.0 million due in 3-5 years and $44.6 million due thereafter. +(2) +Does not include estimated interest of $102,000 due in less than one year and $16,000 due in 1-3 years. +(3) +The purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. +Off-balance Sheet Arrangements +We had no off-balance sheet arrangements as of December 31, 2014 . +New Accounting Pronouncements +In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . ASU 2014-08 changes the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other material disposal transactions that do not meet the revised definition of a discontinued operation. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. The ASU is effective for annual and interim periods beginning after December 15, 2014, however, early adoption is permitted. We early adopted this ASU on a prospective basis beginning with the second quarter of 2014. The adoption did not have a material impact on our consolidated financial statements. +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach. We are in the process of evaluating the impact on our consolidated financial statements. +In August 2014, the FASB issued ASU No. 2014-15, " Presentation of Financial Statements - Going Concern (Subtopic 205-40) ." The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $34.03 per barrel, or Bbl, in February 2009 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.82 per MMBtu in April 2012 to a high of $7.51 per MMBtu in January 2010. During 2014, WTI prices ranged from $52.87 to $100.54 per Bbl and the Henry Hub spot market price of natural gas ranged from $2.89 to $4.91 per MMBtu. On January 20, 2015, the WTI posted price for crude oil was $46.47 per Bbl and the Henry Hub spot market price of natural gas was $2.82 per MMBtu, representing decreases of 54% and 43%, respectively, from the high of $100.54 per Bbl of oil and $4.91 per MMBtu for natural gas during 2014. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swaps and swaptions at December 31, 2014 : +Volume (MMBtu per day) +Weighted Average Price ($ per MMBtu) +Fixed Price Swaps and Swaptions: +January 2015 - March 2015 +190,625 +$ +4.12 +April 2015 +191,250 +$ +4.05 +May 2015 - June 2015 +201,250 +$ +4.05 +July 2015 - September 2015 +216,875 +$ +4.04 +October 2015 - December 2015 +232,500 +$ +4.04 +January 2015 - March 2016 +172,500 +$ +3.99 +April 2016 +162,500 +$ +3.99 +May 2016 - December 2016 +92,500 +$ +3.97 +January 2017 - June 2017 +62,500 +$ +3.96 +In January and February of 2015, we entered into fixed price swaps for 1,000 barrels of oil per day at a weighted average price of $62.25 per barrel. For the period of September 2015 through December 2015, we entered into fixed price swaps for 30,000 MMBtu of natural gas per day at a weighted average price of $3.40 per MMBtu. For the period from January 2016 through December 2017, we entered into fixed price swaps for 80,000 MMBtu of natural gas per day at a weighted average +67 +Table of Contents +Index to Financial Statements +price of $3.45 per MMBtu. For the period from January 2018 through December 2018, we entered into fixed price swaps for 30,000 MMBtu of natural gas per day at a weighted average price of $3.40 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX. We will receive the fixed price amount stated in the contract and pay to our counterparty the current market price as listed on NYMEX for natural gas. +In February 2015, we entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon to the NYMEX Henry Hub natural gas price for 30,000 MMBtu per day at a hedge differential of $.02 for the period from March 2015 through December 2016 and for 10,000 MMBtu per day at a hedge differential of $.01 for the period from March 2015 through December 2016. +Under our 2015 contracts, we have hedged approximately 47% to 52% of our expected 2015 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. These fixed price swaps are accounted for as cash flow hedges and recorded at fair value pursuant to FASB ASC 815 and related pronouncements. At December 31, 2014 , we had a net asset derivative position of $102.8 million as compared to a net liability derivative position of $22.8 million as of December 31, 2013 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $42.1 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $42.1 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2014 , amounts borrowed under our revolving credit facility bore interest at the Eurodollar rate of 1.91%. A 1% increase in interest rates would increase interest expense by approximately $1.0 million per year, based on $100.0 million outstanding under our revolving credit facility as of December 31, 2014 . As of December 31, 2014 , we did not have any interest rate swaps to hedge our interest risks. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this item appears beginning on page F-1 following the signature pages of this Report. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2014 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2014 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +68 +Table of Contents +Index to Financial Statements +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2014 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2014 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2014 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Aaron Gaydosik +Name: +Michael G. Moore +Name: +Aaron Gaydosik +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +69 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and Subsidiaries (the “Company”) as of December 31, 2014 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014 and our report dated February 27, 2015 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 27, 2015 +70 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +None. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 11. +EXECUTIVE COMPENSATION +For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +71 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +The following documents are filed as part of this report or incorporated by reference herein: +(1) +Financial Statements +Reference is made to the Index to Financial Statements appearing on Page F-1. +Reference is also made to the Financial Statements of Diamondback Energy, Inc. (“Diamondback”) that have been included on pages F-1 to F-54 in Diamondback’s Annual Report on Form 10-K (File No. 001-35700) filed with the SEC on February 20, 2015, as such Annual Report on Form 10-K may be amended from time to time, which Financial Statements are incorporated herein by reference. +(2) +Financial Statement Schedules +All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto. +(3) +Exhibits +Exhibit +Number +Description +2.1 +Contribution Agreement, dated May 7, 2012, by and between the Company and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 8, 2012). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of October 17, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (including the form of Gulfport Energy Corporation's 7.750% Senior Note Due November 1, 2020) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 23, 2012). +4.3 +First Supplemental Indenture, dated December 21, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 26, 2012). +4.4 +Second Supplemental Indenture, dated August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +4.5 +Registration Rights Agreement, dated as of August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.4 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +72 +Table of Contents +Index to Financial Statements +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+* +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Employment Agreement, entered into on April 30, 2014, by and between Gulfport Energy Corporation and Michael G. Moore (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4/A, File No. 333-199905, filed by the Company with the SEC on February 3, 2015). +10.8 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.9 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.10 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.11# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.12# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.13+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.14 +Investor Rights Agreement, dated as of October 11, 2012, between Gulfport Energy Corporation and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 17, 2012). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +73 +Table of Contents +Index to Financial Statements +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Ryder Scott Company. +99.2* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC on January 16, 2015, which portions have been omitted and filed separately with the SEC. +74 +Table of Contents +Index to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 27, 2015 +GULFPORT ENERGY CORPORATION +By: +/s/ MICHAEL G. MOORE +Michael G. Moore +Chief Executive Officer and President +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: +February 27, 2015 +By: +/s/ MICHAEL G. MOORE +Michael G. Moore +Chief Executive Officer and President +(Principal Executive Officer) +Date: +February 27, 2015 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 27, 2015 +By: +/s/ AARON GAYDOSIK +Aaron Gaydosik +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: +February 27, 2015 +By: +/s/ DONALD DILLINGHAM +Donald Dillingham +Director +Date: +February 27, 2015 +By: +/s/ CRAIG GROESCHEL +Craig Groeschel +Director +Date: +February 27, 2015 +By: +/s/ SCOTT E. STRELLER +Scott E. Streller +Director +Date: +February 27, 2015 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +S-1 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets, December 31, 2014 and December 31, 2013 +F-3 +Consolidated Statements of Operations, Years Ended December 31, 2014, 2013 and 2012 +F-4 +Consolidated Statements of Comprehensive Income, Years Ended December 31, 2014, 2013 and 2012 +F-5 +Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2014, 2013 and 2012 +F-6 +Consolidated Statements of Cash Flows, Years Ended December 31, 2014, 2013 and 2012 +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware Corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulfport Energy Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2015 expressed an unqualified opinion. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 27, 2015 +F-2 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, +2014 +December 31, +2013 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +142,340 +$ +458,956 +Accounts receivable—oil and gas +103,858 +58,824 +Accounts receivable—related parties +46 +2,617 +Prepaid expenses and other current assets +3,714 +2,581 +Deferred tax asset +— +6,927 +Short-term derivative instruments +78,391 +324 +Note receivable - related party +— +875 +Total current assets +328,349 +531,104 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $1,465,538 and $1,020,835 excluded from amortization in 2014 and 2013, respectively +3,923,154 +2,477,178 +Other property and equipment +18,344 +11,131 +Accumulated depletion, depreciation, amortization and impairment +(1,050,879 +) +(784,717 +) +Property and equipment, net +2,890,619 +1,703,592 +Other assets: +Equity investments ($0 and $178,708 attributable to fair value option in 2014 and 2013, respectively) +369,581 +440,068 +Derivative instruments +24,448 +521 +Other assets +19,396 +17,851 +Total other assets +413,425 +458,440 +Total assets +$ +3,632,393 +$ +2,693,136 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +371,410 +$ +190,707 +Asset retirement obligation—current +75 +795 +Short-term derivative instruments +— +12,280 +Deferred tax liability +27,070 +— +Current maturities of long-term debt +168 +159 +Total current liabilities +398,723 +203,941 +Long-term derivative instrument +— +11,366 +Asset retirement obligation—long-term +17,863 +14,288 +Deferred tax liability +203,195 +114,275 +Long-term debt, net of current maturities +716,316 +299,028 +Total liabilities +1,336,097 +642,898 +Commitments and contingencies (Notes 16 and 17) +Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding +— +— +Stockholders’ equity: +Common stock - $.01 par value, 200,000,000 authorized, 85,655,438 issued and outstanding in 2014 and 85,177,532 in 2013 +856 +851 +Paid-in capital +1,828,602 +1,813,058 +Accumulated other comprehensive loss +(26,675 +) +(9,781 +) +Retained earnings +493,513 +246,110 +Total stockholders’ equity +2,296,296 +2,050,238 +Total liabilities and stockholders’ equity +$ +3,632,393 +$ +2,693,136 +See accompanying notes to consolidated financial statements. +F-3 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2014 +2013 +2012 +(In thousands, except share data) +Revenues: +Oil and condensate sales +$ +247,381 +$ +224,129 +$ +242,708 +Gas sales +329,254 +21,015 +3,225 +Natural gas liquid sales +94,127 +17,081 +2,668 +Other income +504 +528 +325 +671,266 +262,753 +248,926 +Costs and expenses: +Lease operating expenses +52,191 +26,703 +24,308 +Production taxes +24,006 +26,933 +28,957 +Midstream gathering and processing +64,467 +11,030 +443 +Depreciation, depletion and amortization +265,431 +118,880 +90,749 +General and administrative +38,290 +22,519 +13,808 +Accretion expense +761 +717 +698 +(Gain) loss on sale of assets +(11 +) +508 +(7,300 +) +445,135 +207,290 +151,663 +INCOME FROM OPERATIONS +226,131 +55,463 +97,263 +OTHER (INCOME) EXPENSE: +Interest expense +23,986 +17,490 +7,458 +Interest income +(195 +) +(297 +) +(72 +) +Litigation settlement +25,500 +— +— +Gain on contribution of investments +(84,470 +) +— +— +Income from equity method investments +(139,434 +) +(213,058 +) +(8,322 +) +(174,613 +) +(195,865 +) +(936 +) +INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES +400,744 +251,328 +98,199 +INCOME TAX EXPENSE +153,341 +98,136 +26,363 +INCOME FROM CONTINUING OPERATIONS +247,403 +153,192 +71,836 +DISCONTINUED OPERATIONS +Loss on disposal of Belize properties, net of tax +— +— +3,465 +NET INCOME +$ +247,403 +$ +153,192 +$ +68,371 +NET INCOME PER COMMON SHARE: +Basic net income from continuing operations per share +$ +2.90 +$ +1.98 +$ +1.28 +Basic net income from discontinued operations, net of tax, per share +— +— +(0.06 +) +Basic net income per share +$ +2.90 +$ +1.98 +$ +1.22 +Diluted net income from continuing operations per share +$ +2.88 +$ +1.97 +$ +1.27 +Diluted net income from discontinued operations, net of tax, per share +— +— +(0.06 +) +Diluted net income per share +$ +2.88 +$ +1.97 +$ +1.21 +Weighted average common shares outstanding—Basic +85,445,963 +77,375,683 +55,933,354 +Weighted average common shares outstanding—Diluted +85,813,182 +77,861,646 +56,417,488 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +For the Year Ended December 31, +2014 +2013 +2012 +(In thousands) +Net income +$ +247,403 +$ +153,192 +$ +68,371 +Foreign currency translation adjustment +(16,894 +) +(12,223 +) +1,355 +Change in fair value of derivative instruments (1) +— +(4,419 +) +(8,452 +) +Reclassification of settled contracts (2) +— +10,290 +1,005 +Other comprehensive loss +(16,894 +) +(6,352 +) +(6,092 +) +Comprehensive income +$ +230,509 +$ +146,840 +$ +62,279 +(1) Net of $4.3 million and $(4.3) million in taxes for the years ended December 31, 2013 and 2012, respectively. No taxes were recorded in the year ended 2014. +(2) Net of $(0.5) million and $0.5 million in taxes for the years ended December 31, 2013 and 2012, respectively. No taxes were recorded in the year ended 2014. +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Income (Loss) +Retained +Earnings +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2012 +55,621,371 +$ +556 +$ +604,584 +$ +2,663 +$ +24,547 +$ +632,350 +Net income +— +— +— +— +68,371 +68,371 +Other Comprehensive Loss +— +— +— +(6,092 +) +— +(6,092 +) +Stock Compensation +— +— +4,688 +— +— +4,688 +Issuance of Common Stock in public offerings, net of related expenses +11,750,000 +118 +426,789 +— +— +426,907 +Issuance of Restricted Stock +135,015 +— +— +— +— +— +Issuance of Common Stock through exercise of options +21,000 +— +184 +— +— +184 +Balance at December 31, 2012 +67,527,386 +674 +1,036,245 +(3,429 +) +92,918 +1,126,408 +Net income +— +— +— +— +153,192 +153,192 +Other Comprehensive Loss +— +— +— +(6,352 +) +— +(6,352 +) +Stock Compensation +— +— +10,495 +— +— +10,495 +Issuance of Common Stock in public offerings, net of related expenses +17,287,500 +173 +764,922 +— +— +765,095 +Issuance of Restricted Stock +237,646 +3 +(3 +) +— +— +— +Issuance of Common Stock through exercise of options +125,000 +1 +1,399 +— +— +1,400 +Balance at December 31, 2013 +85,177,532 +851 +1,813,058 +(9,781 +) +246,110 +2,050,238 +Net income +— +— +— +— +247,403 +247,403 +Other Comprehensive Loss +— +— +— +(16,894 +) +— +(16,894 +) +Stock Compensation +— +— +14,860 +— +— +14,860 +Issuance of Restricted Stock +272,665 +3 +(3 +) +— +— +— +Issuance of Common Stock through exercise of options +205,241 +2 +687 +689 +Balance at December 31, 2014 +85,655,438 +$ +856 +$ +1,828,602 +$ +(26,675 +) +$ +493,513 +$ +2,296,296 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2014 +2013 +2012 +(In thousands) +Cash flows from operating activities: +Net income +$ +247,403 +$ +153,192 +$ +68,371 +Adjustments to reconcile net income to net cash provided by operating activities: +Accretion of discount—Asset Retirement Obligation +761 +717 +698 +Depletion, depreciation and amortization +265,431 +118,880 +90,749 +Stock-based compensation expense +8,916 +6,297 +2,813 +Gain from equity investments +(54,171 +) +(212,714 +) +(8,322 +) +Gain on contribution of investments +(84,470 +) +— +— +Interest income - note receivable +(46 +) +(26 +) +(2 +) +Unrealized (gain) loss on derivative instruments +(121,148 +) +18,189 +144 +Deferred income tax expense +122,917 +84,951 +24,120 +Amortization of loan commitment fees +1,685 +1,012 +640 +Amortization of note discount and premium +(533 +) +298 +59 +Write off of loan commitment fees +— +— +1,143 +Loss on disposal of assets +— +— +5,702 +Gain on sale of assets +— +— +(7,300 +) +Changes in operating assets and liabilities: +(Increase) decrease in accounts receivable +(45,034 +) +(33,209 +) +2,404 +Decrease (increase) in accounts receivable—related party +2,571 +32,231 +(30,117 +) +Increase in prepaid expenses +(1,133 +) +(1,075 +) +(179 +) +Increase in other assets +— +(4,523 +) +— +Increase in accounts payable and accrued liabilities +73,925 +29,310 +50,506 +Settlement of asset retirement obligation +(7,201 +) +(2,465 +) +(2,271 +) +Net cash provided by operating activities +409,873 +191,065 +199,158 +Cash flows from investing activities: +Deductions to cash held in escrow +8 +8 +8 +Additions to other property and equipment +(7,030 +) +(2,322 +) +(638 +) +Additions to oil and gas properties +(1,329,277 +) +(808,183 +) +(757,192 +) +Proceeds from sale of other property and equipment +— +113 +140 +Proceeds from sale of oil and gas properties +4,404 +— +63,590 +Repayments (advances) on note receivable to related party +875 +(875 +) +— +Proceeds from sale of investments +258,362 +192,737 +— +Contributions to equity method investments +(63,999 +) +(47,014 +) +(147,307 +) +Distributions from equity method investments +— +1,276 +820 +Net cash used in investing activities +(1,136,657 +) +(664,260 +) +(840,579 +) +Cash flows from financing activities: +Principal payments on borrowings +(115,690 +) +(149 +) +(158,639 +) +Borrowings on line of credit +215,000 +— +158,500 +Proceeds from bond issuance +318,000 +— +296,835 +Debt issuance costs and loan commitment fees +(7,831 +) +(1,283 +) +(9,175 +) +Proceeds from issuance of common stock, net of offering costs +689 +766,495 +427,091 +Net cash provided by financing activities +410,168 +765,063 +714,612 +Net (decrease) increase in cash and cash equivalents +(316,616 +) +291,868 +73,191 +Cash and cash equivalents at beginning of period +458,956 +167,088 +93,897 +Cash and cash equivalents at end of period +$ +142,340 +$ +458,956 +$ +167,088 +Supplemental disclosure of cash flow information: +Interest payments +$ +28,646 +$ +24,280 +$ +1,461 +Income tax payments +$ +23,800 +$ +2,761 +$ +261 +Supplemental disclosure of non-cash transactions: +Capitalized stock based compensation +$ +5,944 +$ +4,198 +$ +1,875 +Asset retirement obligation capitalized +$ +9,295 +$ +3,556 +$ +2,195 +Interest capitalized +$ +9,687 +$ +7,132 +$ +— +Foreign currency translation (loss) gain on investment in Grizzly Oil Sands ULC +$ +16,894 +$ +(12,223 +) +$ +1,355 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2014 , 2013 AND 2012 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the “Company”) is an independent oil and gas exploration, development and production company with its principal properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in Western Colorado in the Niobrara Formation, and has investments in companies operating in the United States, Canada and Thailand. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC and Puma Resources, Inc. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company’s accounts receivable—oil and gas primarily are from companies in the oil and gas industry. The majority of its receivables are from three purchasers of the Company’s oil and gas and receivables from joint interest owners on properties the Company operates. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2014 and December 31, 2013 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for 2014 , 2013 and 2012 , adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled $1.5 billion and $1.0 billion at December 31, 2014 and December 31, 2013 , respectively. These costs are reviewed quarterly by management for impairment. If impairment has +F-8 +Table of Contents +Index to Financial Statements +occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities under FASB ASC Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”), which requires the Company to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive income (loss). +(In thousands) +December 31, 2011 +$ +1,087 +December 31, 2012 +$ +2,442 +December 31, 2013 +$ +(9,781 +) +December 31, 2014 +$ +(26,675 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 12. +Income Taxes +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 1999 – 2014 U.S. federal and state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2014 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative +F-9 +Table of Contents +Index to Financial Statements +expenses, respectively. For the year ended December 31, 2014 , there is no interest or penalties associated with uncertain tax positions in the Company’s consolidated financial statements. +Revenue Recognition +Natural gas revenues are recorded in the month produced and delivered to the purchaser using the entitlement method, whereby any production volumes received in excess of the Company’s ownership percentage in the property are recorded as a liability. If less than Gulfport’s entitlement is received, the underproduction is recorded as a receivable. At December 31, 2014 and 2013 , the Company had no gas imbalance liability. Oil revenues are recognized when ownership transfers, which occurs in the month produced. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the statement of operations. In accordance with FASB ASC 825 , "Financial Instruments ," the Company has elected the fair value option of accounting for its equity method investment in the common stock of Diamondback Energy Inc. ("Diamondback"). At the end of each reporting period, the quoted closing market price of Diamondback's common stock is multiplied by the total shares owned by the Company and the resulting gain or loss is recognized in income from equity method investments in the consolidated statements of operations. As of December 31, 2014 , the Company did not own any shares of Diamondback's common stock. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. There was no impairment of equity method investments at December 31, 2013 . At December 31, 2014, the Company recognized an impairment of $12.1 million related to its investment in Tatex Thailand III, LLC. See Note 5 for further discussion of this impairment. +Accounting for Stock-Based Compensation +The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC Topic 718, “ Compensation—Stock Compensation ” (“FASB ASC 718”). FASB ASC 718 requires share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for the options range between three to five years and have a maximum contractual term of ten years. The vesting periods for restricted shares range between one to five years with either quarterly or annual vesting installments. +Accounting for Derivative Instruments and Hedging Activities +The Company may seek to reduce its exposure to unfavorable changes in oil and natural gas prices by utilizing energy swaps and collars. The Company follows the provisions of FASB ASC 815, “ Derivatives and Hedging ” (“FASB ASC 815”) as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. +The Company estimates the fair value of all derivative instruments using established index prices and other sources. These values are based upon, among other things, futures prices, correlation between index prices and the Company’s realized prices, time to maturity and credit risk. The values reported in the consolidated financial statements change as these estimates are revised to reflect actual results, changes in market conditions or other factors. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Designation is established at the inception of a derivative, but re-designation is permitted. For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of +F-10 +Table of Contents +Index to Financial Statements +proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements to conform to current period presentation. +Recent Accounting Pronouncements +In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . ASU 2014-08 changes the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other material disposal transactions that do not meet the revised definition of a discontinued operation. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. The ASU is effective for annual and interim periods beginning after December 15, 2014, however, early adoption is permitted. The Company early adopted this ASU on a prospective basis beginning with the second quarter of 2014. The adoption did not have a material impact on the Company’s consolidated financial statements. +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach. The Company is in the process of evaluating the impact on its consolidated financial statements. +In August 2014, the FASB issued ASU No. 2014-15, " Presentation of Financial Statements - Going Concern (Subtopic 205-40) ." The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements. +In February 2013, the FASB issued ASU No. 2013-02 , "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires additional information about amounts reclassified out of accumulated other comprehensive income by component. This ASU requires the presentation, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, a cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The requirements of this ASU are effective prospectively for reporting periods beginning after December 15, 2012 with early adoption permitted. Adoption of the provisions of this ASU did not have a material effect on the Company's consolidated financial statements. +In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which provides amendments to FASB ASC Topic 820, “Fair Value Measurements and Disclosure” (“FASB ASC 820”) . The purpose of the amendments in this update is to create common fair value measurement and disclosure requirements between GAAP and IFRS. The amendments change certain fair value measurement principles and enhance the disclosure requirements. The amendments to FASB ASC 820 were effective for interim and annual periods beginning after December 15, 2011. Adoption of this ASU had no impact on the Company's financial position or results of operations. +F-11 +Table of Contents +Index to Financial Statements +In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income,” which provides amendments to FASB ASC Topic 220, “Comprehensive Income” (“FASB ASC 220”). The purpose of the amendments in this update is to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. The amendments eliminate the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. The amendments to FASB ASC 220 were effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The Company adopted this ASU for reporting periods in 2012 and reports the components of net income and the components of other comprehensive income in two separate but consecutive statements. Adoption of this ASU had no impact on the Company's financial position or results of operations. +2. +ACQUISITIONS +Beginning in February 2011, the Company entered into agreements to acquire certain leasehold interests located in the Utica Shale in Ohio. Certain of the agreements also granted the Company an exclusive right of first refusal for a period of six months to acquire certain additional tracts leased by the seller. Certain entities that, at the time, were affiliates of Gulfport initially participated with the Company on a 50/50 basis in the acquisition of all leases described above. On December 17, 2012, Gulfport entered into a definitive agreement with one of the affiliates to purchase approximately 30,000 net acres in the Utica Shale for approximately $302.0 million . On December 19, 2012, the parties amended that agreement to provide for Gulfport's acquisition of approximately 7,000 additional net acres for approximately $70.0 million , resulting in a total purchase price of approximately $372.0 million , subject to certain adjustments. This transaction closed on December 24, 2012. At closing, approximately $53.9 million of the purchase price was placed in escrow pending completion of title review after the closing. Gulfport funded this acquisition with a portion of the net proceeds from its common stock offering that closed on December 24, 2012 (with a second closing for the underwriters' purchase of 900,000 shares pursuant to their over-allotment option on January 7, 2013). The Company received aggregate net proceeds of approximately $460.7 million from this equity offering, as discussed below in Note 8. +On February 15, 2013, the Company completed an acquisition of approximately 22,000 net acres in the Utica Shale. The purchase price was approximately $220.0 million , subject to certain adjustments. At closing, approximately $33.6 million of the purchase price was placed in escrow pending completion of title review after the closing. Gulfport funded this acquisition with a portion of the net proceeds from its common stock offering that closed on February 15, 2013. The Company received aggregate net proceeds of approximately $325.8 million from this equity offering. All of the acreage included in these transactions was nonproducing at the time of the applicable transaction and the Company is the operator of all of this acreage, subject to existing development and operating agreements between the parties. These acquisitions excluded the seller's interest in 14 existing wells and 16 proposed future wells together with certain acreage surrounding these wells. +In May 2013, both escrow accounts terminated and an aggregate of $10.0 million was returned to the Company. The balance of the escrow accounts was distributed to the seller based on the results of the title review. +In February 2014, the Company entered into a definitive agreement with Rhino Exploration LLC ("Rhino") to acquire additional oil and natural gas properties consisting of approximately 8,000 net acres in the Utica Shale, as well as Rhino's interest in all of the producing wells on this acreage (the "Rhino Acquisition"). The Company purchased approximately $182.0 million ( $179.5 million net of purchase price adjustments) of these assets in 2014. The Company recognized $6.4 million of net revenues and $1.0 million of lease operating expenses as a result of the Rhino Acquisition from the closing date of March 20, 2014 through December 31, 2014 , which is included in the accompanying consolidated statements of operations. +The Rhino Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the March 20, 2014 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See "Note 14 - Fair Value Measurements" for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the Rhino Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +The following table summarizes the consideration paid in the Rhino Acquisition to acquire the properties and the fair value amount of the assets acquired as of March 20, 2014. +F-12 +Table of Contents +Index to Financial Statements +(in thousands) +Consideration paid +Cash, net of purchase price adjustments +$ +179,527 +Fair value of identifiable assets acquired +Oil and natural gas properties +Proved +$ +31,961 +Unproved +6,263 +Unevaluated +141,303 +Fair value of net identifiable assets acquired +$ +179,527 +3. +ACCOUNTS RECEIVABLE—RELATED PARTIES +Included in the accompanying consolidated balance sheets as of December 31, 2014 and 2013 are amounts receivable from related parties of the Company. At December 31, 2013 , these receivables totaled $2.6 million . At December 31, 2014 , the amount of related party receivables was immaterial. +4. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2014 and 2013 are as follows: +December 31, +2014 +2013 +(In thousands) +Oil and natural gas properties +$ +3,923,154 +$ +2,477,178 +Office furniture and fixtures +10,752 +6,093 +Building +5,398 +4,626 +Land +2,194 +412 +Total property and equipment +3,941,498 +2,488,309 +Accumulated depletion, depreciation, amortization and impairment +(1,050,879 +) +(784,717 +) +Property and equipment, net +$ +2,890,619 +$ +1,703,592 +No impairment of oil and natural gas properties was required under the ceiling test for the years ended December 31, 2014 , 2013 or 2012 . +Included in oil and natural gas properties at December 31, 2014 and 2013 is the cumulative capitalization of $ 72.7 million and $47.5 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 25.2 million , $14.9 million and $9.1 million for the years ended December 31, 2014 , 2013 and 2012 , respectively. +The following is a summary of Gulfport’s oil and gas properties not subject to amortization as of December 31, 2014 : +F-13 +Table of Contents +Index to Financial Statements +Costs Incurred in +2014 +2013 +2012 +Prior to 2012 +Total +(in thousands) +Acquisition costs +$ +405,226 +$ +323,515 +$ +459,151 +$ +93,864 +$ +1,281,756 +Exploration costs +— +— +— +— +— +Development costs +173,693 +1,801 +506 +— +176,000 +Capitalized interest +5,204 +2,578 +— +— +7,782 +Total oil and gas properties not subject to amortization +$ +584,123 +$ +327,894 +$ +459,657 +$ +93,864 +$ +1,465,538 +The following table summarizes the Company’s non-producing properties excluded from amortization by area at December 31, 2014 : +December 31, 2014 +(In thousands) +Colorado +$ +5,127 +Bakken +96 +Southern Louisiana +145 +Ohio +1,460,125 +Other +45 +$ +1,465,538 +At December 31, 2013 , approximately $1.0 billion of non-producing leasehold costs was not subject to amortization. +During the year ended December 31, 2012, the Company determined that further development of its non-producing leasehold assets located in Belize was not in alignment with its strategic operating plan and, therefore, recognized a loss on disposal of assets, net of tax, of approximately $3.5 million which is included in discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2012. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation is expected to occur within three to five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2014 and 2013 is as follows: +December 31, +2014 +2013 +(In thousands) +Asset retirement obligation, beginning of period +$ +15,083 +$ +13,275 +Liabilities incurred +9,295 +3,556 +Liabilities settled +(7,201 +) +(2,465 +) +Accretion expense +761 +717 +Asset retirement obligation as of end of period +17,938 +15,083 +Less current portion +75 +795 +Asset retirement obligation, long-term +$ +17,863 +$ +14,288 +On May 7, 2012, the Company entered into a contribution agreement with Diamondback. Under the terms of the contribution agreement, the Company agreed to contribute to Diamondback, prior to the closing of the Diamondback initial public offering (“Diamondback IPO”), all its oil and natural gas interests in the Permian Basin (the "Contribution"). The Contribution was completed on October 11, 2012. At the closing of the Contribution, Diamondback issued to the Company (i) +F-14 +Table of Contents +Index to Financial Statements +7,914,036 shares of Diamondback common stock and (ii) a promissory note for $ 63.6 million , which was repaid to the Company at the closing of the Diamondback IPO on October 17, 2012. This aggregate consideration was subject to a post-closing cash adjustment based on changes in the working capital, long-term debt and certain other items of Diamondback O&G LLC, formerly Windsor Permian LLC ("Diamondback O&G"), as of the date of the Contribution. In January 2013, the Company received an additional payment from Diamondback of approximately $18.6 million as a result of this post-closing adjustment. Diamondback O&G is a wholly-owned subsidiary of Diamondback. Under the contribution agreement, the Company is generally responsible for all liabilities and obligations with respect to the contributed properties arising prior to the Contribution and Diamondback is responsible for such liabilities and obligations with respect to the contributed properties arising after the Contribution. +In accordance with the Company's policy under the full cost method of accounting to only recognize a gain or loss upon the disposal of oil and natural gas properties if such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves, the Company recognized a gain on the sale of its Permian Basin assets of approximately $7.3 million , which is included in the accompanying consolidated statements of operations for the year ended December 31, 2012. In addition, the Company recorded a reduction to its full cost pool of approximately $213.0 million as a result of the Contribution. +In connection with the Contribution, the Company and Diamondback entered into an investor rights agreement under which the Company had the right, for so long as it beneficially owned more than 10% of Diamondback’s outstanding common stock, to designate one individual as a nominee to serve on Diamondback’s board of directors. Such nominee, if elected to Diamondback’s board, would also serve on each committee of the board so long as he or she satisfied the independence and other requirements for service on the applicable committee of the board. So long as the Company had the right to designate a nominee to Diamondback’s board and there was no Gulfport nominee actually serving as a Diamondback director, the Company had the right to appoint one individual as an advisor to the board who would be entitled to attend board and committee meetings. The Company was also entitled to certain information rights and Diamondback granted the Company certain demand and “piggyback” registration rights obligating Diamondback to register with the SEC any shares of Diamondback common stock that the Company owns. Immediately upon completion of the Contribution, the Company owned a 35% equity interest in Diamondback, rather than leasehold interests in the Company’s Permian Basin acreage. Upon completion of the Diamondback IPO in October 2012, Gulfport owned approximately 21.4% of Diamondback's outstanding common stock. Following the Contribution, the Company has accounted for its interest in Diamondback as an equity investment. In November 2014, the Company sold all of the remaining shares of Diamondback common stock that it received in the Contribution and, as of December 31, 2014, Gulfport did not own any shares of Diamondback's common stock. See Note 5, "Equity Investments - Diamondback Energy, Inc ." +F-15 +Table of Contents +Index to Financial Statements +5. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2014 and 2013 : +Carrying Value +(Income) loss from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2014 +2013 +2014 +2013 +2012 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +(475 +) +$ +(343 +) +$ +7 +Investment in Tatex Thailand III, LLC +17.9 +% +— +10,774 +12,408 +254 +251 +Investment in Grizzly Oil Sands ULC +24.9999 +% +180,218 +191,473 +13,159 +2,999 +1,512 +Investment in Bison Drilling and Field Services LLC +— +% +— +12,318 +213 +3,533 +373 +Investment in Muskie Proppant LLC +— +% +— +7,544 +371 +1,975 +1,031 +Investment in Timber Wolf Terminals LLC +50.0 +% +1,013 +1,001 +9 +(6 +) +122 +Investment in Windsor Midstream LLC +22.5 +% +13,505 +10,632 +(477 +) +(1,125 +) +(663 +) +Investment in Stingray Pressure Pumping LLC +— +% +— +19,624 +2,027 +(818 +) +1,235 +Investment in Stingray Cementing LLC +50.0 +% +2,647 +3,291 +344 +93 +159 +Investment in Blackhawk Midstream LLC +— +% +— +— +(84,787 +) +673 +436 +Investment in Stingray Logistics LLC +50.0 +% +— +903 +(464 +) +51 +36 +Investment in Diamondback Energy, Inc. +— +% +— +178,708 +(79,654 +) +(220,129 +) +(12,821 +) +Investment in Stingray Energy Services LLC +50.0 +% +5,718 +3,800 +(88 +) +(215 +) +— +Investment in Sturgeon Acquisitions LLC +25.0 +% +22,507 +— +(1,819 +) +— +— +Investment in Mammoth Energy Partners LP +30.5 +% +143,973 +— +(201 +) +— +— +$ +369,581 +$ +440,068 +$ +(139,434 +) +$ +(213,058 +) +$ +(8,322 +) +The tables below summarize financial information for the Company's equity investments, excluding Diamondback, as of December 31, 2014 and 2013 . +Summarized balance sheet information: +December 31, +2014 +2013 +(In thousands) +Current assets +$ +181,060 +$ +84,107 +Noncurrent assets +$ +1,306,891 +$ +1,107,579 +Current liabilities +$ +114,506 +$ +112,406 +Noncurrent liabilities +$ +230,062 +$ +110,095 +Summarized results of operations: +December 31, +2014 +2013 +2012 +(In thousands) +Gross revenue +$ +390,620 +$ +162,401 +$ +39,918 +Net loss +$ +140,796 +$ +17,350 +$ +1,943 +Gross revenue and net loss presented above include approximately one month of activity for Mammoth Energy Partners LP ("Mammoth") and approximately eleven months of activity for Stingray Pressure Pumping LLC, Stingray Logistics LLC, +F-16 +Table of Contents +Index to Financial Statements +Muskie Proppant LLC and Bison Drilling and Field Services LLC, which were contributed to Mammoth in November 2014. See further discussion of the contribution to Mammoth below. +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds 85,122 of the 1,000,000 outstanding shares of APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. During the year ended December 31, 2014 , Gulfport received $0.5 million in distributions from Tatex which is included in income from equity method investments in the consolidated statements of operations. +Tatex Thailand III, LLC +The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. During the years ended December 31, 2014 and 2013 , the Company paid cash calls of $1.6 million and $2.4 million , respectively. As of December 31, 2014, the Company reviewed its investment in Tatex III and made the decision to allow the concession to expire in 2015. As such, the Company fully impaired the asset as of December 31, 2014 , recognizing a loss of $12.1 million which is included in income from equity method investments in the accompanying consolidated statements of operations. +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of December 31, 2014 , Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions of Alberta, Canada. Initiation of steam injection at its first project, Algar Lake Phase 1, commenced in January 2014 and first bitumen production was achieved during the second quarter of 2014. During the years ended December 31, 2014 and 2013 , Gulfport paid $ 18.8 million and $33.9 million , respectively, in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was decreased by $16.9 million and $12.2 million as a result of a foreign currency translation loss for the years ended December 31, 2014 and 2013 , respectively, and increased by $1.4 million as a result of a foreign currency translation gain for the year ended December 31, 2012 . +Bison Drilling and Field Services LLC +During 2011 , the Company invested in Bison Drilling and Field Services LLC (“Bison”). Bison owns and operates drilling rigs. During the years ended December 31, 2014 and 2013 , Gulfport paid $ 17.0 million and $2.3 million , respectively, in cash calls. +The Company entered into a loan agreement with Bison effective May 15, 2012. Interest accrued at LIBOR plus 0.28% or 8% , whichever was lower, and was to be paid on a paid-in-kind basis by increasing the outstanding balance of the loan. The loan had a maturity date of January 31, 2015. The Company loaned Bison $1.6 million during the first nine months of 2012, all of which was repaid by Bison during the third quarter of 2012. This loan agreement was terminated in November 2014. +The Company contributed its investment in Bison to Mammoth during the fourth quarter of 2014. See below under Mammoth Energy Partners LP for discussion of contribution. +Muskie Proppant LLC +During 2011 , the Company invested in Muskie Proppant LLC (“Muskie”). Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain rights in a lease covering land in Wisconsin for mining oil and natural gas fracture grade sand. During the years ended December 31, 2014 and 2013 , Gulfport paid $ 1.0 million and $2.2 million , respectively, in cash calls to Muskie. +The Company entered into a loan agreement with Muskie effective July 1, 2013, under which it loaned Muskie $0.9 million . Interest accrued at the prime rate plus 2.5% . The loan had a original maturity date of July 31, 2014. Effective July 31, 2014, an amendment was made to the loan agreement which changed the maturity date of the loan to July 31, 2015. During the fourth quarter of 2014, Muskie repaid the outstanding balance and the loan agreement was terminated. +F-17 +Table of Contents +Index to Financial Statements +The Company contributed its investment in Muskie to Mammoth during the fourth quarter of 2014. See below under Mammoth Energy Partners LP for discussion of contribution. +Timber Wolf Terminals LLC +During 2012, the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). The Company's initial investment during 2012 was $ 1.0 million . Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. During the year ended December 31, 2014 , the Company paid an immaterial amount of cash calls related to Timber Wolf. During the year ended December 31, 2013 , Gulfport paid $0.1 million in cash calls. +Windsor Midstream LLC +During 2012, the Company purchased an ownership interest in Windsor Midstream LLC (“Midstream”). Midstream owns a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. In February of 2015, Coronado announced its intent to sell its natural gas gathering and processing facilities for approximately $600.0 million . During the year ended December 31, 2014 , the Company paid $2.4 million in cash calls to Midstream. During the year ended December 31, 2013, the Company paid an immaterial amount in net cash calls to Midstream. +Stingray Pressure Pumping LLC +During 2012, the Company invested in Stingray Pressure Pumping LLC ("Stingray Pressure"). Stingray Pressure provides well completion services. During the years ended December 31, 2014 and 2013 , the Company paid $ 2.5 million and $1.8 million , respectively, in cash calls. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. +The Company contributed its investment in Stingray Pressure to Mammoth during the fourth quarter of 2014. See below under Mammoth Energy Partners LP for discussion of contribution. +Stingray Cementing LLC +During 2012, the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. During the years ended December 31, 2014 and 2013 , the Company did not pay any cash calls related to Stingray Cementing. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. +Blackhawk Midstream LLC +During 2012, the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinates gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. During the year ended December 31, 2013, the Company paid $0.7 million in cash calls related to Blackhawk. On January 28, 2014, Blackhawk closed on the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million , of which $14.3 million was placed in escrow. Gulfport received $84.8 million in net proceeds from this transaction in 2014, which is included in income from equity method investments in the accompanying consolidated statements of operations. Subsequent to December 31, 2014 , the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale. +Stingray Logistics LLC +During 2012, the Company invested in Stingray Logistics LLC ("Stingray Logistics"). Stingray Logistics provides well services. During the years ended December 31, 2014 and 2013 , the Company did not pay any cash calls related to Stingray Logistics. +The Company contributed its investment in Stingray Logistics to Mammoth during the fourth quarter of 2014. See below under Mammoth Energy Partners LP for discussion of contribution. +Diamondback Energy, Inc. +F-18 +Table of Contents +Index to Financial Statements +As noted above in Note 4, on October 11, 2012, following the closing of the Diamondback IPO, the Company owned 7,914,036 shares of Diamondback's outstanding common stock for an initial investment in Diamondback valued at $ 138.5 million . In June and November of 2013, the Company sold 2,234,536 and 2,300,000 shares of its Diamondback common stock, respectively, and received aggregate net proceeds of approximately $192.7 million . In June and September of 2014, the Company sold 1,000,000 and 1,437,500 shares of its Diamondback common stock, respectively, and received aggregate net proceeds of approximately $197.6 million . On November 12, 2014, the Company sold its remaining 942,000 shares of Diamondback common stock for net proceeds of approximately $60.8 million . As of December 31, 2014 , the Company did not own any shares of Diamondback common stock. +The Company accounted for its interest in Diamondback as an equity method investment and had elected the fair value option of accounting for this investment. While the investment in Diamondback was below 20% ownership prior to November 2014, the Company had appointed a member of Diamondback's Board as discussed in Note 4. The individual appointed by the Company continues to serve on Diamondback's board and the Company had influence through this board seat. The Company recognized an aggregate gain of approximately $79.7 million , $220.1 million and $12.8 million on its investment in Diamondback for years ended December 31, 2014 , 2013 , and 2012 , respectively, which is included in income from equity method investments in the consolidated statements of operations. +The Company has determined that for the periods presented in its consolidated financial statements, Diamondback has met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X, for which the Company is required, pursuant to Rule 3-09 of Regulation S-X, to attach separate financial statements as exhibits to its Annual Report on Form 10-K. +Stingray Energy Services LLC +During 2013, the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. During the year ended December 31, 2014 , the Company did not pay any cash calls to Stingray Energy. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. +Sturgeon Acquisitions LLC +During the third quarter of 2014, the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. +Mammoth Energy Partners LP +In the fourth quarter of 2014, the Company contributed its investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth for a 30.5% interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth intends to pursue this offering in 2015 subject to market conditions. +The Company accounted for the contribution as a sale of financial assets under ASC 860. The Company estimated the fair market value of its investment in Mammoth as of the contribution date using an average of the market approach and the income approach, based on a independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for lack of marketability due to the Company's minority interest, resulting in a fair value of $143.5 million for the Company's 30.5% interest. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See "Note 14 - Fair Value Measurements" for additional discussion of the measurement inputs. The Company recognized a gain of $84.5 million from its contribution of assets to Mammoth, which is included in gain on contribution of investments in the accompanying consolidated statements of operations. +6. +OTHER ASSETS +Other assets consist of the following as of December 31, 2014 and 2013 : +F-19 +Table of Contents +Index to Financial Statements +December 31, +2014 +2013 +(In thousands) +Plugging and abandonment escrow account on the WCBB properties (Note 16) +$ +3,097 +$ +3,105 +Certificates of Deposit securing letter of credit +275 +275 +Prepaid drilling costs +483 +526 +Loan commitment fees +15,390 +9,341 +Derivative receivable +— +4,493 +Deposits +34 +34 +Other +117 +77 +$ +19,396 +$ +17,851 +7. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31, 2014 and 2013 : +December 31, +2014 +2013 +(In thousands) +Revolving credit agreement (1) +$ +100,000 +$ +— +Building loans (2) +1,826 +1,995 +7.75% senior unsecured notes due 2020 (3) +600,000 +300,000 +Unamortized original issue premium (discount), net (4) +14,658 +(2,808 +) +Less: current maturities of long term debt +(168 +) +(159 +) +Debt reflected as long term +$ +716,316 +$ +299,028 +Maturities of long-term debt (excluding premiums and discounts) as of December 31, 2014 are as follows: +(In thousands) +2015 +$ +168 +2016 +1,658 +2017 +— +2018 +100,000 +2019 +— +Thereafter +600,000 +Total +$ +701,826 +The Company capitalized approximately $9.7 million and $7.1 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2014 and 2013 , respectively. +(1) On September 30, 2010, the Company entered into a senior secured revolving credit agreement with the Bank of Nova Scotia as the lead arranger and administrative agent and certain lenders from time to time party thereto. On December 27, 2013, the Company amended and restated its credit agreement in its entirety (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provided for an increase in the maximum facility amount from $350.0 million to $1.5 billion , with an increase in borrowing base availability as of December 27, 2013 from $50.0 million to $150.0 million . The credit agreement is secured by substantially all of the Company's assets. The Amended and Restated Credit Agreement matures on June 6, 2018. +On April 23, 2014, the Company entered into a first amendment to the Amended and Restated Credit Agreement. The first amendment increased the letter of credit sublimit from $20.0 million to $70.0 million and provided for an increase in the +F-20 +Table of Contents +Index to Financial Statements +borrowing base availability from $150.0 million to $275.0 million . The first amendment also made certain changes to the lenders and their respective lending commitments thereunder. +On November 26, 2014, the Company entered into a second amendment to the Amended and Restated Credit Agreement. The second amendment changed the definition of EBITDAX to exclude proceeds from the disposition of equity method investments and changed the ratio of funded debt to EBITDAX to be the ratio of net funded debt to EBITDAX. Net funded debt is funded debt less the amount of cash and short-term investments the Company has at the end of the relevant fiscal quarter. The second amendment increases the ratio from 2.00 to 1.00 to 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and then decreases the ratio to 3.25 to 1.00 for the periods thereafter. Further, the second amendment increased the letter of credit sublimit from $70.0 million to $125.0 million and provided for an increase in the borrowing base availability from $275.0 million to $450.0 million . As of December 31, 2014 , $100.0 million was outstanding under the Amended and Restated Credit Agreement. At December 31, 2014 , the total availability for future borrowings under Amended and Restated Credit Agreement, after giving effect to an aggregate of $43.6 million of letters of credit, was $306.4 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the Amended and Restated Credit Agreement. +Advances under the Amended and Restated Credit Agreement may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. At December 31, 2014 , amounts borrowed under the Amended and Restated Credit Agreement bore interest at the Eurodollar rate ( 1.91% ). +The Amended and Restated Credit Agreement contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to: +• incur indebtedness; +• grant liens; +• pay dividends and make other restricted payments; +• make investments; +• make fundamental changes; +• enter into swap contracts and forward sales contracts; +• dispose of assets; +• change the nature of their business; and +• enter into transactions with affiliates. +The negative covenants are subject to certain exceptions as specified in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains certain affirmative covenants, including, but not limited to the following financial covenants: +(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or noncash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum +F-21 +Table of Contents +Index to Financial Statements +of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and 3.25 to 1.00 for the twelve-month period ending September 30, 2015 and periods thereafter; and +(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00 . +The Company was in compliance with all covenants at December 31, 2014 . +The Bank of Nova Scotia, as sole lead arranger and administrative agent of the Company's revolving credit facility, as part of the regular spring 2015 borrowing base redetermination process, informed the Company that it will be recommending to the lending syndicate an increase in the Company's borrowing base under this facility from $450.0 million to $575.0 million . The Company expects final approval and implementation of the borrowing base increase to be completed within the next 30 to 45 days by the lending syndicate. +(2) In March 2011, the Company entered into a new building loan agreement for the office building it occupies in Oklahoma City, Oklahoma. The new loan agreement refinanced the $2.4 million outstanding under the previous building loan agreement. The new agreement matures in February 2016 and bears interest at the rate of 5.82% per annum. The new building loan requires monthly interest and principal payments of approximately $22,000 and is collateralized by the Oklahoma City office building and associated land. +(3) On October 17, 2012, the Company issued $250.0 million in aggregate principal amount of October Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act, (the "October Notes Offering") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, (the "senior note indenture"). On December 21, 2012, the Company issued an additional $50.0 million in aggregate principal amount of December Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act ("the December Notes Offering"). The December Notes were issued as additional securities under the senior note indenture. The October Notes Offering and the December Notes Offering are collectively referred to as the "Notes Offerings". The Company used a portion of the net proceeds from the October Notes Offering to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds of October Notes Offering and the net proceeds of the December Notes Offering for general corporate purposes, which included funding a portion of its 2013 capital development plan. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act in October 2013 (the "Exchange Notes"). +On August 18, 2014, the Company issued an additional $300.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "August Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act ("the August Notes Offering"). The August Notes were issued as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the August Notes Offering to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds of the August Notes Offering for general corporate purposes, including funding a portion of its 2014 capital development plans. The October Notes Offering, December Notes Offering and the August Notes Offering are collectively referred to as the "Notes Offerings" and the Exchange Notes, and the August Notes are collectively referred to as the "Notes". +In connection with the issuance of the August Notes, the Company and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers on August 18, 2014, pursuant to which the Company and the subsidiary guarantors have agreed to file a registration statement with respect to an offer to exchange the August Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the August Notes was filed on November 6, 2014, as amended on February 3, 2015, and declared effective by the SEC on February 4, 2015. The exchange offer for the August Note is expected to be completed on or about March 10, 2015. +F-22 +Table of Contents +Index to Financial Statements +Under the senior note indenture, interest on the Notes accrues at a rate of 7.75% per annum on the outstanding principal amount from October 17, 2012, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013. The Notes are the Company's senior unsecured obligations and rank equally in the right of payment with all of the Company's other senior indebtedness and senior in right of payment to any future subordinated indebtedness. All of the Company's existing and future restricted subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt guarantee the Notes; provided, however, that the Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. The Company may redeem some or all of the Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, the Company may redeem the Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding immediately after such redemption. +(4) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000% . The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531% . The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561% . The premium and discount are being amortized using the effective interest method. +Interest Expense +The following schedule shows the components of interest expense at December 31, 2014 , 2013 and 2012 : +December 31, +2014 +2013 +2012 +(In thousands) +Cash paid for interest +$ +28,646 +$ +24,270 +$ +1,404 +Change in accrued interest +3,875 +(969 +) +4,155 +Write-off of deferred loan costs +— +— +1,143 +Capitalized interest +(9,687 +) +(7,132 +) +— +Amortization of loan costs +1,685 +1,012 +640 +Amortization of note discount and premium +(533 +) +298 +59 +Other +— +11 +57 +Total interest expense +$ +23,986 +$ +17,490 +$ +7,458 +8. +COMMON STOCK OPTIONS, WARRANTS, RESTRICTED STOCK AND CHANGES IN CAPITALIZATION +Options +In January 2005, the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”), which is administered by the Compensation Committee (the "Committee"). Under the terms of the 2005 Plan, the Committee may determine when options shall be granted, to which eligible participants options shall be granted, the number of shares covered by such options, the purchase price or exercise price of such options, the vesting periods of such options and the exercisable period of such options. Eligible participants are defined as employees, consultants, and directors of the Company. +On April 20, 2006, the Company amended and restated the 2005 Plan to (i) include (a) incentive stock options, (b) nonstatutory stock options, (c) restricted awards (restricted stock and restricted stock units), (d) performance awards and (e) stock appreciation rights and (ii) increase the maximum aggregate amount of common stock that may be issued under the 2005 Plan from 1,904,606 shares to 3,000,000 shares, including the 627,337 shares underlying options granted to employees under the Plan prior to adoption of the 2005 Plan. As of December 31, 2014 , the Company had granted 997,269 options for the purchase of shares of the Company’s common stock and 1,143,217 shares of restricted stock under the 2005 Plan. No additional securities will be issued under the Plan other than upon exercise of options that are outstanding. +On April 19, 2013, the Company amended and restated the 2005 Plan with the 2013 Restated Stock Incentive Plan ("2013 Plan"). The 2013 Plan increased the numbers of shares that may be awarded from 3,000,000 to 7,500,000 shares, including the +F-23 +Table of Contents +Index to Financial Statements +627,337 shares underlaying options granted to employees under the Plan. The shares of stock issued once the options are exercised will be from authorized but unissued common stock. As of December 31, 2014 , the Company had granted 258,361 shares of restricted stock under the 2013 Plan. +Sale of Common Stock +On December 24, 2012, the Company completed the sale of an aggregate of 11,750,000 shares of its common stock in an underwritten public offering (including the partial exercise of a 1,650,000 share over-allotment option granted to the underwriters, which option was initially exercised to the extent of 750,000 shares) at a public offering price of $38.00 per share less the underwriting discount. The underwriters subsequently exercised their option to purchase the remaining 900,000 additional shares of common stock subject to the over-allotment option in a second closing, which occurred on January 7, 2013. The Company received aggregate net proceeds from both closings of approximately $460.7 million from the sale of these shares after deducting the underwriting discount and before offering expenses. The Company used a portion of these net proceeds to fund the acquisition of approximately 37,000 net acres in the Utica Shale, as described above in Note 2, and for general corporate purposes, including the funding of a portion of its 2013 capital development plan. +On February 15, 2013, the Company completed the sale of an aggregate of 8,912,500 shares of its common stock in an underwritten public offering at a public offering price of $38.00 per share less the underwriting discount. The Company received aggregate net proceeds of approximately $325.8 million from the sale of these shares after deducting the underwriting discount and before offering expenses. The Company used a portion of the net proceeds from this equity offering to fund its acquisition of additional Utica Shale acreage as described in Note 2, and the balance for general corporate purposes, including the funding of a portion of its 2013 capital development plan. +On November 13, 2013, the Company completed the sale of an aggregate of 7,475,000 shares of its common stock in an underwritten public offering at a public offering price of $56.75 per share less the underwriting discount. The Company received aggregate net proceeds of approximately $408.0 million from the sale of these shares after deducting the underwriting discount and before offering expenses. The Company has used and intends to continue to use the net proceeds from this equity offering for general corporate purposes, which may include expenditures associated with its 2014 drilling program and additional acreage acquisitions in the Utica Shale. +Private Placement Offering +In March 2002, the Company completed a private placement offering of 10,000 units. Each unit consisted of (i) one share of Cumulative Preferred Stock, Series A, of the Company (the “Preferred”) and (ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per share, of the Company (the “Warrants”). Holders of the Preferred were entitled to receive dividends at the rate of 12% of the liquidation preference per annum payable quarterly in cash or, at the option of the Company for all quarters ending on or prior to March 31, 2004, payable in whole or in part in additional shares of Preferred at the rate of 15% of the liquidation preference per annum. All Preferred shares were redeemed in 2005. +The 2,322,962 Warrants issued had a term of 10 years and a current exercise price of $1.19 per share of common stock subject to adjustment. The Company granted to holders of the Warrants certain demand and piggyback registration rights with respect to shares of common stock issuable upon exercise of the Warrants. The 8,875 unexercised warrants expired on March 31, 2012. +9. +STOCK-BASED COMPENSATION +During the years ended December 31, 2014 , 2013 and 2012 the Company’s stock-based compensation cost was $ 14.9 million , $10.5 million and $4.7 million , respectively, of which the Company capitalized $ 5.9 million , $4.2 million and $1.9 million , respectively, relating to its exploration and development efforts. +The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the market price of Gulfport’s common stock over a period of time ending on the grant date. Based upon the historical experience of the Company, the expected term of options granted is equal to the vesting period plus one year. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The 2013 Restated Stock Incentive Plan (which amended and restated the 2005 Plan) provides that all options must have an exercise price not less than the fair value of the Company’s common stock on the date of the grant. +No stock options were issued during the years ended December 31, 2014 , 2013 and 2012 . +The Company has not declared dividends and does not intend to do so in the foreseeable future, and thus did not use a dividend yield. In each case, the actual value that will be realized, if any, depends on the future performance of the common stock and overall stock market conditions. There is no assurance that the value an optionee actually realizes will be at or near the value estimated using the Black-Scholes model. +A summary of the status of stock options and related activity for the years ended December 31, 2014 , 2013 and 2012 is presented below: +F-24 +Table of Contents +Index to Financial Statements +Shares +Weighted +Average +Exercise Price +per Share +Weighted +Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value (In thousands) +Options outstanding at December 31, 2011 +356,241 +$ +6.51 +3.41 +$ +8,172 +Granted +— +— +Exercised +(21,000 +) +8.80 +628 +Forfeited/expired +— +— +Options outstanding at December 31, 2012 +335,241 +6.37 +2.39 +$ +10,678 +Granted +— +— +Exercised +(125,000 +) +11.20 +4,797 +Forfeited/expired +— +— +Options outstanding at December 31, 2013 +210,241 +3.50 +1.07 +$ +12,538 +Granted +— +— +Exercised +(205,241 +) +3.36 +12,822 +Forfeited/expired +— +— +Options outstanding at December 31, 2014 +5,000 +$ +9.07 +0.69 +$ +163 +Options exercisable at December 31, 2014 +5,000 +$ +9.07 +0.69 +$ +163 +The following table summarizes information about the stock options outstanding at December 31, 2014 : +Exercise +Price +Number +Outstanding +Weighted Average +Remaining Life +(in years) +Number +Exercisable +$ +9.07 +5,000 +0.69 +5,000 +5,000 +5,000 +The following table summarizes restricted stock activity for the twelve months ended December 31, 2014 , 2013 and 2012 : +Number of +Unvested +Restricted Shares +Weighted +Average +Grant Date +Fair Value +Unvested shares as of December 31, 2011 +203,348 +$ +26.02 +Granted +196,832 +35.87 +Vested +(135,015 +) +29.59 +Forfeited +(19,334 +) +26.81 +Unvested shares as of December 31, 2012 +245,831 +$ +31.88 +Granted +463,952 +$ +50.00 +Vested +(237,646 +) +41.79 +Forfeited +(8,500 +) +38.54 +Unvested shares as of December 31, 2013 +463,637 +$ +44.80 +Granted +246,409 +$ +65.07 +Vested +(272,665 +) +45.76 +Forfeited +(50,136 +) +53.72 +Unvested shares as of December 31, 2014 +387,245 +$ +55.87 +Unrecognized compensation expense as of December 31, 2014 related to outstanding stock options and restricted shares was $ 17.9 million . The expense is expected to be recognized over a weighted average period of 1.49 years. +F-25 +Table of Contents +Index to Financial Statements +10. +FAIR VALUE OF FINANCIAL INSTRUMENTS +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the building loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +At December 31, 2014 , the carrying value of the outstanding debt represented by the Notes was $ 614.7 million , including the remaining unamortized discount of approximately $2.8 million related to the October Notes and the remaining unamortized premium of approximately $ 0.4 million related to the December Notes and $17.1 million related to the August Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $ 587.6 million at December 31, 2014 . +The fair value of the derivative instruments is computed based on the difference between the prices provided by the fixed-price contracts and forward market prices as of the specified date, as adjusted for basis differentials. Forward market prices for oil and natural gas are dependent upon supply and demand factors in such forward market and are subject to significant volatility. +11. +INCOME TAXES +The income tax provision for continuing operations consists of the following: +2014 +2013 +2012 +(In thousands) +Current: +State +$ +14,384 +$ +6,860 +$ +84 +Federal +16,039 +6,325 +646 +Deferred: +State +4,314 +7,385 +2,214 +Federal +118,604 +77,566 +23,419 +Total income tax expense provision from continuing operations +$ +153,341 +$ +98,136 +$ +26,363 +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2014 +2013 +2012 +(In thousands) +Income from continuing operations before federal income taxes +$ +400,744 +$ +251,328 +$ +98,199 +Expected income tax at statutory rate +140,259 +87,965 +34,370 +State income taxes +11,570 +9,297 +1,493 +Other differences +1,512 +874 +292 +Changes in valuation allowance +— +— +(9,792 +) +Income tax expense recorded for continuing operations +$ +153,341 +$ +98,136 +$ +26,363 +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2014 , 2013 and 2012 are estimated as follows: +F-26 +Table of Contents +Index to Financial Statements +2014 +2013 +2012 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +1,091 +$ +1,462 +$ +1,513 +FASB ASC 718 compensation expense +1,562 +634 +762 +AMT credit +24,053 +7,968 +1,643 +Charitable contributions carryover +150 +25 +5 +Unrealized loss on hedging activities +— +8,540 +3,836 +Foreign tax credit carryforwards +2,074 +2,074 +2,074 +Accrued liabilities +1,260 +— +— +State net operating loss carryover +2,627 +4,408 +4,315 +Total deferred tax assets +32,817 +25,111 +14,148 +Valuation allowance for deferred tax assets +(3,145 +) +(4,743 +) +(4,629 +) +Deferred tax assets, net of valuation allowance +29,672 +20,368 +9,519 +Deferred tax liabilities: +Oil and gas property basis difference +183,767 +72,173 +15,049 +Investment in pass through entities +38,315 +8,799 +3,618 +Non-oil and gas property basis difference +849 +249 +227 +Investment in nonconsolidated affiliates +— +46,495 +9,232 +Unrealized gain on hedging activities +37,006 +— +— +Total deferred tax liabilities +259,937 +127,716 +28,126 +Net deferred tax liability +$ +(230,265 +) +$ +(107,348 +) +$ +(18,607 +) +The Company has an available federal tax net operating loss carryforward estimated at approximately $3.1 million as of December 31, 2014 . This carryforward will begin to expire in the year 2034. Based upon the December 31, 2014 , 2013 and 2012 net deferred tax liability position of the Company's oil and gas assets, management believes that this is a positive source of evidence to utilize the carryforward before it expires. Therefore, a valuation allowance has not been provided at December 31, 2014 , 2013 and 2012 . The Company also has state net operating loss carryovers of $50.5 million from Louisiana that will begin to expire in 2014, alternative minimum tax credits of $24.1 million with no expiration date and federal foreign tax credit carryovers of $2.1 million which begin to expire in 2017. The Company has recorded a valuation allowance of $3.1 million related to state net operating loss carryovers and foreign tax credit carryovers as the carryovers may not be utilized based upon a more likely than not basis. +In 2012, the Diamondback Contribution generated an estimated $61.9 million taxable gain. As a result, the Company recognized $9.8 million of its deferred tax assets which had previously been subject to a valuation allowance. The Company also recognized $25.6 million of deferred tax expense in 2012 primarily due to the utilization of prior net operating losses from the Diamondback Contribution gain. In 2013, the sale of Diamondback common shares generated $120.0 million taxable gain resulting in deferred tax expense of $35.7 million and current tax expense of $13.2 million . In 2014, the sale of the remaining shares of Diamondback, as well as the sale of Blackhawk, generated $203.3 million and $83.7 million taxable gains, respectively, resulting in a deferred tax expense of $79.4 million and $32.3 million , respectively. The Company's current federal tax expense in 2014, 2013 and 2012 is primarily attributable to alternative minimum tax, primarily generated by taxable gains from the sale of shares of Diamondback and the sale of assets by Blackhawk in 2014. +At December 31, 2014 and 2013 , the Company owed approximately $17.7 million and $11.0 million , respectively, for state and federal income taxes payable which is included on the accompanying consolidated balance sheets. +F-27 +Table of Contents +Index to Financial Statements +12. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2014 +2013 +2012 +Income +Shares +Per +Share +Income +Shares +Per +Share +Income +Shares +Per Share +(In thousands, except share data) +Basic: +Net income +$ +247,403 +85,445,963 +$ +2.90 +$ +153,192 +77,375,683 +$ +1.98 +$ +68,371 +55,933,354 +$ +1.22 +Effect of dilutive securities: +Stock options and awards +— +367,219 +— +485,963 +— +484,134 +Diluted: +Net income +$ +247,403 +85,813,182 +$ +2.88 +$ +153,192 +77,861,646 +$ +1.97 +$ +68,371 +56,417,488 +$ +1.21 +There were no potential shares of common stock that were considered anti-dilutive for the years ended December 31, 2014 , 2013 and 2012 . +F-28 +Table of Contents +Index to Financial Statements +13. +HEDGING ACTIVITIES +Oil Price Hedging Activities +The Company seeks to reduce its exposure to unfavorable changes in oil and natural gas prices, which are subject to significant and often volatile fluctuation, by entering into fixed price swaps. These contracts allow the Company to predict with greater certainty the effective oil and natural gas prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +The Company accounts for its oil and natural gas derivative instruments as cash flow hedges for accounting purposes under FASB ASC 815 and related pronouncements. All derivative contracts are marked to market each quarter end and are included in the accompanying consolidated balance sheets as derivative assets and liabilities. +During 2013 and 2014, the Company entered into fixed price swap and swaption contracts for 2013 through 2017 with four financial institutions. The Company’s fixed price swap contracts are tied to the commodity prices on the International Petroleum Exchange (“IPE”) and NYMEX. The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on the IPE for Brent Crude and the NYMEX WTI for oil and on the NYMEX Henry Hub for natural gas. At December 31, 2014 , the Company had the following fixed price swaps in place: +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2015 - March 2015 +190,625 +$ +4.12 +April 2015 +191,250 +$ +4.05 +May 2015 - June 2015 +201,250 +$ +4.05 +July 2015 - September 2015 +216,875 +$ +4.04 +October 2015 - December 2015 +232,500 +$ +4.04 +January 2016 - March 2016 +172,500 +$ +3.99 +April 2016 +162,500 +$ +3.99 +May 2016 - December 2016 +92,500 +$ +3.97 +January 2017 - June 2017 +62,500 +$ +3.96 +At December 31, 2014 the fair value of derivative assets and liabilities related to the fixed price swaps was as follows: +(In thousands) +Short-term derivative instruments - asset +$ +78,391 +Long-term derivative instruments - asset +$ +24,448 +At December 31, 2013 the fair value of derivative assets and liabilities related to the fixed price swaps and swaptions was as follows: +(In thousands) +Short-term derivative instruments - asset +$ +324 +Long-term derivative instruments - asset +$ +521 +Short-term derivative instruments - liability +$ +12,280 +Long-term derivative instruments - liability +$ +11,366 +All fixed price swaps have been executed in connection with the Company’s oil and natural gas price hedging program. For fixed price swaps qualifying as cash flow hedges pursuant to FASB ASC 815, the realized contract price is included in oil and gas sales in the period for which the underlying production was hedged. +F-29 +Table of Contents +Index to Financial Statements +For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Amounts reclassified out of accumulated other comprehensive income (loss) into earnings as a component of oil and condensate sales for the years ended December 31, 2014 , 2013 and 2012 are presented below. +Year Ended December 31, +2014 +2013 +2012 +(In thousands) +Reduction to oil and condensate sales +$ +— +$ +(9,779 +) +$ +(1,517 +) +At December 31, 2014 , no amounts related to fixed price swaps remain in accumulated other comprehensive income (loss). +The following table presents the balances of the Company’s cumulative hedging activities included in other comprehensive loss. +(In thousands) +December 31, 2011 +$ +1,576 +December 31, 2012 +$ +(9,660 +) +December 31, 2013 +$ +— +December 31, 2014 +$ +— +Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. The Company recognized a gain of $121.1 million related to hedge ineffectiveness for the year ended December 31, 2014 , which is included in oil and condensate and gas sales in the consolidated statements of operations. The Company recognized a loss of $18.2 million related to hedge ineffectiveness for the year ended December 31, 2013 , which is included in oil and condensate and gas sales in the consolidated statements of operations. This loss was comprised of a loss of $9.1 million related to hedge ineffectiveness and a loss of $9.1 million related to the amortization of other comprehensive income for the year ended December 31, 2013 . The Company recognized a loss of $0.1 million related to hedge ineffectiveness for the year ended December 31, 2012 , which is included in oil and condensate sales in the consolidated statements of operations. +The Company delivered approximately 62% of its 2014 production under fixed price swaps. +14. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. +The following tables summarize the Company’s financial and non-financial liabilities by FASB ASC 820 valuation level as of December 31, 2014 and 2013 : +F-30 +Table of Contents +Index to Financial Statements +December 31, 2014 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Fixed price swaps +$ +— +$ +102,839 +$ +— +December 31, 2013 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Fixed price swaps +$ +— +$ +845 +$ +— +Equity investment in Diamondback +178,708 +— +— +Liabilities: +Fixed price swaps +$ +— +$ +23,646 +$ +— +The estimated fair value of the Company’s fixed price swap contracts were based upon forward commodity prices based on quoted market prices, adjusted for differentials. See Note 13 for further discussion of the Company's hedging activities. The estimated fair value of the Company's equity investment in Diamondback was based upon the public closing share price of Diamondback's common stock as of December 31, 2013 . +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company's acquisitions. +The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 4 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the year ended December 31, 2014 were approximately $ 9.3 million . +Due to the unobservable nature of the inputs, the fair value of the Company's initial investment in Mammoth was estimated using assumptions that represent level 3 inputs. The Company estimated the fair value of the investment as of the November 24, 2014 contribution date. See Note 5 for further discussion of the Company's contribution to Mammoth. The estimated fair value of the Company's investment in Mammoth was $143.5 million at December 31, 2014 . +15. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +Gulfport is the operator of its Niobrara Formation acreage under a development agreement with Windsor Niobrara LLC ("Windsor Niobrara"). As operator, the Company is responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013 , the Company billed Windsor Niobrara approximately $0.9 million for these services. At December 31, 2013 , Windsor Niobrara owed the Company an immaterial amount for these services. Windsor Niobrara was not a related party in 2014. +Windsor Ohio LLC ("Windsor Ohio") participated with the Company in the acquisition of certain leasehold interests in acreage located in the Utica Shale in Ohio. As operator of this acreage, the Company is responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013 , the Company billed Windsor Ohio approximately $73.4 million for these services. At December 31, 2013 , Windsor Ohio owed the +F-31 +Table of Contents +Index to Financial Statements +Company approximately $1.6 million for these services. During the years ended December 31, 2013 and 2012 , the Company purchased certain oil and natural gas properties in the Utica Shale from Windsor Ohio. For information regarding these transactions, see Note 2. Windsor Ohio was not a related party in 2014. +Stingray Pressure provides well completion services. Stingray Pressure was previously 50% owned by the Company until its contribution to Mammoth in November 2014 as discussed above in Note 5. As of the contribution date, the Company owns a 30.5% limited partner interest in Mammoth. No amounts were owed to Stingray Pressure at the date of the contribution. As of December 31, 2013 , the Company owed Stingray Pressure approximately $8.3 million related to these services. Approximately $78.3 million and $58.3 million of services provided by Stingray Pressure are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2014 and 2013 , respectively. +Stingray Cementing, which is 50% owned by the Company, provides well cementing services as discussed above in Note 5. At December 31, 2014 and 2013 , the Company owed Stingray Cementing approximately $0.8 million and $1.5 million , respectively, related to these services. Approximately $6.0 million and $4.0 million of services provided by Stingray Cementing are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2014 and 2013 , respectively. +Stingray Energy, which is 50% owned by the Company, provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites as discussed above in Note 5. At December 31, 2014 and 2013 , the Company owed Stingray Energy approximately $6.0 million and $4.1 million , respectively, related to these services. Approximately $1.3 million and an immaterial amount of services provided by Stingray Energy are included in lease operating expenses in the consolidated statements of operations for the year ended December 31, 2014 and 2013 , respectively. Approximately $24.8 million and $5.1 million of services provided by Stingray Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2014 and 2013 , respectively. +Athena Construction LLC (“Athena”) performs services for the Company at its WCBB and Hackberry fields. At December 31, 2013 , the Company owed Athena approximately $1.0 million related to these services. Approximately $0.6 million of services provided by Athena are included in lease operating expenses in the consolidated statements of operations for the year ended December 31, 2013 . Approximately $4.1 million related to services performed by Athena are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2013 . Athena was not a related party in 2014. +Black Fin P&A, LLC (“Black Fin”) performed plugging and abandonment services for the Company at its WCBB field. No amounts were owed to Black Fin at December 31, 2013 . An immaterial amount of services performed by Black Fin are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2013 . Black Fin was not a related party in 2014. +Panther Drilling Systems, LLC ("Panther") performs directional drilling services for the Company. In November 2014, Panther became a wholly-owned subsidiary of Mammoth. The Company owns a 30.5% limited partner interest in Mammoth as discussed above in Note 5. At December 31, 2014 and 2013 , the Company owed Panther approximately $2.4 million and $1.8 million , respectively, related to these services. Approximately $7.6 million and $12.6 million of services provided by Panther are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2014 and 2013 , respectively. +Redback Directional Services, LLC ("Redback") provides coil tubing and flow back services for the Company. In November 2014, Redback became a wholly-owned subsidiary of Mammoth. The Company owns a 30.5% limited partner interest in Mammoth as discussed above in Note 5. At December 31, 2014 , the Company owed Redback approximately $0.4 million related to these services. No amounts were owed to Redback at December 31, 2013 . Approximately $1.0 million and $0.1 million related to services performed by Redback are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2014 and 2013 , respectively. +In November 2014, the Company contributed its investment in Muskie, Stingray Pressure, Stingray Logistics and Bison to Mammoth, of which the Company owns 30.5% . Approximately $11.1 million of services provided by Mammoth are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2014 . At December 31, 2014 , the Company owed Mammoth approximately $28.4 million related to these services. +F-32 +Table of Contents +Index to Financial Statements +Caliber Development Company, LLC ("Caliber") provides building maintenance services for the Company's headquarters in Oklahoma City, Oklahoma. Caliber also leases office space to the Company. At December 31, 2013 , the Company owed Caliber an immaterial amount related to these services. Approximately $0.2 million of services performed by Caliber and rent paid to Caliber are included in general and administrative expenses on the accompanying consolidated statements of operations for the year ended December 31, 2013 . Caliber was not a related party in 2014. +Each of Diamondback, Windsor Niobrara, Windsor Ohio, Stingray Pressure, Stingray Cementing, Stingray Energy, Stingray Logistics, Athena, Black Fin, Panther, Redback and Caliber is affiliated with or controlled by Wexford Capital LP ("Wexford"). In addition, affiliates of Wexford own the general partner of Mammoth and the remaining 69.5% limited partner interest in Mammoth. See Note 5 above. Prior to September 21, 2012, Wexford and/or its affiliates beneficially owned more than 10% of the Company's common stock and was deemed to be a related party. On or about September 28, 2012, Wexford’s and/or its affiliates’ ownership of Gulfport’s common stock dropped to below 1% and, as a result, was no longer deemed to be a related party. Subsequent to September 28, 2012, the Company continued to treat Windsor Niobrara, Windsor Ohio, Athena, Black Fin, Panther, Redback and Caliber as related parties because Mr. Mike Liddell, the Company's former Chairman of the Board and a named executive officer during 2013, had informed the Company that he was the operating member of each such entity and also held a 10% participation interest in Windsor Ohio and a 10% contingent participation interest in Windsor Niobrara, Athena, Black Fin, Panther, Redback and Caliber. Mr. Liddell is no longer a related party with respect to the Company. +16. +COMMITMENTS +Plugging and Abandonment Funds +In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of December 31, 2014 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2014 , the Company had plugged 450 wells at WCBB since it began its plugging program in 1997, which management believes fulfills its current minimum plugging obligation. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100% of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company will make a contribution each calendar year on behalf of each employee equal to at least 3% of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2014 , 2013 and 2012 , Gulfport incurred $0.8 million , $0.6 million , and $0.4 million , respectively, in contributions expense related to this plan. +Employment Agreements +Effective November 1, 2012, the Company entered into employment agreements with Mike Liddell, the Company's former Chairman, James D. Palm, the Company's former Chief Executive Officer, and Michael G. Moore, the Company's former Chief Financial Officer. Each agreement had an initial three -year term expiring on November 1, 2015 subject to automatic one -year extensions unless terminated by either party to the agreement at least 90 days prior to the end of the then current term. These agreements provided for minimum salary and bonus levels which were subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's Amended and Restated 2005 Stock Incentive Plan (or other equity incentive plans that may be put in place for the benefit of employees) and other employee benefits. +Effective February 15, 2014, Mr. Palm retired and his employment agreement with the Company terminated. The Company entered into a separation agreement with Mr. Palm, under which agreement certain benefits are provided to, and obligations imposed on, Mr. Palm. As of December 31, 2014 , the minimum commitment under Mr. Palm's separation agreement was approximately $0.6 million . +F-33 +Table of Contents +Index to Financial Statements +Mr. Liddell resigned as the Company's Chairman effective June 2013 at which date his employment agreement with Gulfport terminated. At that same time, the Company entered into a consulting agreement with Mr. Liddell. In October 2014, Mr. Liddell terminated his consulting agreement with the Company effective January 1, 2015. +On April 22, 2014, the Board of Directors appointed Michael G. Moore as Chief Executive Officer of the Company. The Company and Mr. Moore entered into an amended and restated employment agreement. The agreement has a three-year term commencing effective April 22, 2014. This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. The aggregate minimum commitment for future salary at December 31, 2014 under the April 22, 2014 amended and restated employment agreement was approximately $0.9 million . +Firm Transportation Commitments +As of December 31, 2014 , the Company had approximately 218,000 MMBtu per day of firm sales contracted with third parties. Of these sales, 33,000 MMBtu per day, 5,000 MMBtu per day, 30,000 MMBtu per day, 50,000 MMBtu per day, 50,000 MMBtu per day and 50,000 MMBtu per day expire in 2015, 2016, 2017, 2018, 2019 and 2022, respectively. +Operating Leases +The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at December 31, 2014 are as follows: +(In thousands) +2015 +$ +615 +2016 +524 +2017 +451 +2018 +20 +Total +$ +1,610 +The following table presents rent expense for the years ended December 31, 2014 , 2013 and 2012 , respectively. +For the years ended December 31, +2014 +2013 +2012 +(In thousands) +Minimum rentals +$ +733 +$ +258 +$ +139 +Less: Sublease rentals +15 +45 +7 +$ +718 +$ +213 +$ +132 +Other Commitments +Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie that expires on September 30, 2018. Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at a fixed price per ton, subject to certain adjustments, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. As of December 31, 2014, the Company had accrued $0.3 million related to non-utilization fees. +Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure that expires on September 30, 2018. Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. +Future minimum commitments under these agreements at December 31, 2014 are as follows: +F-34 +Table of Contents +Index to Financial Statements +(In thousands) +2015 +$ +52,440 +2016 +52,440 +2017 +52,440 +2018 +39,330 +Total +$ +196,650 +17. CONTINGENCIES +Due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations. +Concentration of Credit Risk +Gulfport operates in the oil and gas industry principally in the states of Ohio and Louisiana with sales to refineries, re-sellers such as pipeline companies, and local distribution companies. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 . At December 31, 2014 , Gulfport held cash in excess of insured limits in these banks totaling $140.9 million . +During the year ended December 31, 2014 , Gulfport sold approximately 99% of its oil production to Shell Trading Company (“Shell”), 100% of its natural gas liquids production to MarkWest Utica and 40% , 32% and 19% of its natural gas production to BP, DTE Energy Trading Inc. and Hess, respectively. During the year ended December 31, 2013 , Gulfport sold approximately 99% of its oil production to Shell, 100% of its natural gas liquids production to MarkWest Utica, and 32% , 31% and 17% of its natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. During the year ended December 31, 2012 , Gulfport sold approximately 92% and 8% of its oil production to Shell and Diamondback O&G, respectively, 91% of its natural gas liquids production to Diamondback O&G and 41% , 18% and 16% of its natural gas production to Noble Americas Gas, Hess and Chevron, respectively. +18. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +On October 17, 2012, December 21, 2012, and August 18, 2014, the Company issued an aggregate of $600.0 million of its 7.75% Senior Notes. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act. The Exchange Notes and the August Notes are collectively referred to as the "Notes". The Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The Notes are not guaranteed by Grizzly Holdings, Inc., (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. +In connection with the issuance of the August Notes, the Company and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers on August 18, 2014, pursuant to which the Company and the subsidiary guarantors have agreed to file a registration statement with respect to an offer to exchange the August Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the August Notes was filed on November 6, 2014, as amended on February 3, 2015, and declared effective by the SEC on February 4, 2015. The exchange offer for the August Note is expected to be completed on or about March 10, 2015. +F-35 +Table of Contents +Index to Financial Statements +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive income (loss) and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor. +F-36 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +141,535 +$ +804 +$ +1 +$ +— +$ +142,340 +Accounts receivable - oil and gas +103,762 +96 +— +— +103,858 +Accounts receivable - related parties +46 +— +— +— +46 +Accounts receivable - intercompany +45,222 +27 +— +(45,249 +) +— +Prepaid expenses and other current assets +3,714 +— +— +— +3,714 +Short-term derivative instruments +78,391 +— +— +— +78,391 +Total current assets +372,670 +927 +1 +(45,249 +) +328,349 +Property and equipment: +Oil and natural gas properties, full-cost accounting +3,887,874 +35,990 +— +(710 +) +3,923,154 +Other property and equipment +18,301 +43 +— +— +18,344 +Accumulated depletion, depreciation, amortization and impairment +(1,050,855 +) +(24 +) +— +— +(1,050,879 +) +Property and equipment, net +2,855,320 +36,009 +— +(710 +) +2,890,619 +Other assets: +Equity investments and investments in subsidiaries +360,238 +— +180,217 +(170,874 +) +369,581 +Derivative instruments +24,448 +— +— +— +24,448 +Other assets +19,396 +— +— +— +19,396 +Total other assets +404,082 +— +180,217 +(170,874 +) +413,425 +Total assets +$ +3,632,072 +$ +36,936 +$ +180,218 +$ +(216,833 +) +$ +3,632,393 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +371,089 +$ +321 +$ +— +$ +— +$ +371,410 +Accounts payable - intercompany +— +45,143 +106 +(45,249 +) +— +Asset retirement obligation - current +75 +— +— +— +75 +Deferred tax liability +27,070 +— +— +— +27,070 +Current maturities of long-term debt +168 +— +— +— +168 +Total current liabilities +398,402 +45,464 +106 +(45,249 +) +398,723 +Asset retirement obligation - long-term +17,863 +— +— +— +17,863 +Deferred tax liability +203,195 +— +— +— +203,195 +Long-term debt, net of current maturities +716,316 +— +— +— +716,316 +Total liabilities +1,335,776 +45,464 +106 +(45,249 +) +1,336,097 +Stockholders' equity: +Common stock +856 +— +— +— +856 +Paid-in capital +1,828,602 +322 +227,079 +(227,401 +) +1,828,602 +Accumulated other comprehensive income (loss) +(26,675 +) +— +(26,675 +) +26,675 +(26,675 +) +Retained earnings (accumulated deficit) +493,513 +(8,850 +) +(20,292 +) +29,142 +493,513 +Total stockholders' equity +2,296,296 +(8,528 +) +180,112 +(171,584 +) +2,296,296 +Total liabilities and stockholders' equity +$ +3,632,072 +$ +36,936 +$ +180,218 +$ +(216,833 +) +$ +3,632,393 +F-37 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +451,431 +$ +7,525 +$ +— +$ +— +$ +458,956 +Accounts receivable - oil and gas +58,662 +162 +— +— +58,824 +Accounts receivable - related parties +2,617 +— +— +— +2,617 +Accounts receivable - intercompany +21,379 +27 +— +(21,406 +) +— +Prepaid expenses and other current assets +2,581 +— +— +— +2,581 +Deferred tax asset +6,927 +— +— +— +6,927 +Short-term derivative instruments +324 +— +— +— +324 +Note receivable - related party +875 +— +— +— +875 +Total current assets +544,796 +7,714 +— +(21,406 +) +531,104 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +2,470,411 +7,340 +— +(573 +) +2,477,178 +Other property and equipment +11,102 +29 +— +— +11,131 +Accumulated depletion, depreciation, amortization and impairment +(784,695 +) +(22 +) +— +— +(784,717 +) +Property and equipment, net +1,696,818 +7,347 +— +(573 +) +1,703,592 +Other assets: +Equity investments and investments in subsidiaries +432,727 +— +191,473 +(184,132 +) +440,068 +Derivative instruments +521 +— +— +— +521 +Other assets +17,851 +— +— +— +17,851 +Total other assets +451,099 +— +191,473 +(184,132 +) +458,440 +Total assets +$ +2,692,713 +$ +15,061 +$ +191,473 +$ +(206,111 +) +$ +2,693,136 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +190,284 +$ +423 +$ +— +$ +— +$ +190,707 +Accounts payable - intercompany +— +21,296 +110 +(21,406 +) +— +Asset retirement obligation - current +795 +— +— +— +795 +Short-term derivative instruments +12,280 +— +— +— +12,280 +Current maturities of long-term debt +159 +— +— +— +159 +Total current liabilities +203,518 +21,719 +110 +(21,406 +) +203,941 +Long-term derivative instruments +11,366 +— +— +— +11,366 +Asset retirement obligation - long-term +14,288 +— +— +— +14,288 +Deferred tax liability +114,275 +— +— +— +114,275 +Long-term debt, net of current maturities +299,028 +— +— +— +299,028 +Total liabilities +642,475 +21,719 +110 +(21,406 +) +642,898 +Stockholders' equity: +Common stock +851 +— +— +— +851 +Paid-in capital +1,813,058 +322 +208,277 +(208,599 +) +1,813,058 +Accumulated other comprehensive income (loss) +(9,781 +) +— +(9,781 +) +9,781 +(9,781 +) +Retained earnings (accumulated deficit) +246,110 +(6,980 +) +(7,133 +) +14,113 +246,110 +Total stockholders' equity +2,050,238 +(6,658 +) +191,363 +(184,705 +) +2,050,238 +Total liabilities and stockholders' equity +$ +2,692,713 +$ +15,061 +$ +191,473 +$ +(206,111 +) +$ +2,693,136 +F-38 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +669,067 +$ +2,199 +$ +— +$ +— +$ +671,266 +Costs and expenses: +Lease operating expenses +51,238 +953 +— +— +52,191 +Production taxes +23,803 +203 +— +— +24,006 +Midstream gathering and processing +64,402 +65 +— +— +64,467 +Depreciation, depletion and amortization +265,428 +3 +— +— +265,431 +General and administrative +37,846 +446 +(2 +) +— +38,290 +Accretion expense +761 +— +— +— +761 +Gain on sale of assets +(11 +) +— +— +— +(11 +) +443,467 +1,670 +(2 +) +— +445,135 +INCOME FROM OPERATIONS +225,600 +529 +2 +— +226,131 +OTHER (INCOME) EXPENSE: +Interest expense +23,986 +— +— +— +23,986 +Interest income +(195 +) +— +— +— +(195 +) +Litigation settlement +25,500 +— +— +— +25,500 +Gain on contribution of investments +(84,470 +) +— +— +— +(84,470 +) +(Income) loss from equity method investments and investments in subsidiaries +(139,965 +) +— +13,159 +(12,628 +) +(139,434 +) +(175,144 +) +— +13,159 +(12,628 +) +(174,613 +) +INCOME (LOSS) BEFORE INCOME TAXES +400,744 +529 +(13,157 +) +12,628 +400,744 +INCOME TAX EXPENSE +153,341 +— +— +— +153,341 +NET INCOME (LOSS) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +F-39 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +261,809 +$ +1,517 +$ +— +$ +(573 +) +$ +262,753 +Costs and expenses: +Lease operating expenses +25,971 +732 +— +— +26,703 +Production taxes +26,848 +85 +— +— +26,933 +Midstream gathering and processing +10,999 +31 +— +— +11,030 +Depreciation, depletion and amortization +118,878 +2 +— +— +118,880 +General and administrative +22,359 +159 +1 +— +22,519 +Accretion expense +717 +— +— +— +717 +Loss on sale of assets +508 +— +— +— +508 +206,280 +1,009 +1 +— +207,290 +INCOME (LOSS) FROM OPERATIONS +55,529 +508 +(1 +) +(573 +) +55,463 +OTHER (INCOME) EXPENSE: +Interest expense +17,490 +— +— +— +17,490 +Interest income +(297 +) +— +— +— +(297 +) +(Income) loss from equity method investments and investments in subsidiaries +(212,992 +) +— +2,999 +(3,065 +) +(213,058 +) +(195,799 +) +— +2,999 +(3,065 +) +(195,865 +) +INCOME (LOSS) BEFORE INCOME TAXES +251,328 +508 +(3,000 +) +2,492 +251,328 +INCOME TAX EXPENSE +98,136 +— +— +— +98,136 +NET INCOME (LOSS) +$ +153,192 +$ +508 +$ +(3,000 +) +$ +2,492 +$ +153,192 +F-40 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2012 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +247,637 +$ +1,289 +$ +— +$ +— +$ +248,926 +Costs and expenses: +Lease operating expenses +23,644 +664 +— +— +24,308 +Production taxes +28,874 +83 +— +— +28,957 +Midstream gathering and processing +432 +11 +— +— +443 +Depreciation, depletion and amortization +90,749 +— +— +— +90,749 +General and administrative +13,602 +132 +74 +— +13,808 +Accretion expense +698 +— +— +— +698 +Gain on sale of assets +(7,300 +) +— +— +— +(7,300 +) +150,699 +890 +74 +— +151,663 +INCOME (LOSS) FROM OPERATIONS +96,938 +399 +(74 +) +— +97,263 +OTHER (INCOME) EXPENSE: +Interest expense +7,458 +— +— +— +7,458 +Interest income +(72 +) +— +— +— +(72 +) +(Income) loss from equity method investments and investments in subsidiaries +(5,182 +) +— +1,512 +(4,652 +) +(8,322 +) +2,204 +— +1,512 +(4,652 +) +(936 +) +INCOME (LOSS) FROM COTINUING OPERATIONS BEFORE INCOME TAXES +94,734 +399 +(1,586 +) +4,652 +98,199 +INCOME TAX EXPENSE +26,363 +— +— +— +26,363 +INCOME (LOSS) FROM CONTINUING OPERATIONS +68,371 +399 +(1,586 +) +4,652 +71,836 +DISCONTINUED OPERATIONS +Loss on disposal of Belize properties, net of tax +— +3,465 +— +— +3,465 +NET INCOME (LOSS) +$ +68,371 +$ +(3,066 +) +$ +(1,586 +) +$ +4,652 +$ +68,371 +F-41 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(Amounts in thousands) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +Foreign currency translation adjustment +(16,894 +) +— +(16,894 +) +16,894 +(16,894 +) +Other comprehensive income (loss) +(16,894 +) +— +(16,894 +) +16,894 +(16,894 +) +Comprehensive income +$ +230,509 +$ +529 +$ +(30,051 +) +$ +29,522 +$ +230,509 +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +153,192 +$ +508 +$ +(3,000 +) +$ +2,492 +$ +153,192 +Foreign currency translation adjustment +(12,223 +) +— +(12,223 +) +12,223 +(12,223 +) +Change in fair value of derivative instruments, net of taxes +(4,419 +) +— +— +— +(4,419 +) +Reclassification of settled contracts, net of taxes +10,290 +— +— +— +10,290 +Other comprehensive income (loss) +(6,352 +) +— +(12,223 +) +12,223 +(6,352 +) +Comprehensive income +$ +146,840 +$ +508 +$ +(15,223 +) +$ +14,715 +$ +146,840 +Year Ended December 31, 2012 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +68,371 +$ +(3,066 +) +$ +(1,586 +) +$ +4,652 +$ +68,371 +Foreign currency translation adjustment +1,355 +— +1,355 +(1,355 +) +1,355 +Change in fair value of derivative instruments, net of taxes +(8,452 +) +— +— +— +(8,452 +) +Reclassification of settled contracts, net of taxes +1,005 +— +— +— +1,005 +Other comprehensive income (loss) +(6,092 +) +— +1,355 +(1,355 +) +(6,092 +) +Comprehensive income +$ +62,279 +$ +(3,066 +) +$ +(231 +) +$ +3,297 +$ +62,279 +F-42 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +388,177 +$ +21,698 +$ +(2 +) +$ +— +$ +409,873 +Net cash provided by (used in) investing activities +(1,108,241 +) +(28,419 +) +(18,799 +) +18,802 +(1,136,657 +) +Net cash provided by (used in) financing activities +410,168 +— +18,802 +(18,802 +) +410,168 +Net increase (decrease) in cash and cash equivalents +(309,896 +) +(6,721 +) +1 +— +(316,616 +) +Cash and cash equivalents at beginning of period +451,431 +7,525 +— +— +458,956 +Cash and cash equivalents at end of period +$ +141,535 +$ +804 +$ +1 +$ +— +$ +142,340 +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +182,961 +$ +8,104 +$ +— +$ +— +$ +191,065 +Net cash provided by (used in) investing activities +(661,886 +) +(2,374 +) +(33,929 +) +33,929 +(664,260 +) +Net cash provided by (used in) financing activities +765,063 +— +33,929 +(33,929 +) +765,063 +Net increase in cash and cash equivalents +286,138 +5,730 +— +— +291,868 +Cash and cash equivalents at beginning of period +165,293 +1,795 +— +— +167,088 +Cash and cash equivalents at end of period +$ +451,431 +$ +7,525 +$ +— +$ +— +$ +458,956 +Year Ended December 31, 2012 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +195,734 +$ +3,425 +$ +(1 +) +$ +— +$ +199,158 +Net cash provided by (used in) investing activities +(838,177 +) +(2,402 +) +(103,915 +) +103,915 +(840,579 +) +Net cash provided by (used in) financing activities +714,612 +— +103,915 +(103,915 +) +714,612 +Net increase (decrease) in cash and cash equivalents +72,169 +1,023 +(1 +) +— +73,191 +Cash and cash equivalents at beginning of period +93,124 +772 +1 +— +93,897 +Cash and cash equivalents at end of period +$ +165,293 +$ +1,795 +$ +— +$ +— +$ +167,088 +F-43 +Table of Contents +Index to Financial Statements +19. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +As discussed above in Notes 4 and 5, the Company did not own any of Diamondback's common stock at December 31, 2014 . However, at December 31, 2013 and December 31, 2012 , the Company owned a 7.2% and 21.4% equity interest in Diamondback, respectively, which interest is shown below. The Company also owns a 24.9999% interest in Grizzly, which interest is shown below. Grizzly achieved first production in 2014, therefore, interest in Grizzly is shown only for 2014. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2014 +2013 +(In thousands) +Proven properties +$ +2,457,616 +$ +1,526,588 +Unproven properties +1,465,538 +950,590 +3,923,154 +2,477,178 +Accumulated depreciation, depletion, amortization and impairment reserve +(1,044,273 +) +(779,561 +) +Net capitalized costs +$ +2,878,881 +$ +1,697,617 +Equity investment in Diamondback Energy, Inc. +Proven properties +$ +— +$ +92,074 +Unproven properties +— +26,608 +— +118,682 +Accumulated depreciation, depletion, amortization and impairment reserve +— +(15,180 +) +Net capitalized costs +$ +— +$ +103,502 +Equity investment in Grizzly Oil Sand ULC +Proven properties +$ +96,859 +$ +— +Unproven properties +103,160 +— +200,019 +— +Accumulated depreciation, depletion, amortization and impairment reserve +(1,248 +) +— +Net capitalized costs +$ +198,771 +$ +— +F-44 +Table of Contents +Index to Financial Statements +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2014 +2013 +2012 +(In thousands) +Acquisition +$ +440,288 +$ +338,153 +$ +513,904 +Development of proved undeveloped properties +864,511 +408,121 +121,787 +Exploratory +2,249 +26,174 +93,397 +Recompletions +45,658 +44,633 +24,643 +Capitalized asset retirement obligation +2,095 +3,556 +2,195 +Total +$ +1,354,801 +$ +820,637 +$ +755,926 +Equity investment in Diamondback Energy, Inc. +Acquisition +$ +— +$ +44,534 +$ +49,895 +Development of proved undeveloped properties +— +6,369 +22,740 +Exploratory +— +17,491 +3,755 +Capitalized asset retirement obligation +— +50 +203 +Total +$ +— +$ +68,444 +$ +76,593 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +1,230 +$ +— +$ +— +Development of proved undeveloped properties +7,107 +— +— +Exploratory +— +— +— +Capitalized asset retirement obligation +1,055 +— +— +Total +$ +9,392 +$ +— +$ +— +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +F-45 +Table of Contents +Index to Financial Statements +2014 +2013 +2012 +(In thousands) +Revenues +$ +670,762 +$ +262,225 +$ +248,601 +Production costs +(140,664 +) +(64,666 +) +(53,708 +) +Depletion +(263,946 +) +(118,118 +) +(90,230 +) +266,152 +79,441 +104,663 +Income tax expense (benefit) +Current +— +— +730 +Deferred +96,061 +49,447 +25,633 +96,061 +49,447 +26,363 +Results of operations from producing activities +$ +170,091 +$ +29,994 +$ +78,300 +Depletion per Mcf of gas equivalent (Mcfe) +$ +3.01 +$ +4.78 +$ +5.85 +Results of Operations from equity method investment in Diamondback Energy, Inc. +Revenues +$ +— +$ +14,976 +$ +16,042 +Production costs +— +(2,518 +) +(4,474 +) +Depletion +— +(4,754 +) +(5,515 +) +— +7,704 +6,053 +Income tax expense +— +2,286 +2,158 +Results of operations from producing activities +$ +— +$ +5,418 +$ +3,895 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +5,449 +$ +— +$ +— +Production costs +(10,113 +) +— +— +Depletion +(1,195 +) +— +— +(5,859 +) +— +— +Income tax expense +— +— +— +Results of operations from producing activities +$ +(5,859 +) +$ +— +$ +— +Oil and Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2014 , 2013 and 2012 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2014 , 2013 and 2012 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (MBbls) and volumes for gas are stated in millions of cubic feet (MMcf). The prices used for the 2014 reserve report are $94.99 per barrel of oil, $4.35 per MMbtu and $44.84 per barrel for NGLs, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2013 and 2012 for reserve report purposes are $96.78 per barrel, $3.67 per MMbtu and $41.23 per barrel for NGLs and $91.32 per barrel and $2.76 per MMbtu, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +F-46 +Table of Contents +Index to Financial Statements +2014 +2013 +2012 +Oil +Gas +NGL +Oil +Gas +NGL +Oil +Gas +NGL +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +Proved Reserves +Beginning of the period +8,346 +146,446 +5,675 +8,106 +33,771 +145 +13,954 +15,728 +2,791 +Purchases in oil and gas reserves in place +173 +8,863 +353 +— +— +— +— +— +— +Extensions and discoveries +4,975 +629,151 +22,594 +2,765 +123,597 +5,850 +4,732 +31,265 +148 +Sales of oil and gas reserves in place +— +— +— +— +— +— +(7,875 +) +(11,757 +) +(2,729 +) +Revisions of prior reserve estimates +(1,313 +) +(6,136 +) +(304 +) +(208 +) +(2,031 +) +— +(382 +) +(357 +) +— +Current production +(2,684 +) +(59,318 +) +(2,050 +) +(2,317 +) +(8,891 +) +(320 +) +(2,323 +) +(1,108 +) +(65 +) +End of period +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +8,106 +33,771 +145 +Proved developed reserves +5,719 +345,166 +12,379 +5,609 +94,552 +3,527 +5,175 +18,482 +44 +Proved undeveloped reserves +3,778 +373,840 +13,889 +2,737 +51,894 +2,148 +2,931 +15,289 +101 +Equity investment in Diamondback Energy, Inc. +Proved Reserves +Beginning of the period +— +— +— +5,606 +7,398 +1,766 +3,874 +4,398 +1,080 +Change in ownership interest in Diamondback +— +— +— +(3,720 +) +(4,909 +) +(1,171 +) +— +— +— +Purchases in oil and gas reserves in place +— +— +— +528 +752 +120 +1,543 +2,292 +540 +Extensions and discoveries +— +— +— +1,227 +1,741 +331 +665 +804 +186 +Revisions of prior reserve estimates +— +— +— +(428 +) +(417 +) +(249 +) +(314 +) +82 +(1 +) +Current production +— +— +— +(146 +) +(124 +) +(26 +) +(162 +) +(178 +) +(39 +) +End of period +— +— +— +3,067 +4,441 +771 +5,606 +7,398 +1,766 +Proved developed reserves +— +— +— +1,425 +2,263 +358 +1,539 +2,753 +641 +Proved undeveloped reserves +— +— +— +1,642 +2,178 +413 +4,068 +4,645 +1,124 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +13,637 +— +— +— +— +— +— +— +— +Purchases in oil and gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +990 +— +— +— +— +— +— +— +— +Current production +(69 +) +— +— +— +— +— +— +— +— +End of period +14,558 +— +— +— +— +— +— +— +— +Proved developed reserves +1,632 +— +— +— +— +— +— +— +— +Proved undeveloped reserves +12,926 +— +— +— +— +— +— +— +— +F-47 +Table of Contents +Index to Financial Statements +In 2014, the Company experienced extensions and discoveries of 786,347 million cubic feet of gas equivalent (MMcfe) of proved reserves attributable to the development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of 15,837 MMcfe in estimated proved reserves in 2014 primarily due to the exclusion of PUD locations in our Southern Louisiana and Utica fields that were not expected to be drilled within five years of initial booking. The Company also purchased 12,019 MMcfe of proved reserves as a result of its acquisition from Rhino discussed in Note 2. In 2013, the Company experienced extensions and discoveries of 166,832 MMcfe of proved reserves attributable to the development of the Company's Utica Shale acreage. The Company contributed its Permian Basin assets to Diamondback in 2012, as discussed in Note 4, resulting in a decrease of 75,384 MMcfe in estimated proved reserves in 2012. The Company experienced extensions and discoveries of proved reserves of 40,049 MMcfe in 2012 attributable to the discovery and development of the Company's Utica Shale acreage. In addition, the Company experienced downward reserve revisions of 2,649 MMcfe in estimated proved reserves in 2012 primarily due to a change in the drilling schedule of its Niobrara acreage. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2014 , 2013 and 2012 using an unweighted average first-of-the-month price for the period January through December 31, 2014 , 2013 and 2012 . +F-48 +Table of Contents +Index to Financial Statements +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2014 +2013 +2012 +(In thousands) +Future cash flows +$ +4,667,678 +$ +1,657,708 +$ +954,833 +Future development and abandonment costs +(719,898 +) +(272,500 +) +(159,113 +) +Future production costs +(880,427 +) +(274,428 +) +(147,024 +) +Future production taxes +(71,229 +) +(78,647 +) +(89,175 +) +Future income taxes +(693,154 +) +(172,691 +) +(114,867 +) +Future net cash flows +2,302,970 +859,442 +444,654 +10% discount to reflect timing of cash flows +(875,803 +) +(280,976 +) +(96,013 +) +Standardized measure of discounted future net cash flows +$ +1,427,167 +$ +578,466 +$ +348,641 +Equity investment in Diamondback Energy, Inc. Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +331,505 +$ +592,669 +Future development and abandonment costs +— +(37,229 +) +(115,869 +) +Future production costs +— +(58,096 +) +(165,553 +) +Future production taxes +— +(22,925 +) +(30,122 +) +Future income taxes +— +(48,547 +) +(71,669 +) +Future net cash flows +— +164,708 +209,456 +10% discount to reflect timing of cash flows +— +(94,462 +) +(130,871 +) +Standardized measure of discounted future net cash flows +$ +— +$ +70,246 +$ +78,585 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +754,720 +$ +— +$ +— +Future development and abandonment costs +(205,242 +) +— +— +Future production costs +(291,988 +) +— +— +Future production taxes +— +— +— +Future income taxes +(11,250 +) +— +— +Future net cash flows +246,240 +— +— +10% discount to reflect timing of cash flows +(152,494 +) +— +— +Standardized measure of discounted future net cash flows +$ +93,746 +$ +— +$ +— +In order to develop its proved undeveloped reserves according to the drilling schedule used by the engineers in Gulfport’s reserve report, the Company will need to spend $221.0 million , $93.1 million and $215.4 million during years 2015 , 2016 and 2017 , respectively. +F-49 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2014 +2013 +2012 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +(530,098 +) +$ +(197,559 +) +$ +(194,893 +) +Net changes in prices, production costs, and development costs +97,716 +65,573 +108,941 +Acquisition of oil and gas reserves in place +14,266 +— +— +Extensions and discoveries +790,533 +130,826 +151,654 +Previously estimated development costs incurred during the period +68,227 +43,478 +10,211 +Revisions of previous quantity estimates, less related production costs +(37,801 +) +(3,591 +) +(10,504 +) +Sales of reserves in place +— +— +(214,867 +) +Accretion of discount +57,847 +34,864 +37,668 +Net changes in income taxes +(295,226 +) +(30,239 +) +25,585 +Change in production rates and other +683,237 +186,473 +58,165 +Total change in standardized measure of discounted future net cash flows +$ +848,701 +$ +229,825 +$ +(28,040 +) +Equity investment in Diamondback Energy, Inc. Changes in standardized measure of discounted cash flows +Change in ownership interest in Diamondback +$ +— +$ +(52,145 +) +$ +— +Sales and transfers of oil and gas produced, net of production costs +— +(12,524 +) +(11,601 +) +Net changes in prices, production costs, and development costs +— +3,312 +(14,596 +) +Acquisition of oil and gas reserves in place +— +21,968 +23,090 +Extensions and discoveries +— +39,776 +16,969 +Previously estimated development costs incurred during the period +— +5,517 +19,014 +Revisions of previous quantity estimates, less related production costs +— +(9,143 +) +(4,897 +) +Accretion of discount +— +4,175 +7,803 +Net changes in income taxes +— +(12,137 +) +(26,866 +) +Change in production rates and other +— +2,862 +(8,358 +) +Total change in standardized measure of discounted future net cash flows +$ +— +$ +(8,339 +) +$ +558 +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +4,664 +$ +— +$ +— +Net changes in prices, production costs, and development costs +(76,518 +) +— +— +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +7,107 +— +— +Previously estimated development costs incurred during the period +— +— +— +Revisions of previous quantity estimates, less related production costs +10,659 +— +— +Accretion of discount +14,946 +— +— +Net changes in income taxes +9,162 +— +— +Change in production rates and other +(25,738 +) +— +— +Total change in standardized measure of discounted future net cash flows +$ +(55,718 +) +$ +— +$ +— +F-50 +Table of Contents +Index to Financial Statements +20. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2014 and 2013 : +2014 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +118,029 +$ +114,736 +$ +170,804 +$ +267,697 +Income from operations +25,109 +18,110 +53,454 +129,458 +Income tax expense +49,247 +31,461 +4,876 +67,757 +Net income +82,558 +47,852 +6,920 +110,073 +Income per share: +Basic +$ +0.97 +$ +0.56 +$ +0.08 +$ +1.29 +Diluted +$ +0.96 +$ +0.56 +$ +0.08 +$ +1.28 +2013 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +55,000 +$ +70,434 +$ +69,252 +$ +68,067 +Income from operations +14,944 +22,456 +15,137 +2,926 +Income tax expense +28,195 +25,514 +23,400 +21,027 +Net income +44,559 +43,828 +40,527 +24,278 +Income per share: +Basic +$ +0.61 +$ +0.57 +$ +0.52 +$ +0.30 +Diluted +$ +0.61 +$ +0.56 +$ +0.52 +$ +0.30 +21. SUBSEQUENT EVENTS +In January and February of 2015, the Company entered into fixed price swaps for 1,000 barrels of oil per day at a weighted average price of $62.25 per barrel. For the period of September 2015 through December 2015, the Company entered into fixed price swaps for 30,000 MMBtu of natural gas per day at a weighted average price of $3.40 per MMBtu. For the period from January 2016 through December 2017, the Company entered into fixed price swaps for 80,000 MMBtu of natural gas per day at a weighted average price of $3.45 per MMBtu. For the period from January 2018 through December 2018, the Company entered into fixed price swaps for 30,000 MMBtu of natural gas per day at a weighted average price of $3.40 per MMBtu. The Company's fixed price swap contracts are tied to the commodity prices on NYMEX. The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas. +In February 2015, the Company entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon to the NYMEX Henry Hub natural gas price for 30,000 MMBtu per day at a hedge differential of $.02 for the period from March 2015 through December 2016 and for 10,000 MMBtu per day at a hedge differential of $.01 for the period from March 2015 through December 2016. +F-51 +Table of Contents +Index to Financial Statements +ITEM 6. +EXHIBITS +Exhibit +Number +Description +2.1 +Contribution Agreement, dated May 7, 2012, by and between the Company and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 8, 2012). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of October 17, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (including the form of Gulfport Energy Corporation's 7.750% Senior Note Due November 1, 2020) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 23, 2012). +4.3 +First Supplemental Indenture, dated December 21, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 26, 2012). +4.4 +Second Supplemental Indenture, dated August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +4.5 +Registration Rights Agreement, dated as of August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.4 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +E-1 +Table of Contents +Index to Financial Statements +10.7+ +Employment Agreement, entered into on April 30, 2014, by and between Gulfport Energy Corporation and Michael G. Moore (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4/A, File No. 333-199905, filed by the Company with the SEC on February 3, 2015). +10.8 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.9 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.10 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.11# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.12# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.13+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.14 +Investor Rights Agreement, dated as of October 11, 2012, between Gulfport Energy Corporation and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 17, 2012). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Ryder Scott Company. +99.2* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +E-2 +Table of Contents +Index to Financial Statements +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC on January 16, 2015, which portions have been omitted and filed separately with the SEC. +E-3 \ No newline at end of file diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/filing_metadata.csv b/raw/filings/0000874499/2014/0001628280-15-001182/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..962c58710b07a4d31ed9ecae988a349a845821f9 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2015-02-27,2014-12-31,2015-02-27T21:20:18.000Z,0001628280-15-001182,gpor-12312014x10k.htm,10-K,29851557,1,0,https://www.sec.gov/Archives/edgar/data/874499/000162828015001182/gpor-12312014x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828015001182/,2014,2014,1 diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/item1.txt b/raw/filings/0000874499/2014/0001628280-15-001182/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..11824946e24df49cac48936158307f8c0181c7e7 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/item1.txt @@ -0,0 +1,453 @@ +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and interests in entities that operate in Southeast Asia, including the Phu Horm gas field in Thailand. Until November 2014, we held an equity interest in Diamondback Energy, Inc., or Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and natural gas interests in October 2012 immediately prior to Diamondback's initial public offering, or the Diamondback IPO. At December 31, 2014, we did not own any shares of Diamondback. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 13, 2015, we held acquired leasehold interests in approximately 188,000 gross (184,000 net) acres in the Utica Shale primarily in Eastern Ohio, including approximately 8,200 net acres acquired from Rhino Exploration LLC in the first quarter of 2014. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2014 , had spud 151 gross wells, 101 of which were completed and were producing. In 2014 , we spud 85 gross (67.2 net) wells, of which 36 were completed as producing wells, two were non-productive and, as of December 31, 2014, 41 were in various stages of completion and six were still being drilled. We commenced sales from 63 gross wells (47.4 net wells) in the Utica Shale during 2014. During 2015 (through February 13, 2015), we had spud five gross (four net) wells. As of February 13, 2015, three of these wells were in various stages of completion and two were still drilling. In addition, 110 gross (13.3 net) wells were drilled by other operators on our Utica Shale acreage during 2014. +We currently intend to drill 46 to 52 gross (28 to 32 net) horizontal wells, and commence sales from 49 to 53 gross (42 to 46 net) horizontal wells on our Utica Shale acreage in 2015 for an estimated aggregate cost of $400.0 million to $430.0 million. We currently anticipate 11 to 16 gross (four to six net) horizontal wells will be drilled, and sales commenced from 50 to 64 gross (seven to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2015 for an estimated cost of $125.0 million to $140.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2014 was approximately 32,513 net million cubic feet of natural gas equivalent, or MMcfe, or 353.4 MMcfe per day, of which 80% was from natural gas and 20% was from oil and natural gas liquids, or NGLs. During January 2015, our average daily net production from the Utica Shale was approximately 345.6 MMcfe, of which 79% was from natural gas and 21% was from oil and NGLs. +In 2014 , at our WCBB field, we recompleted 91 wells and spud 29 wells. Of the 29 new wells spud at WCBB in 2014 , 21 were completed as producing wells, five were non-productive and, at year end, three were waiting on completion. In the fourth quarter of 2014 , production at WCBB was approximately 1,810 MMcfe, or an average of 19.7 MMcfe per day, 100% of which was from oil. During January 2015, our average net daily production at WCBB was approximately 19.0 MMcfe, 100% of which was from oil. +In 2014 , at our East Hackberry field, we recompleted 68 wells and spud 15 wells. All of the 15 new wells spud at East Hackberry during 2014 were completed as producing wells. In the fourth quarter of 2014 , net production at East Hackberry was approximately 640 MMcfe, or an average of 7.0 MMcfe per day, of which 82% was from oil and 18% was from natural gas. During January 2015, our average net daily production at East Hackberry was approximately 10.1 MMcfe, of which 91% was from oil and 9% was from natural gas. +In 2014 , at our West Hackberry field, we recompleted two wells and spud one well which was productive. In the fourth quarter of 2014 , net production at West Hackberry was approximately 66.3 MMcfe, or an average of 720.4 Mcfe per day, of which 91% was from oil and 9% was from natural gas. During January 2015, our average net daily production at West Hackberry was approximately 589.2 Mcfe, of which 97% was from oil and 3% was from natural gas. +2 +Table of Contents +Index to Financial Statements +We currently estimate our 2015 activities in our Southern Louisiana fields to be approximately $20.0 million to $25.0 million in aggregate for maintenance capital activities. +Effective as of April 1, 2010, we acquired our initial leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2014 , we held leases for approximately 5,900 net acres. During the year ended December 31, 2014 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2014 , net production from our Niobrara Formation acreage was approximately 27.4 MMcfe, or an average of 297.3 Mcfe per day, 100% of which was from oil. During January 2015, our average net daily production from our Niobrara Formation acreage was approximately 326.3 Mcfe, 100% of which was from oil. During 2015, we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2014 , we held approximately 864 net acres in the Bakken Formation of Western North Dakota and Eastern Montana with interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2014 , our net production from this acreage was approximately 74.4 MMcfe, or an average of 808.8 Mcfe per day, of which 93% was from oil and natural gas liquids and 7% was from natural gas. During January 2015, our average daily net production from our Bakken Formation acreage was approximately 609.0 Mcfe, of which 87% was from oil and 13% was from natural gas. +As of December 31, 2014, we had sold all of our shares of common stock of Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and gas interests in October 2012 immediately prior to the Diamondback IPO. See Notes 4 and 5 to our consolidated financial statements included elsewhere in this report for additional information regarding our prior investment in Diamondback. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2014 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 1,400 barrels of bitumen per day at its Algar Lake SAGD project during the fourth quarter of 2014. Grizzly has announced that it expects bitumen production to reach its 6,000 barrels per day peak production rate by the fourth quarter of 2015. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by mid-2015. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly is pursuing a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. +We also own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on Tatex III's concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III plans to allow the concession to expire in 2015. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, Stingray Cementing LLC, or +3 +Table of Contents +Index to Financial Statements +Stingray Cementing, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals, LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with a contemplated initial public offering, which it intends to pursue in 2015 subject to market conditions. See Note 5 to our consolidated financial statements included elsewhere in this report for additional information regarding these investments. +As of December 31, 2014 , we had 933.6 Bcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $1.8 billion and associated standardized measure of discounted future net cash flows of approximately $1.4 billion , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See "Item 2. Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10, a non-GAAP financial measure, and a reconciliation of our standardized measure of discounted future net cash flows to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2014 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells (2) +Non-Productive +Wells +Developed +Acreage (3) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (4) +34.52/41.46 +195 +80.85 +3 +2.66 +21,652 +19,340 +716,905 +5,412 +26,268 +906,982 +West Cote Blanche Bay Field (5) +80.108/100 +123 +123 +185 +185 +5,668 +5,668 +1,318 +2,968 +— +19,127 +E. Hackberry Field (6) +80.945/100 +39 +39 +107 +107 +3,931 +3,931 +516 +469 +— +3,331 +W. Hackberry Field +79.167/100 +6 +6 +7 +7 +1,192 +1,192 +— +402 +— +2,413 +Niobrara Formation +39.83/47.85 +6 +3 +— +— +3,502 +1,751 +135 +124 +— +878 +Bakken Formation (4) +1.51/1.83 +18 +0.3 +— +— +1,862 +163 +108 +121 +— +834 +Overrides/Royalty Non-operated +Various +384 +0.42 +— +— +— +— +24 +1 +— +33 +Total +771 +252.57 +302 +301.66 +37,807 +32,045 +719,006 +9,497 +26,268 +933,598 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Includes one gross and net well at WCBB that is producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 16% of our acreage is developed acreage and has been held by production. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 94 gross (7.57 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +4 +Table of Contents +Index to Financial Statements +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2014 , we held leasehold interests in approximately 185,000 gross (180,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of February 7, 2015, there were 740 producing horizontal wells, 335 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 273 horizontal wells that were being drilled and an additional 451 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2014 , had spud 151 gross wells, 101 of which were completed and were producing. In 2014, we spud 85 gross (67.2 net) wells, of which 36 were completed and are productive, two were non-productive and, as of December 31, 2014, 41 were in various stages of completion and six were still being drilled. During 2015 (through February 13, 2015), we had spud five gross (four net) wells during 2015 of which three were in various stages of completion and two were still drilling. In addition, 110 gross (13.3 net) wells were drilled by other operators on our Utica Shale acreage during 2014. +We currently intend to drill 46 to 52 gross (28 to 32 net) horizontal wells, and commence sales from 49 to 53 gross (42 to 46 net) horizontal wells, on our Utica Shale acreage in 2015 and anticipate 11 to 16 gross (four to six net) horizontal wells will be drilled, and sales commenced from 50 to 64 gross (seven to nine net) horizontal wells, by other operators on our Utica Shale +5 +Table of Contents +Index to Financial Statements +acreage during 2015. As of February 25, 2015, we had four operated horizontal rigs drilling in the play, but plan to release one of these rigs by the end of the first quarter of 2015. +Production Status +Aggregate net production from the Utica Shale during the three months ended December 31, 2014 was approximately 32,513 MMcfe, or 353.4 MMcfe per day, of which 80% was from natural gas and 20% was from oil and NGLs. During January 2015, our average daily net production from the Utica Shale was approximately 345.6 MMcfe, of which 79% was from natural gas and 21% was from oil and NGLs. The slight decrease in January 2015 production was the result of adverse winter weather conditions, partially offset by our 2014 drilling activities. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2014 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2014 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2014 , estimated field cumulative gross production was 196.8 MMBOE and 237.0 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2014 , 122 were producing, 185 were shut-in, one was producing intermittently, one was waiting on completion and six were being used as salt water disposal wells. The other 762 wells have been plugged and abandoned. +In 1991, Texaco conducted a 70 square mile 3-D seismic survey with 1,100 shot points per mile that processed out 100 fold. In 1993, an undershoot survey around the crest and production facilities was completed. We own the rights to the seismic data. In December 1999, we completed the reprocessing of the seismic data and our technical staff developed prospects from the data. The reprocessed data has enabled us to identify prospects in areas of the field that would have otherwise remained obscure. During the first half of 2005, we again reprocessed the seismic data using advanced seismic data processing. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2014 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, +6 +Table of Contents +Index to Financial Statements +can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, eight natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent and Future Activity +In 2014, we recompleted 91 gross and net wells and spud 29 gross and net wells at WCBB. Of the 29 new wells spud at WCBB in 2014, 21 were completed as producers, five were non-productive and, at year end, three were waiting on completion. As of February 13, 2015, we had recompleted seven wells during 2015 in our WCBB field. Of the 29 wells drilled in 2014, 22 were considered deep wells. The 21 productive wells, with total depths ranging from 2,500 to 10,501 feet, have approximately 894 feet of aggregate apparent net pay. +Production Status +In the fourth quarter of 2014, our production at WCBB was approximately 1,810 net MMcfe, or an average of 19.7 MMcfe per day, 100% of which was from oil. During January 2015, our average net daily production at WCBB was approximately 19.0 MMcfe, 100% of which was from oil. The slight decrease in average net daily production in January 2015 was due to normal production declines. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.945% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2014 , we held beneficial interests in approximately 4,512 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. We licensed approximately 54 square miles of 3-D seismic data covering a portion of the area and have received a processed version of the seismic data. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2014 was over 4,037 MBOE and 331.8 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2014 , 39 wells had daily production, 107 were shut-in and three had been converted to salt water disposal wells. The remaining 120 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, five natural gas compressors, dehydration units and salt water disposal systems. +7 +Table of Contents +Index to Financial Statements +Recent and Future Activity +During 2014 at East Hackberry, we recompleted 68 gross and net wells and drilled 15 gross and net land wells. All of the 15 wells drilled during 2014 were completed as producing wells. As of February 13, 2015, we had recompleted 11 wells during 2015 in our East Hackberry field. +Production Status +In the fourth quarter of 2014, our net production at East Hackberry was approximately 640 MMcfe, or an average of 7.0 MMcfe per day, 82% of which was from oil and 18% of which was from natural gas. During January 2015, our average net daily production at East Hackberry was approximately 10.1 MMcfe, of which 91% was from oil and 9% was from natural gas. The increase in production in 2015 is a result of our 2014 drilling and recompletion activities. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 79.167% NRI) in 1,192 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2014 was 426 MBOE and 140 Bcf of natural gas. As of December 31, 2014, 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2014, six of such wells were producing, seven were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent and Future Activity +During 2014 at West Hackberry, we recompleted two gross and net wells and drilled one gross and net well which was productive. As of February13, 2015, no new wells had been drilled in our West Hackberry field. +Production Status +In the fourth quarter of 2014, our net production at West Hackberry was approximately 66.3 MMcfe, or an average of 720.4 Mcfe per day, of which 91% was from oil and 9% was from natural gas. During January 2015, our average net daily production at West Hackberry was approximately 589.2 Mcfe, of which 97% was from oil and 3% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +8 +Table of Contents +Index to Financial Statements +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2014, we held leases for approximately 5,900 net acres. In 2014, no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2014, our net production from our Niobrara Formation acreage was approximately 27.4 MMcfe, or an average of 297.3 Mcfe per day, 100% of which was from oil. During January 2015, our average daily net production from our Niobrara Formation acreage was approximately 326.3 Mcfe, 100% of which was from oil. +Facilities +There are typical land oil and gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent and Future Activity +We have completed a 60 square mile 3-D seismic survey over our Craig Dome prospect and have received a processed version of the seismic. We do not anticipate drilling any wells in the Niobrara Formation during 2015. +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2014 , we held approximately 864 net acres, interests in 18 wells and an overriding royalty interests in certain existing and future wells. +9 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2014, our net production from our Bakken Formation acreage was approximately 74.4 MMcfe, or an average of 808.8 Mcfe per day, of which 93% was from oil and NGLs and 7% was from natural gas. During January 2015, our average net daily production from this acreage was approximately 609.0 Mcfe, of which 87% was from oil and 13% was from natural gas. +Facilities +There are typical land, oil and gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent and Future Activities +Two gross (.01 net) wells were drilled on our Bakken Formation acreage in 2014. As of February 13, 2015, no new wells had been drilled on our Bakken Formation acreage in 2015. +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2014: +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.694 +% +— +1 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2014 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 1,400 barrels of bitumen per day at its Algar Lake SAGD project during the fourth quarter of 2014. Grizzly has announced that it expects bitumen production to reach its 6,000 barrels per day peak production rate by the fourth quarter of 2015. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by mid-2015. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly is pursuing a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +10 +Table of Contents +Index to Financial Statements +Thailand . We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 million cubic feet per day. For 2014, net gas production was approximately 105 MMcf per day and condensate production was 415 barrels per day. Hess Corporation, or Hess, operates the field with a 35% interest. Other interest owners include APICO (35% interest), PTT Exploration and Production Public Company Limited (20% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +We own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on this concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III plans to allow the concession to expire in 2015. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure, Stingray Cementing, and Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk and Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Midstream which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with a contemplated initial public offering which it intends to pursue in 2015 subject to market conditions. See Note 5 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. Our production from WCBB is being sold in accordance with the Shell posted price for West Texas/New Mexico Intermediate crude plus or minus Platt's trade month average P+ value, plus or minus the Platt's HLS/WTI differential +11 +Table of Contents +Index to Financial Statements +less transportation charges. Shell is the purchaser of our Utica Shale oil and pays us WTI less a differential. MarkWest Utica currently markets our Utica Shale NGLs and remits to us a weighted average selling price less a marketing fee. We have NAESBs in place with various purchasers for our Utica Shale natural gas production. In 2014, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily trades. The majority of purchases are transacted at the tailgate of the plants with available pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "- Transportation and Takeaway Capacity," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2014 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica and 40%, 32% and 19% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2013, we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest Utica and 32%, 31% and 17% of our natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. During the year ended December 31, 2012, we sold approximately 92% and 8% of our oil production to Shell and Diamondback O&G LLC (a wholly-owned subsidiary of Diamondback formerly known as Windsor Permian LLC), or Diamondback O&G, respectively, 91% of our natural gas liquids production to Diamondback O&G and 41%, 18% and 16% of our natural gas production to Noble Americas Gas, Hess and Chevron, respectively. +As of December 31, 2014, we had approximately 218,000 MMBtu per day of firm sales contracted with third parties. Of these sales, 33,000 MMBtu per day, 5,000 MMBtu per day, 30,000 MMBtu per day, 50,000 MMBtu per day, 50,000 MMBtu per day and 50,000 MMBtu per day expire in 2015, 2016, 2017, 2018, 2019 and 2022, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2014, we had entered into firm transportation contracts for 2015, 2016 and 2017 for an aggregate of approximately 619,000 MMBtu per day, 719,000 MMBtu per day and 719,000 MMBtu per day, respectively, and currently have agreements in place to transport and/or sell approximately 787,000 MMBtu per day of our gross Utica Shale gas production by year-end 2015. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional contracts to be limited in 2015. Our primary long-haul firm transportation commitments include the following: +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets, +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities beginning in April 2015 allowing access to Gulf Coast delivery points, +• +175,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities expected to begin in mid-2015 allowing additional connectivity to Gulf Coast and Midwest markets, +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2016 allowing additional access to Gulf Coast delivery points, and +• +100,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities beginning in late 2016/early 2017 allowing additional access to both Midwest and Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +Regulation of Gas and Oil Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is +12 +Table of Contents +Index to Financial Statements +under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically sensitive and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or relate to our owned or operated facilities. The strict and joint and several liability nature of such laws and regulations could impose liability upon us regardless of fault. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. However, we cannot assure you that the EPA or state or local governments will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally imposes strict and joint and several liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or +13 +Table of Contents +Index to Financial Statements +operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” may be subject to strict and joint and several liability for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. These laws and regulations also prohibit certain activity in wetlands unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on October 20, 2011, the EPA announced a schedule to develop pre-treatment standards for wastewater discharges produced by natural gas extraction from shale formations. The EPA stated that it will gather data, consult with the stakeholders, including ongoing consultation with the industry, and solicit public comment on a proposed rule for shale gas in early 2015. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gasses, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allowed the agency to proceed with the adoption and implementation of regulations that +14 +Table of Contents +Index to Financial Statements +would restrict emissions of GHGs under existing provisions of the federal Clean Air Act, including rules that regulate emissions of GHGs from certain large stationary sources of emissions such as power plants or industrial facilities. In response to its endangerment finding, the EPA adopted two sets of rules regarding possible future regulation of GHG emissions under the Clean Air Act. The motor vehicle rule, which became effective in January 2011, purports to limit emissions of GHGs from motor vehicles. The EPA adopted the stationary source rule (or the “tailoring rule”) in May 2010, and it also became effective in January 2011. The tailoring rule established new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On December 19, 2014, the EPA issued two memoranda providing initial guidance on GHG permitting requirements in response to the Court’s decision in Utility Air Regulatory Group v. EPA . In its preliminary guidance, the EPA indicated that it will undertake a rulemaking action no later than December 31, 2015 to rescind any PSD permits issued under the portions of the tailoring rule that were vacated by the Court. In the interim, the EPA issued a narrowly crafted “no action assurance” indicating it will exercise its enforcement discretion not to pursue enforcement of the terms and conditions relating to GHGs in an EPA-issued PSD permit, and for related terms and conditions in a Title V permit. In November 2010, the EPA expanded its existing GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. +The EPA has continued to adopt GHG regulations applicable to other industries, such as the September 2013 proposed GHG rule that, if finalized, would set New Source Performance Standards, which we refer to as the NSP standards, for new coal-fired and natural-gas fired power plants. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +In addition, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, as amended, or the ESA, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and prohibits taking of endangered species. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +15 +Table of Contents +Index to Financial Statements +We are also subject to the requirements of OSHA and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. The EPA, however, has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. In addition, on May 9, 2014, the EPA issued an Advance Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The public comment period ended on September 19, 2014. Also, the EPA is updating chloride water quality criteria for the protection of aquatic life under the Clean Water Act, which criteria are used by states for establishing acceptable discharge limits. The EPA is expected to release draft criteria in early 2016. Moreover, the EPA announced in 2011 that it was launching a study regarding wastewater resulting from hydraulic fracturing activities and currently plans to propose standards in early 2015 that such wastewater must meet before being transported to a treatment plant. As part of these studies, the EPA has requested that certain companies provide them with information concerning the chemicals used in the hydraulic fracturing process. These studies, depending on their results, could spur initiatives to regulate hydraulic fracturing under the SDWA or otherwise. +Legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. +On August 16, 2012, the EPA approved final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. The EPA intends to issue revised rules that will likely be responsive to some of these requests. For example, on September 23, 2013, the EPA published an amendment extending compliance dates for certain storage vessels. Also, on December 19, 2014, the EPA released final updates and clarifications to the NSP standards. In addition, on January 14, 2015, the EPA announced a series of steps it plans to take to address methane and smog-forming VOC emissions from the oil and gas industry. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. In addition, the U.S. Department of the Interior, or DOI, published a revised proposed rule on May 24, 2013, that would update existing regulation for hydraulic fracturing activities on federal lands, including requirements for disclosure, well bore integrity and handling of flowback water. The DOI announced its intent to finalize the rule in 2014, however, the final rule remains pending. +In addition, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources, with results of the study anticipated to be available in March 2015. The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices. The U.S. Department of Energy has conducted an investigation into practices the agency could recommend to better protect the environment from drilling using hydraulic-fracturing completion methods. Additionally, certain members of Congress have called upon the U.S. Government Accountability Office to investigate how hydraulic fracturing might adversely affect water resources, the Securities and Exchange Commission, or SEC, to investigate the natural gas industry and any possible misleading of investors or the public +16 +Table of Contents +Index to Financial Statements +regarding the economic feasibility of pursuing natural gas deposits in shale formations by means of hydraulic fracturing, and the U.S. Energy Information Administration to provide a better understanding of that agency’s estimates regarding natural gas reserves, including reserves from shale formations, as well as uncertainties associated with those estimates. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, in June 2012, Ohio’s Governor signed legislation mandating chemical disclosure for hydraulic fracturing fluids, pre-drilling testing of water samples within 1,500 feet of a proposed horizontal well, and increased well operator liability insurance requirements. In addition, in April 2014, Ohio’s Department of Natural Resources announced new permit conditions for drilling near faults or areas of past seismic activity. The Texas Railroad Commission, or RRC, and Louisiana Department of Natural Resources adopted rules and regulations requiring that well operators disclose the list of chemical ingredients subject to the requirements of federal Occupational Safety and Health Act (OSHA) to state regulators and on a public internet website. Additionally, on October 28, 2014, the RRC adopted disposal well rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced water and hydraulic fracturing flowback fluid to conduct seismic activity searches utilizing the U.S. Geological Survey. These searches are intended to determine the potential of earthquakes within a circular area of 100 square miles around a proposed new disposal well. The disposal well rule amendments, which became effective in Texas on November 17, 2014, also clarify the RRC’s authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well is likely to contribute to seismic activity. Also, in May 2013, the RRC adopted new rules, which became effective in January 2014, governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Effective August 27, 2011, Montana adopted hydraulic fracturing disclosure regulations under which well operators must provide information in drilling permit applications on the estimated volume and types of materials to be used in the proposed hydraulic fracturing activities. Upon completion of the well, well operators must provide the Montana Board of Oil and Gas Conservation with the volume and type of chemicals used, including the additive type, chemical ingredient names, and Chemical Abstracts Service, or CAS, number, subject to certain trade secret protections. On April 1, 2012, the North Dakota Industrial Commission enacted regulations requiring hydraulic fracturing well operators to disclose the hydraulic fluid composition, including the trade name, supplier, ingredients, CAS Number, and the maximum ingredient concentrations of all additives in the hydraulic fracturing fluid. Colorado enacted rules requiring similar disclosures on January 30, 2012. Also, in 2013 and 2014, Colorado approved regulations that require well operators to test groundwater quality before and after drilling and to install emission controls to capture 95 percent of VOC and methane emissions. In addition, on May 16, 2013, the DOI issued a revised proposed rule that seeks to require companies operating on federal and Indian lands to (i) publicly disclose the chemicals used in the hydraulic fracturing process; (ii) confirm its wells meet certain construction standards and (iii) establish site plans to manage flowback water. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +17 +Table of Contents +Index to Financial Statements +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation and sale for resale of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and oil and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +18 +Table of Contents +Index to Financial Statements +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services must be provided on an open-access, non-discriminatory basis at cost-based rates or at market-based rates if the transportation market at issue is sufficiently competitive. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane +19 +Table of Contents +Index to Financial Statements +related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $21.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $38.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. In the event of a loss under this policy, we have up to $12.6 million of business interruption coverage available after a 90 day waiting period. All of our insurance coverage includes deductibles of up to $500,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually each May. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2014 and 2013 were approximately $0.2 million and $0.7 million, respectively. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that serves as our corporate headquarters. Additionally, we lease approximately 25,200 square feet of office space in other buildings in Oklahoma City. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We also lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We own an approximately 5,700 square foot office building in St. Clairsville, Ohio that serves as our Ohio headquarters. In addition, we lease approximately 4,275 square feet of office space in St. Clairsville, Ohio. Each of these properties is suitable and adequate for its use. +20 +Table of Contents +Index to Financial Statements +Employees +At December 31, 2014 , we had 203 employees. An unrelated Louisiana well servicing company provides all necessary field personnel needed to operate the WCBB and the Hackberry fields. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. \ No newline at end of file diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/item13.txt b/raw/filings/0000874499/2014/0001628280-15-001182/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2f04df11e3a34b80e43e7cb8a0c34418a99503 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). \ No newline at end of file diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/item9a.txt b/raw/filings/0000874499/2014/0001628280-15-001182/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..558e0240441c4d0a23c3e8a09c2bff4024e7c177 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/item9a.txt @@ -0,0 +1,40 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2014 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2014 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +68 +Table of Contents +Index to Financial Statements +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2014 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2014 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2014 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Aaron Gaydosik +Name: +Michael G. Moore +Name: +Aaron Gaydosik +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +69 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and Subsidiaries (the “Company”) as of December 31, 2014 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014 and our report dated February 27, 2015 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 27, 2015 +70 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/rp_note.txt b/raw/filings/0000874499/2014/0001628280-15-001182/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2014/0001628280-15-001182/rpt_disclosure.txt b/raw/filings/0000874499/2014/0001628280-15-001182/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..1f1cbc08c42a7790affd197a5e41511d81008822 --- /dev/null +++ b/raw/filings/0000874499/2014/0001628280-15-001182/rpt_disclosure.txt @@ -0,0 +1,16 @@ +Certain Relationships and Related Transactions +Review and Approval of Related Party Transactions +The audit committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be +substantively applied to each transaction reviewed by the audit committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether such transactions are in the best interests of the +Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party +transactions. +The Company’s policy is that all of its employees and directors, as well as their family members, must avoid any activity that is or +has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform +the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the board of directors or a committee consisting solely of independent directors may grant waivers of the provisions of the +Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give +rise to a conflict of interest. +Further, under the audit committee charter, the audit committee is responsible for reviewing and monitoring compliance +with our Code of Business Conduct and Ethics and recommending any warranted changes to the board of directors. In addition, the board of directors and, pursuant to its written charter, the audit committee, reviews and approves all relationships and +transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or +indirect material interest. The board of directors and the audit committee approve only those transactions that, in light of known circumstances, are consistent, or are not inconsistent with, the Company’s best interests, as they determine in +the good faith exercise of their discretion. \ No newline at end of file diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/filing.txt b/raw/filings/0000874499/2015/0001628280-16-011417/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5db6d85a3effcd8d8f571669dd8bd2178c7413e2 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/filing.txt @@ -0,0 +1,7614 @@ +10-K +1 +gpor-12312015x10k.htm +10-K +10-K +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2015 +OR +¨ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corporation +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of +Incorporation or Organization) +(IRS Employer +Identification Number) +14313 North May Avenue, Suite 100 +Oklahoma City, Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +(405) 848-8807 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 30, 2015 , based on the closing price of the common stock on the NASDAQ Global Select Market on June 30, 2015 , the last business day of the registrant’s most recently completed second fiscal quarter ( $40.25 per share), was $4,355,210,235 . +As of February 10, 2016 , 108,324,750 shares of the registrant’s common stock were outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +21 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +44 +ITEM 2. +PROPERTIES +44 +ITEM 3. +LEGAL PROCEEDINGS +50 +ITEM 4. +MINE SAFETY DISCLOSURES +50 +PART II +51 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +51 +ITEM 6. +SELECTED FINANCIAL DATA +52 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +55 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +70 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +72 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +72 +ITEM 9A. +CONTROLS AND PROCEDURES +72 +ITEM 9B. +OTHER INFORMATION +75 +PART III +75 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +75 +ITEM 11. +EXECUTIVE COMPENSATION +75 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +75 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +75 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +75 +PART IV +76 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +76 +Signatures +S-1 +Index to Consolidated Financial Statements +F-1 +Exhibit Index +E-1 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have an interest in producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an interest in an entity that operates in the Phu Horm gas field in Thailand. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 10, 2016 , we held leasehold interests in approximately 244,000 gross (237,000 net) acres in the Utica Shale primarily in Eastern Ohio, including approximately 24,000 net acres acquired in our purchase of Paloma Partners III, LLC, or Paloma, and approximately 35,000 net acres acquired from American Energy-Utica, LLC (now known as Ascent Resources Utica, LLC), or AEU, in each case during the second quarter of 2015. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2015 , had spud 219 gross wells (including wells from our AEU acquisition), 165 of which were completed and were producing. In 2015 , we spud 49 gross (38.4 net) wells, of which ten were completed as producing wells, 36 were in various stages of completion and, as of December 31, 2015 , three were still being drilled. We commenced sales from 55 gross wells (50.2 net wells) in the Utica Shale during 2015 . During 2016 (through February 10, 2016 ), we had spud four gross (2.2 net) wells. As of February 10, 2016 , one well was waiting on completion and three were still drilling. In addition, 25 gross (7.3 net) wells were drilled by other operators on our Utica Shale acreage during 2015 . +We currently intend to drill 29 to 32 gross (19 to 21 net) horizontal wells, and commence sales from 44 to 48 gross (28 to 30 net) horizontal wells on our Utica Shale acreage in 2016 for an estimated aggregate cost of $219.0 million to $247.0 million. We currently anticipate 17 to 19 gross (two to three net) horizontal wells will be drilled, and sales commenced from 30 to 34 gross (eight to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2016 for an estimated net cost to us of $90.0 million to $100.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2015 was approximately 57,381 net million cubic feet of natural gas equivalent, or MMcfe, or 623.7 MMcfe per day, of which 85% was from natural gas and 15% was from oil and natural gas liquids, or NGLs. During January 2016 , our average daily net production from the Utica Shale was approximately 586.9 MMcfe, of which 86% was from natural gas and 14% was from oil and NGLs. +In 2015 , at our WCBB field, we recompleted 35 gross and net wells and spud no new wells. In the fourth quarter of 2015 , production at WCBB was approximately 1,363 MMcfe, or an average of 14.8 MMcfe per day, of which 97% was from oil and 3% was from natural gas. During January 2016 , our average net daily production at WCBB was approximately 13.1 MMcfe, 100% of which was from oil. +In 2015 , at our East Hackberry field, we recompleted 37 gross and net wells and spud no new wells. In the fourth quarter of 2015 , net production at East Hackberry was approximately 315.8 MMcfe, or an average of 3.4 MMcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at East Hackberry was approximately 4.6 MMcfe, of which 96% was from oil and 4% was from natural gas. +In 2015 , at our West Hackberry field, we had no recompletions and spud no new wells. In the fourth quarter of 2015 , net production at West Hackberry was approximately 45.1 MMcfe, or an average of 489.9 Mcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at West Hackberry was approximately 685.5 Mcfe, of which 99% was from oil and 1% was from natural gas. +We currently estimate our 2016 activities in our Southern Louisiana fields to be approximately $26.0 million to $28.0 million in aggregate for maintenance capital activities. +2 +Table of Contents +Index to Financial Statements +As of December 31, 2015 , we held leasehold interests in approximately 5,000 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2015 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2015 , net production from our Niobrara Formation acreage was approximately 29.1 MMcfe, or an average of 315.9 Mcfe per day, 100% of which was from oil. During January 2016 , our average net daily production from our Niobrara Formation acreage was approximately 292.5 Mcfe, 100% of which was from oil. During 2016 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2015 , we held leasehold interests in approximately 864 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2015 , our net production from this acreage was approximately 94.3 MMcfe, or an average of 1.0 MMcfe per day, of which 90% was from oil and natural gas liquids and 10% was from natural gas. During January 2016 , our average daily net production from our Bakken Formation acreage was approximately 375.0 Mcfe, of which 82% was from oil and 18% was from natural gas. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2015 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see " Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see " Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see " Our Equity Investments–Other Investments " below. +As of December 31, 2015 , we had 1.7 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $765.8 million and associated standardized measure of discounted future net cash flows of approximately $764.3 million , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2015 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells (2) +Non-Productive +Wells +Developed +Acreage (3) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (4) +39.11/48.15 +306 +147.49 +3 +2.66 +36,549 +32,110 +1,558,677 +3,618 +17,736 +1,686,795 +West Cote Blanche Bay Field (5) +80.108/100 +98 +98 +202 +202 +5,668 +5,668 +894 +2,258 +— +14,442 +E. Hackberry Field (6) +79.91/100 +21 +21 +124 +124 +2,910 +2,910 +316 +309 +— +2,168 +W. Hackberry Field +80.00/100 +5 +5 +8 +8 +1,192 +1,192 +— +14 +— +88 +Niobrara Formation +38.94/46.77 +4 +2 +2 +1 +2,740 +1,370 +55 +117 +— +758 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +1,861 +163 +189 +141 +— +1,038 +Overrides/Royalty Non-operated +Various +541 +0.71 +— +— +— +— +14 +1 +— +23 +Total +993 +274.5 +339 +337.66 +50,920 +43,413 +1,560,145 +6,458 +17,736 +1,705,312 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +3 +Table of Contents +Index to Financial Statements +(2) +Includes two gross and net wells at WCBB that are producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 17% of our acreage is developed acreage and has been held by production. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 141 gross (15.66 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2015 , we held leasehold interests in approximately 240,000 gross (234,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of January 2, 2016 , there were 1,126 producing horizontal wells, 403 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 12 horizontal wells that were being drilled and an additional 447 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +4 +Table of Contents +Index to Financial Statements +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2015 , had spud 219 gross wells (including wells from our AEU acquisition), 165 of which were completed and were producing. In 2015 , we spud 49 gross (38.4 net) wells, of which ten were completed as producing wells, 36 were in various stages of completion and, as of December 31, 2015 , three were still being drilled. We commenced sales from 55 gross wells (50.2 net wells) in the Utica Shale during 2015 . During 2016 (through February 10, 2016 ), we had spud four gross (2.2 net) wells of which one was waiting on completion and three were still drilling. In addition, 25 gross (7.3 net) wells were drilled by other operators on our Utica Shale acreage during 2015 . +We currently intend to drill 29 to 32 gross (19 to 21 net) horizontal wells, and commence sales from 44 to 48 gross (28 to 30 net) horizontal wells, on our Utica Shale acreage in 2016 for an estimated aggregate cost of $219.0 million to $247.0 million. We currently anticipate 17 to 19 gross (two to three net) horizontal wells will be drilled, and sales commenced from 30 to 34 gross (eight to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2016 for an estimated net cost to us of $90.0 million to $100.0 million. As of February 10, 2016 , we had three operated horizontal rigs drilling in the play. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2015 was approximately 57,381 MMcfe, or 623.7 MMcfe per day, of which 85% was from natural gas and 15% was from oil and NGLs. During January 2016 , our average daily net production from the Utica Shale was approximately 586.9 MMcfe, of which 86% was from natural gas and 14% was from oil and NGLs. The slight decrease in January 2016 production was the result of our decision to temporarily curtail our production beginning in the fourth quarter of 2015. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2015 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2015 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2015 , estimated field cumulative gross production was 197.9 MMBO and 237.1 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2015 , 96 were producing, 202 were shut-in, two were producing intermittently, and six were being used as salt water disposal wells. The other 771 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2015 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +5 +Table of Contents +Index to Financial Statements +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2015 , at our WCBB field, we recompleted 35 gross and net wells and spud no new wells. As of February 10, 2016 , we had recompleted six gross and net wells during 2016 in our WCBB field. +Production Status +In the fourth quarter of 2015 , our net production at WCBB was approximately 1,363 MMcfe, or an average of 14.8 MMcfe per day, of which 97% was from oil and 3% was from natural gas. During January 2016 , our average net daily production at WCBB was approximately 13.1 MMcfe, 100% of which was from oil. The slight decrease in average net daily production in January 2016 was due to normal production declines. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 79.91% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2015 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. We licensed approximately 54 square miles of 3-D seismic data covering a portion of the area and have received a processed version of the seismic data. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2015 was over 4,425 MBO and 331.9 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2015 , 21 wells had daily production, 125 were shut-in and three had been converted to salt water disposal wells. The remaining 120 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +6 +Table of Contents +Index to Financial Statements +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, three natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2015 at East Hackberry, we recompleted 37 gross and net wells and spud no new wells. As of February 10, 2016 , we had recompleted two gross and net wells during 2016 in our East Hackberry field. +Production Status +In the fourth quarter of 2015 , our net production at East Hackberry was approximately 315.8 MMcfe, or an average of 3.4 MMcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at East Hackberry was approximately 4.6 MMcfe, of which 96% was from oil and 4% was from natural gas. The slight increase in production in January 2016 is a result of our 2016 recompletion activities. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.00% NRI) in 1,192 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2015 was 452 MBO and 140 Bcf of natural gas. As of December 31, 2015 , 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2015 , five of such wells were producing, eight were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2015 at West Hackberry, we had no recompletions and spud no new wells. We do not anticipate drilling any wells in our West Hackberry field during 2016. +Production Status +In the fourth quarter of 2015 , our net production at West Hackberry was approximately 45.1 MMcfe, or an average of 489.9 Mcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at West Hackberry was approximately 685.5 Mcfe, of which 99% was from oil and 1% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +7 +Table of Contents +Index to Financial Statements +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2015 , we held leases for approximately 5,000 net acres. In 2015 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2015 , net production from our Niobrara Formation acreage was approximately 29.1 MMcfe, or an average of 315.9 Mcfe per day, 100% of which was from oil. During January 2016 , our average net daily production from our Niobrara Formation acreage was approximately 292.5 Mcfe, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2015 . We do not anticipate drilling any wells in the Niobrara Formation during 2016 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2015 , we held approximately 864 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +8 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2015 , our net production from this acreage was approximately 94.3 MMcfe, or an average of 1.0 MMcfe per day, of which 90% was from oil and natural gas liquids and 10% was from natural gas. During January 2016 , our average daily net production from our Bakken Formation acreage was approximately 375.0 Mcfe, of which 82% was from oil and 18% was from natural gas. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2015 . We do not anticipate drilling any wells in the Bakken Formation during 2016 . +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2015 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2015 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly at September 30, 2015 and December 31, 2015 for impairment, resulting in an aggregate other than temporary impairment write down of $101.6 million for the year ended December 31, 2015. If commodity prices continue to decline, further impairment of our investment in Grizzly may result in the future. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by early 2016. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. In December 2015, Grizzly suspended the review of the Thickwood application by the AER. The Thickwood application will be resubmitted once the regulations have +9 +Table of Contents +Index to Financial Statements +been updated. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly has pursued a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 million cubic feet per day. For 2015, net gas production was approximately 90 MMcf per day and condensate production was 407 barrels per day. Hess Corporation, or Hess, operates the field with a 35% interest. Other interest owners include APICO (35% interest), PTT Exploration and Production Public Company Limited (20% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +We own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on this concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III allowed the concession to expire in January 2015. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, Stingray Cementing LLC, or Stingray Cementing, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth originally intended to pursue the offering in 2015; however, Mammoth continues to evaluate market conditions and the commodity price environment which will impact the timing of the proposed offering. See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +In February 2016, we entered into a joint venture with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the joint venture and Rice acts as operator and owns the remaining 75% interest in the joint venture. Construction of the gathering assets, which is underway, is expected to provide connectivity of our dry gas gathering systems and interchangeability of natural gas across our firm portfolio. The joint venture has completed the first phase of the projects: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. The lateral has been commissioned and first flow commenced on February 1, 2016. In addition, we and Rice have agreed to negotiate in good faith to expand the joint venture to provide water services to us within the dedicated areas. +Competition +10 +Table of Contents +Index to Financial Statements +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. Our production from WCBB is being sold in accordance with the Shell posted price for West Texas/New Mexico Intermediate crude plus or minus Platt's trade month average P+ value, plus or minus the Platt's HLS/WTI differential less transportation charges. The majority of our Utica Shale oil is sold to Shell and Marathon Petroleum Corporation, or Marathon. The purchaser takes custody at the MarkWest Utica EMG, or MarkWest, operated condensate stabilizer located near Cadiz, Ohio. Our Utica Shale NGLs are currently purchased by MarkWest which remits to us a weighted average selling price of products sold to various markets. We have NAESBs in place with various purchasers for our Utica Shale natural gas production. The majority of our gas is sold to BP Energy Company, or BP. In 2015, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily trades. The majority of purchases are transacted at the tailgate of the plants or at central delivery points with available pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2015 , we sold approximately 90% and 10% of our oil production to Shell and Marathon Oil Corporation, respectively, 76% and 24% of our natural gas liquids production to MarkWest and Antero Resources, respectively and 79% , 14% and 5% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2014 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest and 40% , 32% and 19% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2013 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest and 32% , 31% and 17% of our natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. +As of December 31, 2015, we had an average of approximately 476,000 MMBtu per day of firm sales contracted with third parties for 2016. We had an average of approximately 349,000 MMBtu per day, 216,000 MMBtu per day, 197,000 MMBtu per day, 152,000 MMBtu per day and 62,000 MMBtu per day contracted with third parties for 2017, 2018, 2019, 2020 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2015, we had entered into firm transportation contracts to deliver approximately 725,000 MMBtu to 775,000 MMBtu per day for 2016. For 2017, we had entered into firm transportation contracts to deliver approximately 775,000 MMBtu to 1,125,000 MMBtu per day. For 2018 through 2020, we had entered into firm transportation contracts to deliver approximately 1,125,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional contracts to be limited in 2016. Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +11 +Table of Contents +Index to Financial Statements +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities expected to begin in 2016 allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities expected to begin in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities expected to begin in 2017 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities expected to begin in late 2017 allowing additional access to Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +12 +Table of Contents +Index to Financial Statements +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or relate to our owned or operated facilities. Liability under such laws and regulations is strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally imposes liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +13 +Table of Contents +Index to Financial Statements +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. These laws and regulations also prohibit certain activity in wetlands unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on April 7, 2015, the EPA published a proposed rule establishing federal pre-treatment standards for wastewater discharged from onshore unconventional oil and gas extraction facilities to publicly owned treatment works, or POTW, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allowed the agency to proceed with the adoption and implementation of regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act, including rules that regulate emissions of GHGs from certain large stationary sources of emissions such as power plants or industrial facilities. In response to its endangerment finding, the EPA adopted two sets of rules regarding possible future regulation of GHG emissions under the Clean Air Act. The motor vehicle rule, which became effective in July 2010, purports to limit emissions of GHGs from motor vehicles. The EPA adopted the stationary source rule, or the tailoring rule, in May 2010, and it became effective in January 2011. The tailoring rule established new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On December 19, 2014, the EPA issued two memoranda providing initial guidance on GHG permitting requirements in response to +14 +Table of Contents +Index to Financial Statements +the Court’s decision in Utility Air Regulatory Group v. EPA . In its preliminary guidance, the EPA indicated that it will undertake a rulemaking action to rescind any PSD permits issued under the portions of the tailoring rule that were vacated by the Court. In the interim, the EPA issued a narrowly crafted “no action assurance” indicating it will exercise its enforcement discretion not to pursue enforcement of the terms and conditions relating to GHGs in an EPA-issued PSD permit, and for related terms and conditions in a Title V permit. On April 30, 2015, the EPA issued a final rule allowing permitting authorities to rescind PSD permits issued under the invalid regulations. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +The EPA has continued to adopt GHG regulations applicable to other industries, such as its August 2015 adoption of three separate, but related, actions to address carbon dioxide pollution from power plants, including final Carbon Pollution Standards for new, modified and reconstructed power plants, a final Clean Power Plan to cut carbon dioxide pollution from existing power plants, and a proposed federal plan to implement the Clean Power Plan emission guidelines. Upon publication of the Clean Power Plan on October 23, 2015, more than two dozen States as well as industry and labor groups challenged the Clean Power Plan in the D.C. Circuit Court of Appeals. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States joined the international community at the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement, if ratified, establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our business is not a party to this litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, as amended, or the ESA, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and prohibits taking of endangered species. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their +15 +Table of Contents +Index to Financial Statements +critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. The EPA, however, has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. Furthermore, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. +In addition, on May 9, 2014, the EPA issued an Advance Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The public comment period ended on September 18, 2014. The EPA plans to develop a Notice of Proposed Rulemaking by December 2016, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on April 7, 2015, the EPA published a proposed rule establishing federal pre-treatment standards for wastewater discharged from onshore unconventional oil and gas extraction facilities to POTW. The EPA asserts that wastewater from such facilities can be generated in large quantities and can contain constituents that may disrupt POTW operations and/or be discharged, untreated, from the POTW to receiving waters. If adopted, the new pre-treatment rule would require unconventional oil and gas facilities to pre-treat wastewater before transferring it to a POTW. The public comment period ended on July 17, 2015, and the EPA is expected to publish a final rule by August 2016. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. For example, in September 2013 and December 2014, the EPA amended its rules to extend compliance deadlines and to clarify the NSP standards. Further, on July 31, 2015, the EPA finalized two updates to the NSP standards to address the definition of low-pressure wells and references to tanks that are connected to one another (referred to as connected in parallel). In addition, on September 18, 2015, the EPA published a suite of proposed rules to reduce methane and VOC emissions from oil and gas industry, including new +16 +Table of Contents +Index to Financial Statements +“downstream” requirements covering equipment in the natural gas transmission segment of the industry that was not regulated by the 2012 rules. The public comment period closed on December 4, 2015. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. The rule took effect on June 24, 2015, although it is the subject of several pending lawsuits filed by industry groups and at least four states, alleging that federal law does not give the BLM authority to regulate hydraulic fracturing. On September 30, 2015, the United States District Court for Wyoming issued a preliminary injunction preventing the BLM from implementing the rule nationwide. This order has been appealed to the Tenth Circuit Court of Appeals. Also, on January 22, 2016, the BLM announced a proposed rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The proposed rule would require operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule would also clarify when operators owe the government royalties for flared gas. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources. In June 2015, the EPA released its draft assessment report for peer review and public comment, finding that, while there are certain mechanisms by which hydraulic fracturing activities could potentially impact drinking water resources, there is no evidence available showing that those mechanisms have led to widespread, systemic impacts. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, in June 2012, Ohio’s Governor signed legislation mandating chemical disclosure for hydraulic fracturing fluids, pre-drilling testing of water samples within 1,500 feet of a proposed horizontal well, and increased well operator liability insurance requirements. In addition, in April 2014, Ohio’s Department of Natural Resources announced new permit conditions for drilling near faults or areas of past seismic activity. The Texas Railroad Commission, or RRC, and Louisiana Department of Natural Resources adopted rules and regulations requiring that well operators disclose the list of chemical ingredients subject to the requirements of federal OSHA, to state regulators and on a public internet website. Also, in May 2013, the RRC adopted new rules, which became effective in January 2014, governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Additionally, on October 28, 2014, the RRC adopted disposal well rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced water and hydraulic fracturing flowback fluid to conduct seismic activity searches utilizing the U.S. Geological Survey. These searches are intended to determine the potential of earthquakes within a circular area of 100 square miles around a proposed new disposal well. The disposal well rule amendments, which became effective in Texas on November 17, 2014, also clarify the RRC’s authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well is likely to contribute to seismic activity. RRC has used this authority to deny permits for waste disposal wells. Effective August 26, 2011, Montana adopted hydraulic fracturing well integrity and disclosure regulations under which well operators must demonstrate a suitable and safe mechanical configuration for the proposed stimulation treatment and provide information in the drilling permit application on the estimated volume and types of materials to be used in the proposed hydraulic fracturing activities. Upon completion of the well, well operators must provide the Montana Board of Oil and Gas Conservation with the volume and type of chemicals used, including the additive type, chemical ingredient names, and Chemical Abstracts Service, or CAS, number, subject to certain trade secret protections. On April 1, 2012, the North Dakota Industrial Commission enacted regulations requiring hydraulic fracturing well operators to disclose the hydraulic fluid composition, including the trade name, supplier, ingredients, CAS Number, and the maximum ingredient concentrations of all additives in the hydraulic fracturing fluid. Colorado enacted rules requiring similar disclosures on January 30, 2012. Also, in 2013 and 2014, Colorado approved +17 +Table of Contents +Index to Financial Statements +regulations that require well operators to test groundwater quality before and after drilling and to install emission controls to capture 95 percent of VOC and methane emissions. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation and sale for resale of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and oil and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +18 +Table of Contents +Index to Financial Statements +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +19 +Table of Contents +Index to Financial Statements +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of well pads. Under these new rules, operators must submit detailed horizontal well pad site plans certified by a professional engineer for review by the ODNR Division of Oil and Gas Resources Management prior to the construction of a well pad. These rules will result in increased construction costs for operators. It is expected that the ODNR will pursue further initiatives in 2016, including additional emergency response rules. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $21.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually each May. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +20 +Table of Contents +Index to Financial Statements +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2015 and 2014 were approximately $0.1 million and $0.2 million, respectively. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that serves as our corporate headquarters. Additionally, we lease approximately 26,900 square feet of office space in other buildings in Oklahoma City. A new corporate headquarters is currently under construction in Oklahoma City, Oklahoma. The building, currently scheduled to be completed in the fourth quarter of 2016, will have approximately 120,000 square feet of office space and will allow our employees to office in one location in Oklahoma City. We have received various offers to purchase or lease our existing headquarters building which we are evaluating. +We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We also lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We own an approximately 5,700 square foot office building in St. Clairsville, Ohio that serves as our Ohio headquarters. In addition, we lease approximately 4,275 square feet of office space in St. Clairsville, Ohio. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2015 , we had 230 employees. An unrelated third-party Louisiana well servicing company provides a majority of the field personnel needed to operate the WCBB and the Hackberry fields. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +ITEM 1A. +RISK FACTORS +21 +Table of Contents +Index to Financial Statements +Risks Related to our Business and Industry +Market conditions for oil and natural gas, and particularly the recent decline in prices for oil and natural gas, have, and may continue to, adversely affect our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including: +• +worldwide and domestic supplies of oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +the level of consumer demand; +• +the price and availability of alternative fuels; +• +technical advances affecting energy consumption; +• +risks associated with operating drilling rigs; +• +the availability of pipeline capacity and other transportation facilities; +• +the price and level of foreign imports; +• +domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +speculative trading in crude oil and natural gas derivative contracts; +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• +the overall domestic and global economic environment; and +• +weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $27.56 per barrel, or Bbl, in January 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.80 per MMBtu in December 2015 to a high of $7.51 per MMBtu in January 2010. During 2015, WTI prices ranged from $36.48 to $65.69 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.80 to $3.65 per MMBtu. On January 20, 2016, the WTI posted price for crude oil was $28.35 per Bbl and the Henry Hub spot market price of natural gas was $2.12 per MMBtu, representing decreases of 57% and 42%, respectively, from the high of $65.69 per Bbl of oil and $3.65 per MMBtu for natural gas during 2015. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this +22 +Table of Contents +Index to Financial Statements +occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to further write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our future growth rate. +Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our 2016 business plan, we considered allocating capital and other resources to various aspects of our businesses, including well development, reserve acquisitions, midstream infrastructure and other activities. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2016 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, including the appropriate rate of reserve development, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2016 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives. +We periodically engage in acquisitions, dispositions and other strategic transactions, including equity investments and joint ventures such as our recent joint venture with Rice. These transactions involve various inherent risks, such as changes in prevailing market conditions, our ability to obtain the necessary regulatory approvals, the timing of and conditions that may be imposed on us by regulators and our ability to achieve benefits anticipated to result from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us to risks and uncertainties, such as committing us to fund operating and/or capital expenditures, the timing and amount of which we may not be able to control. Further, the counterparties to these transactions may not satisfy their obligations to the joint venture. Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish further, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2016 to be in the range of $335.0 million to $375.0 million and an additional $60.0 million to $65.0 million for acreage expenses, primarily lease extensions, in the Utica Shale and $30.0 million to $35.0 million for cash capital contributions to our midstream joint venture with Rice in Eastern Ohio. +23 +Table of Contents +Index to Financial Statements +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2016 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including: +• recoverable reserves; +• future oil and natural gas prices and their applicable differentials; +• operating costs; and +• potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and +24 +Table of Contents +Index to Financial Statements +financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We may incur losses as a result of title defects in the properties in which we invest. +It is our practice in acquiring oil and natural gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. +Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals and/or permits; +• +unplanned increases in the cost of construction materials or labor; +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +25 +Table of Contents +Index to Financial Statements +• +market-related increases in a project's debt or equity financing costs; and +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2015 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly at September 30, 2015 and December 31, 2015 for impairment, resulting in an aggregate other than temporary impairment write down of $101.6 million for the year ended December 31, 2015. If commodity prices continue to decline, further impairment of our investment in Grizzly may result in the future. The Algar Lake and other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Restrictions on the ability to obtain water may impact our operations. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. +We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of Michael G. Moore, our Chief Executive Officer and President, or our other senior management and technical personnel, could disrupt our operations and have a material adverse effect on our financial condition and results of operations. Our executives are not restricted from competing with us if they cease to be employed by us, except under certain limited circumstances prohibiting competition while making use of our trade secrets. We are party to an employment agreement with three of our executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +26 +Table of Contents +Index to Financial Statements +Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production. +There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our Utica Shale acreage at December 31, 2015 and our WCBB, Hackberry and Niobrara fields at each of December 31, 2015, 2014 and 2013, (ii) Ryder Scott with respect to our Utica Shale acreage at December 31, 2014 and 2013 and (iii) our personnel with respect to our overriding royalty and non-operated interests at December 31, 2015, 2014 and 2013. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. +Estimates of reserves as of year-end 2015, 2014 and 2013 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2015, 2014 and 2013, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. +The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2015, 2014 and 2013 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2015, 2014 and 2013, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Commodity prices have deteriorated significantly since that time and, accordingly, using more recent prices in estimating our proved reserves, without giving effect to any acquisition or development activities we have executed during 2016, would result in a reduction in proved reserve volumes due to economic limits. Furthermore, any such reduction in proved reserve volumes combined with lower commodity prices would substantially reduce the PV-10 and standardized measure of discounted future net cash flows from our proved reserves as of a more recent date. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• +actual prices we receive for oil and natural gas; +• +the amount and timing of actual production; +• +supply of and demand for oil and natural gas; and +• +changes in governmental regulations or taxation. +The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. +SEC rules could limit our ability to book additional proved undeveloped reserves in the future. +SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to +27 +Table of Contents +Index to Financial Statements +write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe, because they have become uneconomic or otherwise. +The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. +Approximately 55.0% of our total estimated proved reserves at December 31, 2015, were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. With respect to our Utica Shale acreage where we are focusing substantially all of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. We are also at risk with respect to oil and natural gas produced at our Southern Louisiana fields. In October 2006, for example, a natural gas line in our WCBB field operated by our natural gas purchaser was ruptured by a third party contractor, requiring the field to be shut in for approximately seven weeks until the line could be repaired. Further, we are dependent on our oil purchaser to provide the barges necessary to transport our oil production from the WCBB field. If we are unable, for any sustained period, to have access to acceptable delivery or transportation arrangements or encounter compression or other production related difficulties, we will be required to shut in or curtail production from the impacted fields. Any such shut in or curtailment, or an inability to obtain favorable terms for +28 +Table of Contents +Index to Financial Statements +delivery of the oil and natural gas produced from our fields, would adversely affect our financial condition and results of operations. +If production from our Utica Shale acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations. +As of December 31, 2015, we had entered into firm transportation contracts to sell approximately 725,000 MMBtu to 775,000 MMBtu per day for 2016. For 2017, we had entered into firm transportation contracts to sell approximately 775,000 MMBtu to 1,125,000 MMBtu per day. For 2018 through 2020, we had entered into firm transportation contracts to sell approximately 1,125,000 MMBtu per day. See Item 1. “ Business-Transportation and Takeaway Capacity .” Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale acreage decreases due to decreased developmental activities, taking into consideration the current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +Substantially all of our producing properties are located in Eastern Ohio and Louisiana, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. +We have identified over 1,000 drilling locations on our Ohio, Louisiana and Western Colorado properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations. +Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including: +• +unusual or unexpected geological formations; +• +loss of drilling fluid circulation; +• +title problems; +• +facility or equipment malfunctions; +29 +Table of Contents +Index to Financial Statements +• +unexpected operational events; +• +shortages or delivery delays of equipment and services; +• +compliance with environmental and other governmental requirements; and +• +adverse weather conditions. +Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. +Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. +In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities. +We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier, seismically active areas and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities for spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws. +30 +Table of Contents +Index to Financial Statements +Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected. +We have entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management and, if we fail to comply with the conditions of the compliance agreement or any potential future agreements, all or part of our drilling and producing operations in the State of Ohio may be suspended. +In September 2013, we entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management, or the Division, concerning aspects of our operations at seven drilling sites in Ohio. We had previously notified the Division of brine contamination at these drilling sites. After receipt of this notification, the Division conducted an investigation and determined that certain contaminants were escaping from underneath the containment liners at these locations. In the compliance agreement, we agreed, among other things, to conduct our production operations in compliance with all requirements of applicable regulations, implement a remediation plan and make a payment of $250,000. We have fulfilled our obligations under the compliance agreement and have been released from it by the Division. We cannot assure you that we will not be subject to compliance agreements with the Division or other regulatory bodies in the future. Our failure to comply with any such compliance agreements may result in the suspension of all or part of drilling and production operations for some specified period as well as the imposition of additional penalties and costs. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new +31 +Table of Contents +Index to Financial Statements +techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +We have been an early entrant into the Utica Shale in Eastern Ohio. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. +We have been an early entrant into the Utica Shale in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012. As a developing play, our drilling results in this area are more uncertain than drilling results in areas that are more developed and have been producing for a longer period of time. Since the Utica Shale has limited production history and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the Utica Shale may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the Utica Shale or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +A key part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. +Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following: +• effectively controlling the level of pressure flowing from particular wells; +• landing our wellbore in the desired drilling zone; +• staying in the desired drilling zone while drilling horizontally through the formation; +• running our casing the entire length of the wellbore; and +• being able to run tools and other equipment consistently through the horizontal wellbore. +Risks that we face while completing our wells include, but are not limited to, the following: +• the ability to fracture stimulate the planned number of stages; +• the ability to run tools the entire length of the wellbore during completion operations; and +• the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. +32 +Table of Contents +Index to Financial Statements +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income. +A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. Approximately 24% of our total Utica Shale undeveloped acreage will be subject to expiration in 2016, with 9% of such acreage expiring in 2017, 18% in 2018, 1% in 2019 and 12% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2015, leases representing 36%, 7%, 8% and 39%, respectively, of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2016, 2017, 2018 and 2019. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +33 +Table of Contents +Index to Financial Statements +Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities. +Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations, including those relating to protection of human health and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations have continually imposed increasingly strict requirements for water and air pollution control and solid waste management. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. We believe the trend of more expansive and stricter legislation and regulations of our industry will continue. See Item 1. “Business-Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of certain laws and regulations that affect us. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the Underground Injection Control, or UIC, program under the federal State Drinking Water Act, or the SDWA, specifically as “Class II” UIC wells. Furthermore, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. +In addition, on May 9, 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The EPA plans to develop a Notice of Proposed Rulemaking by December 2016, which would describe a proposed mechanism - regulatory, voluntary or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on April 7, 2015, the EPA published a proposed rule establishing federal pre-treatment standards for wastewater discharged from onshore unconventional oil and gas extraction facilities to publicly owned treatment works, or POTW. If adopted, the new pre-treatment rule would require unconventional oil and gas facilities to pre-treat wastewater before transferring it to a POTW. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and natural gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA's rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. +34 +Table of Contents +Index to Financial Statements +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA continues to evaluate the potential impacts of hydraulic fracturing on drinking water resources and the induced seismic activity from disposal wells and has recommended strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of federal, state and local laws and initiatives concerning hydraulic fracturing, see Item 1. “ Business-Regulation-Regulation of Hydraulic Fracturing ” above. We plan to use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties and any increased federal, state, local, foreign or international regulation of hydraulic fracturing or offshore drilling, including legislation and regulation in the states in which we operate, could reduce the volumes of oil and natural gas that we can economically recover, which could materially and adversely affect our revenues and results of operations. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate. +Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain +35 +Table of Contents +Index to Financial Statements +futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. +In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy. +The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows. +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, and additional state taxes on natural gas extraction may be imposed, as a result of future legislation. +From time to time, legislative proposals are made that would, if enacted, make significant changes to U.S. tax laws. These proposed changes have included, but are not limited to, (i) eliminating the immediate deduction for intangible drilling and development costs, (ii) eliminating the deduction from income for domestic production activities relating to oil and natural gas exploration and development, (iii) the repeal of the percentage depletion allowance for oil and natural gas properties; (iv) an extension of the amortization period for certain geological and geophysical expenditures and (v) implementing certain international tax reforms. Further, in February 2016, the Obama administration issued a proposed budget which includes, among other things, a proposed tax of $10.25 per barrel equivalent on petroleum products. +In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014 and was pending in the Ohio Senate. The Ohio State Senate held a hearing on the bill, but there was no further movement before the summer recess of the Ohio Legislature. +In February 2015, the Governor of Ohio proposed another plan to enact new severance taxes on the oil and gas industry as part of the state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would have +36 +Table of Contents +Index to Financial Statements +imposed a 6.5% tax on oil and gas sold at the wellhead. Although the severance tax increase was removed from the bill subsequently passed by the Ohio House, additional severance tax proposals are expected to be introduced in Ohio. +These proposed changes in the U.S. and applicable state tax law, if adopted, or other similar changes that tax our production or reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows. +The adoption of climate change legislation by Congress could result in increased operating costs and reduced demand for the oil and natural gas we produce. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for oil and natural gas industry, and the U.S. Congress has, from time to time, considered adopting legislation to reduce emissions. Almost one-half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives. For a description of GHG existing and proposed rules and regulations, see Item 1. “ Business-Regulation-Environmental Regulation-Climate Change .” +In December 2015, the United States joined the international community at the 21st Conference of the Parties (COP-21) of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement, if ratified, establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. +Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our business is not a party to this litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase. +Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore a exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress, which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, financial condition or results of operations. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations. +We face extensive competition in our industry. +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as +37 +Table of Contents +Index to Financial Statements +fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. +The loss of one or more of these purchasers could, among other factors, limit our access to suitable markets for the oil and natural gas we produce. +We depend upon a limited number of customers for the sale of most of our oil and natural gas production. During the year ended December 31, 2015 , we sold approximately 90% and 10% of our oil production to Shell and Marathon Oil Corporation, respectively, 76% and 24% of our natural gas liquids production to MarkWest and Antero Resources, respectively, and 79% , 14% and 5% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. The loss of one or more of these purchasers could, among other factors, limit our access to suitable markets for the oil and natural gas we produce. If a purchaser is unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could materially and adversely affect our business, financial condition, results of operations and cash flows. +Our method of accounting for oil and natural gas properties may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2015, 2014 and 2013 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can give us a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $1.4 billion for the year ended December 31, 2015 . If prices of oil, natural gas and natural gas liquids continue to decrease, we may be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations. +Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical. +We are exposed to fluctuations in the price of natural gas and oil. Although we have hedged a portion of our estimated 2016 production, we may still be adversely affected by continuing and prolonged declines in the price of natural gas and oil. +We use fixed price swaps to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For information regarding these fixed price swaps, see Item 7A. "Quantitative and Qualitative Disclosures about Market Risk." Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current +38 +Table of Contents +Index to Financial Statements +levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted. +Our hedging transactions expose us to counterparty credit risk. +Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the terms of the derivative contract and we may not be able to realize the benefit of the derivative contract. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Loss of our information and computer systems could adversely affect our business. +We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, whether due to cyber attack or otherwise, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, and processing activities. For example, we depend on digital technologies to interpret seismic data, manage drilling rigs, production equipment and gathering systems, conduct reservoir modeling and reserves estimation, and process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of its vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. We do not maintain specialized insurance for possible liability resulting from a cyberattack on our assets that may shut down all or part of our business. +39 +Table of Contents +Index to Financial Statements +Risks Relating to Our Indebtedness +Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects. +As of December 31, 2015 , we had total indebtedness (net of associated accrued discount and premiums and unamortized debt issuance costs) of approximately $946.3 million , including $944.6 million attributable to our senior notes. We had borrowing base availability of $521.4 million under our secured revolving credit facility after giving effect to an aggregate of $178.6 million of letters of credit and no outstanding borrowings. +Our outstanding indebtedness could have important consequences to you, including the following: +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indenture; +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on the senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. +Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. +Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity +40 +Table of Contents +Index to Financial Statements +capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indenture governing the senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +Restrictive covenants in our secured revolving credit facility, the indenture governing the senior notes and in future debt instruments may restrict our ability to pursue our business strategies. +Our secured revolving credit facility and the indenture governing the senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to: +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets including capital stock of restricted subsidiaries; +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indenture governing the senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indenture governing the senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and the senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +41 +Table of Contents +Index to Financial Statements +Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $700.0 million. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2015 , we had no borrowings under our revolving credit facility. However, we intend to borrow under our revolving credit facility in the future. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indenture governing the senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2015 , our borrowing base under our revolving credit facility was set at $700.0 million and we had no borrowings outstanding under this facility. In addition, the indenture governing the senior notes allows us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indenture governing the senior notes also allows us to incur certain other additional secured debt and allows us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to the senior notes. In addition, the indenture governing the senior notes does not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with the senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of the senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. +Our borrowings under our revolving credit facility expose us to interest rate risk. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2015 , we had no variable interest rate borrowings outstanding; therefore, an increase in interest rates would not have impacted our interest expense. However, any increase in our interest rate at the time we do have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2015 , we did not hedge our interest rate risk. +If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit. +Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs. +42 +Table of Contents +Index to Financial Statements +Risks Related to Our Common Stock +If our quarterly revenues and operating results fluctuate significantly, the price of our common stock may be volatile. +Our revenues and operating results may in the future vary significantly from quarter to quarter. If our quarterly results fluctuate, it may cause our stock price to be volatile. We believe that a number of factors could cause these fluctuations, including: +• +changes in oil and natural gas prices; +• +changes in production levels; +• +changes in governmental regulations and taxes; +• +geopolitical developments; +• +the level of foreign imports of oil and natural gas; and +• +conditions in the oil and natural gas industry and the overall economic environment. +Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. +We do not currently pay dividends on our common stock and do not anticipate doing so in the future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +A change of control could limit our use of net operating losses. +As of December 31, 2015 , we had a net operating loss, or NOL, carry forward of approximately $132.0 million for federal income tax purposes. Transfers of our stock could result in an ownership change. In such a case, our ability to use the NOLs generated through the ownership change date could be limited. In general, the amount of NOLs we could use for any tax year after the date of the ownership change would be limited to the value of our stock (as of the ownership change date) multiplied by the long-term tax-exempt rate. +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC. Sales of these shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 10, 2016, there were 108,324,750 shares of our common stock issued and outstanding, excluding 491,026 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan. +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of +43 +Table of Contents +Index to Financial Statements +our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Additional information regarding our properties is included in Item 1. "Business" above and in Note 3 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference. +Proved Oil and Natural Gas Reserves +Evaluation and Review of Reserves. +Reserve estimates at December 31, 2015 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio ( 99% of our proved reserves at December 31, 2015 ) and our WCBB, Hackberry and Niobrara fields ( 1% of our proved reserves at December 31, 2015 ). Reserve estimates at December 31, 2014 and 2013 were prepared by Ryder Scott with respect to our assets in the Utica Shale in Eastern Ohio and by NSAI with respect to our WCBB, Hackberry and Niobrara fields. Our personnel prepared reserve estimates with respect to our overriding royalty and non-operated interests (less than 1% of our proved reserves) at December 31, 2015 , 2014 and 2013. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +In 2015, we made the decision to transfer the engineering of our Utica Shale reserves from Ryder Scott to NSAI. NSAI prepares the reserve estimates for several of the other operators located in close proximity to our Utica Shale acreage and brings specific expertise in the Utica Shale. In addition, NSAI has historically engineered our other operated fields and we believe we will benefit from synergies having the majority of our reserves engineered by one firm. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale and our WCBB, Hackberry and Niobrara fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 35 years of reservoir and operations experience and our geophysical staff has over 60 years combined industry experience. Our +44 +Table of Contents +Index to Financial Statements +technical staff uses historical information for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by our experienced reservoir engineers or under their direct supervision; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; and +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments. +Further, during 2015 , we implemented additional procedures in connection with our year-end reserve preparation and annual capital budget determination, including: +• +review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +The following table sets forth our estimated proved reserves at December 31, 2015 , 2014 and 2013 : +Year Ended December 31, +2015 +2014 +2013 +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Proved developed +6,120 +652,961 +12,910 +5,719 +345,166 +12,379 +5,609 +94,552 +3,527 +Proved undeveloped +338 +907,184 +4,826 +3,778 +373,840 +13,889 +2,737 +51,894 +2,148 +Total (1) +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +Year Ended December 31, +2015 +2014 +2013 +Total net proved oil and natural gas reserves (MMcfe) (1) +1,705,312 +933,598 +230,574 +PV-10 value (in millions) (2) +$ +765.8 +$ +1,840.8 +$ +696.9 +Standardized measure (in millions) (3) +$ +764.3 +$ +1,427.2 +$ +578.5 +_____________________ +(1) +Estimates of reserves as of year-end 2015 , 2014 and 2013 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12- +45 +Table of Contents +Index to Financial Statements +month period ended December 31, 2015 , 2014 and 2013 , respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2015 , 2014 and 2013 . Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. +(2) +Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2015 , 2014 and 2013 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $50.28 per barrel and $2.59 per MMBtu for 2015 , $94.99 per barrel and $4.35 per MMBtu for 2014 and $96.78 per barrel and $3.67 per MMBtu for 2013 , and in each case adjusted by lease for transportation fees and regional price differentials. +PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows. The following table reconciles the standardized measure of future net cash flows to the PV-10 value: +December 31, +2015 +2014 +2013 +(In thousands) +Standardized measure of discounted future net cash flows +$ +764,331 +$ +1,427,167 +$ +578,466 +Add: Present value of future income tax discounted at 10% +1,432 +413,671 +118,445 +PV-10 value +$ +765,763 +$ +1,840,838 +$ +696,911 +(3) +The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. +The above table does not include proved reserves net to our interest in Diamondback, Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “ Business–Our Equity Investments .” +As noted above, our December 31, 2015 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2015 of $50.28 per barrel and $2.59 per MMBtu. Holding production and development costs constant, if our 2015 reserves were calculated using the December 31, 2015 price of $37.18 per barrel and $2.28 per MMBtu, our discounted future net cash flows before income taxes would have been approximately $453.0 million, or $312.8 million less than our actual PV-10 value of $765.8 million at December 31, 2015. +The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +46 +Table of Contents +Index to Financial Statements +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves, or PUDs, at December 31, 2015 , 2014 and 2013 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 18 to our consolidated financial statements included in this report. Also contained in the Supplemental Information are our estimates of future net cash flows and discounted future net cash flows from proved reserves. Additional information regarding our proved reserves can be found in Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations ” and “– Critical Accounting Policies and Estimates ” included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2015 , our proved undeveloped reserves totaled 338 MBbls of oil, 907,184 MMcf of natural gas and 4,826 MBbls of NGLs, for a total of 938,168 MMcfe. Almost all of our PUDs at year-end 2015 were located in our Utica field. PUDs will be converted from undeveloped to developed as the applicable wells begin production. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include delays in the availability of infrastructure, well permitting delays, changes in commodity price outlook and costs, and new data from recently completed wells. During 2015 , we made slight adjustments to our development plan with respect to our PUD locations booked in our reserve report for the year ended December 31, 2014 and scheduled to be drilled during 2015 . Specifically, due to the continued significant decline in commodity prices during 2015, we did not drill six operated locations originally scheduled to be drilled in 2015, instead replacing these six locations with more economic non-PUD locations. In addition, one PUD location that was scheduled to be drilled by another operator in 2015 was not drilled and rescheduled to be drilled in 2016. +Changes in PUDs that occurred during 2015 were primarily due to: +• +Additions of 625.9 Bcfe primarily attributable to 2015 extensions in our Utica field; +• +Conversion of approximately 81.2 Bcfe attributable to 14 PUDs into proved developed reserves; +• +Additions of 13.9 Bcfe attributable to four PUDs drilled during 2015 that were waiting on completion and pipeline connection and, as such, remain categorized as PUDs at December 31, 2015; +• +Acquisition of approximately 271.8 Bcfe in our Paloma acquisition; and +• +Downward revisions of 372.1 Bcfe due to the exclusion of PUD locations in our Southern Louisiana and Utica fields due to lower commodity prices and changes in the drilling timeline due to lower commodity prices. +We drilled approximately 18.6% of our December 31, 2014 PUD locations during the year ended December 31, 2015 . +Costs incurred relating to the development of PUDs were approximately $112.1 million in 2015 . Estimated future development costs relating to the development of PUDs are projected to be approximately $170.3 million in 2016 , $177.6 million in 2017 , $158.4 million in 2018 , $252.1 million in 2019 and $78.8 million in 2020 . +All PUD drilling locations included in our 2015 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2015 , 5% of our total proved reserves were classified as proved developed non-producing. +As noted above, our December 31, 2015 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2015 of $50.28 per barrel and $2.59 per MMBtu. Holding production and development costs constant, if SEC pricing were $40.00 per barrel and $2.00 per MMBtu, this would have resulted in a loss of 921.2 Bcfe of our PUD volumes at December 31, 2015. Holding production and +47 +Table of Contents +Index to Financial Statements +development costs constant, if SEC pricing were $30.00 per barrel and $1.75 per MMBtu, this would have resulted in a loss of 928.5 Bcfe of our PUD volumes at December 31, 2015. +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2015 +2014 +2013 +Production Volumes: +Oil (MBbls) +2,899 +2,684 +2,317 +Gas (MMcf) +156,151 +59,318 +8,891 +Natural gas liquids (MGal) +185,792 +86,092 +13,416 +Gas equivalents (MMcfe) +200,089 +87,719 +24,709 +Average Prices: +Oil (per Bbl) +$ +48.91 +(1) +$ +92.18 +(1) +$ +96.74 +(1) +Gas (per Mcf) +$ +3.25 +(1) +$ +5.55 +(1) +$ +2.36 +Natural gas liquids (per Gal) +$ +0.32 +(1) +$ +1.09 +$ +1.27 +Gas equivalents (per Mcfe) +$ +3.54 +$ +7.65 +$ +10.61 +Production Costs: +Average production costs (per Mcfe) +$ +0.35 +$ +0.59 +$ +1.08 +Average production taxes and midstream costs (per Mcfe) +$ +0.77 +$ +1.01 +$ +1.54 +Total production and midstream costs and production taxes (per Mcfe) +$ +1.12 +$ +1.60 +$ +2.62 +(1) +Includes various derivative contracts at a weighted average price of: +Per barrel +January – December 2015 +$ +62.36 +January – December 2014 +$ +102.79 +January – December 2013 +$ +100.90 +Per MMBtu +January – December 2015 +$ +3.94 +January – December 2014 +$ +4.06 +January – December 2013 +$ +4.00 +Per gallon +January – December 2015 +$ +0.48 +Excluding the effect of fixed price swaps, the average price for 2015 would have been $42.29 per barrel of oil, $2.08 per Mcf of gas, $0.31 per gallon of NGL and $2.53 per Mcfe. The total volume hedged for 2015 represented approximately 46% of our total sales volumes for the year. Excluding the effect of fixed price swaps, the average price for 2014 would have been $89.88 per barrel of oil, $3.81 per Mcf of gas and $6.40 per Mcfe. The total volume hedged for 2014 represented approximately 62% of our total sales volumes for the year. Excluding the effect of fixed price swap contracts, the average price for 2013 would have been $104.51 per barrel of oil, $3.73 per Mcf of gas and $11.83 per Mcfe. The total volume hedged for 2013 represented approximately 48% of our total sales volumes for the year. +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2015 : +48 +Table of Contents +Index to Financial Statements +Year Ended December 31, +2015 +2014 +2013 +Utica Shale +Net Production +Oil (MBbls) +1,608 +883 +315 +Gas (MMcf) +155,926 +58,919 +8,439 +NGL (Mgal) +185,753 +86,051 +13,384 +Total (MMcfe) +192,108 +76,512 +12,238 +Average Sales Price: +Oil (per Bbl) +$ +42.41 +$ +78.63 +$ +83.67 +Gas (per Mcf) +$ +3.25 +$ +5.56 +$ +2.29 +NGL (per Gal) +$ +0.32 +$ +1.09 +$ +1.27 +Average Production Cost (per Mcfe) +$ +0.25 +$ +0.38 +$ +0.59 +Productive Wells and Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2015 . +NRI/WI (1) +Productive +Oil Wells (2) +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage (3) +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (4) +39.11/48.15 +82 +36.96 +224 +110.53 +3 +2.66 +— +— +36,549 +32,110 +203,931 +201,469 +West Cote Blanche Bay Field (5) +80.108/100 +98 +98 +— +— +185 +185 +17 +17 +5,668 +5,668 +— +— +E. Hackberry Field (6) +79.91/100 +21 +21 +— +— +124 +124 +— +— +2,910 +2,910 +1,206 +1,206 +W. Hackberry Field +80.00/100 +5 +5 +— +— +8 +8 +— +— +1,192 +1,192 +— +— +Niobrara Formation (7) +38.94/46.77 +4 +2 +— +— +2 +1 +— +— +2,740 +1,370 +7,415 +3,624 +Bakken Formation (8) +1.51/1.83 +18 +0.3 +— +— +— +— +— +— +1,861 +163 +3,505 +701 +Overrides/Royalty Non-operated +Various +541 +0.71 +— +— +— +— +— +— +— +— +— +— +Total +769 +163.97 +224 +110.53 +322 +320.66 +17 +17 +50,920 +43,413 +216,057 +207,000 +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +(2) +Includes two gross and net wells at WCBB that are producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 17% of our acreage is developed acreage and has been perpetuated by production. +(4) +With respect to our total undeveloped Utica Shale acreage as of December 31, 2015 , 24%, 9%, 18%, 1% and 12% is subject to expire in 2016, 2017, 2018, 2019 and thereafter. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 105 gross (12.03 net) gas wells and 36 gross (3.63 net) oil wells drilled by other operators on our acreage. +49 +Table of Contents +Index to Financial Statements +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +(7) +The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 36%, 7%, 8% and 39% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2016, 2017, 2018 and 2019, respectively. +(8) +NRI/WI is from wells that have been drilled or in which we have elected to participate. +Completed and Present Drilling and Recompletion Activities +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return. +2015 +2014 +2013 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +72 +72 +161 +161 +150 +150 +Dry +— +— +— +— +— +— +Total +72 +72 +161 +161 +150 +150 +Development: +Productive +49 +38 +119 +100 +80 +63.8 +Dry +— +— +7 +6.8 +2 +2 +Total +49 +38 +126 +106.8 +82 +65.8 +Exploratory: +Productive +— +— +— +— +3 +2.7 +Dry +— +— +— +— +— +— +Total +— +— +— +— +3 +2.7 +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +ITEM 3. +LEGAL PROCEEDINGS +Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +50 +Table of Contents +Index to Financial Statements +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Price Range of Common Stock +Our common stock is quoted on the NASDAQ Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods presented: +Price Range of +Common Stock +High +Low +2014 +First Quarter +$ +71.35 +$ +52.28 +Second Quarter +75.75 +58.90 +Third Quarter +65.18 +51.59 +Fourth Quarter +56.72 +36.56 +2015 +First Quarter +$ +48.60 +$ +35.00 +Second Quarter +52.28 +39.29 +Third Quarter +40.59 +28.97 +Fourth Quarter +36.12 +20.21 +Unregistered Sales of Equity Securities and Use of Proceeds +None. +Repurchases of Equity Securities +None. +Holders of Record +At the close of business on February 09, 2016, there were 310 stockholders of record holding 108,322,250 shares of our outstanding common stock. There were approximately 32,247 beneficial owners of our common stock as of February 09, 2016. +Dividend Policy +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock. +51 +Table of Contents +Index to Financial Statements +ITEM 6. +SELECTED FINANCIAL DATA +You should read the following selected consolidated financial data in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2015 , December 31, 2014 and December 31, 2013 and the selected consolidated balance sheet data at December 31, 2015 and December 31, 2014 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2012 and December 31, 2011 and the selected consolidated balance sheet data at December 31, 2013 , December 31, 2012 and December 31, 2011 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table. +52 +Table of Contents +Index to Financial Statements +Fiscal Year Ended December 31, +2015 +2014 +2013 +2012 +2011 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +709,475 +$ +671,266 +$ +262,753 +$ +248,926 +$ +229,254 +Costs and expenses: +Lease operating expenses +69,475 +52,191 +26,703 +24,308 +20,897 +Production taxes +14,740 +24,006 +26,933 +28,957 +26,054 +Midstream gathering and processing +138,590 +64,467 +11,030 +443 +279 +Depreciation, depletion and amortization +337,694 +265,431 +118,880 +90,749 +62,320 +Impairment of oil and gas properties +1,440,418 +— +— +— +— +General and administrative +41,967 +38,290 +22,519 +13,808 +8,074 +Accretion expense +820 +761 +717 +698 +666 +(Gain) loss on sale of assets +— +(11 +) +508 +(7,300 +) +— +2,043,704 +445,135 +207,290 +151,663 +118,290 +(Loss) Income from Operations +(1,334,229 +) +226,131 +55,463 +97,263 +110,964 +Other (Income) Expense: +Interest expense +51,221 +23,986 +17,490 +7,458 +1,400 +Interest income +(643 +) +(195 +) +(297 +) +(72 +) +(186 +) +Litigation settlement +— +25,500 +— +— +— +Insurance proceeds +(10,015 +) +— +— +— +— +Gain on contribution of investments +— +(84,470 +) +— +— +— +Loss (income) from equity method investments +106,093 +(139,434 +) +(213,058 +) +(8,322 +) +1,418 +146,656 +(174,613 +) +(195,865 +) +(936 +) +2,632 +(Loss) Income from Continuing Operations before Income Taxes +(1,480,885 +) +400,744 +251,328 +98,199 +108,332 +Income Tax (Benefit) Expense +(256,001 +) +153,341 +98,136 +26,363 +(90 +) +(Loss) Income from Continuing Operations +(1,224,884 +) +247,403 +153,192 +71,836 +108,422 +Discontinued Operations: +Loss on disposal of Belize properties, net of tax +— +— +— +3,465 +— +Net (Loss) Income Available to Common Stockholders +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +$ +68,371 +$ +108,422 +Net (Loss) Income Per Common Share—Basic: +$ +(12.27 +) +$ +2.90 +$ +1.98 +$ +1.22 +$ +2.22 +Net (Loss) Income Per Common Share—Diluted: +$ +(12.27 +) +$ +2.88 +$ +1.97 +$ +1.21 +$ +2.20 +53 +Table of Contents +Index to Financial Statements +At December 31, +2015 +2014 +2013 +2012 +2011 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +3,334,734 +$ +3,619,473 +$ +2,685,039 +$ +1,569,431 +$ +691,158 +Total debt, including current maturity +$ +946,263 +$ +703,564 +$ +291,090 +$ +290,101 +$ +2,283 +Total liabilities +$ +1,295,897 +$ +1,323,177 +$ +634,801 +$ +443,023 +$ +58,808 +Stockholders’ equity +$ +2,038,837 +$ +2,296,296 +$ +2,050,238 +$ +1,126,408 +$ +632,350 +54 +Table of Contents +Index to Financial Statements +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. +Overview +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and interests in entities that operate in Southeast Asia, including the Phu Horm gas field in Thailand. Until November 2014, we held an equity interest in Diamondback Energy, Inc., or Diamondback, a NASDAQ Global Select Market listed company to which we contributed our Permian Basin oil and natural gas interests in October 2012 immediately prior to Diamondback's initial public offering. At December 31, 2015, we did not own any shares of Diamondback. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +In this Annual Report on Form 10-K, our oil and natural gas production is presented in cubic feet of natural gas equivalent, as compared to our production presentation in periods prior to the year ended December 31, 2014 which was expressed in barrels of oil equivalent. The current presentation is due to the change in our production mix from predominately oil and natural gas liquids to predominately natural gas and natural gas liquids that occurred during 2014. Certain changes have been made to our financial statements for periods prior to the year ended December 31, 2014 to conform to the current presentation. +Prices for oil and natural gas have historically been volatile and subject to significant fluctuation in response to changes in supply and demand, market uncertainty and a variety of other factors beyond our control. The decline in commodity prices that began in mid-2014 continued during 2015. In response to these declining commodity prices, during 2015 we reduced our capital expenditures by approximately 36% as compared to 2014 and continued to focus on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner. We currently estimate that our total capital expenditure budget for 2016 will be in the range of $425.0 million to $475.0 million, an approximate 36% to 43% decrease from our total capital expenditures in 2015. +With commodity prices declining further in early 2016 to reach multi-year lows, we remain focused on capital discipline, conservative leverage and creating long-term value for our stockholders. We will continue to monitor the commodity price environment and expect to maintain financial flexibility to adjust our drilling and completion plans to appropriately respond to market conditions. To maintain financial flexibility, we chose to complete our spring borrowing base redetermination under our revolving credit facility earlier in 2016, which resulted in the bank syndicate affirming and maintaining the existing $700.0 million borrowing base under this facility. We believe that the quality of our asset base, our robust reserve growth during 2015 and our strong hedge position contributed to this determination, despite the current commodity price environment. As of December 31, 2015, our revolving credit facility was undrawn with outstanding letters of credit totaling $178.6 million, and we had cash on hand of approximately $113.0 million. See “ -Liquidity and Capital Resources ” below. +2015 and 2016 Year to Date Highlights +• +Production increased 128% to approximately 200,089 MMcfe for the year ended December 31, 2015 from approximately 87,719 MMcfe for the year ended December 31, 2014 . +55 +Table of Contents +Index to Financial Statements +• +Oil and natural gas revenues increased 6% to $709.0 million for the year ended December 31, 2015 from $670.8 million for the year ended December 31, 2014 . +• +During 2015, we spud 49 gross (38.4 net) wells, participated in an additional 25 gross (7.3 net) wells that were drilled by other operators on our Utica Shale acreage and recompleted 72 gross and net wells. Of our 49 new wells spud during 2015, ten were completed as producing wells and, at year end, 36 were in various stages of completion and three were drilling. +• +In August 2015, we acquired Paloma for a total purchase price of approximately $301.9 million. Paloma holds approximately 24,000 net nonproducing acres in the Utica Shale of Ohio. +• +On April 21, 2015, we issued 10,925,000 shares of our common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $501.8 million. We used a portion of these net proceeds, together with a portion of the net proceeds from our concurrent senior notes offering described below, to repay all borrowings outstanding at that time under our senior secured revolving credit facility and to fund the acquisition of Paloma and used the remaining funds from these offerings for general corporate purposes, including the funding of a portion of our 2015 capital development plans. +• +On April 21 2015, we issued $350.0 million in aggregate principal amount of our 6.625% senior unsecured notes due 2023, resulting in net proceeds to us of $343.6 million. +• +On June 12, 2015, we issued 11,500,000 shares of our common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $479.7 million. We used a portion of these net proceeds to fund the acquisition of certain acreage and other assets in the Utica Shale in Ohio from AEU, described below, and used the remaining funds for general corporate purposes, including the funding of a portion of our 2015 capital development plans. +• +On June 9, 2015, we completed the acquisition of 6,198 gross and net acres located in Belmont and Jefferson Counties, Ohio from AEU for a purchase price of approximately $68.2 million in a transaction we refer to as the Belmont/Jefferson acquisition. This acreage is located near or adjacent to the acreage included in our acquisition of Paloma. This newly acquired Belmont and Jefferson County acreage is undeveloped. +• +On June 12, 2015, we completed the acquisition of 38,965 gross (27,228 net) acres located in Monroe County, Ohio, which we refer to as the Monroe County Acreage, 14.6 MMcf per day of average net production (estimated for April 2015), 18 gross (11.3 net) drilled but uncompleted wells, an 11 mile gas gathering system and a four well pad location from AEU for a total purchase price of approximately $319.0 million, which we refer to as the Monroe Acquisition. We used a portion of the net proceeds from our June 2015 equity offering described above to fund the Monroe Acquisition. The Monroe County Acreage has a net revenue interest of approximately 84% and is approximately 85% held by production by a ten well per year drilling commitment. On June 29, 2015, we acquired an additional 4,950 gross (1,900 net) acres in Monroe County for an additional approximately $18.2 million from AEU. +• +As of February 10, 2016 , we held leasehold interests in approximately 244,000 gross (237,000 net) acres in the Utica Shale. During 2015, we spud 49 gross (38.4 net) wells on our Utica Shale acreage and, during 2016 (through February 10, 2016 ), we had spud four gross (2.2 net) wells. As of February 10, 2016 , one well was waiting on completion and three were still being drilled. +Critical Accounting Policies and Estimates +Our disc ussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: +56 +Table of Contents +Index to Financial Statements +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and totaled $1.8 billion at December 31, 2015 and $1.5 billion at December 31, 2014 . These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development. +Ceiling Test . Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling (as defined in the preceding paragraph). If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $1.4 billion for the year ended December 31, 2015 . If prices of oil, natural gas and natural gas liquids continue to decline, we may be required to further write down the value of our oil and natural gas properties, which could negatively affect our results of operations. +Asset Retirement Obligations . We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities. +We account for abandonment and restoration liabilities under FASB ASC 410 which requires us to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates. +Oil and Gas Reserve Quantities . Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Netherland, Sewell & Associates, Inc. and to a lesser extent our personnel have prepared reserve reports of our reserve estimates at December 31, 2015 on a well-by-well basis for our properties. +57 +Table of Contents +Index to Financial Statements +Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following: +• +the quality and quantity of available data; +• +the interpretation of that data; +• +the accuracy of various mandated economic assumptions; and +• +the judgments of the individuals preparing the estimates. +Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Periodically, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2015 , a valuation allowance of $281.8 million had been established for the net deferred tax asset, with the exception of certain NOL's and alternative minimum tax, or AMT, credits that we expect to utilize based on the uncertainty these assets may be realized. +Revenue Recognition . We derive almost all of our revenue from the sale of crude oil and natural gas produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals. +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. In accordance with FASB ASC 825 , "Financial Instruments," we elected the fair value option of accounting for our equity method investment in Diamondback's stock. At the end of each reporting period, the quoted closing market price of Diamondback's stock was multiplied by the total shares owned by us and the resulting gain or loss was recognized in income from equity method investments in the consolidated statements of operations. As of December 31, 2014, we had sold all of our shares of common stock of Diamondback. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. For the year ended December 31, 2015 , we recognized an impairment loss related to our investment in Grizzly of approximately $101.6 million . At December 31, 2014 , we fully impaired our investment in Tatex III. +Commitments and Contingencies . Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities. +58 +Table of Contents +Index to Financial Statements +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. We follow the provisions of FASB ASC 815, “ Derivatives and Hedging ,” as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While we have historically designated derivative instruments as accounting hedges, effective January 1, 2015, we discontinued hedge accounting prospectively. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +See Item 7. "Commodity Price Risk" for a summary of our derivative instruments in place as of December 31, 2015 . +RESULTS OF OPERATIONS +Results of Operations +The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2015 +2014 +2013 +Production Volumes: +Oil (MBbls) +2,899 +2,684 +2,317 +Gas (MMcf) +156,151 +59,318 +8,891 +Natural gas liquids (MGal) +185,792 +86,092 +13,416 +Gas equivalents (MMcfe) +200,089 +87,719 +24,709 +Average Prices: +Oil (per Bbl) +$ +48.91 +(1) +$ +92.18 +(1) +$ +96.74 +(1) +Gas (per Mcf) +$ +3.25 +(1) +$ +5.55 +(1) +$ +2.36 +(1) +Natural gas liquids (per Gal) +$ +0.32 +(1) +$ +1.09 +$ +1.27 +Gas equivalents (per Mcfe) +$ +3.54 +$ +7.65 +$ +10.61 +Production Costs: +Average production costs (per Mcfe) +$ +0.35 +$ +0.59 +$ +1.08 +Average production taxes and midstream costs (per Mcfe) +$ +0.77 +$ +1.01 +$ +1.54 +Total production and midstream costs and production taxes (per Mcfe) +$ +1.12 +$ +1.60 +$ +2.62 +_____________________ +(1) +Includes various derivative contracts at a weighted average price of: +Per barrel +January – December 2015 +$ +62.36 +January – December 2014 +$ +102.79 +January – December 2013 +$ +100.90 +59 +Table of Contents +Index to Financial Statements +Per MMBtu +January – December 2015 +$ +3.94 +January – December 2014 +$ +4.06 +January – December 2013 +$ +4.00 +Per gallon +January – December 2015 +$ +0.48 +Excluding the net effect of fixed price swaps, the average prices for 2015 would have been $42.29 per barrel of oil, $2.08 per Mcf of gas, $0.31 per gallon of NGL and $2.53 per Mcfe. The total volume hedged for 2015 represented approximately 46% of our total sales volumes for the year. Excluding the effect of fixed price swaps, the average prices for 2014 would have been $89.88 per barrel of oil, $3.81 per Mcf of gas and $6.40 per Mcfe. The total volume hedged for 2014 represented approximately 62% of our total sales volumes for the year. Excluding the net effect of fixed price swaps, the average prices for 2013 would have been $104.51 per barrel of oil, $3.73 per Mcf of gas and $11.83 per Mcfe. The total volume hedged for 2013 represented approximately 48% of our total sales volumes for the year. +From 2014 to 2015 , our net equivalent gas production increased 128% from 87,719 MMcfe to 200,089 MMcfe primarily as a result of the development of our Utica Shale acreage. From 2013 to 2014 , our net equivalent gas production also increased 255% from 24,709 MMcfe to 87,719 MMcfe primarily as a result of the development of our Utica Shale acreage. We currently estimate that our 2016 production will be between 254,370 and 267,180 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. +Comparison of the Years Ended December 31, 2015 and December 31, 2014 +We reported a net loss of $1.2 billion for the year ended December 31, 2015 as compared to net income of $247.4 million for the year ended December 31, 2014 . This decrease in period-to-period net income was due primarily to an impairment charge of $1.4 billion , a 54% decrease in realized Mcfe prices to $3.54 from $7.65 , a $17.3 million increase in lease operating expenses, a $74.1 million increase in midstream gathering and processing expenses, a $3.7 million increase in general and administrative expenses, a $245.5 million decrease in income from equity method investments and a $27.2 million increase in interest expense, partially offset by a 128% increase in net production to 200,089 MMcfe from 87,719 MMcfe, $10.0 million of insurance proceeds and a $409.3 million decrease in income tax expense for the year ended December 31, 2015 , as compared to the year ended December 31, 2014 . In addition, our 2014 net income included $79.7 million of income recognized from our equity method investment in Diamondback, $84.8 million of income recognized from our equity method investment in Blackhawk and $84.5 million of income recognized from our contribution of investments to Mammoth. +Oil and Gas Revenues . For the year ended December 31, 2015 , we reported oil and natural gas revenues of $709.0 million as compared to oil and natural gas revenues of $670.8 million during 2014 . This $38.2 million , or 6% , increase in revenues was primarily attributable to a 128% increase in net production to 200,089 MMcfe from 87,719 MMcfe, partially offset by a 54% decrease in realized Mcfe prices to $3.54 from $7.65 due the decline in commodity prices and a shift in our production mix toward natural gas and NGLs for the year ended December 31, 2015 as compared to the year ended December 31, 2014 . +The following table summarizes our oil and natural gas production and related pricing for the years ended December 31, 2015 and December 31, 2014 : +60 +Table of Contents +Index to Financial Statements +Year Ended +December 31, +2015 +2014 +Oil production volumes (MBbls) +2,899 +2,684 +Gas production volumes (MMcf) +156,151 +59,318 +Natural gas liquids production volumes (MGal) +185,792 +86,092 +Gas equivalents (MMcfe) +200,089 +87,719 +Average oil price (per Bbl) +$ +48.91 +$ +92.18 +Average gas price (per Mcf) +$ +3.25 +$ +5.55 +Average natural gas liquids (per Gal) +$ +0.32 +$ +1.09 +Gas equivalents (per Mcfe) +$ +3.54 +$ +7.65 +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $69.5 million for the year ended December 31, 2015 from $52.2 million for the year ended December 31, 2014 . This increase was mainly the result of an increase in expenses related to property taxes, contract labor and field supervision, field telemetry, location repair, rentals, facility repairs and maintenance and water hauling and disposal due to our increased production in the Utica Shale. +Production Taxes . Production taxes decreased to $14.7 million for the year ended December 31, 2015 from $24.0 million for 2014 . This decrease was primarily related to changes in our product mix and production location, as well as the decline in commodity prices. +Midstream Gathering and Processing Expenses . Midstream gathering and processing expenses increased by $74.1 million to $138.6 million for the year ended December 31, 2015 from $64.5 million for 2014 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2015 and 2014 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $337.7 million for the year ended December 31, 2015 , and consisted of $335.3 million in depletion of oil and natural gas properties and $2.4 million in depreciation of other property and equipment, as compared to total DD&A expense of $265.4 million for 2014 . This increase was due to an increase in our full cost pool as a result of our capital activities as well as an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $42.0 million for the year ended December 31, 2015 from $38.3 million for the year ended December 31, 2014 . This $3.7 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, increases in fees for audit services, bank service charges, computer support and travel expense, partially offset by decreases in stock compensation expense, consulting expense, legal expense and franchise taxes and an increase in general and administrative costs related to exploration and development activity capitalized to the full cost pool. +Accretion Expense . Accretion expense remained relatively flat at $0.8 million for the years ended December 31, 2015 and 2014 . +Interest Expense . Interest expense increased to $51.2 million for the year ended December 31, 2015 from $24.0 million for the year ended December 31, 2014 due primarily to the issuance of $300.0 million of additional 7.75% Senior Notes due 2020 on August 18, 2014, the issuance of $350.0 million of 6.625% Senior Notes due 2023 on April 21, 2015 and increased borrowings under our revolving credit facility during 2015. Total weighted debt outstanding under our revolving credit facility was $46.6 million for the year ended December 31, 2015 as compared to $22.8 million outstanding under such facility for 2014 . Additionally, we capitalized approximately $13.3 million and $9.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2015 and December 31, 2014 , respectively. This increase in capitalized interest in the 2015 period was the result of an increase in our undeveloped oil and natural gas properties. +Income Taxes . As of December 31, 2015 , we had a net operating loss carry forward of approximately $132.0 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset as a result of recording a full cost +61 +Table of Contents +Index to Financial Statements +ceiling impairment of $1.4 billion . Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2015 , a valuation allowance of $281.8 million was established against the net deferred tax asset, with the exception of certain state NOL's and AMT credits that we expect to be able to utilize with net operating loss carrybacks and tax planning in the amount of $24.2 million. We recognized an income tax benefit from continuing operations of $256.0 million for the year ended December 31, 2015 . +Comparison of the Years Ended December 31, 2014 and December 31, 2013 +We reported net income of $247.4 million for the year ended December 31, 2014 as compared to $153.2 million for the year ended December 31, 2013 . This 61% increase in period-to-period net income was due primarily to $79.7 million of income recognized from our equity method investment in Diamondback, $84.8 million of income recognized from our equity method investment in Blackhawk, $84.5 million of income recognized from our contribution of investments to Mammoth and a 255% increase in net production to 87,719 MMcfe from 24,709 MMcfe, partially offset by a 28% decrease in realized Mcfe prices to $7.65 from $10.61 , a $25.5 million increase in lease operating expenses, a $53.4 million increase in midstream gathering and processing expenses, a $15.8 million increase in general and administrative expenses, a $6.5 million increase in interest expense and a $55.2 million increase in income tax expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013 . +Oil and Gas Revenues . For the year ended December 31, 2014 , we reported oil and natural gas revenues of $670.8 million as compared to oil and natural gas revenues of $262.2 million during 2013 . This $408.5 million , or 156% , increase in revenues was primarily attributable to a 255% increase in net production to 87,719 MMcfe from 24,709 MMcfe, partially offset by a 28% decrease in realized Mcfe prices to $7.65 from $10.61 due to a shift in our production mix toward natural gas and NGLs, for the year ended December 31, 2014 as compared to the year ended December 31, 2013 . +The following table summarizes our oil and natural gas production and related pricing for the years ended December 31, 2014 and December 31, 2013 : +Year Ended +December 31, +2014 +2013 +Oil production volumes (MBbls) +2,684 +2,317 +Gas production volumes (MMcf) +59,318 +8,891 +Natural gas liquids production volumes (MGal) +86,092 +13,416 +Gas equivalents (MMcfe) +87,719 +24,709 +Average oil price (per Bbl) +$ +92.18 +$ +96.74 +Average gas price (per Mcf) +$ +5.55 +$ +2.36 +Average natural gas liquids (per Gal) +$ +1.09 +$ +1.27 +Gas equivalents (per Mcfe) +$ +7.65 +$ +10.61 +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $52.2 million for the year ended December 31, 2014 from $26.7 million for the year ended December 31, 2013 . This increase was mainly the result of an increase in expenses related to property taxes, compressor rentals, compressor repairs and maintenance, contract pumpers, environmental services, field supervision, location repair, rentals and salt water disposal. +Production Taxes . Production taxes decreased to $24.0 million for the year ended December 31, 2014 from $26.9 million for 2013 . This decrease was primarily related to changes in our product mix and production location. +Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $53.4 million to $64.5 million for the year ended December 31, 2014 from $11.0 million for 2013 . This increase was primarily the result of midstream expenses related to our production volumes in the Utica Shale resulting from our 2014 drilling activities. +62 +Table of Contents +Index to Financial Statements +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $265.4 million for the year ended December 31, 2014 , and consisted of $263.9 million in depletion of oil and natural gas properties and $1.5 million in depreciation of other property and equipment, as compared to total DD&A expense of $118.9 million for 2013 . This increase was due to an increase in our full cost pool as a result of our capital activities as well as an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $38.3 million for the year ended December 31, 2014 from $22.5 million for the year ended December 31, 2013 . This $15.8 million increase was due to an increase in salaries, stock compensation expenses and benefits resulting from an increased number of employees, increases in legal expenses, corporate fees, consulting fees, rent expense associated with office space, bank service charges, computer support and franchise taxes, partially offset by an increase in general and administrative costs related to exploration and development activity capitalized to the full cost pool. +Accretion Expense . Accretion expense remained relatively flat at $0.8 million for the years ended December 31, 2014 and 2013 . +Interest Expense . Interest expense increased to $24.0 million for the year ended December 31, 2014 from $17.5 million for the year ended December 31, 2013 due primarily to our issuance of $300.0 million of additional 7.75% Senior Notes due 2020 and increased borrowings under our revolving credit facility. On August 18, 2014, we issued $300.0 million aggregate principal amount of our 7.75% Senior Notes due 2020, a portion of the net proceeds from which was used to repay all outstanding borrowings under our revolving credit facility. Total weighted debt outstanding under our revolving credit facility was $22.8 million for the year ended December 31, 2014 as compared to no borrowings outstanding under such facility for 2013. Additionally, we capitalized approximately $9.7 million and $7.1 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2014 and December 31, 2013 , respectively. This increase in capitalized interest in the 2014 period was the result of an increase in our undeveloped oil and natural gas properties. +Income Taxes . As of December 31, 2014 , we had a net operating loss carry forward of approximately $3.1 million , in addition to numerous temporary differences, which gave rise to a net deferred tax liability. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2014 , a valuation allowance of $3.1 million had been provided for state net operating loss and federal tax credit deferred tax assets based on the uncertainty these assets may be realized. We recognized an income tax expense from continuing operations of $153.3 million for the year ended December 31, 2014 . +Liquidity and Capital Resources +Overview . Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and the issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production. During 2015, we received net proceeds of approximately $343.6 million from the sale of our 6.625% Senior Notes due 2023 issued in April 2015. In addition, we received an aggregate of $981.5 million in net proceeds from the sale of our shares of common stock in underwritten public offerings completed in April and June 2015. We also received approximately $10.0 million of net insurance proceeds in October 2015 related to a 2014 litigation settlement. During 2014, we received net proceeds of $312.0 million from the sale of our 7.750% Senior Notes due 2020. In addition, we received an aggregate of $258.4 million in net proceeds from the sale of shares of our Diamondback common stock in 2014. We also received net proceeds of $84.8 million from the sale of Blackhawk's equity interest in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC. In January 2013, we received $32.8 million of net proceeds from the underwriters' exercise of their option to purchase the remaining shares of common stock subject to the over allotment option granted in connection with our December 2012 equity offering. In 2013, we received an aggregate of $733.8 million from the sale of shares of our common stock. In addition, we received an aggregate of $192.7 million in net proceeds from the sale of shares of our Diamondback common stock in 2013. +Net cash flow provided by operating activities was $ 322.2 million for the year ended December 31, 2015 as compared to net cash flow provided by operating activities of $ 409.9 million for 2014 . This decrease was primarily the result of a 54% decrease in net realized Mcfe prices and increases in our operating expenses due to our increased activity in the Utica Shale, partially offset by an increase in cash receipts from our oil and natural gas purchasers due to a 128% increase in our net Mcfe production. +63 +Table of Contents +Index to Financial Statements +Net cash flow provided by operating activities was $409.9 million for the year ended December 31, 2014 , as compared to net cash flow provided by operating activities of $191.1 million for 2013 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 255% increase in our net Mcfe production, partially offset by a 28% decrease in net Mcfe prices. +Net cash used in investing activities for the year ended December 31, 2015 was $ 1.6 billion as compared to $ 1.1 billion for 2014 . During the year ended December 31, 2015 , we spent $ 1.6 billion in additions to oil and natural gas properties, of which $217.6 million was spent on our 2015 drilling and recompletion programs, $512.0 million was spent on expenses attributable to the wells drilled and recompleted during 2014, $705.1 million was spent on the AEU and Paloma acquisitions, $9.9 million was spent on facility enhancements, $3.1 million was spent on plugging costs and $96.2 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, with the remainder attributable mainly to capitalized general and administrative expenses. In addition, $ 14.5 million was invested in Grizzly. We did not make any material investments in our our other equity investments during the year ended December 31, 2015 . During the year ended December 31, 2015 , we used cash from operations and proceeds from our 2014 and 2015 equity and debt offerings for our investing activities. +Net cash used in investing activities for the year ended December 31, 2014 was $1.1 billion as compared to $664.3 million for 2013 . During the year ended December 31, 2014 , we spent $1.3 billion in additions to oil and natural gas properties, of which $503.8 million was spent on our 2014 drilling and recompletion programs, $317.8 million was spent on expenses attributable to the wells drilled and recompleted during 2013, $7.8 million was spent on compressors and other facility enhancements, $7.5 million was spent on plugging costs, $257.8 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, and $179.5 million was spent on the acquisition of producing properties and non-producing leasehold interests from Rhino, with the remainder attributable mainly to capitalized general and administrative expenses. In addition, $18.8 million was invested in Grizzly and $45.2 million was invested in our other equity investments during the year ended December 31, 2014 . We also received $258.4 million from the sale of shares of Diamondback common stock during 2014. During the year ended December 31, 2014 , we used cash from operations and proceeds from our 2013 equity and 2014 debt offerings for our investing activities. +Net cash provided by financing activities for the year ended December 31, 2015 was $ 1.2 billion as compared to net cash provided by financing activities of $ 410.2 million for 2014 . The 2015 amount provided by financing activities is primarily attributable to the gross proceeds of $350.0 million from our 2015 debt offering and net proceeds of $981.5 million from our 2015 equity offerings. +Net cash provided by financing activities for the year ended December 31, 2014 was $410.2 million as compared to $765.1 million for 2013 . The 2014 amount provided by financing activities is primarily attributable to the net proceeds of $312.0 million from our 2014 debt offering and net borrowings under our revolving credit facility. +Credit Facility . We have entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on June 6, 2018. As of December 31, 2015 , we had no balance outstanding under our revolving credit facility and total funds available for borrowing, after giving effect to an aggregate of $178.6 million of letters of credit, were $521.4 million . This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility. +Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts and forward sales contracts; dispose of assets; change the +64 +Table of Contents +Index to Financial Statements +nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2015 . +We chose to complete our spring borrowing base redetermination under the Company’s revolving credit facility ahead of schedule and the bank syndicate affirmed and maintained the existing $700.0 million borrowing base. +Senior Notes . In October 2012, December 2012 and August 2014, we issued an aggregate of $600.0 million in principal amount of our 7.75% senior notes due 2020 which were subsequently exchanged for substantially identical senior notes registered under the Securities Act. These senior notes, which were issued under an indenture among us, our subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, are treated as a single class of debt securities under the senior note indenture and are referred to collectively as the 2020 Notes. Interest on the 2020 Notes accrues at a rate of 7.75% per annum on the outstanding principal amount payable semi-annually on May 1 and November 1 of each year. The 2020 Notes are senior unsecured obligations and rank equally in the right of payment with all of our other senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. We may redeem some or all of the 2020 Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, we may redeem the 2020 Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, we may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2020 Notes initially issued remains outstanding immediately after such redemption. +In April 2015, we issued an aggregate of $350.0 million in principal amount of our 6.625% senior notes due 2023 under a new indenture, dated as of April 21, 2015, among us, our subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Interest on these senior notes, which we refer to as the 2023 Notes, accrues at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes will mature on May 1, 2023 and are our senior unsecured obligations and rank equally in right of payment with all of our other senior indebtedness, including the 2020 Notes, and senior in right of payment to any of our future subordinated indebtedness. We may redeem some or all of the 2023 Notes at any time on or after May 1, 2018, at the redemption prices listed in the indenture relating to the 2023 Notes. Prior to May 1, 2018, we may redeem all or a portion of the 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 1, 2018, we may redeem the 2023 Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2023 Notes issued prior to such date at a redemption price of 106.625%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings. +All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the 2020 Notes and the 2023 Notes, provided, however, that the 2020 Notes and the 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2020 Notes and the 2023 Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2020 Notes and the 2023 Notes. +65 +Table of Contents +Index to Financial Statements +If we experience a change of control (as defined in the senior note indentures relating to the 2020 Notes and the 2023 Notes), we will be required to make an offer to repurchase the 2020 Notes and the 2023 Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be required to use the remaining proceeds to make an offer to repurchase the 2020 Notes and the 2023 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the 2020 Notes and the 2023 Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the 2023 Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the 2023 Notes are ranked as "investment grade." +In connection with the 2023 Notes Offering, we and our subsidiary guarantors entered into a registration rights agreement with the representatives of the initial purchasers, dated as of April 21, 2015, pursuant to which we agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the 2023 Notes was filed on August 24, 2015 and declared effective by the SEC on September 4, 2015. The exchange offer for the 2023 Notes was completed on October 13, 2015. +Construction Loan. On June 4, 2015, we entered into a construction loan agreement, or the construction loan, with InterBank for the construction of our new corporate headquarters in Oklahoma City. The construction loan allows for maximum principal borrowings of $24.5 million and requires us to fund 30% of the cost of the construction before any funds can be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and is payable on the last day of the month through May 31, 2017. Monthly interest and principal payments are due beginning June 30, 2017, with the final payment due June 4, 2025. As of December 31, 2015 , we had no borrowings under the construction loan. +Capital Expenditures . Our recent capital commitments have been primarily for the execution of our drilling programs, for acquisitions primarily in the Utica Shale, and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities. +Of our net reserves at December 31, 2015 , 55.0% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities. +During 2015, we spud 49 gross (38.4 net) wells in the Utica Shale for a total cost of approximately $253.5 million. In addition, 25 gross (7.3 net) wells were drilled by other operators on our Utica Shale acreage during 2015 for a total cost to us of approximately $38.8 million. We currently expect our 2016 capital expenditures to be $219.0 million to $247.0 million to drill 29 to 32 gross (19 to 21 net) horizontal wells and commence sales from 44 to 48 gross (28 to 30 net) wells on our Utica Shale acreage. As of February 10, 2016 , we had three operated horizontal rigs drilling in the play. We also anticipate an additional 17 to 19 gross (two to three net) horizontal wells will be drilled, and sales commenced from 30 to 34 gross (eight to nine net) horizontal wells, on our Utica Shale acreage by other operators for estimated 2016 expenditures to us of $90.0 million to $100.0 million. In addition, we currently expect to spend $60.0 million to $65.0 million in 2016 for acreage expenses, primarily lease extensions, in the Utica Shale. +During 2015, we recompleted 35 existing wells and spud no new wells for a total cost of approximately $8.1 million at our WCBB field. In our Hackberry fields, in 2015, we recompleted 37 existing wells and spud no new wells for a total cost of approximately $4.9 million. We currently expect to spend $26.0 million to $28.0 million in 2016 for maintenance capital expenditures and recompletions in Southern Louisiana. +During 2015, no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2016. +66 +Table of Contents +Index to Financial Statements +During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2015 , our net investment in Grizzly was approximately $50.6 million. Our capital requirements in 2015 for Grizzly were approximately $14.5 million . Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, of which $57.4 million was outstanding at December 31, 2015 . Grizzly has agreed to pay the outstanding balance by the maturity date of June 2016, of which our proportionate share is approximately $14.4 million. We do not currently anticipate any additional material capital expenditures in 2016 related to Grizzly's activities. +We had no material capital expenditures during the during the year ended December 31, 2015 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2016. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. See Item 1. "Business–Our Equity Investments" and Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the year ended December 31, 2014, we invested approximately $43.6 million in these entities. During the year ended December 31, 2015 , we did not make any additional investments in these entities, and we do not currently anticipate any capital expenditures related to these entities in 2016. We are currently evaluating strategic alternatives with respect to some of these oil field service entities. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth originally intended to pursue the offering in 2015; however, Mammoth continues to evaluate market conditions and the commodity price environment which will impact the timing of the proposed offering. In January 2014, Blackhawk completed the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million, of which we received $84.8 million in net proceeds. During the year ended December 31, 2015 , we received net proceeds of $7.2 million from the release of escrow from the Blackhawk sale. +In February 2016, we entered into a joint venture with Rice to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the joint venture and Rice acts as operator and owns the remaining 75% interest in the joint venture. Construction of the gathering assets, which is underway, is expected to provide connectivity of our dry gas gathering systems and interchangeability of natural gas across our firm portfolio. +The joint venture has completed the first phase of the projects: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. The lateral has been commissioned and first flow commenced on February 1, 2016. In addition, we and Rice have agreed to negotiate in good faith to expand the joint venture to provide water services to us within the dedicated areas. In connection with the formation of the joint venture, we contributed certain assets, including an approximately 11 mile-long, 12-inch diameter gathering line. We currently anticipate that we will also make $30.0 million to $35.0 million in cash contributions to the joint venture in 2016. +During 2015, we continued to focus on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, particularly in light of the continued downturn in commodity prices. To do so, we have leveraged the lower commodity price environment to gain access to higher-quality equipment and superior services for reduced costs, which has contributed to increased productivity. To further benefit from these efficiencies and cost savings, we elected to accelerate our completion activities in late 2015 in advance of the winter months when operations are less efficient and more costly due to the cold weather. Our total capital expenditures for 2016 are currently estimated to be in the range of $335.0 million to $375.0 million for drilling and completion expenditures. In addition, we currently expect to spend $60.0 million to $65.0 million in 2016 for acreage expenses, primarily lease extensions, in the Utica Shale and $30.0 million to $35.0 million to fund our recent joint venture with Rice. Approximately 94% of our 2016 estimated capital expenditures are currently expected to be spent in the Utica Shale. The 2016 range is down from the $851.8 million spent in 2015, which excludes Utica leasehold acquisitions (including the AEU and Paloma acquisitions), primarily due to current commodity prices and a desire to maintain a favorable liquidity position. As a result of the decline in commodity prices, our 2016 development plan contemplates running an average of 2.5 rigs on our operated Utica Shale acreage, as compared to an average of 3.7 rigs in 2015. Strong results from our existing production base and efficiencies realized in our completion activities resulted in our 2015 production trending ahead of expectations. Taking into consideration our strong production results, realized efficiencies and the weakness in natural gas commodity pricing, we made the decision to idle completion crews and suspend our hydraulic fracturing activities during the first quarter of 2016 and have entered into an agreement with one of our service providers that adjusts the amount of service fees that would otherwise be payable during this period. We anticipate resuming these activities in April 2016. +67 +Table of Contents +Index to Financial Statements +We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months. In the event commodity prices decline further, our capital or other costs increase, our equity investments require additional contributions and/or we pursue additional equity method investments or acquisitions, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the decline in commodity prices continues or worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected. +Commodity Price Risk +The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $27.56 per barrel, or Bbl, in January 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.80 per MMBtu in December 2015 to a high of $7.51 per MMBtu in January 2010. During 2015, WTI prices ranged from $36.48 to $65.69 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.80 to $3.65 per MMBtu. On January 20, 2016, the WTI posted price for crude oil was $28.35 per Bbl and the Henry Hub spot market price of natural gas was $2.12 per MMBtu, representing decreases of 57% and 42%, respectively, from the high of $65.69 per Bbl of oil and $3.65 per MMBtu for natural gas during 2015. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2015 . +Commitments +In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2015 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2015 , we have plugged 463 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation. +Contractual and Commercial Obligations +The following table sets forth our contractual and commercial obligations at December 31, 2015 : +68 +Table of Contents +Index to Financial Statements +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +7.75% senior unsecured notes due 2020 (1) +$ +830,627 +$ +46,500 +$ +93,000 +$ +691,127 +$ +— +6.625% senior unsecured notes due 2023 (2) +523,906 +23,188 +46,375 +46,375 +407,968 +Asset retirement obligations +26,437 +75 +684 +703 +24,975 +Employment agreements +1,216 +882 +334 +— +— +Building loan (3) +1,653 +179 +1,474 +— +— +Firm transportation contracts +3,843,274 +145,282 +410,307 +459,899 +2,827,786 +Purchase obligations (4) +144,210 +52,440 +91,770 +— +— +Operating leases +1,437 +800 +637 +— +— +Total +$ +5,372,760 +$ +269,346 +$ +644,581 +$ +1,198,104 +$ +3,260,729 +_____________________ +(1) Includes estimated interest of $46.5 million due in less than one year; $93.0 million due in 1-3 years and $91.1 million due in 3-5 years. +(2) +Includes estimated interest of $23.2 million due in less than one year; $46.4 million due in 1-3 years; $46.4 million due in 3-5 years and $58.0 million due thereafter. +(3) +Does not include estimated interest of $63,000 due in less than one year and $104,000 due in 1-3 years. +(4) +The purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. +Off-balance Sheet Arrangements +We had no off-balance sheet arrangements as of December 31, 2015 . +New Accounting Pronouncements +In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporation and securitization structure, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. We are in the process of evaluating the impact on our consolidated financial statements. This evaluation could result in certain of our equity investments being accounted for as variable interest entities. +In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs . To simplify presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We have reclassified $17.9 million and $12.9 million of debt issuance costs to offset long-term debt at December 31, 2015 and 2014, respectively, as shown in Note 6 to our consolidated financial statements included elsewhere in this Annual Report. +In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The guidance eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior-period information had been revised. The guidance is effective for annual periods beginning after December 15, 2015 and is to be applied prospectively to adjustments of provisional amounts that occur after the effective date. Early adoption is permitted. We are in the process of evaluating this new guidance and do not expect it to have a material impact on our consolidated financial statements. +69 +Table of Contents +Index to Financial Statements +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 705) . Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This update is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are in the process of evaluating the impact on our consolidated financial statements. +In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . ASU 2014-08 changes the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other material disposal transactions that do not meet the revised definition of a discontinued operation. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. The ASU is effective for annual and interim periods beginning after December 15, 2014, however, early adoption is permitted. We early adopted this ASU on a prospective basis beginning with the second quarter of 2014. The adoption did not have a material impact on our consolidated financial statements. +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU was effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach; however, in July 2015 the FASB decided to defer the effective date by one year (until 2018) by issuing ASU No. 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date . We are in the process of evaluating the impact on our consolidated financial statements. +In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) . The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past six years, the posted price for West Texas intermediate light sweet crude oil, +70 +Table of Contents +Index to Financial Statements +which we refer to as West Texas Intermediate or WTI, has ranged from a low of $27.56 per barrel, or Bbl, in January 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.80 per MMBtu in December 2015 to a high of $7.51 per MMBtu in January 2010. During 2015, WTI prices ranged from $36.48 to $65.69 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.80 to $3.65 per MMBtu. On January 20, 2016, the WTI posted price for crude oil was $28.35 per Bbl and the Henry Hub spot market price of natural gas was $2.12 per MMBtu, representing decreases of 57% and 42%, respectively, from the high of $65.69 per Bbl of oil and $3.65 per MMBtu for natural gas during 2015. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swap positions as of December 31, 2015 . +Location +Daily Volume (Bbls/day) +Weighted +Average Price +January 2016 - June 2016 +ARGUS LLS +1,500 +$ +63.03 +January 2016 - June 2016 +NYMEX WTI +1,000 +$ +61.40 +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +NYMEX Henry Hub +415,000 +$ +3.56 +April 2016 +NYMEX Henry Hub +425,000 +$ +3.52 +May 2016 - June 2016 +NYMEX Henry Hub +355,000 +$ +3.42 +July 2016 - September 2016 +NYMEX Henry Hub +375,000 +$ +3.38 +October 2016 +NYMEX Henry Hub +405,000 +$ +3.33 +November 2016 - December 2016 +NYMEX Henry Hub +430,000 +$ +3.30 +January 2017 - March 2017 +NYMEX Henry Hub +317,500 +$ +3.25 +April 2017 - June 2017 +NYMEX Henry Hub +272,500 +$ +3.31 +July 2017 - December 2017 +NYMEX Henry Hub +210,000 +$ +3.12 +January 2018 - December 2018 +NYMEX Henry Hub +160,000 +$ +3.01 +January 2019 - March 2019 +NYMEX Henry Hub +20,000 +$ +3.37 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +January 2016 - December 2016 +Mont Belvieu +1,000 +$ +20.16 +We sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +NYMEX Henry Hub +75,000 +$ +3.25 +April 2016 - December 2016 +NYMEX Henry Hub +95,000 +$ +3.18 +January 2017 - March 2017 +NYMEX Henry Hub +20,000 +$ +2.91 +71 +Table of Contents +Index to Financial Statements +For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2017 through December 2017. These options expire in December 2016. If executed, we would have additional fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.33 and additional short call options for 30,000 MMBtu per day at a weighted average ceiling price of $3.33. +In addition, we have entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon or Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2015 , we had the following natural gas basis swap positions for MichCon and Tetco M2, respectively. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +MichCon +70,000 +$ +0.11 +April 2016 - December 2016 +MichCon +40,000 +$ +0.02 +November 2016 - March 2017 +Tetco M2 +50,000 +$ +(0.59 +) +In January of 2016, we entered into fixed price swaps for the period of February 2016 through March 2016, for 75,000 MMBtu of natural gas per day at a weighted average price of $2.58 per MMBtu. For the period from April 2016 through December 2016, we entered into fixed price swaps for 95,000 MMBtu of natural gas per day at a weighted average price of $2.59 per MMBtu. For the period from January 2017 through December 2017, we entered into fixed price swaps for 95,000 MMBtu of natural gas per day at a weighted average price of $2.70 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX. We will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas. +Under our 2016 contracts, we have hedged approximately 69% to 72% of our expected 2016 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. At December 31, 2015 , we had a net asset derivative position of $186.5 million as compared to a net asset derivative position of $102.8 million as of December 31, 2014 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $80.6 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $80.6 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2015 , we had no variable interest rate borrowings outstanding; therefore, an increase in interest rates would not have impacted our interest expense. As of December 31, 2015 , we did not have any interest rate swaps to hedge our interest risks. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this item appears beginning on page F-1 following the signature pages of this Report. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Accounting Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, +72 +Table of Contents +Index to Financial Statements +summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2015 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Accounting Officer have concluded that, as of December 31, 2015 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2015 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2015 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2015 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Accounting Officer +73 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and subsidiaries (the “Company”) as of December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015 and our report dated February 19, 2016 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 19, 2016 +74 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +None. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 11. +EXECUTIVE COMPENSATION +For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +75 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +The following documents are filed as part of this report or incorporated by reference herein: +(1) +Financial Statements +Reference is made to the Index to Financial Statements appearing on Page F-1. +Reference is also made to the Financial Statements of Diamondback Energy, Inc. (“Diamondback”) that have been included on pages F-1 to F-54 in Diamondback’s Annual Report on Form 10-K (File No. 001-35700) filed with the SEC on February 20, 2015, as such Annual Report on Form 10-K may be amended from time to time, which Financial Statements are incorporated herein by reference. +(2) +Financial Statement Schedules +All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto. +(3) +Exhibits +Exhibit +Number +Description +2.1 +Contribution Agreement, dated May 7, 2012, by and between the Company and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 8, 2012). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of October 17, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (including the form of Gulfport Energy Corporation's 7.750% Senior Note Due November 1, 2020) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 23, 2012). +4.3 +First Supplemental Indenture, dated December 21, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 26, 2012). +4.4 +Second Supplemental Indenture, dated August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +4.5 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +76 +Table of Contents +Index to Financial Statements +4.6 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015) +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+* +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Amended and Restated Employment Agreement, dated as of April 29, 2015, by and between the Company and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 7, 2015). +10.8+ +Employment Agreement, effective as of August 11, 2014, by and between the Company and Aaron Gaydosik (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on March 19, 2015). +10.9+ +Employment Agreement, effective as of April 22, 2014, by and between the Company and Ross Kirtley (incorporated by reference to Exhibit 10.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on March 19, 2015). +10.10 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.11 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.12 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.13 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.14 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +10.15 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +77 +Table of Contents +Index to Financial Statements +10.16# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.17# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.18# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.19*## +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.20+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +78 +Table of Contents +Index to Financial Statements +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the SEC. +79 +Table of Contents +Index to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 19, 2016 +GULFPORT ENERGY CORPORATION +By: +/s/ KERI CROWELL +Keri Crowell +Chief Accounting Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: +February 19, 2016 +By: +/s/ MICHAEL G. MOORE +Michael G. Moore +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: +February 19, 2016 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 19, 2016 +By: +/s/ AARON GAYDOSIK +Aaron Gaydosik +Chief Financial Officer +(Principal Financial Officer) +Date: +February 19, 2016 +By: +/s/ KERI CROWELL +Keri Crowell +Chief Accounting Officer +(Principal Accounting Officer) +Date: +February 19, 2016 +By: +/s/ DONALD DILLINGHAM +Donald Dillingham +Director +Date: +February 19, 2016 +By: +/s/ CRAIG GROESCHEL +Craig Groeschel +Director +Date: +February 19, 2016 +By: +/s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: +February 19, 2016 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +Date: +February 19, 2016 +By: +/s/ SCOTT E. STRELLER +Scott E. Streller +Director +S-1 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets, December 31, 2015 and December 31, 2014 +F-3 +Consolidated Statements of Operations, Years Ended December 31, 2015, 2014, and 2013 +F-4 +Consolidated Statements of Comprehensive (Loss) Income, Years Ended December 31, 2015, 2014, and 2013 +F-5 +Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2015, 2014, and 2013 +F-6 +Consolidated Statements of Cash Flows, Year Ended December 31, 2015, 2014, and 2013 +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware Corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulfport Energy Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. +As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015 related to the accounting for deferred loan costs directly related to the Company's senior notes, which resulted in the reclassification of the net carrying amount of such costs from a noncurrent asset to a direct deduction from the carrying amount of the related long-term debt on the Company's consolidated balance sheet. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2016 expressed an unqualified opinion. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 19, 2016 +F-2 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, +2015 +December 31, +2014 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +112,974 +$ +142,340 +Accounts receivable—oil and gas +71,872 +103,858 +Accounts receivable—related parties +16 +46 +Prepaid expenses and other current assets +3,905 +3,714 +Short-term derivative instruments +142,794 +78,391 +Total current assets +331,561 +328,349 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $1,817,701 and $1,465,538 excluded from amortization in 2015 and 2014, respectively +5,424,342 +3,923,154 +Other property and equipment +33,171 +18,344 +Accumulated depletion, depreciation, amortization and impairment +(2,829,110 +) +(1,050,879 +) +Property and equipment, net +2,628,403 +2,890,619 +Other assets: +Equity investments +242,393 +369,581 +Long-term derivative instruments +51,088 +24,448 +Deferred tax asset +74,925 +— +Other assets +6,364 +6,476 +Total other assets +374,770 +400,505 +Total assets +$ +3,334,734 +$ +3,619,473 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +265,128 +$ +371,410 +Asset retirement obligation—current +75 +75 +Short-term derivative instruments +437 +— +Deferred tax liability +50,697 +27,070 +Current maturities of long-term debt +179 +168 +Total current liabilities +316,516 +398,723 +Long-term derivative instrument +6,935 +— +Asset retirement obligation—long-term +26,362 +17,863 +Deferred tax liability +— +203,195 +Long-term debt, net of current maturities +946,084 +703,396 +Total liabilities +1,295,897 +1,323,177 +Commitments and contingencies (Notes 15 and 16) +Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding +— +— +Stockholders’ equity: +Common stock, $.01 par value; 200,000,000 authorized, 108,322,250 issued and outstanding in 2015 and 85,655,438 in 2014 +1,082 +856 +Paid-in capital +2,824,303 +1,828,602 +Accumulated other comprehensive loss +(55,177 +) +(26,675 +) +Retained (deficit) earnings +(731,371 +) +493,513 +Total stockholders’ equity +2,038,837 +2,296,296 +Total liabilities and stockholders’ equity +$ +3,334,734 +$ +3,619,473 +See accompanying notes to consolidated financial statements. +F-3 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2015 +2014 +2013 +(In thousands, except share data) +Revenues: +Gas sales +$ +507,726 +$ +329,254 +$ +21,015 +Oil and condensate sales +141,816 +247,381 +224,129 +Natural gas liquid sales +59,448 +94,127 +17,081 +Other income +485 +504 +528 +709,475 +671,266 +262,753 +Costs and expenses: +Lease operating expenses +69,475 +52,191 +26,703 +Production taxes +14,740 +24,006 +26,933 +Midstream gathering and processing +138,590 +64,467 +11,030 +Depreciation, depletion and amortization +337,694 +265,431 +118,880 +Impairment of oil and gas properties +1,440,418 +— +— +General and administrative +41,967 +38,290 +22,519 +Accretion expense +820 +761 +717 +(Gain) loss on sale of assets +— +(11 +) +508 +2,043,704 +445,135 +207,290 +(LOSS) INCOME FROM OPERATIONS +(1,334,229 +) +226,131 +55,463 +OTHER (INCOME) EXPENSE: +Interest expense +51,221 +23,986 +17,490 +Interest income +(643 +) +(195 +) +(297 +) +Litigation settlement +— +25,500 +— +Insurance proceeds +(10,015 +) +— +— +Gain on contribution of investments +— +(84,470 +) +— +Loss (income) from equity method investments +106,093 +(139,434 +) +(213,058 +) +146,656 +(174,613 +) +(195,865 +) +(LOSS) INCOME BEFORE INCOME TAXES +(1,480,885 +) +400,744 +251,328 +INCOME TAX (BENEFIT) EXPENSE +(256,001 +) +153,341 +98,136 +NET (LOSS) INCOME +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +NET (LOSS) INCOME PER COMMON SHARE: +Basic +$ +(12.27 +) +$ +2.90 +$ +1.98 +Diluted +$ +(12.27 +) +$ +2.88 +$ +1.97 +Weighted average common shares outstanding—Basic +99,792,401 +85,445,963 +77,375,683 +Weighted average common shares outstanding—Diluted +99,792,401 +85,813,182 +77,861,646 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +For the Year Ended December 31, +2015 +2014 +2013 +(In thousands) +Net (loss) income +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +Foreign currency translation adjustment +(28,502 +) +(16,894 +) +(12,223 +) +Change in fair value of derivative instruments (1) +— +— +(4,419 +) +Reclassification of settled contracts (2) +— +— +10,290 +Other comprehensive loss +(28,502 +) +(16,894 +) +(6,352 +) +Comprehensive (loss) income +$ +(1,253,386 +) +$ +230,509 +$ +146,840 +(1) Net of $4.3 million in taxes for the year ended December 31, 2013. No taxes were recorded in the years ended 2015 and 2014. +(2) Net of $(0.5) million in taxes for the year ended December 31, 2013. No taxes were recorded in the years ended 2015 and 2014. +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Retained +Earnings (Deficit) +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2013 +67,527,386 +$ +674 +$ +1,036,245 +$ +(3,429 +) +$ +92,918 +$ +1,126,408 +Net income +— +— +— +— +153,192 +153,192 +Other Comprehensive Loss +— +— +— +(6,352 +) +— +(6,352 +) +Stock Compensation +— +— +10,495 +— +— +10,495 +Issuance of Common Stock in public offerings, net of related expenses +17,287,500 +173 +764,922 +— +— +765,095 +Issuance of Restricted Stock +237,646 +3 +(3 +) +— +— +— +Issuance of Common Stock through exercise of options +125,000 +1 +1,399 +— +— +1,400 +Balance at December 31, 2013 +85,177,532 +851 +1,813,058 +(9,781 +) +246,110 +2,050,238 +Net income +— +— +— +— +247,403 +247,403 +Other Comprehensive Loss +— +— +— +(16,894 +) +— +(16,894 +) +Stock Compensation +— +— +14,860 +— +— +14,860 +Issuance of Restricted Stock +272,665 +3 +(3 +) +— +— +— +Issuance of Common Stock through exercise of options +205,241 +2 +687 +— +— +689 +Balance at December 31, 2014 +85,655,438 +856 +1,828,602 +(26,675 +) +493,513 +2,296,296 +Net loss +— +— +— +— +(1,224,884 +) +(1,224,884 +) +Other Comprehensive Loss +— +— +— +(28,502 +) +— +(28,502 +) +Stock Compensation +— +— +14,359 +— +— +14,359 +Issuance of Common Stock in public offerings, net of related expenses +22,425,000 +224 +981,299 +— +— +981,523 +Issuance of Restricted Stock +236,812 +2 +(2 +) +— +— +— +Issuance of Common Stock through exercise of options +5,000 +— +45 +— +— +45 +Balance at December 31, 2015 +108,322,250 +$ +1,082 +$ +2,824,303 +$ +(55,177 +) +$ +(731,371 +) +$ +2,038,837 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2015 +2014 +2013 +(In thousands) +Cash flows from operating activities: +Net (loss) income +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Accretion of discount—Asset Retirement Obligation +820 +761 +717 +Depletion, depreciation and amortization +337,694 +265,431 +118,880 +Impairment of oil and gas properties +1,440,418 +— +— +Stock-based compensation expense +8,616 +8,916 +6,297 +Loss (gain) from equity investments +113,120 +(54,171 +) +(212,714 +) +Gain on contribution of investments +— +(84,470 +) +— +Interest income - note receivable +— +(46 +) +(26 +) +(Gain) loss on derivative instruments +(83,671 +) +(121,148 +) +18,189 +Deferred income tax (benefit) expense +(254,493 +) +122,917 +84,951 +Amortization of loan commitment fees +3,219 +1,685 +1,012 +Amortization of note discount and premium +(2,165 +) +(533 +) +298 +Changes in operating assets and liabilities: +Decrease (increase) in accounts receivable +31,986 +(45,034 +) +(33,209 +) +Decrease in accounts receivable—related party +30 +2,571 +32,231 +Increase in prepaid expenses +(191 +) +(1,133 +) +(1,075 +) +Increase in other assets +— +— +(4,523 +) +(Decrease) increase in accounts payable and accrued liabilities +(47,199 +) +73,925 +29,310 +Settlement of asset retirement obligation +(1,121 +) +(7,201 +) +(2,465 +) +Net cash provided by operating activities +322,179 +409,873 +191,065 +Cash flows from investing activities: +Deductions to cash held in escrow +8 +8 +8 +Additions to other property and equipment +(13,572 +) +(7,030 +) +(2,322 +) +Additions to oil and gas properties +(1,579,129 +) +(1,329,277 +) +(808,183 +) +Proceeds from sale of other property and equipment +— +— +113 +Proceeds from sale of oil and gas properties +27,998 +4,404 +— +Repayments (advances) on note receivable to related party +— +875 +(875 +) +Proceeds from sale of investments +— +258,362 +192,737 +Contributions to equity method investments +(14,472 +) +(63,999 +) +(47,014 +) +Distributions from equity method investments +4,914 +— +1,276 +Net cash used in investing activities +(1,574,253 +) +(1,136,657 +) +(664,260 +) +Cash flows from financing activities: +Principal payments on borrowings +(350,172 +) +(115,690 +) +(149 +) +Borrowings on line of credit +250,000 +215,000 +— +Proceeds from bond issuance +350,000 +318,000 +— +Debt issuance costs and loan commitment fees +(8,688 +) +(7,831 +) +(1,283 +) +Proceeds from issuance of common stock, net of offering costs and exercise of stock options +981,568 +689 +766,495 +Net cash provided by financing activities +1,222,708 +410,168 +765,063 +Net (decrease) increase in cash and cash equivalents +(29,366 +) +(316,616 +) +291,868 +Cash and cash equivalents at beginning of period +142,340 +458,956 +167,088 +Cash and cash equivalents at end of period +$ +112,974 +$ +142,340 +$ +458,956 +Supplemental disclosure of cash flow information: +Interest payments +$ +59,736 +$ +28,646 +$ +24,280 +Income tax payments +$ +16,156 +$ +23,800 +$ +2,761 +Supplemental disclosure of non-cash transactions: +Capitalized stock based compensation +$ +5,743 +$ +5,944 +$ +4,198 +Asset retirement obligation capitalized +$ +8,800 +$ +9,295 +$ +3,556 +Interest capitalized +$ +13,580 +$ +9,687 +$ +7,132 +Foreign currency translation loss on investment in Grizzly Oil Sands ULC +$ +(28,502 +) +$ +(16,894 +) +$ +(12,223 +) +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2015 , 2014 AND 2013 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the “Company”) is an independent oil and gas exploration, development and production company with its principal properties located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast. The Company also has an interest in producing properties in Northwestern Colorado in the Niobrara Formation and in Western North Dakota in the Bakken Formation, and has investments in companies operating in the United States, Canada and Thailand. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc. and Gulfport Buckeye LLC. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company’s accounts receivable—oil and gas primarily are from companies in the oil and gas industry. The majority of its receivables are from three purchasers of the Company’s oil and gas and receivables from joint interest owners on properties the Company operates. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2015 and December 31, 2014 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for 2015 , 2014 and 2013 , adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, the Company recognized a ceiling test impairment of $1.4 billion for the year ended December 31, 2015 . If prices of oil, natural gas and natural gas liquids continue to decline, the Company may be required to further write down the value of its oil and natural gas properties, which could negatively affect its results of operations. +F-8 +Table of Contents +Index to Financial Statements +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled $1.8 billion and $1.5 billion at December 31, 2015 and December 31, 2014 , respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”), which requires the Company to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss. +(In thousands) +December 31, 2012 +$ +2,442 +December 31, 2013 +$ +(9,781 +) +December 31, 2014 +$ +(26,675 +) +December 31, 2015 +$ +(55,175 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 11. +Income Taxes +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes +F-9 +Table of Contents +Index to Financial Statements +determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 1998 – 2015 U.S. federal and state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2015 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. For the year ended December 31, 2015 , there is no interest or penalties associated with uncertain tax positions in the Company’s consolidated financial statements. +Revenue Recognition +Natural gas revenues are recorded in the month produced and delivered to the purchaser using the entitlement method, whereby any production volumes received in excess of the Company’s ownership percentage in the property are recorded as a liability. If less than Gulfport’s entitlement is received, the underproduction is recorded as a receivable. At December 31, 2015 and 2014 , the Company had no gas imbalance liability. Oil revenues are recognized when ownership transfers, which occurs in the month produced. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the statement of operations. In accordance FASB ASC 825 , "Financial Instruments ," the Company elected the fair value option of accounting for its equity method investment in the common stock of Diamondback Energy Inc. ("Diamondback"). At the end of each reporting period, the quoted closing market price of Diamondback's common stock was multiplied by the total shares owned by the Company and the resulting gain or loss was recognized in loss (income) from equity method investments in the consolidated statements of operations. As of December 31, 2015 and 2014 , the Company did no t own any shares of Diamondback's common stock. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. For the year ended December 31, 2015 , the Company recognized impairment charges of $101.6 million related to its investment in Grizzly Oil Sands ULC. At December 31, 2014 , the Company recognized an impairment of $12.1 million related to its investment in Tatex Thailand III, LLC. See Note 4 for further discussion of these impairments. +Accounting for Stock-Based Compensation +The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC 718, “ Compensation—Stock Compensation ” (“FASB ASC 718”). FASB ASC 718 requires share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for the options range between three to five years and have a maximum contractual term of ten years. The Company has no t granted any options since 2005, and, at December 31, 2015 , there were no options outstanding. The vesting periods for restricted shares range between two to five years with either quarterly or annual vesting installments. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and natural gas liquid production. The Company follows the provisions of FASB ASC 815, “ Derivatives and Hedging ” (“FASB ASC 815”) as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While the Company has historically designated derivative instruments as accounting hedges, effective January 1, 2015, the Company discontinued hedge accounting prospectively. The Company's current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +F-10 +Table of Contents +Index to Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements to conform to current period presentation. +Recent Accounting Pronouncements +In April 2015, the FASB issued Accounting Standard Update ("ASU") No. 2015-02, " Consolidation (Topic 810): Amendments to the Consolidation Analysis. " This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporation and securitization structure, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. The Company is in the process of evaluating the impact on its consolidated financial statements. This evaluation could result in certain of the Company's equity investments being accounted for as variable interest entities. +In April 2015, the FASB issued ASU No. 2015-03, " Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) ." To simplify presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company has reclassified $17.9 million and $12.9 million of debt issuance costs to offset long-term debt at December 31, 2015 and 2014, respectively, as shown in Note 6. +In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments." The guidance eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior-period information had been revised. The guidance is effective for annual periods beginning after December 15, 2015 and is to be applied prospectively to adjustments of provisional amounts that occur after the effective date. Early adoption is permitted. The Company is in the process of evaluating this new guidance and does not expect it to have a material impact on its consolidated financial statements. +In November 2015, the FASB issued ASU No. 2015-17, " Balance Sheet Classification of Deferred Taxes (Topic 705) ." Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This update is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is in the process of evaluating the impact on its consolidated financial statements. +In April 2014, the FASB issued ASU No. 2014-08, " Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 changes the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other material disposal transactions that do not meet the revised definition of a discontinued operation. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported +F-11 +Table of Contents +Index to Financial Statements +as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. The ASU is effective for annual and interim periods beginning after December 15, 2014, however, early adoption is permitted. The Company early adopted this ASU on a prospective basis beginning with the second quarter of 2014. The adoption did not have a material impact on the Company’s consolidated financial statements. +In May 2014, the FASB issued ASU No. 2014-09, " Revenue from Contracts with Customers" , which supersedes the revenue recognition requirements in Topic 605, " Revenue Recognition" , and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU was effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach; however, in July 2015 the FASB decided to defer the effective date by one year (until 2018) by issuing ASU No. 2015-14, "Revenue From Contracts with Customers: Deferral of the Effective Date." The Company is in the process of evaluating the impact on its consolidated financial statements. +In August 2014, the FASB issued ASU No. 2014-15, " Presentation of Financial Statements - Going Concern (Subtopic 205-40) ." The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements. +2. +ACQUISITIONS +In February 2014, the Company entered into a definitive agreement with Rhino Exploration LLC ("Rhino") to acquire additional oil and natural gas properties consisting of approximately 8,000 net acres in the Utica Shale, as well as Rhino's interest in all of the producing wells on this acreage (the "Rhino Acquisition"). The Company purchased approximately $182.0 million ( $179.5 million net of purchase price adjustments) of these assets in 2014. The Company recognized $6.4 million of net revenues and $1.0 million of lease operating expenses as a result of the Rhino Acquisition from the closing date of March 20, 2014 through December 31, 2014 , which is included in the accompanying consolidated statements of operations. +The Rhino Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the March 20, 2014 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 13 for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the Rhino Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +The following table summarizes the consideration paid in the Rhino Acquisition to acquire the properties and the fair value amount of the assets acquired as of March 20, 2014. +F-12 +Table of Contents +Index to Financial Statements +(in thousands) +Consideration paid +Cash, net of purchase price adjustments +$ +179,527 +Fair value of identifiable assets acquired +Oil and natural gas properties +Proved +$ +31,961 +Unproved +6,263 +Unevaluated +141,303 +Fair value of net identifiable assets acquired +$ +179,527 +In April 2015, the Company entered into an agreement to acquire Paloma Partners III, LLC ("Paloma") for a total purchase price of approximately $301.9 million , subject to certain adjustments. Paloma holds approximately 24,000 net nonproducing acres in the Utica Shale of Ohio. In accordance with the agreement, the Company deposited $75.0 million into an escrow account. At the closing of the transaction the deposit was credited toward the purchase price. This transaction closed on August 31, 2015 for a purchase price of approximately $302.3 million , net of purchase price adjustments. At closing, approximately $30.1 million of the purchase price was placed in escrow as security to the Company for potential indemnification claims that may occur as a result of the sale. +On June 9, 2015, the Company completed the acquisition of 6,198 gross and net acres located in Belmont and Jefferson Counties, Ohio from American Energy-Utica, LLC ("AEU") for a purchase price of approximately $68.2 million , subject to adjustment. On June 12, 2015, the Company completed the acquisition of 38,965 gross ( 27,228 net) acres located in Monroe County, Ohio, 14.6 MMcf per day of average net production (estimated for April 2015), 18 gross ( 11.3 net) drilled but uncompleted wells, an 11 mile gas gathering system and a four well pad location from AEU for a total purchase price of approximately $319.0 million (the "Monroe Acquisition"). On June 29, 2015, the Company acquired an additional 4,950 gross ( 1,900 net) acres in Monroe County for an additional $18.2 million from AEU. The total purchase price of these transactions (collectively referred to as the "AEU Acquisition"), was approximately $405.4 million ( $405.0 million net of purchase price adjustments). At closing, approximately $67.1 million of the purchase price was placed in escrow pending completion of title review after the closing. In December 2015, approximately $2.4 million of the escrow was released and returned to the Company as a result of preliminary title review. +The AEU Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the June 12, 2015 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 13 for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the AEU Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +The following table summarizes the consideration paid in the AEU Acquisition to acquire the properties and the fair value amount of the assets acquired as of June 12, 2015. Both the consideration paid and the fair value assigned to the assets is preliminary and subject to adjustment upon final closing. +(In thousands) +Consideration paid +Cash, net of purchase price adjustments +$ +405,029 +Fair value of identifiable assets acquired +Oil and natural gas properties +Proved +$ +70,804 +Unevaluated +334,225 +Fair value of net identifiable assets acquired +$ +405,029 +F-13 +Table of Contents +Index to Financial Statements +3. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2015 and 2014 are as follows: +December 31, +2015 +2014 +(In thousands) +Oil and natural gas properties +$ +5,424,342 +$ +3,923,154 +Office furniture and fixtures +12,589 +10,752 +Building +16,915 +5,398 +Land +3,667 +2,194 +Total property and equipment +5,457,513 +3,941,498 +Accumulated depletion, depreciation, amortization and impairment +(2,829,110 +) +(1,050,879 +) +Property and equipment, net +$ +2,628,403 +$ +2,890,619 +At December 31, 2015 , the net book value of the Company's oil and natural gas properties was above the calculated ceiling as a result of the reduced commodity prices during the year ended December 31, 2015 . As a result, the Company recorded an impairment of its oil and natural gas properties under the full cost method of accounting in the amount of $1.4 billion for the year ended December 31, 2015 . No impairment of oil and natural gas properties was required under the ceiling test for the years ended December 31, 2014 or 2013 . +Included in oil and natural gas properties at December 31, 2015 and 2014 is the cumulative capitalization of $ 100.6 million and $72.7 million , respectively, in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 27.9 million , $25.2 million and $14.9 million for the years ended December 31, 2015 , 2014 and 2013 , respectively. +The following is a summary of Gulfport’s oil and gas properties not subject to amortization as of December 31, 2015 : +Costs Incurred in +2015 +2014 +2013 +Prior to 2013 +Total +(in thousands) +Acquisition costs +$ +621,519 +$ +361,167 +$ +273,146 +$ +522,872 +$ +1,778,704 +Exploration costs +— +— +— +— +— +Development costs +28,833 +4,688 +1,436 +457 +35,414 +Capitalized interest +3,674 +(2,353 +) +2,262 +— +3,583 +Total oil and gas properties not subject to amortization +$ +654,026 +$ +363,502 +$ +276,844 +$ +523,329 +$ +1,817,701 +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2015 : +F-14 +Table of Contents +Index to Financial Statements +December 31, 2015 +(In thousands) +Utica +$ +1,812,256 +Niobrara +4,932 +Southern Louisiana +372 +Bakken +96 +Other +45 +$ +1,817,701 +As of December 31, 2014 , approximately $1.5 billion of non-producing leasehold costs was not subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company's non-producing leases have five year extension terms which could extend this time frame beyond five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2015 and 2014 is as follows: +December 31, +2015 +2014 +(In thousands) +Asset retirement obligation, beginning of period +$ +17,938 +$ +15,083 +Liabilities incurred +8,800 +9,295 +Liabilities settled +(1,121 +) +(7,201 +) +Accretion expense +820 +761 +Asset retirement obligation as of end of period +26,437 +17,938 +Less current portion +75 +75 +Asset retirement obligation, long-term +$ +26,362 +$ +17,863 +F-15 +Table of Contents +Index to Financial Statements +4. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2015 and 2014 : +Carrying Value +Loss (income) from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2015 +2014 +2015 +2014 +2013 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +189 +$ +(475 +) +$ +(343 +) +Investment in Tatex Thailand III, LLC +17.9 +% +— +— +— +12,408 +254 +Investment in Grizzly Oil Sands ULC +24.9999 +% +50,645 +180,218 +115,544 +13,159 +2,999 +Investment in Bison Drilling and Field Services LLC +— +% +— +— +— +213 +3,533 +Investment in Muskie Proppant LLC +— +% +— +— +— +371 +1,975 +Investment in Timber Wolf Terminals LLC +50.0 +% +999 +1,013 +14 +9 +(6 +) +Investment in Windsor Midstream LLC +22.5 +% +27,955 +13,505 +(18,398 +) +(477 +) +(1,125 +) +Investment in Stingray Pressure Pumping LLC +— +% +— +— +— +2,027 +(818 +) +Investment in Stingray Cementing LLC +50.0 +% +2,487 +2,647 +147 +344 +93 +Investment in Blackhawk Midstream LLC +48.5 +% +— +— +(7,216 +) +(84,787 +) +673 +Investment in Stingray Logistics LLC +— +% +— +— +— +(464 +) +51 +Investment in Diamondback Energy, Inc. +— +% +— +— +— +(79,654 +) +(220,129 +) +Investment in Stingray Energy Services LLC +50.0 +% +5,908 +5,718 +557 +(88 +) +(215 +) +Investment in Sturgeon Acquisitions LLC +25.0 +% +22,769 +22,507 +(1,229 +) +(1,819 +) +— +Investment in Mammoth Energy Partners LP +30.5 +% +131,630 +143,973 +16,485 +(201 +) +— +$ +242,393 +$ +369,581 +$ +106,093 +$ +(139,434 +) +$ +(213,058 +) +The tables below summarize financial information for the Company's equity investments, excluding Diamondback, as of December 31, 2015 and 2014 . +Summarized balance sheet information: +December 31, +2015 +2014 +(In thousands) +Current assets +$ +105,537 +$ +181,060 +Noncurrent assets +$ +1,293,925 +$ +1,306,891 +Current liabilities +$ +56,559 +$ +114,506 +Noncurrent liabilities +$ +155,995 +$ +230,062 +Summarized results of operations: +December 31, +2015 +2014 +2013 +(In thousands) +Gross revenue +$ +430,729 +$ +390,620 +$ +162,401 +Net (income) loss +$ +(16,761 +) +$ +140,796 +$ +17,350 +Gross revenue and net loss presented above for 2014 include approximately one month of activity for Mammoth Energy Partners LP ("Mammoth") and approximately eleven months of activity for Stingray Pressure Pumping LLC, Stingray Logistics +F-16 +Table of Contents +Index to Financial Statements +LLC, Muskie Proppant LLC and Bison Drilling and Field Services LLC, which were contributed to Mammoth in November 2014 . See further discussion of the contribution to Mammoth below. +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds 85,122 of the 1,000,000 outstanding shares of APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. +Tatex Thailand III, LLC +The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. The Company paid cash calls of $1.6 million during the year ended December 31, 2014 . As of December 31, 2014 , the Company reviewed its investment in Tatex III and, together with Tatex III, made the decision to allow the concession to expire in January 2015 . As such, the Company fully impaired the asset as of December 31, 2014 , recognizing a loss of $12.1 million which is included in loss (income) from equity method investments in the accompanying consolidated statements of operations. +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of December 31, 2015 , Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions of Alberta, Canada. Initiation of steam injection at its first project, Algar Lake Phase 1, commenced in January 2014 and first bitumen production was achieved during the second quarter of 2014 . In April 2015 , Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. The Company reviewed its investment in Grizzly as of September 30, 2015 and again as of December 31, 2015 for impairment based on FASB ASC 323 due to certain qualitative factors and as such, engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was required under FASB ASC 323, resulting in an aggregate impairment loss of $101.6 million for the year ended December 31, 2015 which is included in loss (income) from equity method investments in the consolidated statements of operations. If commodity prices continue to decline, further impairment of the investment in Grizzly may result in the future. During the years ended December 31, 2015 and 2014 , Gulfport paid $ 14.5 million and $18.8 million , respectively, in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was decreased by $28.5 million , $16.9 million and $12.2 million as a result of a foreign currency translation loss for the years ended December 31, 2015 , 2014 , and 2013 , respectively. +Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, of which $57.4 million was outstanding at December 31, 2015 . Grizzly has agreed to pay the outstanding balance by the maturity date of June 2016, of which Gulfport's share is approximately $14.4 million . +Bison Drilling and Field Services LLC +During 2011 , the Company invested in Bison Drilling and Field Services LLC (“Bison”). Bison owns and operates drilling rigs. During the year ended December 31, 2014 , the Company paid $17.0 million in cash calls. +The Company contributed its investment in Bison to Mammoth during the fourth quarter of 2014. See below under Mammoth Energy Partners LP for information regarding this contribution. +Muskie Proppant LLC +During 2011 , the Company invested in Muskie Proppant LLC (“Muskie”). Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain rights in a lease covering land in Wisconsin for mining oil and natural gas fracture grade sand. During the year ended December 31, 2014 , the Company paid $1.0 million in cash calls to Muskie. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +F-17 +Table of Contents +Index to Financial Statements +The Company entered into a loan agreement with Muskie effective July 1, 2013 , under which it loaned Muskie $0.9 million . Interest accrued at the prime rate plus 2.5% . The loan had a original maturity date of July 31, 2014 . Effective July 31, 2014 , an amendment was made to the loan agreement which changed the maturity date of the loan to July 31, 2015 . During the fourth quarter of 2014, Muskie repaid the outstanding balance and the loan agreement was terminated. +The Company contributed its investment in Muskie to Mammoth during the fourth quarter of 2014 . See below under Mammoth Energy Partners LP for information regarding this contribution. +Timber Wolf Terminals LLC +During 2012 , the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. During the year ended December 31, 2015 , the Company paid no cash calls to Timber Wolf. During the year ended December 31, 2014 , Gulfport paid an immaterial amount of cash calls. +Windsor Midstream LLC +During 2012 , the Company purchased an ownership interest in Windsor Midstream LLC (“Midstream”). Midstream owned a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. In March 2015 , Coronado was sold to Enlink Midstream Partners, LP ("Enlink") for proceeds of approximately $600.0 million , consisting of cash and units representing a limited partnership interest in Enlink. Midstream recorded an $81.6 million gain on the sale of its investment in Coronado. During the year ended December 31, 2015 , the Company received $3.9 million in distributions from Midstream. During the year ended December 31, 2015 , the Company paid no cash calls to Midstream. During the year ended December 31, 2014 , the Company paid $2.4 million in cash calls. +Stingray Pressure Pumping LLC +During 2012 , the Company invested in Stingray Pressure Pumping LLC ("Stingray Pressure"). Stingray Pressure provides well completion services. During the year ended December 31, 2014 , the Company paid $2.5 million in cash calls. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +The Company contributed its investment in Stingray Pressure to Mammoth during the fourth quarter of 2014 . See below under Mammoth Energy Partners LP for information regarding this contribution. +Stingray Cementing LLC +During 2012 , the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. During the years ended December 31, 2015 and 2014 , the Company did not pay any cash calls related to Stingray Cementing. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +Blackhawk Midstream LLC +During 2012 , the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinates gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. On January 28, 2014 , Blackhawk closed on the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million , of which $14.3 million was placed in escrow. Gulfport received $84.8 million in net proceeds from this transaction in the first quarter of 2014, which is included as income from equity method investments in the accompanying consolidated statements of operations. During the year ended December 31, 2015 , the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale, which is included in loss (income) from equity investments in the consolidated statements of operations. +Stingray Logistics LLC +During 2012 , the Company invested in Stingray Logistics LLC ("Stingray Logistics"). Stingray Logistics provides well services. During the year ended December 31, 2014 , the Company did not pay any cash calls related to Stingray Logistics. +The Company contributed its investment in Stingray Logistics to Mammoth during the fourth quarter of 2014 . See below under Mammoth Energy Partners LP for information regarding this contribution. +F-18 +Table of Contents +Index to Financial Statements +Diamondback Energy, Inc. +On May 7, 2012 , the Company entered into a contribution agreement with Diamondback Energy, Inc. ("Diamondback"). Under the terms of the contribution agreement, the Company agreed to contribute to Diamondback, prior to the closing of the Diamondback initial public offering ("Diamondback IPO"), all its oil and natural gas interests in the Permian Basis (the "Contribution"). The Contribution was completed on October 11, 2012 . Following the closing of the Diamondback IPO, the Company owned 7,914,036 shares of Diamondback's outstanding common stock for an initial investment in Diamondback valued at $138.5 million . In 2013 , the Company sold an aggregate of 4,534,536 shares of its Diamondback common stock and received aggregate net proceeds of approximately $192.7 million . In June and September of 2014 , the Company sold an aggregate of 2,437,500 shares of its Diamondback common stock and received aggregate net proceeds of approximately $197.6 million . On November 12, 2014 , the Company sold its remaining 942,000 shares of Diamondback common stock for net proceeds of approximately $60.8 million . As of December 31, 2015 and 2014 , the Company did not own any shares of Diamondback common stock. +The Company accounted for its interest in Diamondback as an equity method investment and had elected the fair value option of accounting for this investment. While the Company's ownership interest in Diamondback was below 20% prior to the Company's sale of its remaining Diamondback common stock in November 2014 , the Company had appointed a member of Diamondback's Board. The individual appointed by the Company continues to serve on Diamondback's board and the Company had influence through this board seat. The Company recognized a gain of approximately $79.7 million and $220.1 million on its investment in Diamondback for years ended December 31, 2014 and 2013 , respectively, which is included as loss (income) from equity method investments in the consolidated statements of operations. +The Company has determined that for the 2014 and 2013 periods presented in its consolidated financial statements, Diamondback met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X, for which the Company is required, pursuant to Rule 3-09 of Regulation S-X, to attach separate financial statements as exhibits to its Annual Report on Form 10-K. During 2015 , the Company did not own any shares of Diamondback common stock and, as such, Rule 3-09 of Regulation S-X is not applicable and the 2015 consolidated financial statements of Diamondback are not attached. +Stingray Energy Services LLC +During 2013 , the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. During the year ended December 31, 2015 , the Company did not pay any cash calls to Stingray Energy. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +Sturgeon Acquisitions LLC +During the third quarter of 2014 , the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. During the year ended December 31, 2015 , the Company received approximately $1.0 million in distributions from Sturgeon. +Mammoth Energy Partners LP +In the fourth quarter of 2014 , the Company contributed its investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth for a 30.5% interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth originally intended to pursue the offering in 2015 ; however, Mammoth continues to evaluate market conditions and expects to launch the offering when commodity prices have recovered. The Company reviewed its investment in Mammoth at December 31, 2015 and determined no impairment was needed. If commodity prices continue to decline, an impairment of the investment in Mammoth may result in the future. +The Company accounted for the contribution as a sale of financial assets under FASB ASC 860. The Company estimated the fair market value of its investment in Mammoth as of the contribution date using an average of the market approach and the income approach, based on a independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for lack of marketability due to the Company's minority interest, resulting in a fair value of $143.5 million for the Company's 30.5% interest. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 13 for additional discussion of the measurement inputs. The Company recognized a gain of $84.5 million from its contribution of assets to Mammoth, which is included in gain on contribution of investments in the accompanying consolidated statements of operations. +F-19 +Table of Contents +Index to Financial Statements +5. +OTHER ASSETS +Other assets consist of the following as of December 31 : +2015 +2014 +(In thousands) +Plugging and abandonment escrow account on the WCBB properties (Note 15) +$ +3,089 +$ +3,097 +Certificates of Deposit securing letter of credit +276 +275 +Prepaid drilling costs +58 +483 +Loan commitment fees +2,870 +2,470 +Deposits +34 +34 +Other +37 +117 +$ +6,364 +$ +6,476 +6. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31 : +2015 +2014 +(In thousands) +Revolving credit agreement (1) +$ +— +$ +100,000 +Building loans (2) +1,653 +1,826 +7.75% senior unsecured notes due 2020 (3) +600,000 +600,000 +6.625% senior unsecured notes due 2023 (4) +350,000 +— +Net unamortized original issue premium (discount), net (5) +12,493 +14,658 +Net unamortized debt issuance costs (6) +(17,883 +) +(12,920 +) +Construction loan (7) +— +— +Less: current maturities of long term debt +(179 +) +(168 +) +Debt reflected as long term +$ +946,084 +$ +703,396 +Maturities of long-term debt (excluding premiums, discounts and unamortized debt issuance costs) as of December 31, 2015 are as follows: +(In thousands) +2016 +$ +179 +2017 +187 +2018 +1,287 +2019 +— +2020 +600,000 +Thereafter +350,000 +Total +$ +951,653 +(1) On December 27, 2013 , the Company entered into an Amended and Restated Credit Agreement with The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and other lenders (The "Amended and Restated Credit Agreement") that provides for a maximum facility amount of $1.5 billion . The Amended and Restated Credit Agreement matures on June 6, 2018. The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the Amended and Restated Credit Agreement. +F-20 +Table of Contents +Index to Financial Statements +On April 23, 2014 , the Company entered into a first amendment to the Amended and Restated Credit Agreement. The first amendment increased the letter of credit sublimit from $20.0 million to $70.0 million and provided for an increase in the borrowing base availability from $150.0 million to $275.0 million . The first amendment also made certain changes to the lenders and their respective lending commitments thereunder. +On November 26, 2014 , the Company entered into a second amendment to the Amended and Restated Credit Agreement. The second amendment changed the definition of EBITDAX to exclude proceeds from the disposition of equity method investments and changed the ratio of funded debt to EBITDAX to be the ratio of net funded debt to EBITDAX. Net funded debt is funded debt less the amount of cash and short-term investments the Company has at the end of the relevant fiscal quarter. The second amendment increases the ratio from 2.00 to 1.00 to 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and then decreases the ratio to 3.25 to 1.00 for the periods thereafter. Further, the second amendment increased the letter of credit sublimit from $70.0 million to $125.0 million and provided for an increase in the borrowing base availability from $275.0 million to $450.0 million . +On April 10, 2015 , the Company entered into a third amendment to the Amended and Restated Credit Agreement. The third amendment increased the borrowing base from $450.0 million to $575.0 million and increased the Company's basket for unsecured debt issuances to $1.2 billion . The third amendment also made certain changes to the lenders and their respective lending commitments thereunder. +On May 29, 2015 , the Company entered into a fourth amendment to the Amended and Restated Credit Agreement. The fourth amendment increased the letter of credit sublimit from $125.0 million to $150.0 million . Additionally, the Company received consent from its lenders to incur certain new secured indebtedness, limited to $30.0 million , to finance the construction of its new Oklahoma City headquarters. The lenders also agreed to waive certain provisions of the Amended and Restated Credit Agreement that may prohibit the construction loan. +On September 18, 2015 , the Company entered into a fifth amendment to the Amended and Restated Credit Agreement. The fifth amendment among other things, (a) increased Gulfport’s borrowing base from $575.0 million to $700.0 million , (b) increased the maximum permitted ratio of net funded debt to EBITDAX from a current level of 3.25 to 1.00 to 4.00 to 1.00 , (c) revised Gulfport’s letter of credit sublimit from $150.0 million to the greater of (i) $150.0 million and (ii) 40% of the borrowing base existing at such time, (d) added an investments basket with a $100.0 million limitation for investments in joint ventures formed to own and operate midstream assets, (e) revised the limit of the general indebtedness basket from a current limit of $10.0 million in the aggregate at any time outstanding to a limit equal to the greater of (i) $10.0 million in the aggregate at any time outstanding and (ii) two percent ( 2% ) of the borrowing base at the time such indebtedness is incurred, (f) added a dispositions basket covering dispositions of contracts (and rights or interests therein or thereunder) or other arrangements constituting a release of natural gas interstate transportation capacity, which dispositions do not (when considered cumulatively, and taken together with other related transactions and contractual arrangements) deprive Gulfport of the benefit of any material portion of Gulfport’s mineral interests, and (g) revised the provisions that limit Gulfport’s ability to enter into swap contracts. As of December 31, 2015 , the Company did not have any outstanding borrowing under the Amended and Restated Credit Agreement. At December 31, 2015 , the total availability for future borrowings under Amended and Restated Credit Agreement, after giving effect to an aggregate of $178.6 million of letters of credit, was $521.4 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the Amended and Restated Credit Agreement. +Advances under the Amended and Restated Credit Agreement may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +The Amended and Restated Credit Agreement contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to: +F-21 +Table of Contents +Index to Financial Statements +• incur indebtedness; +• grant liens; +• pay dividends and make other restricted payments; +• make investments; +• make fundamental changes; +• enter into swap contracts and forward sales contracts; +• dispose of assets; +• change the nature of their business; and +• enter into transactions with affiliates. +The negative covenants are subject to certain exceptions as specified in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains certain affirmative covenants, including, but not limited to the following financial covenants: +(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or noncash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00 ; and +(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00 . +The Company was in compliance with all covenants at December 31, 2015 . +(2) In March 2011 , the Company entered into a new building loan agreement for the office building it occupies in Oklahoma City, Oklahoma. The new loan agreement refinanced the $2.4 million outstanding under the previous building loan agreement. The new agreement matured in February 2016 and bore interest at the rate of 5.82% per annum. The new building loan required monthly interest and principal payments of approximately $22,000 and is collateralized by the Oklahoma City office building and associated land. Subsequently, the loan was refinanced with a new interest rate of 4.00% per annum. The building loan currently matures in December 2018 and requires monthly interest and principal payments of approximately $20,000 . The Company paid the balance of the loan in full subsequent to December 31, 2015 . +(3) On October 17, 2012 , the Company issued $250.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "October Notes") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, (the "senior note indenture"). On December 21, 2012 , the Company issued an additional $50.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "December Notes") as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the sale of the October Notes to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds from the sale of the October Notes and the net proceeds from the sale of the December Notes for general corporate purposes, which included funding a portion of its 2013 capital development plan. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act in October 2013 (the "Exchange Notes"). +F-22 +Table of Contents +Index to Financial Statements +On August 18, 2014 , the Company issued an additional $300.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "August Notes"). The August Notes were issued as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the sale of the August Notes to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds from the sale of the August Notes for general corporate purposes, including funding a portion of its 2014 and 2015 capital development plans. The October Notes, December Notes and the August Notes are collectively referred to as the "2020 Notes". +In connection with the issuance of the 2020 Notes, the Company and the subsidiary guarantors entered into registration rights agreements with the initial purchasers, pursuant to which the Company and the subsidiary guarantors agreed to file a registration statement with respect to an offer to exchange the 2020 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the October Notes and the December Notes was completed in October 2013 and the exchange offer for the August Note was completed in March 2015 . +Under the senior note indenture relating to the 2020 Notes, interest on the 2020 Notes accrues at a rate of 7.75% per annum on the outstanding principal amount from October 17, 2012 , payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013 . The 2020 Notes are the Company's senior unsecured obligations and rank equally in the right of payment with all of the Company's other senior indebtedness and senior in right of payment to any future subordinated indebtedness. All of the Company's existing and future restricted subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt guarantee the 2020 Notes; provided, however, that the 2020 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. The Company may redeem some or all of the 2020 Notes at any time on or after November 1, 2016 , at the redemption prices listed in the senior note indenture. Prior to November 1, 2016 , the Company may redeem the 2020 Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015 , the Company may redeem up to 35% of the aggregate principal amount of the 2020 Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2020 Notes initially issued remains outstanding immediately after such redemption. +(4) On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the "2023 Notes" and, together with the "2020 Notes," the "Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "2023 Notes Offering"). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses. +The 2023 Notes were issued under an indenture, dated as of April 21, 2015 , among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes will accrue at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015 , payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015 . The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. +In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +(5) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000% . The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531% . The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561% . The April Notes were issued at par. The premium and discount are being amortized using the effective interest method. +(6) In accordance with ASU 2015-03, loan issuance cost related to the Notes have been presented as a reduction to the Notes. At December 31, 2015 , total unamortized debt issuance costs were $5.1 million for the October Notes, $1.1 million for the December Notes, $4.9 million for the August Notes and $6.8 million for the April Notes. +(7) On June 4, 2015, the Company entered into a construction loan agreement (the "Construction Loan") with InterBank for the construction of a new corporate headquarters in Oklahoma City. The Construction Loan allows for maximum principal borrowings of $24.5 million and requires the Company to fund 30% of the cost of the construction before any funds can be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per +F-23 +Table of Contents +Index to Financial Statements +annum and is payable on the last day of the month through May 31, 2017. Monthly interest and principal payments are due beginning June 30, 2017, with the final payment due June 4, 2025. As of December 31, 2015 , the Company had no borrowings on the Construction Loan. +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31 : +2015 +2014 +2013 +(In thousands) +Cash paid for interest +$ +59,736 +$ +28,646 +$ +24,270 +Change in accrued interest +4,011 +3,875 +(969 +) +Capitalized interest +(13,580 +) +(9,687 +) +(7,132 +) +Amortization of loan costs +3,219 +1,685 +1,012 +Amortization of note discount and premium +(2,165 +) +(533 +) +298 +Other +— +— +11 +Total interest expense +$ +51,221 +$ +23,986 +$ +17,490 +The Company capitalized approximately $13.3 million and $9.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2015 and 2014 , respectively. During the year ended December 31, 2015, the Company also capitalized approximately $0.3 million in interest expense related to building construction. +7. +COMMON STOCK OPTIONS, RESTRICTED STOCK AND CHANGES IN CAPITALIZATION +Options +In January 2005, the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”), which is administered by the Compensation Committee (the "Committee"). Under the terms of the 2005 Plan, the Committee may determine when options shall be granted, to which eligible participants options shall be granted, the number of shares covered by such options, the purchase price or exercise price of such options, the vesting periods of such options and the exercisable period of such options. Eligible participants are defined as employees, consultants, and directors of the Company. +On April 20, 2006, the Company amended and restated the 2005 Plan to (i) include (a) incentive stock options, (b) nonstatutory stock options, (c) restricted awards (restricted stock and restricted stock units), (d) performance awards and (e) stock appreciation rights and (ii) increase the maximum aggregate amount of common stock that may be issued under the 2005 Plan from 1,904,606 shares to 3,000,000 shares, including the 627,337 shares underlying options granted to employees under the Plan prior to adoption of the 2005 Plan. As of December 31, 2015 , the Company had granted 997,269 options for the purchase of shares of the Company’s common stock and 1,143,217 shares of restricted stock under the 2005 Plan. No additional securities will be issued under the Plan other than upon exercise of options that are outstanding. +On April 19, 2013, the Company amended and restated the 2005 Plan with the 2013 Restated Stock Incentive Plan ("2013 Plan"). The 2013 Plan increased the numbers of shares that may be awarded from 3,000,000 to 7,500,000 shares, including the 627,337 shares underlying options granted to employees under the Plan. The shares of stock issued once the options are exercised will be from authorized but unissued common stock. As of December 31, 2015 , the Company had granted 610,966 shares of restricted stock under the 2013 Plan. +Sale of Common Stock +On February 15, 2013, the Company completed the sale of an aggregate of 8,912,500 shares of its common stock in an underwritten public offering at a public offering price of $38.00 per share less the underwriting discount. The Company received aggregate net proceeds of approximately $325.8 million from the sale of these shares after deducting the underwriting discount and before offering expenses. The Company used a portion of the net proceeds from this equity offering to fund its acquisition of additional Utica Shale acreage as described in Note 2, and the balance for general corporate purposes, including the funding of a portion of its 2013 capital development plan. +F-24 +Table of Contents +Index to Financial Statements +On November 13, 2013, the Company completed the sale of an aggregate of 7,475,000 shares of its common stock in an underwritten public offering at a public offering price of $56.75 per share less the underwriting discount. The Company received aggregate net proceeds of approximately $408.0 million from the sale of these shares after deducting the underwriting discount and before offering expenses. The Company used the net proceeds from this equity offering for general corporate purposes, which included expenditures associated with its 2014 drilling program and additional acreage acquisitions in the Utica Shale. +On April 21, 2015, the Company issued 10,925,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $501.8 million after underwriting discounts and commissions and offering expenses. The Company used a portion of these net proceeds, together with a portion of the net proceeds from its concurrent senior notes offering (see Note 6), to repay all amounts outstanding at that time under its revolving credit facility and to fund the acquisition of Paloma (see Note 2) and used the remaining net proceeds from these offerings for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +On June 12, 2015, the Company issued 11,500,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $479.7 million after underwriting discounts and commissions and offering expenses. The Company used a portion of the net proceeds to fund the Monroe Acquisition (see Note 2) and used the remaining funds for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +8. +STOCK-BASED COMPENSATION +During the years ended December 31, 2015 , 2014 and 2013 the Company’s stock-based compensation cost was $ 14.4 million , $14.9 million and $10.5 million , respectively, of which the Company capitalized $ 5.7 million , $5.9 million and $4.2 million , respectively, relating to its exploration and development efforts. +The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the market price of Gulfport’s common stock over a period of time ending on the grant date. Based upon the historical experience of the Company, the expected term of options granted is equal to the vesting period plus one year. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The 2013 Restated Stock Incentive Plan (which amended and restated the 2005 Plan) provides that all options must have an exercise price not less than the fair value of the Company’s common stock on the date of the grant. +No stock options were issued during the years ended December 31, 2015 , 2014 and 2013 . +The Company has not declared dividends and does not intend to do so in the foreseeable future, and thus did not use a dividend yield. In each case, the actual value that will be realized, if any, depends on the future performance of the common stock and overall stock market conditions. There is no assurance that the value an optionee actually realizes will be at or near the value estimated using the Black-Scholes model. +A summary of the status of stock options and related activity for the years ended December 31, 2015 , 2014 and 2013 is presented below: +F-25 +Table of Contents +Index to Financial Statements +Shares +Weighted +Average +Exercise Price +per Share +Weighted +Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value (In thousands) +Options outstanding at January 1, 2013 +335,241 +$ +6.37 +2.39 +$ +10,678 +Granted +— +— +Exercised +(125,000 +) +11.20 +4,797 +Forfeited/expired +— +— +Options outstanding at December 31, 2013 +210,241 +3.50 +1.07 +$ +12,538 +Granted +— +— +Exercised +(205,241 +) +3.36 +12,822 +Forfeited/expired +— +— +Options outstanding at December 31, 2014 +5,000 +9.07 +0.69 +$ +163 +Granted +— +— +Exercised +(5,000 +) +9.07 +124 +Forfeited/expired +— +— +Options outstanding at December 31, 2015 +— +$ +— +— +$ +— +Options exercisable at December 31, 2015 +— +$ +— +— +$ +— +The following table summarizes restricted stock activity for the twelve months ended December 31, 2015 , 2014 and 2013 : +Number of +Unvested +Restricted Shares +Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2013 +245,831 +$ +31.88 +Granted +463,952 +50.00 +Vested +(237,646 +) +41.79 +Forfeited +(8,500 +) +38.54 +Unvested shares as of December 31, 2013 +463,637 +$ +44.80 +Granted +246,409 +$ +65.07 +Vested +(272,665 +) +45.76 +Forfeited +(50,136 +) +53.72 +Unvested shares as of December 31, 2014 +387,245 +$ +55.87 +Granted +352,605 +$ +35.99 +Vested +(236,812 +) +52.39 +Forfeited +(18,799 +) +45.21 +Unvested shares as of December 31, 2015 +484,239 +$ +43.51 +Unrecognized compensation expense as of December 31, 2015 related to outstanding stock options and restricted shares was $ 15.7 million . The expense is expected to be recognized over a weighted average period of 1.55 years. +9. +FAIR VALUE OF FINANCIAL INSTRUMENTS +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the building loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +At December 31, 2015 , the carrying value of the outstanding debt represented by the Notes was $ 944.6 million , including the remaining unamortized discount of approximately $2.5 million related to the October Notes and the remaining unamortized +F-26 +Table of Contents +Index to Financial Statements +premium of approximately $ 0.3 million related to the December Notes and approximately $14.7 million related to the August Notes. Also, included in the carrying value of the Notes are unamortized debt issuance cost of approximately $5.1 million related to the October Notes, approximately $1.1 million related to the December Notes, approximately $4.9 million related to the August Notes, and approximately $6.8 million related to the April Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $846.9 million at December 31, 2015 . +10. +INCOME TAXES +The income tax provision consists of the following: +2015 +2014 +2013 +(In thousands) +Current: +State +$ +(1,069 +) +$ +14,384 +$ +6,860 +Federal +(439 +) +16,039 +6,325 +Deferred: +State +(14,218 +) +4,314 +7,385 +Federal +(240,275 +) +118,604 +77,566 +Total income tax (benefit) expense provision +$ +(256,001 +) +$ +153,341 +$ +98,136 +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2015 +2014 +2013 +(In thousands) +(Loss) income before federal income taxes +$ +(1,480,885 +) +$ +400,744 +$ +251,328 +Expected income tax at statutory rate +(518,310 +) +140,259 +87,965 +State income taxes +(15,908 +) +11,570 +9,297 +Other differences +(420 +) +1,512 +874 +Changes in valuation allowance +278,637 +— +— +Income tax (benefit) expense recorded +$ +(256,001 +) +$ +153,341 +$ +98,136 +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2015 , 2014 and 2013 are estimated as follows: +F-27 +Table of Contents +Index to Financial Statements +2015 +2014 +2013 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +46,209 +$ +1,091 +$ +1,462 +Oil and gas property basis difference +292,838 +— +— +FASB ASC 718 compensation expense +1,922 +1,562 +634 +AMT credit +23,629 +24,053 +7,968 +Charitable contributions carryover +146 +150 +25 +Unrealized loss on hedging activities +— +— +8,540 +Foreign tax credit carryforwards +2,074 +2,074 +2,074 +Accrued liabilities +— +1,260 +— +ARO liability +9,415 +— +— +State net operating loss carryover +4,344 +2,627 +4,408 +Total deferred tax assets +380,577 +32,817 +25,111 +Valuation allowance for deferred tax assets +(281,782 +) +(3,145 +) +(4,743 +) +Deferred tax assets, net of valuation allowance +98,795 +29,672 +20,368 +Deferred tax liabilities: +Oil and gas property basis difference +— +183,767 +72,173 +Investment in pass through entities +7,430 +38,315 +8,799 +Non-oil and gas property basis difference +715 +849 +249 +Investment in nonconsolidated affiliates +— +— +46,495 +Unrealized gain on hedging activities +66,422 +37,006 +— +Total deferred tax liabilities +74,567 +259,937 +127,716 +Net deferred tax asset (liability) +$ +24,228 +$ +(230,265 +) +$ +(107,348 +) +The Company has an available federal tax net operating loss carryforward estimated at approximately $132.0 million as of December 31, 2015 . This carryforward will begin to expire in the year 2035. Based upon the December 31, 2015 net deferred tax asset position and a significant loss in 2015 , management believes that there is sufficient negative evidence to place a valuation allowance on the net deferred tax asset that may not be utilized based upon a more likely than not basis. The Company also has state net operating loss carryovers of $88.6 million that will begin to expire in 2016, alternative minimum tax credits of $23.6 million with no expiration date and federal foreign tax credit carryovers of $2.1 million which begin to expire in 2017. The Company believes that it can utilize an Oklahoma state NOL as well as a portion of the AMT credit through carrybacks and a refundable election. Therefore, the Company has recorded a total valuation allowance of $281.8 million related to the remaining net deferred tax asset. +In 2013, the Company's sale of Diamondback common shares generated a $120.0 million taxable gain resulting in deferred tax expense of $35.7 million and current tax expense of $13.2 million . In 2014, the Company's sale of its remaining shares of Diamondback common stock, as well as its share of the proceeds from Blackhawk's sale of its interest in Ohio Gas Gathering Company, LLC and Ohio Condensate Company, LLC, generated $203.3 million and $83.7 million of taxable gain, respectively, resulting in a deferred tax expense of $79.4 million and $32.3 million , respectively. The Company's current federal tax benefit in 2015 is primarily attributable to the Company recording a full cost ceiling impairment of $1.4 billion against the oil and gas assets, while the federal tax expense in 2014 and 2013 is a result of operations plus the sale of Diamondback common shares and the sale of assets by Blackhawk. +At December 31, 2014 , the Company owed approximately $17.7 million for state and federal income taxes payable which is included on the accompanying consolidated balance sheets. No amounts were owed at December 31, 2015 . +F-28 +Table of Contents +Index to Financial Statements +11. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2015 +2014 +2013 +Loss +Shares +Per +Share +Income +Shares +Per +Share +Income +Shares +Per Share +(In thousands, except share data) +Basic: +Net (loss) income +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +$ +247,403 +85,445,963 +$ +2.90 +$ +153,192 +77,375,683 +$ +1.98 +Effect of dilutive securities: +Stock options and awards +— +— +— +367,219 +— +485,963 +Diluted: +Net (loss) income +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +$ +247,403 +85,813,182 +$ +2.88 +$ +153,192 +77,861,646 +$ +1.97 +There were 449,880 shares of common stock that were considered anti-dilutive for the year ended December 31, 2015 . There were no potential shares of common stock that were considered anti-dilutive for the years ended December 31, 2014 and 2013 . +F-29 +Table of Contents +Index to Financial Statements +12. +DERIVATIVE INSTRUMENTS +Oil, Natural Gas and Natural Gas Liquids Derivative Instruments +The Company seeks to reduce its exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, the NYMEX Henry Hub for natural gas and Mont Belvieu for propane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2015 . +Location +Daily Volume (Bbls/day) +Weighted +Average Price +January 2016 - June 2016 +ARGUS LLS +1,500 +$ +63.03 +January 2016 - June 2016 +NYMEX WTI +1,000 +$ +61.40 +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +NYMEX Henry Hub +415,000 +$ +3.56 +April 2016 +NYMEX Henry Hub +425,000 +$ +3.52 +May 2016 - June 2016 +NYMEX Henry Hub +355,000 +$ +3.42 +July 2016 - September 2016 +NYMEX Henry Hub +375,000 +$ +3.38 +October 2016 +NYMEX Henry Hub +405,000 +$ +3.33 +November 2016 - December 2016 +NYMEX Henry Hub +430,000 +$ +3.30 +January 2017 - March 2017 +NYMEX Henry Hub +317,500 +$ +3.25 +April 2017 - June 2017 +NYMEX Henry Hub +272,500 +$ +3.31 +July 2017 - December 2017 +NYMEX Henry Hub +210,000 +$ +3.12 +January 2018 - December 2018 +NYMEX Henry Hub +160,000 +$ +3.01 +January 2019 - March 2019 +NYMEX Henry Hub +20,000 +$ +3.37 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +January 2016 - December 2016 +Mont Belvieu +1,000 +$ +20.16 +The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +NYMEX Henry Hub +75,000 +$ +3.25 +April 2016 - December 2016 +NYMEX Henry Hub +95,000 +$ +3.18 +January 2017 - March 2017 +NYMEX Henry Hub +20,000 +$ +2.91 +For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2017 through December +F-30 +Table of Contents +Index to Financial Statements +2017. These options expire in December 2016. If executed, the Company would have additional fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.33 and additional short call options for 30,000 MMBtu per day at a weighted average ceiling price of $3.33 . +In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon or Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2015 , the Company's had the following natural gas basis swap positions for MichCon and Tetco M2, respectively. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2016 - March 2016 +MichCon +70,000 +$ +0.11 +April 2016 - December 2016 +MichCon +40,000 +$ +0.02 +November 2016 - March 2017 +Tetco M2 +50,000 +$ +(0.59 +) +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2015 and 2014 : +December 31, +2015 +2014 +(In thousands) +Short-term derivative instruments - asset +$ +142,794 +$ +78,391 +Long-term derivative instruments - asset +$ +51,088 +$ +24,448 +Short-term derivative instruments - liability +$ +437 +$ +— +Long-term derivative instruments - liability +$ +6,935 +$ +— +Gains and losses +For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The Company has no cash flow hedges in place for the year ended December 31, 2015 and 2014 , as all fixed price swaps, swaptions and basis swaps had either been deemed ineffective at their inception or had been accounted for using the mark-to-market accounting method. Amounts reclassified out of accumulated other comprehensive (loss) income as a reduction to oil and condensate sales for the year ended December 31, 2013 were approximately $9.8 million . +At December 31, 2015 and 2014 , no amounts related to fixed price swaps, swaptions or basis swaps remain in accumulated other comprehensive income (loss). +The following table presents the gain and loss recognized in gas sales, oil and condensate sales and natural gas liquids sales in the accompanying consolidated statements of operations due to the change in fair value of derivative instruments for the years ended December 31, 2015 , 2014 , and 2013 . +Gain (loss) on derivative instruments +For the Year Ended December 31, +2015 +2014 +2013 +(In thousands) +Gas sales +$ +72,412 +$ +115,324 +$ +(12,484 +) +Oil and condensate sales +10,149 +5,824 +(5,705 +) +Natural gas liquids sales +1,110 +— +— +Total +$ +83,671 +$ +121,148 +$ +(18,189 +) +F-31 +Table of Contents +Index to Financial Statements +The $18.2 million loss in 2013 was comprised of $9.1 million related to hedge ineffectiveness and $9.1 million related to amortization of other comprehensive income. +The Company delivered approximately 46% of its 2015 production under fixed price swaps. +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +13. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820, " Fair Value Measurement and Disclosures " ("FASB ASC 820"). FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +The following tables summarize the Company’s financial and non-financial liabilities by FASB ASC 820 valuation level as of December 31, 2015 and 2014 : +December 31, 2015 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +193,882 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +7,372 +$ +— +December 31, 2014 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +102,839 +$ +— +F-32 +Table of Contents +Index to Financial Statements +The Company estimates the fair value of all derivative instruments industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company's acquisitions. +The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the year ended December 31, 2015 were approximately $ 8.8 million . +Due to the unobservable nature of the inputs, the fair value of the Company's initial investment in Mammoth was estimated using assumptions that represent level 3 inputs. The Company's estimated fair value of the investment as of the November 24, 2014 contribution date was $143.5 million . See Note 4 for further discussion of the Company's contribution to Mammoth. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly was estimated using assumptions that represent Level 3 inputs. The Company estimated the fair value of the investment as of December 31, 2015 to be approximately $50.6 million . See Note 4 for further discussion of the Company's investment in Grizzly. +14. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +Stingray Pressure provides well completion services. Stingray Pressure was previously 50% owned by the Company until its contribution to Mammoth in November 2014 as discussed above in Note 4. As of the contribution date, the Company acquired a 30.5% limited partner interest in Mammoth. No amounts were owed to Stingray Pressure at the date of the contribution. Approximately $78.3 million of services provided by Stingray Pressure are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2014 . +Stingray Cementing, which is 50% owned by the Company, provides well cementing services as discussed above in Note 4. At December 31, 2015 and 2014 , the Company owed Stingray Cementing approximately $2.1 million and $0.8 million , respectively, related to these services. Approximately $7.0 million and $6.0 million of services provided by Stingray Cementing are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2015 and 2014 , respectively. +Stingray Energy, which is 50% owned by the Company, provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites as discussed above in Note 4. At December 31, 2015 and 2014 , the Company owed Stingray Energy approximately $2.2 million and $6.0 million , respectively, related to these services. Approximately $2.2 million and $1.3 million of services provided by Stingray Energy are included in lease operating expenses in the consolidated statements of operations for the year ended December 31, 2015 and 2014 , respectively. Approximately $16.0 million and $24.8 million of services provided by Stingray Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2015 and 2014 , respectively. +Panther Drilling Systems, LLC ("Panther") performs directional drilling services for the Company. In November 2014, Panther became a wholly-owned subsidiary of Mammoth. The Company owns a 30.5% limited partner interest in Mammoth as discussed above in Note 4. Approximately $7.6 million of services provided by Panther are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2014 . +F-33 +Table of Contents +Index to Financial Statements +Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain rights in a lease covering land in Wisconsin for mining and oil and natural gas fracture grade sand. Muskie was previously owned 25% by the Company until its contribution to Mammoth in November 2014, as discussed above in Note 4. As of the contribution date, the Company acquired a 30.5% limited partner interest in Mammoth. No amounts were owed to Muskie as of the date of the contribution. No services provided by Muskie are included in oil and natural gas properties on the accompanying consolidated balance sheets at December 31, 2014 . +Redback Directional Services, LLC ("Redback") provides coil tubing and flow back services for the Company. In November 2014, Redback became a wholly-owned subsidiary of Mammoth. The Company owns a 30.5% limited partner interest in Mammoth as discussed above in Note 4. Approximately $1.0 million related to services performed by Redback are included in oil and natural gas properties on the accompanying consolidated balance sheets at 2014 . +In November 2014, the Company contributed its investment in Muskie, Stingray Pressure, Stingray Logistics and Bison to Mammoth in exchange for a 30.5% limited partner interest in Mammoth. Approximately $141.2 million and $11.1 million of services provided by Mammoth are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2015 and 2014 , respectively. At December 31, 2015 and 2014 , the Company owed Mammoth approximately $24.7 million and $28.4 million , respectively, related to these services. +15. +COMMITMENTS +Plugging and Abandonment Funds +In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of December 31, 2015 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2015 , the Company had plugged 463 wells at WCBB since it began its plugging program in 1997, which management believes fulfills its current minimum plugging obligation. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100% of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company will make a contribution each calendar year on behalf of each employee equal to at least 3% of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2015 , 2014 and 2013 , Gulfport incurred $1.4 million , $0.8 million , and $0.6 million , respectively, in contributions expense related to this plan. +Employment Agreements +Effective November 1, 2012 , the Company entered into employment agreements with Messrs. James Palm, Mike Liddell, and Michael G. Moore, each with an initial three -year term expiring on November 1, 2015 subjected to automatic one -year extensions unless terminated by either party to the agreement at least 90 days prior to the end of the then current term. These agreements provided for minimum salary and bonus levels which were subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +Effective February 15, 2014 , Gulfport's former Chief Executive Officer, Mr. Palm, retired and his employment agreement with the Company terminated. The Company entered into a separation agreement with Mr. Palm, under which agreement certain benefits are provided to, and obligations imposed on, Mr. Palm. As of December 31, 2015 , the minimum commitment under Mr. Palm's separation agreement was approximately $0.4 million . +Mr. Liddell resigned as the Company's Chairman effective June 2013 at which date his employment agreement with Gulfport terminated. At that same time, the Company entered into a consulting agreement with Mr. Liddell. Mr. Liddell terminated his consulting agreement with the Company effective January 1, 2015 . +On April 22, 2014 , the Board of Directors appointed Mr. Moore as Chief Executive Officer of the Company. The Company and Mr. Moore entered into an amended and restated employment agreement. The agreement has a three -year term +F-34 +Table of Contents +Index to Financial Statements +commencing effective April 22, 2014 . This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. Effective as of April 29, 2015 , the Company amended and restated its existing employment agreement with Mr. Moore. The employment agreement, as amended and restated as of April 29, 2015 , reflects the decision of the compensation committee of the Company’s board of directors to increase Mr. Moore’s annual base salary to $460,000 for 2015 and the determination by the compensation committee to continue to increase Mr. Moore’s annual base salary during 2016 and 2017 so as to achieve alignment between the 25th and 50th percentile of the Company’s peer group disclosed in the Company’s annual proxy statement. The amended and restated employment agreement also eliminated Mr. Moore’s right to receive a fixed annual grant of 40,000 shares of restricted stock. Instead, consistent with the recommendation of the Company’s compensation consultant and approved by the compensation committee, the amended and restated employment agreement provided that Mr. Moore is entitled to receive an award of restricted stock equal to 500% of his annual base salary on the same vesting schedule as previously provided in his employment agreement with respect to his equity awards. +On March 13, 2015 , the Company entered into an employment agreement with Ross Kirtley, the Company's Chief Operating Officer. The agreement has a two -year term commencing effective April 22, 2014 . This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +On March 13, 2015 , the Company entered into an employment agreement with Aaron Gaydosik, the Company's Chief Financial Officer. The agreement has a three -year term commencing effective August 11, 2014 . This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +The aggregated minimum commitment for future salary at December 31, 2015 under the above listed employment agreements was approximately $1.2 million . +Firm Transportation Commitments +The Company had approximately 1,452,000 MMBtu per day of firm sales contracted with third parties. The table below presents these commitments at December 31, 2015 as follows: +(MMBtu per day) +2016 +476,000 +2017 +349,000 +2018 +216,000 +2019 +197,000 +2020 +152,000 +Thereafter +62,000 +Total +1,452,000 +Operating Leases +The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at December 31, 2015 are as follows: +(In thousands) +2016 +$ +800 +2017 +583 +2018 +54 +Total +1,437 +F-35 +Table of Contents +Index to Financial Statements +Presented below is rent expense for the years ended December 31, 2015 , 2014 and 2013 , respectively. +For the years ended December 31, +2015 +2014 +2013 +(In thousands) +Minimum rentals +$ +759 +$ +733 +$ +258 +Less: Sublease rentals +8 +15 +45 +$ +751 +$ +718 +$ +213 +Other Commitments +Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie that expires on September 30, 2018. Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at a fixed price per ton, subject to certain adjustments, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. As of December 31, 2015 , the Company had accrued $0.3 million related to non-utilization fees. +Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure that expires on September 30, 2018. Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. +Future minimum commitments under these agreements at December 31, 2015 are as follows: +(In thousands) +2016 +52,440 +2017 +52,440 +2018 +39,330 +Total +$ +144,210 +16. CONTINGENCIES +Due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations. +Insurance Proceeds +In September 2014, the Company settled its legacy surface contamination lawsuit with Reeds et al. Under the terms of the settlement agreement, Gulfport paid $18.0 million , which is included in litigation settlement in the accompanying consolidated statements of operations for the year ended December 31, 2014. In October 2015, the Company was reimbursed $10.0 million , net of related legal fees, by its insurance provider which is included in insurance proceeds in the accompanying consolidated statements of operations for the year ended December 31, 2015. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Louisiana with sales to refineries, re-sellers such as pipeline companies, and local distribution companies. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +F-36 +Table of Contents +Index to Financial Statements +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 . At December 31, 2015 , Gulfport held cash in excess of insured limits in these banks totaling $112.0 million . +During the year ended December 31, 2015 , Gulfport sold approximately 90% and 10% of its oil production to Shell Trading Company (“Shell”) and Marathon Oil Corporation, respectively, 76% and 24% of its natural gas liquids production to MarkWest Utica EMG ("Mark West") and Antero Resources, respectively, and 79% , 14% and 5% of its natural gas production to BP Energy Company ("BP"), DTE Energy Trading Inc. and Hess, respectively. During the year ended December 31, 2014 , Gulfport sold approximately 99% of its oil production to Shell, 100% of its natural gas liquids production to MarkWest and 40% , 32% and 19% of its natural gas production to BP, DTE Energy Trading Inc. and Hess, respectively. During the year ended December 31, 2013 , Gulfport sold approximately 99% of its oil production to Shell, 100% of its natural gas liquids production to MarkWest and 32% , 31% , and 17% of its natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply Inc., respectively. +17. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +On October 17, 2012 , December 21, 2012 and August 18, 2014 , the Company issued an aggregate of $600.0 million of its 7.75% Senior Notes. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act. The October Notes, December Notes and the August Notes are collectively referred to as the "2020 Notes". The 2020 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The 2020 Notes are not guaranteed by Grizzly Holdings, Inc., (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. +In connection with the issuance of the 2020 Notes, the Company and the subsidiary guarantors entered into registration rights agreements with the initial purchasers, pursuant to which the Company and the subsidiary guarantors agreed to file a registration statement with respect to an offer to exchange the 2020 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the October Notes and December Notes was completed in October 2013 and the exchange offer for the August Notes was completed in March 2015 . +On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of its 6.625% Senior Notes due 2023 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the April Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the April Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the April Notes was completed on October 13, 2015 . +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor. +F-37 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +112,494 +$ +479 +$ +1 +$ +— +$ +112,974 +Accounts receivable - oil and gas +72,241 +54 +— +(423 +) +71,872 +Accounts receivable - related parties +16 +— +— +— +16 +Accounts receivable - intercompany +326,475 +60 +— +(326,535 +) +— +Prepaid expenses and other current assets +3,905 +— +— +— +3,905 +Short-term derivative instruments +142,794 +— +— +— +142,794 +Total current assets +657,925 +593 +1 +(326,958 +) +331,561 +Property and equipment: +Oil and natural gas properties, full-cost accounting +5,108,258 +316,813 +— +(729 +) +5,424,342 +Other property and equipment +33,128 +43 +— +— +33,171 +Accumulated depletion, depreciation, amortization and impairment +(2,829,081 +) +(29 +) +— +— +(2,829,110 +) +Property and equipment, net +2,312,305 +316,827 +— +(729 +) +2,628,403 +Other assets: +Equity investments and investments in subsidiaries +231,892 +— +50,644 +(40,143 +) +242,393 +Long-term derivative instruments +51,088 +— +— +— +51,088 +Deferred tax asset +74,925 +— +— +— +74,925 +Other assets +6,364 +— +— +— +6,364 +Total other assets +364,269 +— +50,644 +(40,143 +) +374,770 +Total assets +$ +3,334,499 +$ +317,420 +$ +50,645 +$ +(367,830 +) +$ +3,334,734 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +264,893 +$ +527 +$ +— +$ +(292 +) +$ +265,128 +Accounts payable - intercompany +— +326,541 +124 +(326,665 +) +— +Asset retirement obligation - current +75 +— +— +— +75 +Short-term derivative instruments +437 +— +— +— +437 +Deferred tax liability +50,697 +— +— +— +50,697 +Current maturities of long-term debt +179 +— +— +— +179 +Total current liabilities +316,281 +327,068 +124 +(326,957 +) +316,516 +Long-term derivative instrument +6,935 +— +— +— +6,935 +Asset retirement obligation - long-term +26,362 +— +— +— +26,362 +Long-term debt, net of current maturities +946,084 +— +— +— +946,084 +Total liabilities +1,295,662 +327,068 +124 +(326,957 +) +1,295,897 +Stockholders' equity: +Common stock +1,082 +— +— +— +1,082 +Paid-in capital +2,824,303 +322 +241,553 +(241,875 +) +2,824,303 +Accumulated other comprehensive (loss) income +(55,177 +) +— +(55,177 +) +55,177 +(55,177 +) +Retained (deficit) earnings +(731,371 +) +(9,970 +) +(135,855 +) +145,825 +(731,371 +) +Total stockholders' equity +2,038,837 +(9,648 +) +50,521 +(40,873 +) +2,038,837 +Total liabilities and stockholders' equity +$ +3,334,499 +$ +317,420 +$ +50,645 +$ +(367,830 +) +$ +3,334,734 +F-38 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets +Cash and cash equivalents +$ +141,535 +$ +804 +$ +1 +$ +— +$ +142,340 +Accounts receivable - oil and gas +103,762 +96 +— +— +103,858 +Accounts receivable - related parties +46 +— +— +— +46 +Accounts receivable - intercompany +45,222 +27 +— +(45,249 +) +— +Prepaid expenses and other current assets +3,714 +— +— +— +3,714 +Short-term derivative instruments +78,391 +— +— +— +78,391 +Total current assets +372,670 +927 +1 +(45,249 +) +328,349 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +3,887,874 +35,990 +— +(710 +) +3,923,154 +Other property and equipment +18,301 +43 +— +— +18,344 +Accumulated depletion, depreciation, amortization and impairment +(1,050,855 +) +(24 +) +— +— +(1,050,879 +) +Property and equipment, net +2,855,320 +36,009 +— +(710 +) +2,890,619 +Other assets: +Equity investments and investments in subsidiaries +360,238 +— +180,217 +(170,874 +) +369,581 +Long-term derivative instruments +24,448 +— +— +— +24,448 +Other assets +6,476 +— +— +— +6,476 +Total other assets +391,162 +— +180,217 +(170,874 +) +400,505 +Total assets +$ +3,619,152 +$ +36,936 +$ +180,218 +$ +(216,833 +) +$ +3,619,473 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +371,089 +$ +321 +$ +— +$ +— +$ +371,410 +Accounts payable - intercompany +— +45,143 +106 +(45,249 +) +— +Asset retirement obligation - current +75 +— +— +— +75 +Deferred tax liability +27,070 +— +— +— +27,070 +Current maturities of long-term debt +168 +— +— +— +168 +Total current liabilities +398,402 +45,464 +106 +(45,249 +) +398,723 +Asset retirement obligation - long-term +17,863 +— +— +— +17,863 +Deferred tax liability +203,195 +— +— +— +203,195 +Long-term debt, net of current maturities +703,396 +— +— +— +703,396 +Total liabilities +1,322,856 +45,464 +106 +(45,249 +) +1,323,177 +Stockholders' equity: +Common stock +856 +— +— +— +856 +Paid-in capital +1,828,602 +322 +227,079 +(227,401 +) +1,828,602 +Accumulated other comprehensive (loss) income +(26,675 +) +— +(26,675 +) +26,675 +(26,675 +) +Retained earnings (deficit) +493,513 +(8,850 +) +(20,292 +) +29,142 +493,513 +Total stockholders' equity +2,296,296 +(8,528 +) +180,112 +(171,584 +) +2,296,296 +Total liabilities and stockholders' equity +$ +3,619,152 +$ +36,936 +$ +180,218 +$ +(216,833 +) +$ +3,619,473 +F-39 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +709,525 +$ +1,468 +$ +— +$ +(1,518 +) +$ +709,475 +Costs and expenses: +Lease operating expenses +68,632 +843 +— +— +69,475 +Production taxes +14,618 +122 +— +— +14,740 +Midstream gathering and processing +138,526 +64 +— +— +138,590 +Depreciation, depletion and amortization +337,689 +5 +— +— +337,694 +Impairment of oil and gas properties +1,440,418 +— +— +— +1,440,418 +General and administrative +41,892 +55 +20 +— +41,967 +Accretion expense +820 +— +— +— +820 +2,042,595 +1,089 +20 +— +2,043,704 +(LOSS) INCOME FROM OPERATIONS +(1,333,070 +) +379 +(20 +) +(1,518 +) +(1,334,229 +) +OTHER (INCOME) EXPENSE: +Interest expense +51,221 +— +— +— +51,221 +Interest income +(643 +) +— +— +— +(643 +) +Insurance proceeds +(10,015 +) +— +— +— +(10,015 +) +Loss (income) from equity method investments and investments in subsidiaries +107,252 +— +115,544 +(116,703 +) +106,093 +147,815 +— +115,544 +(116,703 +) +146,656 +(LOSS) INCOME BEFORE INCOME TAXES +(1,480,885 +) +379 +(115,564 +) +115,185 +(1,480,885 +) +INCOME TAX BENEFIT +(256,001 +) +— +— +— +(256,001 +) +NET (LOSS) INCOME +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +F-40 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +669,067 +$ +2,199 +$ +— +$ +— +$ +671,266 +Costs and expenses: +Lease operating expenses +51,238 +953 +— +— +52,191 +Production taxes +23,803 +203 +— +— +24,006 +Midstream gathering and processing +64,402 +65 +— +— +64,467 +Depreciation, depletion and amortization +265,428 +3 +— +— +265,431 +General and administrative +37,846 +446 +(2 +) +— +38,290 +Accretion expense +761 +— +— +— +761 +Gain on sale of assets +(11 +) +— +— +— +(11 +) +443,467 +1,670 +(2 +) +— +445,135 +INCOME FROM OPERATIONS +225,600 +529 +2 +— +226,131 +OTHER (INCOME) EXPENSE: +Interest expense +23,986 +— +— +— +23,986 +Interest income +(195 +) +— +— +— +(195 +) +Litigation settlement +25,500 +— +— +— +25,500 +Gain on contribution of investments +(84,470 +) +— +— +— +(84,470 +) +(Income) loss from equity method investments and investments in subsidiaries +(139,965 +) +— +13,159 +(12,628 +) +(139,434 +) +(175,144 +) +— +13,159 +(12,628 +) +(174,613 +) +INCOME (LOSS) BEFORE INCOME TAXES +400,744 +529 +(13,157 +) +12,628 +400,744 +INCOME TAX EXPENSE +153,341 +— +— +— +153,341 +NET INCOME (LOSS) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +F-41 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +261,809 +$ +1,517 +$ +— +$ +(573 +) +$ +262,753 +Costs and expenses: +Lease operating expenses +25,971 +732 +— +— +26,703 +Production taxes +26,848 +85 +— +— +26,933 +Midstream gathering and processing +10,999 +31 +— +— +11,030 +Depreciation, depletion and amortization +118,878 +2 +— +— +118,880 +General and administrative +22,359 +159 +1 +— +22,519 +Accretion expense +717 +— +— +— +717 +Loss on sale of assets +508 +— +— +— +508 +206,280 +1,009 +1 +— +207,290 +INCOME (LOSS) FROM OPERATIONS +55,529 +508 +(1 +) +(573 +) +55,463 +OTHER (INCOME) EXPENSE: +Interest expense +17,490 +— +— +— +17,490 +Interest income +(297 +) +— +— +— +(297 +) +(Income) loss from equity method investments and investments in subsidiaries +(212,992 +) +— +2,999 +(3,065 +) +(213,058 +) +(195,799 +) +— +2,999 +(3,065 +) +(195,865 +) +INCOME (LOSS) BEFORE INCOME TAXES +251,328 +508 +(3,000 +) +2,492 +251,328 +INCOME TAX EXPENSE +98,136 +— +— +— +98,136 +NET INCOME (LOSS) +$ +153,192 +$ +508 +$ +(3,000 +) +$ +2,492 +$ +153,192 +F-42 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +(Amounts in thousands) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +Foreign currency translation adjustment +(28,502 +) +— +(28,502 +) +28,502 +(28,502 +) +Other comprehensive (loss) income +(28,502 +) +— +(28,502 +) +28,502 +(28,502 +) +Comprehensive (loss) income +$ +(1,253,386 +) +$ +379 +$ +(144,066 +) +$ +143,687 +$ +(1,253,386 +) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +Foreign currency translation adjustment +(16,894 +) +— +(16,894 +) +16,894 +(16,894 +) +Other comprehensive (loss) income +(16,894 +) +— +(16,894 +) +16,894 +(16,894 +) +Comprehensive income (loss) +$ +230,509 +$ +529 +$ +(30,051 +) +$ +29,522 +$ +230,509 +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +153,192 +$ +508 +$ +(3,000 +) +$ +2,492 +$ +153,192 +Foreign currency translation adjustment +(12,223 +) +— +(12,223 +) +12,223 +(12,223 +) +Change in fair value of derivative instruments, net of taxes +(4,419 +) +— +— +— +(4,419 +) +Reclassification of settled contracts, net of taxes +10,290 +— +— +— +10,290 +Other comprehensive (loss) income +(6,352 +) +— +(12,223 +) +12,223 +(6,352 +) +Comprehensive income (loss) +$ +146,840 +$ +508 +$ +(15,223 +) +$ +14,715 +$ +146,840 +F-43 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +344,018 +$ +(21,839 +) +$ +(2 +) +$ +2 +$ +322,179 +Net cash (used in) provided by investing activities +(1,595,767 +) +21,514 +(14,472 +) +14,472 +(1,574,253 +) +Net cash provided by (used in) financing activities +1,222,708 +— +14,474 +(14,474 +) +1,222,708 +Net decrease in cash and cash equivalents +(29,041 +) +(325 +) +— +— +(29,366 +) +Cash and cash equivalents at beginning of period +141,535 +804 +1 +— +142,340 +Cash and cash equivalents at end of period +$ +112,494 +$ +479 +$ +1 +$ +— +$ +112,974 +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +388,177 +$ +21,698 +$ +(2 +) +$ +— +$ +409,873 +Net cash (used in) provided by investing activities +(1,108,241 +) +(28,419 +) +(18,799 +) +18,802 +(1,136,657 +) +Net cash provided by (used in) financing activities +410,168 +— +18,802 +(18,802 +) +410,168 +Net (decrease) increase in cash and cash equivalents +(309,896 +) +(6,721 +) +1 +— +(316,616 +) +Cash and cash equivalents at beginning of period +451,431 +7,525 +— +— +458,956 +Cash and cash equivalents at end of period +$ +141,535 +$ +804 +$ +1 +$ +— +$ +142,340 +Year Ended December 31, 2013 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +182,961 +$ +8,104 +$ +— +$ +— +$ +191,065 +Net cash (used in) provided by investing activities +(661,886 +) +(2,374 +) +(33,929 +) +33,929 +(664,260 +) +Net cash provided by (used in) financing activities +765,063 +— +33,929 +(33,929 +) +765,063 +Net increase in cash and cash equivalents +286,138 +5,730 +— +— +291,868 +Cash and cash equivalents at beginning of period +165,293 +1,795 +— +— +167,088 +Cash and cash equivalents at end of period +$ +451,431 +$ +7,525 +$ +— +$ +— +$ +458,956 +F-44 +Table of Contents +Index to Financial Statements +18. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +As discussed above in Note 4, the Company did not own any of Diamondback's common stock at December 31, 2015 or December 31, 2014 . However, at December 31, 2013 , the Company owned a 7.2% equity interest in Diamondback, which interest is shown below. The Company also owns a 24.9999% interest in Grizzly, which interest is shown below. Grizzly achieved first production in 2014, therefore, interest in Grizzly is shown only for 2014 and 2015. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2015 +2014 +(In thousands) +Proven properties +$ +3,606,641 +$ +2,457,616 +Unproven properties +1,817,701 +1,465,538 +5,424,342 +3,923,154 +Accumulated depreciation, depletion, amortization and impairment reserve +(2,820,113 +) +(1,044,273 +) +Net capitalized costs +$ +2,604,229 +$ +2,878,881 +Equity investment in Grizzly Oil Sands ULC +Proven properties +$ +81,473 +$ +96,859 +Unproven properties +82,388 +103,160 +163,861 +200,019 +Accumulated depreciation, depletion, amortization and impairment reserve +(1,531 +) +(1,248 +) +Net capitalized costs +$ +162,330 +$ +198,771 +F-45 +Table of Contents +Index to Financial Statements +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2015 +2014 +2013 +(In thousands) +Acquisition +$ +810,755 +$ +440,288 +$ +338,153 +Development of proved undeveloped properties +642,811 +864,511 +408,121 +Exploratory +— +2,249 +26,174 +Recompletions +13,894 +45,658 +44,633 +Capitalized asset retirement obligation +8,800 +2,095 +3,556 +Total +$ +1,476,260 +$ +1,354,801 +$ +820,637 +Equity investment in Diamondback Energy, Inc. +Acquisition +$ +— +$ +— +$ +44,534 +Development of proved undeveloped properties +— +— +6,369 +Exploratory +— +— +17,491 +Capitalized asset retirement obligation +— +— +50 +Total +$ +— +$ +— +$ +68,444 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +396 +$ +1,230 +$ +— +Development of proved undeveloped properties +47 +7,107 +— +Exploratory +— +— +Capitalized asset retirement obligation +282 +1,055 +— +Total +$ +725 +$ +9,392 +$ +— +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +F-46 +Table of Contents +Index to Financial Statements +2015 +2014 +2013 +(In thousands) +Revenues +$ +708,990 +$ +670,762 +$ +262,225 +Production costs +(222,805 +) +(140,664 +) +(64,666 +) +Depletion +(335,288 +) +(263,946 +) +(118,118 +) +Impairment +(1,440,418 +) +— +— +— +(1,289,521 +) +266,152 +79,441 +Income tax (benefit) expense +Current +— +— +— +Deferred +(220,201 +) +96,061 +49,447 +(220,201 +) +96,061 +49,447 +Results of operations from producing activities +$ +(1,069,320 +) +$ +170,091 +$ +29,994 +Depletion per Mcf of gas equivalent (Mcfe) +$ +1.68 +$ +3.01 +$ +4.78 +Results of Operations from equity method investment in Diamondback Energy, Inc. +Revenues +$ +— +$ +— +$ +14,976 +Production costs +— +— +(2,518 +) +Depletion +— +— +(4,754 +) +— +— +7,704 +Income tax expense +— +— +2,286 +Results of operations from producing activities +$ +— +$ +— +$ +5,418 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +1,436 +$ +5,449 +$ +— +Production costs +(1,549 +) +(10,113 +) +— +Depletion +(625 +) +(1,195 +) +— +(738 +) +(5,859 +) +— +Income tax expense +— +— +— +Results of operations from producing activities +$ +(738 +) +$ +(5,859 +) +$ +— +Oil and Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2015 , 2014 and 2013 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2015 , 2014 and 2013 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (MBbls) and volumes for gas are stated in millions of cubic feet (MMcf). The prices used for the 2015 reserve report are $50.28 per barrel of oil, $2.59 per MMbtu and $13.21 per barrel for NGLs, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2014 and 2013 for reserve report purposes are $94.99 per barrel, $4.35 per MMbtu and $44.84 per barrel for NGLs and $96.78 per barrel, $3.67 per MMbtu and $41.23 per barrel for NGLs, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +F-47 +Table of Contents +Index to Financial Statements +2015 +2014 +2013 +Oil +Gas +NGL +Oil +Gas +NGL +Oil +Gas +NGL +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +Proved Reserves +Beginning of the period +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +8,106 +33,771 +145 +Purchases in oil and gas reserves in place +— +371,663 +— +173 +8,863 +353 +— +— +— +Extensions and discoveries +2,413 +997,057 +5,486 +4,975 +629,151 +22,594 +2,765 +123,597 +5,850 +Revisions of prior reserve estimates +(2,553 +) +(371,430 +) +(9,594 +) +(1,313 +) +(6,136 +) +(304 +) +(208 +) +(2,031 +) +— +Current production +(2,899 +) +(156,151 +) +(4,424 +) +(2,684 +) +(59,318 +) +(2,050 +) +(2,317 +) +(8,891 +) +(320 +) +End of period +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +Proved developed reserves +6,120 +652,961 +12,910 +5,719 +345,166 +12,379 +5,609 +94,552 +3,527 +Proved undeveloped reserves +338 +907,184 +4,826 +3,778 +373,840 +13,889 +2,737 +51,894 +2,148 +Equity investment in Diamondback Energy, Inc. +Proved Reserves +Beginning of the period +— +— +— +— +— +— +5,606 +7,398 +1,766 +Change in ownership interest in Diamondback +— +— +— +— +— +— +(3,720 +) +(4,909 +) +(1,171 +) +Purchases in oil and gas reserves in place +— +— +— +— +— +— +528 +752 +120 +Extensions and discoveries +— +— +— +— +— +— +1,227 +1,741 +331 +Revisions of prior reserve estimates +— +— +— +— +— +— +(428 +) +(417 +) +(249 +) +Current production +— +— +— +— +— +— +(146 +) +(124 +) +(26 +) +End of period +— +— +— +— +— +— +3,067 +4,441 +771 +Proved developed reserves +— +— +— +— +— +— +1,425 +2,263 +358 +Proved undeveloped reserves +— +— +— +— +— +— +1,642 +2,178 +413 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +14,558 +— +— +13,637 +— +— +— +— +— +Purchases in oil and gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +(14,530 +) +— +— +990 +— +— +— +— +— +Current production +(28 +) +— +— +(69 +) +— +— +— +— +— +End of period +— +— +— +14,558 +— +— +— +— +— +Proved developed reserves +— +— +— +1,632 +— +— +— +— +— +Proved undeveloped reserves +— +— +— +12,926 +— +— +— +— +— +In 2015 , the Company experienced extensions and discoveries of 1,044.5 Bcfe of proved reserves attributable to the continued development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of +F-48 +Table of Contents +Index to Financial Statements +444,314 MMcfe in estimated proved reserves in 2015 primarily due to the exclusion of PUD locations in our Utica and Southern Louisiana fields that became uneconomic due to the continued decline in commodity prices. In 2015 , the Company also purchased 371,663 MMcfe of proved reserves as a result of acquisitions from Paloma and AEU discussed above in Note 2. In 2014, the Company experienced extensions and discoveries of 786,347 MMcfe of proved reserves attributable to the development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of 15,837 MMcfe in estimated proved reserves in 2014 primarily due to the exclusion of PUD locations in our Southern Louisiana and Utica fields that were not expected to be drilled within five years of initial booking. The Company also purchased 12,019 MMcfe of proved reserves as a result of its acquisition from Rhino discussed in Note 2. In 2013, the Company experienced extensions and discoveries of 166,832 MMcfe of proved reserves attributable to the development of the Company's Utica Shale acreage. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2015 , 2014 and 2013 using an unweighted average first-of-the-month price for the period January through December 31, 2015 , 2014 and 2013 . +F-49 +Table of Contents +Index to Financial Statements +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2015 +2014 +2013 +(In thousands) +Future cash flows +$ +3,043,450 +$ +4,667,678 +$ +1,657,708 +Future development and abandonment costs +(877,660 +) +(719,898 +) +(272,500 +) +Future production costs +(941,243 +) +(880,427 +) +(274,428 +) +Future production taxes +(58,169 +) +(71,229 +) +(78,647 +) +Future income taxes +(2,648 +) +(693,154 +) +(172,691 +) +Future net cash flows +1,163,730 +2,302,970 +859,442 +10% discount to reflect timing of cash flows +(399,399 +) +(875,803 +) +(280,976 +) +Standardized measure of discounted future net cash flows +$ +764,331 +$ +1,427,167 +$ +578,466 +Equity investment in Diamondback Energy, Inc. Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +— +$ +331,505 +Future development and abandonment costs +— +— +(37,229 +) +Future production costs +— +— +(58,096 +) +Future production taxes +— +— +(22,925 +) +Future income taxes +— +— +(48,547 +) +Future net cash flows +— +— +164,708 +10% discount to reflect timing of cash flows +— +— +(94,462 +) +Standardized measure of discounted future net cash flows +$ +— +$ +— +$ +70,246 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +754,720 +$ +— +Future development and abandonment costs +— +(205,242 +) +— +Future production costs +— +(291,988 +) +— +Future production taxes +— +— +— +Future income taxes +— +(11,250 +) +— +Future net cash flows +— +246,240 +— +10% discount to reflect timing of cash flows +(152,494 +) +— +Standardized measure of discounted future net cash flows +$ +— +$ +93,746 +$ +— +In order to develop its proved undeveloped reserves according to the drilling schedule used by the engineers in Gulfport’s reserve report, the Company will need to spend $170.3 million , $177.6 million and $158.4 million during years 2016 , 2017 and 2018 , respectively. +F-50 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2015 +2014 +2013 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +(486,185 +) +$ +(530,098 +) +$ +(197,559 +) +Net changes in prices, production costs, and development costs +(1,412,181 +) +97,716 +65,573 +Acquisition of oil and gas reserves in place +83,340 +14,266 +— +Extensions and discoveries +262,895 +790,533 +130,826 +Previously estimated development costs incurred during the period +117,540 +68,227 +43,478 +Revisions of previous quantity estimates, less related production costs +(98,162 +) +(37,801 +) +(3,591 +) +Accretion of discount +142,717 +57,847 +34,864 +Net changes in income taxes +412,240 +(295,226 +) +(30,239 +) +Change in production rates and other +314,960 +683,237 +186,473 +Total change in standardized measure of discounted future net cash flows +$ +(662,836 +) +$ +848,701 +$ +229,825 +Equity investment in Diamondback Energy, Inc. Changes in standardized measure of discounted cash flows +Change in ownership interest in Diamondback +$ +— +$ +— +$ +(52,145 +) +Sales and transfers of oil and gas produced, net of production costs +— +— +(12,524 +) +Net changes in prices, production costs, and development costs +— +— +3,312 +Acquisition of oil and gas reserves in place +— +— +21,968 +Extensions and discoveries +— +— +39,776 +Previously estimated development costs incurred during the period +— +— +5,517 +Revisions of previous quantity estimates, less related production costs +— +— +(9,143 +) +Accretion of discount +— +— +4,175 +Net changes in income taxes +— +— +(12,137 +) +Change in production rates and other +— +— +2,862 +Total change in standardized measure of discounted future net cash flows +$ +— +$ +— +$ +(8,339 +) +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +114 +$ +4,664 +$ +— +Net changes in prices, production costs, and development costs +— +(76,518 +) +— +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +— +7,107 +— +Previously estimated development costs incurred during the period +47 +— +— +Revisions of previous quantity estimates, less related production costs +(103,282 +) +10,659 +— +Accretion of discount +9,375 +14,946 +— +Net changes in income taxes +— +9,162 +— +Change in production rates and other +— +(25,738 +) +— +Total change in standardized measure of discounted future net cash flows +$ +(93,746 +) +$ +(55,718 +) +$ +— +19. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +F-51 +Table of Contents +Index to Financial Statements +The following table summarizes quarterly financial data for the years ended December 31, 2015 and 2014 : +2015 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +176,317 +$ +112,270 +$ +230,569 +$ +190,319 +Income (loss) from operations +28,773 +(21,644 +) +(529,076 +) +(812,282 +) +Income tax expense (benefit) +14,479 +(17,214 +) +(216,603 +) +(36,663 +) +Net income (loss) +25,519 +(31,325 +) +(388,209 +) +(830,869 +) +Income (loss) per share: +Basic +$ +0.30 +$ +(0.32 +) +$ +(3.59 +) +$ +(7.67 +) +Diluted +$ +0.30 +$ +(0.32 +) +$ +(3.59 +) +$ +(7.67 +) +2014 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +118,029 +$ +114,736 +$ +170,804 +$ +267,697 +Income from operations +25,109 +18,110 +53,454 +129,458 +Income tax expense +49,247 +31,461 +4,876 +67,757 +Net income +82,558 +47,852 +6,920 +110,073 +Income per share: +Basic +$ +0.97 +$ +0.56 +$ +0.08 +$ +1.29 +Diluted +$ +0.96 +$ +0.56 +$ +0.08 +$ +1.28 +20. SUBSEQUENT EVENTS +Derivatives +In January of 2016, the Company entered into fixed price swaps for the period of February 2016 through March 2016, for 45,000 MMBtu of natural gas per day at a weighted average price of $2.64 per MMBtu. For the period from April 2016 through December 2017, the Company entered into fixed price swaps for 65,000 MMBtu of natural gas per day at a weighted average price of $2.64 per MMBtu. Additionally, the Company restructured several existing natural gas swaps and call options. All of the Company’s sold call options for 2016 were terminated or moved to 2017. No cash consideration was exchanged as a result of the restructuring transactions. The Company's fixed price swap contracts are tied to the commodity prices on NYMEX. The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas. +Amendment to Master Services Agreement +On February 18, 2016, to be effective as of January 1, 2016, the Company amended its Master Services Agreement with Stingray Pressure, dated December 3, 2012. The amendment adjusts the amount of service fees payable for the period from January 1, 2016 through September 30, 2016. +Joint Venture Agreement +In February 2016, the Company entered into a joint venture with Rice Midstream Holdings LLC (“Rice”), a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio (the “dedicated areas”). The Company owns a 25% interest in the joint venture and Rice acts as operator and owns the remaining 75% interest in the joint venture. Construction of the gathering assets, which is underway, is expected to provide connectivity of the Company’s dry gas gathering systems and interchangeability of natural gas across its firm portfolio. +The joint venture has completed the first phase of the projects: a lateral that connects two existing dry gas gathering systems on which the Company currently flows the majority of its dry gas volumes. The lateral has been commissioned and +F-52 +Table of Contents +Index to Financial Statements +first flow commenced on February 1, 2016. In addition, the Company and Rice have agreed to negotiate in good faith to expand the joint venture to provide water services to the Company within the dedicated areas. The Company currently anticipates that it will make $30.0 million to $35.0 million in cash contributions to the joint venture in 2016. +Revolving Credit Facility +The Company chose to complete its spring borrowing base redetermination under the Company’s revolving credit facility ahead of schedule and the bank syndicate affirmed and maintained the existing $700.0 million borrowing base. +F-53 +Table of Contents +Index to Financial Statements +ITEM 6. +EXHIBITS +Exhibit +Number +Description +2.1 +Contribution Agreement, dated May 7, 2012, by and between the Company and Diamondback Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 8, 2012). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of October 17, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (including the form of Gulfport Energy Corporation's 7.750% Senior Note Due November 1, 2020) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 23, 2012). +4.3 +First Supplemental Indenture, dated December 21, 2012, among Gulfport Energy Corporation, subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 26, 2012). +4.4 +Second Supplemental Indenture, dated August 18, 2014, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on August 19, 2014). +4.5 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +4.6 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015). +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +E-1 +Table of Contents +Index to Financial Statements +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Amended and Restated Employment Agreement, dated as of April 29, 2015, by and between the Company and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 7, 2015). +10.8+ +Employment Agreement, effective as of August 11, 2014, by and between the Company and Aaron Gaydosik (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on March 19, 2015). +10.9+ +Employment Agreement, effective as of April 22, 2014, by and between the Company and Ross Kirtley (incorporated by reference to Exhibit 10.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on March 19, 2015). +10.10 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.11 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.12 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.13 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.14 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +10.15 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +10.16# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.17# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.18# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.19*## +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.20+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +E-2 +Table of Contents +Index to Financial Statements +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the SEC. +E-3 \ No newline at end of file diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/filing_metadata.csv b/raw/filings/0000874499/2015/0001628280-16-011417/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..bab04f1ac808f20e959d1815a028d557c203e618 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2016-02-19,2015-12-31,2016-02-19T18:16:31.000Z,0001628280-16-011417,gpor-12312015x10k.htm,10-K,21304302,1,0,https://www.sec.gov/Archives/edgar/data/874499/000162828016011417/gpor-12312015x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828016011417/,2015,2015,1 diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/item1.txt b/raw/filings/0000874499/2015/0001628280-16-011417/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b8f964dfc0e0c4020882381ae45a58b26df325a5 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/item1.txt @@ -0,0 +1,475 @@ +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In addition, we have an interest in producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an interest in an entity that operates in the Phu Horm gas field in Thailand. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 10, 2016 , we held leasehold interests in approximately 244,000 gross (237,000 net) acres in the Utica Shale primarily in Eastern Ohio, including approximately 24,000 net acres acquired in our purchase of Paloma Partners III, LLC, or Paloma, and approximately 35,000 net acres acquired from American Energy-Utica, LLC (now known as Ascent Resources Utica, LLC), or AEU, in each case during the second quarter of 2015. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2015 , had spud 219 gross wells (including wells from our AEU acquisition), 165 of which were completed and were producing. In 2015 , we spud 49 gross (38.4 net) wells, of which ten were completed as producing wells, 36 were in various stages of completion and, as of December 31, 2015 , three were still being drilled. We commenced sales from 55 gross wells (50.2 net wells) in the Utica Shale during 2015 . During 2016 (through February 10, 2016 ), we had spud four gross (2.2 net) wells. As of February 10, 2016 , one well was waiting on completion and three were still drilling. In addition, 25 gross (7.3 net) wells were drilled by other operators on our Utica Shale acreage during 2015 . +We currently intend to drill 29 to 32 gross (19 to 21 net) horizontal wells, and commence sales from 44 to 48 gross (28 to 30 net) horizontal wells on our Utica Shale acreage in 2016 for an estimated aggregate cost of $219.0 million to $247.0 million. We currently anticipate 17 to 19 gross (two to three net) horizontal wells will be drilled, and sales commenced from 30 to 34 gross (eight to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2016 for an estimated net cost to us of $90.0 million to $100.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2015 was approximately 57,381 net million cubic feet of natural gas equivalent, or MMcfe, or 623.7 MMcfe per day, of which 85% was from natural gas and 15% was from oil and natural gas liquids, or NGLs. During January 2016 , our average daily net production from the Utica Shale was approximately 586.9 MMcfe, of which 86% was from natural gas and 14% was from oil and NGLs. +In 2015 , at our WCBB field, we recompleted 35 gross and net wells and spud no new wells. In the fourth quarter of 2015 , production at WCBB was approximately 1,363 MMcfe, or an average of 14.8 MMcfe per day, of which 97% was from oil and 3% was from natural gas. During January 2016 , our average net daily production at WCBB was approximately 13.1 MMcfe, 100% of which was from oil. +In 2015 , at our East Hackberry field, we recompleted 37 gross and net wells and spud no new wells. In the fourth quarter of 2015 , net production at East Hackberry was approximately 315.8 MMcfe, or an average of 3.4 MMcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at East Hackberry was approximately 4.6 MMcfe, of which 96% was from oil and 4% was from natural gas. +In 2015 , at our West Hackberry field, we had no recompletions and spud no new wells. In the fourth quarter of 2015 , net production at West Hackberry was approximately 45.1 MMcfe, or an average of 489.9 Mcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at West Hackberry was approximately 685.5 Mcfe, of which 99% was from oil and 1% was from natural gas. +We currently estimate our 2016 activities in our Southern Louisiana fields to be approximately $26.0 million to $28.0 million in aggregate for maintenance capital activities. +2 +Table of Contents +Index to Financial Statements +As of December 31, 2015 , we held leasehold interests in approximately 5,000 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2015 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2015 , net production from our Niobrara Formation acreage was approximately 29.1 MMcfe, or an average of 315.9 Mcfe per day, 100% of which was from oil. During January 2016 , our average net daily production from our Niobrara Formation acreage was approximately 292.5 Mcfe, 100% of which was from oil. During 2016 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2015 , we held leasehold interests in approximately 864 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2015 , our net production from this acreage was approximately 94.3 MMcfe, or an average of 1.0 MMcfe per day, of which 90% was from oil and natural gas liquids and 10% was from natural gas. During January 2016 , our average daily net production from our Bakken Formation acreage was approximately 375.0 Mcfe, of which 82% was from oil and 18% was from natural gas. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2015 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see " Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see " Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see " Our Equity Investments–Other Investments " below. +As of December 31, 2015 , we had 1.7 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $765.8 million and associated standardized measure of discounted future net cash flows of approximately $764.3 million , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2015 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells (2) +Non-Productive +Wells +Developed +Acreage (3) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (4) +39.11/48.15 +306 +147.49 +3 +2.66 +36,549 +32,110 +1,558,677 +3,618 +17,736 +1,686,795 +West Cote Blanche Bay Field (5) +80.108/100 +98 +98 +202 +202 +5,668 +5,668 +894 +2,258 +— +14,442 +E. Hackberry Field (6) +79.91/100 +21 +21 +124 +124 +2,910 +2,910 +316 +309 +— +2,168 +W. Hackberry Field +80.00/100 +5 +5 +8 +8 +1,192 +1,192 +— +14 +— +88 +Niobrara Formation +38.94/46.77 +4 +2 +2 +1 +2,740 +1,370 +55 +117 +— +758 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +1,861 +163 +189 +141 +— +1,038 +Overrides/Royalty Non-operated +Various +541 +0.71 +— +— +— +— +14 +1 +— +23 +Total +993 +274.5 +339 +337.66 +50,920 +43,413 +1,560,145 +6,458 +17,736 +1,705,312 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +3 +Table of Contents +Index to Financial Statements +(2) +Includes two gross and net wells at WCBB that are producing intermittently. +(3) +Developed acres are acres spaced or assigned to productive wells. Approximately 17% of our acreage is developed acreage and has been held by production. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 141 gross (15.66 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2015 , we held leasehold interests in approximately 240,000 gross (234,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of January 2, 2016 , there were 1,126 producing horizontal wells, 403 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 12 horizontal wells that were being drilled and an additional 447 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +4 +Table of Contents +Index to Financial Statements +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2015 , had spud 219 gross wells (including wells from our AEU acquisition), 165 of which were completed and were producing. In 2015 , we spud 49 gross (38.4 net) wells, of which ten were completed as producing wells, 36 were in various stages of completion and, as of December 31, 2015 , three were still being drilled. We commenced sales from 55 gross wells (50.2 net wells) in the Utica Shale during 2015 . During 2016 (through February 10, 2016 ), we had spud four gross (2.2 net) wells of which one was waiting on completion and three were still drilling. In addition, 25 gross (7.3 net) wells were drilled by other operators on our Utica Shale acreage during 2015 . +We currently intend to drill 29 to 32 gross (19 to 21 net) horizontal wells, and commence sales from 44 to 48 gross (28 to 30 net) horizontal wells, on our Utica Shale acreage in 2016 for an estimated aggregate cost of $219.0 million to $247.0 million. We currently anticipate 17 to 19 gross (two to three net) horizontal wells will be drilled, and sales commenced from 30 to 34 gross (eight to nine net) horizontal wells, by other operators on our Utica Shale acreage during 2016 for an estimated net cost to us of $90.0 million to $100.0 million. As of February 10, 2016 , we had three operated horizontal rigs drilling in the play. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2015 was approximately 57,381 MMcfe, or 623.7 MMcfe per day, of which 85% was from natural gas and 15% was from oil and NGLs. During January 2016 , our average daily net production from the Utica Shale was approximately 586.9 MMcfe, of which 86% was from natural gas and 14% was from oil and NGLs. The slight decrease in January 2016 production was the result of our decision to temporarily curtail our production beginning in the fourth quarter of 2015. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2015 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2015 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2015 , estimated field cumulative gross production was 197.9 MMBO and 237.1 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2015 , 96 were producing, 202 were shut-in, two were producing intermittently, and six were being used as salt water disposal wells. The other 771 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2015 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +5 +Table of Contents +Index to Financial Statements +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2015 , at our WCBB field, we recompleted 35 gross and net wells and spud no new wells. As of February 10, 2016 , we had recompleted six gross and net wells during 2016 in our WCBB field. +Production Status +In the fourth quarter of 2015 , our net production at WCBB was approximately 1,363 MMcfe, or an average of 14.8 MMcfe per day, of which 97% was from oil and 3% was from natural gas. During January 2016 , our average net daily production at WCBB was approximately 13.1 MMcfe, 100% of which was from oil. The slight decrease in average net daily production in January 2016 was due to normal production declines. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 79.91% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2015 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. We licensed approximately 54 square miles of 3-D seismic data covering a portion of the area and have received a processed version of the seismic data. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2015 was over 4,425 MBO and 331.9 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2015 , 21 wells had daily production, 125 were shut-in and three had been converted to salt water disposal wells. The remaining 120 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +6 +Table of Contents +Index to Financial Statements +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, three natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2015 at East Hackberry, we recompleted 37 gross and net wells and spud no new wells. As of February 10, 2016 , we had recompleted two gross and net wells during 2016 in our East Hackberry field. +Production Status +In the fourth quarter of 2015 , our net production at East Hackberry was approximately 315.8 MMcfe, or an average of 3.4 MMcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at East Hackberry was approximately 4.6 MMcfe, of which 96% was from oil and 4% was from natural gas. The slight increase in production in January 2016 is a result of our 2016 recompletion activities. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.00% NRI) in 1,192 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2015 was 452 MBO and 140 Bcf of natural gas. As of December 31, 2015 , 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2015 , five of such wells were producing, eight were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2015 at West Hackberry, we had no recompletions and spud no new wells. We do not anticipate drilling any wells in our West Hackberry field during 2016. +Production Status +In the fourth quarter of 2015 , our net production at West Hackberry was approximately 45.1 MMcfe, or an average of 489.9 Mcfe per day, of which 94% was from oil and 6% was from natural gas. During January 2016 , our average net daily production at West Hackberry was approximately 685.5 Mcfe, of which 99% was from oil and 1% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +7 +Table of Contents +Index to Financial Statements +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2015 , we held leases for approximately 5,000 net acres. In 2015 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2015 , net production from our Niobrara Formation acreage was approximately 29.1 MMcfe, or an average of 315.9 Mcfe per day, 100% of which was from oil. During January 2016 , our average net daily production from our Niobrara Formation acreage was approximately 292.5 Mcfe, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2015 . We do not anticipate drilling any wells in the Niobrara Formation during 2016 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2015 , we held approximately 864 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +8 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2015 , our net production from this acreage was approximately 94.3 MMcfe, or an average of 1.0 MMcfe per day, of which 90% was from oil and natural gas liquids and 10% was from natural gas. During January 2016 , our average daily net production from our Bakken Formation acreage was approximately 375.0 Mcfe, of which 82% was from oil and 18% was from natural gas. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2015 . We do not anticipate drilling any wells in the Bakken Formation during 2016 . +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2015 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2015 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly at September 30, 2015 and December 31, 2015 for impairment, resulting in an aggregate other than temporary impairment write down of $101.6 million for the year ended December 31, 2015. If commodity prices continue to decline, further impairment of our investment in Grizzly may result in the future. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved by early 2016. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. In December 2015, Grizzly suspended the review of the Thickwood application by the AER. The Thickwood application will be resubmitted once the regulations have +9 +Table of Contents +Index to Financial Statements +been updated. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly has pursued a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 million cubic feet per day. For 2015, net gas production was approximately 90 MMcf per day and condensate production was 407 barrels per day. Hess Corporation, or Hess, operates the field with a 35% interest. Other interest owners include APICO (35% interest), PTT Exploration and Production Public Company Limited (20% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +We own a 17.9% ownership interest in Tatex Thailand III, LLC, or Tatex III. Tatex III owns a concession covering approximately 245,000 acres in Southeast Asia. In 2009, Tatex III completed a 3-D seismic survey on this concession. Between 2010 and 2013, three wells were drilled on this concession. Each of the wells lacked sufficient permeability to produce in commercial quantities. Tatex III allowed the concession to expire in January 2015. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, Stingray Cementing LLC, or Stingray Cementing, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owns a 28.4% equity interest in a gas processing plant in West Texas. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth originally intended to pursue the offering in 2015; however, Mammoth continues to evaluate market conditions and the commodity price environment which will impact the timing of the proposed offering. See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +In February 2016, we entered into a joint venture with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the joint venture and Rice acts as operator and owns the remaining 75% interest in the joint venture. Construction of the gathering assets, which is underway, is expected to provide connectivity of our dry gas gathering systems and interchangeability of natural gas across our firm portfolio. The joint venture has completed the first phase of the projects: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. The lateral has been commissioned and first flow commenced on February 1, 2016. In addition, we and Rice have agreed to negotiate in good faith to expand the joint venture to provide water services to us within the dedicated areas. +Competition +10 +Table of Contents +Index to Financial Statements +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. Our production from WCBB is being sold in accordance with the Shell posted price for West Texas/New Mexico Intermediate crude plus or minus Platt's trade month average P+ value, plus or minus the Platt's HLS/WTI differential less transportation charges. The majority of our Utica Shale oil is sold to Shell and Marathon Petroleum Corporation, or Marathon. The purchaser takes custody at the MarkWest Utica EMG, or MarkWest, operated condensate stabilizer located near Cadiz, Ohio. Our Utica Shale NGLs are currently purchased by MarkWest which remits to us a weighted average selling price of products sold to various markets. We have NAESBs in place with various purchasers for our Utica Shale natural gas production. The majority of our gas is sold to BP Energy Company, or BP. In 2015, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily trades. The majority of purchases are transacted at the tailgate of the plants or at central delivery points with available pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2015 , we sold approximately 90% and 10% of our oil production to Shell and Marathon Oil Corporation, respectively, 76% and 24% of our natural gas liquids production to MarkWest and Antero Resources, respectively and 79% , 14% and 5% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2014 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest and 40% , 32% and 19% of our natural gas production to BP, DTE Energy Trading, Inc. and Hess, respectively. During the year ended December 31, 2013 , we sold approximately 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest and 32% , 31% and 17% of our natural gas production to Sequent Energy Management, L.P., Hess and Interstate Gas Supply, Inc., respectively. +As of December 31, 2015, we had an average of approximately 476,000 MMBtu per day of firm sales contracted with third parties for 2016. We had an average of approximately 349,000 MMBtu per day, 216,000 MMBtu per day, 197,000 MMBtu per day, 152,000 MMBtu per day and 62,000 MMBtu per day contracted with third parties for 2017, 2018, 2019, 2020 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2015, we had entered into firm transportation contracts to deliver approximately 725,000 MMBtu to 775,000 MMBtu per day for 2016. For 2017, we had entered into firm transportation contracts to deliver approximately 775,000 MMBtu to 1,125,000 MMBtu per day. For 2018 through 2020, we had entered into firm transportation contracts to deliver approximately 1,125,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional contracts to be limited in 2016. Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +11 +Table of Contents +Index to Financial Statements +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities expected to begin in 2016 allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities expected to begin in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities expected to begin in 2017 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities expected to begin in late 2017 allowing additional access to Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +12 +Table of Contents +Index to Financial Statements +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or relate to our owned or operated facilities. Liability under such laws and regulations is strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally imposes liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +13 +Table of Contents +Index to Financial Statements +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. These laws and regulations also prohibit certain activity in wetlands unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on April 7, 2015, the EPA published a proposed rule establishing federal pre-treatment standards for wastewater discharged from onshore unconventional oil and gas extraction facilities to publicly owned treatment works, or POTW, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allowed the agency to proceed with the adoption and implementation of regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act, including rules that regulate emissions of GHGs from certain large stationary sources of emissions such as power plants or industrial facilities. In response to its endangerment finding, the EPA adopted two sets of rules regarding possible future regulation of GHG emissions under the Clean Air Act. The motor vehicle rule, which became effective in July 2010, purports to limit emissions of GHGs from motor vehicles. The EPA adopted the stationary source rule, or the tailoring rule, in May 2010, and it became effective in January 2011. The tailoring rule established new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On December 19, 2014, the EPA issued two memoranda providing initial guidance on GHG permitting requirements in response to +14 +Table of Contents +Index to Financial Statements +the Court’s decision in Utility Air Regulatory Group v. EPA . In its preliminary guidance, the EPA indicated that it will undertake a rulemaking action to rescind any PSD permits issued under the portions of the tailoring rule that were vacated by the Court. In the interim, the EPA issued a narrowly crafted “no action assurance” indicating it will exercise its enforcement discretion not to pursue enforcement of the terms and conditions relating to GHGs in an EPA-issued PSD permit, and for related terms and conditions in a Title V permit. On April 30, 2015, the EPA issued a final rule allowing permitting authorities to rescind PSD permits issued under the invalid regulations. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +The EPA has continued to adopt GHG regulations applicable to other industries, such as its August 2015 adoption of three separate, but related, actions to address carbon dioxide pollution from power plants, including final Carbon Pollution Standards for new, modified and reconstructed power plants, a final Clean Power Plan to cut carbon dioxide pollution from existing power plants, and a proposed federal plan to implement the Clean Power Plan emission guidelines. Upon publication of the Clean Power Plan on October 23, 2015, more than two dozen States as well as industry and labor groups challenged the Clean Power Plan in the D.C. Circuit Court of Appeals. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States joined the international community at the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement, if ratified, establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our business is not a party to this litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, as amended, or the ESA, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and prohibits taking of endangered species. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their +15 +Table of Contents +Index to Financial Statements +critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. The EPA, however, has in the past taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. Furthermore, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. +In addition, on May 9, 2014, the EPA issued an Advance Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. The public comment period ended on September 18, 2014. The EPA plans to develop a Notice of Proposed Rulemaking by December 2016, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on April 7, 2015, the EPA published a proposed rule establishing federal pre-treatment standards for wastewater discharged from onshore unconventional oil and gas extraction facilities to POTW. The EPA asserts that wastewater from such facilities can be generated in large quantities and can contain constituents that may disrupt POTW operations and/or be discharged, untreated, from the POTW to receiving waters. If adopted, the new pre-treatment rule would require unconventional oil and gas facilities to pre-treat wastewater before transferring it to a POTW. The public comment period ended on July 17, 2015, and the EPA is expected to publish a final rule by August 2016. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. For example, in September 2013 and December 2014, the EPA amended its rules to extend compliance deadlines and to clarify the NSP standards. Further, on July 31, 2015, the EPA finalized two updates to the NSP standards to address the definition of low-pressure wells and references to tanks that are connected to one another (referred to as connected in parallel). In addition, on September 18, 2015, the EPA published a suite of proposed rules to reduce methane and VOC emissions from oil and gas industry, including new +16 +Table of Contents +Index to Financial Statements +“downstream” requirements covering equipment in the natural gas transmission segment of the industry that was not regulated by the 2012 rules. The public comment period closed on December 4, 2015. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements with any certainty. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. The rule took effect on June 24, 2015, although it is the subject of several pending lawsuits filed by industry groups and at least four states, alleging that federal law does not give the BLM authority to regulate hydraulic fracturing. On September 30, 2015, the United States District Court for Wyoming issued a preliminary injunction preventing the BLM from implementing the rule nationwide. This order has been appealed to the Tenth Circuit Court of Appeals. Also, on January 22, 2016, the BLM announced a proposed rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The proposed rule would require operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule would also clarify when operators owe the government royalties for flared gas. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources. In June 2015, the EPA released its draft assessment report for peer review and public comment, finding that, while there are certain mechanisms by which hydraulic fracturing activities could potentially impact drinking water resources, there is no evidence available showing that those mechanisms have led to widespread, systemic impacts. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, in June 2012, Ohio’s Governor signed legislation mandating chemical disclosure for hydraulic fracturing fluids, pre-drilling testing of water samples within 1,500 feet of a proposed horizontal well, and increased well operator liability insurance requirements. In addition, in April 2014, Ohio’s Department of Natural Resources announced new permit conditions for drilling near faults or areas of past seismic activity. The Texas Railroad Commission, or RRC, and Louisiana Department of Natural Resources adopted rules and regulations requiring that well operators disclose the list of chemical ingredients subject to the requirements of federal OSHA, to state regulators and on a public internet website. Also, in May 2013, the RRC adopted new rules, which became effective in January 2014, governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Additionally, on October 28, 2014, the RRC adopted disposal well rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced water and hydraulic fracturing flowback fluid to conduct seismic activity searches utilizing the U.S. Geological Survey. These searches are intended to determine the potential of earthquakes within a circular area of 100 square miles around a proposed new disposal well. The disposal well rule amendments, which became effective in Texas on November 17, 2014, also clarify the RRC’s authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well is likely to contribute to seismic activity. RRC has used this authority to deny permits for waste disposal wells. Effective August 26, 2011, Montana adopted hydraulic fracturing well integrity and disclosure regulations under which well operators must demonstrate a suitable and safe mechanical configuration for the proposed stimulation treatment and provide information in the drilling permit application on the estimated volume and types of materials to be used in the proposed hydraulic fracturing activities. Upon completion of the well, well operators must provide the Montana Board of Oil and Gas Conservation with the volume and type of chemicals used, including the additive type, chemical ingredient names, and Chemical Abstracts Service, or CAS, number, subject to certain trade secret protections. On April 1, 2012, the North Dakota Industrial Commission enacted regulations requiring hydraulic fracturing well operators to disclose the hydraulic fluid composition, including the trade name, supplier, ingredients, CAS Number, and the maximum ingredient concentrations of all additives in the hydraulic fracturing fluid. Colorado enacted rules requiring similar disclosures on January 30, 2012. Also, in 2013 and 2014, Colorado approved +17 +Table of Contents +Index to Financial Statements +regulations that require well operators to test groundwater quality before and after drilling and to install emission controls to capture 95 percent of VOC and methane emissions. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation and sale for resale of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and oil and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +18 +Table of Contents +Index to Financial Statements +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +19 +Table of Contents +Index to Financial Statements +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of well pads. Under these new rules, operators must submit detailed horizontal well pad site plans certified by a professional engineer for review by the ODNR Division of Oil and Gas Resources Management prior to the construction of a well pad. These rules will result in increased construction costs for operators. It is expected that the ODNR will pursue further initiatives in 2016, including additional emergency response rules. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $21.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually each May. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +20 +Table of Contents +Index to Financial Statements +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2015 and 2014 were approximately $0.1 million and $0.2 million, respectively. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that serves as our corporate headquarters. Additionally, we lease approximately 26,900 square feet of office space in other buildings in Oklahoma City. A new corporate headquarters is currently under construction in Oklahoma City, Oklahoma. The building, currently scheduled to be completed in the fourth quarter of 2016, will have approximately 120,000 square feet of office space and will allow our employees to office in one location in Oklahoma City. We have received various offers to purchase or lease our existing headquarters building which we are evaluating. +We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We also lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We own an approximately 5,700 square foot office building in St. Clairsville, Ohio that serves as our Ohio headquarters. In addition, we lease approximately 4,275 square feet of office space in St. Clairsville, Ohio. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2015 , we had 230 employees. An unrelated third-party Louisiana well servicing company provides a majority of the field personnel needed to operate the WCBB and the Hackberry fields. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. \ No newline at end of file diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/item13.txt b/raw/filings/0000874499/2015/0001628280-16-011417/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2f04df11e3a34b80e43e7cb8a0c34418a99503 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). \ No newline at end of file diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/item9a.txt b/raw/filings/0000874499/2015/0001628280-16-011417/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5d159dc85655d0c99b934ffbf4d94e44608c661 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/item9a.txt @@ -0,0 +1,41 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Accounting Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, +72 +Table of Contents +Index to Financial Statements +summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2015 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Accounting Officer have concluded that, as of December 31, 2015 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2015 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2015 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2015 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Accounting Officer +73 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and subsidiaries (the “Company”) as of December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015 and our report dated February 19, 2016 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 19, 2016 +74 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/rp_note.txt b/raw/filings/0000874499/2015/0001628280-16-011417/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2015/0001628280-16-011417/rpt_disclosure.txt b/raw/filings/0000874499/2015/0001628280-16-011417/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..dcc7e5adf4de7d2b3f25d68aa496ed1d7bbeee93 --- /dev/null +++ b/raw/filings/0000874499/2015/0001628280-16-011417/rpt_disclosure.txt @@ -0,0 +1,83 @@ +and approves related party transactions. +• Appoints, determines compensation, evaluates and terminates our independent +auditors. +• Pre-approves audit and permissible non-audit services to be performed by the +independent auditors. +• Prepares the report required by the Securities and Exchange Commission, or +the SEC, for the inclusion in our annual proxy statement. +• Reviews and reassesses the adequacy of the audit committee charter on a +periodic basis. +• Inform our independent auditors of the audit committee’s understanding +of significant relationships and transactions with related parties and review and discuss with our independent auditors the auditors’ evaluation of our identification of, accounting for and disclosure of our relationships and transactions with +related parties, including any significant matters arising from the audit regarding our relationships and transactions with related parties. +Four (4) +8 +Table of Contents +Committee +Members +Principal Functions +Number of +Meetings in +2015 +Compensation +Scott E. Streller* +Craig Groeschel +David L. Houston +C. Doug Johnson +• Oversees and administers our executive compensation +policies, plans and practices and evaluates their impact on risk and risk management. +• Assists the board of directors in discharging its responsibilities relating +to the compensation of our executives, including our chief executive officer, and other key employees. +• Administers our equity-based compensation plans, including the grants of +stock options, restricted stock awards and other equity awards under such plans. +• Reviews, approves and administers our cash-based incentive bonus plans, +including the establishment of performance criteria, targets and awards under our 2014 Executive Annual Incentive Compensation Plan. +• Makes recommendations to the board with respect to incentive +compensation. +• Where appropriate or required, makes recommendations to our stockholders +with respect to incentive compensation and equity-based plans. +• Conducts annual performance evaluation of the committee. +• Reviews +disclosure related to executive compensation in our proxy statement and prepares an annual compensation committee report. +• Reviews and considers the stockholders’ advisory vote on executive +compensation and the frequency of holding such advisory vote. +• Reviews and reassesses the adequacy of the compensation committee +charter. +Six (6) +Nominating and Corporate Governance +Ben T. Morris* +Donald L. Dillingham+ +David L. Houston +Scott E. Streller +• Assists the board of directors in developing criteria for, +identifying and evaluating individuals qualified to serve as members of our board of directors. +• Selects and recommends director candidates to the board of directors to be +submitted for election at the Annual Meeting and to fill any vacancies on the board of directors. +• Periodically reviews and makes recommendations regarding the composition and +size of the board of directors and each of its committees. +Three (3) +9 +Table of Contents +Committee +Members +Principal Functions +Number of +Meetings in +2015 +• Reviews and recommends to the board of directors +appropriate corporate governance policies and procedures for the Company. +• Conducts an annual assessment of the qualifications and performance of +the board of directors. +• Annually reviews and reports to the board of directors on the +performance of management. +• Reviews and reassesses the adequacy of the nominating committee +charter. +* +Committee Chairperson. ++ +Mr. Dillingham informed us that he did not intend to stand for re-election at the Annual Meeting. +Do +the committees have written charters? +Yes. The charters for our audit committee, compensation committee and nominating committee can be found on our +website at www.gulfportenergy.com under the “Corporate Governance” caption. You may also obtain copies of these charters, as well as our Code of Business Conduct and Ethics, which is described below, by writing to our Assistant +Corporate Secretary, Paul K. Heerwagen IV, at Gulfport Energy Corporation, 14313 N. May Avenue, Suite 100, Oklahoma City, Oklahoma 73134. \ No newline at end of file diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/filing.txt b/raw/filings/0000874499/2016/0001628280-17-001359/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..08d1b088f0b67ff91ffe560eb5667a1efa61f482 --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/filing.txt @@ -0,0 +1,7610 @@ +10-K +1 +gpor-12312016x10k.htm +10-K +Document +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2016 +OR +¨ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corporation +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of +Incorporation or Organization) +(IRS Employer +Identification Number) +3001 Quail Springs Parkway +Oklahoma City, Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +(405) 252-4600 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 30, 2016 , based on the closing price of the common stock on the NASDAQ Global Select Market on June 30, 2016 , the last business day of the registrant’s most recently completed second fiscal quarter ( $31.26 per share), was $3,918,915,089 . +As of February 10, 2017 , 158,829,816 shares of the registrant’s common stock were outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +21 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +45 +ITEM 2. +PROPERTIES +45 +ITEM 3. +LEGAL PROCEEDINGS +52 +ITEM 4. +MINE SAFETY DISCLOSURES +53 +PART II +53 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +53 +ITEM 6. +SELECTED FINANCIAL DATA +54 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +56 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +73 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +75 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +75 +ITEM 9A. +CONTROLS AND PROCEDURES +75 +ITEM 9B. +OTHER INFORMATION +78 +PART III +78 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +78 +ITEM 11. +EXECUTIVE COMPENSATION +78 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +78 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +78 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +78 +PART IV +79 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +79 +Signatures +S-1 +Index to Consolidated Financial Statements +F-1 +Exhibit Index +E-1 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In December 2016, we entered into a definitive agreement to purchase oil and natural gas assets including 46,400 net surface acres with multiple producing zones, including the Woodford and Springer formations, in Grady, Stephens, and Garvin counties, Oklahoma, (see " - Our Pending Acquisition " below) which we expect to complete in February 2017. In addition, we have an interest in producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an interest in an entity that operates in the Phu Horm gas field in Thailand. We also hold an approximate 24.2% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the NASDAQ Global Select Market, to which we contributed our membership interest in Mammoth Partners LLC (previously, Mammoth Energy Partners LP) in connection with Mammoth Energy’s initial public offering completed on October 19, 2016. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 10, 2017 , we held leasehold interests in approximately 232,000 gross (213,000 net) acres in the Utica Shale primarily in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2016 , had spud 268 gross wells, 219 of which were completed and were producing. In 2016 , we spud 50 gross (43.5 net) wells, of which 16 were completed as producing wells, two were non-productive, and as of December 31, 2016 , 26 were in various stages of completion and six were still being drilled. We commenced sales from 54 gross wells (40.2 net wells) in the Utica Shale during 2016 . During 2017 (through February 10, 2017 ), we spud ten gross (9.2 net) wells. As of February 10, 2017 , four of these wells were waiting on completion and the other six were still drilling. In addition, other operators drilled 35 gross (6.9 net) wells and commenced sales from 25 gross (6.3 net) wells on our Utica Shale acreage in 2016 . +We currently intend to drill 87 to 97 gross (67 to 74 net) horizontal wells, and commence sales from 72 to 80 gross (61 to 67 net) horizontal wells on our Utica Shale acreage in 2017 . We currently anticipate 30 to 34 gross (10 to 11 net) horizontal wells will be drilled, and sales commenced from 42 to 46 gross (nine to 10 net) horizontal wells, by other operators on our Utica Shale acreage. We currently expect our anticipated operated and non-operated activity during 2017 to cost us $645.0 million to $690.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2016 was approximately 70,653 net million cubic feet of natural gas equivalent, or MMcfe, or 768.0 MMcfe per day, of which 89% was from natural gas and 11% was from oil and natural gas liquids, or NGLs. +In 2016 , at our WCBB field, we recompleted 54 gross and net wells and spud no new wells. In the fourth quarter of 2016 , production at WCBB was approximately 1,272 MMcfe, or an average of 13.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +In 2016 , at our East Hackberry field, we recompleted 23 gross and net wells and spud no new wells. In the fourth quarter of 2016 , net production at East Hackberry was approximately 334 MMcfe, or an average of 3.6 MMcfe per day, of which 97% was from oil and 3% was from natural gas. +In 2016 , at our West Hackberry field, we had no recompletions and spud no new wells. In the fourth quarter of 2016 , net production at West Hackberry was approximately 45 MMcfe, or an average of 492.8 thousand cubic feet of natural gas equivalent, or Mcfe, per day, of which 99% was from oil and 1% was from natural gas. +We currently estimate our 2017 activities in our Southern Louisiana fields to be approximately $30.0 million to $35.0 million in aggregate to drill 12 to 15 gross and net wells and perform recompletion activities. +As of December 31, 2016 , we held leasehold interests in approximately 4,000 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2016 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2016 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or +2 +Table of Contents +Index to Financial Statements +an average of 277.8 Mcfe per day, 100% of which was from oil. During 2017 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2016 , we held leasehold interests in approximately 778 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2016 , our net production from this acreage was approximately 71 MMcfe, or an average of 773.5 Mcfe per day, of which 80% was from oil, 16% was from natural gas and 4% was from natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2016 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2016 , we had 2.3 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $696.0 million and associated standardized measure of discounted future net cash flows of approximately $688.0 million , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2016 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +40.33/49.28 +393 +193.84 +5 +4.23 +48,523 +41,081 +2,165,739 +2,798 +20,126 +2,303,282 +West Cote Blanche Bay Field (4) +80.108/100 +116 +116 +145 +145 +5,668 +5,668 +865 +2,039 +— +13,096 +E. Hackberry Field (5) +82.04/100 +25 +25 +119 +119 +2,910 +2,910 +210 +356 +— +2,349 +W. Hackberry Field +80.357/100 +7 +7 +6 +6 +726 +726 +— +72 +— +433 +Niobrara Formation +34.52/48.61 +3 +1.46 +1 +0.41 +2,100 +1,050 +89 +157 +— +1,029 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +153 +123 +1 +899 +Overrides/Royalty Non-operated +Various +583 +0.77 +— +— +— +— +12 +1 +— +20 +Total +1,145 +344.37 +276 +274.64 +60,313 +51,512 +2,167,068 +5,546 +20,127 +2,321,108 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 23% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 174 gross (22.25 net) wells drilled by other operators on our acreage. +3 +Table of Contents +Index to Financial Statements +(4) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(5) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2016 , we held leasehold interests in approximately 232,000 gross (213,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of December 31, 2016, there were 1,472 producing horizontal wells, 256 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 19 horizontal wells that were being drilled and an additional 460 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2016 , had spud 268 gross wells, 219 of which were completed and were producing. In 2016 , we spud 50 gross (43.5 net) wells, of which 16 were completed as producing wells and two were non-productive, and as of December 31, 2016 , 26 were in various stages of completion and six were still being drilled. We commenced sales from 54 gross wells (40.2 net wells) in the Utica Shale during 2016 . During 2017 (through February 10, 2017 ), we spud ten gross (9.2 net) wells. As of February 10, 2017 , four of these +4 +Table of Contents +Index to Financial Statements +wells were waiting on completion and the other six were still drilling. In addition, other operators drilled 35 gross (6.9 net) wells and commenced sales from 25 gross (6.3 net) wells on our Utica Shale acreage in 2016 . +We currently intend to drill 87 to 97 gross (67 to 74 net) horizontal wells, and commence sales from 72 to 80 gross (61 to 67 net) horizontal wells, on our Utica Shale acreage in 2017 . We currently anticipate 30 to 34 gross (10 to 11 net) horizontal wells will be drilled, and sales commenced from 42 to 46 gross (nine to 10 net) horizontal wells, by other operators on our Utica Shale acreage during 2017 . We currently anticipate our 2017 capital expenditures to be $645.0 million to $690.0 million related to our operated and non-operated Utica Shale activities. As of February 10, 2017 , we had six operated horizontal rigs drilling in the play. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2016 was approximately 70,653 net million cubic feet of natural gas equivalent, or MMcfe, or 768.0 MMcfe per day, of which 89% was from natural gas and 11% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2016 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2016 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2016 , estimated field cumulative gross production was 199 MMBO and 237.2 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2016 , 116 were producing, 145 were shut-in, and six were being used as salt water disposal wells. The other 810 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2016 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more +5 +Table of Contents +Index to Financial Statements +efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2016 , at our WCBB field, we recompleted 54 gross and net wells and spud no new wells. As of February 10, 2017 , we had recompleted 14 gross and net wells during 2017 in our WCBB field. +Production Status +In the fourth quarter of 2016 , our net production at WCBB was approximately 1,272 MMcfe, or an average of 13.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.04% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2016 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2016 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2016 , 25 wells had daily production, 119 were shut-in and three had been converted to salt water disposal wells. The remaining 122 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, three natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2016 at East Hackberry, we recompleted 23 gross and net wells and spud no new wells. As of February 10, 2017 , we had recompleted two gross and net wells during 2017 in our East Hackberry field. +6 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2016 , our net production at East Hackberry was approximately 334 MMcfe, or an average of 3.6 MMcfe per day, of which 97% was from oil and 3% was from natural gas. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.00% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2016 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2016 , 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2016 , seven of such wells were producing, six were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2016 at West Hackberry, we had no recompletions and spud no new wells. +Production Status +In the fourth quarter of 2016 , our net production at West Hackberry was approximately 45 MMcfe, or an average of 492.8 Mcfe per day, of which 99% was from oil and 1% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2016 , we held leases for approximately 4,000 net acres. In 2016 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural +7 +Table of Contents +Index to Financial Statements +fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2016 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 277.8 Mcfe per day, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2016 . We do not anticipate drilling any wells in the Niobrara Formation during 2017 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2016 , we held approximately 778 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2016 , our net production from this acreage was approximately 71 MMcfe, or an average of 773.5 Mcfe per day, of which 80% was from oil, 16% was from natural gas and 4% was from natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2016 . We do not anticipate drilling any wells in the Bakken Formation during 2017 . +8 +Table of Contents +Index to Financial Statements +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2016 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.0686 +% +— +1 +— +Our Pending Acquisition +We have entered into a purchase agreement, dated as of December 13, 2016, with Vitruvian II Woodford, LLC, an unrelated third-party seller, referred to herein as the Seller or Vitruvian, to acquire certain assets of the Seller for a total purchase price consisting of $1.35 billion in cash and approximately 23.9 million in shares of our common stock, subject to certain adjustments, which we refer to herein as the Pending Acquisition. The assets subject to the Pending Acquisition include 46,400 net surface acres, with multiple producing zones including the Woodford and Springer formations, in Grady, Stephens and Garvin Counties, Oklahoma. Given the potential for numerous producing intervals across this acreage, we have identified approximately 1,750 gross drilling locations, comprised of only Woodford and Springer zones with significant upside potential through infill drilling and additional prospective zones present on the acreage. The properties subject to the Pending Acquisition are located primarily in the over-pressured liquids-rich to dry gas windows of the SCOOP play and include approximately 183 MMcfe per day of net production for October 2016, based on information provided by the Seller. The Pending Acquisition also includes 48 producing horizontal wells and an additional interest in over 150 non-operated horizontal wells. Four rigs are currently operating on the acreage and we intend to maintain a four-rig cadence in the play during 2017. Based on the estimates prepared by the Seller as of September 30, 2016 and audited by Netherland, Sewell & Associates, Inc., or NSAI, the estimated proved reserves attributable to the acreage subject to the Pending Acquisition are approximately 1.1 Tcfe. These estimates are internal estimates prepared by the Seller, and we may revise such estimates following the completion of the Pending Acquisition. We do not currently hold any leasehold interests or have any operations in the SCOOP play. The Pending Acquisition is expected to provide basin diversification to our operations. We intend to fund the cash portion of the purchase price of the Pending Acquisition with the net proceeds from the December 2016 common stock and senior note offerings and cash on hand. We anticipate completing the Pending Acquisition in February 2017. However, the Pending Acquisition remains subject to completion of due diligence and satisfaction or waiver of other closing conditions. There can be no assurance that the Pending Acquisition will be completed or that we will acquire all or any portion of the acreage subject to the Pending Acquisition. See Item 1A. " Risk Factors - Risks Relating to the Pending Acquisition ." +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2016 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly as of September 30, 2015 and December 31, 2015 , and again at March 31, 2016 , for impairment based on FASB ASC 323-Investments: Equity Method and Joint Ventures, or FASB ASC 323, due to certain qualitative factors and engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, we concluded that an other than temporary impairment was required under +9 +Table of Contents +Index to Financial Statements +FASB ASC 323, resulting in an aggregate impairment loss of $101.6 million for the year ended December 31, 2015 and $23.1 million for the for the year ended December 31, 2016 . As of and during the period ended December 31, 2016 , commodity prices had increased as compared to the quarter ended March 31, 2016 , and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline again in the future, further impairment of our investment in Grizzly may result. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved in the first half of 2017. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. In December 2015, Grizzly suspended the review of the Thickwood application by the AER. The Thickwood application will be resubmitted once the regulations have been updated. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly continues to pursue a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2016, net gas production was approximately 118 MMcf per day and condensate production was 435 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy Services, Inc., or Mammoth Energy, which is the parent company of Mammoth, completed its initial public offering, or the IPO, of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth Energy Partners LLC (as the sucessor to Mammoth). We intend to use the net proceeds for the sale of our Mammoth Energy shares in the IPO for general corporate purposes. As of December 31, 2016 , we owned an approximate 24.2% interest in Mammoth Energy. +In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Cementing LLC, or Stingray Cementing, with an initial ownership of 50%. Stingray Cementing provides well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owned a 28.4% equity interest in a gas processing plant in +10 +Table of Contents +Index to Financial Statements +West Texas. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns an entity that operates sand mines that produce hydraulic fracturing grade sand. +In February 2016, we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the newly formed entity called Strike Force Midstream LLC, or Strike Force, and Rice acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is underway, is providing gathering services for an increasing number of Gulfport operated wells and connectivity of existing dry gas gathering systems and interchangeability of natural gas across our firm portfolio. The first phase of the project has been completed: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. First flow commenced through this lateral on February 1, 2016. +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. The majority of this production is being sold under a West Texas Intermediate crude price HLS/LLS differential less transportation costs. The majority of our Utica Shale oil is sold to Marathon Petroleum Corporation, or Marathon. The purchaser takes custody at the MarkWest Utica EMG, or MarkWest, owned and operated condensate stabilizer located near Cadiz, Ohio. Our Utica Shale NGLs are currently purchased by MarkWest which remits to us a weighted average selling price of products sold to various markets. Our Utica Shale natural gas production is sold to various purchasers through established NAESBs with the counterparties. The majority of our gas is sold to BP Energy Company, or BP. In 2016, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily transactions. The majority of our production is delivered at the tailgate of the plants or at central delivery points with market pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2016 , we sold approximately 68% and 10% of our natural gas production to BP and DTE Energy Trading, Inc., or DTE, respectively, 72% and 24% of our oil production to Shell and Marathon, respectively, and 74% and 23% of our natural gas liquids production to MarkWest and Antero Resources, or Antero, respectively. During the year ended December 31, 2015 , we sold approximately 79% and 14% of our natural gas production to BP and DTE, respectively, 90% and 10% of our oil production to Shell and Marathon, respectively, and 76% and 24% of our natural gas liquids production to MarkWest and Antero, respectively. During the year ended December 31, 2014 , we sold approximately 40% , 32% and 19% of our natural gas production to BP, DTE, and Hess, respectively, 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest. +11 +Table of Contents +Index to Financial Statements +As of December 31, 2016, we had an average of approximately 516,000 MMBtu per day of firm sales contracted with third parties for 2017. We had an average of approximately 257,000 MMBtu per day, 226,000 MMBtu per day, 223,000 MMBtu per day, 126,000 MMBtu per day and 31,000 MMBtu contracted with third parties for 2018, 2019, 2020, 2021 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2016, we had entered into firm transportation contracts to deliver approximately 775,000 MMBtu to 1,125,000 MMBtu per day for 2017. For 2018 through 2020, we had entered into firm transportation contracts to deliver approximately 1,125,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional long term contracts to be limited in 2017. Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities expected to begin in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities expected to begin in 2017 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities expected to begin in late 2017 allowing additional access to Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +12 +Table of Contents +Index to Financial Statements +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent not-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be +13 +Table of Contents +Index to Financial Statements +significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory +14 +Table of Contents +Index to Financial Statements +agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. In May 2010, the EPA adopted regulations establishing new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On August 26, 2016, the EPA proposed changes needed to bring EPA’s air permitting regulations in line with the Supreme Court’s decision on GHG permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the public comment period closed on December 2, 2016. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +The EPA has continued to adopt GHG regulations applicable to other industries, such as its August 2015 adoption of three separate, but related, actions to address carbon dioxide pollution from power plants, including final Carbon Pollution Standards for new, modified and reconstructed power plants, a final Clean Power Plan to cut carbon dioxide pollution from existing power plants, and a proposed federal plan to implement the Clean Power Plan emission guidelines. Upon publication of the Clean Power Plan on October 23, 2015, more than two dozen States as well as industry and labor groups challenged the Clean Power Plan in the D.C. Circuit Court of Appeals. On February 9, 2016, the Supreme Court stayed the implementation of the Clean Power Plan while legal challenges to the rule proceed. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. Also, on June 29, 2016, the leaders of the United States, Canada and Mexico announced an Action Plan to, among other things, boost clean energy, improve energy efficiency, and reduce greenhouse gas emissions. The Action Plan specifically calls for a reduction in methane emissions from the oil and gas sector by 40 to 45 percent by 2025. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. It also remains unclear whether and how the results of the 2016 U.S. election could impact the regulation of GHG emissions at the federal and state level. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +15 +Table of Contents +Index to Financial Statements +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +In addition, the EPA plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also +16 +Table of Contents +Index to Financial Statements +establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. On the same day, the EPA finalized a plan to implement its minor new source review program on Indian lands for oil and natural gas production, and it issued for public comment an information request that will require companies to provide extensive information instrumental for the development of regulations to reduce methane emissions from existing oil and gas sources. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. On June 21, 2016, the United States District Court for Wyoming set aside the rule, holding that the BLM lacked Congressional authority to promulgate the rule. The BLM has appealed the decision to the Tenth Circuit Court of Appeals. Also, on November 15, 2016, the BLM finalized a rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. State and industry groups have challenged this rule in federal court, asserting that the BLM lacks authority to prescribe air quality regulations. Congress is currently considering whether to repeal the rule pursuant to the Congressional Review Act. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +17 +Table of Contents +Index to Financial Statements +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, +18 +Table of Contents +Index to Financial Statements +decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of well pads. Under these new rules, operators must submit detailed horizontal well pad site plans certified by a professional engineer for review by the ODNR Division of Oil and Gas Resources Management prior to the construction of a +19 +Table of Contents +Index to Financial Statements +well pad. These rules will result in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil or gas releases. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $25.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during each of 2016 and 2015 were approximately $0.1 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable +20 +Table of Contents +Index to Financial Statements +state agency personnel on spills and releases through Ohio's Incident Notification Hotline. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +Construction of our new corporate headquarters in Oklahoma City, Oklahoma was completed in December of 2016. The building has approximately 120,000 square feet of office space and allows us to consolidate all of our employees in one location in Oklahoma City. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that served as our previous corporate headquarters. We have received various offers to purchase or lease this building, which we are evaluating. +We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. In 2016, we purchased an approximately 12,300 square feet building located in St. Clairsville, Ohio to serve as our headquarters for our Ohio operations. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2016 , we had 241 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +ITEM 1A. +RISK FACTORS +Risks Relating to the Pending Acquisition +We may be unable to successfully integrate or otherwise develop the assets subject to the Pending Acquisition or to generate anticipated revenue and production volumes, recover the estimated proven reserves or realize other anticipated cost savings, revenues or other benefits from the Pending Acquisition. +The success of the Pending Acquisition requires an assessment of several factors, the accuracy of which is inherently uncertain. In connection with these assessments, we performed a review of the subject properties that we believe to be generally consistent with industry practices, however our review may not have revealed all existing or potential problems. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or a portion of the underlying deficiencies. In some of our transactions, we are not entitled to contractual indemnification for environmental liabilities and acquire properties on an “as is” basis, and in others, we are entitled to indemnification for only certain environmental liabilities. +The Pending Acquisition may involve other risks that may cause our business to suffer, including: +• +diversion of our management’s attention to evaluating and developing the assets subject to the Pending Acquisition; +• +the challenges, including delays or any other unanticipated changed circumstances, and costs involved in integrating and/or developing the assets subject to the Pending Acquisition; and +• +failure of the assets subject to the Pending Acquisition to generate anticipated revenues and production volumes or otherwise perform in accordance with our expectations, or our ability to recover the estimated proved reserves +21 +Table of Contents +Index to Financial Statements +associated with such properties or realize other expected benefits of the Pending Acquisition within the expected time frame or at all. +If these risks or other unexpected costs and liabilities were to materialize, any desired benefits of the Pending Acquisition may not be fully realized, if at all, and our future financial performance and results of operations could be negatively impacted. +We will incur significant transaction and acquisition-related costs in connection with the Pending Acquisition. +We expect to incur significant costs associated with the Pending Acquisition and integration and/or development of the assets subject to the Pending Acquisition as part of our operations. The substantial majority of the expenses resulting from the Pending Acquisition are composed of transaction costs related to the Pending Acquisition and the costs involved in financing the Pending Acquisition. We may also incur transaction fees and costs related to formulating integration and/or development plans for the assets subject to the Pending Acquisition. +The historical financial information relating to the assets to be acquired in the Pending Acquisition may not be representative of the results or financial condition of such assets if they had been operated independently of the Seller and, as a result, may not be a reliable indicator of their future results. +The financial information relating to the assets to be acquired in the Pending Acquisition has been derived from the financial statements and accounting records of the Seller and reflect the costs as well as assumptions and allocations made by the Seller’s management. The financial position, results of operations and cash flows relating to such assets presented may be different from those that would have resulted had such assets been operated independently of the Seller during the applicable periods or at the applicable dates. As a result, the historical financial information relating to such assets may not be a reliable indicator of future results. +Misrepresentations made to us by the Seller could cause us to incur substantial financial obligations and harm our business. +If we were to discover that there were misrepresentations made to us by the Seller or its representatives regarding the assets we acquire, we would explore all possible legal remedies to compensate us for any loss, including our rights to indemnification under the purchase agreement for the Pending Acquisition. However, there is no assurance that legal remedies would be available or collectible. If such unknown liabilities exist and we are not fully indemnified for any loss that we incur as a result thereof, we could incur substantial financial obligations, which could materially adversely affect our financial condition and harm our business. +Risks Related to our Business and Industry +Market conditions for oil and natural gas, and particularly the recent decline in prices for oil and natural gas, have, and may continue to, adversely affect our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including: +• +worldwide and domestic supplies of oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +the level of consumer demand; +• +the price and availability of alternative fuels; +• +technical advances affecting energy consumption; +22 +Table of Contents +Index to Financial Statements +• +risks associated with operating drilling rigs; +• +the availability of pipeline capacity and other transportation facilities; +• +the price and level of foreign imports; +• +domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +speculative trading in crude oil and natural gas derivative contracts; +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• +the overall domestic and global economic environment; and +• +weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past seven years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $26.05 per barrel, or Bbl, in February 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.61 per MMBtu in March 2016 to a high of $7.51 per MMBtu in January 2010. During 2016, WTI prices ranged from $26.05 to $54.51 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.61 to $3.99 per MMBtu. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to further write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our future growth rate. +Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our 2017 business plan, we considered allocating capital and other resources to various aspects of our businesses, including well development, reserve acquisitions, midstream infrastructure and other activities. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2017 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, including the appropriate rate of reserve development, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2017 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives. +We periodically engage in acquisitions, dispositions and other strategic transactions, including equity investments and joint ventures such as our recent midstream agreement with Rice. These transactions involve various inherent risks, such as changes in prevailing market conditions, our ability to obtain the necessary regulatory approvals, the timing of and conditions that may be imposed on us by regulators and our ability to achieve benefits anticipated to result from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us to risks and uncertainties, such as committing us to fund operating and/or capital expenditures, the timing and amount of which we may not be able to control. Further, the counterparties to these transactions may not satisfy their obligations to the joint venture. +23 +Table of Contents +Index to Financial Statements +Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish further, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2017 to be in the range of $845.0 million to $915.0 million and an additional $110.0 million to $120.0 million for acreage expenses, primarily lease extensions, in the Utica Shale and $50.0 million to $60.0 million for cash capital contributions to our midstream joint venture with Rice in Eastern Ohio. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including: +• +our proved reserves; +• +the volume of oil and natural gas we are able to produce from existing wells; +• +the prices at which oil and natural gas are sold; +• +our ability to acquire, locate and produce economically new reserves; and +• +our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2017 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our +24 +Table of Contents +Index to Financial Statements +production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including: +• +recoverable reserves; +• +future oil and natural gas prices and their applicable differentials; +• +operating costs; and +• +potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our +25 +Table of Contents +Index to Financial Statements +purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We may incur losses as a result of title defects in the properties in which we invest. +It is our practice in acquiring oil and natural gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. +Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. +Recent decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio. +On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 version of the ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action in order to establish abandonment of mineral rights. After June 30, 2006, (the effective date of the 2006 version of the ODMA), surface owners are required to follow the statutory notice and recording procedures enacted in 2006. We have assessed the impact of these recent Ohio Supreme Court decisions on our operations in Ohio where the majority of our acreage and our producing properties are located and are taking steps to mitigate any potential risks identified as a result of our assessment. However, the Ohio Supreme Court decisions could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expense, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio, any of which could have an adverse effect on our results of operations and financial condition. +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals and/or permits; +• +unplanned increases in the cost of construction materials or labor; +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +• +market-related increases in a project's debt or equity financing costs; and +26 +Table of Contents +Index to Financial Statements +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2016 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly as of September 30, 2015 and December 31, 2015, and again at March 31, 2016, for impairment, resulting in an aggregate other than temporary impairment write down of $101.6 million for the year ended December 31, 2015 and $23.1 million for the year ended December 31, 2016 . As of and during the period ended December 31, 2016 , commodity prices had increased as compared to the quarter ended March 31, 2016, and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline, further impairment of our investment in Grizzly may result in the future. The Algar Lake and other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Restrictions on the ability to obtain water may impact our operations. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. +We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of Michael G. Moore, our Chief Executive Officer and President, or our other senior management and technical personnel, could disrupt our operations and have a material adverse effect on our financial condition and results of operations. Our executives are not restricted from competing with us if they cease to be employed by us, except under certain limited circumstances prohibiting competition while making use of our trade secrets. We are party to an employment agreement with one of our executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +27 +Table of Contents +Index to Financial Statements +Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production. +There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our Utica Shale acreage at December 31, 2016 and 2015, our WCBB and Hackberry fields at each of December 31, 2016, 2015 and 2014, and our Niobrara field at December 31, 2015 and 2014, (ii) Ryder Scott with respect to our Utica Shale acreage at December 31, 2014 and (iii) our personnel with respect to our overriding royalty and non-operated interests at December 31, 2016, 2015 and 2014 and our Niobrara field at December 31, 2016. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. +Estimates of reserves as of year-end 2016, 2015 and 2014 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2016, 2015 and 2014, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. +The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2016, 2015 and 2014 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2016, 2015 and 2014, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• +actual prices we receive for oil and natural gas; +• +the amount and timing of actual production; +• +supply of and demand for oil and natural gas; and +• +changes in governmental regulations or taxation. +The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. +SEC rules could limit our ability to book additional proved undeveloped reserves in the future. +SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe, because they have become uneconomic or otherwise. +28 +Table of Contents +Index to Financial Statements +The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. +Approximately 63.0% of our total estimated proved reserves at December 31, 2016, were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. With respect to our Utica Shale acreage where we are focusing substantially all of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. +If production from our Utica Shale acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations. +As of December 31, 2016, we had entered into firm transportation contracts to deliver approximately 775,000 MMBtu to 1,125,000 MMBtu per day for 2017. For 2018 through 2020, we had entered into firm transportation contracts to deliver approximately 1,125,000 MMBtu per day. See Item 1. “ Business-Transportation and Takeaway Capacity .” Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale acreage decreases due to decreased developmental activities, taking into consideration the +29 +Table of Contents +Index to Financial Statements +current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +Substantially all of our producing properties are located in Eastern Ohio and Louisiana, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. +We have identified over 1,000 drilling locations on our Ohio, Louisiana and Western Colorado properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations. +Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including: +• +unusual or unexpected geological formations; +• +loss of drilling fluid circulation; +• +title problems; +• +facility or equipment malfunctions; +• +unexpected operational events; +• +shortages or delivery delays of equipment and services; +• +compliance with environmental and other governmental requirements; and +• +adverse weather conditions. +Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. +30 +Table of Contents +Index to Financial Statements +Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. +In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities. +We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier, seismically active areas and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities for spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations, the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws. +Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected. +We have entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management and, if we fail to comply with the conditions of the compliance agreement or any potential future agreements, all or part of our drilling and producing operations in the State of Ohio may be suspended. +31 +Table of Contents +Index to Financial Statements +In September 2013, we entered into a compliance agreement with the Ohio Division of Oil and Gas Resources Management, or the Division, concerning aspects of our operations at seven drilling sites in Ohio. We had previously notified the Division of brine contamination at these drilling sites. After receipt of this notification, the Division conducted an investigation and determined that certain contaminants were escaping from underneath the containment liners at these locations. In the compliance agreement, we agreed, among other things, to conduct our production operations in compliance with all requirements of applicable regulations, implement a remediation plan and make a payment of $250,000. We have fulfilled our obligations under the compliance agreement and have been released from it by the Division. We cannot assure you that we will not be subject to compliance agreements with the Division or other regulatory bodies in the future. Our failure to comply with any such compliance agreements may result in the suspension of all or part of drilling and production operations for some specified period as well as the imposition of additional penalties and costs. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as +32 +Table of Contents +Index to Financial Statements +attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +We have been an early entrant into the Utica Shale in Eastern Ohio. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. +We have been an early entrant into the Utica Shale in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012. As a developing play, our drilling results in this area are more uncertain than drilling results in areas that are more developed and have been producing for a longer period of time. Since the Utica Shale has limited production history and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the Utica Shale may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the Utica Shale or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +A key part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. +Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following: +• effectively controlling the level of pressure flowing from particular wells; +• landing our wellbore in the desired drilling zone; +• staying in the desired drilling zone while drilling horizontally through the formation; +• running our casing the entire length of the wellbore; and +• being able to run tools and other equipment consistently through the horizontal wellbore. +Risks that we face while completing our wells include, but are not limited to, the following: +• the ability to fracture stimulate the planned number of stages; +• the ability to run tools the entire length of the wellbore during completion operations; and +• the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +33 +Table of Contents +Index to Financial Statements +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income. +A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. Approximately 19% of our total Utica Shale undeveloped acreage will be subject to expiration in 2017, with 36% of such acreage expiring in 2018, 14% in 2019, 16% in 2020 and 15% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2016, leases representing 25%, 13%, and 62%, respectively, of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2017, 2018, and 2019. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities. +Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations, including those relating to protection of human health +34 +Table of Contents +Index to Financial Statements +and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations have continually imposed increasingly strict requirements for water and air pollution control and solid waste management, which trend may continue. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. See Item 1. “Business-Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of certain laws and regulations that affect us. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process is pending. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the Underground Injection Control, or UIC, program under the federal State Drinking Water Act, or the SDWA, specifically as “Class II” UIC wells. +In addition, the EPA plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory, voluntary or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and natural gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA's rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. On the same day, the EPA finalized a plan to implement its minor new source review program on Indian lands for oil and natural gas production, and it issued for public comment an information request that will require companies to provide extensive information instrumental for the development of regulations to reduce methane emissions from existing oil and gas sources. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements or mandate the use of specific equipment or technologies to control emissions. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. These ongoing or proposed studies, depending on their degree of pursuit and whether any meaningful results are obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory authorities. The EPA continues to evaluate the potential impacts of hydraulic fracturing on drinking water resources and the induced seismic activity from disposal wells and has recommended strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic +35 +Table of Contents +Index to Financial Statements +fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of federal, state and local laws and initiatives concerning hydraulic fracturing, see Item 1. “ Business-Regulation-Regulation of Hydraulic Fracturing ” above. We plan to use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties and any increased federal, state, local, foreign or international regulation of hydraulic fracturing or offshore drilling, including legislation and regulation in the states in which we operate, could reduce the volumes of oil and natural gas that we can economically recover, which could materially and adversely affect our revenues and results of operations. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, most recently in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +We dispose of large volumes of produced water gathered from our drilling and production operations in our Louisiana fields by injecting it into wells pursuant to permits issued to us by governmental authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. The adoption and implementation of any new laws or regulations that restrict our ability to use hydraulic fracturing or dispose of produced water gathered from our drilling and production activities by own disposal wells, could have a material adverse effect on our business, financial condition and results of operations. We do not currently inject produced water in our Utica our operations and do not currently anticipate injecting produced water in connection with the Pending Acquisition assets. +Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate. +Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife species or their habitat. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high +36 +Table of Contents +Index to Financial Statements +costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect threatened or endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. +In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy. +The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows. +Certain federal income tax deductions currently available with respect to natural gas and oil exploration and development may be eliminated, and additional state taxes on natural gas extraction may be imposed, as a result of future legislation. +From time to time, legislative proposals are made that would, if enacted, make significant changes to U.S. tax laws. These proposed changes have included, but are not limited to, (i) eliminating the immediate deduction for intangible drilling and development costs, (ii) eliminating the deduction from income for domestic production activities relating to oil and natural gas exploration and development, (iii) the repeal of the percentage depletion allowance for oil and natural gas properties; (iv) an +37 +Table of Contents +Index to Financial Statements +extension of the amortization period for certain geological and geophysical expenditures and (v) implementing certain international tax reforms. +In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014 and was pending in the Ohio Senate. The Ohio State Senate held a hearing on the bill, but there was no further movement before the summer recess of the Ohio Legislature. +In February 2015, the Governor of Ohio proposed another plan to enact new severance taxes on the oil and gas industry as part of the state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would have imposed a 6.5% tax on oil and gas sold at the wellhead. Although the severance tax increase was removed from the bill subsequently passed by the Ohio House, additional severance tax proposals are expected to be introduced in Ohio. +A new General Assembly took office in January 2017, and the Governor of Ohio proposed a new severance tax initiative. The proposal would impose a fixed rate of 6.5% for crude oil and natural gas when sold at the wellhead and a lower rate of 4.5% at later stages of distribution for natural gas and natural gas liquids. The proposal was again met with opposition and may not ultimately be included in the final budget documents that must be passed by June 30, 2017 in order to be effective for the period of July 1, 2017 through June 30, 2019. +These proposed changes in the U.S. and applicable state tax law, if adopted, or other similar changes that tax our production or reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows. +The adoption of climate change legislation by Congress could result in increased operating costs and reduced demand for the oil and natural gas we produce. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for oil and natural gas industry, and the U.S. Congress has, from time to time, considered adopting legislation to reduce emissions. Almost one-half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives. For a description of GHG existing and proposed rules and regulations, see Item 1. “ Business-Regulation-Environmental Regulation-Climate Change .” +In December 2015, the United States participated in the 21st Conference of the Parties (COP-21) of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. Also, on June 29, 2016, the leaders of the United States, Canada and Mexico announced an Action Plan to, among other things, boost clean energy, improve energy efficiency and reduce GHG emissions. The Action Plan specifically calls for a reduction in methane emissions from the oil and gas sector by 40 to 45 percent by 2025. +Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. It also remains unclear whether and how the results of the 2016 U.S. election could impact the regulation of GHG emissions at the federal and state level. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our +38 +Table of Contents +Index to Financial Statements +business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase. +Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore is exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress, which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, financial condition or results of operations. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations. +We face extensive competition in our industry. +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +We depend upon a limited number of customers for the sale of most of our oil and natural gas production. During the year ended December 31, 2016 , we sold approximately 68% and 10% of our natural gas production to BP and DTE, respectively, 72% and 24% of our oil production to Shell and Marathon, respectively, and 74% and 23% of our natural gas liquids production to MarkWest and Antero, respectively. If a purchaser is unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +Our method of accounting for oil and natural gas properties may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2016, 2015 and 2014 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can give us a significant loss for a particular period. Once incurred, a write down of oil and natural gas +39 +Table of Contents +Index to Financial Statements +properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016 . If prices of oil, natural gas and natural gas liquids continue to decrease, we may be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations. +Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical. +We are exposed to fluctuations in the price of natural gas and oil. Although we have hedged a portion of our estimated 2017 production, we may still be adversely affected by continuing and prolonged declines in the price of natural gas and oil. +We use fixed price swaps to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For information regarding these fixed price swaps, see Item 7A. " Quantitative and Qualitative Disclosures about Market Risk. " Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted. +Our hedging transactions expose us to counterparty credit risk. +Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the terms of the derivative contract and we may not be able to realize the benefit of the derivative contract. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. +Loss of our information and computer systems could adversely affect our business. +We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, whether due to cyber attack or otherwise, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, and processing activities. For example, we depend on digital technologies to interpret seismic data, manage drilling rigs, production equipment and gathering systems, conduct reservoir modeling and reserves estimation, and process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific +40 +Table of Contents +Index to Financial Statements +targets of cyber security threats. Our technologies, systems, networks, and those of its vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. We do not maintain specialized insurance for possible liability resulting from a cyberattack on our assets that may shut down all or part of our business. +Risks Relating to Our Indebtedness +Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects. +As of December 31, 2016 , we had total indebtedness (net of unamortized debt issuance costs) of approximately $1.6 billion , primarily attributable to our senior notes. We had borrowing base availability of $490.3 million under our secured revolving credit facility after giving effect to an aggregate of $209.7 million of letters of credit and no outstanding borrowings. +Our outstanding indebtedness could have important consequences to you, including the following: +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indenture; +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on the senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. +41 +Table of Contents +Index to Financial Statements +Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. +Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indenture governing the senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +Restrictive covenants in our secured revolving credit facility, the indenture governing the senior notes and in future debt instruments may restrict our ability to pursue our business strategies. +Our secured revolving credit facility and the indenture governing the senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to: +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets including capital stock of restricted subsidiaries; +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indenture governing the senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indenture governing the senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility +42 +Table of Contents +Index to Financial Statements +will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and the senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $700.0 million. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2016 , we had no borrowings under our revolving credit facility. However, we intend to borrow under our revolving credit facility in the future. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indenture governing the senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2016 , our borrowing base under our revolving credit facility was set at $700.0 million and we had no borrowings outstanding under this facility. In addition, the indenture governing the senior notes allows us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indenture governing the senior notes also allows us to incur certain other additional secured debt and allows us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to the senior notes. In addition, the indenture governing the senior notes does not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with the senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of the senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. +Our borrowings under our revolving credit facility expose us to interest rate risk. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2016 , we had no variable interest rate borrowings outstanding; therefore, an increase in interest rates would not have impacted our interest expense. However, any increase in our interest rate at the time we do have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2016 , we did not hedge our interest rate risk. +If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit. +Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs. +43 +Table of Contents +Index to Financial Statements +Risks Related to Our Common Stock +If our quarterly revenues and operating results fluctuate significantly, the price of our common stock may be volatile. +Our revenues and operating results may in the future vary significantly from quarter to quarter. If our quarterly results fluctuate, it may cause our stock price to be volatile. We believe that a number of factors could cause these fluctuations, including: +• +changes in oil and natural gas prices; +• +changes in production levels; +• +changes in governmental regulations and taxes; +• +geopolitical developments; +• +the level of foreign imports of oil and natural gas; and +• +conditions in the oil and natural gas industry and the overall economic environment. +Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. +We do not currently pay dividends on our common stock and do not anticipate doing so in the future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +A change of control could limit our use of net operating losses. +As of December 31, 2016 , we had a net operating loss, or NOL, carry forward of approximately $463.1 million for federal income tax purposes. Transfers of our stock could result in an ownership change. In such a case, our ability to use the NOLs generated through the ownership change date could be limited. In general, the amount of NOLs we could use for any tax year after the date of the ownership change would be limited to the value of our stock (as of the ownership change date) multiplied by the long-term tax-exempt rate. +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC. Sales of these shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 10, 2017, there were 158,829,816 shares of our common stock issued and outstanding, excluding 613,056 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan. +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of +44 +Table of Contents +Index to Financial Statements +our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Additional information regarding our properties is included in Item 1. " Business " above and in Note 3 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference. +Proved Oil and Natural Gas Reserves +Evaluation and Review of Reserves. +Reserve estimates at December 31, 2016 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio ( 99% of our proved reserves at December 31, 2016 ) and our WCBB and Hackberry fields ( 1% of our proved reserves at December 31, 2016 ). Reserve estimates at December 31, 2015 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio and our WCBB, Hackberry and Niobrara fields. Reserve estimates at December 31, 2014 were prepared by Ryder Scott with respect to our assets in the Utica Shale in Eastern Ohio and by NSAI with respect to our WCBB, Hackberry and Niobrara fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests (less than 1% of our proved reserves) at December 31, 2016 . At December 31, 2015 and 2014, our personnel prepared reserve estimates with respect to our overriding royalty and non-operated interests (less than 1% of our proved reserves). +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale and our WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 35 years of reservoir and operations experience and our geophysical staff has over 75 years combined industry experience. Our technical staff uses historical information for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs. +45 +Table of Contents +Index to Financial Statements +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by our experienced reservoir engineers or under their direct supervision; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• +annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +The following table sets forth our estimated proved reserves at December 31, 2016 , 2015 and 2014 : +Year Ended December 31, +2016 +2015 +2014 +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Proved developed +4,882 +744,797 +14,299 +6,120 +652,961 +12,910 +5,719 +345,166 +12,379 +Proved undeveloped +664 +1,422,271 +5,828 +338 +907,184 +4,826 +3,778 +373,840 +13,889 +Total (1) +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +Year Ended December 31, +2016 +2015 +2014 +Total net proved oil and natural gas reserves (MMcfe) (1) +2,321,108 +1,705,312 +933,598 +PV-10 value (in millions) (2) +$ +696.0 +$ +765.8 +$ +1,840.8 +Standardized measure (in millions) (3) +$ +688.0 +$ +764.3 +$ +1,427.2 +_____________________ +(1) +Estimates of reserves as of year-end 2016 , 2015 and 2014 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2016 , 2015 and 2014 , respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2016 , 2015 and 2014 . Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. +46 +Table of Contents +Index to Financial Statements +(2) +Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2016 , 2015 and 2014 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $42.75 per barrel and $2.48 per MMBtu for 2016 , $50.28 per barrel and $2.59 per MMBtu for 2015 and $94.99 per barrel and $4.35 per MMBtu for 2014 , and in each case adjusted by lease for transportation fees and regional price differentials. +PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows. +The following table reconciles the standardized measure of future net cash flows to the PV-10 value: +December 31, +2016 +2015 +2014 +(In thousands) +Standardized measure of discounted future net cash flows +$ +688,040 +$ +764,331 +$ +1,427,167 +Add: Present value of future income tax discounted at 10% +7,927 +1,432 +413,671 +PV-10 value +$ +695,967 +$ +765,763 +$ +1,840,838 +(3) +The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. +The above table does not include proved reserves net to our interest in Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “ Business–Our Equity Investments .” +As noted above, our December 31, 2016 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2016 of $42.75 per barrel and $2.48 per MMBtu. Holding production and development costs constant, if our 2016 reserves were calculated using the December 31, 2016 price of $53.72 per barrel and $3.65 per MMBtu, our discounted future net cash flows before income taxes would have been approximately $2.6 billion, or $1.9 billion more than our actual PV-10 value of $696.0 million at December 31, 2016. +The table below provides the 2016 SEC pricing of benchmark prices as well as the unweighted average of the months ending December 31, 2016 and January 31, 2017: +SEC Pricing 2016 +2-month Average 2017 +Henry Hub Natural Gas (per MMBtu) +$ +2.48 +$ +3.58 +WTI Crude Oil (per Bbl) +$ +42.75 +$ +52.39 +The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +47 +Table of Contents +Index to Financial Statements +Changes in Proved Reserves during 2016. +The following table summarizes the changes in our estimated proved reserves during 2016 (in Bcfe): +Proved Reserves, December 31, 2015 +1,705 +Purchases of oil and natural gas reserves in place +— +Extensions and discoveries +1,135 +Revisions of prior reserve estimates +(256 +) +Current production +(263 +) +Proved Reserves, December 31, 2016 +2,321 +Purchases of oil and natural gas reserves in place. These are additions to proved reserves resulting from the purchases of minerals in place during a period. We had no significant purchases of proved oil and natural gas reserves in 2016 . +Extensions and discoveries. These are additions to our proved reserves that result from (i) extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery and (ii) discovery of new fields with proved reserves or of new reservoirs of proved reserves in existing fields. Extensions and discoveries of 1.1 Tcfe of proved reserves were attributable to the continued development of our Utica Shale acreage. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from new information normally obtained from development drilling and production history or resulting from a change in economic factors, such as commodity prices, operating costs or development costs. +Commodity prices decreased significantly in 2016 . The 12-month average price for natural gas decreased from $2.59 per MMBtu for 2015 to $2.48 per MMBtu for 2016 , the 12-month average price for NGLs decreased from $13.21 per barrel for 2015 to $9.91 per barrel for 2016 , and the 12-month average price for crude oil decreased from $50.28 per barrel for 2015 to $42.75 per barrel for 2016 . These decreases shortened the economic lives of certain of our producing properties and caused certain exploration and development projects to become uneconomic, which had an adverse impact on our proved reserve estimates. We experienced downward reserve revisions of 285.3 Bcfe in estimated proved reserves in 2016 primarily due to the exclusion of 35 PUD locations in our Utica field that became uneconomic due to the continued decline in commodity prices and other downward revisions to 32 PUD locations as a result of the decline in commodity prices. The downward revisions were partially offset by positive revisions of 29.0 Bcfe due to lower operating costs being realized in 2016, improvements in operating efficiencies and increased performance of offset locations. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2016 , 2015 and 2014 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 18 to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2016 , our proved undeveloped reserves totaled 664 MBbls of oil, 1,422,271 MMcf of natural gas and 5,828 MBbls of NGLs, for a total of 1,461,226 MMcfe. Almost all of our PUDs at year-end 2016 were located in our Utica field. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include delays in the availability of infrastructure, well permitting delays, changes in commodity price outlook and costs, and new data from recently completed wells. During 2016 , we did not deviate from our development plan with respect to our PUD locations booked in our reserve report for the year ended December 31, 2015 and scheduled to be drilled during 2016 , other than to drill three additional PUD locations than initially scheduled to be drilled during 2016. +48 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved undeveloped reserves during 2016 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2015 +938 +Purchases of oil and natural gas reserves in place +— +Extensions and discoveries +1,032 +Conversion to proved developed reserves +(290 +) +Revisions of prior reserve estimates +(219 +) +Proved Undeveloped Reserves, December 31, 2016 +1,461 +Purchases of oil and natural gas reserves in place. We had no significant purchases of oil and natural gas reserves in 2016. +Extensions and discoveries. Our additions of 1.0 Tcfe were primarily attributable to 2016 extensions in our Utica field. +Conversion to proved developed reserves. We converted approximately 289.7 Bcfe attributable to 34 PUDs into proved developed reserves and five PUDs into proved developed not producing. +Revision of prior reserve estimates. We experienced downward revisions of 227.9 Bcfe due to lower commodity prices on 67 PUD locations, including the loss of 35 of the 67 PUD locations as they were no longer economic, as well as downward revisions of 17.4 Bcfe due to rescheduling of the drilling timeline of four PUD locations in excess of five years of initial booking resulting in the removal of these four PUD locations. In addition, we experienced positive revisions of 26.7 Bcfe attributable to improved performance of 34 PUD locations as a result of 14.5% production increases due to well performance of offset producers as well as lower lease operated and capital expenditures. +We drilled approximately 26% of our December 31, 2015 PUD locations during the year ended December 31, 2016 . +Costs incurred relating to the development of PUDs were approximately $168.2 million in 2016 . Estimated future development costs relating to the development of PUDs are projected to be approximately $401.5 million in 2017 , $331.4 million in 2018 , $192.7 million in 2019 , $98.0 million in 2020 and $86.2 million in 2021 . +All PUD drilling locations included in our 2016 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2016 , 3% of our total proved reserves were classified as proved developed non-producing. +As noted above, our December 31, 2016 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2016 of $42.75 per barrel and $2.48 per MMBtu. Holding production and development costs constant, if SEC pricing were $40.00 per barrel and $2.00 per MMBtu, this would have resulted in a loss of 1.2 Tcfe of our PUD volumes at December 31, 2016. Holding production and development costs constant, if SEC pricing were $30.00 per barrel and $1.75 per MMBtu, this would have resulted in a loss of 1.5 Tcfe of our PUD volumes at December 31, 2016 . +Production, Prices and Production Costs +49 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2016 +2015 +2014 +($ In thousands) +Gas sales +Gas production volumes (MMcf) +227,594 +156,151 +59,318 +Total Gas sales +$ +420,128 +$ +324,733 +$ +226,126 +Gas sales without the impact of derivatives ($/Mcf) +$ +1.85 +$ +2.08 +$ +3.81 +Impact from settled derivatives ($/Mcf) +$ +0.60 +$ +0.71 +$ +(0.20 +) +Average Gas sales price, including settled derivatives ($/Mcf) +$ +2.45 +$ +2.79 +$ +3.61 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,126 +2,899 +2,684 +Total Oil and condensate sales +$ +81,173 +$ +122,615 +$ +241,210 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +38.18 +$ +42.29 +$ +89.88 +Impact from settled derivatives ($/Bbl) +$ +5.11 +$ +3.12 +$ +0.13 +Average Oil and condensate sales price, including settled derivatives ($/Bbl) +$ +43.29 +$ +45.41 +$ +90.01 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +161,562 +185,792 +86,092 +Total Natural gas liquids sales +$ +59,115 +$ +58,129 +$ +94,127 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.37 +$ +0.31 +$ +1.09 +Impact from settled derivatives ($/Gal) +$ +(0.01 +) +$ +— +$ +— +Average Natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.36 +$ +0.31 +$ +1.09 +Gas, oil and condensate and natural gas liquids sales +Gas equivalents (MMcfe) +263,430 +200,089 +87,719 +Total gas, oil and condensate and natural gas liquids sales +$ +560,416 +$ +505,477 +$ +561,463 +Gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.13 +$ +2.53 +$ +6.40 +Impact from settled derivatives ($/Mcfe) +$ +0.56 +$ +0.60 +$ +(0.13 +) +Average gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.69 +$ +3.13 +$ +6.27 +Production Costs: +Average production costs (per Mcfe) +$ +0.26 +$ +0.35 +$ +0.59 +Average production taxes and midstream costs (per Mcfe) +$ +0.68 +$ +0.77 +$ +1.01 +Total production and midstream costs and production taxes (per Mcfe) +$ +0.94 +$ +1.12 +$ +1.60 +50 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2016 : +Year Ended December 31, +2016 +2015 +2014 +Utica Shale +Net Production +Oil (MBbls) +870 +1,608 +883 +Gas (MMcf) +227,447 +155,926 +58,919 +NGL (Mgal) +161,494 +185,753 +86,051 +Total (MMcfe) +255,740 +192,108 +76,512 +Average Sales Price Without the Impact of Derivatives: +Oil (per Bbl) +$ +34.59 +$ +37.85 +$ +78.63 +Gas (per Mcf) +$ +1.85 +$ +2.08 +$ +3.81 +NGL (per Gal) +$ +0.37 +$ +0.31 +$ +1.09 +Average Production Cost (per Mcfe) +$ +0.18 +$ +0.25 +$ +0.38 +Productive Wells and Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2016 . +NRI/WI (1) +Productive +Oil Wells +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage (2) +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (3) +40.33/49.28 +81 +36.41 +312 +157.43 +3 +2.66 +2 +1.57 +48,523 +41,081 +183,040 +171,570 +West Cote Blanche Bay Field (4) +80.108/100 +116 +116 +— +— +128 +128 +17 +17 +5,668 +5,668 +— +— +E. Hackberry Field (5) +82.04/100 +25 +25 +— +— +119 +119 +— +— +2,910 +2,910 +1,206 +1,206 +W. Hackberry Field +80.357/100 +7 +7 +— +— +6 +6 +— +— +723 +723 +306 +306 +Niobrara Formation (6) +34.52/48.61 +3 +1.46 +— +— +1 +0.41 +— +— +2,100 +1,050 +6,080 +2,957 +Bakken Formation (7) +1.51/1.83 +18 +0.3 +— +— +— +— +— +— +386 +77 +3,505 +701 +Overrides/Royalty Non-operated +Various +583 +0.77 +— +— +— +— +— +— +— +— +— +— +Total +833 +186.94 +312 +157.43 +257 +256.07 +19 +18.57 +60,310 +51,509 +194,137 +176,740 +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 23% of our acreage is developed acreage and has been perpetuated by production. +(3) +With respect to our total undeveloped Utica Shale acreage as of December 31, 2016 , 19%, 36%, 14%, 16% and 15% is subject to expire in 2017, 2018, 2019, 2020 and thereafter. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to +51 +Table of Contents +Index to Financial Statements +participate. Includes 138 gross (18.62 net) gas wells and 36 gross (3.63 net) oil wells drilled by other operators on our acreage. +(4) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(5) +NRI shown is for producing wells. +(6) +The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 25%, 13%, and 62% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2017, 2018 and 2019, respectively. +(7) +NRI/WI is from wells that have been drilled or in which we have elected to participate. +Completed and Present Drilling and Recompletion Activities +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return. +2016 +2015 +2014 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +77 +77 +72 +72 +161 +161 +Dry +— +— +— +— +— +— +Total +77 +77 +72 +72 +161 +161 +Development: +Productive +49 +42.5 +49 +38 +119 +100 +Dry +1 +1 +— +— +7 +6.8 +Total +50 +43.5 +49 +38 +126 +106.8 +Exploratory: +Productive +— +— +— +— +— +— +Dry +— +— +— +— +— +— +Total +— +— +— +— +— +— +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +ITEM 3. +LEGAL PROCEEDINGS +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermillion on July 29, 2016, we were named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermillion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which we referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of +52 +Table of Contents +Index to Financial Statements +the Vermillion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +We were served with the Cameron complaint in early May 2016 and with the Vermillion Complaint in early September 2016. The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermillion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the lawsuit to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs have filed a motion to remand, but both Courts have stayed further proceedings on the motions to remand pending a ruling from the United States Court of Appeals, Fifth Circuit on similar jurisdictional issues in another matter. The plaintiffs have granted all defendants an extension of time to file responsive pleadings to the Complaints until the District Courts rule on the motions to remand. We have not had the opportunity to evaluate the applicability of the allegations made in such complaints to our operations. Due to the early stages of these matters, management cannot determine the amount of loss, if any, that may result. +In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Price Range of Common Stock +Our common stock is quoted on the NASDAQ Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods +53 +Table of Contents +Index to Financial Statements +presented: +Price Range of +Common Stock +High +Low +2015 +First Quarter +$ +48.60 +$ +35.00 +Second Quarter +52.58 +39.29 +Third Quarter +40.59 +28.97 +Fourth Quarter +36.12 +20.21 +2016 +First Quarter +$ +31.05 +$ +21.00 +Second Quarter +34.67 +26.00 +Third Quarter +32.50 +25.34 +Fourth Quarter +30.47 +21.30 +Unregistered Sales of Equity Securities and Use of Proceeds +None. +Repurchases of Equity Securities +None. +Holders of Record +At the close of business on February 7, 2017, there were 310 stockholders of record holding 158,829,816 shares of our outstanding common stock. There were approximately 51,525 beneficial owners of our common stock as of February 7, 2017. +Dividend Policy +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock. +ITEM 6. +SELECTED FINANCIAL DATA +You should read the following selected consolidated financial data in conjunction with Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2016 , December 31, 2015 and December 31, 2014 and the selected consolidated balance sheet data at December 31, 2016 and December 31, 2015 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2013 and December 31, 2012 and the selected consolidated balance sheet data at December 31, 2014 , December 31, 2013 and December 31, 2012 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table. +54 +Table of Contents +Index to Financial Statements +Fiscal Year Ended December 31, +2016 +2015 +2014 +2013 +2012 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +385,910 +$ +708,990 +$ +670,762 +$ +262,225 +$ +248,601 +Costs and expenses: +Lease operating expenses +68,877 +69,475 +52,191 +26,703 +24,308 +Production taxes +13,276 +14,740 +24,006 +26,933 +28,957 +Midstream gathering and processing +165,972 +138,590 +64,467 +11,030 +443 +Depreciation, depletion and amortization +245,974 +337,694 +265,431 +118,880 +90,749 +Impairment of oil and gas properties +715,495 +1,440,418 +— +— +— +General and administrative +43,409 +41,967 +38,290 +22,519 +13,808 +Accretion expense +1,057 +820 +761 +717 +698 +(Gain) loss on sale of assets +— +— +(11 +) +508 +(7,300 +) +1,254,060 +2,043,704 +445,135 +207,290 +151,663 +(Loss) Income from Operations +(868,150 +) +(1,334,714 +) +225,627 +54,935 +96,938 +Other (Income) Expense: +Interest expense +63,530 +51,221 +23,986 +17,490 +7,458 +Interest income +(1,230 +) +(643 +) +(195 +) +(297 +) +(72 +) +Litigation settlement +— +— +25,500 +— +— +Insurance proceeds +(5,718 +) +(10,015 +) +— +— +— +Loss on debt extinguishment +23,776 +— +— +— +— +Gain on contribution of investments +— +— +(84,470 +) +— +— +Loss (income) from equity method investments +33,985 +106,093 +(139,434 +) +(213,058 +) +(8,322 +) +Other expense (income) +129 +(485 +) +(504 +) +(528 +) +(325 +) +114,472 +146,171 +(175,117 +) +(196,393 +) +(1,261 +) +(Loss) Income from Continuing Operations before Income Taxes +(982,622 +) +(1,480,885 +) +400,744 +251,328 +98,199 +Income Tax (Benefit) Expense +(2,913 +) +(256,001 +) +153,341 +98,136 +26,363 +(Loss) Income from Continuing Operations +(979,709 +) +(1,224,884 +) +247,403 +153,192 +71,836 +Discontinued Operations: +Loss on disposal of Belize properties, net of tax +— +— +— +— +3,465 +Net (Loss) Income Available to Common Stockholders +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +$ +68,371 +Net (Loss) Income Per Common Share—Basic: +$ +(7.97 +) +$ +(12.27 +) +$ +2.90 +$ +1.98 +$ +1.22 +Net (Loss) Income Per Common Share—Diluted: +$ +(7.97 +) +$ +(12.27 +) +$ +2.88 +$ +1.97 +$ +1.21 +55 +Table of Contents +Index to Financial Statements +At December 31, +2016 +2015 +2014 +2013 +2012 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +4,223,145 +$ +3,334,734 +$ +3,619,473 +$ +2,685,039 +$ +1,569,431 +Total debt, including current maturity +$ +1,593,875 +$ +946,263 +$ +703,564 +$ +291,090 +$ +290,101 +Total liabilities +$ +2,039,253 +$ +1,295,897 +$ +1,323,177 +$ +634,801 +$ +443,023 +Stockholders’ equity +$ +2,183,892 +$ +2,038,837 +$ +2,296,296 +$ +2,050,238 +$ +1,126,408 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. +Overview +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In December 2016, we entered into a definitive agreement to purchase oil and natural gas assets including 46,400 net surface acres with multiple producing zones, including the Woodford and Springer formations, in Grady, Stephens, and Garvin counties, Oklahoma, (see Item 1. " Business- Our Pending Acquisition ") which we expect to complete in February 2017. In addition, we have producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and interests in entities that operate in Southeast Asia, including the Phu Horm gas field in Thailand. We also hold an approximate 24.2% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the NASDAQ Global Select Market, to which we contributed our membership interest in Mammoth Partners LLC (previously, Mammoth Energy Partners LP) in connection with Mammoth Energy’s initial public offering completed on October 19, 2016. +Prices for oil and natural gas have historically been volatile and subject to significant fluctuation in response to changes in supply and demand, market uncertainty and a variety of other factors beyond our control. The decline in commodity prices that began in mid-2014 continued during 2015 and into 2016. In response to these declining commodity prices, during 2015 we reduced our capital expenditures by approximately 36% as compared to 2014 and continued to focus on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner. During 2016, we continued our focus on operational efficiencies and cost reductions, locking in approximately 85% of our currently anticipated drilling and completions costs for 2017. +2016 and 2017 Year to Date Highlights +• +Production increased 32% to approximately 263,430 MMcfe for the year ended December 31, 2016 from approximately 200,089 MMcfe for the year ended December 31, 2015 . +• +Oil and natural gas revenues, before the impact of derivatives, increased 11% to $560.4 million for the year ended December 31, 2016 from $505.5 million for the year ended December 31, 2015 . +• +During 2016, we spud 50 gross (43.5 net) wells, participated in an additional 35 gross (6.9 net) wells that were drilled by other operators on our Utica Shale acreage and recompleted 77 gross and net wells. Of our 50 new wells spud +56 +Table of Contents +Index to Financial Statements +during 2016, 16 were completed as producing wells and two were non-productive and, at year end, 26 were in various stages of completion and six were drilling. +• +During the year ended December 31, 2016, we reduced our unit lease operating expense by 25% to $0.26 per Mcfe from $0.35 per Mcfe during the year ended December 31, 2015. +• +During the year ended December 31, 2016, we reduced our unit midstream gathering and processing expense by 9% to $0.63 per Mcfe from $0.69 per Mcfe during the year ended December 31, 2015. +• +On December 13, 2016, we entered into a purchase agreement with Vitruvian, an unrelated third-party seller to acquire certain assets including 46,000 net surface acres with multiple producing zones in Grady, Stephens, and Garvin counties, Oklahoma, for a total purchase price consisting of $1.35 billion in cash and approximately 23.9 million shares of our common stock, subject to adjustment. See Item 1. " Business - Our Pending Acquisition ." The closing of the Acquisition is expected to occur in February 2017, although delays could occur. +• +In February 2016, we entered into an agreement with Rice to develop natural gas gathering assets in the dedicated areas. We contributed certain gathering assets for a 25% interest in Strike Force. Rice acts as operator and owns the remaining 75% interest in Strike Force. +• +On March 15, 2016, we issued 16,905,000 shares of our common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $411.7 million , after underwriting discounts and commissions and offering expenses. We intend to use the net proceeds from this offering primarily to fund a portion of our 2017 capital development plan and for general corporate purposes. +• +On October 14, 2016, we issued $650.0 million in aggregate principal amount of 6.000% Senior Notes due 2024, or the 2024 Notes. The net proceeds of approximately $638.9 million from the offering of the 2024 Notes were used, together with cash on hand, to repurchase (in a cash tender offer) or redeem all of our 7.75% senior notes due 2020, which we refer to as the 2020 Notes, of which $600.0 million in the aggregate principal amount was then outstanding. +• +On December 21, 2016, we issued 33,350,000 shares of our common stock in an underwritten public offering, which included 4,350,000 shares of common stock issued pursuant to an option to purchase additional shares granted to the underwriters. The net proceeds from this equity offering were approximately $698.8 million after deducting underwriting discounts and commissions and estimated offering expenses. We intend to use these net proceeds, together with the net proceeds from the offering of the 2025 Notes discussed below and cash on hand, to fund the cash portion of the purchase price of the Pending Acquisition. +• +On December 21, 2016, we issued $600.0 million in aggregate principal amount of 6.375% Senior Notes due 2025, or the 2025 Notes. We received approximately $590.8 million in net proceeds from the offering of the 2025 Notes, after deducting the initial purchasers’ discounts and estimated offering expenses. As discussed above, we intend to use the net proceeds from the offering of the 2025 Notes, together with the net proceeds from our December 2016 underwritten public offering of common stock and cash on hand to fund the cash portion of the purchase price for the Pending Acquisition. +• +During the year ended December 31, 2016, we sold a non-core exploratory acreage position in the Utica Shale in West Virginia. We reinvested the net proceeds from that sale, together with cash on hand, in the acquisition of approximately 12,600 net undeveloped acres in the core of the dry gas window of the Utica Shale in northern Monroe County, Ohio for an aggregate purchase price of approximately $86.6 million. +• +During 2017 (through February 10, 2017 ), we spud ten gross (9.2 net) wells. As of February 10, 2017 , four wells were waiting on completion and six were still being drilled. +• +On October 19, 2016, Mammoth Energy completed its IPO of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth. We currently hold an approximate 24.2% equity interest in Mammoth Energy. +57 +Table of Contents +Index to Financial Statements +Critical Accounting Policies and Estimates +Our disc ussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and totaled $1.6 billion at December 31, 2016 and $1.8 billion at December 31, 2015 . These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development. +Ceiling Test . Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling (as defined in the preceding paragraph). If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016 . If prices of oil, natural gas and natural gas liquids decline in the future, we may be required to further write down the value of our oil and natural gas properties, which could negatively affect our results of operations. +Asset Retirement Obligations . We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities. +We account for abandonment and restoration liabilities under FASB ASC 410 which requires us to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +58 +Table of Contents +Index to Financial Statements +The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates. +Oil and Gas Reserve Quantities . Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Netherland, Sewell & Associates, Inc. and to a lesser extent our personnel have prepared reserve reports of our reserve estimates at December 31, 2016 on a well-by-well basis for our properties. +Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following: +• +the quality and quantity of available data; +• +the interpretation of that data; +• +the accuracy of various mandated economic assumptions; and +• +the judgments of the individuals preparing the estimates. +Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Periodically, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2016 , a valuation allowance of $645.8 million had been established for the net deferred tax asset, with the exception of certain NOLs and alternative minimum tax, or AMT, credits that we expect to realize on a more likely than not basis. +Revenue Recognition . We derive almost all of our revenue from the sale of crude oil and natural gas produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals. +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. In accordance with FASB ASC 825 , "Financial Instruments," we elected the fair value option of accounting for our equity method investment in Diamondback's stock. At the end of each reporting period, the quoted closing market price of Diamondback's stock was multiplied by the total shares owned by us and +59 +Table of Contents +Index to Financial Statements +the resulting gain or loss was recognized in income from equity method investments in the consolidated statements of operations. As of December 31, 2014, we had sold all of our shares of common stock of Diamondback. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. For the years ended December 31, 2016 and 2015 , we recognized an impairment loss related to our investment in Grizzly of approximately $23.1 million and $101.6 million , respectively. At December 31, 2014 , we fully impaired our investment in Tatex III. +Commitments and Contingencies . Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. We follow the provisions of FASB ASC 815, “ Derivatives and Hedging ,” as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While we have historically designated derivative instruments as accounting hedges, effective January 1, 2015, we discontinued hedge accounting prospectively. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +See Item 7. " Commodity Price Risk " for a summary of our derivative instruments in place as of December 31, 2016 . +RESULTS OF OPERATIONS +Results of Operations +The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +60 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2016 +2015 +2014 +($ In thousands) +Gas sales +Gas production volumes (MMcf) +227,594 +156,151 +59,318 +Total Gas sales +$ +420,128 +$ +324,733 +$ +226,126 +Gas sales without the impact of derivatives ($/Mcf) +$ +1.85 +$ +2.08 +$ +3.81 +Impact from settled derivatives ($/Mcf) +$ +0.60 +$ +0.71 +$ +(0.20 +) +Average Gas sales price, including settled derivatives ($/Mcf) +$ +2.45 +$ +2.79 +$ +3.61 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,126 +2,899 +2,684 +Total Oil and condensate sales +$ +81,173 +$ +122,615 +$ +241,210 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +38.18 +$ +42.29 +$ +89.88 +Impact from settled derivatives ($/Bbl) +$ +5.11 +$ +3.12 +$ +0.13 +Average Oil and condensate sales price, including settled derivatives ($/Bbl) +$ +43.29 +$ +45.41 +$ +90.01 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +161,562 +185,792 +86,092 +Total Natural gas liquids sales +$ +59,115 +$ +58,129 +$ +94,127 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.37 +$ +0.31 +$ +1.09 +Impact from settled derivatives ($/Gal) +$ +(0.01 +) +$ +— +$ +— +Average Natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.36 +$ +0.31 +$ +1.09 +Gas, oil and condensate and natural gas liquids sales +Gas equivalents (MMcfe) +263,430 +200,089 +87,719 +Total gas, oil and condensate and natural gas liquids sales +$ +560,416 +$ +505,477 +$ +561,463 +Gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.13 +$ +2.53 +$ +6.40 +Impact from settled derivatives ($/Mcfe) +$ +0.56 +$ +0.60 +$ +(0.13 +) +Average gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.69 +$ +3.13 +$ +6.27 +Production Costs: +Average production costs (per Mcfe) +$ +0.26 +$ +0.35 +$ +0.59 +Average production taxes and midstream costs (per Mcfe) +$ +0.68 +$ +0.77 +$ +1.01 +Total production and midstream costs and production taxes (per Mcfe) +$ +0.94 +$ +1.12 +$ +1.60 +61 +Table of Contents +Index to Financial Statements +The total volume hedged for 2016 represented approximately 77% of our total sales volumes for the year. The total volume hedged for 2015 represented approximately 46% of our total sales volumes for the year. The total volume hedged for 2014 represented approximately 62% of our total sales volumes for the year. +From 2015 to 2016 , our net equivalent gas production increase d 32% from 200,089 MMcfe to 263,430 MMcfe primarily as a result of the continued development of our Utica Shale acreage. From 2014 to 2015 , our net equivalent gas production increased 128% from 87,719 MMcfe to 200,089 MMcfe primarily as a result of the development of our Utica Shale acreage. We currently estimate that our 2017 production will be between 381,425 and 401,500 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. See Item 1A. "Risk Factors." +Comparison of the Years Ended December 31, 2016 and December 31, 2015 +We reported a net loss of $979.7 million for the year ended December 31, 2016 as compared to a net loss of $1.2 billion for the year ended December 31, 2015 . This decrease in period-to-period net loss was due primarily to a $724.9 million decrease of impairment of oil and gas properties, a $91.7 million decrease in depreciation, depletion and amortization expense and a $72.1 million decrease in loss from equity method investments, partially offset by a $323.1 million decrease in oil and gas revenues, a $27.4 million increase in midstream gathering and processing expenses, a $23.8 million loss on debt extinguishment and a $253.1 million decrease in income tax benefit for the year ended December 31, 2016 , as compared to the year ended December 31, 2015 . +Oil and Gas Revenues . For the year ended December 31, 2016 , we reported oil and natural gas revenues of $385.9 million as compared to oil and natural gas revenues of $709.0 million during 2015 . This $323.1 million , or 46% , decrease in revenues was primarily attributable to the following: +• +A $378.0 million decrease in natural gas and oil sales due to an unfavorable change in gains and losses from derivative instruments. Of the total change, $407.0 million was due to unfavorable changes in the fair value of our open derivative positions in each period and $29.0 million was due to a favorable change in settlements related to our derivative positions. +• +A $95.4 million increase in gas sales without the impact of derivatives due to a 46% increase in gas sales volumes, partially offset by an 11% decrease in natural gas market prices. +• +A $41.4 million decrease in oil and condensate sales without the impact of derivatives due to a 27% decrease in oil and condensate sales volumes and a 10% decrease in oil and condensate market prices. +• +A $1.0 million increase in natural gas liquids sales without the impact of derivatives due to a 17% increase in natural gas liquids market prices, partially offset by a 13% decrease in natural gas liquids sales volumes. +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes decrease d to $68.9 million for the year ended December 31, 2016 from $69.5 million for the year ended December 31, 2015 . This decrease was mainly the result of an decrease in expenses related to contract labor and field supervision, field telemetry, facility repairs and maintenance and water disposal, partially offset by increases in water hauling, compression and ad valorem taxes. +Production Taxes . Production taxes decrease d to $13.3 million for the year ended December 31, 2016 from $14.7 million for 2015 . This decrease was primarily related to changes in our product mix and production location, as well as a decrease in commodity prices. +Midstream Gathering and Processing Expenses . Midstream gathering and processing expenses increase d by $27.4 million to $166.0 million for the year ended December 31, 2016 from $138.6 million for 2015 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2016 and 2015 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense decrease d to $246.0 million for the year ended December 31, 2016 , and consisted of $243.1 million in depletion of oil and natural gas properties and $2.9 million in depreciation of other property and equipment, as compared to total DD&A expense of $337.7 million for 2015 . This decrease was due to a decrease in our full cost pool as a result of our 2015 and 2016 ceiling test +62 +Table of Contents +Index to Financial Statements +impairments and an increase in our total proved reserves volume used to calculate our total DD&A expense, partially offset by an increase in our production. +General and Administrative Expenses . Net general and administrative expenses increase d to $43.4 million for the year ended December 31, 2016 from $42.0 million for the year ended December 31, 2015 . This $1.4 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, increases in fees for tax services, bank service charges, computer support, legal fees and consulting services, partially offset by a decrease in stock compensation expense. +Accretion Expense . Accretion expense increased to $1.1 million for the years ended December 31, 2016 from $0.8 million for the year ended December 31, 2015 . +Interest Expense . Interest expense increase d to $63.5 million for the year ended December 31, 2016 from $51.2 million for the year ended December 31, 2015 due primarily to the issuance of $350.0 million of 6.625% Senior Notes due 2023 on April 21, 2015 and the issuance of $600.0 million of the 2025 Notes on December 21, 2016, partially offset by our repurchase or redemption of the 2020 Notes in October 2016 with the net proceeds from our issuance of $650.0 million of the 2024 Notes. Total weighted debt outstanding under our revolving credit facility was $0.2 million for the year ended December 31, 2016 as compared to $46.6 million outstanding under such facility for 2015 . Additionally, we capitalized approximately $8.7 million and $13.3 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2016 and December 31, 2015 , respectively. This decrease in capitalized interest in the 2016 period was the result of changes to our development plan for our oil and natural gas properties. +Income Taxes . As of December 31, 2016 , we had a net operating loss carry forward of approximately $463.1 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2016 , a valuation allowance of $645.8 million was established against the net deferred tax asset, with the exception of certain state NOLs and AMT credits that we expect to be able to utilize with net operating loss carrybacks and tax planning in the amount of $4.7 million. We recognized an income tax benefit from continuing operations of $2.9 million for the year ended December 31, 2016 . +Comparison of the Years Ended December 31, 2015 and December 31, 2014 +We reported a net loss of $1.2 billion for the year ended December 31, 2015 as compared to net income of $246.9 million for the year ended December 31, 2014 . This decrease in period-to-period net income was due primarily to to an impairment charge of $1.4 billion , a $17.3 million increase in lease operating expenses, a $74.1 million increase in midstream gathering and processing expenses, a $3.7 million increase in general and administrative expenses, a $245.5 million decrease in income from equity method investments and a $27.2 million increase in interest expense, partially offset by a $38.2 million increase in oil and natural gas revenues, $10.0 million of insurance proceeds and a $409.3 million decrease in income tax expense for the year ended December 31, 2015 , as compared to the year ended December 31, 2014 . In addition, our 2014 net income included $79.7 million of income recognized from our equity method investment in Diamondback, $84.8 million of income recognized from our equity method investment in Blackhawk and $84.5 million of income recognized from our contribution of investments to Mammoth. +Oil and Gas Revenues . For the year ended December 31, 2015 , we reported oil and natural gas revenues of $709.0 million as compared to oil and natural gas revenues of $670.8 million during 2014 . This $38.2 million , or 6% , increase in revenues was primarily attributable to the following: +• +A $94.2 million increase in natural gas and oil sales due to favorable change in gains and losses from derivative instruments. Of the total change, $131.7 million was due to a favorable change in settlements related to our derivative positions and $37.5 million was due to unfavorable changes in the fair value of our open derivative positions in each period. +• +A $98.6 million increase in gas sales without the impact of derivatives due to a 163% increase in gas sales volumes, partially offset by a 45% decrease in natural gas market prices. +• +a $118.6 million decrease in oil and condensate sales without the impact of derivatives due to a 53% decrease in oil and condensate market prices, partially offset by an 8% increase in oil and condensate sales volumes. +63 +Table of Contents +Index to Financial Statements +• +A $36.0 million decrease in natural gas liquids sales without the impact of derivatives due to a 71% decrease in natural gas liquids market prices, partially offset by a 116% increase in natural gas liquids sales volumes. +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $69.5 million for the year ended December 31, 2015 from $52.2 million for the year ended December 31, 2014 . This increase was mainly the result of an increase in expenses related to property taxes, contract labor and field supervision, field telemetry, location repair, rentals, facility repairs and maintenance and water hauling and disposal due to our increased production in the Utica Shale. +Production Taxes . Production taxes decreased to $14.7 million for the year ended December 31, 2015 from $24.0 million for 2014 . This decrease was primarily related to changes in our product mix and production location, as well as the decline in commodity prices. +Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $74.1 million to $138.6 million for the year ended December 31, 2015 from $64.5 million for 2014 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2015 and 2014 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $337.7 million for the year ended December 31, 2015 , and consisted of $335.3 million in depletion of oil and natural gas properties and $2.4 million in depreciation of other property and equipment, as compared to total DD&A expense of $265.4 million for 2014 . This increase was due to an increase in our full cost pool as a result of our capital activities as well as an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $42.0 million for the year ended December 31, 2015 from $38.3 million for the year ended December 31, 2014 . This $3.7 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, increases in fees for audit services, bank service charges, computer support and travel expense, partially offset by decreases in stock compensation expense, consulting expense, legal expense and franchise taxes and an increase in general and administrative costs related to exploration and development activity capitalized to the full cost pool. +Accretion Expense . Accretion expense remained relatively flat at $0.8 million for the years ended December 31, 2015 and 2014 . +Interest Expense . Interest expense increased to $51.2 million for the year ended December 31, 2015 from $24.0 million for the year ended December 31, 2014 due primarily to the issuance of $300.0 million of additional 7.75% Senior Notes due 2020 on August 18, 2014, the issuance of $350.0 million of 6.625% Senior Notes due 2023 on April 21, 2015 and increased borrowings under our revolving credit facility during 2015. Total weighted debt outstanding under our revolving credit facility was $46.6 million for the year ended December 31, 2015 as compared to $22.8 million outstanding under such facility for 2014. Additionally, we capitalized approximately $13.3 million and $9.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2015 and December 31, 2014 , respectively. This increase in capitalized interest in the 2015 period was the result of an increase in our undeveloped oil and natural gas properties. +Income Taxes . As of December 31, 2015 , we had a net operating loss carry forward of approximately $132.0 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset as a result of recording a full cost ceiling impairment of $1.4 billion. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2015 , a valuation allowance of $281.8 million was established against the net deferred tax asset, with the exception of certain state NOL's and AMT credits that we expect to be able to utilize with net operating loss carrybacks and tax planning in the amount of $24.2 million. We recognized an income tax benefit from continuing operations of $256.0 million for the year ended December 31, 2015 . +Liquidity and Capital Resources +Overview . Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production. +64 +Table of Contents +Index to Financial Statements +Net cash flow provided by operating activities was $ 337.8 million for the year ended December 31, 2016 as compared to net cash flow provided by operating activities of $ 322.2 million for 2015 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 13% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses. +Net cash flow provided by operating activities was $322.2 million for the year ended December 31, 2015 , as compared to net cash flow provided by operating activities of $409.9 million for 2014 . This decrease was primarily the result of a 54% decrease in net realized Mcfe prices and increases in our operating expenses due to our increased activity in the Utica Shale, partially offset by an increase in cash receipts from our oil and natural gas purchasers due to a 128% increase in our net Mcfe production. +Net cash used in investing activities for the year ended December 31, 2016 was $ 905.6 million as compared to $ 1.6 billion for 2015 . During the year ended December 31, 2016 , we spent $ 724.9 million in additions to oil and natural gas properties, of which $346.7 million was spent on our 2016 drilling and recompletion programs, $145.3 million was spent on expenses attributable to the wells spud, completed and recompleted during 2015, $4.3 million was spent on facility enhancements, $3.7 million was spent on plugging costs, $154.5 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. In addition, $ 15.5 million was invested in Grizzly and $11.0 million was invested in Strike Force. We did not make any material investments in our our other equity investments during the year ended December 31, 2016 . We also received approximately $45.8 million from the sale of oil and gas properties, primarily the sale of non-producing leasehold acreage in the non-core area of our Utica acreage and spent $185.0 million to fund the escrow deposit for our pending acquisition. During the year ended December 31, 2016 , we used cash from operations and proceeds from our 2015 and 2016 equity and debt offerings for our investing activities. +Net cash used in investing activities for the year ended December 31, 2015 was $1.6 billion as compared to $1.1 billion for 2014 . During the year ended December 31, 2015 , we spent $1.6 billion in additions to oil and natural gas properties, of which $217.6 million was spent on our 2015 drilling and recompletion programs, $512.0 million was spent on expenses attributable to the wells drilled and recompleted during 2014, $705.1 million was spent on the AEU and Paloma acquisitions, $9.9 million was spent on facility enhancements, $3.1 million was spent on plugging costs and $96.2 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, with the remainder attributable mainly to capitalized general and administrative expenses. In addition, $14.5 million was invested in Grizzly. We did not make an material investments in our other equity investments during the year ended December 31, 2015 . During the year ended December 31, 2015 , we used cash from operations and proceeds from our 2014 equity and 2015 debt offerings for our investing activities. +Net cash provided by financing activities for the year ended December 31, 2016 was $ 1.7 billion as compared to net cash provided by financing activities of $ 1.2 billion for 2015 . The 2016 amount provided by financing activities is primarily attributable to the net proceeds of $1.2 billion from our 2016 debt offerings. partially offset by the redemption of our 2020 Notes, and net proceeds of $1.1 billion from our 2016 equity offerings. +Net cash provided by financing activities for the year ended December 31, 2015 was $1.2 billion as compared to $410.2 million for 2014 . The 2015 amount provided by financing activities is primarily attributable to the gross proceeds of $350.0 million from our 2015 debt offering and net proceeds of $981.5 million from our 2015 equity offerings. +Credit Facility . We have entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 13, 2021. As of December 31, 2016 , we had no balance outstanding under our revolving credit facility and total funds available for borrowing, after giving effect to an aggregate of $209.7 million of letters of credit, were $490.3 million . This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility. +Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 1.00% to 2.00%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 2.00% to 3.00%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average +65 +Table of Contents +Index to Financial Statements +London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts and forward sales contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2016 . +Senior Notes . In October 2012, December 2012 and August 2014, we issued an aggregate of $600.0 million in principal amount of our 7.75% senior notes due 2020 which were subsequently exchanged for substantially identical senior notes registered under the Securities Act. These senior notes, which were issued under an indenture among us, our subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, were treated as a single class of debt securities under the senior note indenture and are referred to collectively as the 2020 Notes. Interest on the 2020 Notes accrued at a rate of 7.75% per annum on the outstanding principal amount payable semi-annually on May 1 and November 1 of each year. The 2020 Notes were senior unsecured obligations and ranked equally in the right of payment with all of our other senior indebtedness and were senior in right of payment to any of our future subordinated indebtedness. We had the option to redeem some or all of the 2020 Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, we had the option to redeem the 2020 Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, we had the option to redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2020 Notes initially issued remained outstanding immediately after such redemption. +On October 6, 2016 , we commenced a cash tender offer to purchase any and all of the 2020 Notes, which tender offer expired on October 13, 2016 and settled on October 14, 2016 . Holders of the 2020 Notes that were validly tendered and accepted at or prior to the expiration time of the tender offer, or who delivered the 2020 Notes pursuant to the guaranteed delivery procedures, received total cash consideration of $1,042 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date. An aggregate of $403.5 million in principal amount of the 2020 Notes was validly tendered in the tender offer. The remaining 2020 Notes that were not tendered in the tender offer were redeemed by us. The redemption payment included approximately $196.5 million in aggregate principal amount at a redemption price of 103.875% of the principal amount of the redeemed 2020 Notes, plus accrued and unpaid interest thereon to the redemption date. Upon deposit of the redemption payment with the paying agent on October 14, 2016 , the indenture governing the 2020 Notes was fully satisfied and discharged. The cash tender offer for the 2020 Notes and redemption of the remaining 2020 Notes were funded with the net proceeds from the offering of the 2024 Senior Notes (as discussed below) and cash on hand. +In April 2015, we issued an aggregate of $350.0 million in principal amount of our 6.625% senior notes due 2023 under a new indenture, dated as of April 21, 2015, among us, our subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Interest on these senior notes, which we refer to as the 2023 Notes, accrues at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes will mature on May 1, 2023 and are our senior unsecured obligations and rank equally in right of payment with all of our other senior indebtedness, including the 2020 Notes, and senior in right of payment to any of our future subordinated indebtedness. We may redeem some or all of the 2023 Notes at any time on or after May 1, 2018, at the +66 +Table of Contents +Index to Financial Statements +redemption prices listed in the indenture relating to the 2023 Notes. Prior to May 1, 2018, we may redeem all or a portion of the 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 1, 2018, we may redeem the 2023 Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2023 Notes issued prior to such date at a redemption price of 106.625%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings. +On October 14, 2016 , we issued the 2024 Notes in aggregate principal amount of $650.0 million. The 2024 Notes were issued under an indenture, dated as of October 14, 2016, among us, the subsidiary guarantors party thereto and the senior note indenture, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under this indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016 , payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017 . The 2024 Notes will mature on October 15, 2024 . We received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer. +On December 21, 2016 , we issued $600.0 million in aggregate principal amount of 2025 Notes. The 2025 Notes were issued under an indenture, dated as of December 21, 2016 , among us, the subsidiary guarantors party thereto and the senior note indenture, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under this indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016 , payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017 . The 2025 Notes will mature on May 15, 2025 . We received approximately $590.8 million in net proceeds from the offering of the 2025 Notes, which we intend to use, together with the net proceeds from our December 2016 offering of common stock and cash on hand, to fund the cash portion of the purchase price for the Pending Acquisition with Vitruvian. +All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the 2023 Notes, 2024 Notes, and 2025 Notes, provided, however, that the 2023 Notes, 2024 Notes, and 2025 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2023 Notes, 2024 Notes, and 2025 Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2023 Notes, 2024 Notes, and 2025 Notes. +If we experience a change of control (as defined in the senior note indentures relating to the 2023 Notes, 2024 Notes, and 2025 Notes), we will be required to make an offer to repurchase the 2023 Notes, 2024 Notes, and 2025 Notes and at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be required to use the remaining proceeds to make an offer to repurchase the 2023 Notes, 2024 Notes, and 2025 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the 2023 Notes, 2024 Notes, and 2025 Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the 2023 Notes, 2024 Notes and 2025 Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the 2023 Notes, 2024 Notes, and 2025 Notes are ranked as "investment grade." +In connection with the offerings of the 2024 Notes and the 2025 Notes, we and our subsidiary guarantors entered into registration rights agreements with the representatives of the initial purchasers pursuant to which we agreed to file a registration statement with respect to an offer to exchange the 2024 Notes and the 2025 Notes for new issues of substantially identical debt securities registered under the Securities Act. +67 +Table of Contents +Index to Financial Statements +Construction Loan. On June 4, 2015, we entered into a construction loan agreement, or the construction loan, with InterBank for the construction of our new corporate headquarters in Oklahoma City. The construction loan allows for maximum principal borrowings of $24.5 million and requires us to fund 30% of the cost of the construction before any funds can be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and is payable on the last day of the month through May 31, 2017. Monthly interest and principal payments are due beginning June 30, 2017, with the final payment due June 4, 2025. As of December 31, 2016 , the total borrowings under the construction loan were approximately $21.0 million . +Capital Expenditures . Our recent capital commitments have been primarily for the execution of our drilling programs, for acquisitions primarily in the Utica Shale, and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities. +Of our net reserves at December 31, 2016 , 63.0% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities. +During 2016, we spud 50 gross (43.5 net) and commenced sales from 54 gross (40.2 net) wells in the Utica Shale for a total cost of approximately $330.1 million. In addition, 35 gross (6.9 net) wells were drilled and 25 gross (6.3 net) wells were turned to sales by other operators on our Utica Shale acreage during 2016 for a total cost to us of approximately $19.3 million. We currently expect to drill 87 to 97 gross (67 to 74 net) horizontal wells and commence sales from 72 to 80 gross (61 to 67 net) wells on our Utica Shale acreage. As of February 10, 2017 , we had six operated horizontal rigs drilling in the play. We also anticipate an additional 30 to 34 gross (10 to 11 net) horizontal wells will be drilled, and sales commenced from 42 to 46 gross (nine to 10 net) horizontal wells, on our Utica Shale acreage by other operators. We currently anticipate our 2017 capital expenditures to be $645.0 million to $690.0 million related to our operated and non-operated Utica Shale activities. +During 2017, we currently expect to drill 19 to 21 gross (16 to 18 net) wells and commence sales from 17 to 19 gross (14 to 16 net) wells on the acreage subject to our pending SCOOP acquisition. We also anticipate ten to 12 gross (one to two net) wells will be drilled, and sales commenced from ten to 12 gross (one to two net) wells on this SCOOP acreage by other operators. We currently expect to spend $170.0 million to $190.0 million on these activities for our pending SCOOP acreage during 2017. +In addition, we currently expect to spend an aggregate of $110.0 million to $120.0 million in 2017 for acreage expenses in the Utica Shale and SCOOP. +During 2016, we recompleted 54 existing wells and spud no new wells for a total cost of approximately $11.7 million at our WCBB field. In our Hackberry fields, in 2016, we recompleted 23 existing wells and spud no new wells for a total cost of approximately $4.4 million. We currently expect to spend $30.0 million to $35.0 million in 2017 to drill 12 to 15 gross and net wells and perform recompletion activities in Southern Louisiana. +During 2016, no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2017. +During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2016 , our net investment in Grizzly was approximately $45.2 million. Our capital requirements in 2016 for Grizzly were approximately $15.5 million . Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, of which Grizzly paid the outstanding balance in full in July 2016. Gulfport paid its share of this amount on June 30, 2016. We do not currently anticipate any material capital expenditures in 2017 related to Grizzly's activities. +We had no material capital expenditures during the during the year ended December 31, 2016 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2017. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. See Item 1. "Business–Our Equity Investments" and Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the years ended December 31, 2016 and 2015 , we did not make any additional investments in these +68 +Table of Contents +Index to Financial Statements +entities, and we do not currently anticipate any capital expenditures related to these entities in 2017. We are currently evaluating strategic alternatives with respect to some of these oil field service entities. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy completed its IPO of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth. Following the IPO, we owned an approximate 24.2% interest in Mammoth Energy. +In February 2016, we, through Midstream Holdings, entered into an agreement with Rice to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the newly formed entity Strike Force, and Rice acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is underway, is providing gathering services for an increasing number of Gulfport operated wells and connectivity of existing dry gas gathering systems and interchangeability of natural gas across our firm portfolio. The first phase of the project has been completed: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. First flow commenced through this lateral on February 1, 2016. In connection with the agreement, we contributed certain assets, including an approximately 11 mile-long, 12-inch diameter gathering line. During the year ended December 31, 2016 , we also paid $11.0 million in cash calls related to Strike Force. We currently anticipate that we will also make $50.0 million to $60.0 million in cash contributions to Strike Force in 2017. +During 2015 and 2016, we continued to focus on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, particularly in light of the continued downturn in commodity prices. We have successfully leveraged the lower commodity price environment to gain access to higher-quality equipment and superior services for reduced costs, which has contributed to increased productivity. We have also renegotiated the contracts for our horizontal drilling rigs and locked in approximately 85% of our currently anticipated drilling and completion costs for 2017. This has allowed us to secure a base level of activity for 2017, hedge against expected increases in service costs and ensure access to quality equipment and experienced crews, all of which we expect to contribute to further efficiency gains. With regard to our leasehold position, we continue to upgrade our acreage within our portfolio and focus our efforts on consolidating our premium, core position in the wet gas and dry gas windows of the Utica Shale. During the third quarter of 2016, we sold a non-core exploratory acreage position in the Utica Shale in West Virginia and re-invested the net proceeds from that sale in the dry gas window of the Utica Shale in Ohio. As a result of the continued decline in commodity prices in early 2016, our initial 2016 development plan contemplated running three rigs beginning in January 2016 and reducing activity levels throughout the year for an average of 2.5 rigs on our operated Utica Shale acreage during 2016, as compared to an average of 3.7 rigs in 2015. However, in response to the strengthening of natural gas prices later in 2016, we contracted three additional rigs, for a total of six rigs, that were phased in between September and December 2016. +Our total capital expenditures for 2017 are currently estimated to be in the range of $845.0 million to $915.0 million for drilling and completion expenditures. In addition, we currently expect to spend $110.0 million to $120.0 million in 2017 for acreage expenses, primarily lease extensions, in the Utica Shale and $50.0 million to $60.0 million to fund our investment in Strike Force. Approximately 75% of our 2017 estimated capital expenditures are currently expected to be spent in the Utica Shale. The 2017 range of capital expenditures is higher than the $549.5 million spent in 2016, primarily due to the increase in current commodity prices. +We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months, including the operations related to our pending acquisition. We believe that our strong liquidity position, hedge portfolio and conservative balance sheet position us well to react quickly to changing commodity prices and accelerate our activity within the Utica Basin from the current six rigs, or to scale back our activity, as the market conditions warrant. Notwithstanding the foregoing, in the event commodity prices decline from current levels, our capital or other costs increase, our equity investments require additional contributions and/or we pursue additional equity method investments or acquisitions, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the current low commodity price environment worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected. +69 +Table of Contents +Index to Financial Statements +Commodity Price Risk +The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past seven years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $26.05 per barrel, or Bbl, in February 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.61 per MMBtu in March 2016 to a high of $7.51 per MMBtu in January 2010. During 2016, WTI prices ranged from $26.21 to $54.51 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.61 to $3.99 per MMBtu. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2016 . +Commitments +In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2016 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2016 , we have plugged 513 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation. +Contractual and Commercial Obligations +The following table sets forth our contractual and commercial obligations at December 31, 2016 : +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +6.625% senior unsecured notes due 2023 (1) +$ +500,719 +$ +23,188 +$ +46,375 +$ +46,375 +384,781 +6.000% senior unsecured notes due 2024 (2) +962,210 +37,637 +78,000 +78,000 +768,573 +6.375% senior unsecured notes due 2024 (3) +921,423 +33,006 +76,500 +76,500 +735,417 +Asset retirement obligations +34,276 +195 +599 +760 +32,722 +Employment agreements +350 +350 +— +— +— +Building loan (4) +15,467 +276 +1,108 +1,361 +12,722 +Firm transportation contracts +3,820,181 +176,800 +474,201 +474,201 +2,694,979 +Purchase obligations (5) +91,770 +52,440 +39,330 +— +— +Operating leases +637 +583 +54 +— +— +Total +$ +6,347,033 +$ +324,475 +$ +716,167 +$ +677,197 +$ +4,629,194 +_____________________ +(1) +Includes estimated interest of $23.2 million due in less than one year; $46.4 million due in 1-3 years; $46.4 million due in 3-5 years and $34.8 million due thereafter. +70 +Table of Contents +Index to Financial Statements +(2) Includes estimated interest of $37.6 million due in less than one year; $78.0 million due in 1-3 years; $78.0 million due in 3-5 years and $118.6 million due thereafter. +(3) Includes estimated interest of $33.0 million due in less than one year; $76.5 million due in 1-3 years; $76.5 million due in 3-5 years and $135.4 million due thereafter. +(4) +Does not include estimated interest of $543,000 due in less than one year; $1.7 million due in 1-3 years: $1.4 million due in 3-5 years and $1.9 million due thereafter. +(5) +The purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. +Off-balance Sheet Arrangements +We had no off-balance sheet arrangements as of December 31, 2016 . +New Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which we expect to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach. In July 2015, the FASB decided to defer the effective date by one year (until 2018). We are evaluating the impact of this ASU on our consolidated financial statements and, based on the continuing evaluation of our revenue streams, this ASU is not expected to have a material impact on our net income. We are still in the process of determining whether or not we will use the retrospective method or the modified retrospective approach to implementation. +In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for periods after December 15, 2016, with early adoption permitted. We adopted this guidance in the fourth quarter of 2016 with no impact to our consolidated financial statements. +In April 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysi s. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporation and securitization structure, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. We adopted this ASU on January 1, 2016. As a result, certain of our equity investments were determined to be variable interest entities; however, we were not required to consolidate these investments. +In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs . To simplify the presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance is effective for periods after December 15, 2015. We adopted this guidance on a retrospective basis in the fourth quarter of 2015 and have debt issuance costs offsetting long-term debt at December 31, 2016 and December 31, 2015 as shown in Note 6. +In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The guidance eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if the prior-period information had been revised. The guidance is effective for periods after December 15, 2015. We adopted this guidance in the first quarter of 2016 and there was no impact to our consolidated financial statements. +71 +Table of Contents +Index to Financial Statements +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 705) . Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for periods after December 15, 2016, with early adoption permitted. We adopted this guidance in the fourth quarter of 2016 on a prospective basis; therefore, prior periods were not retrospectively adjusted. +In February 2016, the FASB issued ASU No. 2016-02, Leases . The guidance requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liability for those leases currently classified as operating leases. The accounting for lessors is largely unchanged. The guidance is effective for periods after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements and related disclosures; however, based on our current operating leases, it is not expected to have a material impact. +In March 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The guidance was issued to clarify that change in the counterparty to a derivative instrument that had been designated as the hedging instrument under Topic 815, does not require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for periods after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact on our consolidated financial statements. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements as all current derivative instruments are not designated for hedge accounting. +In March 2016, the FASB issued ASU No. 2016-07, Equity Method and Joint Ventures. This guidance simplified current requirements by eliminating the need to retrospectively apply the equity method of accounting upon obtaining significant influence over an investment that it previously accounted for under the cost basis or at fair value. This guidance is effective for periods after December 15, 2016, with early adoption permitted. We adopted this guidance in fourth quarter of 2016 and there was no impact to our consolidated financial statements as all current investments are accounted for under the equity method of accounting. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting . This guidance was intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for periods after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. +In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This guidance rescinds SEC Staff Observer comments that are codified in Topic 606, Revenue Recognition, and Topic 932, Extractive Activities--Oil and Gas. This amendment is effective upon adoption of Topic 606. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. We are currently evaluating the impact this standard will have on our financial statements and related disclosures and do not anticipate it to have a material affect. +In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance provides guidance of eight specific cash flow issues. This amendment is effective for periods after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. +72 +Table of Contents +Index to Financial Statements +In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interests Held through Related Parties That Are under Common Control . This guidance provides an amendment to the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. We have adopted this ASU and there was no current impact to our consolidated financial statements. +In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers . This guidance updates narrow aspects of the guidance issued in Update 2014-09. This amendment is effective for periods after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this ASU on our consolidated financial statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During the past seven years, the posted price for West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, has ranged from a low of $26.05 per barrel, or Bbl, in February 2016 to a high of $113.39 per Bbl in April 2011. The Henry Hub spot market price of natural gas has ranged from a low of $1.61 per MMBtu in March 2016 to a high of $7.51 per MMBtu in January 2010. During 2016, WTI prices ranged from $26.05 to $54.51 per Bbl and the Henry Hub spot market price of natural gas ranged from $1.61 to $3.99 per MMBtu. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swap positions as of December 31, 2016 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +NYMEX Henry Hub +531,171 +$ +3.17 +2018 +NYMEX Henry Hub +296,438 +$ +3.10 +2019 +NYMEX Henry Hub +4,932 +$ +3.37 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2017 +ARGUS LLS +1,748 +$ +51.97 +2017 +NYMEX WTI +3,353 +$ +54.98 +2018 +NYMEX WTI +899 +$ +55.31 +73 +Table of Contents +Index to Financial Statements +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2017 +Mont Belvieu C3 +1,630 +$ +25.70 +2017 +Mont Belvieu C5 +250 +$ +49.14 +We sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +NYMEX Henry Hub +60,068 +$ +3.12 +2018 +NYMEX Henry Hub +4,932 +$ +2.91 +For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2018 through December 2018. These options expire in December 2017. If executed, we would have additional fixed price swaps for 30,000 MMBtu per day with the option to double at a weighted average price of $3.36 and additional short call options for 30,000 MMBtu per day with the option to double at a weighted average ceiling price of $3.36. +In addition, we have entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2016 , we had the following natural gas basis swap positions for Tetco M2. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +Tetco M2 +12,329 +$ +(0.59 +) +In January and February 2017 , we entered into fixed price swaps for 2017 for approximately 23,000 MMBtu of natural gas per day at a weighted average price of $3.44 per MMbtu and for approximately 1,000 Bbls of C3 propane per day at a weighted average price of $28.56 per Bbl. For 2018 , we entered into fixed price swaps for approximately 87,000 MMBtu of natural gas per day at a weighted average price of $3.19 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX for natural gas and Mont Belvieu for propane. We will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas or Mont Belvieu for propane. +In addition, we entered into natural gas basis swap positions, which settle on the pricing index to basis differential of NPGL MC to the NYMEX Henry Hub natural gas price. In January and February 2017 , we entered into natural gas basis swap positions for 2017 for approximately 38,000 MMBtu of natural gas per day at a weighted average differential of $0.26 per MMBtu. For 2018 , we entered into natural gas basis swap positions for approximately 12,000 MMBtu of natural gas per day at a weighted average differential of $0.26 per MMBtu. +Under our 2017 contracts, we have hedged approximately 60% to 63% of our expected 2017 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. At December 31, 2016 , we had a net liability derivative position of $136.8 million as compared to a net asset derivative position of $186.5 million as of December 31, 2015 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $119.3 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $119.3 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2016 , we had no variable interest rate borrowings +74 +Table of Contents +Index to Financial Statements +outstanding; therefore, an increase in interest rates would not have impacted our interest expense. As of December 31, 2016 , we did not have any interest rate swaps to hedge our interest risks. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this item appears beginning on page F-1 following the signature pages of this Report. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2016 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2016 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2016 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2016 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2016 , as stated in their accompanying report. +75 +Table of Contents +Index to Financial Statements +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +76 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and subsidiaries (the “Company”) as of December 31, 2016 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016 and our report dated February 14, 2017 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 14, 2017 +77 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +None. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 11. +EXECUTIVE COMPENSATION +For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +78 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +The following documents are filed as part of this report or incorporated by reference herein: +(1) +Financial Statements +Reference is made to the Index to Financial Statements appearing on Page F-1. +Reference is also made to the Financial Statements of Diamondback Energy, Inc. (“Diamondback”) that have been included on pages F-1 to F-54 in Diamondback’s Annual Report on Form 10-K (File No. 001-35700) filed with the SEC on February 19, 2015, as such Annual Report on Form 10-K may be amended from time to time, which Financial Statements are incorporated herein by reference. +(2) +Financial Statement Schedules +All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto. +(3) +Exhibits +Exhibit +Number +Description +2.1## +Purchase and Sale Agreement, dated as of December 13, 2016, by and among Gulfport Energy Corporation, SCOOP Acquisition Company, LLC and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +4.4 +Registration Rights Agreement, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC and Scotia Capital (USA) Inc., as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +79 +Table of Contents +Index to Financial Statements +4.5 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.6 +Registration Rights Agreement, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.7 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015) +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Amended and Restated Employment Agreement, dated as of April 29, 2015, by and between the Company and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 7, 2015). +10.8 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.9 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.10 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.11 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.12 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +80 +Table of Contents +Index to Financial Statements +10.13 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +10.14 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 5, 2016). +10.15 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +10.16# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.17# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.18# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.19# +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.20+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.21+ +Separation and Release Agreement by and between Gulfport Energy Corporation and Ross Kirtley entered into November 2, 2016 (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 3, 2016). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +81 +Table of Contents +Index to Financial Statements +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +The schedules (or similar attachments) referenced in this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule (or similar attachment) will be furnished supplementally to the Securities and Exchange Commission. +82 +Table of Contents +Index to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 14, 2017 +GULFPORT ENERGY CORPORATION +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: +February 14, 2017 +By: +/s/ MICHAEL G. MOORE +Michael G. Moore +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: +February 14, 2017 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 14, 2017 +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +(Principal Accounting and Financial Officer) +Date: +February 14, 2017 +By: +/s/ CRAIG GROESCHEL +Craig Groeschel +Director +Date: +February 14, 2017 +By: +/s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: +February 14, 2017 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +Date: +February 14, 2017 +By: +/s/ SCOTT E. STRELLER +Scott E. Streller +Director +S-1 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets, December 31, 2016 and December 31, 2015 +F-3 +Consolidated Statements of Operations, Years Ended December 31, 2016, 2015, and 2014 +F-4 +Consolidated Statements of Comprehensive (Loss) Income, Years Ended December 31, 2016, 2015, and 2014 +F-5 +Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2016, 2015, and 2014 +F-6 +Consolidated Statements of Cash Flows, Year Ended December 31, 2016, 2015, and 2014 +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulfport Energy Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. +As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2016 related to the presentation of deferred income taxes. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 14, 2017 expressed an unqualified opinion. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 14, 2017 +F-2 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, +2016 +December 31, +2015 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +1,275,875 +$ +112,974 +Restricted cash +185,000 +— +Accounts receivable—oil and gas +136,761 +71,872 +Accounts receivable—related parties +16 +16 +Prepaid expenses and other current assets +7,639 +3,905 +Derivative instruments +3,488 +142,794 +Total current assets +1,608,779 +331,561 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $1,580,305 and $1,817,701 excluded from amortization in 2016 and 2015, respectively +6,071,920 +5,424,342 +Other property and equipment +68,986 +33,171 +Accumulated depletion, depreciation, amortization and impairment +(3,789,780 +) +(2,829,110 +) +Property and equipment, net +2,351,126 +2,628,403 +Other assets: +Equity investments +243,920 +242,393 +Derivative instruments +5,696 +51,088 +Deferred tax asset +4,692 +74,925 +Other assets +8,932 +6,364 +Total other assets +263,240 +374,770 +Total assets +$ +4,223,145 +$ +3,334,734 +Liabilities and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +265,124 +$ +265,128 +Asset retirement obligation +195 +75 +Derivative instruments +119,219 +437 +Deferred tax liability +— +50,697 +Current maturities of long-term debt +276 +179 +Total current liabilities +384,814 +316,516 +Long-term derivative instrument +26,759 +6,935 +Asset retirement obligation +34,081 +26,362 +Long-term debt, net of current maturities +1,593,599 +946,084 +Total liabilities +2,039,253 +1,295,897 +Commitments and contingencies (Notes 15 and 16) +Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding +— +— +Stockholders’ equity: +Common stock, $.01 par value; 200,000,000 authorized, 158,829,816 issued and outstanding in 2016 and 108,322,250 in 2015 +1,588 +1,082 +Paid-in capital +3,946,442 +2,824,303 +Accumulated other comprehensive loss +(53,058 +) +(55,177 +) +Retained deficit +(1,711,080 +) +(731,371 +) +Total stockholders’ equity +2,183,892 +2,038,837 +Total liabilities and stockholders’ equity +$ +4,223,145 +$ +3,334,734 +See accompanying notes to consolidated financial statements. +F-3 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2016 +2015 +2014 +(In thousands, except share data) +Revenues: +Gas sales +$ +420,128 +$ +324,733 +$ +226,126 +Oil and condensate sales +81,173 +122,615 +241,210 +Natural gas liquid sales +59,115 +58,129 +94,127 +Net (loss) gain on gas, oil, and NGL derivatives +(174,506 +) +203,513 +109,299 +385,910 +708,990 +670,762 +Costs and expenses: +Lease operating expenses +68,877 +69,475 +52,191 +Production taxes +13,276 +14,740 +24,006 +Midstream gathering and processing +165,972 +138,590 +64,467 +Depreciation, depletion and amortization +245,974 +337,694 +265,431 +Impairment of oil and gas properties +715,495 +1,440,418 +— +General and administrative +43,409 +41,967 +38,290 +Accretion expense +1,057 +820 +761 +Gain on sale of assets +— +— +(11 +) +1,254,060 +2,043,704 +445,135 +(LOSS) INCOME FROM OPERATIONS +(868,150 +) +(1,334,714 +) +225,627 +OTHER (INCOME) EXPENSE: +Interest expense +63,530 +51,221 +23,986 +Interest income +(1,230 +) +(643 +) +(195 +) +Litigation settlement +— +— +25,500 +Insurance proceeds +(5,718 +) +(10,015 +) +— +Loss on debt extinguishment +23,776 +— +— +Gain on contribution of investments +— +— +(84,470 +) +Loss (income) from equity method investments +33,985 +106,093 +(139,434 +) +Other expense (income) +129 +(485 +) +(504 +) +114,472 +146,171 +(175,117 +) +(LOSS) INCOME BEFORE INCOME TAXES +(982,622 +) +(1,480,885 +) +400,744 +INCOME TAX (BENEFIT) EXPENSE +(2,913 +) +(256,001 +) +153,341 +NET (LOSS) INCOME +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +NET (LOSS) INCOME PER COMMON SHARE: +Basic +$ +(7.97 +) +$ +(12.27 +) +$ +2.90 +Diluted +$ +(7.97 +) +$ +(12.27 +) +$ +2.88 +Weighted average common shares outstanding—Basic +122,952,866 +99,792,401 +85,445,963 +Weighted average common shares outstanding—Diluted +122,952,866 +99,792,401 +85,813,182 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +For the Year Ended December 31, +2016 +2015 +2014 +(In thousands) +Net (loss) income +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +Foreign currency translation adjustment (1) +2,119 +(28,502 +) +(16,894 +) +Other comprehensive income (loss) +2,119 +(28,502 +) +(16,894 +) +Comprehensive (loss) income +$ +(977,590 +) +$ +(1,253,386 +) +$ +230,509 +(1) Net of $1.3 million in taxes for the year ended December 31, 2016 . No taxes were recorded for the years ended December 31, 2015 and 2014 . +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Retained +Earnings (Deficit) +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2014 +85,177,532 +$ +851 +$ +1,813,058 +$ +(9,781 +) +$ +246,110 +$ +2,050,238 +Net income +— +— +— +— +247,403 +247,403 +Other Comprehensive Loss +— +— +— +(16,894 +) +— +(16,894 +) +Stock Compensation +— +— +14,860 +— +— +14,860 +Issuance of Restricted Stock +272,665 +3 +(3 +) +— +— +— +Issuance of Common Stock through exercise of options +205,241 +2 +687 +— +— +689 +Balance at December 31, 2014 +85,655,438 +856 +1,828,602 +(26,675 +) +493,513 +2,296,296 +Net loss +— +— +— +— +(1,224,884 +) +(1,224,884 +) +Other Comprehensive Loss +— +— +— +(28,502 +) +— +(28,502 +) +Stock Compensation +— +— +14,359 +— +— +14,359 +Issuance of Common Stock in public offerings, net of related expenses +22,425,000 +224 +981,299 +— +— +981,523 +Issuance of Restricted Stock +236,812 +2 +(2 +) +— +— +— +Issuance of Common Stock through exercise of options +5,000 +— +45 +— +— +45 +Balance at December 31, 2015 +108,322,250 +1,082 +2,824,303 +(55,177 +) +(731,371 +) +2,038,837 +Net loss +— +— +— +— +(979,709 +) +(979,709 +) +Other Comprehensive Income +— +— +— +2,119 +— +2,119 +Stock Compensation +— +— +12,251 +— +— +12,251 +Issuance of Common Stock in public offerings, net of related expenses +50,255,000 +503 +1,109,891 +— +— +1,110,394 +Issuance of Restricted Stock +252,566 +3 +(3 +) +— +— +— +Balance at December 31, 2016 +158,829,816 +$ +1,588 +$ +3,946,442 +$ +(53,058 +) +$ +(1,711,080 +) +$ +2,183,892 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2016 +2015 +2014 +(In thousands) +Cash flows from operating activities: +Net (loss) income +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Accretion of discount—Asset Retirement Obligation +1,057 +820 +761 +Depletion, depreciation and amortization +245,974 +337,694 +265,431 +Impairment of oil and gas properties +715,495 +1,440,418 +— +Stock-based compensation expense +7,351 +8,616 +8,916 +Loss (gain) from equity investments +34,397 +113,120 +(54,171 +) +Gain on debt extinguishment +(1,108 +) +— +— +Gain on contribution of investments +— +— +(84,470 +) +Interest income - note receivable +— +— +(46 +) +Loss (gain) on derivative instruments +323,303 +(83,671 +) +(121,148 +) +Deferred income tax expense (benefit) +18,188 +(254,493 +) +122,917 +Amortization of loan commitment fees +3,660 +3,219 +1,685 +Amortization of note discount and premium +(1,716 +) +(2,165 +) +(533 +) +Changes in operating assets and liabilities: +(Increase) decrease in accounts receivable +(64,889 +) +31,986 +(45,034 +) +Decrease in accounts receivable—related party +— +30 +2,571 +Increase in prepaid expenses +(3,734 +) +(191 +) +(1,133 +) +Increase (decrease) in accounts payable and accrued liabilities and other +43,763 +(47,199 +) +73,925 +Settlement of asset retirement obligation +(4,189 +) +(1,121 +) +(7,201 +) +Net cash provided by operating activities +337,843 +322,179 +409,873 +Cash flows from investing activities: +Deductions to cash held in escrow +8 +8 +8 +Additions to other property and equipment +(33,152 +) +(13,572 +) +(7,030 +) +Additions to oil and gas properties +(724,925 +) +(1,579,129 +) +(1,329,277 +) +Proceeds from sale of oil and gas properties +45,812 +27,998 +4,404 +Repayments on note receivable to related party +— +— +875 +Proceeds from sale of investments +— +— +258,362 +Contributions to equity method investments +(26,472 +) +(14,472 +) +(63,999 +) +Distributions from equity method investments +18,147 +4,914 +— +Funding of restricted cash +(185,000 +) +— +— +Net cash used in investing activities +(905,582 +) +(1,574,253 +) +(1,136,657 +) +Cash flows from financing activities: +Principal payments on borrowings +(87,685 +) +(350,172 +) +(115,690 +) +Borrowings on line of credit +86,000 +250,000 +215,000 +Proceeds from bond issuance +1,250,000 +350,000 +318,000 +Repayment of bonds +(624,561 +) +— +— +Borrowings on term loan +21,049 +— +— +Debt issuance costs and loan commitment fees +(24,718 +) +(8,688 +) +(7,831 +) +Proceeds from issuance of common stock, net of offering costs and exercise of stock options +1,110,555 +981,568 +689 +Net cash provided by financing activities +1,730,640 +1,222,708 +410,168 +Net increase (decrease) in cash and cash equivalents +1,162,901 +(29,366 +) +(316,616 +) +Cash and cash equivalents at beginning of period +112,974 +142,340 +458,956 +Cash and cash equivalents at end of period +$ +1,275,875 +$ +112,974 +$ +142,340 +Supplemental disclosure of cash flow information: +Interest payments +$ +68,966 +$ +59,736 +$ +28,646 +Income tax (receipts) payments +$ +(19,770 +) +$ +16,156 +$ +23,800 +Supplemental disclosure of non-cash transactions: +Capitalized stock based compensation +$ +4,900 +$ +5,743 +$ +5,944 +Asset retirement obligation capitalized +$ +10,971 +$ +8,800 +$ +9,295 +Interest capitalized +$ +9,148 +$ +13,580 +$ +9,687 +Foreign currency translation gain (loss) on equity method investments +$ +3,468 +$ +(28,502 +) +$ +(16,894 +) +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2016 , 2015 AND 2014 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the “Company”) is an independent oil and gas exploration, development and production company with its principal properties located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast. The Company also has an interest in producing properties in Northwestern Colorado in the Niobrara Formation and in Western North Dakota in the Bakken Formation, and has investments in companies operating in the United States, Canada and Thailand. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Buckeye LLC, Gulfport Midstream Holdings, LLC, and SCOOP Acquisition Company, LLC. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company’s accounts receivable—oil and gas primarily are from companies in the oil and gas industry. The majority of its receivables are from three purchasers of the Company’s oil and gas and receivables from joint interest owners on properties the Company operates. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2016 and December 31, 2015 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for 2016 , 2015 and 2014 , adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, the Company recognized a ceiling test impairment of $715.5 million for the year ended +F-8 +Table of Contents +Index to Financial Statements +December 31, 2016 . If prices of oil, natural gas and natural gas liquids continue to decline, the Company may be required to further write down the value of its oil and natural gas properties, which could negatively affect its results of operations. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $1.6 billion and $1.8 billion at December 31, 2016 and December 31, 2015 , respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”), which requires the Company to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, the Company has an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes. +(In thousands) +December 31, 2013 +$ +(9,781 +) +December 31, 2014 +$ +(26,675 +) +December 31, 2015 +$ +(55,175 +) +December 31, 2016 +$ +(51,709 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 11. +F-9 +Table of Contents +Index to Financial Statements +Income Taxes +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 1998 – 2015 U.S. federal and state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2016 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. For the year ended December 31, 2016 , there is no interest or penalties associated with uncertain tax positions in the Company’s consolidated financial statements. +Revenue Recognition +Natural gas revenues are recorded in the month produced and delivered to the purchaser using the entitlement method, whereby any production volumes received in excess of the Company’s ownership percentage in the property are recorded as a liability. If less than Gulfport’s entitlement is received, the underproduction is recorded as a receivable. At December 31, 2016 and 2015 , the Company had no gas imbalance liability. Oil revenues are recognized when ownership transfers, which occurs in the month produced. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the statement of operations. In accordance FASB ASC 825 , "Financial Instruments ," the Company elected the fair value option of accounting for its equity method investment in the common stock of Diamondback Energy Inc. ("Diamondback"). At the end of each reporting period, the quoted closing market price of Diamondback's common stock was multiplied by the total shares owned by the Company and the resulting gain or loss was recognized in loss (income) from equity method investments in the consolidated statements of operations. As of December 31, 2016 and 2015 , the Company did no t own any shares of Diamondback's common stock. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. The Company recognized impairment charges of $23.1 million and $101.6 million related to its investment in Grizzly Oil Sands ULC for the years ended December 31, 2016 and December 31, 2015, respectively. At December 31, 2014 , the Company recognized an impairment of $12.1 million related to its investment in Tatex Thailand III, LLC. See Note 4 for further discussion of these impairments. +Accounting for Stock-Based Compensation +The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC 718, “ Compensation—Stock Compensation ” (“FASB ASC 718”). FASB ASC 718 requires share-based payments to employees, including grants of restricted stock, to be recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between two to five years with either quarterly or annual vesting installments. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and natural gas liquid production. The Company follows the provisions of FASB ASC 815, “ Derivatives and Hedging ” (“FASB ASC 815”) as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. +F-10 +Table of Contents +Index to Financial Statements +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While the Company has historically designated derivative instruments as accounting hedges, effective January 1, 2015, the Company discontinued hedge accounting prospectively. The Company's current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. +Recent Accounting Pronouncements +In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach. In July 2015, the FASB decided to defer the effective date by one year (until 2018). The Company is evaluating the impact of this ASU on its consolidated financial statements, and based on the continuing evaluation of its revenue streams, this ASU is not expected to have a material impact on its net income. The Company is still in the process of determining whether or not it will use the retrospective method or the modified retrospective approach to implementation. +In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The standard is effective for periods after December 15, 2016, with early adoption permitted. The Company adopted this guidance in the fourth quarter of 2016 with no impact to its consolidated financial statements. +In April 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysi s. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporation and securitization structure, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. The Company adopted this ASU on January 1, 2016. As a result, certain of the Company's equity investments were determined to be variable interest entities; however, the Company was not required to consolidate these investments. +In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs . To simplify the presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance is effective for periods after December 15, 2015. The Company adopted this guidance on a retrospective basis in the fourth quarter of 2015 and has debt issuance costs offsetting long-term debt at December 31, 2016 and December 31, 2015 as shown in Note 6. +F-11 +Table of Contents +Index to Financial Statements +In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The guidance eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if the prior-period information had been revised. The guidance is effective for periods after December 15, 2015. The Company adopted this guidance in the first quarter of 2016 and there was no impact to its consolidated financial statements. +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 705) . Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for periods after December 15, 2016, with early adoption permitted. The Company adopted this guidance in the fourth quarter of 2016 on a prospective basis; therefore, prior periods were not retrospectively adjusted. +In February 2016, the FASB issued ASU No. 2016-02, Leases . The guidance requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liability for those leases currently classified as operating leases. The accounting for lessors is largely unchanged. The guidance is effective for periods after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures; however, based on the Company's current operating leases, it is not expected to have a material impact. +In March 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The guidance was issued to clarify that change in the counterparty to a derivative instrument that had been designated as the hedging instrument under Topic 815, does not require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for periods after December 15, 2017, with early adoption permitted. The Company is in the process of evaluating the impact on its consolidated financial statements. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements as all current derivative instruments are not designated for hedge accounting. +In March 2016, the FASB issued ASU No. 2016-07, Equity Method and Joint Ventures. This guidance simplified current requirements by eliminating the need to retrospectively apply the equity method of accounting upon obtaining significant influence over an investment that it previously accounted for under the cost basis or at fair value. This guidance is effective for periods after December 15, 2016, with early adoption permitted. The Company adopted this guidance in the fourth quarter of 2016 and there was no impact to its consolidated financial statements as all current investments are accounted for under the equity method of accounting. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting . This guidance was intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for periods after December 15, 2016, with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements. +In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This guidance rescinds SEC Staff Observer comments that are codified in Topic 606, Revenue Recognition, and Topic 932, Extractive Activities--Oil and Gas. This amendment is effective upon adoption of Topic 606. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, +F-12 +Table of Contents +Index to Financial Statements +reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures and does not anticipate it to have a material affect. +In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance provides guidance of eight specific cash flow issues. This amendment is effective for periods after December 15, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements. +In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interests Held through Related Parties That Are under Common Control . This guidance provides an amendment to the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The Company has adopted this ASU and there was no current impact on its consolidated financial statements. +In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers . This guidance updates narrow aspects of the guidance issued in Update 2014-09. This amendment is effective for periods after December 15, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its consolidated financial statements. +2. +ACQUISITIONS +In April 2015, the Company entered into an agreement to acquire Paloma Partners III, LLC, which is now know as Gulfport Buckeye LLC ("Buckeye"), for a total purchase price of approximately $301.9 million , subject to certain adjustments. Buckeye holds approximately 24,000 net nonproducing acres in the Utica Shale of Ohio. In accordance with the agreement, the Company deposited $75.0 million into an escrow account. At the closing of the transaction the deposit was credited toward the purchase price. This transaction closed on August 31, 2015 for a purchase price of approximately $302.3 million , net of purchase price adjustments. At closing, approximately $30.1 million of the purchase price was placed in escrow as security to the Company for potential indemnification claims that may occur as a result of the sale. +On June 9, 2015 , the Company completed the acquisition of 6,198 gross and net acres located in Belmont and Jefferson Counties, Ohio from American Energy-Utica, LLC ("AEU") for a purchase price of approximately $68.2 million , subject to adjustment. On June 12, 2015 , the Company completed the acquisition of 38,965 gross ( 27,228 net) acres located in Monroe County, Ohio, 14.6 MMcf per day of average net production (estimated for April 2015), 18 gross ( 11.3 net) drilled but uncompleted wells, an 11 mile gas gathering system and a four well pad location from AEU for a total purchase price of approximately $319.0 million (the "Monroe Acquisition"). On June 29, 2015 , the Company acquired an additional 4,950 gross ( 1,900 net) acres in Monroe County for an additional $18.2 million from AEU. The total purchase price of these transactions (collectively referred to as the "AEU Acquisition"), was approximately $405.4 million ( $405.0 million net of purchase price adjustments). At closing, approximately $67.1 million of the purchase price was placed in escrow pending completion of title review after the closing. In December 2015 , approximately $2.4 million of the escrow was released and returned to the Company as a result of final title review. +The AEU Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the June 12, 2015 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 13 for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the AEU Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +The following table summarizes the consideration paid in the AEU Acquisition to acquire the properties and the fair value amount of the assets acquired as of June 12, 2015 . Both the consideration paid and the fair value assigned to the assets is preliminary and subject to adjustment upon final closing. +F-13 +Table of Contents +Index to Financial Statements +(In thousands) +Consideration paid +Cash, net of purchase price adjustments +$ +405,029 +Fair value of identifiable assets acquired +Oil and natural gas properties +Proved +$ +70,804 +Unevaluated +334,225 +Fair value of net identifiable assets acquired +$ +405,029 +3. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2016 and 2015 are as follows: +December 31, +2016 +2015 +(In thousands) +Oil and natural gas properties +$ +6,071,920 +$ +5,424,342 +Office furniture and fixtures +21,204 +12,589 +Building +42,530 +16,915 +Land +5,252 +3,667 +Total property and equipment +6,140,906 +5,457,513 +Accumulated depletion, depreciation, amortization and impairment +(3,789,780 +) +(2,829,110 +) +Property and equipment, net +$ +2,351,126 +$ +2,628,403 +At December 31, 2016 and 2015 , the net book value of the Company's oil and natural gas properties was above the calculated ceiling as a result of the reduced commodity prices during the years ended December 31, 2016 and 2015 , respectively. As a result, the Company recorded an impairment of its oil and natural gas properties under the full cost method of accounting in the amount of $715.5 million and $1.4 billion for the years ended December 31, 2016 and 2015 , respectively. No impairment of oil and natural gas properties was required under the ceiling test for the year ended December 31, 2014 . +Included in oil and natural gas properties at December 31, 2016 and 2015 is the cumulative capitalization of $129.9 million and $100.6 million , respectively, in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 29.3 million , $27.9 million and $25.2 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. +The following is a summary of Gulfport’s oil and gas properties not subject to amortization as of December 31, 2016 : +Costs Incurred in +2016 +2015 +2014 +Prior to 2014 +Total +(In thousands) +Acquisition costs +$ +147,382 +$ +515,905 +$ +314,077 +$ +571,924 +$ +1,549,288 +Exploration costs +— +— +— +— +— +Development costs +18,853 +5,067 +3,248 +1,533 +28,701 +Capitalized interest +3,632 +(876 +) +(2,504 +) +2,064 +2,316 +Total oil and gas properties not subject to amortization +$ +169,867 +$ +520,096 +$ +314,821 +$ +575,521 +$ +1,580,305 +F-14 +Table of Contents +Index to Financial Statements +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2016 : +December 31, 2016 +(In thousands) +Utica +$ +1,577,207 +Niobrara +2,172 +Southern Louisiana +462 +Bakken +96 +Other +368 +$ +1,580,305 +As of December 31, 2015 , approximately $1.8 billion of non-producing leasehold costs was not subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company's non-producing leases have five year extension terms which could extend this time frame beyond five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2016 and 2015 is as follows: +December 31, +2016 +2015 +(In thousands) +Asset retirement obligation, beginning of period +$ +26,437 +$ +17,938 +Liabilities incurred +10,971 +8,800 +Liabilities settled +(4,189 +) +(1,121 +) +Accretion expense +1,057 +820 +Asset retirement obligation as of end of period +34,276 +26,437 +Less current portion +195 +75 +Asset retirement obligation, long-term +$ +34,081 +$ +26,362 +F-15 +Table of Contents +Index to Financial Statements +4. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2016 and 2015 : +Carrying Value +Loss (income) from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2016 +2015 +2016 +2015 +2014 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +(412 +) +$ +189 +$ +(475 +) +Investment in Tatex Thailand III, LLC +17.9 +% +— +— +— +— +12,408 +Investment in Grizzly Oil Sands ULC +24.9999 +% +45,213 +50,645 +25,150 +115,544 +13,159 +Investment in Bison Drilling and Field Services LLC +— +% +— +— +— +— +213 +Investment in Muskie Proppant LLC +— +% +— +— +— +— +371 +Investment in Timber Wolf Terminals LLC +50.0 +% +991 +999 +8 +14 +9 +Investment in Windsor Midstream LLC +22.5 +% +25,749 +27,955 +(13,618 +) +(18,398 +) +(477 +) +Investment in Stingray Pressure Pumping LLC +— +% +— +— +— +— +2,027 +Investment in Stingray Cementing LLC +50.0 +% +1,920 +2,487 +263 +147 +344 +Investment in Blackhawk Midstream LLC +48.5 +% +— +— +— +(7,216 +) +(84,787 +) +Investment in Stingray Logistics LLC +— +% +— +— +— +— +(464 +) +Investment in Diamondback Energy, Inc. +— +% +— +— +— +— +(79,654 +) +Investment in Stingray Energy Services LLC +50.0 +% +4,215 +5,908 +1,044 +557 +(88 +) +Investment in Sturgeon Acquisitions LLC +25.0 +% +20,526 +22,769 +993 +(1,229 +) +(1,819 +) +Investment in Mammoth Energy Services, Inc. +24.2 +% +111,717 +131,630 +20,646 +16,485 +(201 +) +Investment in Strike Force Midstream LLC +25.0 +% +33,589 +— +(89 +) +— +— +$ +243,920 +$ +242,393 +$ +33,985 +$ +106,093 +$ +(139,434 +) +The tables below summarize financial information for the Company's equity investments, as of December 31, 2016 and 2015 . +Summarized balance sheet information: +December 31, +2016 +2015 +(In thousands) +Current assets +$ +148,733 +$ +105,537 +Noncurrent assets +$ +1,305,407 +$ +1,293,925 +Current liabilities +$ +57,173 +$ +56,559 +Noncurrent liabilities +$ +67,680 +$ +155,995 +Summarized results of operations: +December 31, +2016 +2015 +2014 +(In thousands) +Gross revenue +$ +287,733 +$ +430,729 +$ +390,620 +Net loss (income) +$ +65,070 +$ +(16,761 +) +$ +140,796 +Gross revenue and net loss presented above for 2014 include approximately one month of activity for Mammoth Energy Partners LP ("Mammoth") and approximately eleven months of activity for Stingray Pressure Pumping LLC ("Stingray +F-16 +Table of Contents +Index to Financial Statements +Pressure"), Stingray Logistics LLC ("Stingray Logistics"), Muskie Proppant LLC ("Muskie") and Bison Drilling and Field Services LLC ("Bison"), which were contributed to Mammoth in November 2014 . In October 2016, Mammoth converted into a limited liability company and the Company contributed its interest in that entity to Mammoth Energy Services, Inc. ("Mammoth Energy") in connection with Mammoth Energy's initial public offering. See further discussion of these contributions below. +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. +Tatex Thailand III, LLC +The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. The Company paid cash calls of $1.6 million during the year ended December 31, 2014 . As of December 31, 2014 , the Company reviewed its investment in Tatex III and, together with Tatex III, made the decision to allow the concession to expire in January 2015 . As such, the Company fully impaired the asset as of December 31, 2014 , recognizing a loss of $12.1 million which is included in loss (income) from equity method investments in the accompanying consolidated statements of operations. +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of December 31, 2016 , Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions of Alberta, Canada. Initiation of steam injection at its first project, Algar Lake Phase 1, commenced in January 2014 and first bitumen production was achieved during the second quarter of 2014 . In April 2015 , Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. The Company reviewed its investment in Grizzly as of September 30, 2015 and December 31, 2015, and again at March 31, 2016 for impairment based on FASB ASC 323 due to certain qualitative factors and as such, engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was required under FASB ASC 323, resulting in an aggregate impairment loss of $101.6 million for the year ended December 31, 2015 and $23.1 million for the year ended December 31, 2016 , which is included in loss (income) from equity method investments in the consolidated statements of operations. As of and during the period ended December 31, 2016 , commodity prices had increased as compared to the quarter ended March 31, 2016 , and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline in the future however, further impairment of the investment in Grizzly may be necessary. During the years ended December 31, 2016 and 2015 , Gulfport paid $ 15.5 million and $14.5 million , respectively, in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was increased by $4.2 million as a result of a foreign currency translation gain and decreased by $28.5 million and $16.9 million as a result of a foreign currency translation loss for the years ended December 31, 2016 , 2015 , and 2014 , respectively. +Effective October 5, 2012 , Grizzly entered into a $125.0 million revolving credit facility, of which Grizzly paid the outstanding balance in full in July 2016 . Gulfport paid its share of this amount on June 30, 2016 . +Bison Drilling and Field Services LLC +During 2011 , the Company invested in Bison. Bison owns and operates drilling rigs. During the year ended December 31, 2014 , the Company paid $17.0 million in cash calls. +The Company contributed its investment in Bison to Mammoth during the fourth quarter of 2014 . See below under " Mammoth Energy Partners LP/Mammoth Energy Services, Inc." for information regarding this contribution. +Muskie Proppant LLC +F-17 +Table of Contents +Index to Financial Statements +During 2011 , the Company invested in Muskie. Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain rights in a lease covering land in Wisconsin for mining oil and natural gas fracture grade sand. During the year ended December 31, 2014, the Company paid $1.0 million in cash calls to Muskie. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +The Company entered into a loan agreement with Muskie effective July 1, 2013 , under which it loaned Muskie $0.9 million . Interest accrued at the prime rate plus 2.5% . The loan had an original maturity date of July 31, 2014 . Effective July 31, 2014 , an amendment was made to the loan agreement which changed the maturity date of the loan to July 31, 2015 . During the fourth quarter of 2014 , Muskie repaid the outstanding balance and the loan agreement was terminated. +The Company contributed its investment in Muskie to Mammoth during the fourth quarter of 2014 . See below under " Mammoth Energy Partners LP/Mammoth Energy Services, Inc." for information regarding this contribution. +Timber Wolf Terminals LLC +During 2012 , the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. During the years ended December 31, 2016 and 2015 , the Company paid no cash calls to Timber Wolf. +Windsor Midstream LLC +During 2012 , the Company purchased an ownership interest in Windsor Midstream LLC (“Midstream”). Midstream owned a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. In March 2015 , Coronado was sold to Enlink Midstream Partners, LP ("Enlink") for proceeds of approximately $600.0 million , consisting of cash and units representing a limited partnership interest in Enlink. Midstream recorded an $81.6 million gain on the sale of its investment in Coronado. During the years ended December 31, 2016 and 2015 , the Company received $15.8 million and $3.9 million , respectively, in distributions from Midstream. +Stingray Pressure Pumping LLC +During 2012 , the Company invested in Stingray Pressure. Stingray Pressure provides well completion services. During the year ended December 31, 2014, the Company paid $2.5 million in cash calls. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +The Company contributed its investment in Stingray Pressure to Mammoth during the fourth quarter of 2014 . See below under " Mammoth Energy Partners LP/Mammoth Energy Services, Inc." for information regarding this contribution. +Stingray Cementing LLC +During 2012 , the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. During the years ended December 31, 2016 and 2015 , the Company did not pay any cash calls related to Stingray Cementing. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +Blackhawk Midstream LLC +During 2012 , the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinates gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. On January 28, 2014 , Blackhawk closed on the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million , of which $14.3 million was placed in escrow. Gulfport received $84.8 million in net proceeds from this transaction in the first quarter of 2014 , which is included as income from equity method investments in the accompanying consolidated statements of operations. During the year ended December 31, 2015, the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale, which is included in loss (income) from equity investments in the consolidated statements of operations. +Stingray Logistics LLC +During 2012 , the Company invested in Stingray Logistics. Stingray Logistics provides well services. +F-18 +Table of Contents +Index to Financial Statements +The Company contributed its investment in Stingray Logistics to Mammoth during the fourth quarter of 2014 . See below under " Mammoth Energy Partners LP/Mammoth Energy Services, Inc." for information regarding this contribution. +Diamondback Energy, Inc. +On May 7, 2012 , the Company entered into a contribution agreement with Diamondback. Under the terms of the contribution agreement, the Company agreed to contribute to Diamondback, prior to the closing of the Diamondback initial public offering ("Diamondback IPO"), all its oil and natural gas interests in the Permian Basis (the "Contribution"). The Contribution was completed on October 11, 2012 . Following the closing of the Diamondback IPO, the Company owned 7,914,036 shares of Diamondback's outstanding common stock for an initial investment in Diamondback valued at $138.5 million . In 2013 , the Company sold an aggregate of 4,534,536 shares of its Diamondback common stock and received aggregate net proceeds of approximately $192.7 million . In June and September of 2014 , the Company sold an aggregate of 2,437,500 shares of its Diamondback common stock and received aggregate net proceeds of approximately $197.6 million . On November 12, 2014 , the Company sold its remaining 942,000 shares of Diamondback common stock for net proceeds of approximately $60.8 million , and therefore, did not own any shares of Diamondback common stock as of December 31, 2016 or 2015 . +The Company accounted for its interest in Diamondback as an equity method investment and had elected the fair value option of accounting for this investment. While the Company's ownership interest in Diamondback was below 20% prior to the Company's sale of its remaining Diamondback common stock in November 2014 , the Company had appointed a member of Diamondback's Board. The individual appointed by the Company continues to serve on Diamondback's board and the Company had influence through this board seat. The Company recognized a gain of approximately $79.7 million on its investment in Diamondback for year ended December 31, 2014, which is included as loss (income) from equity method investments in the consolidated statements of operations. +The Company has determined that for the 2014 period presented in its consolidated financial statements, Diamondback met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X, for which the Company is required, pursuant to Rule 3-09 of Regulation S-X, to attach separate financial statements as exhibits to its Annual Report on Form 10-K. During 2015 and 2016 , the Company did not own any shares of Diamondback common stock and, as such, Rule 3-09 of Regulation S-X is not applicable and the 2015 and 2016 consolidated financial statements of Diamondback are not attached. +Stingray Energy Services LLC +During 2013 , the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. During the years ended December 31, 2016 and 2015 , the Company did not pay any cash calls to Stingray Energy. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +Sturgeon Acquisitions LLC +During the third quarter of 2014 , the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. During the years ended December 31, 2016 and 2015 , the Company received approximately $1.3 million and $1.0 million , respectively, in distributions from Sturgeon. +Mammoth Energy Partners LP/Mammoth Energy Services, Inc. +In the fourth quarter of 2014 , the Company contributed its investments in four entities to Mammoth for a 30.5% interest in this entity. Mammoth originally intended to pursue its initial public offering in 2014 or 2015 ; however, due to low commodity prices, the offering was postponed. In October 2016 , Mammoth converted from a limited partnership into a limited liability company named Mammoth Energy Partners LLC ("Mammoth LLC") and the Company and the other members of Mammoth LLC contributed their interests in Mammoth LLC to Mammoth Energy Services, Inc. ("Mammoth Energy"). The Company received 9,150,000 shares of Mammoth Energy common stock in return for its contribution. Following the contribution, Mammoth Energy completed its initial public offering (the "IPO") of 7,750,000 shares of its common stock at a public offering price of $ 15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by the Company for which it received net proceeds of $1.1 million . At December 31, 2016, the Company owned an approximate 24.2% interest in Mammoth Energy. To reflect the dilution of the Company's shares of Mammoth Energy stock after the IPO, the Company recognized a gain of $3.4 million , +F-19 +Table of Contents +Index to Financial Statements +which is included in loss (income) from equity method investments in the accompanying consolidated statements of operations. The Company's investment in Mammoth Energy was decreased by a $0.8 million foreign currency loss resulting from Mammoth Energy's foreign subsidiary for the year ended December 31, 2016 . The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +The Company accounted for the 2014 contribution to Mammoth as a sale of financial assets under FASB ASC 860. The Company estimated the fair market value of its investment in Mammoth as of the contribution date using an average of the market approach and the income approach, based on a independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for lack of marketability due to the Company's minority interest, resulting in a fair value of $143.5 million for the Company's 30.5% interest. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See "Note 13 - Fair Value Measurements" for additional discussion of the measurement inputs. The Company recognized a gain of $84.5 million from its contribution of assets to Mammoth, which is included in gain on contribution of investments in the accompanying consolidated statements of operations. +The Company reviewed its investment in Mammoth Energy at December 31, 2016 and determined no impairment was needed. If commodity prices decline, an impairment of the investment in Mammoth Energy may result in the future. +Strike Force Midstream LLC +In February 2016 , the Company, through its wholly owned subsidiary Gulfport Midstream Holdings, LLC ("Midstream Holdings"), entered into an agreement with Rice Midstream Holdings LLC ("Rice"), a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio (the "dedicated areas"). The Company contributed certain gathering assets for a 25% interest in the newly formed entity called Strike Force Midstream LLC ("Strike Force"). Rice acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is underway, is expected to provide gathering services for Gulfport operated wells and connectivity of existing dry gas gathering systems. During the year ended December 31, 2016 , Gulfport paid $11.0 million in cash calls to Strike Force. +The Company accounted for its contribution to Strike Force at fair value under applicable codification guidance. The Company estimated the fair market value of its investment in Strike Force as of the contribution date using the discounted cash flow method under the income approach, based on an independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for the lack of marketability due to the Company's minority interest, resulting in a fair value of $22.5 million for the Company's 25% interest. The fair value of the assets contributed was estimated using assumptions that represent Level 3 inputs. See Note 13 - Fair Value Measurements for additional discussion of the measurement inputs. The Company has elected to report its proportionate share of Strike Force's earnings on a one-quarter lag as permitted under FASB ASC 323. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +5. +VARIABLE INTEREST ENTITIES +As of December 31, 2016 , the Company held variable interests in the following variable interest entities ("VIEs"), but was not the primary beneficiary: Stingray Energy, Stingray Cementing, Sturgeon, Midstream and Timber Wolf. These entities have governing provisions that are the functional equivalent of a limited partnership and are considered VIEs because the limited partners or non-managing members lack substantive kick-out or participating rights which causes the equity owners, as a group, to lack a controlling financial interest. The Company is a limited partner or non-managing member in each of these VIEs and is not the primary beneficiary because it does not have a controlling financial interest. The general partner or managing member has power to direct the activities that most significantly impact the VIEs’ economic performance. The Company also held a variable interest in Strike Force due to the fact that it does not have sufficient equity capital at risk. The Company is not the primary beneficiary of this entity. Prior to Mammoth's IPO, Mammoth was considered a variable interest entity. As a result of the IPO, Mammoth was incorporated and the Company determined that Mammoth is no longer a variable interest entity. +The Company accounts for its investment in these VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. See Note 4 for further discussion of these entities, including the carrying amounts of each investment. +F-20 +Table of Contents +Index to Financial Statements +6. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31 : +2016 +2015 +(In thousands) +Revolving credit agreement (1) +$ +— +$ +— +Building loans (2) +— +1,653 +7.75% senior unsecured notes due 2020 (3) +— +600,000 +6.625% senior unsecured notes due 2023 (4) +350,000 +350,000 +6.000% senior unsecured notes due 2024 (5) +650,000 +— +6.375% senior unsecured notes due 2025 (6) +600,000 +— +Net unamortized original issue premium (discount) (7) +— +12,493 +Net unamortized debt issuance costs (8) +(27,174 +) +(17,883 +) +Construction loan (9) +21,049 +— +Less: current maturities of long term debt +(276 +) +(179 +) +Debt reflected as long term +$ +1,593,599 +$ +946,084 +Maturities of long-term debt (excluding premiums, discounts and unamortized debt issuance costs) as of December 31, 2016 are as follows: +(In thousands) +2017 +$ +276 +2018 +522 +2019 +586 +2020 +649 +2021 +712 +Thereafter +1,618,304 +Total +$ +1,621,049 +(1) The Company has entered into a senior secured revolving credit facility as amended, with the Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on June 6, 2018 . On February 19, 2016 , the Company further amended its revolving credit facility to, among other things, (a) increase the basket for unsecured debt issuances to $1.4 billion from $1.2 billion (of which $950 million was then outstanding), (b) reaffirm the Company's borrowing base of $700.0 million , and (c) increase the percentage of projected oil and gas production that may be hedged by the Company during 2016. On December 13, 2016 , the Company further amended its revolving credit facility to, among other things, (a) reset the maturity date to December 31, 2021 , (b) adjust lenders, (c) increase the basket for unsecured debt issuances to $1.6 billion , (d) increase the interest rates by 50 basis points, (e) increase the mortgage requirement to 85% (from 80% ), and (f) add deposit account control agreement language. +As of December 31, 2016 , the Company did not have any outstanding borrowing under the Amended and Restated Credit Agreement. At December 31, 2016 , the total availability for future borrowings under Amended and Restated Credit Agreement, after giving effect to an aggregate of $209.7 million of letters of credit, was $490.3 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the Amended and Restated Credit Agreement. +Advances under the Amended and Restated Credit Agreement may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 1.00% to 2.00% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 2.00% to 3.00% , plus (2) the London interbank +F-21 +Table of Contents +Index to Financial Statements +offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +The Amended and Restated Credit Agreement contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to: +• incur indebtedness; +• grant liens; +• pay dividends and make other restricted payments; +• make investments; +• make fundamental changes; +• enter into swap contracts and forward sales contracts; +• dispose of assets; +• change the nature of their business; and +• enter into transactions with affiliates. +The negative covenants are subject to certain exceptions as specified in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains certain affirmative covenants, including, but not limited to the following financial covenants: +(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or noncash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00 ; and +(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00 . +The Company was in compliance with all covenants at December 31, 2016 . +(2) In March 2011 , the Company entered into a new building loan agreement for the office building it occupies in Oklahoma City, Oklahoma. The new loan agreement refinanced the $2.4 million outstanding under the previous building loan agreement. The new agreement matured in February 2016 and bore interest at the rate of 5.82% per annum. The new building loan required monthly interest and principal payments of approximately $22,000 and was collateralized by the Oklahoma City office building and associated land. Subsequently, the loan was refinanced with a new interest rate of 4.00% per annum. The building loan matured in December 2018 and required monthly interest and principal payments of approximately $20,000 . The Company paid the balance of the loan in full in February 2016 . +F-22 +Table of Contents +Index to Financial Statements +(3) On October 17, 2012 , the Company issued $250.0 million in aggregate principal amount of Senior Notes due 2020 (the "October Notes") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, (the "senior note indenture"). On December 21, 2012 , the Company issued an additional $50.0 million in aggregate principal amount of 7.75% Senior Notes due 2020 (the "December Notes") as additional securities under the senior note indenture. On August 18, 2014, the Company issued an additional $300.0 million in aggregate principal amount of 7.75% Senior Notes due 2020 (the "August Notes"). The August Notes were issued as additional securities under the senior note indenture. The October Notes, December Notes and the August Notes are collectively referred to as the "2020 Notes." +On October 6, 2016 , the Company commenced a cash tender offer to purchase any and all of its 2020 Notes, which tender offer expired on October 13, 2016 and settled on October 14, 2016 . Holders of the 2020 Notes that were validly tendered and accepted at or prior to the expiration time of the tender offer, or who delivered the 2020 Notes pursuant to the guaranteed delivery procedures, received total cash consideration of $ 1,042 per $ 1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date. An aggregate of $403.5 million in principal amount of the 2020 Notes was validly tendered in the tender offer. The remaining 2020 Notes that were not tendered in the tender offer were redeemed by the Company. The redemption payment included approximately $196.5 million in aggregate principal amount at a redemption price of 103.875% of the principal amount of the redeemed 2020 Notes, plus accrued and unpaid interest thereon to the redemption date. Upon deposit of the redemption payment with the paying agent on October 14, 2016 , the indenture governing the 2020 Notes was fully satisfied and discharged. The cash tender offer for the 2020 Notes and redemption of the remaining 2020 Notes were funded with the net proceeds from the offering of the 6.000% Senior Notes due 2024 (the “2024 Notes”) as discussed below and cash on hand. +(4) On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the "2023 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "2023 Notes Offering"). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses. +The 2023 Notes were issued under an indenture, dated as of April 21, 2015 , among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes will accrue at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015 , payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015 . The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. +In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +(5) On October 14, 2016 , the Company issued the 2024 Notes in aggregate principal amount of $650.0 million . The 2024 Notes were issued under an indenture, dated as of October 14, 2016, among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the "2024 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the “2024 Notes Offering”). Under the 2024 Indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016 , payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017 . The 2024 Notes will mature on October 15, 2024 . The Company received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer. +(6) On December 21, 2016 , the Company issued $600.0 million in aggregate principal amount of 6.375% Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes were issued under an indenture, dated as of December 21, 2016 , among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the "2025 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under the 2025 Indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016 , payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017 . The 2025 Notes will mature on May 15, 2025 . The Company received approximately $590.8 million in net proceeds from the offering of the 2025 Notes, which the Company intends to use, together with the net proceeds from the Company's December 2016 common stock offering and cash on hand, to fund the cash portion +F-23 +Table of Contents +Index to Financial Statements +of the purchase price for the pending acquisition of certain assets from Vitruvian II Woodford, LLC ("Vitruvian"). See Note 15 for more details on the pending Vitruvian Acquisition. +(7) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000% . The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531% . The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561% . The 2023 Notes, 2024 Notes, and 2025 Notes were issued at par. The premium and discount was amortized using the effective interest method until the bonds were redeemed, at which point the remaining premium and discount of $10.8 million was written off and is included in loss on debt extinguishment on the consolidated statements of operations. +(8) In accordance with ASU 2015-03, loan issuance cost related to the Notes have been presented as a reduction to the Notes. At December 31, 2016 , total unamortized debt issuance costs were $6.0 million for the 2023 Notes, $10.9 million for the 2024 Notes, and $10.1 million for the 2025 Notes. In addition, loan commitment fee costs for the construction loan agreement described immediately below were $0.1 million at December 31, 2016 . +(9) On June 4, 2015 , the Company entered into a construction loan agreement (the "Construction Loan") with InterBank for the construction of a new corporate headquarters in Oklahoma City. The Construction Loan allows for maximum principal borrowings of $24.5 million and requires the Company to fund 30% of the cost of the construction before any funds can be drawn, which occurred in January 2016 . Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and is payable on the last day of the month through May 31, 2017 . Monthly interest and principal payments are due beginning June 30, 2017 , with the final payment due June 4, 2025 . At December 31, 2016 , the total borrowings under the Construction loan were approximately $21.0 million . +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31 : +2016 +2015 +2014 +(In thousands) +Cash paid for interest +$ +68,966 +$ +59,736 +$ +28,646 +Change in accrued interest +1,768 +4,011 +3,875 +Capitalized interest +(9,148 +) +(13,580 +) +(9,687 +) +Amortization of loan costs +3,660 +3,219 +1,685 +Amortization of note discount and premium +(1,716 +) +(2,165 +) +(533 +) +Total interest expense +$ +63,530 +$ +51,221 +$ +23,986 +The Company capitalized approximately $8.7 million and $13.3 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2016 and 2015 , respectively. During the year ended December 31, 2016 and 2015 , the Company also capitalized approximately $0.4 million and $0.3 million in interest expense related to building construction, respectively. +7. +COMMON STOCK OPTIONS, RESTRICTED STOCK AND CHANGES IN CAPITALIZATION +Options +In January 2005 , the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”), which is administered by the Compensation Committee (the "Committee"). Under the terms of the 2005 Plan, the Committee may determine when options shall be granted, to which eligible participants options shall be granted, the number of shares covered by such options, the purchase price or exercise price of such options, the vesting periods of such options and the exercisable period of such options. Eligible participants are defined as employees, consultants, and directors of the Company. +On April 20, 2006 , the Company amended and restated the 2005 Plan to (i) include (a) incentive stock options, (b) nonstatutory stock options, (c) restricted awards (restricted stock and restricted stock units), (d) performance awards and (e) stock appreciation rights and (ii) increase the maximum aggregate amount of common stock that may be issued under the +F-24 +Table of Contents +Index to Financial Statements +2005 Plan from 1,904,606 shares to 3,000,000 shares, including the 627,337 shares underlying options granted to employees under the Plan prior to adoption of the 2005 Plan. As of December 31, 2016 , the Company had granted 997,269 options for the purchase of shares of the Company’s common stock and 1,143,217 shares of restricted stock under the 2005 Plan. No additional securities will be issued under the Plan other than upon exercise of options that are outstanding. +On April 19, 2013 , the Company amended and restated the 2005 Plan with the 2013 Restated Stock Incentive Plan ("2013 Plan"). The 2013 Plan increased the numbers of shares that may be awarded from 3,000,000 to 7,500,000 shares, including the 627,337 shares underlying options granted to employees under the Plan. The shares of stock issued once the options are exercised will be from authorized but unissued common stock. As of December 31, 2016 , the Company had granted 1,062,207 shares of restricted stock under the 2013 Plan. +Sale of Common Stock +On April 21, 2015 , the Company issued 10,925,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $501.8 million after underwriting discounts and commissions and offering expenses. The Company used a portion of these net proceeds, together with a portion of the net proceeds from its concurrent senior notes offering (see Note 6), to repay all amounts outstanding at that time under its revolving credit facility and to fund the acquisition of Paloma (see Note 2) and used the remaining net proceeds from these offerings for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +On June 12, 2015 , the Company issued 11,500,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $479.7 million after underwriting discounts and commissions and offering expenses. The Company used a portion of the net proceeds to fund the Monroe Acquisition (see Note 2) and used the remaining funds for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +On March 15, 2016 , the Company issued 16,905,000 shares of its common stock in an underwritten public offering (which included 2,205,000 shares sold pursuant to an option to purchase additional shares of the Company's common stock granted by the Company to, and exercised in full by, the underwriters). The net proceeds from this equity offering were approximately $411.7 million , after underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from this offering primarily to fund a portion of its 2017 capital development plan and for general corporate purposes. +On December 21, 2016 , the Company issued an aggregate 33,350,000 shares of its common stock in an underwritten public offering (which included 4,350,000 shares subject to an option to purchase additional shares exercised by the underwriters). The net proceeds from this equity offering were approximately $698.8 million , after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds from this offering, together with the net proceeds from the offering of the 2025 Notes and cash on hand, to fund the cash portion of the purchase price for the pending Vitruvian Acquisition (see Note 15) and intends to use the remaining funds for general corporate purposes, including the funding of a portion of its capital development plans. +8. +STOCK-BASED COMPENSATION +During the years ended December 31, 2016 , 2015 and 2014 the Company’s stock-based compensation cost was $ 12.3 million , $14.4 million and $14.9 million , respectively, of which the Company capitalized $ 4.9 million , $5.7 million and $5.9 million , respectively, relating to its exploration and development efforts. +The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the market price of Gulfport’s common stock over a period of time ending on the grant date. Based upon the historical experience of the Company, the expected term of options granted is equal to the vesting period plus one year. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The 2013 Restated Stock Incentive Plan (which amended and restated the 2005 Plan) provides that all options must have an exercise price not less than the fair value of the Company’s common stock on the date of the grant. +No stock options were issued during the years ended December 31, 2016 , 2015 and 2014 . +The Company has not declared dividends and does not intend to do so in the foreseeable future, and thus did not use a dividend yield. In each case, the actual value that will be realized, if any, depends on the future performance of the common +F-25 +Table of Contents +Index to Financial Statements +stock and overall stock market conditions. There is no assurance that the value an optionee actually realizes will be at or near the value estimated using the Black-Scholes model. +A summary of the status of stock options and related activity for the years ended December 31, 2016 , 2015 and 2014 is presented below: +Shares +Weighted +Average +Exercise Price +per Share +Weighted +Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value (In thousands) +Options outstanding at January 1, 2014 +210,241 +$ +3.50 +1.07 +$ +12,538 +Granted +— +— +Exercised +(205,241 +) +3.36 +12,822 +Forfeited/expired +— +— +Options outstanding at December 31, 2014 +5,000 +9.07 +0.69 +$ +163 +Granted +— +— +Exercised +(5,000 +) +9.07 +124 +Forfeited/expired +— +— +Options outstanding at December 31, 2015 +— +— +— +$ +— +Granted +— +— +Exercised +— +— +— +Forfeited/expired +— +— +Options outstanding at December 31, 2016 +— +$ +— +— +$ +— +Options exercisable at December 31, 2016 +— +$ +— +— +$ +— +The following table summarizes restricted stock activity for the twelve months ended December 31, 2016 , 2015 and 2014 : +Number of +Unvested +Restricted Shares +Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2014 +463,637 +$ +44.80 +Granted +246,409 +65.07 +Vested +(272,665 +) +45.76 +Forfeited +(50,136 +) +53.72 +Unvested shares as of December 31, 2014 +387,245 +$ +55.87 +Granted +352,605 +$ +35.99 +Vested +(236,812 +) +52.39 +Forfeited +(18,799 +) +45.21 +Unvested shares as of December 31, 2015 +484,239 +$ +43.51 +Granted +451,241 +$ +27.78 +Vested +(252,566 +) +43.94 +Forfeited +(69,858 +) +33.43 +Unvested shares as of December 31, 2016 +613,056 +$ +32.90 +Unrecognized compensation expense as of December 31, 2016 related to outstanding stock options and restricted shares was $ 14.3 million . The expense is expected to be recognized over a weighted average period of 1.60 years. +F-26 +Table of Contents +Index to Financial Statements +9. +FAIR VALUE OF FINANCIAL INSTRUMENTS +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the building loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +At December 31, 2016 , the carrying value of the outstanding debt represented by the Notes was $ 1.6 billion including the unamortized debt issuance cost of approximately $6.0 million related to the 2023 Notes, approximately $10.9 million related to the 2024 Notes, and approximately $10.1 million related to the 2025 Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $1.6 billion at December 31, 2016 . +10. +INCOME TAXES +The income tax provision consists of the following: +2016 +2015 +2014 +(In thousands) +Current: +State +$ +(1,330 +) +$ +(1,069 +) +$ +14,384 +Federal +(19,770 +) +(439 +) +16,039 +Deferred: +State +(386 +) +(14,218 +) +4,314 +Federal +18,573 +(240,275 +) +118,604 +Total income tax (benefit) expense provision +$ +(2,913 +) +$ +(256,001 +) +$ +153,341 +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2016 +2015 +2014 +(In thousands) +(Loss) income before federal income taxes +$ +(982,622 +) +$ +(1,480,885 +) +$ +400,744 +Expected income tax at statutory rate +(343,918 +) +(518,310 +) +140,259 +State income taxes +(5,883 +) +(15,908 +) +11,570 +Other differences +4,293 +(420 +) +1,512 +Intraperiod tax allocation +(1,349 +) +— +— +Changes in valuation allowance +343,944 +278,637 +— +Income tax (benefit) expense recorded +$ +(2,913 +) +$ +(256,001 +) +$ +153,341 +F-27 +Table of Contents +Index to Financial Statements +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2016 , 2015 and 2014 are estimated as follows: +2016 +2015 +2014 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +162,073 +$ +46,209 +$ +1,091 +Oil and gas property basis difference +386,302 +292,838 +— +Investment in pass through entities +27,469 +14,034 +— +FASB ASC 718 compensation expense +2,084 +1,922 +1,562 +Business energy investment tax credit +369 +— +— +AMT credit +3,842 +23,629 +24,053 +Charitable contributions carryover +303 +146 +150 +Unrealized loss on hedging activities +48,317 +— +— +Foreign tax credit carryforwards +2,074 +2,074 +2,074 +Accrued liabilities +397 +— +1,260 +ARO liability +12,107 +9,415 +— +State net operating loss carryover +5,351 +4,344 +2,627 +Total deferred tax assets +650,688 +394,611 +32,817 +Valuation allowance for deferred tax assets +(645,841 +) +(303,246 +) +(13,522 +) +Deferred tax assets, net of valuation allowance +4,847 +91,365 +19,295 +Deferred tax liabilities: +Oil and gas property basis difference +— +— +183,767 +Investment in pass through entities +— +— +27,938 +Non-oil and gas property basis difference +155 +715 +849 +Unrealized gain on hedging activities +— +66,422 +37,006 +Total deferred tax liabilities +155 +67,137 +249,560 +Net deferred tax asset (liability) +$ +4,692 +$ +24,228 +$ +(230,265 +) +The Company has an available federal tax net operating loss carryforward estimated at approximately $463.1 million as of December 31, 2016 . This carryforward will begin to expire in the year 2036 . Based upon the December 31, 2016 net deferred tax asset position and a significant loss in 2016 , management believes that there is sufficient negative evidence to place a valuation allowance on the net deferred tax asset that may not be utilized based upon a more likely than not basis. The Company also has state net operating loss carryovers of $111.9 million that will begin to expire in 2016 , alternative minimum tax credits of $3.8 million with no expiration date and federal foreign tax credit carryovers of $2.1 million which begin to expire in 2017 . The Company believes that it can utilize an Oklahoma state NOL as well as a portion of the AMT credit through carrybacks and a refundable election. Therefore, the Company has recorded a total valuation allowance of $645.8 million related to the remaining net deferred tax asset. +In 2014 , the Company's sale of its remaining shares of Diamondback common stock, as well as its share of the proceeds from Blackhawk's sale of its interest in Ohio Gas Gathering Company, LLC and Ohio Condensate Company, LLC, generated $203.3 million and $83.7 million of taxable gain, respectively, resulting in a deferred tax expense of $79.4 million and $32.3 million , respectively. The Company's current federal tax benefit in 2016 and 2015 is primarily attributable to the Company recording a full cost ceiling impairment of $715.5 million and $1.4 billion against the oil and gas assets, while the federal tax expense in 2014 is a result of operations plus the sale of Diamondback common shares and the sale of assets by Blackhawk. +No amounts for state and federal income taxes payable were owed at December 31, 2016 and 2015 . +F-28 +Table of Contents +Index to Financial Statements +11. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2016 +2015 +2014 +Loss +Shares +Per +Share +Loss +Shares +Per +Share +Income +Shares +Per Share +(In thousands, except share data) +Basic: +Net (loss) income +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +$ +247,403 +85,445,963 +$ +2.90 +Effect of dilutive securities: +Stock options and awards +— +— +— +— +— +367,219 +Diluted: +Net (loss) income +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +$ +247,403 +85,813,182 +$ +2.88 +There were 539,988 and 449,880 shares of common stock that were considered anti-dilutive for the years ended December 31, 2016 and 2015 , respectively. There were no potential shares of common stock that were considered anti-dilutive for the year ended December 31, 2014 . +F-29 +Table of Contents +Index to Financial Statements +12. +DERIVATIVE INSTRUMENTS +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments +The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, and Mont Belvieu for propane and pentane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2016 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +NYMEX Henry Hub +531,171 +$ +3.17 +2018 +NYMEX Henry Hub +296,438 +$ +3.10 +2019 +NYMEX Henry Hub +4,932 +$ +3.37 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2017 +ARGUS LLS +1,748 +$ +51.97 +2017 +NYMEX WTI +3,353 +$ +54.98 +2018 +NYMEX WTI +899 +$ +55.31 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2017 +Mont Belvieu C3 +1,630 +$ +25.70 +2017 +Mont Belvieu C5 +250 +$ +49.14 +The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +NYMEX Henry Hub +60,068 +$ +3.12 +2018 +NYMEX Henry Hub +4,932 +$ +2.91 +For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2018 through December 2018 . These options expire in December 2017 . If executed, the Company would have additional fixed price swaps for 30,000 MMBtu per day with the option to double at a weighted average price of $3.36 and additional short call options for 30,000 MMBtu per day with the option to double at a weighted average ceiling price of $3.36 . +F-30 +Table of Contents +Index to Financial Statements +In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2016 , the Company had the following natural gas basis swap positions for Tetco M2. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2017 +Tetco M2 +12,329 +$ +(0.59 +) +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2016 and 2015 : +December 31, +2016 +2015 +(In thousands) +Short-term derivative instruments - asset +$ +3,488 +$ +142,794 +Long-term derivative instruments - asset +$ +5,696 +$ +51,088 +Short-term derivative instruments - liability +$ +119,219 +$ +437 +Long-term derivative instruments - liability +$ +26,759 +$ +6,935 +Gains and losses +For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, the effective portion of changes in fair value are recognized in accumulated other comprehensive income (loss) and subsequently reclassified out of accumulated other comprehensive income (loss) into earnings as the underlying hedged transaction impacts earnings. The Company had no cash flow hedges in place for the years ended December 31, 2016 , 2015 and 2014 , as all fixed price swaps, swaptions and basis swaps had either been deemed ineffective at their inception or had been accounted for using the mark-to-market accounting method. +The following table presents the gain and loss recognized in Net (loss) gain on gas, oil and NGL derivatives in the accompanying consolidated statements of operations due to derivative instruments for the years ended December 31, 2016 , 2015 , and 2014 . +Gain (loss) on derivative instruments +For the Year Ended December 31, +2016 +2015 +2014 +(In thousands) +Natural gas derivatives +$ +(165,933 +) +$ +182,993 +$ +103,128 +Oil derivatives +(5,387 +) +19,201 +6,171 +Natural gas liquids derivatives +(3,186 +) +1,319 +— +Total +$ +(174,506 +) +$ +203,513 +$ +109,299 +The Company delivered approximately 77% of its 2016 production under fixed price swaps. +Offsetting of derivative assets and liabilities +The following table presents the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value. +F-31 +Table of Contents +Index to Financial Statements +As of December 31, 2016 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +9,184 +$ +(9,184 +) +$ +— +Derivative liabilities +$ +(145,978 +) +$ +9,184 +$ +(136,794 +) +As of December 31, 2015 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +193,882 +$ +(7,372 +) +$ +186,510 +Derivative liabilities +$ +(7,372 +) +$ +7,372 +$ +— +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +13. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820, " Fair Value Measurement and Disclosures " ("FASB ASC 820"). FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +F-32 +Table of Contents +Index to Financial Statements +The following tables summarize the Company’s financial and non-financial liabilities by FASB ASC 820 valuation level as of December 31, 2016 and 2015 : +December 31, 2016 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +9,184 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +145,978 +$ +— +December 31, 2015 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +193,882 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +7,372 +$ +— +The Company estimates the fair value of all derivative instruments industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company's acquisitions. +The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the year ended December 31, 2016 were approximately $ 11.0 million . +Due to the unobservable nature of the inputs, the fair value of the Company's initial investment in Mammoth was estimated using assumptions that represent Level 3 inputs. The Company's estimated fair value of the investment as of the November 24, 2014 contribution date was $143.5 million . See Note 4 for further discussion of the Company's contribution to Mammoth. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly was estimated using assumptions that represent Level 3 inputs. The Company estimated the fair value of the investment as of March 31, 2016 to be approximately $39.1 million . See Note 4 for further discussion of the Company's investment in Grizzly. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Strike Force was estimated using assumptions that represent Level 3 inputs. The Company's estimated fair value of the investment as of the February 1, 2016 contribution date was $22.5 million . See Note 4 for further discussion of the Company's contribution to Strike Force. +F-33 +Table of Contents +Index to Financial Statements +14. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +Stingray Cementing, which is 50% owned by the Company, provides well cementing services as discussed above in Note 4. At December 31, 2016 and 2015 , the Company owed Stingray Cementing approximately $0.5 million and $2.1 million , respectively, related to these services. Approximately $6.3 million and $7.0 million of services provided by Stingray Cementing are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2016 and 2015 , respectively. +Stingray Energy, which is 50% owned by the Company, provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites as discussed above in Note 4. At December 31, 2016 and 2015 , the Company owed Stingray Energy approximately $3.6 million and $2.2 million , respectively, related to these services. Approximately $1.1 million and $2.2 million of services provided by Stingray Energy are included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2016 and 2015 , respectively. Approximately $11.0 million and $16.0 million of services provided by Stingray Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2016 and 2015 , respectively. +After completing the contributions to Mammoth and Mammoth Energy and Mammoth Energy's IPO, all as discussed above in Note 4, the Company owned an approximate 24.2% equity investment in Mammoth Energy. Approximately $110.5 million and $141.2 million of services provided by Mammoth Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2016 and 2015 , respectively. At December 31, 2016 and 2015 , the Company owed Mammoth Energy approximately $23.5 million and $24.7 million , respectively, related to these services. +Strike Force, which is 25% owned by the Company, develops natural gas gathering assets in dedicated areas as discussed above in Note 4. At December 31, 2016 the Company owed approximately $1.6 million to Strike Force for these related services. Approximately $1.8 million of services provided by Strike Force are included in midstream gathering and processing on the accompanying consolidated statement of operations for the year ended December 31, 2016 . +15. +COMMITMENTS +Plugging and Abandonment Funds +In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997 . Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009 , the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of December 31, 2016 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2016 , the Company had plugged 513 wells at WCBB since it began its plugging program in 1997 , which management believes fulfills its current minimum plugging obligation. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100% of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company will make a contribution each calendar year on behalf of each employee equal to at least 3% of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2016 , 2015 and 2014 , Gulfport incurred $1.7 million , $1.4 million , and $0.8 million , respectively, in contributions expense related to this plan. +Employment Agreements +Effective November 1, 2012, the Company entered into employment agreements with Messrs. James Palm, Mike Liddell, and Michael G. Moore, each with an initial three -year term expiring on November 1, 2015 subjected to automatic one -year extensions unless terminated by either party to the agreement at least 90 days prior to the end of the then current term. These +F-34 +Table of Contents +Index to Financial Statements +agreements provided for minimum salary and bonus levels which were subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +Effective February 15, 2014, Gulfport's former Chief Executive Officer, Mr. Palm, retired and his employment agreement with the Company terminated. The Company entered into a separation agreement with Mr. Palm, under which agreement certain benefits are provided to, and obligations imposed on, Mr. Palm. +Mr. Liddell resigned as the Company's Chairman effective June 2013 at which date his employment agreement with Gulfport terminated. At that same time, the Company entered into a consulting agreement with Mr. Liddell. Mr. Liddell terminated his consulting agreement with the Company effective January 1, 2015. +On April 22, 2014, the Board of Directors appointed Mr. Moore as Chief Executive Officer of the Company. The Company and Mr. Moore entered into an amended and restated employment agreement. The agreement has a three -year term commencing effective April 22, 2014, which was amended effective as of April 29, 2015 . The employment agreement, as amended and restated as of April 29, 2015, provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +On March 13, 2015, the Company entered into an employment agreement with Ross Kirtley, the Company's Chief Operating Officer. The agreement had a two -year term commencing effective April 22, 2014. This agreement provided, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. On August 5, 2016 , Mr. Kirtley’s employment as the Company's Chief Operating Officer terminated. +In connection with Mr. Kirtley’s termination, the Company entered into a separation and release agreement with Mr. Kirtley, dated as of November 2, 2016 (the “Separation Agreement”), pursuant to which the Company agreed to provide Mr. Kirtley with (i) the cash compensation specified in his employment agreement, (ii) health care benefits for Mr. Kirtley and his eligible dependents for up to eighteen ( 18 ) months following the termination date, (iii) his company vehicle, (iv) the vesting of 3,000 shares of restricted stock and (v) the vesting of 14,820 restricted stock units provided that such restricted stock units will be settled in four substantially equal annual installments beginning in March 2017 in accordance with the original vesting schedule. All other restricted stock and restricted stock unit awards granted to Mr. Kirtley were forfeited and terminated. +Under the Separation Agreement, Mr. Kirtley is subject to certain covenants regarding confidentiality, non-solicitation, non-competition, trade secrets, unfair competition and inventions. The Separation Agreement also contains customary waiver and release provisions pursuant to which Mr. Kirtley waived, released and discharged the Company and certain other related parties from any and all claims that Mr. Kirtley may have had against the Company or such other parties as of the date of the Separation Agreement. +On March 13, 2015, the Company entered into an employment agreement with Aaron Gaydosik, the Company's Chief Financial Officer. The agreement had a three -year term commencing effective August 11, 2014. This agreement provided, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. Mr. Gaydosik's employment agreement was terminated upon his resignation as the Company's Chief Financial Officer, effective January 4, 2017 . As provided in such employment agreement, upon resignation, Mr. Gaydosik was entitled to any of his earned but unpaid salary through the date of resignation. Any unvested awards granted to Mr. Gaydosik under the Company’s equity incentive plan lapsed. +The aggregated minimum commitment for future salary at December 31, 2016 under the above listed employment agreements was approximately $0.4 million . +F-35 +Table of Contents +Index to Financial Statements +Firm Transportation Commitments +The Company had approximately 1,379,000 MMBtu per day of firm sales contracted with third parties. The table below presents these commitments at December 31, 2016 as follows: +(MMBtu per day) +2017 +516,000 +2018 +257,000 +2019 +226,000 +2020 +223,000 +2021 +126,000 +Thereafter +31,000 +Total +1,379,000 +The Company also had approximately $3.8 billion of firm transportation contracted with third parties. The table below presents these commitments at December 31, 2016 as follows: +(In thousands) +2017 +$ +176,800 +2018 +237,101 +2019 +237,100 +2020 +237,100 +2021 +237,101 +Thereafter +2,694,979 +Total +$ +3,820,181 +Operating Leases +The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at December 31, 2016 are as follows: +(In thousands) +2017 +$ +583 +2018 +54 +Total +$ +637 +Presented below is rent expense for the years ended December 31, 2016 , 2015 and 2014 , respectively. +For the years ended December 31, +2016 +2015 +2014 +(In thousands) +Minimum rentals +$ +840 +$ +759 +$ +733 +Less: Sublease rentals +— +8 +15 +$ +840 +$ +751 +$ +718 +Other Commitments +Effective October 1, 2014 , the Company entered into a Sand Supply Agreement with Muskie that expires on September 30, 2018 . Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of +F-36 +Table of Contents +Index to Financial Statements +proppant sand subject to exceptions specified in the agreement at a fixed price per ton, subject to certain adjustments, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $1.9 million and $0.3 million related to non-utilization fees during the year ended December 31, 2016 and December 31, 2015 , respectively. +Effective October 1, 2014 , the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure that expires on September 30, 2018 . Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. +Future minimum commitments under these agreements at December 31, 2016 are as follows: +(In thousands) +2017 +$ +52,440 +2018 +39,330 +Total +$ +91,770 +Other Agreements +On December 13, 2016 , the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Vitruvian, an unrelated third-party seller, pursuant to which the Company agreed to acquire certain assets of the seller (the “Acquisition”). Under the terms of the Purchase Agreement, the purchase price for these assets will consist of approximately 23.9 million shares of the Company’s common stock and $1.4 billion of cash, subject to adjustment as described in the Purchase Agreement. The closing of the Acquisition is expected to occur during February 2017, however, the closing of the Acquisition remains subject to customary closing conditions, including the completion of due diligence and the satisfaction or waiver of the closing conditions set forth in the Purchase Agreement. The Company has funded the $185.0 million deposit required under the Purchase Agreement into an escrow account. +16. +CONTINGENCIES +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermillion on July 29, 2016 , the Company was named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermillion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978 , as amended, and the rules, regulations, orders and ordinances adopted thereunder, which Gulfport referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of the Vermillion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +F-37 +Table of Contents +Index to Financial Statements +The Company was served with the Cameron complaint in early May 2016 and with the Vermillion Complaint in early September 2016 . The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermillion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the lawsuit to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs have filed a motion to remand, but both Courts have stayed further proceedings on the motions to remand pending a ruling from the United States Court of Appeals, Fifth Circuit on similar jurisdictional issues in another matter. The plaintiffs have granted all defendants an extension of time to file responsive pleadings to the Complaints until the District Courts rule on the motions to remand. Gulfport has not had the opportunity to evaluate the applicability of the allegations made in such complaints to their operations. Due to the early stages of these matters, management cannot determine the amount of loss, if any, that may result. +Due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations. +Insurance Proceeds +In September 2014 , the Company settled its legacy surface contamination lawsuit with Reeds et al. Under the terms of the settlement agreement, Gulfport paid $18.0 million , which is included in litigation settlement in the accompanying consolidated statements of operations for the year ended December 31, 2014 . For the years ended December 31, 2016 and 2015 the Company was reimbursed $5.7 million and $10.0 million , respectively, net of related legal fees by its insurance provider, which is included in insurance proceeds in the accompanying consolidated statements of operations. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Louisiana with sales to refineries, re-sellers such as pipeline companies, and local distribution companies. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 . At December 31, 2016 , Gulfport held cash in excess of insured limits in these banks totaling $1.5 billion . +During the year ended December 31, 2016 , Gulfport sold approximately 68% and 10% of its natural gas production to BP Energy Company ("BP") and DTE Energy Trading, Inc. ("DTE"), respectively, 72% and 24% of its oil production to Shell Trading Company ("Shell") and Marathon Oil Corporation ("Marathon"), respectively, and 74% and 23% of its natural gas liquids production to MarkWest Utica EMG ("MarkWest"), and Antero Resources ("Antero"), respectively. During the year ended December 31, 2015 , Gulfport sold approximately 79% and 14% of its natural gas production to BP and DTE, respectively, 90% and 10% of its oil production to Shell and Marathon, respectively, and 76% and 24% of its natural gas liquids production to MarkWest and Antero, respectively. During the year ended December 31, 2014 , Gulfport sold approximately 40% , 32% , and 19% of its natural gas production to BP, DTE and Hess, respectively, 99% of its oil production to Shell, and 100% of its natural gas liquids production to MarkWest. +17. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +On October 17, 2012 , December 21, 2012 and August 18, 2014 , the Company issued an aggregate of $600.0 million of its 7.75% Senior Notes. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act. The October Notes, December Notes and the August Notes are collectively referred to as the "2020 Notes". +In connection with the issuance of the 2020 Notes, the Company and the subsidiary guarantors entered into registration rights agreements with the initial purchasers, pursuant to which the Company and the subsidiary guarantors agreed to file a registration statement with respect to an offer to exchange the 2020 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the October Notes and December Notes was completed in October 2013 and the exchange offer for the August Notes was completed in March 2015 . In October 2016, the Company +F-38 +Table of Contents +Index to Financial Statements +repurchased (in a cash tender offer) or redeemed all of the 2020 Notes, of which $600.0 million in aggregate principal amount was then outstanding, with the net proceeds from the issuance of the 2024 Notes discussed below and cash on hand. +On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of its 6.625% Senior Notes due 2023 (the "2023 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the April Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the April Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the April Notes was completed on October 13, 2015 . +On October 14, 2016, the Company issued $650.0 million in aggregate principal amount of its 6.000% Senior Notes due 2024 (the "2024 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The net proceeds from the issuance of the 2024 Notes, together with cash on hand, were used to repurchase or redeem all of the then-outstanding 2020 Notes in October 2016. +On December 21, 2016, the Company issued $600.0 million in aggregate principal amount of its 6.375% Senior Notes due 2025 (the "2025 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The Company intends to use the net proceeds from the issuance of the 2025 Notes, together with the net proceeds from the December 2016 underwritten offering of the Company’s common stock and cash on hand, to fund the cash portion of the purchase price for the Acquisition. +The 2020 Notes were, and the 2023 Notes, the 2024 Notes and the 2025 Notes are, guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The 2020 Notes were not, and the 2023 Notes, the 2024 Notes and the 2025 Notes are not, guaranteed by Grizzly Holdings, Inc. (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor. +F-39 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +1,273,882 +$ +1,993 +$ +— +$ +— +$ +1,275,875 +Restricted Cash +185,000 +— +— +— +185,000 +Accounts receivable - oil and gas +137,087 +37,496 +— +(37,822 +) +136,761 +Accounts receivable - related parties +16 +— +— +— +16 +Accounts receivable - intercompany +449,517 +1,151 +— +(450,668 +) +— +Prepaid expenses and other current assets +6,230 +1,409 +— +— +7,639 +Short-term derivative instruments +3,488 +— +— +— +3,488 +Total current assets +2,055,220 +42,049 +— +(488,490 +) +1,608,779 +Property and equipment: +Oil and natural gas properties, full-cost accounting +5,655,125 +417,524 +— +(729 +) +6,071,920 +Other property and equipment +68,943 +43 +— +— +68,986 +Accumulated depletion, depreciation, amortization and impairment +(3,789,746 +) +(34 +) +— +— +(3,789,780 +) +Property and equipment, net +1,934,322 +417,533 +— +(729 +) +2,351,126 +Other assets: +Equity investments and investments in subsidiaries +236,327 +33,590 +45,213 +(71,210 +) +243,920 +Long-term derivative instruments +5,696 +— +— +— +5,696 +Deferred tax asset +4,692 +— +— +— +4,692 +Other assets +8,932 +— +— +— +8,932 +Total other assets +255,647 +33,590 +45,213 +(71,210 +) +263,240 +Total assets +$ +4,245,189 +$ +493,172 +$ +45,213 +$ +(560,429 +) +$ +4,223,145 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +255,966 +$ +9,158 +$ +— +$ +— +$ +265,124 +Accounts payable - intercompany +31,202 +457,163 +126 +(488,491 +) +— +Asset retirement obligation +195 +— +— +— +195 +Derivative instruments +119,219 +— +— +— +119,219 +Current maturities of long-term debt +276 +— +— +— +276 +Total current liabilities +406,858 +466,321 +126 +(488,491 +) +384,814 +Long-term derivative instrument +26,759 +— +— +— +26,759 +Asset retirement obligation +34,081 +— +— +— +34,081 +Long-term debt, net of current maturities +1,593,599 +— +— +— +1,593,599 +Total liabilities +2,061,297 +466,321 +126 +(488,491 +) +2,039,253 +Stockholders' equity: +Common stock +1,588 +— +— +— +1,588 +Paid-in capital +3,946,442 +33,822 +257,026 +(290,848 +) +3,946,442 +Accumulated other comprehensive (loss) income +(53,058 +) +— +(50,931 +) +50,931 +(53,058 +) +Retained (deficit) earnings +(1,711,080 +) +(6,971 +) +(161,008 +) +167,979 +(1,711,080 +) +Total stockholders' equity +2,183,892 +26,851 +45,087 +(71,938 +) +2,183,892 +Total liabilities and stockholders' equity +$ +4,245,189 +$ +493,172 +$ +45,213 +$ +(560,429 +) +$ +4,223,145 +F-40 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets +Cash and cash equivalents +$ +112,494 +$ +479 +$ +1 +$ +— +$ +112,974 +Accounts receivable - oil and gas +72,241 +54 +— +(423 +) +71,872 +Accounts receivable - related parties +16 +— +— +— +16 +Accounts receivable - intercompany +326,475 +60 +— +(326,535 +) +— +Prepaid expenses and other current assets +3,905 +— +— +— +3,905 +Short-term derivative instruments +142,794 +— +— +— +142,794 +Total current assets +657,925 +593 +1 +(326,958 +) +331,561 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +5,108,258 +316,813 +— +(729 +) +5,424,342 +Other property and equipment +33,128 +43 +— +— +33,171 +Accumulated depletion, depreciation, amortization and impairment +(2,829,081 +) +(29 +) +— +— +(2,829,110 +) +Property and equipment, net +2,312,305 +316,827 +— +(729 +) +2,628,403 +Other assets: +Equity investments and investments in subsidiaries +231,892 +— +50,644 +(40,143 +) +242,393 +Long-term derivative instruments +51,088 +— +— +— +51,088 +Deferred tax asset +74,925 +— +— +— +74,925 +Other assets +6,364 +— +— +— +6,364 +Total other assets +364,269 +— +50,644 +(40,143 +) +374,770 +Total assets +$ +3,334,499 +$ +317,420 +$ +50,645 +$ +(367,830 +) +$ +3,334,734 +Liabilities and Stockholders' Equity +Current liabilities: +Accounts payable and accrued liabilities +$ +264,893 +$ +527 +$ +— +$ +(292 +) +$ +265,128 +Accounts payable - intercompany +— +326,541 +124 +(326,665 +) +— +Asset retirement obligation +75 +— +— +— +75 +Derivative instruments +437 +— +— +— +437 +Deferred tax liability +50,697 +— +— +— +50,697 +Current maturities of long-term debt +179 +— +— +— +179 +Total current liabilities +316,281 +327,068 +124 +(326,957 +) +316,516 +Long-term derivative instrument +6,935 +— +— +— +6,935 +Asset retirement obligation +26,362 +— +— +— +26,362 +Long-term debt, net of current maturities +946,084 +— +— +— +946,084 +Total liabilities +1,295,662 +327,068 +124 +(326,957 +) +1,295,897 +Stockholders' equity: +Common stock +1,082 +— +— +— +1,082 +Paid-in capital +2,824,303 +322 +241,553 +(241,875 +) +2,824,303 +Accumulated other comprehensive (loss) income +(55,177 +) +— +(55,177 +) +55,177 +(55,177 +) +Retained (deficit) earnings +(731,371 +) +(9,970 +) +(135,855 +) +145,825 +(731,371 +) +Total stockholders' equity +2,038,837 +(9,648 +) +50,521 +(40,873 +) +2,038,837 +Total liabilities and stockholders' equity +$ +3,334,499 +$ +317,420 +$ +50,645 +$ +(367,830 +) +$ +3,334,734 +F-41 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +381,931 +$ +3,979 +$ +— +$ +— +$ +385,910 +Costs and expenses: +Lease operating expenses +68,034 +843 +— +— +68,877 +Production taxes +13,121 +155 +— +— +13,276 +Midstream gathering and processing +165,400 +572 +— +— +165,972 +Depreciation, depletion and amortization +245,970 +4 +— +— +245,974 +Impairment of oil and gas properties +715,495 +— +— +— +715,495 +General and administrative +43,896 +(490 +) +3 +— +43,409 +Accretion expense +1,057 +— +— +— +1,057 +1,252,973 +1,084 +3 +— +1,254,060 +(LOSS) INCOME FROM OPERATIONS +(871,042 +) +2,895 +(3 +) +— +(868,150 +) +OTHER (INCOME) EXPENSE: +Interest expense +63,529 +1 +— +— +63,530 +Interest income +(1,230 +) +— +— +— +(1,230 +) +Insurance proceeds +(5,718 +) +— +— +— +(5,718 +) +Loss on debt extinguishment +23,776 +— +— +— +23,776 +Loss (income) from equity method investments and investments in subsidiaries +31,078 +(89 +) +25,150 +(22,154 +) +33,985 +Other expense (income) +145 +(16 +) +— +— +129 +111,580 +(104 +) +25,150 +(22,154 +) +114,472 +(LOSS) INCOME BEFORE INCOME TAXES +(982,622 +) +2,999 +(25,153 +) +22,154 +(982,622 +) +INCOME TAX BENEFIT +(2,913 +) +— +— +— +(2,913 +) +NET (LOSS) INCOME +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +F-42 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +707,868 +$ +1,122 +$ +— +$ +— +$ +708,990 +Costs and expenses: +Lease operating expenses +68,632 +843 +— +— +69,475 +Production taxes +14,618 +122 +— +— +14,740 +Midstream gathering and processing +138,526 +64 +— +— +138,590 +Depreciation, depletion and amortization +337,689 +5 +— +— +337,694 +Impairment of oil and gas properties +1,440,418 +— +— +— +1,440,418 +General and administrative +41,892 +55 +20 +— +41,967 +Accretion expense +820 +— +— +— +820 +2,042,595 +1,089 +20 +— +2,043,704 +(LOSS) INCOME FROM OPERATIONS +(1,334,727 +) +33 +(20 +) +— +(1,334,714 +) +OTHER (INCOME) EXPENSE: +Interest expense +51,221 +— +— +— +51,221 +Interest income +(643 +) +— +— +— +(643 +) +Insurance proceeds +(10,015 +) +— +— +— +(10,015 +) +Loss (income) from equity method investments and investments in subsidiaries +107,252 +— +115,544 +(116,703 +) +106,093 +Other expense (income) +(1,657 +) +(346 +) +— +1,518 +(485 +) +146,158 +(346 +) +115,544 +(115,185 +) +146,171 +(LOSS) INCOME BEFORE INCOME TAXES +(1,480,885 +) +379 +(115,564 +) +115,185 +(1,480,885 +) +INCOME TAX BENEFIT +(256,001 +) +— +— +— +(256,001 +) +NET (LOSS) INCOME +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +F-43 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +668,961 +$ +1,801 +$ +— +$ +— +$ +670,762 +Costs and expenses: +Lease operating expenses +51,238 +953 +— +— +52,191 +Production taxes +23,803 +203 +— +— +24,006 +Midstream gathering and processing +64,402 +65 +— +— +64,467 +Depreciation, depletion and amortization +265,428 +3 +— +— +265,431 +General and administrative +37,846 +446 +(2 +) +— +38,290 +Accretion expense +761 +— +— +— +761 +Gain on sale of assets +(11 +) +— +— +— +(11 +) +443,467 +1,670 +(2 +) +— +445,135 +INCOME FROM OPERATIONS +225,494 +131 +2 +— +225,627 +OTHER (INCOME) EXPENSE: +Interest expense +23,986 +— +— +— +23,986 +Interest income +(195 +) +— +— +— +(195 +) +Litigation settlement +25,500 +— +— +— +25,500 +Gain on contribution of investments +(84,470 +) +— +— +— +(84,470 +) +(Income) loss from equity method investments and investments in subsidiaries +(139,965 +) +— +13,159 +(12,628 +) +(139,434 +) +Other (income) expense +(106 +) +(398 +) +— +— +(504 +) +(175,250 +) +(398 +) +13,159 +(12,628 +) +(175,117 +) +INCOME (LOSS) BEFORE INCOME TAXES +400,744 +529 +(13,157 +) +12,628 +400,744 +INCOME TAX EXPENSE +153,341 +— +— +— +153,341 +NET INCOME (LOSS) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +F-44 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +(Amounts in thousands) +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +Foreign currency translation adjustment +2,119 +778 +1,341 +(2,119 +) +2,119 +Other comprehensive income (loss) +2,119 +778 +1,341 +(2,119 +) +2,119 +Comprehensive (loss) income +$ +(977,590 +) +$ +3,777 +$ +(23,812 +) +$ +20,035 +$ +(977,590 +) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +Foreign currency translation adjustment +(28,502 +) +— +(28,502 +) +28,502 +(28,502 +) +Other comprehensive (loss) income +(28,502 +) +— +(28,502 +) +28,502 +(28,502 +) +Comprehensive (loss) income +$ +(1,253,386 +) +$ +379 +$ +(144,066 +) +$ +143,687 +$ +(1,253,386 +) +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +247,403 +$ +529 +$ +(13,157 +) +$ +12,628 +$ +247,403 +Foreign currency translation adjustment +(16,894 +) +— +(16,894 +) +16,894 +$ +(16,894 +) +Other comprehensive (loss) income +(16,894 +) +— +(16,894 +) +16,894 +(16,894 +) +Comprehensive income (loss) +$ +230,509 +$ +529 +$ +(30,051 +) +$ +29,522 +$ +230,509 +F-45 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +336,330 +$ +(9,486 +) +$ +(2 +) +$ +11,001 +$ +337,843 +Net cash (used in) provided by investing activities +(905,582 +) +(22,500 +) +(15,472 +) +37,972 +(905,582 +) +Net cash provided by (used in) financing activities +1,730,640 +33,500 +15,473 +(48,973 +) +1,730,640 +Net increase (decrease) in cash and cash equivalents +1,161,388 +1,514 +(1 +) +— +1,162,901 +Cash and cash equivalents at beginning of period +112,494 +479 +1 +— +112,974 +Cash and cash equivalents at end of period +$ +1,273,882 +$ +1,993 +$ +— +$ +— +$ +1,275,875 +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +344,018 +$ +(21,839 +) +$ +(2 +) +$ +2 +$ +322,179 +Net cash (used in) provided by investing activities +(1,595,767 +) +21,514 +(14,472 +) +14,472 +(1,574,253 +) +Net cash provided by (used in) financing activities +1,222,708 +— +14,474 +(14,474 +) +1,222,708 +Net decrease in cash and cash equivalents +(29,041 +) +(325 +) +— +— +(29,366 +) +Cash and cash equivalents at beginning of period +141,535 +804 +1 +— +142,340 +Cash and cash equivalents at end of period +$ +112,494 +$ +479 +$ +1 +$ +— +$ +112,974 +Year Ended December 31, 2014 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +388,177 +$ +21,698 +$ +(2 +) +$ +— +$ +409,873 +Net cash (used in) provided by investing activities +(1,108,241 +) +(28,419 +) +(18,799 +) +18,802 +(1,136,657 +) +Net cash provided by (used in) financing activities +410,168 +— +18,802 +(18,802 +) +410,168 +Net (decrease) increase in cash and cash equivalents +(309,896 +) +(6,721 +) +1 +— +(316,616 +) +Cash and cash equivalents at beginning of period +451,431 +7,525 +— +— +458,956 +Cash and cash equivalents at end of period +$ +141,535 +$ +804 +$ +1 +$ +— +$ +142,340 +F-46 +Table of Contents +Index to Financial Statements +18. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company owns a 24.9999% interest in Grizzly, which interest is shown below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2016 +2015 +(In thousands) +Proven properties +$ +4,491,615 +$ +3,606,641 +Unproven properties +1,580,305 +1,817,701 +6,071,920 +5,424,342 +Accumulated depreciation, depletion, amortization and impairment reserve +(3,778,043 +) +(2,820,113 +) +Net capitalized costs +$ +2,293,877 +$ +2,604,229 +Equity investment in Grizzly Oil Sands ULC +Proven properties +$ +70,266 +$ +81,473 +Unproven properties +80,892 +82,388 +151,158 +163,861 +Accumulated depreciation, depletion, amortization and impairment reserve +(1,578 +) +(1,531 +) +Net capitalized costs +$ +149,580 +$ +162,330 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2016 +2015 +2014 +(In thousands) +Acquisition +$ +152,887 +$ +810,755 +$ +440,288 +Development of proved undeveloped properties +423,998 +642,811 +864,511 +Exploratory +— +— +2,249 +Recompletions +16,386 +13,894 +45,658 +Capitalized asset retirement obligation +10,971 +8,800 +2,095 +Total +$ +604,242 +$ +1,476,260 +$ +1,354,801 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +357 +$ +396 +$ +1,230 +Development of proved undeveloped properties +— +47 +7,107 +Exploratory +— +— +— +Capitalized asset retirement obligation +784 +282 +1,055 +Total +$ +1,141 +$ +725 +$ +9,392 +F-47 +Table of Contents +Index to Financial Statements +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +2016 +2015 +2014 +(In thousands) +Revenues +$ +385,910 +$ +708,990 +$ +670,762 +Production costs +(248,125 +) +(222,805 +) +(140,664 +) +Depletion +(243,098 +) +(335,288 +) +(263,946 +) +Impairment +(715,495 +) +(1,440,418 +) +— +— +(820,808 +) +(1,289,521 +) +266,152 +Income tax (benefit) expense +Current +— +— +— +Deferred +— +(220,201 +) +96,061 +— +(220,201 +) +96,061 +Results of operations from producing activities +$ +(820,808 +) +$ +(1,069,320 +) +$ +170,091 +Depletion per Mcf of gas equivalent (Mcfe) +$ +0.92 +$ +1.68 +$ +3.01 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +— +$ +1,436 +$ +5,449 +Production costs +(13 +) +(1,549 +) +(10,113 +) +Depletion +— +(625 +) +(1,195 +) +(13 +) +(738 +) +(5,859 +) +Income tax expense +— +— +— +Results of operations from producing activities +$ +(13 +) +$ +(738 +) +$ +(5,859 +) +Oil and Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2016 , 2015 and 2014 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2016 , 2015 and 2014 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (MBbls) and volumes for gas are stated in millions of cubic feet (MMcf). The prices used for the 2016 reserve report are $42.75 per barrel of oil, $2.48 per MMbtu and $9.91 per barrel for NGLs, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2015 and 2014 for reserve report purposes are $50.28 per barrel, $2.59 per MMbtu and $13.21 per barrel for NGLs and $94.99 per barrel, $4.35 per MMbtu and $44.84 per barrel for NGLs, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +F-48 +Table of Contents +Index to Financial Statements +2016 +2015 +2014 +Oil +Gas +NGL +Oil +Gas +NGL +Oil +Gas +NGL +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +Proved Reserves +Beginning of the period +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +8,346 +146,446 +5,675 +Purchases in oil and gas reserves in place +— +— +— +— +371,663 +— +173 +8,863 +353 +Extensions and discoveries +1,217 +1,082,220 +7,677 +2,413 +997,057 +5,486 +4,975 +629,151 +22,594 +Revisions of prior reserve estimates +(3 +) +(247,703 +) +(1,439 +) +(2,553 +) +(371,430 +) +(9,594 +) +(1,313 +) +(6,136 +) +(304 +) +Current production +(2,126 +) +(227,594 +) +(3,847 +) +(2,899 +) +(156,151 +) +(4,424 +) +(2,684 +) +(59,318 +) +(2,050 +) +End of period +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +Proved developed reserves +4,882 +744,797 +14,299 +6,120 +652,961 +12,910 +5,719 +345,166 +12,379 +Proved undeveloped reserves +664 +1,422,271 +5,828 +338 +907,184 +4,826 +3,778 +373,840 +13,889 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +— +— +— +14,558 +— +— +13,637 +— +— +Purchases in oil and gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +— +— +— +(14,530 +) +— +— +990 +— +— +Current production +— +— +— +(28 +) +— +— +(69 +) +— +— +End of period +— +— +— +— +— +— +14,558 +— +— +Proved developed reserves +— +— +— +— +— +— +1,632 +— +— +Proved undeveloped reserves +— +— +— +— +— +— +12,926 +— +— +In 2016 , the Company experienced extensions and discoveries of 1.1 Tcfe of estimated proved reserves attributable to the continued development of the Company's Utica Shale acreage. The Company experienced downward revisions of 227.9 Bcfe due to lower commodity prices on 67 PUD locations, including the loss of 35 of the 67 PUD locations as they were no longer economic, as well as downward revisions of 17.4 Bcfe due to rescheduling the drilling timeline of four PUD locations in excess of five years of initial booking resulting in the removal of these four PUD locations. In addition, the Company experienced upward revisions of 26.7 Bcfe attributable to improved performance of 34 PUD locations as a result of 14.5% production increases due to well performance of offset producers as well as lower lease operated and capital expenditures. In 2015 , the Company experienced extensions and discoveries of 1,044.5 Bcfe of estimated proved reserves attributable to the continued development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of 444,314 MMcfe in estimated proved reserves in 2015 primarily due to the exclusion of PUD locations in its Utica and Southern Louisiana fields that became uneconomic due to the continued decline in commodity prices. In 2015 , the Company also purchased 371,663 MMcfe of proved reserves as a result of acquisitions from Paloma and AEU discussed above in Note 2. In 2014 , the Company experienced extensions and discoveries of 786,347 MMcfe of estimated proved reserves attributable to the development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of 15,837 MMcfe in estimated proved reserves in 2014 primarily due to the exclusion of PUD locations in our Southern Louisiana and Utica fields that were not expected to be drilled within five years of initial booking. The Company also purchased 12,019 MMcfe of proved reserves as a result of its acquisition from Rhino Exploration LLC. +Discounted Future Net Cash Flows +F-49 +Table of Contents +Index to Financial Statements +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2016 , 2015 and 2014 using an unweighted average first-of-the-month price for the period January through December 31, 2016 , 2015 and 2014 . +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2016 +2015 +2014 +(In thousands) +Future cash flows +$ +3,354,168 +$ +3,043,450 +$ +4,667,678 +Future development and abandonment costs +(1,165,025 +) +(877,660 +) +(719,898 +) +Future production costs +(924,167 +) +(941,243 +) +(880,427 +) +Future production taxes +(69,447 +) +(58,169 +) +(71,229 +) +Future income taxes +(14,545 +) +(2,648 +) +(693,154 +) +Future net cash flows +1,180,984 +1,163,730 +2,302,970 +10% discount to reflect timing of cash flows +(492,944 +) +(399,399 +) +(875,803 +) +Standardized measure of discounted future net cash flows +$ +688,040 +$ +764,331 +$ +1,427,167 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +— +$ +754,720 +Future development and abandonment costs +— +— +(205,242 +) +Future production costs +— +— +(291,988 +) +Future production taxes +— +— +— +Future income taxes +— +— +(11,250 +) +Future net cash flows +— +— +246,240 +10% discount to reflect timing of cash flows +(152,494 +) +Standardized measure of discounted future net cash flows +$ +— +$ +— +$ +93,746 +In order to develop its proved undeveloped reserves according to the drilling schedule used by the engineers in Gulfport’s reserve report, the Company will need to spend $401.5 million , $331.4 million and $192.7 million during years 2017 , 2018 and 2019 , respectively. +F-50 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2016 +2015 +2014 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +(312,291 +) +$ +(486,185 +) +$ +(530,098 +) +Net changes in prices, production costs, and development costs +(146,518 +) +(1,412,181 +) +97,716 +Acquisition of oil and gas reserves in place +— +83,340 +14,266 +Extensions and discoveries +186,909 +262,895 +790,533 +Previously estimated development costs incurred during the period +176,218 +117,540 +68,227 +Revisions of previous quantity estimates, less related production costs +(38,448 +) +(98,162 +) +(37,801 +) +Accretion of discount +76,433 +142,717 +57,847 +Net changes in income taxes +(6,495 +) +412,240 +(295,226 +) +Change in production rates and other +(12,099 +) +314,960 +683,237 +Total change in standardized measure of discounted future net cash flows +$ +(76,291 +) +$ +(662,836 +) +$ +848,701 +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +— +$ +114 +$ +4,664 +Net changes in prices, production costs, and development costs +— +— +(76,518 +) +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +— +— +7,107 +Previously estimated development costs incurred during the period +— +47 +— +Revisions of previous quantity estimates, less related production costs +— +(103,282 +) +10,659 +Accretion of discount +— +9,375 +14,946 +Net changes in income taxes +— +— +9,162 +Change in production rates and other +— +— +(25,738 +) +Total change in standardized measure of discounted future net cash flows +$ +— +$ +(93,746 +) +$ +(55,718 +) +F-51 +Table of Contents +Index to Financial Statements +19. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2016 and 2015 : +2016 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +156,961 +$ +(28,158 +) +$ +193,691 +$ +63,416 +Loss from operations +(195,794 +) +(323,412 +) +(157,995 +) +(190,949 +) +Income tax (benefit) expense +(191 +) +(157 +) +(3,407 +) +842 +Net loss +(242,267 +) +(339,776 +) +(157,296 +) +(240,370 +) +Loss per share: +Basic +$ +(2.17 +) +$ +(2.71 +) +$ +(1.25 +) +$ +(1.86 +) +Diluted +$ +(2.17 +) +$ +(2.71 +) +$ +(1.25 +) +$ +(1.86 +) +2015 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +176,077 +$ +112,294 +$ +230,393 +$ +190,226 +Income (loss) from operations +28,533 +(21,620 +) +(529,252 +) +(812,375 +) +Income tax expense (benefit) +14,479 +(17,214 +) +(216,603 +) +(36,663 +) +Net income (loss) +25,519 +(31,325 +) +(388,209 +) +(830,869 +) +Income (loss) per share: +Basic +$ +0.30 +$ +(0.32 +) +$ +(3.59 +) +$ +(7.67 +) +Diluted +$ +0.30 +$ +(0.32 +) +$ +(3.59 +) +$ +(7.67 +) +20. +SUBSEQUENT EVENTS +Derivatives +In January and February 2017 , the Company entered into fixed price swaps for 2017 for approximately 23,000 MMBtu of natural gas per day at a weighted average price of $3.44 per MMbtu and for approximately 1,000 Bbls of C3 propane per day at a weighted average price of $28.56 per Bbl. For 2018 , the Company entered into fixed price swaps for approximately 87,000 MMBtu of natural gas per day at a weighted average price of $3.19 per MMBtu. The Company's fixed price swap contracts are tied to the commodity prices on NYMEX for natural gas and Mont Belvieu for propane. The Company will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas or Mont Belvieu for propane. +In addition, the Company entered into natural gas basis swap positions, which settle on the pricing index to basis differential of NPGL MC to the NYMEX Henry Hub natural gas price. In January and February 2017 , the Company entered into natural gas basis swap positions for 2017 for approximately 38,000 MMBtu of natural gas per day at a weighted average differential of $0.26 per MMBtu. For 2018 , the Company entered into natural gas basis swap positions for approximately 12,000 MMBtu of natural gas per day at a weighted average differential of $0.26 per MMBtu. +F-52 +Table of Contents +Index to Financial Statements +EXHIBITS INDEX +Exhibit +Number +Description +2.1## +Purchase and Sale Agreement, dated as of December 13, 2016, by and among Gulfport Energy Corporation, SCOOP Acquisition Company, LLC and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +4.4 +Registration Rights Agreement, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC and Scotia Capital (USA) Inc., as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +4.5 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.6 +Registration Rights Agreement, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.7 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015). +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +E-1 +Table of Contents +Index to Financial Statements +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Amended and Restated Employment Agreement, dated as of April 29, 2015, by and between the Company and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 7, 2015). +10.8 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.9 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.10 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.11 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.12 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +10.13 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +10.14 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 5, 2016). +10.15 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +10.16# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.17# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.18# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +E-2 +Table of Contents +Index to Financial Statements +10.19# +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.20+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.21+ +Separation and Release Agreement by and between Gulfport Energy Corporation and Ross Kirtley entered into November 2, 2016 (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 3, 2016). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Ryder Scott Company. +23.3* +Consent of Netherland, Sewell & Associates, Inc. +23.4* +Consent of Grant Thornton LLP with respect to financial statements of Diamondback Energy, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +The schedules (or similar attachments) referenced in this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule (or similar attachment) will be furnished supplementally to the Securities and Exchange Commission. +E-3 \ No newline at end of file diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/filing_metadata.csv b/raw/filings/0000874499/2016/0001628280-17-001359/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1a89845b328aef2575271d17a913ad3b04353f90 --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2017-02-15,2016-12-31,2017-02-14T23:36:38.000Z,0001628280-17-001359,gpor-12312016x10k.htm,10-K,20579931,1,0,https://www.sec.gov/Archives/edgar/data/874499/000162828017001359/gpor-12312016x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828017001359/,2016,2016,1 diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/item1.txt b/raw/filings/0000874499/2016/0001628280-17-001359/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..4562b0b67765c3a4d8960695327a29a7ce341d9b --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/item1.txt @@ -0,0 +1,492 @@ +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields. In December 2016, we entered into a definitive agreement to purchase oil and natural gas assets including 46,400 net surface acres with multiple producing zones, including the Woodford and Springer formations, in Grady, Stephens, and Garvin counties, Oklahoma, (see " - Our Pending Acquisition " below) which we expect to complete in February 2017. In addition, we have an interest in producing properties in the Niobrara Formation of Northwestern Colorado and the Bakken Formation. We also hold a significant acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an interest in an entity that operates in the Phu Horm gas field in Thailand. We also hold an approximate 24.2% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the NASDAQ Global Select Market, to which we contributed our membership interest in Mammoth Partners LLC (previously, Mammoth Energy Partners LP) in connection with Mammoth Energy’s initial public offering completed on October 19, 2016. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 10, 2017 , we held leasehold interests in approximately 232,000 gross (213,000 net) acres in the Utica Shale primarily in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2016 , had spud 268 gross wells, 219 of which were completed and were producing. In 2016 , we spud 50 gross (43.5 net) wells, of which 16 were completed as producing wells, two were non-productive, and as of December 31, 2016 , 26 were in various stages of completion and six were still being drilled. We commenced sales from 54 gross wells (40.2 net wells) in the Utica Shale during 2016 . During 2017 (through February 10, 2017 ), we spud ten gross (9.2 net) wells. As of February 10, 2017 , four of these wells were waiting on completion and the other six were still drilling. In addition, other operators drilled 35 gross (6.9 net) wells and commenced sales from 25 gross (6.3 net) wells on our Utica Shale acreage in 2016 . +We currently intend to drill 87 to 97 gross (67 to 74 net) horizontal wells, and commence sales from 72 to 80 gross (61 to 67 net) horizontal wells on our Utica Shale acreage in 2017 . We currently anticipate 30 to 34 gross (10 to 11 net) horizontal wells will be drilled, and sales commenced from 42 to 46 gross (nine to 10 net) horizontal wells, by other operators on our Utica Shale acreage. We currently expect our anticipated operated and non-operated activity during 2017 to cost us $645.0 million to $690.0 million. +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2016 was approximately 70,653 net million cubic feet of natural gas equivalent, or MMcfe, or 768.0 MMcfe per day, of which 89% was from natural gas and 11% was from oil and natural gas liquids, or NGLs. +In 2016 , at our WCBB field, we recompleted 54 gross and net wells and spud no new wells. In the fourth quarter of 2016 , production at WCBB was approximately 1,272 MMcfe, or an average of 13.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +In 2016 , at our East Hackberry field, we recompleted 23 gross and net wells and spud no new wells. In the fourth quarter of 2016 , net production at East Hackberry was approximately 334 MMcfe, or an average of 3.6 MMcfe per day, of which 97% was from oil and 3% was from natural gas. +In 2016 , at our West Hackberry field, we had no recompletions and spud no new wells. In the fourth quarter of 2016 , net production at West Hackberry was approximately 45 MMcfe, or an average of 492.8 thousand cubic feet of natural gas equivalent, or Mcfe, per day, of which 99% was from oil and 1% was from natural gas. +We currently estimate our 2017 activities in our Southern Louisiana fields to be approximately $30.0 million to $35.0 million in aggregate to drill 12 to 15 gross and net wells and perform recompletion activities. +As of December 31, 2016 , we held leasehold interests in approximately 4,000 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2016 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2016 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or +2 +Table of Contents +Index to Financial Statements +an average of 277.8 Mcfe per day, 100% of which was from oil. During 2017 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2016 , we held leasehold interests in approximately 778 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2016 , our net production from this acreage was approximately 71 MMcfe, or an average of 773.5 Mcfe per day, of which 80% was from oil, 16% was from natural gas and 4% was from natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2016 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2016 , we had 2.3 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $696.0 million and associated standardized measure of discounted future net cash flows of approximately $688.0 million , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2016 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +40.33/49.28 +393 +193.84 +5 +4.23 +48,523 +41,081 +2,165,739 +2,798 +20,126 +2,303,282 +West Cote Blanche Bay Field (4) +80.108/100 +116 +116 +145 +145 +5,668 +5,668 +865 +2,039 +— +13,096 +E. Hackberry Field (5) +82.04/100 +25 +25 +119 +119 +2,910 +2,910 +210 +356 +— +2,349 +W. Hackberry Field +80.357/100 +7 +7 +6 +6 +726 +726 +— +72 +— +433 +Niobrara Formation +34.52/48.61 +3 +1.46 +1 +0.41 +2,100 +1,050 +89 +157 +— +1,029 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +153 +123 +1 +899 +Overrides/Royalty Non-operated +Various +583 +0.77 +— +— +— +— +12 +1 +— +20 +Total +1,145 +344.37 +276 +274.64 +60,313 +51,512 +2,167,068 +5,546 +20,127 +2,321,108 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 23% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 174 gross (22.25 net) wells drilled by other operators on our acreage. +3 +Table of Contents +Index to Financial Statements +(4) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(5) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2016 , we held leasehold interests in approximately 232,000 gross (213,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of December 31, 2016, there were 1,472 producing horizontal wells, 256 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 19 horizontal wells that were being drilled and an additional 460 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2016 , had spud 268 gross wells, 219 of which were completed and were producing. In 2016 , we spud 50 gross (43.5 net) wells, of which 16 were completed as producing wells and two were non-productive, and as of December 31, 2016 , 26 were in various stages of completion and six were still being drilled. We commenced sales from 54 gross wells (40.2 net wells) in the Utica Shale during 2016 . During 2017 (through February 10, 2017 ), we spud ten gross (9.2 net) wells. As of February 10, 2017 , four of these +4 +Table of Contents +Index to Financial Statements +wells were waiting on completion and the other six were still drilling. In addition, other operators drilled 35 gross (6.9 net) wells and commenced sales from 25 gross (6.3 net) wells on our Utica Shale acreage in 2016 . +We currently intend to drill 87 to 97 gross (67 to 74 net) horizontal wells, and commence sales from 72 to 80 gross (61 to 67 net) horizontal wells, on our Utica Shale acreage in 2017 . We currently anticipate 30 to 34 gross (10 to 11 net) horizontal wells will be drilled, and sales commenced from 42 to 46 gross (nine to 10 net) horizontal wells, by other operators on our Utica Shale acreage during 2017 . We currently anticipate our 2017 capital expenditures to be $645.0 million to $690.0 million related to our operated and non-operated Utica Shale activities. As of February 10, 2017 , we had six operated horizontal rigs drilling in the play. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2016 was approximately 70,653 net million cubic feet of natural gas equivalent, or MMcfe, or 768.0 MMcfe per day, of which 89% was from natural gas and 11% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,077 wells drilled as of December 31, 2016 , 973 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2016 , we drilled 265 new wells, 233 of which were productive, for an 88% success rate. As of December 31, 2016 , estimated field cumulative gross production was 199 MMBO and 237.2 Bcf of gas. Of the 1,077 wells drilled in WCBB as of December 31, 2016 , 116 were producing, 145 were shut-in, and six were being used as salt water disposal wells. The other 810 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,077 wells that had been drilled in the field as of December 31, 2016 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more +5 +Table of Contents +Index to Financial Statements +efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2016 , at our WCBB field, we recompleted 54 gross and net wells and spud no new wells. As of February 10, 2017 , we had recompleted 14 gross and net wells during 2017 in our WCBB field. +Production Status +In the fourth quarter of 2016 , our net production at WCBB was approximately 1,272 MMcfe, or an average of 13.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.04% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2016 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2016 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 269 wells have been drilled on our portion of the field. As of December 31, 2016 , 25 wells had daily production, 119 were shut-in and three had been converted to salt water disposal wells. The remaining 122 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, three natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2016 at East Hackberry, we recompleted 23 gross and net wells and spud no new wells. As of February 10, 2017 , we had recompleted two gross and net wells during 2017 in our East Hackberry field. +6 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2016 , our net production at East Hackberry was approximately 334 MMcfe, or an average of 3.6 MMcfe per day, of which 97% was from oil and 3% was from natural gas. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 80.00% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2016 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2016 , 41 wells had been drilled on our portion of West Hackberry. As of December 31, 2016 , seven of such wells were producing, six were shut-in and one had been converted to a saltwater disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2016 at West Hackberry, we had no recompletions and spud no new wells. +Production Status +In the fourth quarter of 2016 , our net production at West Hackberry was approximately 45 MMcfe, or an average of 492.8 Mcfe per day, of which 99% was from oil and 1% was from natural gas. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2016 , we held leases for approximately 4,000 net acres. In 2016 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural +7 +Table of Contents +Index to Financial Statements +fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2016 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 277.8 Mcfe per day, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2016 . We do not anticipate drilling any wells in the Niobrara Formation during 2017 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2016 , we held approximately 778 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2016 , our net production from this acreage was approximately 71 MMcfe, or an average of 773.5 Mcfe per day, of which 80% was from oil, 16% was from natural gas and 4% was from natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2016 . We do not anticipate drilling any wells in the Bakken Formation during 2017 . +8 +Table of Contents +Index to Financial Statements +Additional Properties +Louisiana . In addition to our interests in the WCBB, East Hackberry and West Hackberry fields, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2016 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.0686 +% +— +1 +— +Our Pending Acquisition +We have entered into a purchase agreement, dated as of December 13, 2016, with Vitruvian II Woodford, LLC, an unrelated third-party seller, referred to herein as the Seller or Vitruvian, to acquire certain assets of the Seller for a total purchase price consisting of $1.35 billion in cash and approximately 23.9 million in shares of our common stock, subject to certain adjustments, which we refer to herein as the Pending Acquisition. The assets subject to the Pending Acquisition include 46,400 net surface acres, with multiple producing zones including the Woodford and Springer formations, in Grady, Stephens and Garvin Counties, Oklahoma. Given the potential for numerous producing intervals across this acreage, we have identified approximately 1,750 gross drilling locations, comprised of only Woodford and Springer zones with significant upside potential through infill drilling and additional prospective zones present on the acreage. The properties subject to the Pending Acquisition are located primarily in the over-pressured liquids-rich to dry gas windows of the SCOOP play and include approximately 183 MMcfe per day of net production for October 2016, based on information provided by the Seller. The Pending Acquisition also includes 48 producing horizontal wells and an additional interest in over 150 non-operated horizontal wells. Four rigs are currently operating on the acreage and we intend to maintain a four-rig cadence in the play during 2017. Based on the estimates prepared by the Seller as of September 30, 2016 and audited by Netherland, Sewell & Associates, Inc., or NSAI, the estimated proved reserves attributable to the acreage subject to the Pending Acquisition are approximately 1.1 Tcfe. These estimates are internal estimates prepared by the Seller, and we may revise such estimates following the completion of the Pending Acquisition. We do not currently hold any leasehold interests or have any operations in the SCOOP play. The Pending Acquisition is expected to provide basin diversification to our operations. We intend to fund the cash portion of the purchase price of the Pending Acquisition with the net proceeds from the December 2016 common stock and senior note offerings and cash on hand. We anticipate completing the Pending Acquisition in February 2017. However, the Pending Acquisition remains subject to completion of due diligence and satisfaction or waiver of other closing conditions. There can be no assurance that the Pending Acquisition will be completed or that we will acquire all or any portion of the acreage subject to the Pending Acquisition. See Item 1A. " Risk Factors - Risks Relating to the Pending Acquisition ." +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2016 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has three oil sands projects in various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has received regulatory approval for up to 11,300 barrels per day of bitumen production. Grizzly produced approximately 900 barrels of bitumen per day at its Algar Lake SAGD project during the first quarter of 2015. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. We reviewed our investment in Grizzly as of September 30, 2015 and December 31, 2015 , and again at March 31, 2016 , for impairment based on FASB ASC 323-Investments: Equity Method and Joint Ventures, or FASB ASC 323, due to certain qualitative factors and engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, we concluded that an other than temporary impairment was required under +9 +Table of Contents +Index to Financial Statements +FASB ASC 323, resulting in an aggregate impairment loss of $101.6 million for the year ended December 31, 2015 and $23.1 million for the for the year ended December 31, 2016 . As of and during the period ended December 31, 2016 , commodity prices had increased as compared to the quarter ended March 31, 2016 , and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline again in the future, further impairment of our investment in Grizzly may result. In the first quarter of 2012, Grizzly acquired the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application was filed with the regulatory authorities in the fourth quarter of 2013, covering the eastern portion of the May River lease. The development application continues to move through the regulatory process and is expected to be approved in the first half of 2017. In the first quarter of 2014, a 2-D seismic program covering approximately 83 kilometers was completed to more fully define the resource over the remaining lease beyond the development application area. At the Thickwood thermal project, a development application for a 12,000 barrel per day oil sands project was filed in the fourth quarter of 2012. Since then, the Alberta Energy Regulator, or AER, announced it is implementing a policy for future regulatory requirements for reservoir containment in shallow SAGD areas, which impacts the Thickwood application. Additional work to advance the Thickwood application will be required and is expected to be addressed once the May River development approval is received. In December 2015, Grizzly suspended the review of the Thickwood application by the AER. The Thickwood application will be resubmitted once the regulations have been updated. Grizzly has also developed delineation drilling, seismic and regulatory work plans at its Cadotte, Peace River property. Grizzly continues to pursue a rail marketing strategy to ensure consistent and flexible access to premium markets for its production, including its Windell truck to rail terminal located near Conklin, Alberta, which commenced transloading blended bitumen production from Algar Lake on to rail cars for delivery to the US Gulf Coast markets in the second quarter of 2014. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2016, net gas production was approximately 118 MMcf per day and condensate production was 435 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy Services, Inc., or Mammoth Energy, which is the parent company of Mammoth, completed its initial public offering, or the IPO, of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth Energy Partners LLC (as the sucessor to Mammoth). We intend to use the net proceeds for the sale of our Mammoth Energy shares in the IPO for general corporate purposes. As of December 31, 2016 , we owned an approximate 24.2% interest in Mammoth Energy. +In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Cementing LLC, or Stingray Cementing, with an initial ownership of 50%. Stingray Cementing provides well completion and other well services. In 2012, we also participated in the formation of Blackhawk Midstream LLC, or Blackhawk, and Timber Wolf Terminals LLC, or Timber Wolf, with an initial ownership interest of 50% in each entity. Blackhawk coordinates gathering, compression, processing and marketing activities in connection with the development of our Utica Shale acreage and Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. Also in 2012, we acquired a 22.5% equity interest in Windsor Midstream LLC, or Midstream, which owned a 28.4% equity interest in a gas processing plant in +10 +Table of Contents +Index to Financial Statements +West Texas. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns an entity that operates sand mines that produce hydraulic fracturing grade sand. +In February 2016, we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas. We own a 25% interest in the newly formed entity called Strike Force Midstream LLC, or Strike Force, and Rice acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is underway, is providing gathering services for an increasing number of Gulfport operated wells and connectivity of existing dry gas gathering systems and interchangeability of natural gas across our firm portfolio. The first phase of the project has been completed: a lateral that connects two existing dry gas gathering systems on which we currently flow the majority of our dry gas volumes. First flow commenced through this lateral on February 1, 2016. +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. The oil and natural gas we produce in Louisiana is sold to purchasers who service the areas where our wells are located. We sell the majority of our Southern Louisiana oil to Shell Trading Company, or Shell. Shell takes custody of the oil at the outlet from our oil storage barge. The majority of this production is being sold under a West Texas Intermediate crude price HLS/LLS differential less transportation costs. The majority of our Utica Shale oil is sold to Marathon Petroleum Corporation, or Marathon. The purchaser takes custody at the MarkWest Utica EMG, or MarkWest, owned and operated condensate stabilizer located near Cadiz, Ohio. Our Utica Shale NGLs are currently purchased by MarkWest which remits to us a weighted average selling price of products sold to various markets. Our Utica Shale natural gas production is sold to various purchasers through established NAESBs with the counterparties. The majority of our gas is sold to BP Energy Company, or BP. In 2016, our Utica Shale natural gas and natural gas liquids were sold under monthly, seasonal and long term contracts and, as needed, through daily transactions. The majority of our production is delivered at the tailgate of the plants or at central delivery points with market pricing based on Platts Gas Daily - Appalachian - Dominion South Point (Dominion Eastern and Dominion Transmission) or Texas Eastern M2 Zone when sold in the Utica Basin. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements to transport a portion of our natural gas production out of the Utica Basin. These agreements have pricing based on the appropriate delivery point less transportation charges and fuel. +During the year ended December 31, 2016 , we sold approximately 68% and 10% of our natural gas production to BP and DTE Energy Trading, Inc., or DTE, respectively, 72% and 24% of our oil production to Shell and Marathon, respectively, and 74% and 23% of our natural gas liquids production to MarkWest and Antero Resources, or Antero, respectively. During the year ended December 31, 2015 , we sold approximately 79% and 14% of our natural gas production to BP and DTE, respectively, 90% and 10% of our oil production to Shell and Marathon, respectively, and 76% and 24% of our natural gas liquids production to MarkWest and Antero, respectively. During the year ended December 31, 2014 , we sold approximately 40% , 32% and 19% of our natural gas production to BP, DTE, and Hess, respectively, 99% of our oil production to Shell, 100% of our natural gas liquids production to MarkWest. +11 +Table of Contents +Index to Financial Statements +As of December 31, 2016, we had an average of approximately 516,000 MMBtu per day of firm sales contracted with third parties for 2017. We had an average of approximately 257,000 MMBtu per day, 226,000 MMBtu per day, 223,000 MMBtu per day, 126,000 MMBtu per day and 31,000 MMBtu contracted with third parties for 2018, 2019, 2020, 2021 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio, as of December 31, 2016, we had entered into firm transportation contracts to deliver approximately 775,000 MMBtu to 1,125,000 MMBtu per day for 2017. For 2018 through 2020, we had entered into firm transportation contracts to deliver approximately 1,125,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale acreage but expect additional long term contracts to be limited in 2017. Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities expected to begin in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities expected to begin in 2017 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities expected to begin in late 2017 allowing additional access to Gulf Coast delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin position. +Regulation +12 +Table of Contents +Index to Financial Statements +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent not-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be +13 +Table of Contents +Index to Financial Statements +significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory +14 +Table of Contents +Index to Financial Statements +agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. In May 2010, the EPA adopted regulations establishing new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On August 26, 2016, the EPA proposed changes needed to bring EPA’s air permitting regulations in line with the Supreme Court’s decision on GHG permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the public comment period closed on December 2, 2016. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +The EPA has continued to adopt GHG regulations applicable to other industries, such as its August 2015 adoption of three separate, but related, actions to address carbon dioxide pollution from power plants, including final Carbon Pollution Standards for new, modified and reconstructed power plants, a final Clean Power Plan to cut carbon dioxide pollution from existing power plants, and a proposed federal plan to implement the Clean Power Plan emission guidelines. Upon publication of the Clean Power Plan on October 23, 2015, more than two dozen States as well as industry and labor groups challenged the Clean Power Plan in the D.C. Circuit Court of Appeals. On February 9, 2016, the Supreme Court stayed the implementation of the Clean Power Plan while legal challenges to the rule proceed. As a result of this continued regulatory focus, future GHG regulations of the oil and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. Also, on June 29, 2016, the leaders of the United States, Canada and Mexico announced an Action Plan to, among other things, boost clean energy, improve energy efficiency, and reduce greenhouse gas emissions. The Action Plan specifically calls for a reduction in methane emissions from the oil and gas sector by 40 to 45 percent by 2025. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. It also remains unclear whether and how the results of the 2016 U.S. election could impact the regulation of GHG emissions at the federal and state level. +In addition, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce environmental laws and regulations against us and could allege personal injury or property damages. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +15 +Table of Contents +Index to Financial Statements +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +In addition, the EPA plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also +16 +Table of Contents +Index to Financial Statements +establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. On the same day, the EPA finalized a plan to implement its minor new source review program on Indian lands for oil and natural gas production, and it issued for public comment an information request that will require companies to provide extensive information instrumental for the development of regulations to reduce methane emissions from existing oil and gas sources. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. On June 21, 2016, the United States District Court for Wyoming set aside the rule, holding that the BLM lacked Congressional authority to promulgate the rule. The BLM has appealed the decision to the Tenth Circuit Court of Appeals. Also, on November 15, 2016, the BLM finalized a rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. State and industry groups have challenged this rule in federal court, asserting that the BLM lacks authority to prescribe air quality regulations. Congress is currently considering whether to repeal the rule pursuant to the Congressional Review Act. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +17 +Table of Contents +Index to Financial Statements +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state and local authorities also have regulations for plugging and abandonment, +18 +Table of Contents +Index to Financial Statements +decommissioning and site restoration. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of well pads. Under these new rules, operators must submit detailed horizontal well pad site plans certified by a professional engineer for review by the ODNR Division of Oil and Gas Resources Management prior to the construction of a +19 +Table of Contents +Index to Financial Statements +well pad. These rules will result in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil or gas releases. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusion and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $25.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during each of 2016 and 2015 were approximately $0.1 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, we also actively manage an incident response planning program and coordinate with applicable +20 +Table of Contents +Index to Financial Statements +state agency personnel on spills and releases through Ohio's Incident Notification Hotline. We also participate in Ohio's Emergency Planning and Community Right to Know Act (EPCRA) program, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +Construction of our new corporate headquarters in Oklahoma City, Oklahoma was completed in December of 2016. The building has approximately 120,000 square feet of office space and allows us to consolidate all of our employees in one location in Oklahoma City. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma that served as our previous corporate headquarters. We have received various offers to purchase or lease this building, which we are evaluating. +We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. In 2016, we purchased an approximately 12,300 square feet building located in St. Clairsville, Ohio to serve as our headquarters for our Ohio operations. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2016 , we had 241 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. \ No newline at end of file diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/item13.txt b/raw/filings/0000874499/2016/0001628280-17-001359/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2f04df11e3a34b80e43e7cb8a0c34418a99503 --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). \ No newline at end of file diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/item9a.txt b/raw/filings/0000874499/2016/0001628280-17-001359/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..24992a41eb9dfd5c6dddec394632ed7dc466098a --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/item9a.txt @@ -0,0 +1,40 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2016 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2016 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2016 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2016 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2016 , as stated in their accompanying report. +75 +Table of Contents +Index to Financial Statements +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +76 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation: +We have audited the internal control over financial reporting of Gulfport Energy Corporation and subsidiaries (the “Company”) as of December 31, 2016 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016 and our report dated February 14, 2017 expressed an unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 14, 2017 +77 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/rp_note.txt b/raw/filings/0000874499/2016/0001628280-17-001359/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2016/0001628280-17-001359/rpt_disclosure.txt b/raw/filings/0000874499/2016/0001628280-17-001359/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b3388c94e3f3440a6b3ffe00205828e5bfb3e62d --- /dev/null +++ b/raw/filings/0000874499/2016/0001628280-17-001359/rpt_disclosure.txt @@ -0,0 +1,82 @@ +approves related party transactions. +• Appoints, determines compensation, evaluates and terminates our independent auditors. +• Pre-approves audit and permissible non-audit services to be performed by the independent auditors. +• Prepares the +report required by the Securities and Exchange Commission, or the SEC, for the inclusion in our annual proxy statement. +• Reviews and +reassesses the adequacy of the audit committee charter on a periodic basis. +• Inform our +independent auditors of the audit committee’s understanding of significant relationships and transactions with related parties and review and discuss with our independent auditors the auditors’ evaluation of our identification of, +accounting for and disclosure of our relationships and transactions with related parties, including any significant matters arising from the audit regarding our relationships and transactions with related parties. +4 +8 +Table of Contents +Committee +Members +Principal Functions +Number of +Meetings in +2016 +Compensation +Scott E. Streller* +Craig Groeschel +David L. Houston +C. Doug Johnson +• Oversees and +administers our executive compensation policies, plans and practices and evaluates their impact on risk and risk management. +• Assists the board +of directors in discharging its responsibilities relating to the compensation of our executives, including our chief executive officer, and other key employees. +• Administers our +equity-based compensation plans, including the grants of stock options, restricted stock awards and other equity awards under such plans. +• Reviews, approves +and administers our cash-based incentive bonus plans, including the establishment of performance criteria, targets and awards under our 2014 Executive Annual Incentive Compensation Plan. +• Makes +recommendations to the board with respect to incentive compensation. +• Where appropriate +or required, makes recommendations to our stockholders with respect to incentive compensation and equity-based plans. +• Conducts annual +performance evaluation of the committee. +• Reviews +disclosure related to executive compensation in our proxy statement and prepares an annual compensation committee report. +• Reviews and +considers the stockholders’ advisory vote on executive compensation and the frequency of holding such advisory vote. +• Reviews and +reassesses the adequacy of the compensation committee charter. +10 +Nominating and Corporate Governance+ +Ben T. Morris* +David L. Houston +Scott E. Streller +• Assists the board +of directors in developing criteria for, identifying and evaluating individuals qualified to serve as members of our board of directors. +• Selects and +recommends director candidates to the board of directors to be submitted for election at the Annual Meeting and to fill any vacancies on the board of directors. +• Periodically +reviews and makes recommendations regarding the composition and size of the board of directors and each of its committees. +• Reviews and +recommends to the board of directors appropriate corporate governance policies and procedures for the Company. +• Conducts an +annual assessment of the qualifications and performance of the board of directors. +2 +9 +Table of Contents +Committee +Members +Principal Functions +Number of +Meetings in +2016 +• Annually reviews +and reports to the board of directors on the performance of management. +• Reviews and +reassesses the adequacy of the nominating committee charter. +* +Committee Chairperson. ++ +Our former director, Mr. Donald L. Dillingham, who, as previously disclosed, did not stand for re-election at our 2016 Annual Meeting of Stockholders, served on the +audit committee and the nominating and corporate governance committee of our board of directors during 2016 until the date of our 2016 Annual Meeting of Stockholders. +Do the committees have written charters? +Yes. The +charters for our audit committee, compensation committee and nominating committee can be found on our website at www.gulfportenergy.com under the “Corporate Governance” caption. You may also obtain copies of these charters, as well +as our Code of Business Conduct and Ethics, which is described below, by writing to our Senior Vice President of Corporate Development and Strategy, Paul K. Heerwagen IV, at Gulfport Energy Corporation, 3001 Quail Springs Parkway, Oklahoma City, +Oklahoma 73134. \ No newline at end of file diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/filing.txt b/raw/filings/0000874499/2017/0001628280-18-002041/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..03ce1a6a7b0b13b96ddc97d4e59dd4babf176aca --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/filing.txt @@ -0,0 +1,7520 @@ +10-K +1 +gpor-12312017x10k.htm +10-K +Document +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +OR +¨ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corporation +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of +Incorporation or Organization) +(IRS Employer +Identification Number) +3001 Quail Springs Parkway +Oklahoma City, Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +(405) 252-4600 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 30, 2017 , based on the closing price of the common stock on the NASDAQ Global Select Market on June 30, 2017 , the last business day of the registrant’s most recently completed second fiscal quarter ( $14.75 per share), was $2,697,110,085 . +As of February 12, 2018 , 183,105,910 shares of the registrant’s common stock were outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +22 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +45 +ITEM 2. +PROPERTIES +45 +ITEM 3. +LEGAL PROCEEDINGS +54 +ITEM 4. +MINE SAFETY DISCLOSURES +55 +PART II +55 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +55 +ITEM 6. +SELECTED FINANCIAL DATA +56 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +58 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +75 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +76 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +76 +ITEM 9A. +CONTROLS AND PROCEDURES +77 +ITEM 9B. +OTHER INFORMATION +79 +PART III +79 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +79 +ITEM 11. +EXECUTIVE COMPENSATION +79 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +79 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +79 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +79 +PART IV +80 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +80 +ITEM 16. +FORM 10-K SUMMARY +84 +Signatures +84 +Index to Consolidated Financial Statements +F-1 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, crude oil and natural gas liquids, or NGLs, in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly and an approximate 25.1% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the Nasdaq Global Select Market (TUSK). We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 9, 2018 , we held leasehold interests in approximately 237,000 gross ( 213,000 net) acres in the Utica Shale primarily in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2017 , had spud 362 gross wells, 287 of which were completed and were producing. In 2017 , we spud 94 gross ( 88.7 net) wells, of which 32 were completed as producing wells and, as of December 31, 2017 , 58 were in various stages of completion and four were still being drilled. We commenced sales from 68 gross ( 61.1 net) wells in the Utica Shale during 2017 . During 2018 (through February 9, 2018 ), we spud eight gross ( 6.4 net) wells. As of February 9, 2018 , five of these wells were waiting on completion and the other three were still drilling. In addition, other operators drilled 26 gross ( 8.4 net) wells and commenced sales from 45 gross ( 9.3 net) wells on our Utica Shale acreage in 2017 . +We currently intend to drill 36 to 40 gross ( 26 to 29 net) horizontal wells, and commence sales from 33 to 37 gross ( 33 to 37 net) horizontal wells on our Utica Shale acreage in 2018 . We currently anticipate seven to eight net horizontal wells will be drilled, and sales commenced from nine to ten net horizontal wells, by other operators on our Utica Shale acreage. We currently expect to spend $425.0 million to $455.0 million on our operated and non-operated activities during 2018 . +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2017 was approximately 95,854 net million cubic feet of natural gas equivalent, or MMcfe, or 1,041.9 MMcfe per day, of which 93% was from natural gas and 7% was from oil and NGLs. +As of February 9, 2018 , we held leasehold interests in approximately 50,400 net surface acres in the SCOOP. In 2017 , we spud 19 gross ( 15.7 net) wells, of which seven were completed as producing wells and, as of December 31, 2017 , four were being drilled and eight were in various stages of completion. We commenced sales from 13 gross ( 11.0 net) wells in the SCOOP during 2017 . During 2018 (through February 9, 2018 ), we spud four gross ( 3.4 net) wells. As of February 9, 2018 , one of these wells was waiting on completion and the other three were still drilling. In addition, other operators drilled 31 gross ( 0.9 net) wells and commenced sales from 23 gross ( 0.8 net) wells on our SCOOP acreage during the period from February 17, 2017 to December 31, 2017 . +We currently intend to drill 15 to 16 gross ( 10 to 11 net) horizontal wells, and commence sales from 20 to 22 gross ( 16 to 18 net) horizontal wells on our SCOOP acreage in 2018 . We currently anticipate four to five net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other operators on our SCOOP acreage. We currently expect to spend $185.0 million to $210.0 million on our operated and non-operated activities during 2018 . +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2017 was approximately 19,008 MMcfe, or an average of 206.6 MMcfe per day, of which 67% was from natural gas and 33% was from oil and NGLs. +In 2017 , at our WCBB field, we recompleted 60 gross and net wells and spud ten new wells. In the fourth quarter of 2017 , production at WCBB was approximately 1,089 MMcfe, or an average of 11.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +In 2017 , at our East Hackberry field, we recompleted 20 gross and net wells and spud four new wells. In the fourth quarter of 2017 , net production at East Hackberry was approximately 174 MMcfe, or an average of 1.9 MMcfe per day, of which 98% was from oil and 2% was from natural gas. +2 +Table of Contents +Index to Financial Statements +In 2017 , at our West Hackberry field, we recompleted one gross and net well and spud one new well. In the fourth quarter of 2017 , net production at West Hackberry was approximately 17 MMcfe, or an average of 188.2 thousand cubic feet of natural gas equivalent, or Mcfe, per day, of which 100% was from oil. +We currently estimate our 2018 activities in our Southern Louisiana fields to be approximately $20.0 million in aggregate to perform recompletion activities. +As of December 31, 2017 , we held leasehold interests in approximately 3,383 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2017 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2017 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 279.8 Mcfe per day, 100% of which was from oil. During 2018 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2017 , we held leasehold interests in approximately 778 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2017 , our net production from this acreage was approximately 57 MMcfe, or an average of 622.4 Mcfe per day, of which 81% was from oil, 14% was from natural gas and 5% was from natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2017 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2017 , we had 5.4 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $2.9 billion and associated standardized measure of discounted future net cash flows of approximately $2.6 billion , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2017 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, the SCOOP in Oklahoma, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +3 +Table of Contents +Index to Financial Statements +Proved Reserves +Field +NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +42.75/52.07 +507 +264.05 +5 +4.23 +66,133 +55,733 +3,766,063 +2,597 +24,154 +3,926,574 +SCOOP (4) +30.83/38.52 +410 +145.85 +37 +25.72 +38,182 +38,182 +1,058,143 +14,048 +51,610 +1,452,094 +West Cote Blanche Bay Field (5) +80.108/100 +86 +86 +162 +162 +5,668 +5,668 +605 +1,675 +— +10,655 +E. Hackberry Field (6) +82.33/100 +17 +17 +130 +130 +2,910 +2,910 +211 +397 +— +2,594 +W. Hackberry Field +87.5/100 +2 +2 +12 +12 +726 +726 +— +149 +— +892 +Niobrara Formation +34.52/48.61 +3 +1.46 +— +— +1,460 +730 +127 +182 +— +1,218 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +150 +107 +2 +800 +Overrides/Royalty Non-operated +Various +662 +0.8 +— +— +— +— +11 +2 +— +24 +Total +1,705 +517.46 +346 +333.95 +115,465 +104,026 +4,825,310 +19,157 +75,766 +5,394,851 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 37% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 220 gross (32.47 net) wells drilled by other operators on our acreage. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 240 gross (8.4 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2017 , we held leasehold interests in approximately 237,000 gross ( 213,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of December 31, 2017 , there were 1,798 producing horizontal wells, 236 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 206 horizontal wells that were being drilled and an additional 500 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout +4 +Table of Contents +Index to Financial Statements +this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2017 , had spud 362 gross wells, 287 of which were completed and were producing. In 2017 , we spud 94 gross ( 88.7 net) wells, of which 32 were completed as producing wells and, as of December 31, 2017 , 58 were in various stages of completion and four were still being drilled. We commenced sales from 68 gross ( 61.1 net) wells in the Utica Shale during 2017 . During 2018 (through February 9, 2018 ), we spud eight gross ( 6.4 net) wells. As of February 9, 2018 , five of these wells were waiting on completion and the other three were still drilling. In addition, other operators drilled 26 gross ( 8.4 net) wells and commenced sales from 45 gross ( 9.3 net) wells on our Utica Shale acreage in 2017 . +We currently intend to drill 36 to 40 gross ( 26 to 29 net) horizontal wells, and commence sales from 33 to 37 gross ( 33 to 37 net) horizontal wells, on our Utica Shale acreage in 2018 . We currently anticipate seven to eight net horizontal wells will be drilled, and sales commenced from nine to ten net horizontal wells, by other operators on our Utica Shale acreage during 2018 . We currently anticipate our 2018 capital expenditures to be $425.0 million to $455.0 million related to our operated and non-operated Utica Shale activities. As of February 9, 2018 , we had three operated horizontal rigs drilling in the play and expect to release one rig in March of 2018 as our contract expires. We plan to run, on average, approximately 2.5 operated horizontal rigs in the Utica Shale in 2018. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2017 was approximately 95,854 MMcfe, or 1,041.9 MMcfe per day, of which 93% was from natural gas and 7% was from oil and NGLs. +SCOOP (Oklahoma) +Location and Land +As of December 31, 2017 , we held leasehold interests in approximately 50,400 gross ( 50,400 net) surface acres in the SCOOP and approximately 92,900 net reservoir acres, which includes 50,400 net Woodford acres and 42,500 net Springer acres. +Area History +The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined province that encompasses many of the top hydrocarbon producing counties in Oklahoma. The area extends mainly across Grady, Caddo, McClain, Garvin, Stevens, Carter and Love Counties. The region was historically developed by vertical wells drilled through multiple stacked reservoirs ranging from the Cambrian to Permian Periods in age. The play represents the transition to mainly horizontal development targeting predominantly oil and condensate-rich hydrocarbons. The most prolific of these reservoirs include the, Springer (Goddard) Shale, Caney Shale, Woodford Shale and Sycamore Formation. +5 +Table of Contents +Index to Financial Statements +Geology +The SCOOP play of Oklahoma is located in the southeast portion of the prolific Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford Shale. The Woodford Shale is a silica and highly organic rich black shale that was deposited about 320 million to 370 million years ago. Across our position, the Woodford Shale ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation is age equivalent to the Meramec and Osage being developed in the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play and is located between the organic-rich Woodford and Caney Shales. The Sycamore formation is approximately 250 feet thick across our acreage position, presenting a significant future development target. +Facilities +There are standard land oil and natural gas processing facilities in the SCOOP. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon, LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. +Upon our acquisition of these assets, we focused on the high-grading of equipment for our rig fleet to drive efficiencies and lower drill days in the play. Frac design on the wells to date includes an enhanced completion when compared to historical practices for the area. Our 2017 drilling program concentrated on SCOOP Woodford wells, however, during 2017, we also spud and turned-to-sales our first Springer and Sycamore wells. +In 2017 , we spud 19 gross ( 15.7 net) wells, of which seven were completed as producing wells and, as of December 31, 2017 , eight were in various stages of completion and four were still being drilled. We commenced sales from 13 gross ( 11.0 net) wells in the SCOOP during 2017 . During 2018 (through February 9, 2018 ), we spud four gross ( 3.4 net) wells. As of February 9, 2018 , one of these wells was waiting on completion and the other three were still drilling. In addition, other operators drilled 31 gross ( 0.9 net) wells and commenced sales from 23 gross ( 0.8 net) wells on our SCOOP acreage in 2017 . +We currently intend to drill 15 to 16 gross ( 10 to 11 net) horizontal wells, and commence sales from 20 to 22 gross ( 16 to 18 net) horizontal wells, on our SCOOP acreage in 2018 . We currently anticipate four to five net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other operators on our SCOOP acreage during 2018 . We currently anticipate our 2018 capital expenditures to be $185.0 million to $210.0 million related to our operated and non-operated SCOOP activities. As of February 9, 2018 , we had four operated horizontal rigs drilling in the play and expect to release two rigs in mid-summer 2018 as our contracts expire. We intend to run, on average, three operated horizontal rigs in the SCOOP during 2018. +Production Status +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2017 was approximately 19,008 net MMcfe, or 206.6 MMcfe per day, of which 67% was from natural gas and 33% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working +6 +Table of Contents +Index to Financial Statements +interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,093 wells drilled as of December 31, 2017 , 980 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2017 , we drilled 273 new wells, 240 of which were productive, for an 88% success rate. As of December 31, 2017 , estimated field cumulative gross production was 200 MMBO and 237.8 Bcf of gas. Of the 1,093 wells drilled in WCBB as of December 31, 2017 , 86 were producing, 162 were shut-in, and six were being used as salt water disposal wells. The other 839 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,093 wells that had been drilled in the field as of December 31, 2017 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2017 , at our WCBB field, we recompleted 60 gross and net wells and spud eight new wells. As of February 9, 2018 , we had recompleted seven gross and net wells during 2018 in our WCBB field. +Production Status +In the fourth quarter of 2017 , our net production at WCBB was approximately 1,089 MMcfe, or an average of 11.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +7 +Table of Contents +Index to Financial Statements +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.33% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2017 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2017 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 272 wells have been drilled on our portion of the field. As of December 31, 2017 , 17 wells had daily production, 130 were shut-in and three had been converted to salt water disposal wells. The remaining 122 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, two natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2017 at East Hackberry, we recompleted 20 gross and net wells and spud four new wells. As of February 9, 2018 , we had recompleted two gross and net wells during 2018 in our East Hackberry field. +Production Status +In the fourth quarter of 2017 , our net production at East Hackberry was approximately 174 MMcfe, or an average of 1.9 MMcfe per day, of which 98% was from oil and 2% was from natural gas. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 87.50% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2017 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2017 , 42 wells had been drilled on our portion of West Hackberry. +8 +Table of Contents +Index to Financial Statements +As of December 31, 2017 , two of such wells were producing, 12 were shut-in and one was being used as a salt water disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2017 at West Hackberry, we recompleted one gross and net well and spud one new well. As of February 9, 2018 , we had recompleted one gross and net well during 2018 in our West Hackberry field. +Production Status +In the fourth quarter of 2017 , our net production at West Hackberry was approximately 17 MMcfe, or an average of 188.2 Mcfe per day, of which 100% was from oil. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +During 2018 , we intend to run one recompletion rig in our Southern Louisiana fields. +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2017 , we held leases for approximately 3,383 net acres. In 2017 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +9 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2017 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 279.8 Mcfe per day, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2017 . We do not anticipate drilling any wells in the Niobrara Formation during 2018 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2017 , we held approximately 778 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2017 , our net production from this acreage was approximately 57 MMcfe, or an average of 622.4 Mcfe per day, of which 81% was from oil, 14% was from natural gas and 5% was from natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2017 . We do not anticipate drilling any wells in the Bakken Formation during 2018 . +Additional Properties +In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2017 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.0686 +% +— +1 +— +10 +Table of Contents +Index to Financial Statements +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2017 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and is awaiting final approval, which is expected in early 2018. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production, or CHOPS, at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas, or LPG, into the oil sands area for use in Thermal applications by SAGD producers. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2017 , net gas production was approximately 78 MMcf per day and condensate production was 250 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy Services, Inc., or Mammoth Energy, which is the parent company of Mammoth, completed its initial public offering, or the IPO, of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth Energy Partners LLC (as the successor to Mammoth). Immediately following the completion of the IPO, we owned an approximate 24.2% interest in Mammoth Energy. We used the net proceeds for the sale of our Mammoth Energy shares in the IPO for general corporate purposes. +In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Cementing LLC, or Stingray Cementing, with an initial ownership of 50%. Stingray Cementing provides well completion and other well services. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns an entity that operates sand mines that produce hydraulic fracturing grade sand. On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon, Stingray Energy and Stingray Cementing, bringing our equity interest in Mammoth Energy to approximately 25.1%. +11 +Table of Contents +Index to Financial Statements +In February 2016 , we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through a new entity, Strike Force Midstream LLC, or Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. We own a 25% interest in Strike Force. EQT now acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is ongoing, provides gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016 . +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. Both our Utica Shale and SCOOP natural gas production is sold to various counterparties through established NAESBs at the plant tailgates and various central delivery points owned and operated by third party midstream companies. Our natural gas production is sold under monthly, seasonal and long-term contracts and, as needed, through daily transactions. When sold in basin, pricing is typically based on Platts Gas Daily - Texas Eastern M2 Zone for our Utica Shale acreage and Platts Gas Daily - Panhandle Tx-Ok and NGPL Midcontinent for our SCOOP acreage. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements in both the Utica and SCOOP basins to transport a portion of our natural gas production to various delivery points. These agreements allow us to price the molecules at those various downstream markets less transportation charges. The majority of our Utica oil is sold to purchasers at the tailgate of a condensate stabilizer located near Cadiz, Ohio, owned and operated by MPLX Energy Logistics, or MPLX. Our SCOOP oil is sold at the lease to various purchasers at respective area postings. In Southern Louisiana, our oil is sold to parties taking custody at the lease or at the outlet from a Gulfport oil storage barge. Our NGLs in the Utica Shale are primarily fractionated at MPLX's Hopedale facility. The majority of the product is marketed by the operator with Gulfport receiving the benefit from the MPLX's aggregation and established logistic network. Our SCOOP NGLs are primarily sent to Mont Belvieu on our commitment to DCP Souther Hills and purchased at the fractionation facility. For the year ended December 31, 2017, sales to BP Energy Company, or BP, accounted for approximately 40% of our total oil, natural gas and NGL revenues, before the effects of hedging. +As of December 31, 2017 , we had an average of approximately 560,800 MMBtu per day of firm sales contracted with third parties for 2018 . We had an average of approximately 659,000 MMBtu per day, 526,000 MMBtu per day, 372,000 MMBtu per day, 272,000 MMBtu per day and 240,000 MMBtu per day contracted with third parties for 2019 , 2020 , 2021 , 2022 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio and Oklahoma, as of December 31, 2017 , we had entered into firm transportation contracts to deliver approximately 1,095,000 MMBtu to 1,245,000 MMBtu per day for 2018. For 2019 and 2020, we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale and SCOOP acreage +12 +Table of Contents +Index to Financial Statements +but expect additional long term contracts to be limited in 2018 . Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities which began in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities, 50,000 of which began in 2017 allowing additional access to Midwest delivery points, and 100,000 expected to begin in 2018 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities which began in late 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Enable Oklahoma Intrastate which was acquired in early 2017 through our SCOOP acquisition allowing additional connectivity to East Texas and Gulf Coast markets; and +• +30,000 MMBtu per day of firm capacity on Enable Gas Transmission facilities which was acquired in early 2017 through our SCOOP acquisition allowing additional access to East Texas delivery points; and +• +20,000 MMBtu per day of firm capacity on Midcontinent Express Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Gulf Crossing Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +200,000 MMBtu per day of firm capacity on Cheniere Midship Pipeline facilities which will begin in 2019 allowing additional access to East Texas delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin and Oklahoma positions. +13 +Table of Contents +Index to Financial Statements +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent non-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under +14 +Table of Contents +Index to Financial Statements +such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers, or the Corps. On June 29, 2015, the EPA and the Corps jointly promulgated final rules redefining the scope of waters protected under the Clean Water Act. To the extent the rule expands the range of properties subject to the Clean Water Act’s jurisdiction, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas. Following its promulgation, numerous states and industry groups challenged the rule and, on October 9, 2015, a federal court stayed the rule’s implementation nationwide, pending further action in court. In response to this decision, the EPA and the Corps have resumed nationwide use of the agencies’ prior regulations defining the term “waters of the United States.” Further, on February 28, 2017, President Trump signed an executive order directing the relevant executive agencies to review the rules and to initiate rulemaking to rescind or revise them, as appropriate under the stated policies of protecting navigable waters from pollution while promoting economic growth, reducing uncertainty and showing due regard for Congress and the states. On July 27, 2017, the EPA and the Corps published a proposed rule to rescind the 2015 rules and, on November 22, 2017, the agencies published a proposed rule to maintain the status quo pending the agencies review of the 2015 rules. +The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +15 +Table of Contents +Index to Financial Statements +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. In May 2010, the EPA adopted regulations establishing new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On August 26, 2016, the EPA proposed changes needed to bring EPA’s air permitting regulations in line with the Supreme Court’s decision on GHG permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the public comment period closed on December 2, 2016. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process, whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore, in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the commitments set forth in the international accord. +16 +Table of Contents +Index to Financial Statements +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit greenhouse gases directly, current and future laws or regulations limiting such emissions could increase our own costs. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +There have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale and SCOOP acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. +17 +Table of Contents +Index to Financial Statements +Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +In addition, the EPA previously announced plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rulemaking to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. On June 21, 2016, the United States District Court for Wyoming set aside the rule, holding that the BLM lacked Congressional authority to promulgate the rule. The BLM has appealed the decision to the Tenth Circuit Court of Appeals. Also, on November 15, 2016, the BLM finalized a rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. State and industry groups have challenged this rule in federal court, asserting that the BLM lacks authority to prescribe air quality regulations. On March 28, 2017, President Trump signed an executive order directing the BLM to review the above rules and, if appropriate, to initiate a rulemaking to rescind or revise them. Accordingly, on December 29, 2017, the BLM published a final rule to rescind the 2015 hydraulic fracturing rule. Also, on December 8, 2017, the BLM published a final rule to suspend or delay certain requirements of the 2016 methane rule until January 17, 2019. Further legal challenges are expected. At this time, it is uncertain when, or if, the rules will be implemented, and what impact they would have on our operations. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or +18 +Table of Contents +Index to Financial Statements +proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +19 +Table of Contents +Index to Financial Statements +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the plugging and abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate +20 +Table of Contents +Index to Financial Statements +Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of horizontal well pads. Under these new rules, operators must submit detailed horizontal well pad design packages prepared by a professional engineer for review and certification by the ODNR Division of Oil and Gas Resources Management prior to the commencement of any oil and natural gas activity. These rules resulted in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil and natural gas releases. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation, cyber and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $25.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some +21 +Table of Contents +Index to Financial Statements +forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale and SCOOP wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2017 and 2016 were approximately $0.2 million and $0.1 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, Oklahoma and Louisiana, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases through the Ohio, Oklahoma and Louisiana Incident Notification Hotlines. We also participate in the Ohio, Oklahoma and Louisiana Emergency Planning and Community Right to Know Act (EPCRA) programs, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own approximately 120,000 square feet of office space in Oklahoma City, Oklahoma that serves as our corporate headquarters. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma where some of our employees office. +We own an approximately 12,300 square feet building located in St. Clairsville, Ohio that serves as our headquarters for our Ohio operations. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We also lease an office in Lindsay, Oklahoma that serves as our Oklahoma production field office. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2017 , we had 331 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +ITEM 1A. +RISK FACTORS +22 +Table of Contents +Index to Financial Statements +Risks Related to our Business and Industry +Market conditions for oil and natural gas, and volatility in prices for oil and natural gas, have in the past adversely affected, and may continue in the future to adversely affect, our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including: +• +worldwide and domestic supplies of oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +the level of consumer demand; +• +the price and availability of alternative fuels; +• +technical advances affecting energy consumption; +• +risks associated with operating drilling rigs; +• +the availability of pipeline capacity and other transportation facilities; +• +the price and level of foreign imports; +• +domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +speculative trading in crude oil and natural gas derivative contracts; +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• +the overall domestic and global economic environment; and +• +weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2016 , West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $26.19 to $54.01 per barrel and the Henry Hub spot market price of natural gas ranged from $1.49 to $3.80 per MMBtu. During 2017 , WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. If the prices of oil and natural gas decline, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to conduct additional exploration and development activities. +23 +Table of Contents +Index to Financial Statements +Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our future growth rate. +Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our 2018 business plan, we considered allocating capital and other resources to various aspects of our businesses, including well development, reserve acquisitions, midstream infrastructure and other activities. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2018 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, including the appropriate rate of reserve development, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2018 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives. +We periodically engage in acquisitions, dispositions and other strategic transactions, including equity investments and joint ventures such as our recent midstream agreement with Rice. These transactions involve various inherent risks, such as changes in prevailing market conditions, our ability to obtain the necessary regulatory approvals, the timing of and conditions that may be imposed on us by regulators and our ability to achieve benefits anticipated to result from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us to risks and uncertainties, such as committing us to fund operating and/or capital expenditures, the timing and amount of which we may not be able to control. Further, the counterparties to these transactions may not satisfy their obligations to the joint venture. Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. Concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2018 to be in the range of $630.0 million to $685.0 million and an additional $140.0 million to $150.0 million for leasehold expenditures, primarily lease extensions in the Utica Shale, and for cash capital contributions to our midstream joint venture with EQT in Eastern Ohio. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including: +• +our proved reserves; +24 +Table of Contents +Index to Financial Statements +• +the volume of oil and natural gas we are able to produce from existing wells; +• +the prices at which oil and natural gas are sold; +• +our ability to acquire, locate and produce economically new reserves; and +• +our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2018 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including: +• +recoverable reserves; +• +future oil and natural gas prices and their applicable differentials; +• +operating costs; and +• +potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +25 +Table of Contents +Index to Financial Statements +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We may incur losses as a result of title defects in the properties in which we invest. +It is our practice in acquiring oil and natural gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. +Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. +Recent decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio. +On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 version of the ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action in order to establish abandonment of mineral rights. After June 30, 2006, (the effective date of the 2006 version of the ODMA), surface owners are required to follow the statutory notice and recording procedures enacted in 2006. We have assessed the impact of these recent Ohio Supreme Court decisions on our operations in Ohio where the majority of our acreage and our producing properties are located and have taken steps to mitigate any potential risks identified as a result of our assessment. However, the Ohio Supreme Court decisions could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expense, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio, any of which could have an adverse effect on our results of operations and financial condition. +26 +Table of Contents +Index to Financial Statements +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals and/or permits; +• +unplanned increases in the cost of construction materials or labor; +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +• +market-related increases in a project's debt or equity financing costs; and +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2017 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 SAGD oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. We reviewed our investment in Grizzly as of September 30, 2015 and December 31, 2015, and again at March 31, 2016, for impairment, resulting in an aggregate other than temporary impairment write down of $101.6 million for the year ended December 31, 2015 and $23.1 million for the year ended December 31, 2016 . As of and during the period ended December 31, 2017 , commodity prices had increased as compared to the quarter ended March 31, 2016, and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline, further impairment of our investment in Grizzly may result in the future. The Algar Lake and other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +27 +Table of Contents +Index to Financial Statements +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Restrictions on the ability to obtain water may impact our operations. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. +We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of Michael G. Moore, our Chief Executive Officer and President, or our other senior management and technical personnel, could disrupt our operations and have a material adverse effect on our financial condition and results of operations. Our executives are not restricted from competing with us if they cease to be employed by us, except under certain limited circumstances prohibiting competition while making use of our trade secrets. We are party to an employment agreement with certain of our executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production. +There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our Utica Shale acreage and our WCBB and Hackberry fields at December 31, 2017, 2016 and 2015, our SCOOP acreage at December 31, 2017 and our Niobrara field at December 31, 2015 and (ii) our personnel with respect to our overriding royalty and non-operated interests at December 31, 2017, 2016 and 2015 and our Niobrara field at December 31, 2017 and 2016. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. +Estimates of reserves as of year-end 2017 , 2016 and 2015 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2017 , 2016 and 2015 , respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. +The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2017 , 2016 and 2015 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2017 , 2016 and 2015 , respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• +actual prices we receive for oil and natural gas; +• +the amount and timing of actual production; +• +supply of and demand for oil and natural gas; and +28 +Table of Contents +Index to Financial Statements +• +changes in governmental regulations or taxation. +The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. +SEC rules could limit our ability to book additional proved undeveloped reserves in the future. +SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe, because they have become uneconomic or otherwise. +The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. +Approximately 64.9% of our total estimated proved reserves at December 31, 2017 , were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or +29 +Table of Contents +Index to Financial Statements +our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. With respect to our Utica Shale acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. +If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations. +As of December 31, 2017 , we had entered into firm transportation contracts to deliver approximately 1,095,000 MMBtu to 1,245,000 MMBtu per day for 2018 and approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 through 2020. See Item 1. “ Business-Transportation and Takeaway Capacity .” Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, taking into consideration the current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +Substantially all of our producing properties are located in Eastern Ohio, Oklahoma and Louisiana, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio, Oklahoma and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. +We have identified over 1,000 drilling locations on our Ohio, Oklahoma and Louisiana properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations. +Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including: +• +unusual or unexpected geological formations; +• +loss of drilling fluid circulation; +30 +Table of Contents +Index to Financial Statements +• +title problems; +• +facility or equipment malfunctions; +• +unexpected operational events; +• +shortages or delivery delays of equipment and services; +• +compliance with environmental and other governmental requirements; and +• +adverse weather conditions. +Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. +Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. +In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities. +We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier, seismically active areas and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities and restrictions on our activities as a result of spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations (which could cause us to cease operations), the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our +31 +Table of Contents +Index to Financial Statements +operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws. +Moreover, public interest in the protection of the environment has tended to increase over time. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as +32 +Table of Contents +Index to Financial Statements +attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +We have been an early entrant into the SCOOP play in Oklahoma. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. +We have been an early entrant into the SCOOP play in Oklahoma. On February 17, 2017, we completed our SCOOP acquisition, which included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. The area was historically developed by vertical wells drilled through multiple stacked reservoirs; however, the current play represents the transition to mainly horizontal development. As a developing play, our drilling results in this area are more uncertain than drilling results in areas that are more developed and have been producing for a longer period of time. Since limited production history from horizontal wells in the SCOOP exists and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the SCOOP may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the SCOOP or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +A key part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. +Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following: +• effectively controlling the level of pressure flowing from particular wells; +• landing our wellbore in the desired drilling zone; +• staying in the desired drilling zone while drilling horizontally through the formation; +• running our casing the entire length of the wellbore; and +• being able to run tools and other equipment consistently through the horizontal wellbore. +Risks that we face while completing our wells include, but are not limited to, the following: +• the ability to fracture stimulate the planned number of stages; +• the ability to run tools the entire length of the wellbore during completion operations; and +• the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage +The results of our drilling in new or emerging formations (including the SCOOP) are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration +33 +Table of Contents +Index to Financial Statements +activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income. +A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. Approximately 22% of our total Utica Shale undeveloped acreage will be subject to expiration in 2018 , with 8% of such acreage expiring in 2019 , 9% in 2020 and 17% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2017 , leases representing 6%, 67% and 5% respectively, of our total SCOOP undeveloped acreage are schedule to expire in 2018, 2019 and 2020. As of December 31, 2017, leases representing 11% and 53%, respectively, of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2018 and 2019. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities. +Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge +34 +Table of Contents +Index to Financial Statements +permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations, including those relating to protection of human health and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations impose increasingly strict requirements for water and air pollution control and solid waste management, which trend may continue. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. See Item 1. “Business-Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of certain laws and regulations that affect us. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. We use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. The hydraulic fracturing process is typically regulated by state oil and natural gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. +In addition, several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of federal, state and local laws and initiatives concerning hydraulic fracturing, see Item 1. “ Business-Regulation-Regulation of Hydraulic Fracturing ” above. +If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could reduce the volumes of oil and natural gas that we can recover economically and cause us to incur substantial compliance costs. Reduced production and/or compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, +35 +Table of Contents +Index to Financial Statements +including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +We dispose of large volumes of produced water gathered from our drilling and production operations in our Louisiana fields by injecting it into wells pursuant to permits issued to us by governmental authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. The adoption and implementation of any new laws or regulations that restrict our ability to use hydraulic fracturing or dispose of produced water gathered from our drilling and production activities by own disposal wells, could have a material adverse effect on our business, financial condition and results of operations. We do not currently inject produced water in our Utica or SCOOP operations. +Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate. +Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife species or their habitat. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect threatened or endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. +In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy. +The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current +36 +Table of Contents +Index to Financial Statements +counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows. +Regulation of greenhouse emissions could result in increased operating costs and reduced demand for the oil and natural gas we produce. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for oil and natural gas industry, and the U.S. Congress has, from time to time, considered adopting legislation to reduce emissions. Almost one-half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives. For a description of GHG existing and proposed rules and regulations, see Item 1. “ Business-Regulation-Environmental Regulation-Climate Change .” +Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. +In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase. +Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore is exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress, which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, +37 +Table of Contents +Index to Financial Statements +financial condition or results of operations. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations. +We face extensive competition in our industry. +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2017 accounted for approximately 40% of our total oil, natural gas and NGL revenues. If this purchaser, or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +Our method of accounting for oil and natural gas properties may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2017, 2016 and 2015 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can give us a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016 . If prices of oil, natural gas and natural gas liquids continue to decrease, we may be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Recently enacted U.S. tax legislation as well as future U.S. and state tax legislations may adversely affect our business, results of operations, financial condition and cash flow. +On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act, that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. Among other changes, the Tax Act (i) permanently reduces the U.S. corporate income tax rate, (ii) repeals the corporate alternative minimum tax, (iii) eliminates the deduction for certain domestic production activities, (iv) imposes new limitations on the utilization of net operating losses, and (v) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. The Tax Act is complex and far-reaching, and we cannot predict with certainty the resulting impact its enactment will have on us. The ultimate impact of +38 +Table of Contents +Index to Financial Statements +the Tax Act may differ from our estimates due to changes in interpretations and assumptions made by us as well as additional regulatory guidance that may be issued, and any such changes in our interpretations and assumptions could have an adverse effect on our business, results of operations, financial condition and cash flow. +In addition, from time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislations have been introduced in the past to (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal of the percentage depletion allowance for oil and natural gas properties; and (iii) extend the amortization period for certain geological and geophysical expenditures. While these specific changes are not included in the Tax Act, no accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. These proposed changes in the U.S. tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Additional state taxes on natural gas extraction may be imposed as a result of future legislation. +In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014. The Ohio State Senate held a hearing on the bill, but there was no further movement before the recess of that General Assembly. +In February 2015, the Governor of Ohio proposed another plan to the new General Assembly to enact new severance taxes on the oil and gas industry. This proposal was part of a state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would have imposed a 6.5% tax on oil and gas sold at the wellhead. This severance tax increase was removed from the Bill that was ultimately passed by the Ohio House. +A new General Assembly took office in January 2017, and the Governor of Ohio proposed a new severance tax initiative. The proposal would impose a fixed rate of 6.5% for crude oil and natural gas when sold at the wellhead and a lower rate of 4.5% at later stages of distribution for natural gas and natural gas liquids. The proposal was again met with opposition and was not included in the final budget that was passed and signed by the Governor on June 30, 2017 and effective for the period of July 1, 2017 through June 30, 2019. +These proposed changes in the U.S. and applicable state tax law, if adopted, or other similar changes that tax our production or reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows. +Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations. +Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical. +We are exposed to fluctuations in the price of natural gas and oil. Although we have hedged a portion of our estimated 2018 production, we may still be adversely affected by continuing and prolonged declines in the price of natural gas and oil. +We use derivative instruments to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For information regarding these derivative instruments, see Item 7A. " Quantitative and Qualitative Disclosures about Market Risk. " Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current +39 +Table of Contents +Index to Financial Statements +levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted. +Our hedging transactions expose us to counterparty credit risk. +Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the terms of the derivative contract and we may not be able to realize the benefit of the derivative contract. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. +Loss of our information and computer systems could adversely affect our business. +We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, whether due to cyber attack or otherwise, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, and processing activities. For example, we depend on digital technologies to interpret seismic data, manage drilling rigs, production equipment and gathering systems, conduct reservoir modeling and reserves estimation, and process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of its vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. +Risks Relating to Our Indebtedness +Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects. +As of December 31, 2017 , we had total indebtedness (net of unamortized debt issuance costs) of approximately $2.0 billion , primarily attributable to our senior notes. We had borrowing base availability of $759.0 million under our secured revolving credit facility after giving effect to an aggregate of $241.0 million of letters of credit and no outstanding borrowings. +Our outstanding indebtedness could have important consequences to you, including the following: +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indentures; +40 +Table of Contents +Index to Financial Statements +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on our senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. +Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. +Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indentures governing our senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +Restrictive covenants in our secured revolving credit facility, the indentures governing our senior notes and in future debt instruments may restrict our ability to pursue our business strategies. +Our secured revolving credit facility and the indentures governing our senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to: +41 +Table of Contents +Index to Financial Statements +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets including capital stock of restricted subsidiaries; +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indentures governing our senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indentures governing our senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +42 +Table of Contents +Index to Financial Statements +Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $1.2 billion, with an elected commitment of $1.0 billion. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2017 , we had no borrowings under our revolving credit facility. However, we intend to borrow under our revolving credit facility in the future. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indentures governing our senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2017 , our borrowing base under our revolving credit facility was set at $1.2 billion, with an elected commitment of $1.0 billion, and we had no borrowings outstanding under this facility. In addition, the indentures governing our senior notes allow us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indentures governing our senior notes also allow us to incur certain other additional secured debt and allow us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to our senior notes. In addition, the indentures governing our senior notes do not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with our senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of our senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. +Our borrowings under our revolving credit facility expose us to interest rate risk. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2017 , we had no variable interest rate borrowings outstanding; therefore, an increase in interest rates would not have impacted our interest expense. However, any increase in our interest rate at the time we do have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2017 , we did not hedge our interest rate risk. +If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit. +Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs. +43 +Table of Contents +Index to Financial Statements +Risks Related to Our Common Stock +If our quarterly revenues and operating results fluctuate significantly, the price of our common stock may be volatile. +Our revenues and operating results may in the future vary significantly from quarter to quarter. If our quarterly results fluctuate, it may cause our stock price to be volatile. We believe that a number of factors could cause these fluctuations, including: +• +changes in oil and natural gas prices; +• +changes in production levels; +• +changes in governmental regulations and taxes; +• +geopolitical developments; +• +the level of foreign imports of oil and natural gas; and +• +conditions in the oil and natural gas industry and the overall economic environment. +Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. +We do not currently pay dividends on our common stock and do not anticipate doing so in the future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +There is no guarantee that we will repurchase shares of our common stock under our recently announced stock repurchase program at a level anticipated by our stockholders, which could reduce returns to our stockholders. Decisions to repurchase our common stock will be at the discretion of our board of directors based upon a review of relevant considerations. +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018. The repurchase program does not require us to acquire any specific number of shares and, as of February 22, 2018, we have not repurchased any shares of our common stock under our stock repurchase program or otherwise. Our board of director’s determination to repurchase shares of our common stock will depend upon market conditions, applicable legal requirements, contractual obligations and other factors that the board of directors deems relevant. Based on an evaluation of these factors, our board of directors may determine not to repurchase shares or to repurchase shares at reduced levels from those anticipated by our stockholders, any or all of which could reduce returns to our stockholders. +A change of control could limit our use of net operating losses. +As of December 31, 2017 , we had a net operating loss, or NOL, carry forward of approximately $574.4 million for federal income tax purposes. If we were to experience an “ownership change,” as determined under Section 382 of the Code, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Internal Revenue Code) at any time during a rolling three-year period. +44 +Table of Contents +Index to Financial Statements +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC. Sales of these shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 12, 2018, there were 183,105,910 shares of our common stock issued and outstanding, excluding 976,027 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan. +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Additional information regarding our properties is included in Item 1. " Business " above and in Note 3 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference. +Proved Oil and Natural Gas Reserves +Evaluation and Review of Reserves. +Reserve estimates at December 31, 2017 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio ( 73% of our proved reserves at December 31, 2017 ), the SCOOP Woodford and SCOOP Springer plays in Oklahoma which we acquired on February 17, 2017 ( 27% of our proved reserves at December 31, 2017 ) and our WCBB and Hackberry fields (less than 1% of our proved reserves at December 31, 2017 ). Reserve estimates at December 31, 2016 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio and our WCBB and Hackberry fields. Reserve estimates at December 31, 2015 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio and our WCBB, Hackberry and Niobrara fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests (less than 1% of our proved reserves) at December 31, 2017 and 2016. At December 31, 2015, our personnel prepared reserve estimates with respect to our overriding royalty and non-operated interests (less than 1% of our proved reserves). +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining +45 +Table of Contents +Index to Financial Statements +to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale, SCOOP, WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 35 years of reservoir and operations experience. In addition, our geophysical staff has over 100 years combined industry experience and our reservoir staff has approximately 50 years combined experience. Our technical staff uses historical information for our properties such as ownership interest, oil and gas production, well test data, commodity prices and operating and development costs. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by our experienced reservoir engineers or under their direct supervision; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• +annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +The following table sets forth our estimated proved reserves at December 31, 2017 , 2016 and 2015 : +Year Ended December 31, +2017 +2016 +2015 +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Proved developed +10,245 +1,616,930 +36,247 +4,882 +744,797 +14,299 +6,120 +652,961 +12,910 +Proved undeveloped +8,912 +3,208,380 +39,519 +664 +1,422,271 +5,828 +338 +907,184 +4,826 +Total (1) +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +46 +Table of Contents +Index to Financial Statements +Year Ended December 31, +2017 +2016 +2015 +Total net proved oil and natural gas reserves (MMcfe) (1) +5,394,851 +2,321,108 +1,705,312 +PV-10 value (in millions) (2) +$ +2,883.0 +$ +696.0 +$ +765.8 +Standardized measure (in millions) (3) +$ +2,643.6 +$ +688.0 +$ +764.3 +_____________________ +(1) +Estimates of reserves as of year-end 2017 , 2016 and 2015 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2017 , 2016 and 2015 , respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2017 , 2016 and 2015 . Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. +(2) +Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2017 , 2016 and 2015 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $51.34 per barrel and $2.98 per MMBtu for 2017 , $42.75 per barrel and $2.48 per MMBtu for 2016 and $50.28 per barrel and $2.59 per MMBtu for 2015 , and in each case adjusted by lease for transportation fees and regional price differentials. +PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows. +The following table reconciles the standardized measure of future net cash flows to the PV-10 value: +December 31, +2017 +2016 +2015 +(In thousands) +Standardized measure of discounted future net cash flows +$ +2,643,564 +$ +688,040 +$ +764,331 +Add: Present value of future income tax discounted at 10% +239,468 +7,927 +1,432 +PV-10 value +$ +2,883,032 +$ +695,967 +$ +765,763 +(3) +The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. +The above table does not include proved reserves net to our interest in Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “ Business–Our Equity Investments .” +As noted above, our December 31, 2017 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2017 of $51.34 per barrel and $2.98 per MMBtu. Holding production and development costs constant, if our 2017 reserves were calculated using the December 31, 2017 price of $60.42 per barrel and $2.95 per MMBtu, our discounted future net cash flows before income taxes would have been approximately $3.0 billion, or $0.1 billion more than our actual PV-10 value of $2.9 billion at December 31, 2017 . +47 +Table of Contents +Index to Financial Statements +The table below provides the 2017 SEC pricing of benchmark prices as well as the unweighted average of the months ended December 31, 2017 and January 31, 2018: +SEC Pricing 2017 +2-month Average 2018 +Henry Hub Natural Gas (per MMBtu) +$ +2.98 +$ +2.91 +WTI Crude Oil (per Bbl) +$ +51.34 +$ +60.81 +The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2017 . +The following table summarizes the changes in our estimated proved reserves during 2017 (in Bcfe): +Proved Reserves, December 31, 2016 +2,321 +Purchases of oil and natural gas reserves in place +1,511 +Extensions and discoveries +1,629 +Revisions of prior reserve estimates +332 +Current production +(398 +) +Proved Reserves, December 31, 2017 +5,395 +Purchases of oil and natural gas reserves in place. These are additions to proved reserves resulting from the purchases of minerals in place during a period. During 2017 , we purchased 1.5 Tcfe of proved oil and natural gas reserves through our SCOOP acquisition. +Extensions and discoveries. These are additions to our proved reserves that result from (i) extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery and (ii) discovery of new fields with proved reserves or of new reservoirs of proved reserves in existing fields. Extensions and discoveries of 1.6 Tcfe of proved reserves were attributable to the continued development of our Utica Shale acreage. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from new information normally obtained from development drilling and production history or resulting from a change in economic factors, such as commodity prices, operating costs or development costs. +Commodity prices increased significantly in 2017 . The 12-month average price for natural gas increased from $2.48 per MMBtu for 2016 to $2.98 per MMBtu for 2017 , the 12-month average price for NGLs increased from $9.91 per barrel for 2016 to $18.40 per barrel for 2017 , and the 12-month average price for crude oil increased from $42.75 per barrel for 2016 to $51.34 per barrel for 2017 . We experienced positive revisions of 201.3 Bcfe in estimated proved reserves in 2017 due to an increase in well performance, 214.1 Bcfe due to an increase in pricing and 95.9 Bcfe due to changes in our ownership interests. These positive revisions were partially offset by downward revisions of 133.0 Bcfe in estimated proved reserves due to a decline in well performance specific to one area in our Utica field and a decline of 45.7 Bcfe in estimated proved reserves in 2017 primarily due to the exclusion of ten PUD locations in our Utica field, five of which we operate and five of which are operated by others operators, that were excluded due to changes in drilling schedules. An additional downward revision of 0.6 Bcfe was due to two PUD locations in our Southern Louisiana fields that had not been drilled within five years of initial booking. +48 +Table of Contents +Index to Financial Statements +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2017 , 2016 and 2015 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities , or Supplemental Information , in Note 18 to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2017 , our proved undeveloped reserves totaled 8,912 MBbls of oil, 3,208,380 MMcf of natural gas and 39,519 MBbls of NGLs, for a total of 3,498,965 MMcfe. Approximately 73% and 27% of our PUDs at year-end 2017 were located in our Utica field and our SCOOP field, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include delays in the availability of infrastructure, well permitting delays, changes in commodity price outlook and costs, and new data from recently completed wells. During 2017 , we did not deviate from our development plan with respect to our PUD locations booked in our reserve report for the year ended December 31, 2016 and scheduled to be drilled during 2017 , other than to drill 14 additional PUD locations than initially scheduled to be drilled during 2017 . +The following table summarizes the changes in our estimated proved undeveloped reserves during 2017 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2016 +1,461 +Purchases of oil and natural gas reserves in place +947 +Extensions and discoveries +1,467 +Conversion to proved developed reserves +(486 +) +Revisions of prior reserve estimates +110 +Proved Undeveloped Reserves, December 31, 2017 +3,499 +Purchases of oil and natural gas reserves in place. During 2017 , we purchased 946.7 Bcfe of proved undeveloped oil and natural gas reserves through our SCOOP acquisition. +Extensions and discoveries. Our additions of 1.5 Tcfe were primarily attributable to 2017 extensions in our Utica field. +Conversion to proved developed reserves. We converted approximately 486.2 Bcfe attributable to 76 PUDs into proved developed reserves and four PUDs into proved developed not producing. +Revision of prior reserve estimates. We experienced positive revisions of 193.9 Bcfe from 92 PUD locations, of which 95.3 Bcfe was due to an increase in well performance of offset producers, 39.0 Bcfe was a result of an increase in 2017 prices as compared to 2016 prices and 59.6 Bcfe was due to changes in our ownership interest. In addition, we also experienced downward revisions of 37.6 Bcfe due to downward performance revisions on 37 PUD locations. We also experienced downward revisions of 45.7 Bcfe due to changes in our drilling schedule, including the loss of five locations we operate and five locations operated by other operators. We also experienced downward revisions of 0.6 Bcfe due to the removal of two PUD locations in our Southern Louisiana fields that had not been drilled within five years of initial booking. +We drilled approximately 35% of our December 31, 2016 PUD locations during the year ended December 31, 2017 . +Costs incurred relating to the development of PUDs were approximately $386.2 million in 2017 . Estimated future development costs relating to the development of PUDs are projected to be approximately $551.0 million in 2018 , $458.8 million in 2019 , $514.5 million in 2020 , $842.9 million in 2021 and $400.9 million in 2022 . +49 +Table of Contents +Index to Financial Statements +All PUD drilling locations included in our 2017 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2017 , 3% of our total proved reserves were classified as proved developed non-producing. +As noted above, our December 31, 2017 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2017 of $51.34 per barrel and $2.98 per MMBtu. Holding production and development costs constant, if SEC pricing were $40.00 per barrel and $2.00 per MMBtu, this would have resulted in a loss of 2.9 Tcfe of our PUD volumes at December 31, 2017 . Holding production and development costs constant, if SEC pricing were $30.00 per barrel and $1.75 per MMBtu, this would have resulted in a loss of 3.4 Tcfe of our PUD volumes at December 31, 2017 . +Production, Prices and Production Costs +50 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2017 +2016 +2015 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +350,061 +227,594 +156,151 +Total natural gas sales +$ +845,999 +$ +420,128 +$ +324,733 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.42 +$ +1.85 +$ +2.08 +Impact from settled derivatives ($/Mcf) +$ +0.07 +$ +0.60 +$ +0.71 +Average natural gas sales price, including settled derivatives +($/Mcf) +$ +2.49 +$ +2.45 +$ +2.79 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,579 +2,126 +2,899 +Total oil and condensate sales +$ +124,568 +$ +81,173 +$ +122,615 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +48.29 +$ +38.18 +$ +42.29 +Impact from settled derivatives ($/Bbl) +$ +1.59 +$ +5.11 +$ +3.12 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +49.88 +$ +43.29 +$ +45.41 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +224,038 +161,562 +185,792 +Total natural gas liquids sales +$ +136,057 +$ +59,115 +$ +58,129 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.61 +$ +0.37 +$ +0.31 +Impact from settled derivatives ($/Gal) +$ +(0.03 +) +$ +(0.01 +) +$ +— +Average natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.58 +$ +0.36 +$ +0.31 +Natural gas, oil and condensate and natural gas liquids sales +Natural gas equivalents (MMcfe) +397,543 +263,430 +200,089 +Total natural gas, oil and condensate and natural gas liquids sales +$ +1,106,624 +$ +560,416 +$ +505,477 +Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.78 +$ +2.13 +$ +2.53 +Impact from settled derivatives ($/Mcfe) +$ +0.07 +$ +0.56 +$ +0.60 +Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.85 +$ +2.69 +$ +3.13 +Production Costs: +Average production costs (per Mcfe) +$ +0.20 +$ +0.26 +$ +0.35 +Average production taxes and midstream costs (per Mcfe) +$ +0.68 +$ +0.68 +$ +0.77 +Total production and midstream costs and production taxes (per Mcfe) +$ +0.88 +$ +0.94 +$ +1.12 +51 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2017 : +Year Ended December 31, +2017 +2016 +2015 +Utica Shale +Net Production +Oil (MBbls) +473 +870 +1,608 +Natural gas (MMcf) +309,450 +227,447 +155,926 +NGL (Mgal) +139,634 +161,494 +185,753 +Total (MMcfe) +332,238 +255,740 +192,108 +Average Sales Price Without the Impact of Derivatives: +Oil (per Bbl) +$ +44.26 +$ +34.59 +$ +37.85 +Natural gas (per Mcf) +$ +2.38 +$ +1.85 +$ +2.08 +NGL (per Gal) +$ +0.60 +$ +0.37 +$ +0.31 +Average Production Cost (per Mcfe) +$ +0.15 +$ +0.18 +$ +0.25 +Year Ended December 31, +2017 (1) +SCOOP +Net Production +Oil (MBbls) +1,083 +Natural gas (MMcf) +40,501 +NGL (Mgal) +84,283 +Total (MMcfe) +59,038 +Average Sales Price Without the Impact of Derivatives: +Oil (per Bbl) +$ +48.70 +Natural gas (per Mcf) +$ +2.68 +NGL (per Gal) +$ +0.62 +Average Production Cost (per Mcfe) +$ +0.19 +(1) We acquired our SCOOP assets in our SCOOP acquisition completed on February 17, 2017. +Productive Wells and Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2017 . +52 +Table of Contents +Index to Financial Statements +NRI/WI (1) +Productive +Oil Wells +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage (2) +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (3) +42.75/52.07 +74 +36.15 +433 +227.91 +3 +2.66 +2 +1.57 +66,133 +55,733 +170,826 +157,943 +SCOOP (4) +30.83/38.52 +365 +109.96 +45 +35.88 +25 +14.76 +12 +10.96 +38,182 +38,182 +12,226 +12,226 +West Cote Blanche Bay Field (5) +80.108/100 +86 +86 +— +— +146 +146 +16 +16 +5,668 +5,668 +— +— +E. Hackberry Field (6) +82.33/100 +17 +17 +— +— +130 +130 +— +— +2,910 +2,910 +1,206 +1,206 +W. Hackberry Field +87.5/100 +2 +2 +— +— +12 +12 +— +— +726 +726 +306 +306 +Niobrara Formation (7) +34.52/48.61 +3 +1.46 +— +— +— +— +— +— +1,460 +730 +5,473 +2,653 +Bakken Formation (8) +1.51/1.83 +18 +0.3 +— +— +— +— +— +— +386 +77 +3,505 +701 +Overrides/Royalty Non-operated +Various +662 +0.8 +— +— +— +— +— +— +— +— +— +— +Total +1,227 +253.67 +478 +263.79 +316 +305.42 +30 +28.53 +115,465 +104,026 +193,542 +175,035 +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 37% of our acreage is developed acreage and has been perpetuated by production. +(3) +With respect to our total undeveloped Utica Shale acreage as of December 31, 2017 , leases representing 22%, 8%, 9% and 17% are currently scheduled to expire in 2018 , 2019 , 2020 and thereafter, respectively. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 191 gross (29.15 net) gas wells and 29 gross (3.32 net) oil wells drilled by other operators on our acreage. +(4) With respect to our total undeveloped SCOOP acreage as of December 31, 2017, leases representing 6%, 67% and 5% are currently scheduled to expire in 2018, 2019 and 2020, respectively. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes one gross (.05 net) gas well and 239 gross (8.4 net) oil wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +(7) +The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 11% and 53% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2018 and 2019, respectively. +(8) +NRI/WI is from wells that have been drilled or in which we have elected to participate. +Completed and Present Drilling and Recompletion Activities +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return. +53 +Table of Contents +Index to Financial Statements +2017 +2016 +2015 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +81 +81 +77 +77 +72 +72 +Dry +— +— +— +— +— +— +Total +81 +81 +77 +77 +72 +72 +Development: +Productive +124 +115.4 +49 +42.5 +49 +38 +Dry +2 +2 +1 +1 +— +— +Total +126 +117.4 +50 +43.5 +49 +38 +Exploratory: +Productive +— +— +— +— +— +— +Dry +— +— +— +— +— +— +Total +— +— +— +— +— +— +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +ITEM 3. +LEGAL PROCEEDINGS +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016, we were named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which we referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +We were served with the Cameron complaint in early May 2016 and with the Vermilion Complaint in early September 2016. The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermilion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the lawsuit to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs have filed a motion +54 +Table of Contents +Index to Financial Statements +to remand and the plaintiffs agreed to an extension of time for all defendants to file responsive pleadings until the District Courts ruled on the motions to remand. In the Vermilion Parish case, the District Court entered an order on September 26, 2017 remanding the lawsuit to the 15th Judicial District Court, State of Louisiana, Parish of Vermilion. In the Cameron Parish lawsuit, the federal magistrate, on January 18, 2018, issued a report and recommendation that the Cameron Parish lawsuit be remanded to the 38th Judicial District Court, State of Louisiana, Parish of Cameron. It is anticipated that one or more of the defendants will object to the magistrate’s report and recommendation, in which case the report and recommendation will be reviewed by the District Court after additional briefing by the parties. Due the procedural posture of lawsuits, the fact that responsive pleadings have not been filed and the fact that the parties have not begun discovery, we have not had the opportunity to evaluate the applicability of the allegations made in plaintiffs’ complaints to our operations and management cannot determine the amount of loss, if any, that may result. +In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Price Range of Common Stock +Our common stock is quoted on the Nasdaq Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods presented: +Price Range of +Common Stock +High +Low +2016 +First Quarter +$ +31.05 +$ +21.00 +Second Quarter +34.67 +26.00 +Third Quarter +32.50 +25.34 +Fourth Quarter +30.47 +21.30 +2017 +First Quarter +$ +22.35 +$ +15.66 +Second Quarter +17.82 +12.47 +Third Quarter +15.09 +10.90 +Fourth Quarter +15.08 +11.73 +Unregistered Sales of Equity Securities and Use of Proceeds +None. +Repurchases of Equity Securities +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require us to acquire any specific number of shares. We intend +55 +Table of Contents +Index to Financial Statements +to purchase shares under the repurchase program opportunistically while maintaining sufficient liquidity to fund our 2018 capital development program. This repurchase program is authorized to extend through December 31, 2018 and may be suspended from time to time, modified, extended or discontinued by our board of directors at any time. We have not made any purchases of our common stock as of February 22, 2018. +Holders of Record +At the close of business on February 14, 2018, there were 349 stockholders of record holding 183,105,910 shares of our outstanding common stock. There were approximately 22,941 beneficial owners of our common stock as of February 14, 2018. +Dividend Policy +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock. +ITEM 6. +SELECTED FINANCIAL DATA +You should read the following selected consolidated financial data in conjunction with Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2017 , December 31, 2016 and December 31, 2015 and the selected consolidated balance sheet data at December 31, 2017 and December 31, 2016 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2014 and December 31, 2013 and the selected consolidated balance sheet data at December 31, 2015 , December 31, 2014 and December 31, 2013 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table. +56 +Table of Contents +Index to Financial Statements +Fiscal Year Ended December 31, +2017 +2016 +2015 +2014 +2013 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +1,320,303 +$ +385,910 +$ +708,990 +$ +670,762 +$ +262,225 +Costs and expenses: +Lease operating expenses +80,246 +68,877 +69,475 +52,191 +26,703 +Production taxes +21,126 +13,276 +14,740 +24,006 +26,933 +Midstream gathering and processing +248,995 +165,972 +138,590 +64,467 +11,030 +Depreciation, depletion and amortization +364,629 +245,974 +337,694 +265,431 +118,880 +Impairment of oil and natural gas properties +— +715,495 +1,440,418 +— +— +General and administrative +52,938 +43,409 +41,967 +38,290 +22,519 +Accretion expense +1,611 +1,057 +820 +761 +717 +Acquisition expense +2,392 +— +— +— +— +(Gain) loss on sale of assets +— +— +— +(11 +) +508 +771,937 +1,254,060 +2,043,704 +445,135 +207,290 +Income (Loss) from Operations +548,366 +(868,150 +) +(1,334,714 +) +225,627 +54,935 +Other (Income) Expense: +Interest expense +108,198 +63,530 +51,221 +23,986 +17,490 +Interest income +(1,009 +) +(1,230 +) +(643 +) +(195 +) +(297 +) +Litigation settlement +— +— +— +25,500 +— +Insurance proceeds +— +(5,718 +) +(10,015 +) +— +— +Loss on debt extinguishment +— +23,776 +— +— +— +Gain on contribution of investments +— +— +— +(84,470 +) +— +Loss (income) from equity method investments +5,257 +33,985 +106,093 +(139,434 +) +(213,058 +) +Other (income) expense +(1,041 +) +129 +(485 +) +(504 +) +(528 +) +111,405 +114,472 +146,171 +(175,117 +) +(196,393 +) +Income (Loss) from Continuing Operations before Income Taxes +436,961 +(982,622 +) +(1,480,885 +) +400,744 +251,328 +Income Tax Expense (Benefit) +1,809 +(2,913 +) +(256,001 +) +153,341 +98,136 +Income (Loss) from Continuing Operations +435,152 +(979,709 +) +(1,224,884 +) +247,403 +153,192 +Net Income (Loss) Available to Common Stockholders +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +$ +153,192 +Net Income (Loss) Per Common Share—Basic: +$ +2.42 +$ +(7.97 +) +$ +(12.27 +) +$ +2.90 +$ +1.98 +Net Income (Loss) Per Common Share—Diluted: +$ +2.41 +$ +(7.97 +) +$ +(12.27 +) +$ +2.88 +$ +1.97 +57 +Table of Contents +Index to Financial Statements +At December 31, +2017 +2016 +2015 +2014 +2013 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +5,807,752 +$ +4,223,145 +$ +3,334,734 +$ +3,619,473 +$ +2,685,039 +Total debt, including current maturity +$ +2,038,943 +$ +1,593,875 +$ +946,263 +$ +703,564 +$ +291,090 +Total liabilities +$ +2,706,138 +$ +2,039,253 +$ +1,295,897 +$ +1,323,177 +$ +634,801 +Stockholders’ equity +$ +3,101,614 +$ +2,183,892 +$ +2,038,837 +$ +2,296,296 +$ +2,050,238 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. +Overview +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plans in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an approximate 25.1% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the Nasdaq Global Select Market (TUSK). +Prices for oil and natural gas have historically been volatile and subject to significant fluctuation in response to changes in supply and demand, market uncertainty and a variety of other factors beyond our control. During the last three years, particularly in light of the continued downturn in commodity prices, we focused on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, all while growing our production base each year. In 2017, an increase in commodity prices allowed us to increase our capital budget as compared to 2016 and position us well to navigate the current commodity price environment. In response to current declining forward natural gas prices, we are focused on delivering growth within cash flow by exercising strict capital discipline and currently expect to reduce our planned capital expenditures by approximately 23% as compared to 2017. +2017 and 2018 Year to Date Highlights +• +Production increased 51% to approximately 397,543 MMcfe for the year ended December 31, 2017 from approximately 263,430 MMcfe for the year ended December 31, 2016 . +• +On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of our common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the South Central Oklahoma Oil Province, or SCOOP, resource play, in Grady, Stephens and Garvin Counties, Oklahoma. +58 +Table of Contents +Index to Financial Statements +• +On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon Acquisitions LLC, Stingray Energy Services LLC and Stingray Cementing LLC, which we refer to as Sturgeon, Stingray Energy and Stingray Cementing, respectively, bringing our equity interest in Mammoth Energy to approximately 25.1%. +• +During 2017 , we spud 126 gross ( 117.4 net) wells, turned to sales 81 gross ( 72.1 net) operated wells, participated in an additional 57 gross ( 9.4 net) wells that were drilled by other operators on our Utica Shale and SCOOP acreage and recompleted 81 gross and net wells in our Southern Louisiana fields. Of our 126 new wells spud during 2017 , 50 were completed as producing wells, two were non-productive and, at year end, 66 were in various stages of completion and eight were drilling. +• +Oil and natural gas revenues, before the impact of derivatives, increased 97% to $1.1 billion for the year ended December 31, 2017 from $560.4 million for the year ended December 31, 2016 . +• +During the year ended December 31, 2017 , we reduced our unit lease operating expense by 23% to $0.20 per Mcfe from $0.26 per Mcfe during the year ended December 31, 2016 . +• +During the year ended December 31, 2017 , we reduced our unit general and administrative expense by 19% to $0.13 per Mcfe from $0.16 per Mcfe during the year ended December 31, 2016 . +• +On October 11, 2017, we issued $450.0 million in aggregate principal amount of our 6.375% Senior Notes due 2026, or the 2026 Notes, to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from October 11, 2017, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018. The 2026 Notes will mature on January 15, 2026. A portion of the net proceeds from the issuance of the 2026 Notes was used to repay all of our outstanding borrowings under our secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to our 2017 capital development plans. +• +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018, which we believe underscores the confidence we have in our business model, financial performance and asset base. +• +During 2018 (through February 9, 2018 ), we spud 12 gross ( 9.8 net) wells. As of February 9, 2018 , six wells were waiting on completion and six were still being drilled. +Critical Accounting Policies and Estimates +Our disc ussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations +59 +Table of Contents +Index to Financial Statements +recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and totaled $2.9 billion at December 31, 2017 and $1.6 billion at December 31, 2016 . These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development. +Ceiling Test . Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling (as defined in the preceding paragraph). If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016. No ceiling test impairment was recognized by us for the year ended December 31, 2017. If prices of oil, natural gas and natural gas liquids decline in the future, we may be required to further write down the value of our oil and natural gas properties, which could negatively affect our results of operations. +Asset Retirement Obligations . We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities. +We account for abandonment and restoration liabilities under FASB ASC 410 which requires us to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates. +Oil and Gas Reserve Quantities . Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Netherland, Sewell & Associates, Inc. and to a lesser extent our personnel have prepared reserve reports of our reserve estimates at December 31, 2017 on a well-by-well basis for our properties. +Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following: +• +the quality and quantity of available data; +60 +Table of Contents +Index to Financial Statements +• +the interpretation of that data; +• +the accuracy of various mandated economic assumptions; and +• +the judgments of the individuals preparing the estimates. +Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Periodically, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2017 , a valuation allowance of $298.8 million had been established for the net deferred tax asset, with the exception of certain NOLs that we expect to realize on a more likely than not basis. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. Further information on the tax impacts of the Tax Cut and Jobs Act is included in Note 10 of our consolidated financial statements. +Revenue Recognition . We derive almost all of our revenue from the sale of crude oil and natural gas produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals. +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. For the years ended December 31, 2016 and 2015, we recognized an impairment loss related to our investment in Grizzly of approximately $23.1 million and $101.6 million , respectively. +Commitments and Contingencies . Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. We follow the provisions of FASB ASC 815, “ Derivatives and Hedging ,” as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While we have historically designated derivative instruments as accounting hedges, effective January 1, 2015, we discontinued hedge accounting prospectively. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +61 +Table of Contents +Index to Financial Statements +See Item 7. " Commodity Price Risk " for a summary of our derivative instruments in place as of December 31, 2017 . +RESULTS OF OPERATIONS +Results of Operations +The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +62 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2017 +2016 +2015 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +350,061 +227,594 +156,151 +Total natural gas sales +$ +845,999 +$ +420,128 +$ +324,733 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.42 +$ +1.85 +$ +2.08 +Impact from settled derivatives ($/Mcf) +$ +0.07 +$ +0.60 +$ +0.71 +Average natural gas sales price, including settled derivatives ($/Mcf) +$ +2.49 +$ +2.45 +$ +2.79 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,579 +2,126 +2,899 +Total oil and condensate sales +$ +124,568 +$ +81,173 +$ +122,615 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +48.29 +$ +38.18 +$ +42.29 +Impact from settled derivatives ($/Bbl) +$ +1.59 +$ +5.11 +$ +3.12 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +49.88 +$ +43.29 +$ +45.41 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +224,038 +161,562 +185,792 +Total natural gas liquids sales +$ +136,057 +$ +59,115 +$ +58,129 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.61 +$ +0.37 +$ +0.31 +Impact from settled derivatives ($/Gal) +$ +(0.03 +) +$ +(0.01 +) +$ +— +Average natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.58 +$ +0.36 +$ +0.31 +Natural gas, oil and condensate and natural gas liquids sales +Natural gas equivalents (MMcfe) +397,543 +263,430 +200,089 +Total natural gas, oil and condensate and natural gas liquids sales +$ +1,106,624 +$ +560,416 +$ +505,477 +Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.78 +$ +2.13 +$ +2.53 +Impact from settled derivatives ($/Mcfe) +$ +0.07 +$ +0.56 +$ +0.60 +Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.85 +$ +2.69 +$ +3.13 +Production Costs: +Average production costs (per Mcfe) +$ +0.20 +$ +0.26 +$ +0.35 +Average production taxes and midstream costs (per Mcfe) +$ +0.68 +$ +0.68 +$ +0.77 +Total production and midstream costs and production taxes (per Mcfe) +$ +0.88 +$ +0.94 +$ +1.12 +63 +Table of Contents +Index to Financial Statements +The total volume hedged for 2017 , 2016 and 2015 represented approximately 68% , 77% and 46% , respectively, of our total sales volumes for the applicable year. +From 2016 to 2017 , our net equivalent gas production increase d 51% from 263,430 MMcfe to 397,543 MMcfe primarily as a result of the continued development of our Utica Shale acreage and the acquisition of our SCOOP acreage. From 2015 to 2016 , our net equivalent gas production increased 32% from 200,089 MMcfe to 263,430 MMcfe primarily as a result of the continued development of our Utica Shale acreage. We currently estimate that our 2018 production will be between 456,250 and 474,500 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. See Item 1A. "Risk Factors." +Comparison of the Years Ended December 31, 2017 and December 31, 2016 +We reported net income of $435.2 million for the year ended December 31, 2017 as compared to a net loss of $979.7 million for the year ended December 31, 2016 . This increase in period-to-period net income was due primarily to no impairment charge for the year ended December 31, 2017 as compared to a $715.5 million impairment of oil and natural gas properties for the year ended December 31, 2016 and a $934.4 million increase in oil and natural gas revenues, partially offset by an $83.0 million increase in midstream gathering and processing expenses, a $118.7 million increase in depreciation, depletion and amortization expense and a $44.7 million increase in interest expense for the year ended December 31, 2017 , as compared to the year ended December 31, 2016 . +Oil and Natural Gas Revenues . For the year ended December 31, 2017 , we reported oil and natural gas revenues of $1.3 billion as compared to oil and natural gas revenues of $385.9 million during 2016 . This $934.4 million , or 242% , increase in revenues was primarily attributable to the following: +• +A $388.2 million increase in natural gas and oil sales due to a favorable change in gains and losses from derivative instruments. Of the total change, $512.1 million was due to favorable changes in the fair value of our open derivative positions in each period and $123.9 million was due to an unfavorable change in settlements related to our derivative positions. +• +A $425.9 million increase in natural gas sales without the impact of derivatives due to a 54% increase in natural gas sales volumes and a 31% increase in natural gas market prices. +• +A $43.4 million increase in oil and condensate sales without the impact of derivatives due to a 21% increase in oil and condensate sales volumes and a 26% increase in oil and condensate market prices. +• +A $76.9 million increase in natural gas liquids sales without the impact of derivatives due to a 39% increase in natural gas liquids sales volumes and a 66% increase in natural gas liquids market prices. +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $80.2 million for the year ended December 31, 2017 from $68.9 million for the year ended December 31, 2016 . This increase was mainly the result of an increase in expenses related to supervision and labor, overhead, surface rentals, water hauling and treatment, chemicals, ad valorem taxes and road, location and equipment repairs, partially offset by decreases in compression and water disposal. However, due to increased efficiencies and a 51% increase in our production volumes for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , our per unit LOE decreased by 23% from $0.26 per Mcfe to $0.20 per Mcfe. +Production Taxes . Production taxes increase d to $21.1 million for the year ended December 31, 2017 from $13.3 million for 2016 . This increase was primarily related to an increase in realized prices and production volumes. +Midstream Gathering and Processing Expenses . Midstream gathering and processing expenses increase d by $83.0 million to $249.0 million for the year ended December 31, 2017 from $166.0 million for 2016 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2017 and 2016 drilling activities, as well as production volumes resulting from our SCOOP acquisition in February 2017. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $364.6 million for the year ended December 31, 2017 , and consisted of $358.8 million in depletion of oil and natural gas properties and $5.8 million in depreciation of other property and equipment, as compared to total DD&A expense of $246.0 +64 +Table of Contents +Index to Financial Statements +million for 2016 . This increase was due to an increase in our full cost pool as a result of our SCOOP acquisition and an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $52.9 million for the year ended December 31, 2017 from $43.4 million for the year ended December 31, 2016 . This $9.5 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, consulting fees, bank service charges, computer support and franchise taxes, partially offset by a decrease in employee stock compensation expense and legal fees. However, during the year ended December 31, 2017 , we decreased our per unit general and administrative expense by 19% to $0.13 per Mcfe from $0.16 per Mcfe during the year ended December 31, 2016 . +Accretion Expense . Accretion expense increase d to $1.6 million for the years ended December 31, 2017 from $1.1 million for the year ended December 31, 2016 , primarily as a result of our SCOOP acquisition. +Interest Expense . Interest expense increase d to $108.2 million for the year ended December 31, 2017 from $63.5 million for the year ended December 31, 2016 due primarily to the issuance of $450.0 million of the 2026 Notes in October 2017 and the issuance of $600.0 million of the 2025 Notes in December 2016, partially offset by our repurchase or redemption of our 7.75% Senior Notes due 2020, which we refer to as the 2020 Notes, of which $600.0 million in aggregate principal amount was then outstanding, in October 2016 with the net proceeds from our issuance of $650.0 million of the 2024 Notes. In addition, total weighted debt outstanding under our revolving credit facility was $119.2 million for the year ended December 31, 2017 as compared to $0.2 million outstanding under such facility for 2016 . Additionally, we capitalized approximately $9.5 million and $8.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2017 and December 31, 2016 , respectively. This increase in capitalized interest in the 2017 period was primarily the result of our SCOOP acquisition and the development of this acreage. +Income Taxes . As of December 31, 2017 , we had a net operating loss carry forward of approximately $574.4 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2017 , a valuation allowance of $298.8 million had been provided against the net deferred tax asset, with the exception of certain state net operating losses that we expect to be able to utilize with NOL carrybacks. We recognized an income tax expense from continuing operations of $1.8 million for the year ended December 31, 2017 . +Comparison of the Years Ended December 31, 2016 and December 31, 2015 +We reported a net loss of $979.7 million for the year ended December 31, 2016 as compared to a net loss of $1.2 billion for the year ended December 31, 2015 . This decrease in period-to-period net loss was due primarily to a $724.9 million decrease of impairment of oil and natural gas properties, a $91.7 million decrease in depreciation, depletion and amortization expense and a $72.1 million decrease in loss from equity method investments, partially offset by a $323.1 million decrease in oil and natural gas revenues, a $27.4 million increase in midstream gathering and processing expenses, a $23.8 million loss on debt extinguishment and a $253.1 million decrease in income tax benefit for the year ended December 31, 2016 , as compared to the year ended December 31, 2015 . +Oil and Gas Revenues . For the year ended December 31, 2016 , we reported oil and natural gas revenues of $385.9 million as compared to oil and natural gas revenues of $709.0 million during 2015 . This $323.1 million , or 46% , decrease in revenues was primarily attributable to the following: +• +A $378.0 million decrease in natural gas and oil sales due to an unfavorable change in gains and losses from derivative instruments. Of the total change, $407.0 million was due to unfavorable changes in the fair value of our open derivative positions in each period and $29.0 million was due to a favorable change in settlements related to our derivative positions. +• +A $95.4 million increase in natural gas sales without the impact of derivatives due to a 46% increase in natural gas sales volumes, partially offset by an 11% decrease in natural gas market prices. +• +a $41.4 million decrease in oil and condensate sales without the impact of derivatives due to a 27% decrease in oil and condensate sales volumes and a 10% decrease in oil and condensate market prices. +65 +Table of Contents +Index to Financial Statements +• +A $1.0 million increase in natural gas liquids sales without the impact of derivatives due to a 17% increase in natural gas liquids market prices, partially offset by a 13% decrease in natural gas liquids sales volumes. +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes decreased to $68.9 million for the year ended December 31, 2016 from $69.5 million for the year ended December 31, 2015 . This decrease was mainly the result of a decrease in expenses related to contract labor and field supervision, field telemetry, facility repairs and maintenance and water disposal, partially offset by increases in water hauling, compression and ad valorem taxes. +Production Taxes . Production taxes decreased to $13.3 million for the year ended December 31, 2016 from $14.7 million for 2015 . This decrease was primarily related to changes in our product mix and production location, as well as a decrease in commodity prices. +Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $27.4 million to $166.0 million for the year ended December 31, 2016 from $138.6 million for 2015 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2016 and 2015 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense decreased to $246.0 million for the year ended December 31, 2016 , and consisted of $243.1 million in depletion of oil and natural gas properties and $2.9 million in depreciation of other property and equipment, as compared to total DD&A expense of $337.7 million for 2015 . This decrease was due to a decrease in our full cost pool as a result of our 2015 and 2016 ceiling test impairments and an increase in our total proved reserves volume used to calculate our total DD&A expense, partially offset by an increase in our production. +General and Administrative Expenses . Net general and administrative expenses increased to $43.4 million for the year ended December 31, 2016 from $42.0 million for the year ended December 31, 2015 . This $1.4 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, increases in fees for tax services, bank service charges, computer support, legal fees and consulting services, partially offset by a decrease in stock compensation expense. +Accretion Expense . Accretion expense increased to $1.1 million for the year ended December 31, 2016 from $0.8 million for the year ended December 31, 2015 . +Interest Expense . Interest expense increased to $63.5 million for the year ended December 31, 2016 from $51.2 million for the year ended December 31, 2015 due primarily to the issuance of $350.0 million of 6.625% Senior Notes due 2023 on April 21, 2015 and the issuance of $600.0 million of the 2025 Notes on December 21, 2016, partially offset by our repurchase or redemption of the 2020 Notes in October 2016 with the net proceeds from our issuance of $650.0 million of the 2024 Notes. Total weighted debt outstanding under our revolving credit facility was $0.2 million for the year ended December 31, 2016 as compared to $46.6 million outstanding under such facility for 2015. Additionally, we capitalized approximately $8.7 million and $13.3 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2016 and December 31, 2015 , respectively. This decrease in capitalized interest in the 2016 period was the result of changes to our development plan for our oil and natural gas properties. +Income Taxes . As of December 31, 2016 , we had a net operating loss carry forward of approximately $463.1 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2016 , a valuation allowance of $645.8 million was established against the net deferred tax asset, with the exception of certain state NOL's and AMT credits that we expect to be able to utilize with net operating loss carrybacks and tax planning in the amount of $4.7 million. We recognized an income tax benefit from continuing operations of $2.9 million for the year ended December 31, 2016 . +Liquidity and Capital Resources +Overview . Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production. +66 +Table of Contents +Index to Financial Statements +Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments and acquisitions. During 2018, we also intend to purchase shares of our common stock under our recently announced stock repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund our 2018 capital development program. +Net cash flow provided by operating activities was $ 679.9 million for the year ended December 31, 2017 as compared to net cash flow provided by operating activities of $ 337.8 million for 2016 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 60% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses. +Net cash flow provided by operating activities was $337.8 million for the year ended December 31, 2016 , as compared to net cash flow provided by operating activities of $322.2 million for 2015 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 13% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses. +Net cash used in investing activities for the year ended December 31, 2017 was $ 2.3 billion as compared to $ 905.6 million for 2016 . During the year ended December 31, 2017 , we spent $ 1.1 billion in additions to oil and natural gas properties, of which $750.6 million was spent on our 2017 drilling and recompletion programs, $97.4 million was spent on expenses attributable to the wells spud, completed and recompleted during 2016, $1.5 million was spent on facility enhancements, $4.3 million was spent on plugging costs, $119.8 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale and the SCOOP and $7.2 million was spent on seismic with the remainder attributable mainly to future location development and capitalized general and administrative expenses. We also spent $1.3 billion to fund the cash portion of the purchase price for our SCOOP acquisition. In addition, $ 2.3 million was invested in Grizzly and $46.1 million was invested in Strike Force, net of distributions. We did not make any material investments in our our other equity investments during the year ended December 31, 2017 . During the year ended December 31, 2017 , we used cash from operations and proceeds from our 2016 equity and debt offerings and our 2017 debt offering for our investing activities. +Net cash used in investing activities for the year ended December 31, 2016 was $905.6 million as compared to $1.6 billion for 2015 . During the year ended December 31, 2016 , we spent $724.9 million in additions to oil and natural gas properties, of which $346.7 million was spent on our 2016 drilling and recompletion programs, $145.3 million was spent on expenses attributable to the wells spud, completed and recompleted during 2015, $4.3 million was spent on facility enhancements, $3.7 million was spent on plugging costs, $154.5 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. In addition, $15.5 million was invested in Grizzly and $11.0 million was invested in Strike Force. We did not make any material investments in our other equity investments during the year ended December 31, 2016 . We also received approximately $45.8 million from the sale of oil and gas properties, primarily the sale of non-producing leasehold acreage in the non-core area of our Utica acreage, and spent $185.0 million to fund the escrow deposit for our then pending SCOOP acquisition. During the year ended December 31, 2016 , we used cash from operations and proceeds from our 2015 and 2016 equity and debt offerings for our investing activities. +Net cash provided by financing activities for the year ended December 31, 2017 was $ 433.0 million as compared to net cash provided by financing activities of $ 1.7 billion for 2016 . The 2017 amount provided by financing activities is primarily attributable to the net proceeds of $444.3 million from our 2017 debt offering. +Net cash provided by financing activities for the year ended December 31, 2016 was $1.7 billion as compared to $1.2 billion for 2015 . The 2016 amount provided by financing activities is primarily attributable to the net proceeds of $1.2 billion from our 2016 debt offerings, partially offset by the repurchase and redemption of our 2020 Notes, and net proceeds of $1.1 billion from our 2016 equity offerings. +Credit Facility . We have entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 13, 2021. As of December 31, 2017 , we had a borrowing base of $1.2 billion, with an elected commitment of $1.0 billion, and no balance outstanding under our revolving credit facility. Total funds available for borrowing, after giving effect to an aggregate of $241.0 million of letters of credit, were $759.0 million . This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility. +67 +Table of Contents +Index to Financial Statements +Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50%, plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2017 . +Senior Notes . In October 2012, December 2012 and August 2014, we issued an aggregate of $600.0 million in principal amount of our 7.75% senior notes due 2020 which were subsequently exchanged for substantially identical senior notes registered under the Securities Act. These senior notes, which were issued under an indenture among us, our subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, were treated as a single class of debt securities under the senior note indenture and are referred to collectively as the 2020 Notes. Interest on the 2020 Notes accrued at a rate of 7.75% per annum on the outstanding principal amount payable semi-annually on May 1 and November 1 of each year. The 2020 Notes were senior unsecured obligations and ranked equally in the right of payment with all of our other senior indebtedness and were senior in right of payment to any of our future subordinated indebtedness. We had the option to redeem some or all of the 2020 Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, we had the option to redeem the 2020 Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, we had the option to redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2020 Notes initially issued remained outstanding immediately after such redemption. +On October 6, 2016, we commenced a cash tender offer to purchase any and all of the 2020 Notes, which tender offer expired on October 13, 2016 and settled on October 14, 2016. Holders of the 2020 Notes that were validly tendered and accepted at or prior to the expiration time of the tender offer, or who delivered the 2020 Notes pursuant to the guaranteed delivery procedures, received total cash consideration of $1,042 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date. An aggregate of $403.5 million in principal amount of the 2020 Notes was validly tendered in the tender offer. The remaining 2020 Notes that were not tendered in the tender offer were redeemed by us. The redemption payment included approximately $196.5 million in aggregate principal amount at a redemption price of 103.875% of the principal amount of the redeemed 2020 Notes, plus accrued and unpaid interest thereon to the redemption date. Upon deposit of the redemption payment with the paying agent on October 14, 2016, the indenture governing the 2020 Notes was fully satisfied and discharged. The cash tender offer for the 2020 Notes and redemption of the remaining 2020 Notes were funded with the net proceeds from the offering of the 2024 Senior Notes (as discussed below) and cash on hand. +68 +Table of Contents +Index to Financial Statements +In April 2015, we issued an aggregate of $350.0 million in principal amount of our 6.625% senior notes due 2023 under a new indenture, dated as of April 21, 2015, among us, our subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Interest on these senior notes, which we refer to as the 2023 Notes, accrues at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes will mature on May 1, 2023 and are our senior unsecured obligations and rank equally in right of payment with all of our other senior indebtedness, including the 2020 Notes, and senior in right of payment to any of our future subordinated indebtedness. We may redeem some or all of the 2023 Notes at any time on or after May 1, 2018, at the redemption prices listed in the indenture relating to the 2023 Notes. Prior to May 1, 2018, we may redeem all or a portion of the 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 1, 2018, we may redeem the 2023 Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2023 Notes issued prior to such date at a redemption price of 106.625%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings. +On October 14, 2016, we issued the 2024 Notes in aggregate principal amount of $650.0 million. The 2024 Notes were issued under an indenture, dated as of October 14, 2016, among us, the subsidiary guarantors party thereto and the senior note indenture, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under this indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016, payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017. The 2024 Notes will mature on October 15, 2024. We received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer. +On December 21, 2016, we issued $600.0 million in aggregate principal amount of 2025 Notes. The 2025 Notes were issued under an indenture, dated as of December 21, 2016, among us, the subsidiary guarantors party thereto and the senior note indenture, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under this indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016, payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017. The 2025 Notes will mature on May 15, 2025. We received approximately $584.7 million in net proceeds from the offering of the 2025 Notes, which we used, together with the net proceeds from our December 2016 offering of common stock and cash on hand, to fund the cash portion of the purchase price for our acquisition of certain assets of Vitruvian. +On October 11, 2017, we issued $450.0 million in aggregate principal amount of 2026 Notes. The 2026 Notes were issued under an indenture to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under this indenture, interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from October 11, 2017, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018. The 2026 Notes will mature on January 15, 2026. We received approximately $444.3 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of our outstanding borrowings under our secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to our 2017 capital development plans. +All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the 2023 Notes, 2024 Notes, 2025 Notes and the 2026 Notes, provided, however, that the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes. +If we experience a change of control (as defined in the senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes), we will be required to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be +69 +Table of Contents +Index to Financial Statements +required to use the remaining proceeds to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are ranked as "investment grade" by Standard & Poor's and Moody's. +In connection with the issuance of the 2024 Notes, the 2025 Notes and 2026 Notes, we and our subsidiary guarantors entered into registration rights agreements, pursuant to which we agreed to file a registration statement with respect to an offer to exchange the 2024 Notes, the 2025 Notes and the 2026, as applicable, for new issues of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and the 2025 Notes were completed on September 13, 2017. On January 18, 2018, we filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. We commenced the exchange offer relating to the 2026 notes on February 16, 2018, which we expect to close in March of 2018. +Construction Loan. On June 4, 2015, we entered into a construction loan agreement, or the construction loan, with InterBank for the construction of our new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The construction loan allows for maximum principal borrowings of $24.5 million and required us to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017. Monthly interest and principal payments are due beginning June 30, 2017, with the final payment due June 4, 2025. As of December 31, 2017 , the total borrowings under the construction loan were approximately $23.7 million . +Capital Expenditures . Our recent capital commitments have been primarily for the execution of our drilling programs, acquisitions in the Utica Shale, our SCOOP acquisition in February 2017 and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities. +Of our net reserves at December 31, 2017 , 64.9% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities. +During 2017 , we spud 94 gross ( 88.7 net) and commenced sales from 68 gross ( 61.1 net) wells in the Utica Shale for a total cost of approximately $599.8 million. In addition, 26 gross ( 8.4 net) wells were drilled and 45 gross ( 9.3 net) wells were turned to sales by other operators on our Utica Shale acreage during 2017 for a total cost to us of approximately $114.8 million. We currently expect to drill 36 to 40 gross ( 26 to 29 net) horizontal wells and commence sales from 33 to 37 gross ( 33 to 37 net) horizontal wells on our Utica Shale acreage. As of February 9, 2018 , we had three operated horizontal rigs drilling in the play and expect to release a rig in March of 2018 as our contract expires. We plan to run on average 2.5 operated horizontal rigs in the Utica Shale during 2018. We also anticipate an additional seven to eight net horizontal wells will be drilled, and sales commenced from nine to ten net horizontal wells, on our Utica Shale acreage by other operators. We currently anticipate our 2018 capital expenditures to be $425.0 million to $455.0 million related to our operated and non-operated Utica Shale activities. +During 2017 , we spud 19 gross ( 15.7 net) and commenced sales from 13 gross ( 11.0 net) wells in the SCOOP for a total cost of approximately $250.0 million. In addition, 31 gross ( 0.9 net) wells were drilled and 23 gross ( 0.8 net) wells were turned to sales by other operators on our SCOOP acreage during 2017 for a total cost to us of approximately $7.0 million. During 2018 , we currently expect to drill 15 to 16 gross ( 10 to 11 net) horizontal wells and commence sales from 20 to 22 gross ( 16 to 18 net) wells on our SCOOP acreage. We also anticipate four to five net wells will be drilled, and sales commenced from two to three net wells on our SCOOP acreage by other operators. As of February 9, 2018 , we had four operated horizontal +70 +Table of Contents +Index to Financial Statements +drilling rigs in the play and expect to release two rigs mid-summer 2018 as our contracts expire. We plan to run on average approximately three operated horizontal rigs in the SCOOP in 2018. We currently expect to spend $185.0 million to $210.0 million related to these activities for our operated and non-operated SCOOP acreage during 2018. +During 2017 , we recompleted 60 existing wells and spud ten new wells at our WCBB field and recompleted 20 existing wells and spud five new wells in our Hackberry fields for a total aggregate cost of approximately $35.1 million. During 2018, we plan to run one completion rig in our Southern Louisiana fields. We currently expect to spend approximately $20.0 million in 2018 to perform recompletion activities in Southern Louisiana. +During 2017 , no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2018 . +During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2017 , our net investment in Grizzly was approximately $57.6 million. Our capital requirements in 2017 for Grizzly were approximately $2.3 million . Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, of which Grizzly paid the outstanding balance in full in July 2016. Gulfport paid its share of this amount on June 30, 2016. We do not currently anticipate any material capital expenditures in 2018 related to Grizzly's activities. +We had no material capital expenditures during the during the year ended December 31, 2017 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2017. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. See Item 1. "Business–Our Equity Investments" and Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the years ended December 31, 2017 and 2016 , we did not make any additional investments in these entities, and we do not currently anticipate any capital expenditures related to these entities in 2018 . In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy completed its IPO of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth. Following the IPO, we owned an approximate 24.2% interest in Mammoth Energy. On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon, Stingray Energy and Stingray Cementing, bringing our equity interest in Mammoth Energy to approximately 25.1%. +In February 2016, we, through our wholly-owned subsidiary Midstream Holdings, entered into an agreement with Rice to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through an entity called Strike Force. We own a 25% interest in Strike Force, and EQT, following its acquisition of Rice, acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is ongoing, provides gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016. In connection with the formation of Strike Force, we contributed certain assets, including an approximately 11 mile-long, 12-inch diameter gathering line in 2016. During the year ended December 31, 2017 , we paid $46.1 million in net cash calls related to Strike Force. +We currently expect to spend an aggregate of $140.0 million to $150.0 million in 2018 for non-drilling and completion activities, which includes acreage expenses, primarily lease extensions in the Utica Shale, and net cash contributions to Strike Force in 2018 . +During 2015 and 2016, we continued to focus on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, particularly in light of the continued downturn in commodity prices. We have successfully leveraged the lower commodity price environment to gain access to higher-quality equipment and superior services for reduced costs, which has contributed to increased productivity. In 2017, an increase in commodity prices allowed us to increase our capital budget as compared to 2016 and the resulting 2017 development activities enabled us to reach a size and scale, both financially and operationally, where we can navigate the current commodity price environment and adjust our business model accordingly. In response to current declining forward natural gas prices, we are focused on delivering growth within cash flow by exercising strict capital discipline and, as such, currently expect to reduce our planned capital expenditures by approximately 23% as compared to 2017. +71 +Table of Contents +Index to Financial Statements +Our total capital expenditures for 2018 are currently estimated to be in the range of $630.0 million to $685.0 million for drilling and completion expenditures. In addition, we currently expect to spend $140.0 million to $150.0 million in 2018 for non-drilling and completion expenditures, which includes acreage expenses, primarily lease extensions in the Utica Shale, and funding of our investment in Strike Force. Approximately 70% of our 2018 estimated drilling and completion capital expenditures are currently expected to be spent in the Utica Shale. The 2018 range of capital expenditures is lower than the $1.2 billion spent in 2017 , primarily due to the decrease in current commodity prices, specifically natural gas prices, and our desire to fund our capital development program within cash flow. +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018. We intend to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund our 2018 capital development program. +We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months, including the operations related to our pending acquisition. We believe that our strong liquidity position, hedge portfolio and conservative balance sheet position us well to react quickly to changing commodity prices and accelerate or decelerate our activity within the Utica Basin and the SCOOP as the market conditions warrant. Notwithstanding the foregoing, in the event commodity prices decline from current levels, our capital or other costs increase, our equity investments require additional contributions and/or we pursue additional equity method investments or acquisitions, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the current low commodity price environment worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected. +Commodity Price Risk +The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2016 , WTI prices ranged from $26.19 to $54.01 per barrel and the Henry Hub spot market price of natural gas ranged from $1.49 to $3.80 per MMBtu. During 2017 , WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2017 . +Commitments +In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2017 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2017 , we have plugged 551 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation. +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018. Purchases under the repurchase program may be made from time to time in open +72 +Table of Contents +Index to Financial Statements +market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require us to acquire any specific number of shares. We intend to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund our 2018 capital development program. This repurchase program is authorized to extend through December 31, 2018 and may be suspended from time to time, modified, extended or discontinued by our board of directors at any time. We did not make any purchases of our common stock during the three months ended December 31, 2016 under any stock repurchase program or otherwise, and have not made any such purchases of our common stock as of February 22, 2018. +Contractual and Commercial Obligations +The following table sets forth our contractual and commercial obligations at December 31, 2017 : +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +6.625% senior unsecured notes due 2023 (1) +$ +477,531 +$ +23,188 +$ +46,375 +$ +46,375 +$ +361,593 +6.000% senior unsecured notes due 2024 (2) +923,000 +39,000 +78,000 +78,000 +728,000 +6.375% senior unsecured notes due 2025 (3) +886,998 +38,250 +76,500 +76,500 +695,748 +6.375% senior unsecured notes due 2026 (4) +686,991 +21,834 +57,375 +57,375 +550,407 +Asset retirement obligations +75,100 +120 +9,510 +3,624 +61,846 +Building loan (5) +23,724 +622 +1,233 +1,353 +20,516 +Firm transportation contracts +3,752,365 +248,047 +499,225 +493,240 +2,511,853 +Purchase obligations (6) +39,330 +39,330 +— +— +— +Operating leases +190 +136 +54 +— +— +Total +$ +6,865,229 +$ +410,527 +$ +768,272 +$ +756,467 +$ +4,929,963 +_____________________ +(1) +Includes estimated interest of $23.2 million due in less than one year; $46.4 million due in 1-3 years; $46.4 million due in 3-5 years and $11.6 million due thereafter. +(2) Includes estimated interest of $39.0 million due in less than one year; $78.0 million due in 1-3 years; $78.0 million due in 3-5 years and $78.1 million due thereafter. +(3) Includes estimated interest of $38.3 million due in less than one year; $76.5 million due in 1-3 years; $76.5 million due in 3-5 years and $95.7 million due thereafter. +(4) Includes estimated interest of $21.8 million due in less than one year; $57.4 million due in 1-3 years; $57.4 million due in 3-5 years and $100.4 million due thereafter. +(5) +Does not include estimated interest of $1.1 million due in less than one year; $2.1 million due in 1-3 years: $1.9 million due in 3-5 years and $2.2 million due thereafter. +(6) +The purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. +Off-balance Sheet Arrangements +We had no off-balance sheet arrangements as of December 31, 2017 . +New Accounting Pronouncements +In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Subsequent to ASU 2014-09, the FASB issued several related ASU's to clarify the application of the revenue recognition standard. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is +73 +Table of Contents +Index to Financial Statements +effective for annual periods beginning after December 15, 2016, and interim periods within those years. The new standard permits retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented (full retrospective method) or (ii) recognition of a cumulative-effect adjustment as of the date of initial application (modified retrospective method). In July 2015, the FASB decided to defer the effective date by one year (until 2018). We have evaluated the impact of this ASU on our consolidated financial statements. This evaluation required, among other things, a review of existing contracts we have with our customers within each of the revenue streams identified within our business, including natural gas sales, oil and condensate sales and natural gas liquid sales. Substantially all of our revenue is earned pursuant to agreements under which we have currently interpreted one performance obligation, which is satisfied at a point-in-time. We did not identify any changes to our revenue recognition policies that would result in a material effect on the timing of our revenue recognition or its financial position, results of operations, net income or cash flows. Additionally, we do not believe further disaggregation of revenue will be required under the new standard. The adoption of this ASU will have an impact on our revenue related disclosures and internal controls over financial reporting as our revenue recognition related disclosures will expand upon adoption of the new standard. We are currently in the process of finalizing our documentation of new policies, procedures, systems, controls and data requirements as the standard is implemented. We will be in a position to begin reporting under the new standard beginning in the first quarter of 2018, using the modified retrospective method. +In February 2016, the FASB issued ASU No. 2016-02, Leases . The guidance requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liability for those leases currently classified as operating leases. The accounting for lessors is largely unchanged. The guidance is effective for periods after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements and related disclosures and as contracts are reviewed under the new standard, this analysis could result in an impact to our financial statements; however, that impact is currently not known. +In March 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The guidance was issued to clarify that change in the counterparty to a derivative instrument that had been designated as the hedging instrument under Topic 815, does not require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. We adopted the standard as of January 1, 2017. There was no impact on our consolidated financial statements because all current derivative instruments are not designated for hedge accounting. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting . This guidance was intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted the standard as of January 1, 2017. We elected to recognize forfeitures of awards as they occur. The adoption of this standard did not have a material impact on our consolidated financial statements. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. We are currently evaluating the impact this standard will have on our financial statements and related disclosures and do not anticipate it to have a material affect. +In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance provides guidance of eight specific cash flow issues. This amendment is effective for periods after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. +In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business . Under the current business combination guidance, there are three elements of a business: inputs, processes and outputs. The revised guidance adds an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set of assets is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. This amendment is effective for periods after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this ASU on our consolidated financial statements. +74 +Table of Contents +Index to Financial Statements +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2016 , WTI prices ranged from $26.19 to $54.01 per barrel and the Henry Hub spot market price of natural gas ranged from $1.49 to $3.80 per MMBtu. During 2017 , WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. If the prices of oil and natural gas continue at current levels or decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swap positions as of December 31, 2017 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2018 +NYMEX Henry Hub +908,000 +$ +3.06 +2019 +NYMEX Henry Hub +269,000 +$ +2.93 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2018 +ARGUS LLS +1,500 +$ +56.22 +2018 +NYMEX WTI +4,000 +$ +52.20 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2018 +Mont Belvieu C3 +3,500 +$ +28.03 +2018 +Mont Belvieu C5 +500 +$ +46.62 +We sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +75 +Table of Contents +Index to Financial Statements +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2018 - March 2018 +NYMEX Henry Hub +20,000 +$ +2.91 +April 2018 - March 2019 +NYMEX Henry Hub +50,000 +$ +3.13 +April 2019 - December 2019 +NYMEX Henry Hub +30,000 +$ +3.10 +For a portion of the natural gas fixed price swaps listed above, the counterparty has an option to extend the original terms an additional twelve months for the period January 2019 through December 2019. The option to extend the terms expires in December 2018. If executed, we would have additional fixed price swaps for 100,000 MMBtu per day at a weighted average price of $3.05. +In addition, we have entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2017 , we had the following natural gas basis swap positions for Tetco M2. +Location +Daily Volume (MMBtu/day) +Hedged Differential +2018 +NPGL Mid-Continent +12,000 +$ +(0.26 +) +In January and February 2018 , we entered into fixed price swaps for 2018 for approximately 1,000 barrels of oil per day at a weighted average price of $ 62.18 per barrel and for approximately 500 barrels of C3 propane per day at a weighted average price of $35.54 per barrel. For 2019 , we entered into fixed price swaps for approximately 242,000 MMBtu of natural gas per day at a weighted average price of $2.79 per MMBtu and for approximately 2,000 barrels of oil per day at a weighted average price of $57.75 per barrel. Our fixed price swap contracts are tied to the commodity prices on NYMEX for natural gas, NYMEX WTI for oil and Mont Belvieu for propane. We will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas, NYMEX WTI for oil or Mont Belvieu for propane. +Under our 2018 contracts, we have hedged approximately 78% to 81% of our expected 2018 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. At December 31, 2017 , we had a net asset derivative position of $52.0 million as compared to a net liability derivative position of $136.8 million as of December 31, 2016 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $144.8 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $141.4 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2017 , we had no variable interest rate borrowings outstanding; therefore, an increase in interest rates would not have impacted our interest expense. At October 11, 2017, the last day on which borrowings were outstanding under our revolving credit facility, such borrowings bore interest at the Eurodollar rate of 3.74%. A 1% increase in interest rates would have increased interest expense by approximately $1.2 million per year, based on $365.0 million in borrowings outstanding under our revolving credit facility as of that date. As of December 31, 2017 , we did not have any interest rate swaps to hedge our interest risks. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this item appears beginning on page F-1 following the signature pages of this Report. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +76 +Table of Contents +Index to Financial Statements +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2017 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2017 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2017 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2017 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2017 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +77 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 22, 2018 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 22, 2018 +78 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +None. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 11. +EXECUTIVE COMPENSATION +For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +79 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +The following documents are filed as part of this report or incorporated by reference herein: +(1) +Financial Statements +Reference is made to the Index to Financial Statements appearing on Page F-1. +(2) +Financial Statement Schedules +All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto. +(3) +Exhibits +Exhibit +Number +Description +2.1## +Purchase and Sale Agreement, dated as of December 13, 2016, by and among Gulfport Energy Corporation, SCOOP Acquisition Company, LLC and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +4.4 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.5 +Indenture, dated as of October 11, 2017, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2026) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 11, 2017). +80 +Table of Contents +Index to Financial Statements +4.6 +Registration Rights Agreement, dated as of October 11, 2017, among Gulfport Energy Corporation, the subsidiary guarantors party and J.P. Morgan Securities LLC, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 11, 2017). +4.7 +Registration Rights Agreement, dated as of February 17, 2017, by and between Gulfport Energy Corporation and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 24, 2017). +4.8 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015) +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Consulting Agreement, effective as of June 14, 2013, by and between the Company and Mike Liddell (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 19, 2013). +10.6+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.7+ +Amended and Restated Employment Agreement, dated as of April 29, 2015, by and between the Company and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 7, 2015). +10.8 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.9 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.10 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.11 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.12 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +10.13 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +81 +Table of Contents +Index to Financial Statements +10.14 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 5, 2016). +10.15 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +10.16 +Eighth Amendment to Amended and Restated Credit Agreement, entered into as of March 29, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 4, 2017). +10.17 +Ninth Amendment to Amended and Restated Credit Agreement, entered into as of May 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, the existing lenders named therein and JPMorgan Chase Bank, N.A., Commonwealth Bank of Australia, ABN, AMRO Capital USA LLC, Fifth Third Bank and Canadian Imperial Bank of Commerce, New York branch, as new lenders (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +10.18 +Tenth Amendment to Amended and Restated Credit Agreement, dated as of October 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 5, 2017). +10.19 +Eleventh Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on November 28, 2017). +10.20# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.21# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.22# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.23# +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.24+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.25+ +Separation and Release Agreement by and between Gulfport Energy Corporation and Ross Kirtley entered into November 2, 2016 (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 3, 2016). +10.26+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Keri Crowell (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +10.27+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Stuart Maier (incorporated by reference to Exhibit 10.4 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +10.28+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Steve Baldwin (incorporated by reference to Exhibit 10.5 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +82 +Table of Contents +Index to Financial Statements +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Netherland, Sewell & Associates, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc . +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +The schedules (or similar attachments) referenced in this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule (or similar attachment) will be furnished supplementally to the Securities and Exchange Commission. +83 +Table of Contents +Index to Financial Statements +ITEM 16. +FORM 10-K SUMMARY +None. +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 22, 2018 +GULFPORT ENERGY CORPORATION +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: +February 22, 2018 +By: +/s/ MICHAEL G. MOORE +Michael G. Moore +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: +February 22, 2018 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 22, 2018 +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +(Principal Accounting and Financial Officer) +Date: +February 22, 2018 +By: +/s/ CRAIG GROESCHEL +Craig Groeschel +Director +Date: +February 22, 2018 +By: +/s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: +February 22, 2018 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +Date: +February 22, 2018 +By: +/s/ SCOTT E. STRELLER +Scott E. Streller +Director +Date: +February 22, 2018 +By: +/s/ PAUL WESTERMAN +Paul Westerman +Director +84 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets, December 31, 2017 and December 31, 2016 +F-3 +Consolidated Statements of Operations, Years Ended December 31, 2017, 2016, and 2015 +F-4 +Consolidated Statements of Comprehensive Income (Loss), Years Ended December 31, 2017, 2016, and 2015 +F-5 +Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2017, 2016, and 2015 +F-6 +Consolidated Statements of Cash Flows, Year Ended December 31, 2017, 2016, and 2015 +F-7 +Notes to Consolidated Financial Statements +F-8 +F-1 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 22, 2018 expressed an unqualified opinion. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +February 22, 2018 +F-2 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, +2017 +December 31, +2016 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +99,557 +$ +1,275,875 +Restricted cash +— +185,000 +Accounts receivable—oil and natural gas +182,213 +136,761 +Accounts receivable—related parties +— +16 +Prepaid expenses and other current assets +4,912 +3,135 +Short-term derivative instruments +78,847 +3,488 +Total current assets +365,529 +1,604,275 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $2,912,974 and $1,580,305 excluded from amortization in 2017 and 2016, respectively +9,169,156 +6,071,920 +Other property and equipment +86,754 +68,986 +Accumulated depletion, depreciation, amortization and impairment +(4,153,733 +) +(3,789,780 +) +Property and equipment, net +5,102,177 +2,351,126 +Other assets: +Equity investments +302,112 +243,920 +Long-term derivative instruments +8,685 +5,696 +Deferred tax asset +1,208 +4,692 +Inventories +8,227 +4,504 +Other assets +19,814 +8,932 +Total other assets +340,046 +267,744 +Total assets +$ +5,807,752 +$ +4,223,145 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable and accrued liabilities +$ +553,609 +$ +265,124 +Asset retirement obligation—current +120 +195 +Short-term derivative instruments +32,534 +119,219 +Current maturities of long-term debt +622 +276 +Total current liabilities +586,885 +384,814 +Long-term derivative instruments +2,989 +26,759 +Asset retirement obligation—long-term +74,980 +34,081 +Other non-current liabilities +2,963 +— +Long-term debt, net of current maturities +2,038,321 +1,593,599 +Total liabilities +2,706,138 +2,039,253 +Commitments and contingencies (Notes 15 and 16) +Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding +— +— +Stockholders’ equity: +Common stock, $.01 par value; 200,000,000 authorized, 183,105,910 issued and outstanding in 2017 and 158,829,816 in 2016 +1,831 +1,588 +Paid-in capital +4,416,250 +3,946,442 +Accumulated other comprehensive loss +(40,539 +) +(53,058 +) +Retained deficit +(1,275,928 +) +(1,711,080 +) +Total stockholders’ equity +3,101,614 +2,183,892 +Total liabilities and stockholders’ equity +$ +5,807,752 +$ +4,223,145 +See accompanying notes to consolidated financial statements. +F-3 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2017 +2016 +2015 +(In thousands, except share data) +Revenues: +Natural gas sales +$ +845,999 +$ +420,128 +$ +324,733 +Oil and condensate sales +124,568 +81,173 +122,615 +Natural gas liquid sales +136,057 +59,115 +58,129 +Net gain (loss) on natural gas, oil, and NGL derivatives +213,679 +(174,506 +) +203,513 +1,320,303 +385,910 +708,990 +Costs and expenses: +Lease operating expenses +80,246 +68,877 +69,475 +Production taxes +21,126 +13,276 +14,740 +Midstream gathering and processing +248,995 +165,972 +138,590 +Depreciation, depletion and amortization +364,629 +245,974 +337,694 +Impairment of oil and natural gas properties +— +715,495 +1,440,418 +General and administrative +52,938 +43,409 +41,967 +Accretion expense +1,611 +1,057 +820 +Acquisition expense +2,392 +— +— +771,937 +1,254,060 +2,043,704 +INCOME (LOSS) FROM OPERATIONS +548,366 +(868,150 +) +(1,334,714 +) +OTHER (INCOME) EXPENSE: +Interest expense +108,198 +63,530 +51,221 +Interest income +(1,009 +) +(1,230 +) +(643 +) +Insurance proceeds +— +(5,718 +) +(10,015 +) +Loss on debt extinguishment +— +23,776 +— +Loss from equity method investments, net +5,257 +33,985 +106,093 +Other (income) expense +(1,041 +) +129 +(485 +) +111,405 +114,472 +146,171 +INCOME (LOSS) BEFORE INCOME TAXES +436,961 +(982,622 +) +(1,480,885 +) +INCOME TAX EXPENSE (BENEFIT) +1,809 +(2,913 +) +(256,001 +) +NET INCOME (LOSS) +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ +2.42 +$ +(7.97 +) +$ +(12.27 +) +Diluted +$ +2.41 +$ +(7.97 +) +$ +(12.27 +) +Weighted average common shares outstanding—Basic +179,834,146 +122,952,866 +99,792,401 +Weighted average common shares outstanding—Diluted +180,253,024 +122,952,866 +99,792,401 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +For the Year Ended December 31, +2017 +2016 +2015 +(In thousands) +Net income (loss) +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +Foreign currency translation adjustment (1) +12,519 +2,119 +(28,502 +) +Other comprehensive income (loss) +12,519 +2,119 +(28,502 +) +Comprehensive income (loss) +$ +447,671 +$ +(977,590 +) +$ +(1,253,386 +) +(1) Net of $1.3 million in taxes for the year ended December 31, 2016 . No taxes were recorded for the years ended December 31, 2017 and December 31, 2015 . +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Retained +Earnings (Deficit) +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2015 +85,655,438 +$ +856 +$ +1,828,602 +$ +(26,675 +) +$ +493,513 +$ +2,296,296 +Net loss +— +— +— +— +(1,224,884 +) +(1,224,884 +) +Other Comprehensive Loss +— +— +— +(28,502 +) +— +(28,502 +) +Stock Compensation +— +— +14,359 +— +— +14,359 +Issuance of Common Stock in public offerings, net of related expenses +22,425,000 +224 +981,299 +— +— +981,523 +Issuance of Restricted Stock +236,812 +2 +(2 +) +— +— +— +Issuance of Common Stock through exercise of options +5,000 +— +45 +— +— +45 +Balance at December 31, 2015 +108,322,250 +1,082 +2,824,303 +(55,177 +) +(731,371 +) +2,038,837 +Net loss +— +— +— +— +(979,709 +) +(979,709 +) +Other Comprehensive Income +— +— +— +2,119 +— +2,119 +Stock Compensation +— +— +12,251 +— +— +12,251 +Issuance of Common Stock in public offerings, net of related expenses +50,255,000 +503 +1,109,891 +— +— +1,110,394 +Issuance of Restricted Stock +252,566 +3 +(3 +) +— +— +— +Balance at December 31, 2016 +158,829,816 +1,588 +3,946,442 +(53,058 +) +(1,711,080 +) +2,183,892 +Net income +— +— +— +— +435,152 +435,152 +Other Comprehensive Income +— +— +— +12,519 +— +12,519 +Stock Compensation +— +— +10,615 +— +— +10,615 +Issuance of Common Stock for the Vitruvian Acquisition, net of related expenses +23,852,117 +239 +459,197 +— +— +459,436 +Issuance of Restricted Stock +423,977 +4 +(4 +) +— +— +— +Balance at December 31, 2017 +183,105,910 +$ +1,831 +$ +4,416,250 +$ +(40,539 +) +$ +(1,275,928 +) +$ +3,101,614 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2017 +2016 +2015 +(In thousands) +Cash flows from operating activities: +Net income (loss) +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Accretion of discount—Asset Retirement Obligation +1,611 +1,057 +820 +Depletion, depreciation and amortization +364,629 +245,974 +337,694 +Impairment of oil and gas properties +— +715,495 +1,440,418 +Stock-based compensation expense +6,369 +7,351 +8,616 +Loss from equity investments +5,990 +34,397 +113,120 +Gain on debt extinguishment +— +(1,108 +) +— +Change in fair value of derivative instruments +(188,802 +) +323,303 +(83,671 +) +Deferred income tax expense (benefit) +1,690 +18,188 +(254,493 +) +Amortization of loan commitment fees +5,011 +3,660 +3,219 +Amortization of note discount and premium +— +(1,716 +) +(2,165 +) +Changes in operating assets and liabilities: +(Increase) decrease in accounts receivable +(45,452 +) +(64,889 +) +31,986 +Decrease in accounts receivable—related party +16 +— +30 +Increase in prepaid expenses +(1,777 +) +(3,734 +) +(191 +) +Increase in other assets +(7,866 +) +— +— +Increase (decrease) in accounts payable and accrued liabilities and other +106,375 +43,763 +(47,199 +) +Settlement of asset retirement obligation +(3,057 +) +(4,189 +) +(1,121 +) +Net cash provided by operating activities +679,889 +337,843 +322,179 +Cash flows from investing activities: +Deductions to cash held in escrow +8 +8 +8 +Additions to other property and equipment +(19,372 +) +(33,152 +) +(13,572 +) +Acquisitions of oil and natural gas properties +(1,348,657 +) +— +— +Additions to oil and natural gas properties +(1,064,678 +) +(724,925 +) +(1,579,129 +) +Proceeds from sale of oil and gas properties +4,866 +45,812 +27,998 +Proceeds from sale of other property and equipment +1,569 +— +— +Contributions to equity method investments +(55,280 +) +(26,472 +) +(14,472 +) +Distributions from equity method investments +7,376 +18,147 +4,914 +Funding of restricted cash +185,000 +(185,000 +) +— +Net cash used in investing activities +(2,289,168 +) +(905,582 +) +(1,574,253 +) +Cash flows from financing activities: +Principal payments on borrowings +(365,276 +) +(87,685 +) +(350,172 +) +Borrowings on line of credit +365,000 +86,000 +250,000 +Proceeds from bond issuance +450,000 +1,250,000 +350,000 +Repayment of bonds +— +(624,561 +) +— +Borrowings on term loan +2,951 +21,049 +— +Debt issuance costs and loan commitment fees +(14,350 +) +(24,718 +) +(8,688 +) +Proceeds from issuance of common stock, net of offering costs and exercise of stock options +(5,364 +) +1,110,555 +981,568 +Net cash provided by financing activities +432,961 +1,730,640 +1,222,708 +Net (decrease) increase in cash and cash equivalents +(1,176,318 +) +1,162,901 +(29,366 +) +Cash and cash equivalents at beginning of period +1,275,875 +112,974 +142,340 +Cash and cash equivalents at end of period +$ +99,557 +$ +1,275,875 +$ +112,974 +Supplemental disclosure of cash flow information: +Interest payments +$ +101,958 +$ +68,966 +$ +59,736 +Income tax (receipts) payments +$ +(1,105 +) +$ +(19,770 +) +$ +16,156 +Supplemental disclosure of non-cash transactions: +Capitalized stock based compensation +$ +4,246 +$ +4,900 +$ +5,743 +Asset retirement obligation capitalized +$ +42,270 +$ +10,971 +$ +8,800 +Interest capitalized +$ +9,470 +$ +9,148 +$ +13,580 +Foreign currency translation gain (loss) on equity method investments +$ +12,519 +$ +3,468 +$ +(28,502 +) +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2017 , 2016 AND 2015 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the “Company”) is an independent oil and gas exploration, development and production company with its principal properties located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. The Company also holds an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay and Hackberry fields and has an interest in producing properties in Northwestern Colorado in the Niobrara Formation and in Western North Dakota in the Bakken Formation, and has investments in companies operating in the United States, Canada and Thailand. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, and Gulfport MidCon, LLC. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company’s accounts receivable—oil and gas primarily are from companies in the oil and gas industry. The majority of its receivables are from three purchasers of the Company’s oil and natural gas and receivables from joint interest owners on properties the Company operates. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2017 and December 31, 2016 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for 2017 , 2016 and 2015 , adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense +F-8 +Table of Contents +Index to Financial Statements +would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company did not recognize a ceiling test impairment for the year ended December 31, 2017 . +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $2.9 billion and $1.6 billion at December 31, 2017 and December 31, 2016 , respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”), which requires the Company to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, the Company has an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes. +(In thousands) +December 31, 2014 +$ +(26,675 +) +December 31, 2015 +$ +(55,175 +) +December 31, 2016 +$ +(51,709 +) +December 31, 2017 +$ +(39,190 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 11. +Income Taxes +F-9 +Table of Contents +Index to Financial Statements +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 2003 – 2016 U.S. federal and 1997 - 2016 state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2017 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. +On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Act"). Further information on the tax impacts of the Tax Act is included in Note 10 of the Company's consolidated financial statements. +Revenue Recognition +Natural gas revenues are recorded in the month produced and delivered to the purchaser using the entitlement method, whereby any production volumes received in excess of the Company’s ownership percentage in the property are recorded as a liability. If less than Gulfport’s entitlement is received, the underproduction is recorded as a receivable. At December 31, 2017 and 2016 , the Company had a gas imbalance receivable of approximately $0.2 million . Oil revenues are recognized when ownership transfers, which occurs in the month produced. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the statement of operations. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. The Company recognized impairment charges of $23.1 million and $101.6 million related to its investment in Grizzly Oil Sands ULC for the years ended December 31, 2016 and December 31, 2015 , respectively. There was no impairment charge recorded for the year ended December 31, 2017. +Accounting for Stock-Based Compensation +The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC 718, “ Compensation—Stock Compensation ” (“FASB ASC 718”). FASB ASC 718 requires share-based payments to employees, including grants of restricted stock, to be recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to four years with annual vesting installments. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and natural gas liquid production. The Company follows the provisions of FASB ASC 815, “ Derivatives and Hedging ” (“FASB ASC 815”) as amended. It requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. While the Company has historically designated derivative instruments as accounting hedges, effective January 1, 2015, the Company discontinued hedge accounting prospectively. The Company's current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated +F-10 +Table of Contents +Index to Financial Statements +statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net income (loss) or total operating cash flows. +Recent Accounting Pronouncements +In May 2014 , the FASB issued Accounting Standards Update ("ASU") No. 2014-09 , Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605 , Revenue Recognition , and most industry-specific guidance. Subsequent to ASU 2014-09, the FASB issued several related ASU's to clarify the application of the revenue recognition standard. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The ASU is effective for annual periods beginning after December 15, 2016 , and interim periods within those years. The new standard permits retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented (full retrospective method) or (ii) recognition of a cumulative-effect adjustment as of the date of initial application (modified retrospective method). In July 2015, the FASB decided to defer the effective date by one year (until 2018). The Company has evaluated the impact of this ASU on its consolidated financial statements. This evaluation required, among other things, a review of existing contracts the Company has with its customers within each of the revenue streams identified within its business, including natural gas sales, oil and condensate sales and natural gas liquid sales. Substantially all of the Company's revenue is earned pursuant to agreements under which it has currently interpreted one performance obligation, which is satisfied at a point-in-time. The Company did not identify any changes to its revenue recognition policies that would result in a material effect on the timing of the Company's revenue recognition or its financial position, results of operations, net income or cash flows. Additionally, the Company does not believe further disaggregation of revenue will be required under the new standard. The adoption of this ASU will have an impact on the Company's revenue related disclosures and internal controls over financial reporting as the Company's revenue recognition related disclosures will expand upon adoption of the new standard. The Company is currently in the process of finalizing documentation of new policies, procedures, systems, controls and data requirements as the standard is implemented. The Company will be in a position to begin reporting under the new standard beginning in the first quarter of 2018, using the modified retrospective method. +In February 2016 , the FASB issued ASU No. 2016-02 , Leases . The guidance requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liability for those leases currently classified as operating leases. The accounting for lessors is largely unchanged. The guidance is effective for periods after December 15, 2018 , with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures and as contracts are reviewed under the new standard, this analysis could result in an impact to the Company's financial statements; however, that impact is currently not known. +In March 2016 , the FASB issued ASU No. 2016-05 , Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships . The guidance was issued to clarify that change in the counterparty to a derivative instrument that had been designated as the hedging instrument under Topic 815 , does not require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted the standard as of January 1, 2017 . There was no +F-11 +Table of Contents +Index to Financial Statements +impact on the Company's consolidated financial statements because all current derivative instruments are not designated for hedge accounting. +In March 2016 , the FASB issued ASU No. 2016-09 , Improvements to Employee Share-Based Payment Accounting . This guidance was intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted the standard as of January 1, 2017 . The Company has elected to recognize forfeitures of awards as they occur. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. +In June 2016 , the FASB issued ASU No. 2016-13 , Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures and does not anticipate it to have a material affect. +In August 2016 , the FASB issued ASU No. 2016-15 , Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments . This guidance provides guidance of eight specific cash flow issues. This amendment is effective for periods after December 15, 2017 , with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements. +In January 2017 , the FASB issued ASU No. 2017-01 , Clarifying the Definition of a Business . Under the current business combination guidance, there are three elements of a business: inputs, processes and outputs. The revised guidance adds an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set of assets is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. This amendment is effective for periods after December 15, 2017 , with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its consolidated financial statements. +2. +ACQUISITIONS +In December 2016, the Company, through its wholly-owned subsidiary Gulfport MidCon LLC (“Gulfport MidCon”) (formerly known as SCOOP Acquisition Company, LLC), entered into an agreement to acquire certain assets of Vitruvian II Woodford, LLC (“Vitruvian”), an unrelated third-party seller (the “Vitruvian Acquisition”). The assets included in the Vitruvian Acquisition include 46,400 net surface acres located in Grady, Stephens and Garvin Counties, Oklahoma. On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion , consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). The cash portion of the purchase price was funded with the net proceeds from the December 2016 common stock and senior note offerings and cash on hand. Acquisition costs of $2.4 million were incurred during the year ended December 31, 2017 related to the Vitruvian Acquisition. +Allocation of Purchase Price +The Vitruvian Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the February 17, 2017 acquisition date. The fair value of the assets acquired and liabilities assumed was estimated using assumptions that represent Level 3 inputs. See Note 13 for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the Vitruvian Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +The following table summarizes the consideration paid by the Company in the Vitruvian Acquisition to acquire the properties and the fair value amount of the assets acquired as of February 17, 2017. +F-12 +Table of Contents +Index to Financial Statements +(In thousands) +Consideration: +Cash, net of purchase price adjustments +$ +1,354,093 +Fair value of Gulfport’s common stock issued +464,639 +Total Consideration +$ +1,818,732 +Estimated Fair value of identifiable assets acquired and liabilities assumed: +Oil and natural gas properties +Proved properties +$ +362,264 +Unproved properties +1,462,957 +Asset retirement obligations +(6,489 +) +Total fair value of net identifiable assets acquired +$ +1,818,732 +The equity consideration included in the initial purchase price was based on an equity offering price of $20.96 on December 15, 2016. The decrease in the price of Gulfport’s common stock from $20.96 on December 15, 2016 to $19.48 on February 17, 2017 resulted in a decrease to the fair value of the total consideration paid as compared to the initial purchase price of approximately $35.3 million , which resulted in a closing date fair value lower than the initial purchase price. +Post-Acquisition Operating Results +For the period from the acquisition date of February 17, 2017 to December 31, 2017 , the assets acquired in the Vitruvian Acquisition have contributed the following amounts of revenue to the Company’s consolidated statements of operations. The amount of net income contributed by the assets acquired is not presented below as it is impracticable to calculate due to the Company integrating the acquired assets into its overall operations using the full cost method of accounting. +Period from +February 17, 2017 +to +December 31, 2017 +(In thousands) +Revenue +$ +213,368 +Pro Forma Information (Unaudited) +The following unaudited pro forma combined financial information presents the Company’s results as though the Vitruvian Acquisition had been completed at January 1, 2016. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Vitruvian Acquisition taken place on January 1, 2016; furthermore, the financial information is not intended to be a projection of future results. +December 31, +2017 +2016 +(In thousands, except share data) +Pro forma revenue +$ +1,356,202 +$ +523,097 +Pro forma net income (loss) +$ +448,398 +$ +(1,190,481 +) +Pro forma earnings (loss) per share (basic) +$ +2.49 +$ +(8.11 +) +Pro forma earnings (loss) per share (diluted) +$ +2.49 +$ +(8.11 +) +F-13 +Table of Contents +Index to Financial Statements +3. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2017 and 2016 are as follows: +December 31, +2017 +2016 +(In thousands) +Oil and natural gas properties +$ +9,169,156 +$ +6,071,920 +Office furniture and fixtures +37,369 +21,204 +Building +44,565 +42,530 +Land +4,820 +5,252 +Total property and equipment +9,255,910 +6,140,906 +Accumulated depletion, depreciation, amortization and impairment +(4,153,733 +) +(3,789,780 +) +Property and equipment, net +$ +5,102,177 +$ +2,351,126 +No impairment of oil and natural gas properties was required under the ceiling test for the year ended December 31, 2017 . At December 31, 2016 and 2015 , the net book value of the Company's oil and natural gas properties was above the calculated ceiling as a result of the reduced commodity prices during the years ended December 31, 2016 and 2015 , respectively. As a result, the Company recorded an impairment of its oil and natural gas properties under the full cost method of accounting in the amount of $715.5 million and $1.4 billion for the years ended December 31, 2016 and 2015 , respectively. +Included in oil and natural gas properties at December 31, 2017 and 2016 is the cumulative capitalization of $165.6 million and $129.9 million , respectively, in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 35.7 million , $29.3 million and $27.9 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $0.90 , $0.92 and $1.68 per Mcfe for the years ended December 31, 2017 , 2016 and 2015 , respectively. +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2017 : +Costs Incurred in +2017 +2016 +2015 +Prior to 2015 +Total +(In thousands) +Acquisition costs +$ +1,511,685 +$ +129,741 +$ +429,897 +$ +824,363 +$ +2,895,686 +Exploration costs +— +— +— +— +— +Development costs +5,076 +4,607 +3,635 +2,214 +15,532 +Capitalized interest +3,871 +(536 +) +(1,141 +) +(438 +) +1,756 +Total oil and natural gas properties not subject to amortization +$ +1,520,632 +$ +133,812 +$ +432,391 +$ +826,139 +$ +2,912,974 +F-14 +Table of Contents +Index to Financial Statements +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2017 : +December 31, 2017 +(In thousands) +Utica +$ +1,513,452 +MidContinent +1,396,642 +Niobrara +2,184 +Southern Louisiana +552 +Bakken +99 +Other +45 +$ +2,912,974 +As of December 31, 2016 , approximately $1.6 billion of non-producing leasehold costs was not subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company's non-producing leases in the Utica Shale have five year extension terms which could extend this time frame beyond five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2017 and 2016 is as follows: +December 31, +2017 +2016 +(In thousands) +Asset retirement obligation, beginning of period +$ +34,276 +$ +26,437 +Liabilities incurred +16,300 +10,971 +Liabilities settled +(3,057 +) +(4,189 +) +Accretion expense +1,611 +1,057 +Revisions in estimated cash flows +25,970 +— +Asset retirement obligation as of end of period +75,100 +34,276 +Less current portion +120 +195 +Asset retirement obligation, long-term +$ +74,980 +$ +34,081 +F-15 +Table of Contents +Index to Financial Statements +4. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2017 and 2016 : +Carrying Value +Loss (income) from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2017 +2016 +2017 +2016 +2015 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +(549 +) +$ +(412 +) +$ +189 +Investment in Tatex Thailand III, LLC +17.9 +% +— +— +(183 +) +— +— +Investment in Grizzly Oil Sands ULC +24.9999 +% +57,641 +45,213 +2,189 +25,150 +115,544 +Investment in Timber Wolf Terminals LLC +50.0 +% +983 +991 +8 +8 +14 +Investment in Windsor Midstream LLC +22.5 +% +30 +25,749 +25,233 +(13,618 +) +(18,398 +) +Investment in Stingray Cementing LLC (1) +— +% +— +1,920 +205 +263 +147 +Investment in Blackhawk Midstream LLC +48.5 +% +— +— +— +— +(7,216 +) +Investment in Stingray Energy Services LLC (1) +— +% +— +4,215 +282 +1,044 +557 +Investment in Sturgeon Acquisitions LLC (1) +— +% +— +20,526 +(71 +) +993 +(1,229 +) +Investment in Mammoth Energy Services, Inc. (1) +25.1 +% +165,715 +111,717 +(23,811 +) +20,646 +16,485 +Investment in Strike Force Midstream LLC +25.0 +% +77,743 +33,589 +1,954 +(89 +) +— +$ +302,112 +$ +243,920 +$ +5,257 +$ +33,985 +$ +106,093 +(1) +On June 5, 2017, the Company contributed all of its membership interests in Stingray Cementing LLC, Stingray Energy Services LLC and Sturgeon Acquisitions LLC to Mammoth Energy Services, Inc. ("Mammoth Energy"). See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding these transactions. +The tables below summarize financial information for the Company's equity investments, as of December 31, 2017 and 2016 . +Summarized balance sheet information: +December 31, +2017 +2016 +(In thousands) +Current assets +$ +415,032 +$ +148,733 +Noncurrent assets +$ +1,542,090 +$ +1,305,407 +Current liabilities +$ +261,086 +$ +57,173 +Noncurrent liabilities +$ +148,839 +$ +67,680 +Summarized results of operations: +December 31, +2017 +2016 +2015 +(In thousands) +Gross revenue +$ +755,374 +$ +287,733 +$ +430,729 +Net (loss) income +$ +(37,102 +) +$ +(65,070 +) +$ +16,761 +F-16 +Table of Contents +Index to Financial Statements +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. The Company received $0.5 million and $0.4 million in distributions from Tatex II during the years ended December 31, 2017 and 2016 , respectively. +Tatex Thailand III, LLC +The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. As of December 31, 2014 , the Company reviewed its investment in Tatex III and, together with Tatex III, made the decision to allow the concession to expire in January 2015 . As such, the Company fully impaired the asset as of December 31, 2014 . In December 2017, Tatex III was dissolved and the Company received a final distribution of $0.2 million . +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of December 31, 2017 , Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase I steam-assisted gravity drainage ("SAGD") oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses start up plans for the facility. The Company reviewed its investment in Grizzly as of September 30, 2015 and December 31, 2015 , and again at March 31, 2016 , for impairment based on FASB ASC 323 due to certain qualitative factors and as such, engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was required under FASB ASC 323, resulting in an aggregate impairment loss of $101.6 million for the year ended December 31, 2015 and $23.1 million for the year ended December 31, 2016 , which is included in loss from equity method investments, net in the accompanying consolidated statements of operations. As of and during the period ended December 31, 2017 , commodity prices had increased as compared to the quarter ended March 31, 2016 , and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline in the future however, further impairment of the investment in Grizzly may be necessary. During the years ended December 31, 2017 and 2016 , Gulfport paid $ 2.3 million and $15.5 million , respectively, in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was increased by $12.3 million and $4.2 million as a result of a foreign currency translation gain and decreased by $28.5 million as a result of a foreign currency translation loss for the years ended December 31, 2017 , 2016 , and 2015 , respectively. +Effective October 5, 2012 , Grizzly entered into a $125.0 million revolving credit facility, of which Grizzly paid the outstanding balance in full in July 2016 . Gulfport paid its share of this amount on June 30, 2016 . +Timber Wolf Terminals LLC +During 2012 , the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio. During the years ended December 31, 2017 and 2016 , the Company paid no cash calls to Timber Wolf. +Windsor Midstream LLC +At December 31, 2017 , the Company held a 22.5% interest in Windsor Midstream LLC (“Midstream”), an entity controlled and managed by an unrelated third party. Midstream previously owned a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. In March 2015 , Coronado was sold to Enlink Midstream Partners, LP ("Enlink"). As a result of the sale of Coronado to EnLink, Midstream received common units of EnLink, which were +F-17 +Table of Contents +Index to Financial Statements +subsequently sold by Midstream. During the year ended December 31, 2017 , the Company was informed that Midstream had not recorded certain activity and fair value treatment of Midstream's investment in EnLink common units in a timely manner. The corresponding effect of this treatment was immaterial to the Company's previously issued financial statements and the recording of the correction in the current periods' financial statements was not material to the Company's estimated net income for the current full fiscal year. For the year ended December 31, 2017 , approximately $23.4 million of the loss from equity method investments, net was related to the out-of-period activity associated with the accounting for Midstream's investment in EnLink common units. The Company received $0.5 million and $15.8 million in distributions from Midstream during the years ended December 31, 2017 and 2016 , respectively. +Stingray Cementing LLC +During 2012 , the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017 , the Company contributed all of its membership interests in Stingray Cementing to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Blackhawk Midstream LLC +During 2012 , the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinated gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. During the year ended December 31, 2015, the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale, which is included in loss from equity investments, net in the accompanying consolidated statements of operations. Blackhawk does not have any current activities. +Stingray Energy Services LLC +During 2013 , the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017 , the Company contributed all of its membership interests in Stingray Energy to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Sturgeon Acquisitions LLC +During 2014 , the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. During the year ended December 31, 2016 , the Company received approximately $1.3 million in distributions from Sturgeon. On June 5, 2017 , the Company contributed all of its membership interests in Sturgeon to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Mammoth Energy Partners LP/Mammoth Energy Services, Inc. +In the fourth quarter of 2014 , the Company contributed its investments in four entities to Mammoth Energy Partners LP ("Mammoth") for a 30.5% interest in this entity. Mammoth originally intended to pursue its initial public offering in 2014 or 2015 ; however, due to low commodity prices, the offering was postponed. In October 2016 , Mammoth converted from a limited partnership into a limited liability company named Mammoth Energy Partners LLC ("Mammoth LLC") and the Company and the other members of Mammoth LLC contributed their interests in Mammoth LLC to Mammoth Energy. The Company received 9,150,000 shares of Mammoth Energy common stock in return for its contribution. Following the contribution, Mammoth Energy completed its initial public offering (the "IPO") of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by the Company for which it received net proceeds of $1.1 million . At December 31, 2016 , the Company owned an approximate 24.2% interest in Mammoth Energy. To reflect the dilution of the Company's shares of Mammoth Energy stock after the IPO, the Company recognized a gain of $3.4 million , which is included in loss from equity method investments, net in the accompanying consolidated statements of operations. +F-18 +Table of Contents +Index to Financial Statements +On June 5, 2017 , the Company contributed all of its membership interests in Sturgeon (which owns Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC), Stingray Energy and Stingray Cementing to Mammoth Energy in exchange for approximately 2.0 million shares of Mammoth Energy common stock. As of December 31, 2017 , the Company held approximately 25.1% of Mammoth Energy’s outstanding common stock. The Company accounted for the transactions as a sale of financial assets under FASB ASC 860. The Company valued the shares of Mammoth Energy common stock it received in the transactions at $18.50 per share, which was the closing price of Mammoth Energy common stock on June 5, 2017 . The Company recognized a gain of $12.5 million from the transactions, which is included in loss from equity method investments, net in the accompanying consolidated statements of operations. +The Company's investment in Mammoth Energy was increased by a $0.2 million foreign currency gain and decreased by a $0.8 million foreign currency loss resulting from Mammoth Energy's foreign subsidiary for the years ended December 31, 2017 and 2016 . The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +Strike Force Midstream LLC +In February 2016 , the Company, through its wholly owned subsidiary Gulfport Midstream Holdings, LLC ("Midstream Holdings"), entered into an agreement with Rice Midstream Holdings LLC ("Rice"), a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio through an entity called Strike Force Midstream LLC ("Strike Force"). In 2017, Rice was acquired by EQT Corporation ("EQT"). The Company owns a 25% interest in Strike Force and EQT acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is ongoing, provides gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. During the years ended December 31, 2017 and 2016 , Gulfport paid $53.0 million and $11.0 million , respectively, in cash calls to Strike Force. For the year ended December 31, 2017 , Gulfport received distributions of $6.9 million from Strike Force. +The Company accounted for its initial contribution to Strike Force at fair value under applicable codification guidance. The Company estimated the fair market value of its investment in Strike Force as of the contribution date using the discounted cash flow method under the income approach, based on an independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for the lack of marketability due to the Company's minority interest, resulting in a fair value of $22.5 million for the Company's 25% interest. The fair value of the assets contributed was estimated using assumptions that represent Level 3 inputs. See Note 13 - Fair Value Measurements for additional discussion of the measurement inputs. The Company has elected to report its proportionate share of Strike Force's earnings on a one-quarter lag as permitted under FASB ASC 323. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +5. +VARIABLE INTEREST ENTITIES +As of December 31, 2017 , the Company held variable interests in the following variable interest entities ("VIEs"), but was not the primary beneficiary: Midstream and Timber Wolf. These entities have governing provisions that are the functional equivalent of a limited partnership and are considered VIEs because the limited partners or non-managing members lack substantive kick-out or participating rights which causes the equity owners, as a group, to lack a controlling financial interest. The Company is a limited partner or non-managing member in each of these VIEs and is not the primary beneficiary because it does not have a controlling financial interest. The general partner or managing member has power to direct the activities that most significantly impact the VIEs’ economic performance. The Company also held a variable interest in Strike Force due to the fact that it does not have sufficient equity capital at risk. The Company is not the primary beneficiary of this entity. Prior to Mammoth Energy's IPO, Mammoth LLC was considered a VIE. As a result of the Company’s contribution of its interest in Mammoth LLC to Mammoth Energy in exchange for Mammoth Energy common stock and the completion of Mammoth Energy’s IPO, the Company determined that it no longer held an interest in a VIE. Prior to the contribution of Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy, these entities were considered VIEs. As a result of the Company’s contribution of its membership interests in Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy in exchange for Mammoth Energy common stock, the Company determined that it no longer held an interest in a VIE. +The Company accounts for its investment in these VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s +F-19 +Table of Contents +Index to Financial Statements +investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. See Note 4 for further discussion of these entities, including the carrying amounts of each investment. +6. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31 : +2017 +2016 +(In thousands) +Revolving credit agreement (1) +$ +— +$ +— +Building loans (2) +— +— +7.75% senior unsecured notes due 2020 (3) +— +— +6.625% senior unsecured notes due 2023 (4) +350,000 +350,000 +6.000% senior unsecured notes due 2024 (5) +650,000 +650,000 +6.375% senior unsecured notes due 2025 (6) +600,000 +600,000 +6.375% senior unsecured notes due 2026 (7) +450,000 +— +Net unamortized original issue premium (discount) (8) +— +— +Net unamortized debt issuance costs (9) +(34,781 +) +(27,174 +) +Construction loan (10) +23,724 +21,049 +Less: current maturities of long term debt +(622 +) +(276 +) +Debt reflected as long term +$ +2,038,321 +$ +1,593,599 +Maturities of long-term debt (excluding unamortized debt issuance costs) as of December 31, 2017 are as follows: +(In thousands) +2018 +$ +622 +2019 +604 +2020 +629 +2021 +661 +2022 +692 +Thereafter +2,070,516 +Total +$ +2,073,724 +(1) The Company has entered into a senior secured revolving credit facility as amended, with the Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 31, 2021 . On February 19, 2016 , the Company further amended its revolving credit facility to, among other things, (a) increase the basket for unsecured debt issuances to $1.4 billion from $1.2 billion (of which $950 million was then outstanding), (b) reaffirm the Company's borrowing base of $700.0 million , and (c) increase the percentage of projected oil and gas production that may be hedged by the Company during 2016. On December 13, 2016 , the Company further amended its revolving credit facility to, among other things, (a) reset the maturity date to December 31, 2021 , (b) adjust lenders, (c) increase the basket for unsecured debt issuances to $1.6 billion , (d) increase the interest rates by 50 basis points, (e) increase the mortgage requirement to 85% (from 80% ), and (f) add deposit account control agreement language. On March 29, 2017 , the Company further amended its revolving credit facility to, among other things, amend the definition of the term EBITDAX to permit pro forma treatment of acquisitions that involve the payment of consideration by Gulfport and its subsidiaries in excess of $50.0 million and of dispositions of property or series of related dispositions of properties that yields gross proceeds to Gulfport or any of its subsidiaries in excess of $50.0 million . On May 4, 2017 , the revolving credit facility was further amended to increase the borrowing base from $700.0 million to $1.0 billion , adjust certain of the Company’s investment baskets and add five additional banks to the syndicate. On November 21, 2017 , the Company further amended its revolving credit facility to, among other things, (a) decrease the applicable rate for all loans by 0.5% and (b) add a provision that allows Gulfport to elect a commitment amount (the “Elected Commitment Amount”) that is +F-20 +Table of Contents +Index to Financial Statements +less than the borrowing base. In connection with this amendment, the borrowing base was set at $1.2 billion , with an elected commitment of $1.0 billion . +As of December 31, 2017 , the Company did not have any outstanding borrowing under the revolving credit facility and the total availability for future borrowings under this facility, after giving effect to an aggregate of $241.0 million of letters of credit, was $759.0 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the revolving credit facility. +Advances under the revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. +The revolving credit facility contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to: +• incur indebtedness; +• grant liens; +• pay dividends and make other restricted payments; +• make investments; +• make fundamental changes; +• enter into swap contracts; +• dispose of assets; +• change the nature of their business; and +• enter into transactions with affiliates. +The negative covenants are subject to certain exceptions as specified in the revolving credit facility. The revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: +(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or noncash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00 ; and +(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00 . +F-21 +Table of Contents +Index to Financial Statements +The Company was in compliance with all covenants at December 31, 2017 . +(2) In March 2011 , the Company entered into a building loan agreement for its former headquarters building in Oklahoma City, Oklahoma. This loan agreement refinanced the $2.4 million outstanding under the previous building loan agreement. The new agreement, as amended in 2014, matured in December 2018 and bore interest at the rate of 4.00% per annum, required monthly interest and principal payments of approximately $20,000 and was collateralized by the Oklahoma City office building and associated land. The Company paid the balance of the loan in full in February 2016 . +(3) On October 17, 2012 , the Company issued $250.0 million in aggregate principal amount of 7.75% Senior Notes due 2020 (the "October Notes") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee, (the "senior note indenture"). On December 21, 2012 , the Company issued an additional $50.0 million in aggregate principal amount of 7.75% Senior Notes due 2020 (the "December Notes") as additional securities under the senior note indenture. On August 18, 2014 , the Company issued an additional $300.0 million in aggregate principal amount of 7.75% Senior Notes due 2020 (the "August Notes"). The August Notes were issued as additional securities under the senior note indenture. The October Notes, December Notes and the August Notes are collectively referred to as the " 2020 Notes." +On October 6, 2016 , the Company commenced a cash tender offer to purchase any and all of its 2020 Notes, which tender offer expired on October 13, 2016 and settled on October 14, 2016 . Holders of the 2020 Notes that were validly tendered and accepted at or prior to the expiration time of the tender offer, or who delivered the 2020 Notes pursuant to the guaranteed delivery procedures, received total cash consideration of $1,042 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date. An aggregate of $403.5 million in principal amount of the 2020 Notes was validly tendered in the tender offer. The remaining 2020 Notes that were not tendered in the tender offer were redeemed by the Company. The redemption payment included approximately $196.5 million in aggregate principal amount at a redemption price of 103.875% of the principal amount of the redeemed 2020 Notes, plus accrued and unpaid interest thereon to the redemption date. Upon deposit of the redemption payment with the paying agent on October 14, 2016 , the indenture governing the 2020 Notes was fully satisfied and discharged. The cash tender offer for the 2020 Notes and redemption of the remaining 2020 Notes were funded with the net proceeds from the offering of the 6.000% Senior Notes due 2024 (the “ 2024 Notes”) as discussed below and cash on hand. +(4) On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the " 2023 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "2023 Notes Offering"). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses. +The 2023 Notes were issued under an indenture, dated as of April 21, 2015 , among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. In October 2015 , the 2023 Notes were exchanged for a new issue of substantially identical debt securities registered under the Securities Act. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, payable semi-annually on May 1 and November 1 of each year. The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. +In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +(5) On October 14, 2016 , the Company issued the 2024 Notes in aggregate principal amount of $650.0 million . The 2024 Notes were issued under an indenture, dated as of October 14, 2016 , among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the " 2024 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the “ 2024 Notes Offering”). Under the 2024 Indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016 , payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017 . The 2024 Notes will mature on October 15, 2024 . The Company received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer. +F-22 +Table of Contents +Index to Financial Statements +(6) On December 21, 2016 , the Company issued $600.0 million in aggregate principal amount of 6.375% Senior Notes due 2025 (the “ 2025 Notes”). The 2025 Notes were issued under an indenture, dated as of December 21, 2016 , among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the "2025 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under the 2025 Indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016 , payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017 . The 2025 Notes will mature on May 15, 2025 . The Company received approximately $584.7 million in net proceeds from the offering of the 2025 Notes, which was used, together with the net proceeds from the Company's December 2016 common stock offering and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition. See Note 2 for additional discussion of the Vitruvian Acquisition. +In connection with each of the 2024 and 2025 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to offers to exchange the 2024 Notes and 2025 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and 2025 Notes were completed on September 12, 2017. +(7) On October 11, 2017 , the Company issued $450.0 million in aggregate principal amount of its 6.375% Senior Notes due 2026 (the “ 2026 Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from October 11, 2017 , payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018 . The 2026 Notes will mature on January 15, 2026 . The Company received approximately $444.3 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans. +In connection with the 2026 Notes offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2026 Notes for a new issue of substantially identical debt securities registered under the Securities Act. On January 18, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. The Company commenced the exchange offer relating to the 2026 notes on February 16, 2018, which it expects to close in March of 2018. +(8) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000% . The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531% . The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561% . The 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes were issued at par. The premium and discount was amortized using the effective interest method until the bonds were redeemed, at which point the remaining premium and discount of $10.8 million was written off and is included in loss on debt extinguishment on the consolidated statements of operations. +(9) In accordance with ASU 2015-03, loan issuance cost related to the 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes (collectively the "Notes") have been presented as a reduction to the Notes. At December 31, 2017 , total unamortized debt issuance costs were $5.2 million for the 2023 Notes, $9.9 million for the 2024 Notes, $14.0 million for the 2025 Notes and $5.5 million for the 2026 Notes. In addition, loan commitment fee costs for the construction loan agreement described immediately below were $0.1 million at December 31, 2017 . +(10) On June 4, 2015 , the Company entered into a construction loan agreement (the "Construction Loan") with InterBank for the construction of a new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The Construction Loan allows for maximum principal borrowings of $24.5 million and required the Company to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016 . Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017 . Starting June 30, 2017 , the Company began making monthly payments of principal and interest, with the final payment due June 4, 2025 . At December 31, 2017 , the total borrowings under the Construction loan were approximately $23.7 million . +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31 : +F-23 +Table of Contents +Index to Financial Statements +2017 +2016 +2015 +(In thousands) +Cash paid for interest +$ +101,958 +$ +68,966 +$ +59,736 +Change in accrued interest +10,699 +1,768 +4,011 +Capitalized interest +(9,470 +) +(9,148 +) +(13,580 +) +Amortization of loan costs +5,011 +3,660 +3,219 +Amortization of note discount and premium +— +(1,716 +) +(2,165 +) +Total interest expense +$ +108,198 +$ +63,530 +$ +51,221 +The Company capitalized approximately $9.5 million and $8.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2017 and 2016 , respectively. During the year ended December 31, 2016, the Company also capitalized approximately $0.4 million in interest expense related to building construction. Construction on the building was completed in December 2016 and, as such, the Company did not capitalize any interest expense related to building construction for the year ended December 31, 2017. +7. +COMMON STOCK OPTIONS, RESTRICTED STOCK AND CHANGES IN CAPITALIZATION +Options +In January 2005 , the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”), which is administered by the Compensation Committee (the "Committee"). Under the terms of the 2005 Plan, the Committee may determine when options shall be granted, to which eligible participants options shall be granted, the number of shares covered by such options, the purchase price or exercise price of such options, the vesting periods of such options and the exercisable period of such options. Eligible participants are defined as employees, consultants, and directors of the Company. +On April 20, 2006 , the Company amended and restated the 2005 Plan to (i) include (a) incentive stock options, (b) nonstatutory stock options, (c) restricted awards (restricted stock and restricted stock units), (d) performance awards and (e) stock appreciation rights and (ii) increase the maximum aggregate amount of common stock that may be issued under the 2005 Plan from 1,904,606 shares to 3,000,000 shares, including the 627,337 shares underlying options granted to employees under the Plan prior to adoption of the 2005 Plan. As of December 31, 2017 , the Company had granted 997,269 options for the purchase of shares of the Company’s common stock and 1,143,217 shares of restricted stock under the 2005 Plan. No additional securities will be issued under the Plan. +On April 19, 2013 , the Company amended and restated the 2005 Plan with the 2013 Restated Stock Incentive Plan ("2013 Plan"). The 2013 Plan increased the numbers of shares that may be awarded from 3,000,000 to 7,500,000 shares, including the 627,337 shares underlying options granted to employees under the 2005 Plan. The shares of stock issued once the options are exercised will be from authorized but unissued common stock. As of December 31, 2017 , the Company had granted 1,939,053 shares of restricted stock under the 2013 Plan. +Issuance of Common Stock +On April 21, 2015 , the Company issued 10,925,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $501.8 million after underwriting discounts and commissions and offering expenses. The Company used a portion of these net proceeds, together with a portion of the net proceeds from its concurrent senior notes offering (see Note 6), to repay all amounts outstanding at that time under its revolving credit facility and to fund the acquisition of Paloma Partners III, LLC and used the remaining net proceeds from these offerings for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +On June 12, 2015 , the Company issued 11,500,000 shares of its common stock in an underwritten public offering. The net proceeds from this equity offering were approximately $479.7 million after underwriting discounts and commissions and offering expenses. The Company used a portion of the net proceeds to fund the purchase of acreage in Monroe County, Ohio and used the remaining funds for general corporate purposes, including the funding of a portion of its 2015 capital development plans. +F-24 +Table of Contents +Index to Financial Statements +On March 15, 2016 , the Company issued 16,905,000 shares of its common stock in an underwritten public offering (which included 2,205,000 shares sold pursuant to an option to purchase additional shares of the Company's common stock granted by the Company to, and exercised in full by, the underwriters). The net proceeds from this equity offering were approximately $411.7 million , after underwriting discounts and commissions and offering expenses. The Company used the net proceeds from this offering primarily to fund a portion of its 2017 capital development plan and for general corporate purposes. +On December 21, 2016 , the Company issued an aggregate 33,350,000 shares of its common stock in an underwritten public offering (which included 4,350,000 shares subject to an option to purchase additional shares exercised by the underwriters). The net proceeds from this equity offering were approximately $698.8 million , after deducting underwriting discounts and commissions and estimated offering expenses. The Company used the net proceeds from this offering, together with the net proceeds from the offering of the 2025 Notes and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition (see Note 2). +On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion , consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares are subject to the indemnity escrow). See Note 2 for additional discussion of the Vitruvian Acquisition. +8. +STOCK-BASED COMPENSATION +During the years ended December 31, 2017 , 2016 and 2015 the Company’s stock-based compensation cost was $ 10.6 million , $12.3 million and $14.4 million , respectively, of which the Company capitalized $ 4.2 million , $4.9 million and $5.7 million , respectively, relating to its exploration and development efforts. +The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the market price of Gulfport’s common stock over a period of time ending on the grant date. Based upon the historical experience of the Company, the expected term of options granted is equal to the vesting period plus one year. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The 2013 Restated Stock Incentive Plan (which amended and restated the 2005 Plan) provides that all options must have an exercise price not less than the fair value of the Company’s common stock on the date of the grant. +No stock options were issued during the years ended December 31, 2017 , 2016 and 2015 . +The Company has not declared dividends and does not intend to do so in the foreseeable future, and thus did not use a dividend yield. In each case, the actual value that will be realized, if any, depends on the future performance of the common stock and overall stock market conditions. There is no assurance that the value an optionee actually realizes will be at or near the value estimated using the Black-Scholes model. +F-25 +Table of Contents +Index to Financial Statements +A summary of the status of stock options and related activity for the years ended December 31, 2017 , 2016 and 2015 is presented below: +Shares +Weighted +Average +Exercise Price +per Share +Weighted +Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value (In thousands) +Options outstanding at January 1, 2015 +5,000 +$ +9.07 +0.69 +$ +163 +Granted +— +— +Exercised +(5,000 +) +9.07 +124 +Forfeited/expired +— +— +Options outstanding at December 31, 2015 +— +— +— +$ +— +Granted +— +— +Exercised +— +— +— +Forfeited/expired +— +— +Options outstanding at December 31, 2016 +— +— +— +$ +— +Granted +— +— +Exercised +— +— +— +Forfeited/expired +— +— +Options outstanding at December 31, 2017 +— +$ +— +— +$ +— +Options exercisable at December 31, 2017 +— +$ +— +— +$ +— +The following table summarizes restricted stock activity for the twelve months ended December 31, 2017 , 2016 and 2015 : +Number of +Unvested +Restricted Shares +Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2015 +387,245 +$ +55.87 +Granted +352,605 +35.99 +Vested +(236,812 +) +52.39 +Forfeited +(18,799 +) +45.21 +Unvested shares as of December 31, 2015 +484,239 +$ +43.51 +Granted +451,241 +$ +27.78 +Vested +(252,566 +) +43.94 +Forfeited +(69,858 +) +33.43 +Unvested shares as of December 31, 2016 +613,056 +$ +32.90 +Granted +876,846 +$ +15.14 +Vested +(423,977 +) +29.90 +Forfeited +(89,898 +) +27.91 +Unvested shares as of December 31, 2017 +976,027 +$ +18.71 +Unrecognized compensation expense as of December 31, 2017 related to outstanding stock options and restricted shares was $ 14.4 million . The expense is expected to be recognized over a weighted average period of 1.46 years. +9. +FAIR VALUE OF FINANCIAL INSTRUMENTS +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the building loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +F-26 +Table of Contents +Index to Financial Statements +At December 31, 2017 , the carrying value of the outstanding debt represented by the Notes was $ 2.0 billion including the unamortized debt issuance cost of approximately $5.2 million related to the 2023 Notes, approximately $9.9 million related to the 2024 Notes, approximately $14.0 million related to the 2025 Notes, and approximately $5.5 million related to the 2026 Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $2.1 billion at December 31, 2017 . +10. +INCOME TAXES +The income tax provision consists of the following: +2017 +2016 +2015 +(In thousands) +Current: +State +$ +2,167 +$ +(1,330 +) +$ +(1,069 +) +Federal +3,362 +(19,770 +) +(439 +) +Deferred: +State +(118 +) +(386 +) +(14,218 +) +Federal +(3,602 +) +18,573 +(240,275 +) +Total income tax expense (benefit) provision +$ +1,809 +$ +(2,913 +) +$ +(256,001 +) +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2017 +2016 +2015 +(In thousands) +Income (loss) before federal income taxes +$ +436,961 +$ +(982,622 +) +$ +(1,480,885 +) +Expected income tax at statutory rate +152,936 +(343,918 +) +(518,310 +) +State income taxes +2,299 +(5,883 +) +(15,908 +) +Other differences +5,731 +4,293 +(420 +) +Intraperiod tax allocation +— +(1,349 +) +— +Remeasurement due to Tax Cut and Jobs Act +190,034 +— +— +Change in valuation allowance due to current year activity +(158,704 +) +343,944 +278,637 +Change in valuation allowance due to Tax Cuts and Jobs Act +(190,487 +) +— +— +Income tax expense (benefit) recorded +$ +1,809 +$ +(2,913 +) +$ +(256,001 +) +F-27 +Table of Contents +Index to Financial Statements +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2017 , 2016 and 2015 are estimated as follows: +2017 +2016 +2015 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +120,626 +$ +162,073 +$ +46,209 +Oil and gas property basis difference +151,260 +386,302 +292,838 +Investment in pass through entities +12,343 +27,469 +14,034 +FASB ASC 718 compensation expense +813 +2,084 +1,922 +Business energy investment tax credit +369 +369 +— +AMT credit +— +3,842 +23,629 +Charitable contributions carryover +255 +303 +146 +Unrealized loss on hedging activities +— +48,317 +— +Foreign tax credit carryforwards +2,074 +2,074 +2,074 +Accrued liabilities +285 +397 +— +ARO liability +15,897 +12,107 +9,415 +Non-oil and gas property basis difference +171 +— +— +State net operating loss carryover +6,954 +5,351 +4,344 +Total deferred tax assets +311,047 +650,688 +394,611 +Valuation allowance for deferred tax assets +(298,830 +) +(645,841 +) +(303,246 +) +Deferred tax assets, net of valuation allowance +12,217 +4,847 +91,365 +Deferred tax liabilities: +Non-oil and gas property basis difference +— +155 +715 +Unrealized gain on hedging activities +11,009 +— +66,422 +Total deferred tax liabilities +11,009 +155 +67,137 +Net deferred tax asset +$ +1,208 +$ +4,692 +$ +24,228 +The Company has an available federal tax net operating loss carryforward estimated at approximately $574.4 million as of December 31, 2017 . This carryforward will begin to expire in the year 2023. Based upon the December 31, 2017 net deferred tax asset position and a recent history of cumulative losses, management believes that there is sufficient negative evidence to place a valuation allowance on the net deferred tax asset that may not be utilized based upon a more likely than not basis. The Company also has state net operating loss carryovers of $121.3 million that began to expire in 2017 and federal foreign tax credit carryovers of $2.1 million which began to expire in 2017 . The Company believes that it can utilize an Oklahoma state NOL through carrybacks. Therefore, the Company has recorded a total valuation allowance of $298.8 million related to the remaining net deferred tax asset. +The Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21% effective January 1, 2018. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the statutory rate, the Company has remeasured its deferred tax balances, the effects of which are reflected in the rate reconciliation shown in the table above. The Company has applied the provisions of SEC Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. The Company has recorded a provisional estimate of $0.5 million benefit for the impact of the Tax Act within its December 31, 2017 financial statements. The Company will continue to evaluate the impacts of the Tax Act on deferred taxes, compensation and international provisions and will record adjustments, as needed, based on changes to its estimates. +F-28 +Table of Contents +Index to Financial Statements +The Company's income tax benefit in 2016 and 2015 was primarily attributable to the Company recording a full cost ceiling impairment of $715.5 million and $1.4 billion against the oil and gas assets. The Company's income tax expense in 2017 is primarily the result of a change in state income tax positions. +As of December 31, 2017 , the amount of unrecognized tax benefits related to federal and state tax liabilities associated with uncertain tax positions was immaterial. +F-29 +Table of Contents +Index to Financial Statements +11. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2017 +2016 +2015 +Income +Shares +Per +Share +Loss +Shares +Per +Share +Loss +Shares +Per Share +(In thousands, except share data) +Basic: +Net income (loss) +$ +435,152 +179,834,146 +$ +2.42 +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +Effect of dilutive securities: +Stock options and awards +— +418,878 +— +— +— +— +Diluted: +Net income (loss) +$ +435,152 +180,253,024 +$ +2.41 +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +$ +(1,224,884 +) +99,792,401 +$ +(12.27 +) +There were no potential shares of common stock that were considered anti-dilutive for the year ended December 31, 2017 . There were 539,988 and 449,880 shares of common stock that were considered anti-dilutive for the years ended 2016 and 2015 , respectively. +F-30 +Table of Contents +Index to Financial Statements +12. +DERIVATIVE INSTRUMENTS +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments +The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, and Mont Belvieu for propane and pentane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2017 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2018 +NYMEX Henry Hub +908,000 +$ +3.06 +2019 +NYMEX Henry Hub +269,000 +$ +2.93 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2018 +ARGUS LLS +1,500 +$ +56.22 +2018 +NYMEX WTI +4,000 +$ +52.20 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2018 +Mont Belvieu C3 +3,500 +$ +28.03 +2018 +Mont Belvieu C5 +500 +$ +46.62 +The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2018 - March 2018 +NYMEX Henry Hub +20,000 +$ +2.91 +April 2018 - March 2019 +NYMEX Henry Hub +50,000 +$ +3.13 +April 2019 - December 2019 +NYMEX Henry Hub +30,000 +$ +3.10 +For a portion of the natural gas fixed price swaps listed above, the counterparty has an option to extend the original terms an additional twelve months for the period January 2019 through December 2019 . The option to extend the terms expires in December 2018 . If executed, the Company would have additional fixed price swaps for 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu. +In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of NPGL Mid-Continent to NYMEX Henry Hub. As of December 31, 2017 , the Company had the following natural gas basis swap positions for NPGL Mid-Continent. +F-31 +Table of Contents +Index to Financial Statements +Location +Daily Volume (MMBtu/day) +Hedged Differential +2018 +NPGL Mid-Continent +12,000 +$ +(0.26 +) +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2017 and 2016 : +December 31, +2017 +2016 +(In thousands) +Short-term derivative instruments - asset +$ +78,847 +$ +3,488 +Long-term derivative instruments - asset +$ +8,685 +$ +5,696 +Short-term derivative instruments - liability +$ +32,534 +$ +119,219 +Long-term derivative instruments - liability +$ +2,989 +$ +26,759 +Gains and losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2017 , 2016 , and 2015 . +Gain (loss) on derivative instruments +For the Year Ended December 31, +2017 +2016 +2015 +(In thousands) +Natural gas derivatives +$ +232,143 +$ +(165,933 +) +$ +182,993 +Oil derivatives +(3,350 +) +(5,387 +) +19,201 +Natural gas liquids derivatives +(15,114 +) +(3,186 +) +1,319 +Total +$ +213,679 +$ +(174,506 +) +$ +203,513 +The Company delivered approximately 68% of its 2017 production under fixed price swaps. +Offsetting of derivative assets and liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value. +As of December 31, 2017 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +87,532 +$ +(22,199 +) +$ +65,333 +Derivative liabilities +$ +(35,523 +) +$ +22,199 +$ +(13,324 +) +F-32 +Table of Contents +Index to Financial Statements +As of December 31, 2016 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +9,184 +$ +(9,184 +) +$ +— +Derivative liabilities +$ +(145,978 +) +$ +9,184 +$ +(136,794 +) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +13. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820, " Fair Value Measurement and Disclosures " ("FASB ASC 820"). FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +The following tables summarize the Company’s financial and non-financial liabilities by FASB ASC 820 valuation level as of December 31, 2017 and 2016 : +December 31, 2017 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +87,532 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +35,523 +$ +— +F-33 +Table of Contents +Index to Financial Statements +December 31, 2016 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +9,184 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +145,978 +$ +— +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of the business combination were estimated using the same assumptions and methodology as described below. See Note 2 for further discussion of the Company's acquisitions. +The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “ Asset Retirement and Environmental Obligations ” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred or revised during the year ended December 31, 2017 were approximately $16.3 million and $26.0 million , respectively. +The fair value of the common stock received from Mammoth Energy in connection with the Company’s contribution of all of its membership interests in Sturgeon, Stingray Energy and Stingray Cementing was estimated using Level 1 inputs, as the price per share was a quoted price in an active market for identical Mammoth Energy common shares. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly was estimated using assumptions that represent Level 3 inputs. The Company estimated the fair value of the investment as of March 31, 2016 to be approximately $39.1 million . See Note 4 for further discussion of the Company's investment in Grizzly. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Strike Force was estimated using assumptions that represent Level 3 inputs. The Company's estimated fair value of the investment as of the February 1, 2016 contribution date was $22.5 million . See Note 4 for further discussion of the Company's contribution to Strike Force. +14. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +Stingray Cementing provides well cementing services. Stingray Cementing was previously 50% owned by the Company until its contribution to Mammoth Energy in June 2017 as discussed above in Note 4. At the date of the contribution, the Company owed Stingray Cementing approximately $0.5 million . As of December 31, 2016, the Company owed Stingray Cementing approximately $0.5 million related to these services. +Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. Stingray Energy was previously 50% owned by the Company until its contribution to Mammoth Energy in June 2017 as discussed above in Note 4. At the date of the contribution, the Company owed Stingray +F-34 +Table of Contents +Index to Financial Statements +Energy approximately $1.6 million . As of December 31, 2016, the Company owed Stingray Energy approximately $3.6 million related to these services. +As of December 31, 2017, the Company held approximately 25.1% of Mammoth Energy's outstanding common stock as discussed above in Note 4. Approximately $2.1 million of services provided by Mammoth Energy are included in lease operating expenses in the consolidated statements of operations for the year ended December 31, 2017 . Approximately $196.5 million and $110.5 million of services provided by Mammoth Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2017 and 2016 , respectively. At December 31, 2017 and 2016 , the Company owed Mammoth Energy approximately $32.0 million and $23.5 million , respectively, related to these services. +Strike Force, which is 25% owned by the Company, develops natural gas gathering assets in dedicated areas as discussed above in Note 4. At December 31, 2017 and 2016 the Company owed approximately $8.4 million and $1.6 million , respectively, to Strike Force for these related services. Approximately $23.1 million and $1.8 million of services provided by Strike Force are included in midstream gathering and processing on the accompanying consolidated statement of operations for the years ended December 31, 2017 and 2016 , respectively. +15. +COMMITMENTS +Plugging and Abandonment Funds +In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997 . Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009 , the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of December 31, 2017 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2017 , the Company had plugged 551 wells at WCBB since it began its plugging program in 1997 , which management believes fulfills its current minimum plugging obligation. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100% of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company will make a bi-weekly contribution on behalf of each employee equal to at least 3% of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2017 , 2016 and 2015 , Gulfport incurred $3.0 million , $1.7 million , and $1.4 million , respectively, in contributions expense related to this plan. +Employment Agreements +On April 22, 2014, the Board of Directors appointed Michael G. Moore as Chief Executive Officer of the Company. The Company and Mr. Moore entered into an amended and restated employment agreement. The agreement has a three -year term commencing effective April 22, 2014, which was amended effective as of April 29, 2015 . The employment agreement, as amended and restated as of April 29, 2015 , provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. +On March 13, 2015, the Company entered into an employment agreement with Ross Kirtley, the Company's Chief Operating Officer. The agreement had a two -year term commencing effective April 22, 2014. This agreement provided, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. On August 5, 2016 , Mr. Kirtley’s employment as the Company's Chief Operating Officer terminated. +In connection with Mr. Kirtley’s termination, the Company entered into a separation and release agreement with Mr. Kirtley, dated as of November 2, 2016 (the “Separation Agreement”), pursuant to which the Company agreed to provide Mr. Kirtley with (i) the cash compensation specified in his employment agreement, (ii) health care benefits for Mr. Kirtley and his eligible dependents for up to eighteen ( 18 ) months following the termination date, (iii) his company vehicle, (iv) the vesting of +F-35 +Table of Contents +Index to Financial Statements +3,000 shares of restricted stock and (v) the vesting of 14,820 restricted stock units provided that such restricted stock units will be settled in four substantially equal annual installments beginning in March 2017 in accordance with the original vesting schedule. All other restricted stock and restricted stock unit awards granted to Mr. Kirtley were forfeited and terminated. +Under the Separation Agreement, Mr. Kirtley is subject to certain covenants regarding confidentiality, non-solicitation, non-competition, trade secrets, unfair competition and inventions. The Separation Agreement also contains customary waiver and release provisions pursuant to which Mr. Kirtley waived, released and discharged the Company and certain other related parties from any and all claims that Mr. Kirtley may have had against the Company or such other parties as of the date of the Separation Agreement. +On March 13, 2015, the Company entered into an employment agreement with Aaron Gaydosik, the Company's Chief Financial Officer. The agreement had a three -year term commencing effective August 11, 2014. This agreement provided, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. Mr. Gaydosik's employment agreement was terminated upon his resignation as the Company's Chief Financial Officer, effective January 4, 2017 . As provided in such employment agreement, upon resignation, Mr. Gaydosik was entitled to any of his earned but unpaid salary through the date of resignation. Any unvested awards granted to Mr. Gaydosik under the Company’s equity incentive plan lapsed. +The Company has also entered into employment agreements with certain members of management that provide for one -year terms commencing as of January 1, 2017 (the “Initial Period”), which automatically extend for successive one -year periods unless the Company or the executive elects to not extend the term by giving written notice to the other party at least 30 days' prior to the end of the Initial Period or any anniversary thereof. The agreements provide for, among other things, compensation, benefits and severance payments. The employment agreements also contains certain termination and change of control provisions. +Firm Transportation Commitments +The Company had approximately 2,629,800 MMBtu per day of firm sales contracted with third parties. The table below presents these commitments at December 31, 2017 as follows: +(MMBtu per day) +2018 +560,800 +2019 +659,000 +2020 +526,000 +2021 +372,000 +2022 +272,000 +Thereafter +240,000 +Total +2,629,800 +The Company also had approximately $3.8 billion of firm transportation contracted with third parties. The table below presents these commitments at December 31, 2017 as follows: +(In thousands) +2018 +$ +248,047 +2019 +251,644 +2020 +247,581 +2021 +246,620 +2022 +246,620 +Thereafter +2,511,853 +Total +$ +3,752,365 +F-36 +Table of Contents +Index to Financial Statements +Operating Leases +The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at December 31, 2017 are as follows: +(In thousands) +2018 +$ +136 +2019 +54 +Total +$ +190 +Presented below is rent expense for the years ended December 31, 2017 , 2016 and 2015 , respectively. +For the years ended December 31, +2017 +2016 +2015 +(In thousands) +Minimum rentals +$ +343 +$ +840 +$ +759 +Less: Sublease rentals +— +— +8 +$ +343 +$ +840 +$ +751 +Other Commitments +Effective October 1, 2014 , the Company entered into a Sand Supply Agreement with Muskie that expires on September 30, 2018 . Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at a fixed price per ton, subject to certain adjustments, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $1.9 million related to non-utilization fees during the year ended 2016 . The Company did not incur any non-utilization fees during the year ended December 31, 2017 . +Effective October 1, 2014 , the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure that expires on September 30, 2018 . Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. +Future minimum commitments under these agreements at December 31, 2017 are as follows: +(In thousands) +2018 +$ +39,330 +Total +$ +39,330 +16. +CONTINGENCIES +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 , the Company was named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978 , as amended, and the rules, regulations, orders and ordinances adopted thereunder, which the Company referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon and Lac Blanc oil and gas fields, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that +F-37 +Table of Contents +Index to Financial Statements +such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +The Company was served with the Cameron complaint in early May 2016 and with the Vermilion Complaint in early September 2016 . The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermilion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the lawsuit to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs filed a motion to remand, and the plaintiffs agreed to an extension of time for all defendants to file responsive pleadings until the District Courts ruled on the motions to remand. In the Vermilion Parish case, the District Court entered an order on September 26, 2017 remanding the lawsuit to the 15th Judicial District Court, State of Louisiana, Parish of Vermilion. In the Cameron Parish lawsuit, the federal magistrate, on January 18, 2018, issued a report and recommendation that the Cameron Parish lawsuit be remanded to the 38th Judicial District Court, State of Louisiana, Parish of Cameron. It is anticipated that one or more of the defendants will object to the magistrate’s report and recommendation, in which case the report and recommendation will be reviewed by the District Court after additional briefing by the parties. Due to the procedural posture of lawsuits, the fact that responsive pleadings have not been filed and the fact that the parties have not begun discovery and the Company has not had the opportunity to evaluate the applicability of the allegations made in plaintiffs' complaints to the Company's operations, management cannot determine the amount of loss, if any, that may result. +In addition, due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations. +Insurance Proceeds +For the years ended December 31, 2016 and 2015 the Company was reimbursed $5.7 million and $10.0 million , respectively, net of related legal fees by its insurance provider, which is included in insurance proceeds in the accompanying consolidated statements of operations. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio, Oklahoma and Louisiana with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 . At December 31, 2017 , Gulfport held cash in excess of insured limits in these banks totaling $97.6 million . +The Company's sales to major customers (purchases of 10% or more of total sales before the effects of hedging) for the years ended December 31, 2017 , 2016 and 2015 are as follows: +F-38 +Table of Contents +Index to Financial Statements +December 31, +2017 +2016 +2015 +Company A +40 +% +59 +% +62 +% +Company B +5 +% +12 +% +23 +% +Company C +7 +% +10 +% +12 +% +All others +48 +% +19 +% +3 +% +17. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +On October 17, 2012 , December 21, 2012 and August 18, 2014 , the Company issued the 2020 Notes in an aggregate of $600.0 million principal amount. The 2020 Notes were subsequently exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act. In October 2016, the Company repurchased (in a cash tender offer) or redeemed all of the 2020 Notes, of which $600.0 million in aggregate principal amount was then outstanding, with the net proceeds from the issuance of the 2024 Notes discussed below and cash on hand. +On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of the 2023 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +On October 14, 2016, the Company issued $650.0 million in aggregate principal amount of the 2024 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The net proceeds from the issuance of the 2024 Notes, together with cash on hand, were used to repurchase or redeem all of the then-outstanding 2020 Notes in October 2016. +On December 21, 2016, the Company issued $600.0 million in aggregate principal amount of the 2025 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The Company used the net proceeds from the issuance of the 2025 Notes, together with the net proceeds from the December 2016 underwritten offering of the Company’s common stock and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition. +In connection with the 2024 Notes Offering and the 2025 Notes Offering, the Company and its subsidiary guarantors entered into two registration rights agreements, pursuant to which the Company agreed to file a registration statement with respect to offers to exchange the 2024 Notes and the 2025 Notes for new issues of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and the 2025 Notes were completed on September 13, 2017. +On October 11, 2017, the Company issued $450.0 million in aggregate principal amount of the 2026 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. A portion of the net proceeds from the issuance of the 2026 Notes was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans. +The 2020 Notes were, and the 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are, guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The 2020 Notes were not, and the 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are not, guaranteed by Grizzly Holdings, Inc. (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated +F-39 +Table of Contents +Index to Financial Statements +basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor. +F-40 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +67,908 +$ +31,649 +$ +— +$ +— +$ +99,557 +Restricted cash +— +— +— +— +— +Accounts receivable - oil and natural gas +128,121 +54,092 +— +— +182,213 +Accounts receivable - related parties +— +— +— +— +— +Accounts receivable - intercompany +554,439 +63,374 +— +(617,813 +) +— +Prepaid expenses and other current assets +4,719 +193 +— +— +4,912 +Short-term derivative instruments +78,847 +— +— +— +78,847 +Total current assets +834,034 +149,308 +— +(617,813 +) +365,529 +Property and equipment: +Oil and natural gas properties, full-cost accounting +6,562,147 +2,607,738 +— +(729 +) +9,169,156 +Other property and equipment +86,711 +43 +— +— +86,754 +Accumulated depletion, depreciation, amortization and impairment +(4,153,696 +) +(37 +) +— +— +(4,153,733 +) +Property and equipment, net +2,495,162 +2,607,744 +— +(729 +) +5,102,177 +Other assets: +Equity investments and investments in subsidiaries +2,361,575 +77,744 +57,641 +(2,194,848 +) +302,112 +Long-term derivative instruments +8,685 +— +— +— +8,685 +Deferred tax asset +1,208 +— +— +— +1,208 +Inventories +5,816 +2,411 +— +— +8,227 +Other assets +12,483 +7,331 +— +— +19,814 +Total other assets +2,389,767 +87,486 +57,641 +(2,194,848 +) +340,046 +Total assets +$ +5,718,963 +$ +2,844,538 +$ +57,641 +$ +(2,813,390 +) +$ +5,807,752 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +416,249 +$ +137,361 +$ +— +$ +(1 +) +$ +553,609 +Accounts payable - intercompany +63,373 +554,313 +127 +(617,813 +) +— +Asset retirement obligation - current +120 +— +— +— +120 +Short-term derivative instruments +32,534 +— +— +— +32,534 +Current maturities of long-term debt +622 +— +— +— +622 +Total current liabilities +512,898 +691,674 +127 +(617,814 +) +586,885 +Long-term derivative instruments +2,989 +— +— +— +2,989 +Asset retirement obligation - long-term +63,141 +11,839 +— +— +74,980 +Other non-current liabilities +— +2,963 +— +— +2,963 +Long-term debt, net of current maturities +2,038,321 +— +— +— +2,038,321 +Total liabilities +2,617,349 +706,476 +127 +(617,814 +) +2,706,138 +Stockholders' equity: +Common stock +1,831 +— +— +— +1,831 +Paid-in capital +4,416,250 +1,915,598 +259,307 +(2,174,905 +) +4,416,250 +Accumulated other comprehensive (loss) income +(40,539 +) +— +(38,593 +) +38,593 +(40,539 +) +Retained (deficit) earnings +(1,275,928 +) +222,464 +(163,200 +) +(59,264 +) +(1,275,928 +) +Total stockholders' equity +3,101,614 +2,138,062 +57,514 +(2,195,576 +) +3,101,614 +Total liabilities and stockholders' equity +$ +5,718,963 +$ +2,844,538 +$ +57,641 +$ +(2,813,390 +) +$ +5,807,752 +F-41 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets +Cash and cash equivalents +$ +1,273,882 +$ +1,993 +$ +— +$ +— +$ +1,275,875 +Restricted cash +185,000 +— +— +— +$ +185,000 +Accounts receivable - oil and natural gas +137,087 +37,496 +— +(37,822 +) +136,761 +Accounts receivable - related parties +16 +— +— +— +16 +Accounts receivable - intercompany +449,517 +1,151 +— +(450,668 +) +— +Prepaid expenses and other current assets +3,135 +— +— +— +3,135 +Short-term derivative instruments +3,488 +— +— +— +3,488 +Total current assets +2,052,125 +40,640 +— +(488,490 +) +1,604,275 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +5,655,125 +417,524 +— +(729 +) +6,071,920 +Other property and equipment +68,943 +43 +— +— +68,986 +Accumulated depletion, depreciation, amortization and impairment +(3,789,746 +) +(34 +) +— +— +(3,789,780 +) +Property and equipment, net +1,934,322 +417,533 +— +(729 +) +2,351,126 +Other assets: +Equity investments and investments in subsidiaries +236,327 +33,590 +45,213 +(71,210 +) +243,920 +Long-term derivative instruments +5,696 +— +— +— +5,696 +Deferred tax asset +4,692 +— +— +— +4,692 +Inventories +3,095 +1,409 +— +— +4,504 +Other assets +8,932 +— +— +— +8,932 +Total other assets +258,742 +34,999 +45,213 +(71,210 +) +267,744 +Total assets +$ +4,245,189 +$ +493,172 +$ +45,213 +$ +(560,429 +) +$ +4,223,145 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +255,966 +$ +9,158 +$ +— +$ +— +$ +265,124 +Accounts payable - intercompany +31,202 +457,163 +126 +(488,491 +) +— +Asset retirement obligation - current +195 +— +— +— +195 +Short-term derivative instruments +119,219 +— +— +— +119,219 +Current maturities of long-term debt +276 +— +— +— +276 +Total current liabilities +406,858 +466,321 +126 +(488,491 +) +384,814 +Long-term derivative instruments +26,759 +— +— +— +26,759 +Asset retirement obligation - long-term +34,081 +— +— +— +34,081 +Long-term debt, net of current maturities +1,593,599 +— +— +— +1,593,599 +Total liabilities +2,061,297 +466,321 +126 +(488,491 +) +2,039,253 +Stockholders' equity: +Common stock +1,588 +— +— +— +1,588 +Paid-in capital +3,946,442 +33,822 +257,026 +(290,848 +) +3,946,442 +Accumulated other comprehensive (loss) income +(53,058 +) +— +(50,931 +) +50,931 +(53,058 +) +Retained (deficit) earnings +(1,711,080 +) +(6,971 +) +(161,008 +) +167,979 +(1,711,080 +) +Total stockholders' equity +2,183,892 +26,851 +45,087 +(71,938 +) +2,183,892 +Total liabilities and stockholders' equity +$ +4,245,189 +$ +493,172 +$ +45,213 +$ +(560,429 +) +$ +4,223,145 +F-42 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +1,010,989 +$ +309,314 +$ +— +$ +— +$ +1,320,303 +Costs and expenses: +Lease operating expenses +65,793 +14,453 +— +— +80,246 +Production taxes +15,100 +6,026 +— +— +21,126 +Midstream gathering and processing +187,678 +61,317 +— +— +248,995 +Depreciation, depletion and amortization +364,625 +4 +— +— +364,629 +General and administrative +55,589 +(2,654 +) +3 +— +52,938 +Accretion expense +1,246 +365 +— +— +1,611 +Acquisition expense +— +2,392 +— +— +2,392 +690,031 +81,903 +3 +— +771,937 +INCOME (LOSS) FROM OPERATIONS +320,958 +227,411 +(3 +) +— +548,366 +OTHER (INCOME) EXPENSE: +Interest expense +112,732 +(4,534 +) +— +— +108,198 +Interest income +(988 +) +(21 +) +— +— +(1,009 +) +(Income) loss from equity method investments and investments in subsidiaries +(226,130 +) +1,955 +2,189 +227,243 +5,257 +Other (income) expense +(1,617 +) +(324 +) +— +900 +(1,041 +) +(116,003 +) +(2,924 +) +2,189 +228,143 +111,405 +INCOME (LOSS) BEFORE INCOME TAXES +436,961 +230,335 +(2,192 +) +(228,143 +) +436,961 +INCOME TAX EXPENSE +1,809 +— +— +— +1,809 +NET INCOME (LOSS) +$ +435,152 +$ +230,335 +$ +(2,192 +) +$ +(228,143 +) +$ +435,152 +F-43 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +381,931 +$ +3,979 +$ +— +$ +— +$ +385,910 +Costs and expenses: +Lease operating expenses +68,034 +843 +— +— +68,877 +Production taxes +13,121 +155 +— +— +13,276 +Midstream gathering and processing +165,400 +572 +— +— +165,972 +Depreciation, depletion and amortization +245,970 +4 +— +— +245,974 +Impairment of oil and natural gas properties +715,495 +— +— +— +715,495 +General and administrative +43,896 +(490 +) +3 +— +43,409 +Accretion expense +1,057 +— +— +— +1,057 +1,252,973 +1,084 +3 +— +1,254,060 +(LOSS) INCOME FROM OPERATIONS +(871,042 +) +2,895 +(3 +) +— +(868,150 +) +OTHER (INCOME) EXPENSE: +Interest expense +63,529 +1 +— +— +63,530 +Interest income +(1,230 +) +— +— +— +(1,230 +) +Insurance proceeds +(5,718 +) +— +— +— +(5,718 +) +Loss on debt extinguishment +23,776 +— +— +— +23,776 +Loss (income) from equity method investments and investments in subsidiaries +31,078 +(89 +) +25,150 +(22,154 +) +33,985 +Other expense (income) +145 +(16 +) +— +— +129 +111,580 +(104 +) +25,150 +(22,154 +) +114,472 +(LOSS) INCOME BEFORE INCOME TAXES +(982,622 +) +2,999 +(25,153 +) +22,154 +(982,622 +) +INCOME TAX BENEFIT +(2,913 +) +— +— +— +(2,913 +) +NET (LOSS) INCOME +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +F-44 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +707,868 +$ +1,122 +$ +— +$ +— +$ +708,990 +Costs and expenses: +Lease operating expenses +68,632 +843 +— +— +69,475 +Production taxes +14,618 +122 +— +— +14,740 +Midstream gathering and processing +138,526 +64 +— +— +138,590 +Depreciation, depletion and amortization +337,689 +5 +— +— +337,694 +Impairment of oil and natural gas properties +1,440,418 +— +— +— +1,440,418 +General and administrative +41,892 +55 +20 +— +41,967 +Accretion expense +820 +— +— +— +820 +2,042,595 +1,089 +20 +— +2,043,704 +(LOSS) INCOME FROM OPERATIONS +(1,334,727 +) +33 +(20 +) +— +(1,334,714 +) +OTHER (INCOME) EXPENSE: +Interest expense +51,221 +— +— +— +51,221 +Interest income +(643 +) +— +— +— +(643 +) +Insurance proceeds +(10,015 +) +— +— +— +(10,015 +) +Loss (income) from equity method investments and investments in subsidiaries +107,252 +— +115,544 +(116,703 +) +106,093 +Other (income) expense +(1,657 +) +(346 +) +— +1,518 +(485 +) +146,158 +(346 +) +115,544 +(115,185 +) +146,171 +(LOSS) INCOME BEFORE INCOME TAXES +(1,480,885 +) +379 +(115,564 +) +115,185 +(1,480,885 +) +INCOME TAX BENEFIT +(256,001 +) +— +— +— +(256,001 +) +NET (LOSS) INCOME +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +F-45 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(Amounts in thousands) +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +435,152 +$ +230,335 +$ +(2,192 +) +$ +(228,143 +) +$ +435,152 +Foreign currency translation adjustment +12,519 +182 +12,337 +(12,519 +) +12,519 +Other comprehensive income (loss) +12,519 +182 +12,337 +(12,519 +) +12,519 +Comprehensive income (loss) +$ +447,671 +$ +230,517 +$ +10,145 +$ +(240,662 +) +$ +447,671 +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +Foreign currency translation adjustment +2,119 +778 +1,341 +(2,119 +) +2,119 +Other comprehensive income (loss) +2,119 +778 +1,341 +(2,119 +) +2,119 +Comprehensive (loss) income +$ +(977,590 +) +$ +3,777 +$ +(23,812 +) +$ +20,035 +$ +(977,590 +) +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(1,224,884 +) +$ +379 +$ +(115,564 +) +$ +115,185 +$ +(1,224,884 +) +Foreign currency translation adjustment +(28,502 +) +— +(28,502 +) +28,502 +$ +(28,502 +) +Other comprehensive (loss) income +(28,502 +) +— +(28,502 +) +28,502 +(28,502 +) +Comprehensive (loss) income +$ +(1,253,386 +) +$ +379 +$ +(144,066 +) +$ +143,687 +$ +(1,253,386 +) +F-46 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +392,680 +$ +287,209 +$ +— +$ +— +$ +679,889 +Net cash (used in) provided by investing activities +(2,031,615 +) +(1,674,690 +) +(2,280 +) +1,419,417 +(2,289,168 +) +Net cash provided by (used in) financing activities +432,961 +1,417,137 +2,280 +(1,419,417 +) +432,961 +Net (decrease) increase in cash and cash equivalents +(1,205,974 +) +29,656 +— +— +(1,176,318 +) +Cash and cash equivalents at beginning of period +1,273,882 +1,993 +— +— +1,275,875 +Cash and cash equivalents at end of period +$ +67,908 +$ +31,649 +$ +— +$ +— +$ +99,557 +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +336,330 +$ +(9,486 +) +$ +(2 +) +$ +11,001 +$ +337,843 +Net cash (used in) provided by investing activities +(905,582 +) +(22,500 +) +(15,472 +) +37,972 +(905,582 +) +Net cash provided by (used in) financing activities +1,730,640 +33,500 +15,473 +(48,973 +) +1,730,640 +Net increase (decrease) in cash and cash equivalents +1,161,388 +1,514 +(1 +) +— +1,162,901 +Cash and cash equivalents at beginning of period +112,494 +479 +1 +— +112,974 +Cash and cash equivalents at end of period +$ +1,273,882 +$ +1,993 +$ +— +$ +— +$ +1,275,875 +Year Ended December 31, 2015 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +344,018 +$ +(21,839 +) +$ +(2 +) +$ +2 +$ +322,179 +Net cash (used in) provided by investing activities +(1,595,767 +) +21,514 +(14,472 +) +14,472 +(1,574,253 +) +Net cash provided by (used in) financing activities +1,222,708 +— +14,474 +(14,474 +) +1,222,708 +Net decrease in cash and cash equivalents +(29,041 +) +(325 +) +— +— +(29,366 +) +Cash and cash equivalents at beginning of period +141,535 +804 +1 +— +142,340 +Cash and cash equivalents at end of period +$ +112,494 +$ +479 +$ +1 +$ +— +$ +112,974 +F-47 +Table of Contents +Index to Financial Statements +18. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company owns a 24.9999% interest in Grizzly, which interest is shown below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2017 +2016 +(In thousands) +Proven properties +$ +6,256,182 +$ +4,491,615 +Unproven properties +2,912,974 +1,580,305 +9,169,156 +6,071,920 +Accumulated depreciation, depletion, amortization and impairment reserve +(4,136,777 +) +(3,778,043 +) +Net capitalized costs +$ +5,032,379 +$ +2,293,877 +Equity investment in Grizzly Oil Sands ULC +Proven properties +$ +73,818 +$ +70,266 +Unproven properties +86,540 +80,892 +160,358 +151,158 +Accumulated depreciation, depletion, amortization and impairment reserve +(1,693 +) +(1,578 +) +Net capitalized costs +$ +158,665 +$ +149,580 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2017 +2016 +2015 +(In thousands) +Acquisition +$ +1,951,281 +$ +152,887 +$ +810,755 +Development of proved undeveloped properties +994,237 +423,998 +642,811 +Exploratory +— +— +— +Recompletions +14,289 +16,386 +13,894 +Capitalized asset retirement obligation +42,270 +10,971 +8,800 +Total +$ +3,002,077 +$ +604,242 +$ +1,476,260 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +503 +$ +357 +$ +396 +Development of proved undeveloped properties +— +— +47 +Exploratory +— +— +— +Capitalized asset retirement obligation +(524 +) +784 +282 +Total +$ +(21 +) +$ +1,141 +$ +725 +F-48 +Table of Contents +Index to Financial Statements +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +2017 +2016 +2015 +(In thousands) +Revenues +$ +1,320,303 +$ +385,910 +$ +708,990 +Production costs +(350,367 +) +(248,125 +) +(222,805 +) +Depletion +(358,792 +) +(243,098 +) +(335,288 +) +Impairment +— +(715,495 +) +(1,440,418 +) +611,144 +(820,808 +) +(1,289,521 +) +Income tax expense (benefit) +Current +3,362 +— +— +Deferred +(3,602 +) +— +(220,201 +) +(240 +) +— +(220,201 +) +Results of operations from producing activities +$ +611,384 +$ +(820,808 +) +$ +(1,069,320 +) +Depletion per Mcf of gas equivalent (Mcfe) +$ +0.90 +$ +0.92 +$ +1.68 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +— +$ +— +$ +1,436 +Production costs +— +(13 +) +(1,549 +) +Depletion +— +— +(625 +) +— +(13 +) +(738 +) +Income tax expense +— +— +— +Results of operations from producing activities +$ +— +$ +(13 +) +$ +(738 +) +Oil and Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2017 , 2016 and 2015 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2017 , 2016 and 2015 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (MBbls) and volumes for natural gas are stated in millions of cubic feet (MMcf). The prices used for the 2017 reserve report are $51.34 per barrel of oil, $2.98 per MMbtu and $18.40 per barrel for NGLs, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2016 and 2015 for reserve report purposes are $42.75 per barrel, $2.48 per MMbtu and $9.91 per barrel for NGLs and $50.28 per barrel, $2.59 per MMbtu and $13.21 per barrel for NGLs, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +F-49 +Table of Contents +Index to Financial Statements +2017 +2016 +2015 +Oil +Natural Gas +Natural Gas Liquids +Oil +Natural Gas +Natural Gas Liquids +Oil +Natural Gas +Natural Gas Liquids +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +Proved Reserves +Beginning of the period +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +9,497 +719,006 +26,268 +Purchases in oil and natural gas reserves in place +15,132 +1,098,644 +53,617 +— +— +— +— +371,663 +— +Extensions and discoveries +951 +1,594,734 +4,619 +1,217 +1,082,220 +7,677 +2,413 +997,057 +5,486 +Revisions of prior reserve estimates +107 +314,925 +2,737 +(3 +) +(247,703 +) +(1,439 +) +(2,553 +) +(371,430 +) +(9,594 +) +Current production +(2,579 +) +(350,061 +) +(5,334 +) +(2,126 +) +(227,594 +) +(3,847 +) +(2,899 +) +(156,151 +) +(4,424 +) +End of period +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +Proved developed reserves +10,245 +1,616,930 +36,247 +4,882 +744,797 +14,299 +6,120 +652,961 +12,910 +Proved undeveloped reserves +8,912 +3,208,380 +39,519 +664 +1,422,271 +5,828 +338 +907,184 +4,826 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +— +— +— +— +— +— +14,558 +— +— +Purchases in oil and natural gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +— +— +— +— +— +— +(14,530 +) +— +— +Current production +— +— +— +— +— +— +(28 +) +— +— +End of period +— +— +— +— +— +— +— +— +— +Proved developed reserves +— +— +— +— +— +— +— +— +— +Proved undeveloped reserves +— +— +— +— +— +— +— +— +— +In 2017, the Company purchased 1.5 Tcfe through our acquisition of SCOOP properties discussed in Note 2. Also in 2017 , the Company experienced extensions and discoveries of 1.6 Tcfe of estimated proved reserves primarily attributable to the continued development of the Company's Utica Shale acreage. In 2017, the Company experienced upward revisions of 201.3 Bcfe in estimated proved reserves due to an increase in well performance, 214.1 Bcfe due to the increase in pricing and 95.9 Bcfe due to changes in its ownership interests. These positive revisions are partially offset by downward revisions of 133.0 Bcfe due to a decline in well performance specific to one area in the Company's Utica field and a decline of 45.7 Bcfe in estimated proved reserves in 2017 primarily due to the exclusion of ten PUD locations in the Company's Utica field, five of which are operated by the Company and five of which are operated by other operators, that were excluded due to changes in drilling schedules. Additional downward revision of 0.6 Bcfe was due to the removal of two PUD locations in the Company's Southern Louisiana fields that had not been drilled within five years of initial booking. In 2016 , the Company experienced extensions and discoveries of 1.1 Tcfe of estimated proved reserves attributable to the continued development of the Company's Utica Shale acreage. The Company experienced downward revisions of 227.9 Bcfe due to lower commodity prices on 67 PUD locations, including the loss of 35 of the 67 PUD locations as they were no longer economic, as well as downward revisions of 17.4 Bcfe due to rescheduling the drilling timeline of four PUD locations in excess of five years of initial booking resulting in the removal of these four PUD locations. In addition, the Company experienced upward revisions of 26.7 Bcfe attributable to improved performance of 34 PUD locations as a result of 14.5% production increases due to well performance of offset producers as well as lower lease operated and capital expenditures. In 2015 , the Company experienced extensions and discoveries of 1,044.5 Bcfe of estimated proved reserves attributable to the continued development of the Company's Utica Shale acreage. In addition, the Company experienced downward revisions of 444,314 MMcfe in estimated proved reserves in +F-50 +Table of Contents +Index to Financial Statements +2015 primarily due to the exclusion of PUD locations in its Utica and Southern Louisiana fields that became uneconomic due to the continued decline in commodity prices. In 2015 , the Company also purchased 371,663 MMcfe of proved reserves as a result of acquisitions. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2017 , 2016 and 2015 using an unweighted average first-of-the-month price for the period January through December 31, 2017 , 2016 and 2015 . +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2017 +2016 +2015 +(In thousands) +Future cash flows +$ +11,202,692 +$ +3,354,168 +$ +3,043,450 +Future development and abandonment costs +(3,005,217 +) +(1,165,025 +) +(877,660 +) +Future production costs +(2,152,821 +) +(924,167 +) +(941,243 +) +Future production taxes +(289,944 +) +(69,447 +) +(58,169 +) +Future income taxes +(573,965 +) +(14,545 +) +(2,648 +) +Future net cash flows +5,180,745 +1,180,984 +1,163,730 +10% discount to reflect timing of cash flows +(2,537,181 +) +(492,944 +) +(399,399 +) +Standardized measure of discounted future net cash flows +$ +2,643,564 +$ +688,040 +$ +764,331 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +— +$ +— +Future development and abandonment costs +— +— +— +Future production costs +— +— +— +Future production taxes +— +— +— +Future income taxes +— +— +— +Future net cash flows +— +— +— +10% discount to reflect timing of cash flows +Standardized measure of discounted future net cash flows +$ +— +$ +— +$ +— +In order to develop its proved undeveloped reserves according to the drilling schedule used by the engineers in Gulfport’s reserve report, the Company will need to spend $551.0 million , $458.8 million and $514.5 million during years 2018 , 2019 and 2020 , respectively. +F-51 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2017 +2016 +2015 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +(756,257 +) +$ +(312,291 +) +$ +(486,185 +) +Net changes in prices, production costs, and development costs +913,714 +(146,518 +) +(1,412,181 +) +Acquisition of oil and gas reserves in place +703,866 +— +83,340 +Extensions and discoveries +618,039 +186,909 +262,895 +Previously estimated development costs incurred during the period +390,673 +176,218 +117,540 +Revisions of previous quantity estimates, less related production costs +155,200 +(38,448 +) +(98,162 +) +Accretion of discount +68,804 +76,433 +142,717 +Net changes in income taxes +(231,545 +) +(6,495 +) +412,240 +Change in production rates and other +93,030 +(12,099 +) +314,960 +Total change in standardized measure of discounted future net cash flows +$ +1,955,524 +$ +(76,291 +) +$ +(662,836 +) +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +— +$ +— +$ +114 +Net changes in prices, production costs, and development costs +— +— +— +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +— +— +— +Previously estimated development costs incurred during the period +— +— +47 +Revisions of previous quantity estimates, less related production costs +— +— +(103,282 +) +Accretion of discount +— +— +9,375 +Net changes in income taxes +— +— +— +Change in production rates and other +— +— +— +Total change in standardized measure of discounted future net cash flows +$ +— +$ +— +$ +(93,746 +) +F-52 +Table of Contents +Index to Financial Statements +19. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2017 and 2016 : +2017 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +333,004 +$ +323,953 +$ +265,498 +$ +397,848 +Income from operations +181,683 +143,175 +50,483 +173,025 +Income tax expense (benefit) +— +— +2,763 +(954 +) +Net income +154,455 +105,936 +18,235 +156,526 +Income per share: +Basic +$ +0.91 +$ +0.58 +$ +0.10 +$ +0.85 +Diluted +$ +0.91 +$ +0.58 +$ +0.10 +$ +0.85 +2016 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +156,961 +$ +(28,158 +) +$ +193,691 +$ +63,416 +Loss from operations +(195,794 +) +(323,412 +) +(157,995 +) +(190,949 +) +Income tax (benefit) expense +(191 +) +(157 +) +(3,407 +) +842 +Net loss +(242,267 +) +(339,776 +) +(157,296 +) +(240,370 +) +Loss per share: +Basic +$ +(2.17 +) +$ +(2.71 +) +$ +(1.25 +) +$ +(1.86 +) +Diluted +$ +(2.17 +) +$ +(2.71 +) +$ +(1.25 +) +$ +(1.86 +) +20. +SUBSEQUENT EVENTS +Derivatives +In January and February 2018 , the Company entered into fixed price swaps for 2018 for approximately 1,000 barrels of oil per day at a weighted average price of $ 62.18 per barrel and for approximately 500 barrels of C3 propane per day at a weighted average price of $35.54 per barrel. For 2019 , the Company entered into fixed price swaps for approximately 242,000 MMBtu of natural gas per day at a weighted average price of $2.79 per MMBtu and for approximately 2,000 barrels of oil per day at a weighted average price of $57.75 per barrel. The Company's fixed price swap contracts are tied to the commodity prices on NYMEX for natural gas, NYMEX WTI for oil and Mont Belvieu for propane. The Company will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX for natural gas, NYMEX WTI for oil or Mont Belvieu for propane. +Stock Repurchase Program +In January 2018, the board of directors of the Company approved a stock repurchase program to acquire up to $100.0 million of the Company’s outstanding common stock during 2018. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. The Company intends to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund its 2018 capital development program. This repurchase program is authorized to extend through December 31, 2018 and may be suspended from time to time, modified, extended or discontinued by the board of directors of the Company at any time. The Company did not make any purchases of its common stock during the year ended December 31, 2017 under any stock repurchase program or otherwise, and has not made any such purchases of its common stock as of February 22, 2018. +F-53 \ No newline at end of file diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/filing_metadata.csv b/raw/filings/0000874499/2017/0001628280-18-002041/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5a82c87345ce2a6902e9d44f9623e81a21053d72 --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2018-02-22,2017-12-31,2018-02-22T20:25:03.000Z,0001628280-18-002041,gpor-12312017x10k.htm,10-K,20428479,1,0,https://www.sec.gov/Archives/edgar/data/874499/000162828018002041/gpor-12312017x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828018002041/,2017,2017,1 diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/item1.txt b/raw/filings/0000874499/2017/0001628280-18-002041/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..00eaed9b37e48d7bf291a83c2925caf157b4957c --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/item1.txt @@ -0,0 +1,533 @@ +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, crude oil and natural gas liquids, or NGLs, in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly and an approximate 25.1% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the Nasdaq Global Select Market (TUSK). We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 9, 2018 , we held leasehold interests in approximately 237,000 gross ( 213,000 net) acres in the Utica Shale primarily in Eastern Ohio. We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2017 , had spud 362 gross wells, 287 of which were completed and were producing. In 2017 , we spud 94 gross ( 88.7 net) wells, of which 32 were completed as producing wells and, as of December 31, 2017 , 58 were in various stages of completion and four were still being drilled. We commenced sales from 68 gross ( 61.1 net) wells in the Utica Shale during 2017 . During 2018 (through February 9, 2018 ), we spud eight gross ( 6.4 net) wells. As of February 9, 2018 , five of these wells were waiting on completion and the other three were still drilling. In addition, other operators drilled 26 gross ( 8.4 net) wells and commenced sales from 45 gross ( 9.3 net) wells on our Utica Shale acreage in 2017 . +We currently intend to drill 36 to 40 gross ( 26 to 29 net) horizontal wells, and commence sales from 33 to 37 gross ( 33 to 37 net) horizontal wells on our Utica Shale acreage in 2018 . We currently anticipate seven to eight net horizontal wells will be drilled, and sales commenced from nine to ten net horizontal wells, by other operators on our Utica Shale acreage. We currently expect to spend $425.0 million to $455.0 million on our operated and non-operated activities during 2018 . +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2017 was approximately 95,854 net million cubic feet of natural gas equivalent, or MMcfe, or 1,041.9 MMcfe per day, of which 93% was from natural gas and 7% was from oil and NGLs. +As of February 9, 2018 , we held leasehold interests in approximately 50,400 net surface acres in the SCOOP. In 2017 , we spud 19 gross ( 15.7 net) wells, of which seven were completed as producing wells and, as of December 31, 2017 , four were being drilled and eight were in various stages of completion. We commenced sales from 13 gross ( 11.0 net) wells in the SCOOP during 2017 . During 2018 (through February 9, 2018 ), we spud four gross ( 3.4 net) wells. As of February 9, 2018 , one of these wells was waiting on completion and the other three were still drilling. In addition, other operators drilled 31 gross ( 0.9 net) wells and commenced sales from 23 gross ( 0.8 net) wells on our SCOOP acreage during the period from February 17, 2017 to December 31, 2017 . +We currently intend to drill 15 to 16 gross ( 10 to 11 net) horizontal wells, and commence sales from 20 to 22 gross ( 16 to 18 net) horizontal wells on our SCOOP acreage in 2018 . We currently anticipate four to five net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other operators on our SCOOP acreage. We currently expect to spend $185.0 million to $210.0 million on our operated and non-operated activities during 2018 . +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2017 was approximately 19,008 MMcfe, or an average of 206.6 MMcfe per day, of which 67% was from natural gas and 33% was from oil and NGLs. +In 2017 , at our WCBB field, we recompleted 60 gross and net wells and spud ten new wells. In the fourth quarter of 2017 , production at WCBB was approximately 1,089 MMcfe, or an average of 11.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +In 2017 , at our East Hackberry field, we recompleted 20 gross and net wells and spud four new wells. In the fourth quarter of 2017 , net production at East Hackberry was approximately 174 MMcfe, or an average of 1.9 MMcfe per day, of which 98% was from oil and 2% was from natural gas. +2 +Table of Contents +Index to Financial Statements +In 2017 , at our West Hackberry field, we recompleted one gross and net well and spud one new well. In the fourth quarter of 2017 , net production at West Hackberry was approximately 17 MMcfe, or an average of 188.2 thousand cubic feet of natural gas equivalent, or Mcfe, per day, of which 100% was from oil. +We currently estimate our 2018 activities in our Southern Louisiana fields to be approximately $20.0 million in aggregate to perform recompletion activities. +As of December 31, 2017 , we held leasehold interests in approximately 3,383 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2017 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2017 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 279.8 Mcfe per day, 100% of which was from oil. During 2018 , we currently do not anticipate drilling any wells in the Niobrara Formation. +As of December 31, 2017 , we held leasehold interests in approximately 778 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2017 , our net production from this acreage was approximately 57 MMcfe, or an average of 622.4 Mcfe per day, of which 81% was from oil, 14% was from natural gas and 5% was from natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2017 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2017 , we had 5.4 Tcfe of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $2.9 billion and associated standardized measure of discounted future net cash flows of approximately $2.6 billion , excluding reserves attributable to our interests in Grizzly, Tatex II and Tatex III. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2017 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, the SCOOP in Oklahoma, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +3 +Table of Contents +Index to Financial Statements +Proved Reserves +Field +NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +42.75/52.07 +507 +264.05 +5 +4.23 +66,133 +55,733 +3,766,063 +2,597 +24,154 +3,926,574 +SCOOP (4) +30.83/38.52 +410 +145.85 +37 +25.72 +38,182 +38,182 +1,058,143 +14,048 +51,610 +1,452,094 +West Cote Blanche Bay Field (5) +80.108/100 +86 +86 +162 +162 +5,668 +5,668 +605 +1,675 +— +10,655 +E. Hackberry Field (6) +82.33/100 +17 +17 +130 +130 +2,910 +2,910 +211 +397 +— +2,594 +W. Hackberry Field +87.5/100 +2 +2 +12 +12 +726 +726 +— +149 +— +892 +Niobrara Formation +34.52/48.61 +3 +1.46 +— +— +1,460 +730 +127 +182 +— +1,218 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +150 +107 +2 +800 +Overrides/Royalty Non-operated +Various +662 +0.8 +— +— +— +— +11 +2 +— +24 +Total +1,705 +517.46 +346 +333.95 +115,465 +104,026 +4,825,310 +19,157 +75,766 +5,394,851 +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 37% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 220 gross (32.47 net) wells drilled by other operators on our acreage. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 240 gross (8.4 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2017 , we held leasehold interests in approximately 237,000 gross ( 213,000 net) acres in the Utica Shale. +Area History +The Ohio Department of Natural Resources reported that in the Utica Shale in Ohio, as of December 31, 2017 , there were 1,798 producing horizontal wells, 236 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 206 horizontal wells that were being drilled and an additional 500 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +Recently, the application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, has resulted in increased drilling activity and production in the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +The Utica Shale is estimated to be thicker and more geographically extensive than the Marcellus Shale. The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout +4 +Table of Contents +Index to Financial Statements +this area, the Utica Shale ranges in thickness from less than 100 feet to over 500 feet. There is a general thinning from east to west. +The Utica Shale is also significantly deeper than the Marcellus Shale. In some parts of Pennsylvania, the Utica Shale is estimated to be over two miles below sea level and up to 7,000 feet below the Marcellus Shale. However, the depth of the Utica Shale decreases to the west into Ohio and to the northwest under the Great Lakes and into Canada to less than 2,000 feet below sea level. +The Utica Shale is estimated to have higher carbonate and lower clay mineral content than the Marcellus Shale. The difference in mineralogy generally produces a different response to hydraulic fracturing treatments. Operators in the Utica play continue to refine completions techniques to optimize productivity. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2017 , had spud 362 gross wells, 287 of which were completed and were producing. In 2017 , we spud 94 gross ( 88.7 net) wells, of which 32 were completed as producing wells and, as of December 31, 2017 , 58 were in various stages of completion and four were still being drilled. We commenced sales from 68 gross ( 61.1 net) wells in the Utica Shale during 2017 . During 2018 (through February 9, 2018 ), we spud eight gross ( 6.4 net) wells. As of February 9, 2018 , five of these wells were waiting on completion and the other three were still drilling. In addition, other operators drilled 26 gross ( 8.4 net) wells and commenced sales from 45 gross ( 9.3 net) wells on our Utica Shale acreage in 2017 . +We currently intend to drill 36 to 40 gross ( 26 to 29 net) horizontal wells, and commence sales from 33 to 37 gross ( 33 to 37 net) horizontal wells, on our Utica Shale acreage in 2018 . We currently anticipate seven to eight net horizontal wells will be drilled, and sales commenced from nine to ten net horizontal wells, by other operators on our Utica Shale acreage during 2018 . We currently anticipate our 2018 capital expenditures to be $425.0 million to $455.0 million related to our operated and non-operated Utica Shale activities. As of February 9, 2018 , we had three operated horizontal rigs drilling in the play and expect to release one rig in March of 2018 as our contract expires. We plan to run, on average, approximately 2.5 operated horizontal rigs in the Utica Shale in 2018. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2017 was approximately 95,854 MMcfe, or 1,041.9 MMcfe per day, of which 93% was from natural gas and 7% was from oil and NGLs. +SCOOP (Oklahoma) +Location and Land +As of December 31, 2017 , we held leasehold interests in approximately 50,400 gross ( 50,400 net) surface acres in the SCOOP and approximately 92,900 net reservoir acres, which includes 50,400 net Woodford acres and 42,500 net Springer acres. +Area History +The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined province that encompasses many of the top hydrocarbon producing counties in Oklahoma. The area extends mainly across Grady, Caddo, McClain, Garvin, Stevens, Carter and Love Counties. The region was historically developed by vertical wells drilled through multiple stacked reservoirs ranging from the Cambrian to Permian Periods in age. The play represents the transition to mainly horizontal development targeting predominantly oil and condensate-rich hydrocarbons. The most prolific of these reservoirs include the, Springer (Goddard) Shale, Caney Shale, Woodford Shale and Sycamore Formation. +5 +Table of Contents +Index to Financial Statements +Geology +The SCOOP play of Oklahoma is located in the southeast portion of the prolific Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford Shale. The Woodford Shale is a silica and highly organic rich black shale that was deposited about 320 million to 370 million years ago. Across our position, the Woodford Shale ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation is age equivalent to the Meramec and Osage being developed in the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play and is located between the organic-rich Woodford and Caney Shales. The Sycamore formation is approximately 250 feet thick across our acreage position, presenting a significant future development target. +Facilities +There are standard land oil and natural gas processing facilities in the SCOOP. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon, LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. +Upon our acquisition of these assets, we focused on the high-grading of equipment for our rig fleet to drive efficiencies and lower drill days in the play. Frac design on the wells to date includes an enhanced completion when compared to historical practices for the area. Our 2017 drilling program concentrated on SCOOP Woodford wells, however, during 2017, we also spud and turned-to-sales our first Springer and Sycamore wells. +In 2017 , we spud 19 gross ( 15.7 net) wells, of which seven were completed as producing wells and, as of December 31, 2017 , eight were in various stages of completion and four were still being drilled. We commenced sales from 13 gross ( 11.0 net) wells in the SCOOP during 2017 . During 2018 (through February 9, 2018 ), we spud four gross ( 3.4 net) wells. As of February 9, 2018 , one of these wells was waiting on completion and the other three were still drilling. In addition, other operators drilled 31 gross ( 0.9 net) wells and commenced sales from 23 gross ( 0.8 net) wells on our SCOOP acreage in 2017 . +We currently intend to drill 15 to 16 gross ( 10 to 11 net) horizontal wells, and commence sales from 20 to 22 gross ( 16 to 18 net) horizontal wells, on our SCOOP acreage in 2018 . We currently anticipate four to five net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other operators on our SCOOP acreage during 2018 . We currently anticipate our 2018 capital expenditures to be $185.0 million to $210.0 million related to our operated and non-operated SCOOP activities. As of February 9, 2018 , we had four operated horizontal rigs drilling in the play and expect to release two rigs in mid-summer 2018 as our contracts expire. We intend to run, on average, three operated horizontal rigs in the SCOOP during 2018. +Production Status +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2017 was approximately 19,008 net MMcfe, or 206.6 MMcfe per day, of which 67% was from natural gas and 33% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working +6 +Table of Contents +Index to Financial Statements +interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,093 wells drilled as of December 31, 2017 , 980 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2017 , we drilled 273 new wells, 240 of which were productive, for an 88% success rate. As of December 31, 2017 , estimated field cumulative gross production was 200 MMBO and 237.8 Bcf of gas. Of the 1,093 wells drilled in WCBB as of December 31, 2017 , 86 were producing, 162 were shut-in, and six were being used as salt water disposal wells. The other 839 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,093 wells that had been drilled in the field as of December 31, 2017 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2017 , at our WCBB field, we recompleted 60 gross and net wells and spud eight new wells. As of February 9, 2018 , we had recompleted seven gross and net wells during 2018 in our WCBB field. +Production Status +In the fourth quarter of 2017 , our net production at WCBB was approximately 1,089 MMcfe, or an average of 11.8 MMcfe per day, of which 99% was from oil and 1% was from natural gas. +7 +Table of Contents +Index to Financial Statements +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.33% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2017 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2017 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 272 wells have been drilled on our portion of the field. As of December 31, 2017 , 17 wells had daily production, 130 were shut-in and three had been converted to salt water disposal wells. The remaining 122 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate three production facilities at East Hackberry that include two land based tank batteries, a production barge, two natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +During 2017 at East Hackberry, we recompleted 20 gross and net wells and spud four new wells. As of February 9, 2018 , we had recompleted two gross and net wells during 2018 in our East Hackberry field. +Production Status +In the fourth quarter of 2017 , our net production at East Hackberry was approximately 174 MMcfe, or an average of 1.9 MMcfe per day, of which 98% was from oil and 2% was from natural gas. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 87.50% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2017 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2017 , 42 wells had been drilled on our portion of West Hackberry. +8 +Table of Contents +Index to Financial Statements +As of December 31, 2017 , two of such wells were producing, 12 were shut-in and one was being used as a salt water disposal well. The remaining 27 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2017 at West Hackberry, we recompleted one gross and net well and spud one new well. As of February 9, 2018 , we had recompleted one gross and net well during 2018 in our West Hackberry field. +Production Status +In the fourth quarter of 2017 , our net production at West Hackberry was approximately 17 MMcfe, or an average of 188.2 Mcfe per day, of which 100% was from oil. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +During 2018 , we intend to run one recompletion rig in our Southern Louisiana fields. +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2017 , we held leases for approximately 3,383 net acres. In 2017 , no wells were spud on our Niobrara Formation acreage. +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +9 +Table of Contents +Index to Financial Statements +Production Status +In the fourth quarter of 2017 , net production from our Niobrara Formation acreage was approximately 26 MMcfe, or an average of 279.8 Mcfe per day, 100% of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2017 . We do not anticipate drilling any wells in the Niobrara Formation during 2018 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2017 , we held approximately 778 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2017 , our net production from this acreage was approximately 57 MMcfe, or an average of 622.4 Mcfe per day, of which 81% was from oil, 14% was from natural gas and 5% was from natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2017 . We do not anticipate drilling any wells in the Bakken Formation during 2018 . +Additional Properties +In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2017 : +Field +State +Parish/County +Acreage Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.125 +% +— +1 +— +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.301 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.052 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.0686 +% +— +1 +— +10 +Table of Contents +Index to Financial Statements +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2017 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and is awaiting final approval, which is expected in early 2018. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production, or CHOPS, at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas, or LPG, into the oil sands area for use in Thermal applications by SAGD producers. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2017 , net gas production was approximately 78 MMcf per day and condensate production was 250 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. In 2012, we participated in the formation of Stingray Pressure Pumping LLC, or Stingray Pressure, and Stingray Logistics LLC, or Stingray Logistics, with an initial ownership interest in each entity of 50%. These entities provide well completion and other well services. In 2011 and 2012, we acquired an aggregate 40% equity interest in Bison Drilling and Field Services LLC, or Bison, which owns and operates drilling rigs and related equipment. Also in 2011, we acquired a 25% interest in Muskie Proppant LLC, or Muskie, which is engaged in the processing and sale of hydraulic fracturing grade sand. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth Energy Partners LP, or Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy Services, Inc., or Mammoth Energy, which is the parent company of Mammoth, completed its initial public offering, or the IPO, of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth Energy Partners LLC (as the successor to Mammoth). Immediately following the completion of the IPO, we owned an approximate 24.2% interest in Mammoth Energy. We used the net proceeds for the sale of our Mammoth Energy shares in the IPO for general corporate purposes. +In 2013, we participated in the formation of Stingray Energy Services LLC, or Stingray Energy, with an initial ownership interest of 50%. Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. In 2012, we participated in the formation of Stingray Cementing LLC, or Stingray Cementing, with an initial ownership of 50%. Stingray Cementing provides well completion and other well services. In 2014, we acquired a 25% equity interest in Sturgeon Acquisitions LLC, or Sturgeon. Sturgeon owns an entity that operates sand mines that produce hydraulic fracturing grade sand. On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon, Stingray Energy and Stingray Cementing, bringing our equity interest in Mammoth Energy to approximately 25.1%. +11 +Table of Contents +Index to Financial Statements +In February 2016 , we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through a new entity, Strike Force Midstream LLC, or Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. We own a 25% interest in Strike Force. EQT now acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is ongoing, provides gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016 . +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. Both our Utica Shale and SCOOP natural gas production is sold to various counterparties through established NAESBs at the plant tailgates and various central delivery points owned and operated by third party midstream companies. Our natural gas production is sold under monthly, seasonal and long-term contracts and, as needed, through daily transactions. When sold in basin, pricing is typically based on Platts Gas Daily - Texas Eastern M2 Zone for our Utica Shale acreage and Platts Gas Daily - Panhandle Tx-Ok and NGPL Midcontinent for our SCOOP acreage. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements in both the Utica and SCOOP basins to transport a portion of our natural gas production to various delivery points. These agreements allow us to price the molecules at those various downstream markets less transportation charges. The majority of our Utica oil is sold to purchasers at the tailgate of a condensate stabilizer located near Cadiz, Ohio, owned and operated by MPLX Energy Logistics, or MPLX. Our SCOOP oil is sold at the lease to various purchasers at respective area postings. In Southern Louisiana, our oil is sold to parties taking custody at the lease or at the outlet from a Gulfport oil storage barge. Our NGLs in the Utica Shale are primarily fractionated at MPLX's Hopedale facility. The majority of the product is marketed by the operator with Gulfport receiving the benefit from the MPLX's aggregation and established logistic network. Our SCOOP NGLs are primarily sent to Mont Belvieu on our commitment to DCP Souther Hills and purchased at the fractionation facility. For the year ended December 31, 2017, sales to BP Energy Company, or BP, accounted for approximately 40% of our total oil, natural gas and NGL revenues, before the effects of hedging. +As of December 31, 2017 , we had an average of approximately 560,800 MMBtu per day of firm sales contracted with third parties for 2018 . We had an average of approximately 659,000 MMBtu per day, 526,000 MMBtu per day, 372,000 MMBtu per day, 272,000 MMBtu per day and 240,000 MMBtu per day contracted with third parties for 2019 , 2020 , 2021 , 2022 and thereafter, respectively. +Transportation and Takeaway Capacity +In Ohio and Oklahoma, as of December 31, 2017 , we had entered into firm transportation contracts to deliver approximately 1,095,000 MMBtu to 1,245,000 MMBtu per day for 2018. For 2019 and 2020, we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale and SCOOP acreage +12 +Table of Contents +Index to Financial Statements +but expect additional long term contracts to be limited in 2018 . Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities which began in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities, 50,000 of which began in 2017 allowing additional access to Midwest delivery points, and 100,000 expected to begin in 2018 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities which began in late 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Enable Oklahoma Intrastate which was acquired in early 2017 through our SCOOP acquisition allowing additional connectivity to East Texas and Gulf Coast markets; and +• +30,000 MMBtu per day of firm capacity on Enable Gas Transmission facilities which was acquired in early 2017 through our SCOOP acquisition allowing additional access to East Texas delivery points; and +• +20,000 MMBtu per day of firm capacity on Midcontinent Express Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Gulf Crossing Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +200,000 MMBtu per day of firm capacity on Cheniere Midship Pipeline facilities which will begin in 2019 allowing additional access to East Texas delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin and Oklahoma positions. +13 +Table of Contents +Index to Financial Statements +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent non-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under +14 +Table of Contents +Index to Financial Statements +such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers, or the Corps. On June 29, 2015, the EPA and the Corps jointly promulgated final rules redefining the scope of waters protected under the Clean Water Act. To the extent the rule expands the range of properties subject to the Clean Water Act’s jurisdiction, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas. Following its promulgation, numerous states and industry groups challenged the rule and, on October 9, 2015, a federal court stayed the rule’s implementation nationwide, pending further action in court. In response to this decision, the EPA and the Corps have resumed nationwide use of the agencies’ prior regulations defining the term “waters of the United States.” Further, on February 28, 2017, President Trump signed an executive order directing the relevant executive agencies to review the rules and to initiate rulemaking to rescind or revise them, as appropriate under the stated policies of protecting navigable waters from pollution while promoting economic growth, reducing uncertainty and showing due regard for Congress and the states. On July 27, 2017, the EPA and the Corps published a proposed rule to rescind the 2015 rules and, on November 22, 2017, the agencies published a proposed rule to maintain the status quo pending the agencies review of the 2015 rules. +The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +15 +Table of Contents +Index to Financial Statements +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other climatic changes. In May 2010, the EPA adopted regulations establishing new GHG emissions thresholds that determine when stationary sources must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA , the Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best available control technology for GHG emissions at sources otherwise subject to the PSD and Title V programs. On August 26, 2016, the EPA proposed changes needed to bring EPA’s air permitting regulations in line with the Supreme Court’s decision on GHG permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the public comment period closed on December 2, 2016. +The EPA also adopted a GHG reporting rule in September 2009 authorizing the collection of GHG data from large emission sources across a range of industry sectors. In November 2010, the EPA expanded the GHG reporting rule to include onshore and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the GHG reporting rule to add the reporting of GHG emissions from gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines. +In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process, whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore, in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the commitments set forth in the international accord. +16 +Table of Contents +Index to Financial Statements +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit greenhouse gases directly, current and future laws or regulations limiting such emissions could increase our own costs. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +There have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale and SCOOP acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. +17 +Table of Contents +Index to Financial Statements +Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +In addition, the EPA previously announced plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory, voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rulemaking to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements. These standards, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. On June 21, 2016, the United States District Court for Wyoming set aside the rule, holding that the BLM lacked Congressional authority to promulgate the rule. The BLM has appealed the decision to the Tenth Circuit Court of Appeals. Also, on November 15, 2016, the BLM finalized a rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. State and industry groups have challenged this rule in federal court, asserting that the BLM lacks authority to prescribe air quality regulations. On March 28, 2017, President Trump signed an executive order directing the BLM to review the above rules and, if appropriate, to initiate a rulemaking to rescind or revise them. Accordingly, on December 29, 2017, the BLM published a final rule to rescind the 2015 hydraulic fracturing rule. Also, on December 8, 2017, the BLM published a final rule to suspend or delay certain requirements of the 2016 methane rule until January 17, 2019. Further legal challenges are expected. At this time, it is uncertain when, or if, the rules will be implemented, and what impact they would have on our operations. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or +18 +Table of Contents +Index to Financial Statements +proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +19 +Table of Contents +Index to Financial Statements +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the plugging and abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate +20 +Table of Contents +Index to Financial Statements +Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of horizontal well pads. Under these new rules, operators must submit detailed horizontal well pad design packages prepared by a professional engineer for review and certification by the ODNR Division of Oil and Gas Resources Management prior to the commencement of any oil and natural gas activity. These rules resulted in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil and natural gas releases. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation, cyber and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $25.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $40.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $12.5 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.25 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some +21 +Table of Contents +Index to Financial Statements +forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale and SCOOP wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2017 and 2016 were approximately $0.2 million and $0.1 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, Oklahoma and Louisiana, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases through the Ohio, Oklahoma and Louisiana Incident Notification Hotlines. We also participate in the Ohio, Oklahoma and Louisiana Emergency Planning and Community Right to Know Act (EPCRA) programs, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own approximately 120,000 square feet of office space in Oklahoma City, Oklahoma that serves as our corporate headquarters. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma where some of our employees office. +We own an approximately 12,300 square feet building located in St. Clairsville, Ohio that serves as our headquarters for our Ohio operations. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We also lease an office in Lindsay, Oklahoma that serves as our Oklahoma production field office. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2017 , we had 331 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. \ No newline at end of file diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/item13.txt b/raw/filings/0000874499/2017/0001628280-18-002041/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2f04df11e3a34b80e43e7cb8a0c34418a99503 --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). \ No newline at end of file diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/item9a.txt b/raw/filings/0000874499/2017/0001628280-18-002041/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b017a6231cc0220e2ecc16c0499e97c0758ffc33 --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/item9a.txt @@ -0,0 +1,40 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2017 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2017 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2017 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2017 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2017 , as stated in their accompanying report. +/s/ Michael G. Moore +/s/ Keri Crowell +Name: +Michael G. Moore +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +77 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 22, 2018 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 22, 2018 +78 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/rp_note.txt b/raw/filings/0000874499/2017/0001628280-18-002041/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2017/0001628280-18-002041/rpt_disclosure.txt b/raw/filings/0000874499/2017/0001628280-18-002041/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..535d409a0f7eac454be95ae1cbb9b6bde38abe26 --- /dev/null +++ b/raw/filings/0000874499/2017/0001628280-18-002041/rpt_disclosure.txt @@ -0,0 +1,25 @@ +Certain Relationships and Related Transactions +Review and Approval of Related Party Transactions +The audit committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be +substantively applied to each transaction reviewed by the audit committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether such transactions are in the best interests of the +Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party +transactions. +The Company’s policy is that all of its employees and directors, as well as their family members, must avoid any activity that is or +has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform +the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the board of directors or a committee consisting solely of independent directors may grant waivers of the provisions of the +Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give +rise to a conflict of interest. +61 +Table of Contents +Further, under the audit committee charter, the audit committee is responsible for reviewing and monitoring +compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the board of directors. In addition, the board of directors and, pursuant to its written charter, the audit committee, reviews and approves all +relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, +have a direct or indirect material interest. The board of directors and the audit committee approve only those transactions that, in light of known circumstances, are consistent, or are not inconsistent with, the Company’s best interests, as +they determine in the good faith exercise of their discretion. +On February 17, 2017, we, through a wholly-owned subsidiary, completed our +acquisition of certain assets, or the Vitruvian Acquisition, from Vitruvian II Woodford, LLC, or Vitruvian, an unrelated third-party seller at the time of the Vitruvian Acquisition. The consideration paid to Vitruvian was $1.85 billion, which +included approximately 23.9 million shares of our common stock. As a result of the Vitruvian Acquisition, Vitruvian acquired more than 5% of our common stock. In connection with the Vitruvian Acquisition, we entered into a registration rights +agreement with Vitruvian, pursuant to which we agreed to file a shelf registration statement with respect to the registration under the Securities Act of 1933, as amended, of the resale of the shares issued to Vitruvian and any shares of our common +stock that may be issued or distributed in respect of the shares issued to Vitruvian upon certain events, which shelf registration statement became effective in April 2017. Under the registration rights agreement, we also agreed to provide certain +demand and piggyback registration rights to Vitruvian. As Vitruvian was not a related party at the time of the transaction, our policies did not require the Vitruvian Acquisition go through the review process described above. However, the +transaction was considered and approved by our board of directors. \ No newline at end of file diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/filing.txt b/raw/filings/0000874499/2018/0001628280-19-002242/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3bf24715bd61bf4dd42efcdbf1635869eba1c2e --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/filing.txt @@ -0,0 +1,7533 @@ +10-K +1 +gpor-12312018x10k.htm +10-K +Document +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +ý +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2018 +OR +¨ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corporation +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of +Incorporation or Organization) +(IRS Employer +Identification Number) +3001 Quail Springs Parkway +Oklahoma City, Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +(405) 252-4600 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 30, 2018 , based on the closing price of the common stock on the NASDAQ Global Select Market on June 29, 2018 , the last business day of the registrant’s most recently completed second fiscal quarter ( $12.57 per share), was $2,178,406,831 . +As of February 18, 2019 , 162,986,045 shares of the registrant’s common stock were outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +21 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +44 +ITEM 2. +PROPERTIES +44 +ITEM 3. +LEGAL PROCEEDINGS +53 +ITEM 4. +MINE SAFETY DISCLOSURES +54 +PART II +54 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +54 +ITEM 6. +SELECTED FINANCIAL DATA +55 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +57 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +72 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +74 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +74 +ITEM 9A. +CONTROLS AND PROCEDURES +74 +ITEM 9B. +OTHER INFORMATION +77 +PART III +77 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +77 +ITEM 11. +EXECUTIVE COMPENSATION +77 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +77 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +77 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +77 +PART IV +78 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +78 +ITEM 16. +FORM 10-K SUMMARY +82 +Signatures +S-0 +Index to Consolidated Financial Statements +F-1 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, crude oil and natural gas liquids, or NGLs, in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an approximate 21.9% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, a company listed on the Nasdaq Global Select Market (TUSK) that serves the electric utility and oil and natural gas industries. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 15, 2019 , we held leasehold interests in approximately 241,000 gross ( 210,000 net) acres in the Utica Shale primarily in Eastern Ohio. In 2018 , we spud 23 gross ( 19.5 net) wells, of which three were completed as producing wells and, as of December 31, 2018 , 20 were in various stages of completion. We commenced sales from 35 gross and net wells in the Utica Shale during 2018 . During 2019 (through February 15, 2019 ), we spud five gross ( 3.7 net) wells. As of February 15, 2019 , three of these wells were in various stages of completion and the other two were still drilling. In addition, other operators drilled 28 gross ( 4.4 net) wells and commenced sales from 32 gross ( 9.4 net) wells on our Utica Shale acreage in 2018 . +We currently intend to drill 13 to 15 gross ( 10 to 11 net) horizontal wells, and commence sales fr om 47 to 51 gross ( 40 to 45 n et) horizontal wells on our Utica Shale acreage in 2019 . We currently anti cipate two to three net horizontal wells will be drilled, and sales commenced fro m two to three net horizo ntal wells, by other operators on our Utica Shale acreage in 2019 . +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2018 was approximately 102,665 million cubic feet of natural gas equivalent, or MMcfe, or 1,115.9 MMcfe per day, of which 97% was from natural gas and 3% was from oil and NGLs. +As of February 15, 2019 , we held leasehold interests in approximately 50,000 net surface acres in the SCOOP. In 2018 , we spud 13 gross ( 12.1 net) wells, of which four were completed as producing wells and, as of December 31, 2018 , nine were in various stages of completion. We commenced sales from 15 gross ( 12.8 net) wells in the SCOOP during 2018 . During 2019 (through February 15, 2019 ), we spud two gross ( 1.6 net) wells. As of February 15, 2019 , both of these wells were still drilling. In addition, other operators drilled 40 gross ( 3.1 net) wells and commenced sales from 47 gross ( 3.6 net) wells on our SCOOP acreage during 2018 . +We currently intend to drill nine to ten gross ( seven to eight net) horizontal wells, and commence sales from 15 to 17 gross ( 14 to 15 net) horizontal wells on our SCOOP acreage in 2019 . We currently anticipat e one to two net horizontal wells will be drilled, and sales commenced from one to two net hor izontal wells, by other operators on our SCOOP acreage in 2019 . +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2018 was approximately 24,406 MMcfe, or an average of 265.3 MMcfe per day, of which 70% was from natural gas and 30% was from oil and NGLs. +In 2018 , at our WCBB field, we did not spud any new wells and recompleted 32 existing wells. In the fourth quarter of 2018 , net production at WCBB was approximately 837 MMcfe, or an average of 9.1 MMcfe per day, all of which was from oil. +In 2018 , at our East Hackberry field, we did not spud any new wells and recompleted 15 existing wells. In the fourth quarter of 2018 , net production at East Hackberry was approximately 115 MMcfe, or an average of 1.2 MMcfe per day, all of which was from oil. +In 2018 , at our West Hackberry field, we did not spud any new wells. In the fourth quarter of 2018 , net production at West Hackberry was approximately 17 MMcfe, or an average of 186.2 thousand cubic feet of natural gas equivalent, or Mcfe, per day, all of which was from oil. +2 +Table of Contents +Index to Financial Statements +We do not anticipate any material activities in our Southern Louisiana fields during 2019 . +As of December 31, 2018 , we held leasehold interests in approximately 2,900 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2018 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2018 , net production from our Niobrara Formation acreage was approximately 23 MMcfe, or an average of 251.0 Mcfe per day, all of which was from oil. +As of December 31, 2018 , we held leasehold interests in approximately 780 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2018 , our net production from this acreage was approximately 76 MMcfe, or an average of 827.1 Mcfe per day, of which 86% was from oil and 14% was from natural gas and natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2018 , we had 4.7 trillion cubic feet of natural gas equivalent, or Tcfe, of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $3.4 billion and associated standardized measure of discounted future net cash flows of approximately $3.0 billion , excluding reserves attributable to our interests in Grizzly and Tatex II. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2018 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, the SCOOP in Oklahoma, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +Average NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +44.26/54.44 +567 +308 +5 +4.23 +92,594 +72,693 +3,123,629 +5,289 +32,500 +3,350,363 +SCOOP (4) +24.34/30.20 +576 +173.27 +33 +27.83 +48,658 +34,532 +1,009,971 +12,937 +48,020 +1,375,713 +West Cote Blanche Bay Field (5) +80.108/100 +69 +69 +146 +146 +5,668 +5,668 +18 +1,834 +— +11,022 +E. Hackberry Field (6) +82.33/100 +14 +14 +130 +130 +2,910 +2,910 +35 +276 +— +1,692 +W. Hackberry Field +87.50/100 +2 +2 +7 +7 +727 +727 +— +391 +— +2,346 +Niobrara Formation +34.52/48.61 +3 +1.46 +— +— +1,998 +999 +— +128 +— +768 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +227 +195 +— +1,398 +Overrides/Royalty Non-operated +Various +673 +0.9 +— +— +— +— +9 +— +— +9 +Total +1,922 +568.93 +321 +315.06 +152,941 +117,606 +4,133,889 +21,050 +80,520 +4,743,311 +3 +Table of Contents +Index to Financial Statements +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 43% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 245 gross (41.44 net) wells drilled by other operators on our acreage. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 392 gross (30.02 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2018 , we held leasehold interests in approximately 241,000 gross ( 210,000 net) acres in the Utica Shale. +Area History +As of December 31, 2018 , the Ohio Department of Natural Resources reported that there were 2,138 producing horizontal wells, 246 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 116 horizontal wells that were being drilled and an additional 449 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 800 feet. There is a general thinning from east to west. Across our position, the Utica Shale ranges in thickness from over 600 to over 750 feet. +The application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, were the key technologies that unlocked development of the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2018 , had spud 385 gross wel ls, 290 of which were completed and were producing. In 2018 , we spud 23 gross ( 19.5 net) wells, of which three were completed as producing wells and, as of December 31, 2018 , 20 were in various stages of completion. We commenced sales from 35 gross and net wells in the Utica Shale during 2018 . During 2019 (through February 15, 2019 ), we spud five gross ( 3.7 net) wells. As of February 15, 2019 , three of these wells were in various stages of completion and the other two were still drilling. In addition, other operators drilled 28 gross ( 4.4 net) wells and commenced sales from 32 gross ( 9.4 net) wells on our Utica Shale acreage in 2018 . +4 +Table of Contents +Index to Financial Statements +We currently intend to dr ill 13 to 15 gross ( 10 to 11 net) horizontal wells, and commence sales from 47 to 51 gross ( 40 to 45 net) horizontal wells, on our Utica Shale acreage in 2019 . We currently anticipate two to three net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other o perators on our Utica Shale acreage during 2019 . As of February 15, 2019 , we had two operated horizontal rig drilling in the play. We plan to run, on average, approximately one operated horizontal rig in the Utica Shale in 2019. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2018 was approximately 102,665 MMcfe, or 1,115.9 MMcfe per day, of which 97% was from natural gas and 3% was from oil and NGLs. +SCOOP (Oklahoma) +Location and Land +As of December 31, 2018 , we held leasehold interests in approximately 66,000 gross ( 50,000 net) surface acres in the SCOOP and approximately 92,000 net reservoir acres, which includes 50,000 net Woodford acres and 42,000 net Springer acres. +Area History +The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined province that encompasses many of the top hydrocarbon producing counties in Oklahoma. The area extends mainly across Grady, Caddo, McClain, Garvin, Stevens, Carter and Love Counties. The region was historically developed by vertical wells drilled through multiple stacked reservoirs ranging from the Cambrian to Permian Periods in age. The play represents the transition to mainly horizontal development targeting predominantly oil and condensate-rich hydrocarbons. The most prolific of these reservoirs include the, Springer (Goddard) Shale, Caney Shale, Woodford Shale and Sycamore Formation. +Geology +The SCOOP play of Oklahoma is located in the southeast portion of the prolific Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford Shale. The Woodford Shale is a silica and highly organic rich black shale that was deposited about 320 million to 370 million years ago. Across our position, the Woodford Shale ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation is age equivalent to the Meramec and Osage being developed in the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play and is located between the organic-rich Woodford and Caney Shales. The Sycamore formation is approximately 250 feet thick across our acreage position, presenting a significant development target. +Facilities +There are standard land oil and natural gas processing facilities in the SCOOP. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon, LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. +Upon our acquisition of these assets, we focused on the high-grading of equipment for our rig fleet to drive efficiencies and lower drill days in the play. Improved well performance has also been realized with enhanced completion designs compared to +5 +Table of Contents +Index to Financial Statements +historical practices for the area. Our 2018 drilling program concentrated on SCOOP Woodford wells, however, during 2018, we also spud and commenced sales from one upper Sycamore well. +In 2018 , we spud 13 gross ( 12.1 net) wells, of which four were completed as producing wells and, as of December 31, 2018 , nine were in various stages of completion. We commenced sales from 15 gross ( 12.8 net) wells in the SCOOP during 2018 . During 2019 (through February 15, 2019 ), we spud two gross ( 1.6 net) wells. As of February 15, 2019 , both of these wells were still drilling. In addition, other operators drilled 40 gross ( 3.1 net) wells and commenced sales from 47 gross ( 3.6 ne t) wells on our SCOOP acreage in 2018 . +We currently intend to drill nine to ten gross ( seven to eight net) horizontal wells, and commence sales from 15 to 17 gross ( 14 to 15 net) horizontal wells, on our SCOOP acreage in 2019 . We currently anticipate one to two net horizontal wells will be drilled, and sales commenced from one to two net horizontal wells, by other operators on our SCOOP acreage during 2019 . As of February 15, 2019 , we had two operated horizontal rigs drilling in the play . We intend to run, on average, approximately 1.5 operated horizontal rigs in the SCOOP during 2019. +Production Status +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2018 was approximately 24,406 net MMcfe, or 265.3 MMcfe per day, of which 70% was from natural gas and 30% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now part of Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,093 wells drilled as of December 31, 2018 , 980 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2018 , we drilled 273 new wells, 240 of which were productive, for an 88% success rate. As of December 31, 2018 , estimated field cumulative gross production was 200 MMBO and 238 Bcf of gas. Of the 1,093 wells drilled in WCBB as of December 31, 2018 , 69 were producing, 146 were shut-in, and six were being used as salt water disposal wells. The other 872 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,093 wells that had been drilled in the field as of December 31, 2018 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. +6 +Table of Contents +Index to Financial Statements +The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2018 , at our WCBB field, we recompleted 32 existing wells and spud no new wells. As of February 15, 2019 , no existing wells had been recompleted during 2019 in our WCBB field. +Production Status +In the fourth quarter of 2018 , our net production at WCBB was approximately 837 MMcfe, or an average of 9.1 MMcfe per day, all of which was from oil. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.33% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2018 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2018 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 272 wells have been drilled on our portion of the field. As of December 31, 2018 , 14 wells had daily production, 130 were shut-in and three had been converted to salt water disposal wells. The remaining 125 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate two production facilities at East Hackberry that include one land based tank batteries, a production barge, two natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +7 +Table of Contents +Index to Financial Statements +During 2018 at East Hackberry, we recompleted 15 existing wells and spud no new wells. As of February 15, 2019 , no existing wells had been recompleted during 2019 in our East Hackberry field. +Production Status +In the fourth quarter of 2018 , our net production at East Hackberry was approximately 115 MM cfe, or an averag e of 1.2 MMcfe per day, all of which was from oil. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 87.50% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2018 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2018 , 42 wells had been drilled on our portion of West Hackberry. As of December 31, 2018 , two of such wells were producing, seven were shut-in and one was being used as a salt water disposal well. The remaining 32 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2018 at West Hackberry, we did not spu d any new wells . As of February 15, 2019 , no existing wells had been recompleted during 2019 in our West Hackberry field. +Production Status +In the fourth quarter of 2018 , our net production at West Hackberry was approximately 17 MMcfe, or an average of 186.2 Mcfe per day, all of which was from oil. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +We do not anticipate any material activities in our Southern Louisiana fields during 2019 . +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2018 , we held leases for approximately 2,900 net acres. In 2018 , no wells were spud on our Niobrara Formation acreage. +8 +Table of Contents +Index to Financial Statements +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2018 , net production from our Niobrara Formation acreage was approximately 23 MMcfe, or an average of 251.0 Mcfe per day, all of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2018 . We do not anticipate drilling any wells in the Niobrara Formation during 2019 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2018 , we held approximately 780 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2018 , our net production from this acreage was approximatel y 76 MMcfe, or an average o f 827.1 Mcfe per day, of wh ich 86% was f rom oil and 14% was from natural gas and natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +9 +Table of Contents +Index to Financial Statements +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2018 . We do not anticipate drilling any wells in the Bakken Formation during 2019 . +Additional Properties +In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2018 : +Field +State +Parish/County +Average Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.13 +% +— +— +1 +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2.00 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.30 +% +— +1 +— +Fay East +Oklahoma +Blaine +0.15 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.05 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.07 +% +— +2 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and is awaiting final approval. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production, or CHOPS, at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas, or LPG, into the oil sands area for use in Thermal applications by SAGD producers. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2018 , net gas production was approximately 78 MMcf per day and condensate production was 245 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In connection with Mammoth Energy's initial public offering, or IPO, in October 2016, we received 9,150,000 shares of Mammoth Energy common stock in return for our contribution to Mammoth Energy of our 30.5% interest +10 +Table of Contents +Index to Financial Statements +in Mammoth Energy Partners LLC. In June 2017, we received an additional 2,000,000 shares of Mammoth Energy common stock in connection with our contribution of all of our equity interests in three other entities to Mammoth Energy. We sold 76,250 shares of our Mammoth Energy common stock in the IPO and an additional 1,354,574 shares in a subsequent underwritten public offering in 2018. As a result, as of December 31, 2018, we owned 9,829,548 shares, or approximately 21.9%, of Mammoth Energy’s outstanding common stock. +In February 2016 , we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through a new entity, Strike Force Midstream LLC, or Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016 . In May 2018, the Company sold its 25% interest in Strike Force to EQT Midstream Partners, LP for proceeds of $175.0 million in cash. +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these and our other equity investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. Both our Utica Shale and SCOOP natural gas production is sold to various counterparties through established NAESBs at the plant tailgates and various central delivery points owned and operated by third party midstream companies. Our natural gas production is sold under monthly, seasonal and long-term contracts and, as needed, through daily transactions. When sold in basin, pricing is typically based on Platts Gas Daily - Texas Eastern M2 Zone for our Utica Shale acreage and Platts Gas Daily - Panhandle Tx-Ok and NGPL Midcontinent for our SCOOP acreage. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements in both the Utica and SCOOP basins to transport a portion of our natural gas production to various delivery points. These agreements allow us to price the molecules at those various downstream markets less transportation charges. The majority of our Utica oil is sold to purchasers at the tailgate of a condensate stabilizer located near Cadiz, Ohio, owned and operated by MPLX Energy Logistics, or MPLX. Our SCOOP oil is sold at the lease to various purchasers at respective area postings. In Southern Louisiana, our oil is sold to parties taking custody at the lease or at the outlet from a Gulfport oil storage barge. Our NGLs in the Utica Shale are primarily fractionated at MPLX's Hopedale facility. The majority of the product is marketed by the operator with Gulfport receiving the benefit from the MPLX's aggregation and established logistic network. Our SCOOP NGLs are primarily sent to Mont Belvieu on our commitment to DCP Southern Hills and purchased at the fractionation facility. For the year ended December 31, 2018, sales to BP Energy Company, or BP, and ECO-Energy accounted for approximately 17% and 10% , respectively, of our total oil, natural gas and NGL revenues, before the effects of hedging. +As of December 31, 2018 , we had an average of approximately 663,000 MMBtu per day of firm sales contracted with third parties for 2019 . We had an average of approximately 526,000 MMBtu per day, 372,000 MMBtu per day, 272,000 MMBtu per day, 255,000 MMBtu per day and 212,000 MMBtu per day contracted with third parties for 2020 , 2021 , 2022 , 2023 and thereafter, respectively. +11 +Table of Contents +Index to Financial Statements +Transportation and Takeaway Capacity +In Ohio and Oklahoma, as of December 31, 2018 , we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 and 2020. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale and SCOOP acreage but expect additional long term contracts to be limited in 2019 . Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities which began in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities, 50,000 of which began in 2017 allowing additional access to Midwest delivery points, and 100,000 of which began in 2018 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities which began in late 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Enable Oklahoma Intrastate which was acquired in early 2017 through our SCOOP acquisition allowing additional connectivity to East Texas and Gulf Coast markets; and +• +30,000 MMBtu per day of firm capacity on Enable Gas Transmission facilities which was acquired in early 2017 through our SCOOP acquisition allowing additional access to East Texas delivery points; and +• +20,000 MMBtu per day of firm capacity on Midcontinent Express Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Gulf Crossing Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +12 +Table of Contents +Index to Financial Statements +• +200,000 MMBtu per day of firm capacity on Cheniere Midship Pipeline facilities which will begin in 2019 allowing additional access to East Texas delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin and Oklahoma positions. +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent non-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in +13 +Table of Contents +Index to Financial Statements +December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers, or the Corps. On June 29, 2015, the EPA and the Corps jointly promulgated final rules redefining the scope of waters protected under the Clean Water Act. The rules are subject to ongoing litigation and have been stayed in more than half the States. Also, on December 11, 2018, the EPA and the Corps released a proposed rule that would replace the 2015 rule, and significantly reduce the waters subject to federal regulation under the Clean Water Act. Such proposal is currently subject to public review and comment, after which additional legal challenges are anticipated. As a result of such recent developments, substantial uncertainty exists regarding the scope of waters protected under the Clean Water Act. To the extent the rule expands the range of properties subject to the Clean Water Act’s jurisdiction, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas. +The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and +14 +Table of Contents +Index to Financial Statements +several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases. The EPA has finalized a series of greenhouse gas monitoring, reporting and emission control rules for the oil and natural gas industry and the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process, whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore, in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the commitments set forth in the international accord. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit greenhouse gases directly, current and future laws or regulations limiting such emissions could increase our own costs. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +There have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any such litigation, we could be named in actions making similar +15 +Table of Contents +Index to Financial Statements +allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act, though, in December 2017, the U.S. Fish and Wildlife Service provided guidance limiting the reach of the Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale and SCOOP acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +Additionally, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission +16 +Table of Contents +Index to Financial Statements +standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rule making to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements. Also, on October 15, 2018, the EPA published a proposed rule to significantly reduce regulatory burdens imposed by the 2016 regulations, including, for example, reducing the monitoring frequency for fugitive emissions and revising the requirements for pneumatic pumps at well sites. The above standards, to the extent implemented, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. Also, on November 15, 2016, the BLM finalized a waste prevention rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. On March 28, 2017, President Trump signed an executive order directing the BLM to review the above rules and, if appropriate, to initiate a rulemaking to rescind or revise them. Accordingly, on December 29, 2017, the BLM published a final rule to rescind the 2015 hydraulic fracturing rule; however, a coalition of environmentalists, tribal advocates and the state of California filed lawsuits challenging the rule rescission. Also, on February 22, 2018, the LM published proposed amendments to the waste prevention rule that would eliminate certain air quality provisions and, on April 4, 2018, a federal district court stayed certain provisions of the 2016 rule. At this time, it is uncertain when, or if, the rules will be implemented, and what impact they would have on our operations. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are +17 +Table of Contents +Index to Financial Statements +adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce +18 +Table of Contents +Index to Financial Statements +from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the plugging and abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells +19 +Table of Contents +Index to Financial Statements +and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of horizontal well pads. Under these new rules, operators must submit detailed horizontal well pad design packages prepared by a professional engineer for review and certification by the ODNR Division of Oil and Gas Resources Management prior to the commencement of any oil and natural gas activity. These rules resulted in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil and natural gas releases. Also, on November 20, 2018, Ohio EPA announced that it intends to develop new rules that would cover air pollution emissions associated with non-conventional oil and gas facilities. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation, cyber and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $101.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $52.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $16.0 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.75 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale and SCOOP wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by +20 +Table of Contents +Index to Financial Statements +applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2018 and 2017 were approximately $0.6 million and $0.2 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, Oklahoma and Louisiana, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases through the Ohio, Oklahoma and Louisiana Incident Notification Hotlines. We also participate in the Ohio, Oklahoma and Louisiana Emergency Planning and Community Right to Know Act (EPCRA) programs, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an office building with approximately 120,000 square feet of office space in Oklahoma City, Oklahoma that serves as our corporate headquarters. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma where some of our employees office. +We own an approximately 12,300 square foot building located in St. Clairsville, Ohio that serves as our headquarters for our Ohio operations. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We also lease an office in Lindsay, Oklahoma that serves as our Oklahoma production field office. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2018 , we had 350 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +ITEM 1A. +RISK FACTORS +Risks Related to our Business and Industry +Market conditions for oil and natural gas, and volatility in prices for oil and natural gas, have in the past adversely affected, and may continue in the future to adversely affect, our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including: +• +worldwide and domestic supplies of oil and natural gas; +21 +Table of Contents +Index to Financial Statements +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +the level of consumer demand; +• +the price and availability of alternative fuels; +• +technical advances affecting energy consumption; +• +risks associated with operating drilling rigs; +• +the availability of pipeline capacity and other transportation facilities; +• +the price and level of foreign imports; +• +domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +speculative trading in crude oil and natural gas derivative contracts; +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• +the overall domestic and global economic environment; and +• +weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017 , West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018 , WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to conduct additional exploration and development activities. +Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our future growth rate. +Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our 2019 business plan, we considered allocating capital and other resources to various aspects of our businesses, including well development, reserve acquisitions, midstream infrastructure and other activities. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2019 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, including the appropriate rate of reserve development, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and +22 +Table of Contents +Index to Financial Statements +growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2019 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives. +We periodically engage in acquisitions, dispositions and other strategic transactions, including equity investments and joint ventures such as our recent midstream agreement with EQT. These transactions involve various inherent risks, such as changes in prevailing market conditions, our ability to obtain the necessary regulatory approvals, the timing of and conditions that may be imposed on us by regulators and our ability to achieve benefits anticipated to result from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us to risks and uncertainties, such as committing us to fund operating and/or capital expenditures, the timing and amount of which we may not be able to control. Further, the counterparties to these transactions may not satisfy their obligations to the joint venture. Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. Concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2019 to be in the range of $525.0 million to $550.0 million and an additional $40.0 million to $50.0 million for leasehold expenditures, primarily lease extensions and infill leasing within our Utica Shale and Scoop development plans. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including: +• +our proved reserves; +• +the volume of oil and natural gas we are able to produce from existing wells; +• +the prices at which oil and natural gas are sold; +• +our ability to acquire, locate and produce economically new reserves; and +• +our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2019 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we +23 +Table of Contents +Index to Financial Statements +have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including: +• +recoverable reserves; +• +future oil and natural gas prices and their applicable differentials; +• +operating costs; and +• +potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +24 +Table of Contents +Index to Financial Statements +Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities. +Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We may incur losses as a result of title defects in the properties in which we invest. +It is our practice in acquiring oil and natural gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. +Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss. +Recent decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio. +On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 version of the ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action in order to establish abandonment of mineral rights. After June 30, 2006, (the effective date of the 2006 version of the ODMA), surface owners are required to follow the statutory notice and recording procedures enacted in 2006. We have assessed the impact of these recent Ohio Supreme Court decisions on our operations in Ohio where the majority of our acreage and our producing properties are located and have taken steps to mitigate any potential risks identified as a result of our assessment. However, the Ohio Supreme Court decisions could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expense, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio, any of which could have an adverse effect on our results of operations and financial condition. +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals and/or permits; +• +unplanned increases in the cost of construction materials or labor; +25 +Table of Contents +Index to Financial Statements +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +• +market-related increases in a project's debt or equity financing costs; and +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 SAGD oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. We reviewed our investment in Grizzly for impairment, resulting in an aggregate other than temporary impairment write down of $23.1 million for the year ended December 31, 2016. As of and during the years ended December 31, 2018 and 2017, commodity prices had increased as compared to 2016. We engaged an independent third party to perform a sensitivity analysis based on updated pricing as of December 31, 2018, and concluded that there were no impairment indicators that required further evaluation for impairment. If commodity prices decline, further impairment of our investment in Grizzly may result in the future. The Algar Lake and other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Restrictions on the ability to obtain water may impact our operations. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. +We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of David M. Wood, our Chief Executive Officer and President, or our other senior management and technical personnel, could disrupt our operations and have a material adverse effect on our financial condition and results of +26 +Table of Contents +Index to Financial Statements +operations. Our executives are not restricted from competing with us if they cease to be employed by us, except under certain limited circumstances prohibiting competition while making use of our trade secrets. We are party to an employment agreement with certain of our executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production. +There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our Utica Shale acreage and our WCBB and Hackberry fields at December 31, 2018, 2017 and 2016, our SCOOP acreage at December 31, 2018 and 2017 and our Niobrara field and our overriding royalty and non-operated interests at December 31, 2018 and (ii) our personnel with respect to our Niobrara field and our overriding royalty and non-operated interests at December 31, 2017, and 2016. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. +Estimates of reserves as of year-end 2018 , 2017 and 2016 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2018 , 2017 and 2016 , respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. +The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2018 , 2017 and 2016 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2018 , 2017 and 2016 , respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• +actual prices we receive for oil and natural gas; +• +the amount and timing of actual production; +• +supply of and demand for oil and natural gas; and +• +changes in governmental regulations or taxation. +The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. +SEC rules could limit our ability to book additional proved undeveloped reserves in the future. +SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit +27 +Table of Contents +Index to Financial Statements +our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe, because they have become uneconomic or otherwise. +The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. +Approximately 55.4% of our total estimated proved reserves at December 31, 2018 , were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. With respect to our Utica Shale acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. +If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations. +28 +Table of Contents +Index to Financial Statements +As of December 31, 2018 , we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 and 2020. See Item 1. “ Business-Transportation and Takeaway Capacity .” Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, taking into consideration the current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +Substantially all of our producing properties are located in Eastern Ohio, Oklahoma and Louisiana, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio, Oklahoma and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. +We have identified over 1,000 drilling locations on our Ohio and Oklahoma properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business. +Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations. +Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including: +• +unusual or unexpected geological formations; +• +loss of drilling fluid circulation; +• +title problems; +• +facility or equipment malfunctions; +• +unexpected operational events; +• +shortages or delivery delays of equipment and services; +• +compliance with environmental and other governmental requirements; and +• +adverse weather conditions. +29 +Table of Contents +Index to Financial Statements +Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. +Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. +In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities. +We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier, seismically active areas and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities and restrictions on our activities as a result of spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations (which could cause us to cease operations), the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws. +Moreover, public interest in the protection of the environment has tended to increase over time. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected. +30 +Table of Contents +Index to Financial Statements +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +We have been an early entrant into the SCOOP play in Oklahoma. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. +We have been an early entrant into the SCOOP play in Oklahoma. On February 17, 2017, we completed our SCOOP acquisition, which included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. The area was historically developed by vertical wells drilled through multiple stacked reservoirs; however, the current play represents the transition to mainly horizontal development. As a developing play, our drilling results in this area are more uncertain than +31 +Table of Contents +Index to Financial Statements +drilling results in areas that are more developed and have been producing for a longer period of time. Since limited production history from horizontal wells in the SCOOP exists and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the SCOOP may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the SCOOP or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells. +A key part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. +Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following: +• effectively controlling the level of pressure flowing from particular wells; +• landing our wellbore in the desired drilling zone; +• staying in the desired drilling zone while drilling horizontally through the formation; +• running our casing the entire length of the wellbore; and +• being able to run tools and other equipment consistently through the horizontal wellbore. +Risks that we face while completing our wells include, but are not limited to, the following: +• the ability to fracture stimulate the planned number of stages; +• the ability to run tools the entire length of the wellbore during completion operations; and +• the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage +The results of our drilling in new or emerging formations (including the SCOOP) are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +32 +Table of Contents +Index to Financial Statements +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income. +A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. Approximately 18% of our Utica Shale undeveloped acreage that is subject to expiration will be subject to expiration in 2019 , with 16% of such acreage expiring in 2020 , 15% in 2021 and 51% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2018 , leases representing 88%, 8% and 4% of our SCOOP undeveloped acreage that is subject to expiration are scheduled to expire in 2019, 2020 and 2021, respectively. As of December 31, 2018 , leases representing 66% of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2019. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Conservation measures and technological advances could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities. +Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations, including those relating to protection of human health and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations impose increasingly strict requirements for water and air pollution control and solid waste management, which trend may continue. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. See Item 1. “Business- +33 +Table of Contents +Index to Financial Statements +Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of certain laws and regulations that affect us. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. We use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. The hydraulic fracturing process is typically regulated by state oil and natural gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. +In addition, several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of federal, state and local laws and initiatives concerning hydraulic fracturing, see Item 1. “ Business-Regulation-Regulation of Hydraulic Fracturing ” above. +If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could reduce the volumes of oil and natural gas that we can recover economically and cause us to incur substantial compliance costs. Reduced production and/or compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +We dispose of large volumes of produced water gathered from our drilling and production operations in our Louisiana fields by injecting it into wells pursuant to permits issued to us by governmental authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. +In our Utica operations, we attempt to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle 100% of all produced water, we do inject water into third party commercially operated disposal wells in line with all state and federal mandated practices and cease +34 +Table of Contents +Index to Financial Statements +produced water recycle whenever fracture stimulation operations are idle. In the state of Ohio, all water used during drilling operations is disposed of through injection into third party salt water disposal wells regulated by applicable state agencies. +In our SCOOP operations, state regulations allow for the storage of produced water in permitted, above ground, lined and monitored impoundments. These storage impoundments allow the recycle of approximately two-thirds of our produced water from all production and completion operations and approximately 80% of water used in the drilling phase of our operations. The limited water disposed of during drilling operations is injected into state regulated commercial disposal wells. +The adoption and implementation of any new laws or regulations that restrict our ability to use hydraulic fracturing or dispose of produced water gathered from our drilling and production activities by own disposal wells, could have a material adverse effect on our business, financial condition and results of operations. +Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate. +Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife species or their habitat. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect threatened or endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. +The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. +In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy. +The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts +35 +Table of Contents +Index to Financial Statements +(including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows. +Regulation of greenhouse emissions could result in increased operating costs and reduced demand for the oil and natural gas we produce. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for oil and natural gas industry, and the U.S. Congress has, from time to time, considered adopting legislation to reduce emissions. Almost one-half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives. For a description of GHG existing and proposed rules and regulations, see Item 1. “ Business-Regulation-Environmental Regulation-Climate Change .” +Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. +In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase. +Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore is exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress, +36 +Table of Contents +Index to Financial Statements +which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, financial condition or results of operations. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations. +We face extensive competition in our industry. +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The two largest purchasers of our oil and natural gas during the year ended December 31, 2018 accounted for approximately 17% and 10% , respectively, of our total oil, natural gas and NGL revenues. If these purchasers or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +Our method of accounting for oil and natural gas properties may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2018, 2017 and 2016 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recorded a ceiling test impairment of $715.5 million for the year ended December 31, 2016 . If prices of oil, natural gas and natural gas liquids continue to decrease, we may be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Recently enacted U.S. tax legislation as well as future U.S. and state tax legislations may adversely affect our business, results of operations, financial condition and cash flow. +On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act, that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. Among other changes, the Tax Act (i) permanently reduces the U.S. corporate income tax rate, (ii) repeals the corporate alternative minimum tax, (iii) eliminates the deduction for certain domestic production activities, (iv) imposes new limitations on the utilization of net operating losses, and (v) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. The Tax Act is complex and +37 +Table of Contents +Index to Financial Statements +far-reaching, and we cannot predict with certainty the resulting impact its enactment will have on us. The ultimate impact of the Tax Act may differ from our estimates due to changes in interpretations and assumptions made by us as well as additional regulatory guidance that may be issued, and any such changes in our interpretations and assumptions could have an adverse effect on our business, results of operations, financial condition and cash flow. +In addition, from time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislations have been introduced in the past to (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal of the percentage depletion allowance for oil and natural gas properties; and (iii) extend the amortization period for certain geological and geophysical expenditures. While these specific changes are not included in the Tax Act, no accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. These proposed changes in the U.S. tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Additional state taxes on natural gas extraction may be imposed as a result of future legislation. +In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014. The Ohio State Senate held a hearing on the bill, but there was no further movement before the recess of that General Assembly. +In February 2015, the Governor of Ohio proposed another plan to the new General Assembly to enact new severance taxes on the oil and gas industry. This proposal was part of a state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would have imposed a 6.5% tax on oil and gas sold at the wellhead. This severance tax increase was removed from the Bill that was ultimately passed by the Ohio House. +A new General Assembly took office in January 2017, and the Governor of Ohio proposed a new severance tax initiative. The proposal would impose a fixed rate of 6.5% for crude oil and natural gas when sold at the wellhead and a lower rate of 4.5% at later stages of distribution for natural gas and natural gas liquids. The proposal was again met with opposition and was not included in the final budget that was passed and signed by the Governor on June 30, 2017 and effective for the period of July 1, 2017 through June 30, 2019. +These proposed changes in the U.S. and applicable state tax law, if adopted, or other similar changes that tax our production or reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows. +Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and natural gas, which could adversely affect the results of our drilling operations. +Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activities may not be successful or economical. +We are exposed to fluctuations in the price of natural gas and oil. Although we have hedged a portion of our estimated 2018 production, we may still be adversely affected by continuing and prolonged declines in the price of natural gas and oil. +We use derivative instruments to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For information regarding these derivative instruments, see Item 7A. " Quantitative and Qualitative Disclosures about Market Risk. " Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less +38 +Table of Contents +Index to Financial Statements +than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted. +Our hedging transactions expose us to counterparty credit risk. +Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the terms of the derivative contract and we may not be able to realize the benefit of the derivative contract. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. +Loss of our information and computer systems could adversely affect our business. +We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, whether due to cyber attack or otherwise, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, and processing activities. For example, we depend on digital technologies to interpret seismic data, manage drilling rigs, production equipment and gathering systems, conduct reservoir modeling and reserves estimation, and process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of its vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. +Risks Relating to Our Indebtedness +Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects. +As of December 31, 2018 , we had total indebtedness (net of unamortized debt issuance costs) of approximately $2.1 billion , primarily attributable to our senior notes. We had $45.0 million in borrowings outstanding under our secured revolving credit facility and our borrowing base availability was $638.4 million after giving effect to an aggregate of $316.6 million of letters of credit. +Our outstanding indebtedness could have important consequences to you, including the following: +39 +Table of Contents +Index to Financial Statements +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indentures; +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on our senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. +Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness. +Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indentures governing our senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +40 +Table of Contents +Index to Financial Statements +Restrictive covenants in our secured revolving credit facility, the indentures governing our senior notes and in future debt instruments may restrict our ability to pursue our business strategies. +Our secured revolving credit facility and the indentures governing our senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to: +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets including capital stock of restricted subsidiaries; +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indentures governing our senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indentures governing our senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $1.4 billion, with an elected commitment of $1.0 billion. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2018 , we had $45.0 million in borrowings and $316.6 million of letters of credit outstanding under our revolving credit facility. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our +41 +Table of Contents +Index to Financial Statements +borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indentures governing our senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2018 , our borrowing base under our revolving credit facility was set at $1.4 billion, with an elected commitment of $1.0 billion, and we had $45.0 million in borrowings under this facility. Total funds available for borrowing under our revolving credit facility as of December 31, 2018 , after giving effect to $316.6 million of outstanding letters of credit, were $638.4 million . In addition, the indentures governing our senior notes allow us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indentures governing our senior notes also allow us to incur certain other additional secured debt and allow us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to our senior notes. In addition, the indentures governing our senior notes do not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with our senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of our senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. +Our borrowings under our revolving credit facility expose us to interest rate risk. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2018 , amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 4.23%. A 1% increase in the average interest rate would have increased our interest expense by approximately $0.8 million based on outstanding borrowings under our revolving credit facility throughout the year ended December 31, 2018. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2018 , we did not hedge our interest rate risk. +If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit. +Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs. +Risks Related to Our Common Stock +If our quarterly revenues and operating results fluctuate significantly, the price of our common stock may be volatile. +Our revenues and operating results may in the future vary significantly from quarter to quarter. If our quarterly results fluctuate, it may cause our stock price to be volatile. We believe that a number of factors could cause these fluctuations, including: +• +changes in oil and natural gas prices; +• +changes in production levels; +• +changes in governmental regulations and taxes; +42 +Table of Contents +Index to Financial Statements +• +geopolitical developments; +• +the level of foreign imports of oil and natural gas; and +• +conditions in the oil and natural gas industry and the overall economic environment. +Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly. +We do not currently pay dividends on our common stock and do not anticipate doing so in the future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +There is no guarantee that we will repurchase shares of our common stock under our recently announced stock repurchase program at a level anticipated by our stockholders, which could reduce returns to our stockholders. Decisions to repurchase our common stock will be at the discretion of our board of directors based upon a review of relevant considerations. +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program to acquire up to an additional $100.0 million of our common stock during 2018 for a total of up to $200.0 million. This repurchase program was authorized to extend through December 31, 2018 and was fully executed 2018. In January 2019, our board of directors approved a new stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. The repurchase program does not require us to acquire any specific number of shares. From January 1, 2019 through February 28, 2019, we did not repurchase any shares of our common stock under our new stock repurchase program. An aggregate of $400.0 million remains available for future stock repurchases under our new stock repurchase program. Our board of director’s determination to repurchase shares of our common stock under our new stock repurchase program will depend upon market conditions, applicable legal requirements, contractual obligations and other factors that the board of directors deems relevant. Based on an evaluation of these factors, our board of directors may determine not to repurchase shares or to repurchase shares at reduced levels from those anticipated by our stockholders, any or all of which could reduce returns to our stockholders. +A change of control could limit our use of net operating losses. +As of December 31, 2018 , we had a net operating loss, or NOL, carry forward of approximately $782.7 million for federal income tax purposes. If we were to experience an “ownership change,” as determined under Section 382 of the Code, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Internal Revenue Code) at any time during a rolling three-year period. +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC for resale by certain of our stockholders. Sales of these or other shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 18, 2019 , there were 162,986,045 shares of our common stock issued and outstanding, excluding 1,534,688 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan. +43 +Table of Contents +Index to Financial Statements +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Additional information regarding our properties is included in Item 1. " Business " above and in Note 3 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference. +Proved Oil and Natural Gas Reserves +Evaluation and Review of Reserves. +Reserve estimates at December 31, 2018 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio ( 71% of our proved reserves at December 31, 2018 ), the SCOOP Woodford and SCOOP Springer plays in Oklahoma ( 29% of our proved reserves at December 31, 2018 ), our WCBB, Hackberry and Niobrara fields, as well as our overriding royalty and non-operated interests (less than 1% of our proved reserves at December 31, 2018 ). Reserve estimates at December 31, 2017 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma and our WCBB and Hackberry fields. Reserve estimates at December 31, 2016 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio and our WCBB and Hackberry fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests at December 31, 2017 and 2016. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale, SCOOP, WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure +44 +Table of Contents +Index to Financial Statements +and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has over 100 years combined industry experience and our reservoir staff has approximately 50 years combined experience. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• +annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +The following table sets forth our estimated proved reserves at December 31, 2018 , 2017 and 2016 : +Year Ended December 31, +2018 +2017 +2016 +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Oil +(MBbls) +Natural +Gas +(MMcf) +Natural Gas Liquids (MBbls) +Proved developed +9,570 +1,813,184 +40,810 +10,245 +1,616,930 +36,247 +4,882 +744,797 +14,299 +Proved undeveloped +11,480 +2,320,705 +39,710 +8,912 +3,208,380 +39,519 +664 +1,422,271 +5,828 +Total (1) +21,050 +4,133,889 +80,520 +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +Year Ended December 31, +2018 +2017 +2016 +Total net proved oil and natural gas reserves (MMcfe) (1) +4,743,311 +5,394,851 +2,321,108 +PV-10 value (in millions) (2) +$ +3,407.3 +$ +2,883.0 +$ +696.0 +Standardized measure (in millions) (3) +$ +2,982.7 +$ +2,643.6 +$ +688.0 +_____________________ +(1) +Estimates of reserves as of year-end 2018 , 2017 and 2016 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12- +45 +Table of Contents +Index to Financial Statements +month period ended December 31, 2018 , 2017 and 2016 , respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2018 , 2017 and 2016 . Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. +(2) +Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2018 , 2017 and 2016 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $65.56 per barrel and $3.10 per MMBtu for 2018 , $51.34 per barrel and $2.98 per MMBtu for 2017 and $42.75 per barrel and $2.48 per MMBtu for 2016 , and in each case adjusted by lease for transportation fees and regional price differentials. +PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows. +The following table reconciles the standardized measure of future net cash flows to the PV-10 value: +December 31, +2018 +2017 +2016 +(In thousands) +Standardized measure of discounted future net cash flows +$ +2,982,725 +$ +2,643,564 +$ +688,040 +Add: Present value of future income tax discounted at 10% +424,596 +239,468 +7,927 +PV-10 value +$ +3,407,321 +$ +2,883,032 +$ +695,967 +(3) +The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. +The above table does not include proved reserves net to our interest in Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “ Business–Our Equity Investments .” +As noted above, our December 31, 2018 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2018 of $65.56 per barrel and $3.10 per MMBtu. Holding production and development costs constant, if our 2018 reserves were calculated using the December 31, 2018 price of $45.41 per barrel and $2.94 per MMBtu, our discounted future net cash flows before income taxes would have been approximately $2.5 billion, or $0.9 billion less than our actual PV-10 value of $3.4 billion at December 31, 2018 . +The table below provides the 2018 SEC pricing of benchmark prices as well as the unweighted average of the months ended December 31, 2018 and January 31, 2019: +SEC Pricing 2018 +2-month Average 2019 +Henry Hub Natural Gas (per MMBtu) +$ +3.10 +$ +3.90 +WTI Crude Oil (per Bbl) +$ +65.56 +$ +48.17 +The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a +46 +Table of Contents +Index to Financial Statements +result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2018 . +The following table summarizes the changes in our estimated proved reserves during 2018 (in Bcfe): +Proved Reserves, December 31, 2017 +5,395 +Sales of oil and gas reserves in place +(45 +) +Extensions and discoveries +711 +Revisions of prior reserve estimates +(821 +) +Current production +(497 +) +Proved Reserves, December 31, 2018 +4,743 +Sales of oil and natural gas reserves in place. These are revisions to proved reserves resulting from the divestiture of minerals in place during a period. During 2018 , we sold approximately 44.9 Bcfe of proved oil and natural gas reserves through various sales of non-operated interests in both our Utica and SCOOP fields. +Extensions and discoveries. These are additions to our proved reserves that result from (i) extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery and (ii) discovery of new fields with proved reserves or of new reservoirs of proved reserves in existing fields. Extensions and discoveries of approximately 711.2 Bcfe of proved reserves were primarily attributable to the continued development of our Utica Shale and SCOOP acreage. We added 76 locations in our Utica field, 59 locations in our SCOOP field and 13 new locations in our Southern Louisiana fields. Total extensions and discoveries of approximately 569.8 Bcfe were attributed to our Utica field, which was primarily a result of our current development plan which refocuses development within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced downward revisions of approximately 1.0 Tcfe in estimated proved reserves with the exclusion of 127 PUD locations in our Utica field and 12 PUD locations in our SCOOP field, which was primarily a result of changes in our schedule which moved development of these PUD locations beyond five years of initial booking. The development plan change, as approved by our senior management and board of directors, is a result of continued focus on free cash flow generation, thereby reducing the number of wells included in our development plan. This downward revision was partially offset by upward revisions of approximately 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length, 67.6 Bcfe due to changes in ownership interest, 27.9 Bcfe due to an increase in pricing and 8.3 Bcfe due to changes in our well performance. +While commodity prices experienced volatility throughout 2018 , the 12-month average price for natural gas increased from $2.98 per MMBtu for 2017 to $3.10 per MMBtu for 2018 , the 12-month average price for NGLs increased from $18.40 per barrel for 2017 to $32.02 per barrel for 2018 , and the 12-month average price for crude oil increased from $51.34 per barrel for 2017 to $65.56 per barrel for 2018 . +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2018 , 2017 and 2016 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities , or Supplemental Information , in Note 19 to our consolidated financial statements included in this report. +47 +Table of Contents +Index to Financial Statements +Proved Undeveloped Reserves (PUDs) +As of December 31, 2018 , our proved undeveloped reserves totaled 11,480 MBbls of oil, 2,320,705 MMcf of natural gas and 39,710 MBbls of NGLs, for a total of 2,627,845 MMcfe. Approximately 68% and 32% of our PUDs at year-end 2018 were located in our Utica field and our SCOOP field, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The current development plan approved by our senior management and board of directors represents a decrease in drilling activity from our previous plans with a focus on free cash flow generation. As a result, drilling of certain previously booked PUD locations in both our Utica and SCOOP development plans has been extended beyond five years of initial booking. This change was not a result of well performance or economics. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2018 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2017 +3,499 +Sales of oil and natural gas reserves in place +(45 +) +Extensions and discoveries +649 +Conversion to proved developed reserves +(576 +) +Revisions of prior reserve estimates +(899 +) +Proved Undeveloped Reserves, December 31, 2018 +2,628 +Sales of oil and natural gas reserves in place. During 2018 , we sold approximately 44.9 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in our Utica field. +Extensions and discoveries. Our extensions and discoveries of approximately 649.4 Bcfe were primarily attributed to the addition of 75 PUD locations in the Utica field and 11 PUD locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Conversion to proved developed reserves. We converted approximately 575.9 Bcfe attributable to 62 PUD locations into proved developed reserves and 16 PUD locations into proved developed not producing. These 78 PUDs represent a conversion rate of 18% for 2018. +Revision of prior reserve estimates. We experienced negative revisions of approximately 1.0 Tcfe from the exclusion of 127 PUD locations in our Utica field and 12 PUD locations in our SCOOP field, which were primarily a result of changes in our development plan which moved development of these PUD locations beyond five years of initial booking. The development plan change, as approved by our senior management and board of directors, is a result of a focus on free cash flow generation. This negative revision was partially offset by positive revisions of 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length and 26.3 Bcfe due to change in our ownership interest. +Costs incurred relating to the development of PUDs were approximately $370.3 million in 2018 . +All PUD drilling locations included in our 2018 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2018 , 1% of our total proved reserves were classified as proved developed non-producing. +48 +Table of Contents +Index to Financial Statements +As noted above, our December 31, 2018 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2018 of $65.56 per barrel and $3.10 per MMBtu. Holding production and development costs constant, if SEC pricing were $50.00 per barrel and $2.50 per MMBtu, this would have resulted in a loss of 1.3 Tcfe of our PUD volumes at December 31, 2018 . Holding production and development costs constant, if SEC pricing were $40.00 per barrel and $2.00 per MMBtu, this would have resulted in a loss of 2.3 Tcfe of our PUD volumes at December 31, 2018 . +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +49 +Table of Contents +Index to Financial Statements +2018 +2017 +2016 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +443,742 +350,061 +227,594 +Total natural gas sales +$ +1,121,815 +$ +845,999 +$ +420,128 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.53 +$ +2.42 +$ +1.85 +Impact from settled derivatives ($/Mcf) +$ +(0.04 +) +$ +0.07 +$ +0.60 +Average natural gas sales price, including settled derivatives +($/Mcf) +$ +2.49 +$ +2.49 +$ +2.45 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,801 +2,579 +2,126 +Total oil and condensate sales +$ +177,793 +$ +124,568 +$ +81,173 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +63.48 +$ +48.29 +$ +38.18 +Impact from settled derivatives ($/Bbl) +$ +(9.51 +) +$ +1.59 +$ +5.11 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +53.97 +$ +49.88 +$ +43.29 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +251,720 +224,038 +161,562 +Total natural gas liquids sales +$ +178,915 +$ +136,057 +$ +59,115 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.71 +$ +0.61 +$ +0.37 +Impact from settled derivatives ($/Gal) +$ +(0.05 +) +$ +(0.03 +) +$ +(0.01 +) +Average natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.66 +$ +0.58 +$ +0.36 +Natural gas, oil and condensate and natural gas liquids sales +Natural gas equivalents (MMcfe) +496,505 +397,543 +263,430 +Total natural gas, oil and condensate and natural gas liquids sales +$ +1,478,523 +$ +1,106,624 +$ +560,416 +Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.98 +$ +2.78 +$ +2.13 +Impact from settled derivatives ($/Mcfe) +$ +(0.12 +) +$ +0.07 +$ +0.56 +Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.86 +$ +2.85 +$ +2.69 +Production Costs: +Average production costs ($/Mcfe) +$ +0.18 +$ +0.20 +$ +0.26 +Average production taxes ($/Mcfe) +$ +0.07 +$ +0.05 +$ +0.05 +Average midstream gathering and processing ($/Mcfe) +$ +0.58 +$ +0.63 +$ +0.63 +Total production costs, midstream costs and production taxes ($/Mcfe) +$ +0.83 +$ +0.88 +$ +0.94 +50 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2018 : +Year Ended December 31, +2018 +2017 +2016 +Utica Shale +Net Production +Oil (MBbls) +299 +473 +870 +Natural gas (MMcf) +379,417 +309,450 +227,447 +NGL (Mgal) +113,379 +139,634 +161,494 +Total (MMcfe) +397,406 +332,238 +255,740 +Average Sales Price Without the Impact of Derivatives: +Oil ($/Bbl) +$ +60.22 +$ +44.26 +$ +34.59 +Natural gas ($/Mcf) +$ +2.50 +$ +2.38 +$ +1.85 +NGL ($/Gal) +$ +0.67 +$ +0.60 +$ +0.37 +Average Production Costs ($/Mcfe) +$ +0.14 +$ +0.15 +$ +0.18 +Year Ended December 31, +2018 +2017 (1) +SCOOP +Net Production +Oil (MBbls) +1,710 +1,083 +Natural gas (MMcf) +64,258 +40,501 +NGL (Mgal) +138,261 +84,283 +Total (MMcfe) +94,268 +59,038 +Average Sales Price Without the Impact of Derivatives: +Oil ($/Bbl) +$ +62.36 +$ +48.70 +Natural gas ($/Mcf) +$ +2.67 +$ +2.68 +NGL ($/Gal) +$ +0.75 +$ +0.62 +Average Production Costs ($/Mcfe) +$ +0.20 +$ +0.19 +(1) We acquired our SCOOP assets in our SCOOP acquisition completed on February 17, 2017. +Productive Wells and Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2018 . +51 +Table of Contents +Index to Financial Statements +Average NRI/WI (1) +Productive +Oil Wells +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage (2) +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (3) +44.26/54.44 +74 +36.14 +493 +271.86 +3 +2.66 +2 +1.57 +92,594 +72,693 +148,417 +136,839 +SCOOP (4) +24.34/30.20 +110 +18.58 +466 +154.69 +3 +2.59 +30 +25.24 +48,658 +34,532 +17,625 +15,517 +West Cote Blanche Bay Field (5) +80.108/100 +69 +69 +— +— +146 +146 +— +— +5,668 +5,668 +— +— +E. Hackberry Field (6) +82.33/100 +14 +14 +— +— +130 +130 +— +— +2,910 +2,910 +1,206 +1,206 +W. Hackberry Field +87.50/100 +2 +2 +— +— +7 +7 +— +— +727 +727 +306 +306 +Niobrara Formation (7) +34.52/48.61 +3 +1.46 +— +— +— +— +— +— +1,998 +999 +3,816 +1,908 +Bakken Formation (8) +1.51/1.83 +18 +0.3 +— +— +— +— +— +— +386 +77 +3,505 +701 +Overrides/Royalty Non-operated +Various +673 +0.9 +— +— +— +— +— +— +— +— +— +— +Total +963 +142.38 +959 +426.55 +289 +288.25 +32 +26.81 +152,941 +117,606 +174,875 +156,477 +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 43% of our acreage is developed acreage and has been perpetuated by production. +(3) +With respect to our total undeveloped Utica Shale acreage as of December 31, 2018 , leases representing 11%, 10%, 9% and 32% are currently scheduled to expire in 2019 , 2020 , 2021 and thereafter, respectively. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 216 gross (38.12 net) gas wells and 29 gross (3.32 net) oil wells drilled by other operators on our acreage. +(4) With respect to our total undeveloped SCOOP acreage as of December 31, 2018 , leases representing 53%, 5% and 1% are currently scheduled to expire in 2019, 2020 and 2021, respectively. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 296 gross (22.20 net) gas well and 96 gross (7.82 net) oil wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +(7) +The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 66% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2019 . +(8) +NRI/WI is from wells that have been drilled or in which we have elected to participate. +Completed and Present Drilling and Recompletion Activities +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return. +52 +Table of Contents +Index to Financial Statements +2018 +2017 +2016 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +47 +47 +81 +81 +77 +77 +Dry +— +— +— +— +— +— +Total +47 +47 +81 +81 +77 +77 +Development: +Productive +34 +30 +124 +115.4 +49 +42.5 +Dry +— +— +2 +2 +1 +1.0 +Total +34 +30 +126 +117.4 +50 +43.5 +Exploratory: +Productive +2 +1.5 +— +— +— +— +Dry +— +— +— +— +— +— +Total +2 +1.5 +— +— +— +— +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +ITEM 3. +LEGAL PROCEEDINGS +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016, we were named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which we referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +We were served with the Cameron complaint in early May 2016 and with the Vermilion complaint in early September 2016. The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermilion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs filed motions to remand the +53 +Table of Contents +Index to Financial Statements +lawsuits to state court, which were ultimately granted by the district courts. However, on May 23, 2018, a group of defendants again removed the Cameron Parish and Vermilion Parish lawsuits to federal court. In response, the plaintiffs again filed motions to remand the cases to state court. The removing defendants have opposed plaintiffs' motions to remand. On January 16, 2019, the federal district court held a hearing on plaintiff's motion to remand. The court took the matter under advisement and has not yet issued a ruling. Further action in the cases will be stayed until the courts rule on the motions to remand. Also, shortly after the May 23, 2018 removal, the removing defendants filed motions with the United States Judicial Panel on Multidistrict Litigation, or the MDL Panel, requesting that the Cameron Parish and Vermilion Parish lawsuits be consolidated with 40 similar lawsuits so that pre-trial proceedings in the cases could be coordinated. The MDL Panel denied the motion to consolidate the lawsuits. Due to the procedural posture of the lawsuits, the cases are still in their early stages and the parties have conducted very little discovery. As a result, we have not had the opportunity to evaluate the applicability of the allegations made in plaintiffs' complaints to our operations and management cannot determine the amount of loss, if any, that may result. +In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. While the outcome of the pending litigation, disputes or claims cannot be predicted with certainty, in the opinion of our management, none of these matters, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Price Range of Common Stock +Our common stock is quoted on the Nasdaq Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods presented: +Price Range of +Common Stock +High +Low +2017 +First Quarter +$ +22.35 +$ +15.66 +Second Quarter +17.82 +12.47 +Third Quarter +15.09 +10.90 +Fourth Quarter +15.08 +11.73 +2018 +First Quarter +$ +13.74 +$ +8.11 +Second Quarter +12.70 +8.60 +Third Quarter +13.41 +10.07 +Fourth Quarter +11.67 +6.18 +Unregistered Sales of Equity Securities and Use of Proceeds +None. +Issuer Repurchases of Equity Securities +Our common stock repurchase activity for the three months ended December 31, 2018 was as follows: +54 +Table of Contents +Index to Financial Statements +Period +Total number of shares purchased (2) +Average price paid per share +Total number of shares purchased as part of publicly announced plans or programs (2) +Approximate maximum dollar value of shares that may yet be purchased under the plans or programs (1) +October 2018 +— +$ +— +— +$ +90,003,000 +November 2018 +28,584 +$ +8.81 +— +$ +90,003,000 +December 2018 +10,212,483 +$ +8.81 +10,212,483 +$ +— +Total +10,241,067 +$ +8.81 +10,212,483 +(1) +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program authorizing us to acquire up to an additional $100.0 million of our outstanding common stock during 2018 for a total of up to $200.0 million. This repurchase program was authorized to extend through December 31, 2018 and was fully executed in December 2018. +(2) +In November 2018, we repurchased and canceled 28,584 shares at a weighted average price of $8.81 to satisfy tax withholding requirements incurred upon the vesting of restricted stock. Additionally, in December 2018, we repurchased and canceled approximately 10,212,483 shares under the repurchase program at a weighted average price of $8.81 per share. +In January 2019, our board of directors approved a new stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. Our board of director’s determination to repurchase shares of our common stock under our new stock repurchase program will depend upon market conditions, applicable legal requirements, contractual obligations and other factors that the board of directors deems relevant. Based on an evaluation of these factors, our board of directors may determine not to repurchase shares or to repurchase shares at reduced levels from those anticipated by our stockholders, any or all of which could reduce returns to our stockholders. +Holders of Record +At the close of business on February 18, 2019, there were 319 stockholders of record holding 162,986,045 shares of our outstanding common stock. There were approximately 20,540 beneficial owners of our common stock as of February 18, 2019. +Dividend Policy +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock. +ITEM 6. +SELECTED FINANCIAL DATA +You should read the following selected consolidated financial data in conjunction with Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2018 , December 31, 2017 and December 31, 2016 and the selected consolidated balance sheet data at December 31, 2018 and December 31, 2017 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2015 and December 31, 2014 and the selected consolidated balance sheet data at December 31, 2016 , December 31, 2015 and December 31, 2014 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table. +55 +Table of Contents +Index to Financial Statements +Fiscal Year Ended December 31, +2018 +2017 +2016 +2015 +2014 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +1,355,044 +$ +1,320,303 +$ +385,910 +$ +708,990 +$ +670,762 +Costs and expenses: +Lease operating expenses +91,640 +80,246 +68,877 +69,475 +52,191 +Production taxes +33,480 +21,126 +13,276 +14,740 +24,006 +Midstream gathering and processing +290,188 +248,995 +165,972 +138,590 +64,467 +Depreciation, depletion and amortization +486,664 +364,629 +245,974 +337,694 +265,431 +Impairment of oil and natural gas properties +— +— +715,495 +1,440,418 +— +General and administrative +56,633 +52,938 +43,409 +41,967 +38,290 +Accretion expense +4,119 +1,611 +1,057 +820 +761 +Acquisition expense +— +2,392 +— +— +— +Gain on sale of assets +— +— +— +— +(11 +) +962,724 +771,937 +1,254,060 +2,043,704 +445,135 +Income (Loss) from Operations +392,320 +548,366 +(868,150 +) +(1,334,714 +) +225,627 +Other (Income) Expense: +Interest expense +135,273 +108,198 +63,530 +51,221 +23,986 +Interest income +(314 +) +(1,009 +) +(1,230 +) +(643 +) +(195 +) +Litigation settlement +1,075 +— +— +— +25,500 +Insurance proceeds +(231 +) +— +(5,718 +) +(10,015 +) +— +Loss on debt extinguishment +— +— +23,776 +— +— +Gain on contribution of investments +— +— +— +— +(84,470 +) +Gain on sale of equity method investments +(124,768 +) +(12,523 +) +(3,391 +) +— +— +(Income) loss from equity method investments +(49,904 +) +17,780 +37,376 +106,093 +(139,434 +) +Other expense (income) +698 +(1,041 +) +129 +(485 +) +(504 +) +(38,171 +) +111,405 +114,472 +146,171 +(175,117 +) +Income (Loss) from Continuing Operations before Income Taxes +430,491 +436,961 +(982,622 +) +(1,480,885 +) +400,744 +Income Tax (Benefit) Expense +(69 +) +1,809 +(2,913 +) +(256,001 +) +153,341 +Income (Loss) from Continuing Operations +430,560 +435,152 +(979,709 +) +(1,224,884 +) +247,403 +Net Income (Loss) Available to Common Stockholders +$ +430,560 +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +$ +247,403 +Net Income (Loss) Per Common Share—Basic: +$ +2.46 +$ +2.42 +$ +(7.97 +) +$ +(12.27 +) +$ +2.90 +Net Income (Loss) Per Common Share—Diluted: +$ +2.45 +$ +2.41 +$ +(7.97 +) +$ +(12.27 +) +$ +2.88 +56 +Table of Contents +Index to Financial Statements +At December 31, +2018 +2017 +2016 +2015 +2014 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +6,051,036 +$ +5,807,752 +$ +4,223,145 +$ +3,334,734 +$ +3,619,473 +Total debt, including current maturities +$ +2,087,416 +$ +2,038,943 +$ +1,593,875 +$ +946,263 +$ +703,564 +Total liabilities +$ +2,723,268 +$ +2,706,138 +$ +2,039,253 +$ +1,295,897 +$ +1,323,177 +Stockholders’ equity +$ +3,327,768 +$ +3,101,614 +$ +2,183,892 +$ +2,038,837 +$ +2,296,296 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K. +Overview +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plans in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an approximate 21.9% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the Nasdaq Global Select Market (TUSK). +Prices for oil and natural gas have historically been volatile and subject to significant fluctuation in response to changes in supply and demand, market uncertainty and a variety of other factors beyond our control. During the last four years, particularly in light of the continued downturn in commodity prices, we focused on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, all while growing our production base each year. In response to current declining forward natural gas prices, we are shifting to building an organization that is focused on disciplined capital allocation, cash flow generation and a commitment to executing a thoughtful, clearly communicated business plan that enhances value for all of our shareholders. We plan to maximize results with the core assets in our portfolio today and focus on returns that will allow us to operate within our cash flow in 2019. +2018 and 2019 Year to Date Highlights +• +Production increased 25% to approximately 496,505 MMcfe for the year ended December 31, 2018 from approximately 397,543 MMcfe for the year ended December 31, 2017 . +• +During 2018 , we spud 36 gross ( 31.6 net) wells, turned to sales 50 gross ( 47.8 net) operated wells, participated in an additional 68 gross ( 7.5 net) wells that were drilled by other operators on our Utica Shale and SCOOP acreage and recompleted 47 existing wells in our Southern Louisiana fields. Of our 36 new wells spud during 2018 , seven were completed as producing wells and, at year end, 29 were in various stages of completion. +• +Oil and natural gas revenues, before the impact of derivatives, increased 36% to $1.5 billion for the year ended December 31, 2018 from $1.1 billion for the year ended December 31, 2017 . +• +During the year ended December 31, 2018 , we reduced our unit lease operating expense by 10% to $0.18 per Mcfe from $0.20 per Mcfe during the year ended December 31, 2017 . +57 +Table of Contents +Index to Financial Statements +• +During the year ended December 31, 2018 , we reduced our unit general and administrative expense by 15% to $0.11 per Mcfe from $0.13 per Mcfe during the year ended December 31, 2017 . +• +During the year ended December 31, 2018 , we reduced our unit midstream gathering and processing expense by 8% to $0.58 per Mcfe from $0.63 per Mcfe during the year ended December 31, 2017 . +• +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program to acquire up to an additional $100.0 million of our common stock during 2018 for a total of up to $200.0 million, which we believe underscores the confidence we have in our business model, financial performance and asset base. During 2018, we purchased 20.7 million shares of our outstanding common stock for a total of approximately $200.0 million . +• +On May 1, 2018, we sold our 25% equity interest in Strike Force Midstream LLC, or Strike Force, to EQT Midstream Partners, LP for $175.0 million in cash. +• +On June 29, 2018, we sold 1,235,600 shares, and on July 30, 2018, we sold an additional 118,974 shares, of our Mammoth Energy common stock in an underwritten public offering and related partial exercise of the underwriters' option to purchase additional shares for an aggregate net proceeds to us of approximately $51.5 million . Following the sale of these shares, we owned 9,829,548 shares, or 21.9% at December 31, 2018 , of Mammoth Energy’s outstanding common stock. +• +During 2019 (through February 15, 2019 ), we spud seven gross ( 5.3 net) wells. As of February 15, 2019 , three wells were waiting on completion and four were still being drilled. +• +In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months, which we believe underscores the confidence we have in our business model, financial performance and asset base. +Critical Accounting Policies and Estimates +Our disc ussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and +58 +Table of Contents +Index to Financial Statements +totaled $2.9 billion at both December 31, 2018 and December 31, 2017 . These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development. +Ceiling Test . Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling (as defined in the preceding paragraph). If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016. No ceiling test impairment was recognized by us for the years ended December 31, 2018 and 2017. If prices of oil, natural gas and natural gas liquids decline in the future, we may be required to further write down the value of our oil and natural gas properties, which could negatively affect our results of operations. +Asset Retirement Obligations . We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities. +We record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates. +Oil and Gas Reserve Quantities . Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Netherland, Sewell & Associates, Inc. has prepared reserve reports of our reserve estimates at December 31, 2018 on a well-by-well basis for our properties. +Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following: +• +the quality and quantity of available data; +• +the interpretation of that data; +• +the accuracy of various mandated economic assumptions; and +• +the judgments of the individuals preparing the estimates. +59 +Table of Contents +Index to Financial Statements +Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2018 , a valuation allowance of $212.0 million had been established for the net deferred tax asset. On December 22, 2018, we finalized the provisional accounting for the Tax Cuts and Jobs Act, which was enacted in 2017. Further information on the tax impacts of the Tax Cut and Jobs Act is included in Note 11 of our consolidated financial statements. +Revenue Recognition . We derive almost all of our revenue from the sale of crude oil, natural gas and natural gas liquids produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals. +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. For the year ended December 31, 2016, we recognized an impairment loss related to our investment in Grizzly of approximately $23.1 million . +Commitments and Contingencies . Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +See Item 7. " Commodity Price Risk " for a summary of our derivative instruments in place as of December 31, 2018 . +RESULTS OF OPERATIONS +Results of Operations +The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +60 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2018 +2017 +2016 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +443,742 +350,061 +227,594 +Total natural gas sales +$ +1,121,815 +$ +845,999 +$ +420,128 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.53 +$ +2.42 +$ +1.85 +Impact from settled derivatives ($/Mcf) +$ +(0.04 +) +$ +0.07 +$ +0.60 +Average natural gas sales price, including settled derivatives ($/Mcf) +$ +2.49 +$ +2.49 +$ +2.45 +Oil and condensate sales +Oil and condensate production volumes (MBbls) +2,801 +2,579 +2,126 +Total oil and condensate sales +$ +177,793 +$ +124,568 +$ +81,173 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +63.48 +$ +48.29 +$ +38.18 +Impact from settled derivatives ($/Bbl) +$ +(9.51 +) +$ +1.59 +$ +5.11 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +53.97 +$ +49.88 +$ +43.29 +Natural gas liquids sales +Natural gas liquids production volumes (MGal) +251,720 +224,038 +161,562 +Total natural gas liquids sales +$ +178,915 +$ +136,057 +$ +59,115 +Natural gas liquids sales without the impact of derivatives ($/Gal) +$ +0.71 +$ +0.61 +$ +0.37 +Impact from settled derivatives ($/Gal) +$ +(0.05 +) +$ +(0.03 +) +$ +(0.01 +) +Average natural gas liquids sales price, including settled derivatives ($/Gal) +$ +0.66 +$ +0.58 +$ +0.36 +Natural gas, oil and condensate and natural gas liquids sales +Natural gas equivalents (MMcfe) +496,505 +397,543 +263,430 +Total natural gas, oil and condensate and natural gas liquids sales +$ +1,478,523 +$ +1,106,624 +$ +560,416 +Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) +$ +2.98 +$ +2.78 +$ +2.13 +Impact from settled derivatives ($/Mcfe) +$ +(0.12 +) +$ +0.07 +$ +0.56 +Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) +$ +2.86 +$ +2.85 +$ +2.69 +Production Costs: +Average production costs ($/Mcfe) +$ +0.18 +$ +0.20 +$ +0.26 +Average production taxes ($/Mcfe) +$ +0.07 +$ +0.05 +$ +0.05 +Average midstream gathering and processing ($/Mcfe) +$ +0.58 +$ +0.63 +$ +0.63 +Total production costs, midstream costs and production taxes ($/Mcfe) +$ +0.83 +$ +0.88 +$ +0.94 +61 +Table of Contents +Index to Financial Statements +The total volume hedged for 2018 , 2017 and 2016 represented approximately 78% , 68% and 77% , respectively, of our total sales volumes for the applicable year. +From 2017 to 2018 , our net equivalent gas production increased 25% from 397,543 MMcfe to 496,505 MMcfe primarily as a result of the continued development of our Utica Shale and SCOOP acreage. From 2016 to 2017 , our net equivalent gas production increased 51% from 263,430 MMcfe to 397,543 MMcfe primarily as a result of the continued development of our Utica Shale acreage and the acquisition of our SCOOP acreage. We currently estimate that our 2019 production will be between 496,400 and 511,000 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. See Item 1A. "Risk Factors." +Comparison of the Years Ended December 31, 2018 and December 31, 2017 +We reported net income of $430.6 million for the year ended December 31, 2018 as compared to net income of $435.2 million for the year ended December 31, 2017 . This decrease in period-to-period net income was due primarily to a $41.2 million increase in midstream gathering and processing expenses, a $122.0 million increase in depreciation, depletion and amortization expense and a $27.1 million increase in interest expense, partially offset by a $34.7 million increase in oil and natural gas revenues, a $112.2 million increase in gain on sale of equity method investments and a $67.7 million increase in income from equity method investments for the year ended December 31, 2018 , as compared to the year ended December 31, 2017 . +Oil and Natural Gas Revenues . For the year ended December 31, 2018 , we reported oil and natural gas revenues of $1.4 billion as compared to oil and natural gas revenues of $1.3 billion during 2017 . This $34.7 million , or 3% , increase in revenues was primarily attributable to the following: +• +A $275.8 million increase in natural gas sales without the impact of derivatives due to a 27% increase in natural gas sales volumes and a 5% increase in natural gas market prices. +• +A $53.2 million increase in oil and condensate sales without the impact of derivatives due to a 9% increase in oil and condensate sales volumes and a 32% increase in oil and condensate market prices. +• +A $42.9 million increase in natural gas liquids sales without the impact of derivatives due to a 12% increase in natural gas liquids sales volumes and a 17% increase in natural gas liquids market prices. +• +A $337.2 million decrease in natural gas and oil sales due to an unfavorable change in gains and losses from derivative instruments. Of the total change, $253.9 million was due to unfavorable changes in the fair value of our open derivative positions in each period and $83.3 million was due to an unfavorable change in settlements related to our derivative positions. +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $91.6 million for the year ended December 31, 2018 from $80.2 million for the year ended December 31, 2017 . This increase was mainly the result of an increase in expenses related to overhead, water hauling and disposal and ad valorem taxes, partially offset by decreases in road, location and equipment repairs, surface rentals and compression. However, due to increased efficiencies and a 25% increase in our production volumes for the year ended December 31, 2018 as compared to the year ended December 31, 2017 , our per unit LOE decreased by 10% from $0.20 per Mcfe to $0.18 per Mcfe. +Production Taxes . Production taxes increased to $33.5 million for the year ended December 31, 2018 from $21.1 million for 2017 . This increase was primarily related to an increase in realized prices and production volumes. +Midstream Gathering and Processing Expenses . Midstream gathering and processing expenses increased by $41.2 million to $290.2 million for the year ended December 31, 2018 from $249.0 million for 2017 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale and SCOOP resulting from our 2018 and 2017 drilling activities. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $486.7 million for the year ended December 31, 2018 , and consisted of $476.4 million in depletion of oil and natural gas properties and $10.3 million in depreciation of other property and equipment, as compared to total DD&A expense of $364.6 +62 +Table of Contents +Index to Financial Statements +million for 2017 . This increase was due to an increase in our production and our full cost pool and a decrease in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $56.6 million for the year ended December 31, 2018 from $52.9 million for the year ended December 31, 2017 . This $3.7 million increase was due to an increase in salaries, benefits and employee stock compensation expense resulting from an increased number of employees, legal fees and computer support, partially offset by a decrease in consulting fees. However, during the year ended December 31, 2018 , we decreased our per unit general and administrative expense by 15% to $0.11 per Mcfe from $0.13 per Mcfe during the year ended December 31, 2017 as a result of increases in production. +Accretion Expense . Accretion expense increased to $4.1 million for the years ended December 31, 2018 from $1.6 million for the year ended December 31, 2017 , primarily as a result of changes in our asset retirement obligation assumptions during 2017. +Interest Expense . Interest expense increased to $135.3 million for the year ended December 31, 2018 from $108.2 million for the year ended December 31, 2017 due primarily to the issuance of $450.0 million of the 2026 Notes in October 2017. In addition, total weighted debt outstanding under our revolving credit facility was $83.6 million for the year ended December 31, 2018 as compared to $119.2 million outstanding under such facility for 2017 . Additionally, we capitalized approximately $4.5 million and $9.5 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2018 and December 31, 2017 , respectively. This decrease in capitalized interest in the 2018 period was primarily the result of changes to our development plan for our oil and natural gas properties. +Income Taxes . As of December 31, 2018 , we had a net operating loss carry forward of approximately $782.7 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Quarterly, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2018 , a valuation allowance of $212.0 million had been provided against the net deferred tax asset, with the exception of certain state net operating losses that we expect to be able to utilize with NOL carrybacks. We recognized an income tax benefit from continuing operations of $0.1 million for the year ended December 31, 2018 . +Comparison of the Years Ended December 31, 2017 and December 31, 2016 +We reported net income of $435.2 million for the year ended December 31, 2017 as compared to a net loss of $979.7 million for the year ended December 31, 2016 . This increase in period-to-period net income was due primarily to no impairment charge for the year ended December 31, 2017 as compared to a $715.5 million impairment of oil and natural gas properties for the year ended December 31, 2016 and a $934.4 million increase in oil and natural gas revenues, partially offset by an $83.0 million increase in midstream gathering and processing expenses, a $118.7 million increase in depreciation, depletion and amortization expense and a $44.7 million increase in interest expense for the year ended December 31, 2017 , as compared to the year ended December 31, 2016 . +Oil and Gas Revenues . For the year ended December 31, 2017 , we reported oil and natural gas revenues of $1.3 billion as compared to oil and natural gas revenues of $385.9 million during 2016 . This $934.4 million , or 242% , increase in revenues was primarily attributable to the following: +• +A $388.2 million increase in natural gas and oil sales due to a favorable change in gains and losses from derivative instruments. Of the total change, $512.1 million was due to favorable changes in the fair value of our open derivative positions in each period and $123.9 million was due to an unfavorable change in settlements related to our derivative positions. +• +A $425.9 million increase in natural gas sales without the impact of derivatives due to a 54% increase in natural gas sales volumes and a 31% increase in natural gas market prices. +• +a $43.4 million increase in oil and condensate sales without the impact of derivatives due to a 21% increase in oil and condensate sales volumes and a 26% increase in oil and condensate market prices. +• +A $76.9 million increase in natural gas liquids sales without the impact of derivatives due to a 39% increase in natural gas liquids sales volumes and a 66% increase in natural gas liquids market prices. +63 +Table of Contents +Index to Financial Statements +Lease Operating Expenses . Lease operating expenses, or LOE, not including production taxes increased to $80.2 million for the year ended December 31, 2017 from $68.9 million for the year ended December 31, 2016 . This increase was mainly the result of an increase in expenses related to supervision and labor, overhead, surface rentals, water hauling and treatment, chemicals, ad valorem taxes and road, location and equipment repairs, partially offset by decreases in compression and water disposal. However, due to increased efficiencies and a 51% increase in our production volumes for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , our per unit LOE decreased by 23% from $0.26 per Mcfe to $0.20 per Mcfe. +Production Taxes . Production taxes increased to $21.1 million for the year ended December 31, 2017 from $13.3 million for 2016 . This increase was primarily related to an increase in realized prices and production volumes. +Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $83.0 million to $249.0 million for the year ended December 31, 2017 from $166.0 million for 2016 . This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2017 and 2016 drilling activities, as well as production volumes resulting from our SCOOP acquisition in February 2017. +Depreciation, Depletion and Amortization . Depreciation, depletion and amortization, or DD&A, expense increased to $364.6 million for the year ended December 31, 2017 , and consisted of $358.8 million in depletion of oil and natural gas properties and $5.8 million in depreciation of other property and equipment, as compared to total DD&A expense of $246.0 million for 2016 . This increase was due to an increase in our full cost pool as a result of our SCOOP acquisition and an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense. +General and Administrative Expenses . Net general and administrative expenses increased to $52.9 million for the year ended December 31, 2017 from $43.4 million for the year ended December 31, 2016 . This $9.5 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, consulting fees, bank service charges, computer support and franchise taxes, partially offset by a decrease in employee stock compensation expense and legal fees. However, during the year ended December 31, 2017 , we decreased our per unit general and administrative expense by 19% to $0.13 per Mcfe from $0.16 per Mcfe during the year ended December 31, 2016 . +Accretion Expense . Accretion expense increased to $1.6 million for the year ended December 31, 2017 from $1.1 million for the year ended December 31, 2016 , primarily as a result of our SCOOP acquisition. +Interest Expense . Interest expense increased to $108.2 million for the year ended December 31, 2017 from $63.5 million for the year ended December 31, 2016 due primarily to the issuance of $450.0 million of the 2026 Notes in October 2017 and the issuance of $600.0 million of the 2025 Notes in December 2016, partially offset by our repurchase or redemption of our 7.75% Senior Notes due 2020, which we refer to as the 2020 Notes, of which $600.0 million in aggregate principal amount was then outstanding, in October 2016 with the net proceeds from our issuance of $650.0 million of the 2024 Notes. In addition, total weighted debt outstanding under our revolving credit facility was $119.2 million for the year ended December 31, 2017 as compared to $0.2 million outstanding under such facility for 2016 . Additionally, we capitalized approximately $9.5 million and $8.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2017 and December 31, 2016 , respectively. This increase in capitalized interest in the 2017 period was primarily the result of our SCOOP acquisition and the development of this acreage. +Income Taxes . As of December 31, 2017 , we had a net operating loss carry forward of approximately $574.4 million , in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2017 , a valuation allowance of $298.8 million had been provided against the net deferred tax asset, with the exception of certain state net operating losses that we expect to be able to utilize with NOL carrybacks. We recognized an income tax expense from continuing operations of $1.8 million for the year ended December 31, 2017 . +Liquidity and Capital Resources +Overview . Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production. +64 +Table of Contents +Index to Financial Statements +Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments and acquisitions. During 2018, we initiated a stock repurchase program to purchase shares of our common stock. During 2019, we intend to purchase additional shares of our common stock under our recently announced stock repurchase program opportunistically with available funds or non-core asset sales while maintaining sufficient liquidity to fund our 2019 capital development program. +Net cash flow provided by operating activities was $752.5 million for the year ended December 31, 2018 as compared to net cash flow provided by operating activities of $679.9 million for 2017 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 26% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses. +Net cash flow provided by operating activities was $679.9 million for the year ended December 31, 2017 as compared to net cash flow provided by operating activities of $337.8 million for 2016 . This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 60% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses. +Net cash used in investing activities for the year ended December 31, 2018 was $643.1 million as compared to $2.5 billion for 2017 . During the year ended December 31, 2018 , we spent $865.3 million in additions to oil and natural gas properties, of which $461.8 million was spent on our 2018 drilling and recompletion programs, $193.9 million was spent on expenses attributable to the wells spud, completed and recompleted during 2017, $125.6 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, $2.6 million was spent on facility enhancements and $2.1 million was spent on plugging costs, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. During the year ended December 31, 2018 , we received $175.0 million from the sale of our equity investment in Strike Force and $51.5 million from the sale of Mammoth Energy's common stock. In addition, we invested $ 2.3 million in Grizzly, and we received $0.4 million in distributions from our investment in Timber Wolf during the year ended December 31, 2018 . We did not make any material investments in our other equity investments during the year ended December 31, 2018 . During the year ended December 31, 2018 , we used cash from operations and proceeds from sales of our investments to fund our investing activities. +Net cash used in investing activities for the year ended December 31, 2017 was $2.5 billion as compared to $720.6 million for 2016 . During the year ended December 31, 2017 , we spent $1.1 billion in additions to oil and natural gas properties, of which $750.6 million was spent on our 2017 drilling and recompletion programs, $119.8 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale and the SCOOP, $97.4 million was spent on expenses attributable to the wells spud, completed and recompleted during 2016, $7.2 million was spent on seismic, $4.3 million was spent on plugging costs and $1.5 million was spent on facility enhancements, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. We also spent $1.3 billion to fund the cash portion of the purchase price for our SCOOP acquisition. In addition, $2.3 million was invested in Grizzly and $46.1 million was invested in Strike Force (prior to our sale of our equity interest in Strike Force in May 2018), net of distributions. We did not make any material investments in our other equity investments during the year ended December 31, 2017 . During the year ended December 31, 2017 , we used cash from operations and proceeds from our 2016 equity and debt offerings and our 2017 debt offering for our investing activities. +Net cash used in financing activities for the year ended December 31, 2018 was $156.7 million as compared to net cash provided by financing activities of $433.0 million for 2017 . The 2018 amount used by financing activities is primarily attributable to repurchases under our stock repurchase program of approximately $200.0 million, partially offset by net borrowings under our credit facility. +Net cash provided by financing activities for the year ended December 31, 2017 was $433.0 million as compared to net cash provided by financing activities of $1.7 billion for 2016 . The 2017 amount provided by financing activities is primarily attributable to the net proceeds of $444.3 million from our 2017 debt offering. +Credit Facility . We have entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 13, 2021. As of December 31, 2018 , we had a borrowing base of $1.4 billion, with an elected commitment of $1.0 billion, and $45.0 million in borrowings outstanding under our revolving credit facility. Total funds available for borrowing, after giving effect to an aggregate of $316.6 million of letters of credit, were $638.4 million . This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility. +65 +Table of Contents +Index to Financial Statements +Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. As of December 31, 2018 , amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 4.23% . +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2018 . +Senior Notes . In April 2015, we issued an aggregate of $350.0 million in principal amount of our Senior Notes due 2023, or the 2023 Notes. Interest on the 2023 Notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes will mature on May 1, 2023. +On October 14, 2016, we issued an aggregate of $650.0 million in principal amount of our Senior Notes due 2024, or the 2024 Notes. Interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof, payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017. The 2024 Notes will mature on October 15, 2024. +On December 21, 2016, we issued an aggregate of $600.0 million in principal amount of our Senior Notes due 2025, or the 2025 Notes. Interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017. The 2025 Notes will mature on May 15, 2025. +On October 11, 2017, we issued $450.0 million in aggregate principal amount of our 2026 Notes. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018. The 2026 Notes will mature on January 15, 2026. We received approximately $444.1 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of our outstanding borrowings under our secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to our 2017 capital development plans. +All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the 2023 Notes, 2024 Notes, 2025 Notes and the 2026 Notes, provided, however, that the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future +66 +Table of Contents +Index to Financial Statements +unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes. +If we experience a change of control (as defined in the senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes), we will be required to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be required to use the remaining proceeds to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are ranked as "investment grade" by Standard & Poor's and Moody's. +Construction Loan. On June 4, 2015, we entered into a construction loan agreement, or the construction loan, with InterBank for the construction of our new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The construction loan allows for maximum principal borrowings of $24.5 million and required us to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017, after which date we began making monthly payments of interest and principal. The final payment is due June 4, 2025. As of December 31, 2018 , the total borrowings under the construction loan were approximately $23.1 million . +Capital Expenditures . Our recent capital commitments have been primarily for the execution of our drilling programs, acquisitions in the Utica Shale, our SCOOP acquisition in 2017 and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities. +Of our net reserves at December 31, 2018 , 55.4% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities. +During 2018 , we spud 23 gross ( 19.5 net) and commenced sales from 35 gross and net wells in the Utica Shale for a total cost of approximately $305.8 million. In addition, 28 gross ( 4.4 net) wells were drilled and 32 gross ( 9.4 net) wells were turned to sales by other operators on our Utica Shale acreage during 2018 for a total cost to us of approximately $90.1 million. We currently expect to drill 13 to 15 gross ( 10 to 11 net) horizontal wells and commence sales from 47 to 51 gross ( 40 to 45 net) horizontal wells on our Utica Shale acreage. As of February 15, 2019 , we had two operated horizontal rig drilling in the play. We plan to run on average one operated horizontal rig in the Utica Shale during 2019. We also anticipate an additional two to three net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, on our Utica Shale acreage by other operators. +During 2018 , we spud 13 gross ( 12.1 net) and commenced sales from 15 gross ( 12.8 net) wells in the SCOOP for a total cost of approximately $141.3 million . In addition, 40 gross ( 3.1 net) wells were drilled and 47 gross ( 3.6 net) wells were turned to sales by other operators on our SCOOP acreage during 2018 for a total cost to us of approximately $39.0 million. During 2019 , we currently expect to drill nine to 10 gross ( seven to eight net) horizontal wells and commence sales from 15 to +67 +Table of Contents +Index to Financial Statements +17 gross ( 14 to 15 net) wells on our SCOOP acreage. We also anticipate one to two net wells will be drilled, and sales commenced from one to two net wells on our SCOOP acreage by other operators. As of February 15, 2019 , we had two operated horizontal drilling rigs in the play. We plan to run on average approximately 1.5 operated horizontal rigs in the SCOOP in 2019. +During 2018 , we recompleted 32 existing wells and spud no new wells at our WCBB field and recompleted 15 existing wells and spud no new wells in our Hackberry fields for a total aggregate cost of approximately $7.9 million . During 2019 , we do not anticipate any activities in our Southern Louisiana fields. +During 2018 , no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2019 . +During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2018 , our net investment in Grizzly was approximately $44.3 million. Our capital requirements in 2018 for Grizzly were approximately $2.3 million . We do not currently anticipate any material capital expenditures in 2019 related to Grizzly's activities. +We had no material capital expenditures during the during the year ended December 31, 2018 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2019 . +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. See Item 1. "Business–Our Equity Investments" and Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the years ended December 31, 2018 and 2017 , we did not make any additional investments in these entities, and we do not currently anticipate any capital expenditures related to these entities in 2019 . In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy completed its IPO of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth. Following the IPO, we owned an approximate 24.2% interest in Mammoth Energy. On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon, Stingray Energy and Stingray Cementing, bringing our equity interest in Mammoth Energy to approximately 25.1%. On June 29, 2018, we sold 1,235,600 shares, and on July 30, 2018, we sold an additional 118,974 shares, of our Mammoth Energy common stock in an underwritten public offering and related partial exercise of the underwriters' option to purchase additional shares for net proceeds to us of approximately $47.0 million and $4.5 million , respectively. Following the sale of these shares, we owned 9,829,548 shares, or 21.9% at December 31, 2018 , of Mammoth Energy’s outstanding common stock. +In February 2016, we, through our wholly-owned subsidiary Midstream Holdings, entered into an agreement with Rice to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through an entity called Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest in Strike Force. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. During the year ended December 31, 2017 , we paid $46.1 million in net cash calls related to Strike Force. On May 1, 2018, we sold our 25% equity interest in Strike Force to EQT Midstream Partners, LP for $175.0 million in cash. +In response to current declining forward natural gas prices, we are shifting to building an organization that is focused on disciplined capital allocation, cash flow generation and a commitment to executing a thoughtful, clearly communicated business plan that enhances value for all of our shareholders. We plan to maximize results with the core assets in our portfolio today and focus on returns that will allow us to operate within our cash flow in 2019. As a result, we currently expect to reduce our planned capital expenditures by approximately 29% as compared to 2018. +Our total capital expenditures for 2019 are currently estimated to be in the range of $525.0 million to $550.0 million for drilling and completion expenditures. In addition, we currently expect to spend $40.0 million to $50.0 million in 2019 for non-drilling and completion expenditures, which includes acreage expenses, primarily lease extensions in the Utica Shale. The 2019 range of capital expenditures is lower than the $814.7 million spent in 2018 , primarily due to the decrease in current commodity +68 +Table of Contents +Index to Financial Statements +prices, specifically natural gas prices, and our desire to fund our capital development program within cash flow, as well as to generate free cash flow. +In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. We intend to purchase shares under the repurchase program opportunistically with available funds primarily from cash flow from operations and sale of non-core assets while maintaining sufficient liquidity to fund our capital development programs. +We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months. We believe that our strong liquidity position, hedge portfolio and conservative balance sheet position us well to react quickly to changing commodity prices and accelerate or decelerate our activity within the Utica Basin and the SCOOP as the market conditions warrant. Notwithstanding the foregoing, in the event commodity prices decline from current levels, our capital or other costs increase, our equity investments require additional contributions and/or we pursue additional equity method investments or acquisitions, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the current low commodity price environment worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected. +Commodity Price Risk +The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017 , WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018 , WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2018 . +Commitments +In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2018 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2018 , we have plugged 555 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation. +In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018, and in May 2018 expanded this program authorizing us to acquire up to an additional $100.0 million of our outstanding common stock during 2018 for a total of up to $200.0 million. The Company fully executed the program during the year ended December 31, 2018 , and repurchased 20.7 million shares for a cost of approximately $200.0 million . In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific +69 +Table of Contents +Index to Financial Statements +number of shares. The Company intends to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund its 2019 capital development program. This repurchase program is authorized to extend through December 31, 2020 and may be suspended from time to time, modified, extended or discontinued by the board of directors of the Company at any time. We did not make any purchases of our common stock during the year ended December 31, 2017 under any stock repurchase program or otherwise. +Contractual and Commercial Obligations +The following table sets forth our contractual and commercial obligations at December 31, 2018 : +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +Revolving credit agreement (1) +$ +45,000 +$ +— +$ +45,000 +$ +— +$ +— +6.625% senior unsecured notes due 2023 (2) +454,344 +23,188 +46,375 +384,781 +— +6.000% senior unsecured notes due 2024 (3) +884,101 +39,000 +78,000 +78,000 +689,101 +6.375% senior unsecured notes due 2025 (4) +848,748 +38,250 +76,500 +76,500 +657,498 +6.375% senior unsecured notes due 2026 (5) +665,156 +28,687 +57,375 +57,375 +521,719 +Asset retirement obligations (6) +79,952 +— +— +— +79,952 +Building loan (7) +23,149 +651 +1,290 +1,416 +19,792 +Firm transportation contracts +3,504,318 +251,644 +494,201 +490,972 +2,267,501 +Drilling and purchase obligations (8) +204,969 +89,022 +115,947 +— +— +Operating leases +271 +144 +127 +— +— +Total +$ +6,710,008 +$ +470,586 +$ +914,815 +$ +1,089,044 +$ +4,235,563 +_____________________ +(1) Does not include future loan advances, repayments, commitment fees or other fees on our revolving credit facility as we cannot determine with accuracy the timing of such items. Additionally, this table does not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charge. +(2) Includes estimated interest of $23.2 million due in less than one year; $46.4 million due in 1-3 years and $34.8 million due in 3-5 years. +(3) Includes estimated interest of $39.0 million due in less than one year; $78.0 million due in 1-3 years; $78.0 million due in 3-5 years and $39.1 million due thereafter. +(4) Includes estimated interest of $38.3 million due in less than one year; $76.5 million due in 1-3 years; $76.5 million due in 3-5 years and $57.5 million due thereafter. +(5) Includes estimated interest of $28.7 million due in less than one year; $57.4 million due in 1-3 years; $57.4 million due in 3-5 years and $71.7 million due thereafter. +(6) +Amount represents the estimated discounted cost for future abandonment of oil and natural gas properties. Due to the uncertainty in timing of the obligation and no current contractual obligation, the liability is included in the "More than 5 years" category. +(7) +Does not include estimated interest of $1.0 million due in less than one year; $2.0 million due in 1-3 years: $1.9 million due in 3-5 years and $1.3 million due thereafter. +(8) +Drilling and purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. A portion of these future costs will be borne by other interest owners. +Off-balance Sheet Arrangements +We had no off-balance sheet arrangements as of December 31, 2018 . +New Accounting Pronouncements +In May 2014 , the FASB issued Accounting Standards Update, or ASU, No. 2014-09 , Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry- +70 +Table of Contents +Index to Financial Statements +specific guidance with Topic 606. Subsequent to ASU 2014-09, the FASB issued several related ASU's to clarify the application of the revenue recognition standard. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. We adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method applied to contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard. Under the modified retrospective method, we recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The impact of the adoption of the new revenue standard is not expected to be material to our net income on an ongoing basis. See Note 10 to our consolidated financial statements for further discussion of the revenue standard. +In February 2016 , the FASB issued ASU No. 2016-02 , Leases (Topic 842) . The standard supersedes the previous lease guidance by requiring lessees to recognize a right-to-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year while maintaining substantially similar classifications for financing and operating leases. The guidance is effective for periods after December 15, 2018, and we will adopt beginning January 1, 2018 using the transition method permitted by ASU No. 2018-11 , Leases (Topic 842): Targeted Improvements , issued in August 2018, which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. We will also utilize the practical expedient provided by ASU 2018-11 to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components would be accounted for under ASC 606 and other conditions are met. +We have identified our portfolio of leased assets under the new standard and has evaluated the impact of this guidance on our consolidated financial statements and related disclosures. Offsetting right-of-use assets and corresponding lease liabilities recognized by us on the adoption date totaled approximately $110 million, representing minimum payment obligations associated with identified leases with contractual durations longer than one year. Adoption of the new standard will not result in a material impact to the consolidated statement of operations. We have implemented processes and controls needed to comply with the requirements of the new standard, which includes the implementation of a lease accounting software solution to support lease portfolio management and accounting and disclosures. +Additionally, in January 2018, the FASB issued ASU No. 2018-01 , Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 . The amendments in this update provide an optional expedient to not evaluate existing or expired land easements that were not previously accounted for under current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements beginning at the date of adoption. We do not currently account for any land easements under Topic 840 and plan to utilize this practical expedient in conjunction with the adoption of ASU 2016-02. +In June 2016 , the FASB issued ASU No. 2016-13 , Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The guidance is effective for periods after December 15, 2019 , with early adoption permitted. We are currently evaluating the impact this standard will have on our financial statements and related disclosures and do not anticipate it to have a material effect. +In August 2016 , the FASB issued ASU No. 2016-15 , Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments . This ASU clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. We adopted this standard in the first quarter of 2018 and have made an accounting policy election to classify distributions received from equity method investees using the nature of the distribution approach, which classifies distributions received from investees as either cash inflows from operating activities or cash inflows from investing activities in the statement of cash flows based on the nature of the activities of the investee that generated the distribution. The impact of adopting this ASU was not material to prior periods presented. +In November 2016 , the FASB issued ASU No. 2016-18 , Statement of Cash Flows (Topic 230): Restricted Cash . This ASU requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash +71 +Table of Contents +Index to Financial Statements +equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. We adopted this standard in the first quarter of 2018 using the retrospective transition method. The adoption of this standard had no impact on the statement of cash flows for the year ended December 31, 2018. As a result of the adoption, $185.0 million in restricted cash was removed from net cash used in investing resulting in an increase to the ending cash balance for the year ended December 31, 2016. The adoption also resulted in an addition of $185.0 million in restricted cash to the net cash used in investing activities for the year ended December 31, 2017. This addition and the resulting decrease to ending cash was offset by the increase to beginning cash balance of $185.0 million due to the changes at December 31, 2016. Therefore, there was no net impact on the statement of cash flows as of December 31, 2017. +In January 2017 , the FASB issued ASU No. 2017-01 , Clarifying the Definition of a Business . Under the current business combination guidance, there are three elements of a business: inputs, processes and outputs. The revised guidance adds an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set of assets is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. We adopted this standard in the first quarter of 2018 with no significant effect on our financial statements or related disclosures. +In February 2018 , the FASB issued ASU No. 2018-02 , Income statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendment will be effective for reporting periods beginning after December 15, 2018 , and early adoption is permitted. We assessed the impact of the ASU on our consolidated financial statements and related disclosures, and determined there was no material impact. +In August 2018 , the FASB issued ASU No. 2018-13 , Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement , which removes, modifies, and adds certain disclosure requirements on fair value measurements. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. We are currently assessing the impact of the ASU on our consolidated financial statements and related disclosures +In August 2018 , the FASB also issued ASU No. 2018-15 , Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the accounting for costs associated with implementing a cloud computing arrangement in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. We are currently assessing the impact of the ASU on our consolidated financial statements and related disclosures. +In August 2018 , the Securities and Exchange Commission ("SEC") issued Final Rule Release No. 33-10532 , Disclosure Update and Simplification , which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded. Under these amendments, the annual disclosure requirements on the analysis of stockholders' equity is extended to interim financial statements. We will present an analysis of changes in stockholders' equity for the current and comparative year-to-date interim periods. The final rule is effective November 5, 2018 , and we will begin presenting this analysis beginning with the quarter ended March 31, 2019 . +In November 2018 , the FASB also issued ASU No. 2018-18 , Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 , which provides guidance on how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for within the ASU No. 2014-09 revenue recognition standard discussed above. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. We are currently assessing the impact of the ASU on its consolidated financial statements and related disclosures. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been +72 +Table of Contents +Index to Financial Statements +volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017 , WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018 , WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities. +To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swap positions as of December 31, 2018 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2019 +NYMEX Henry Hub +1,254,000 +$ +2.83 +2020 +NYMEX Henry Hub +204,000 +$ +2.77 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2019 +Mont Belvieu C2 +1,000 +$ +18.48 +2019 +Mont Belvieu C3 +4,000 +$ +28.87 +2019 +Mont Belvieu C5 +500 +$ +54.08 +During the fourth quarter of 2018 , we early terminated all of our fixed price swaps for oil based on both Argus Louisiana Light Sweet Crude and NYMEX West Texas Intermediate scheduled to settle during 2019 covering 5,000 Bbls/day. These early terminations resulted in approximately $0.4 million of settlement losses which is included in net (loss) gain on natural gas, oil, and NGL derivatives in the accompanying consolidated statement of operations. +We sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2019 - March 2019 +NYMEX Henry Hub +50,000 +$ +3.13 +April 2019 - December 2019 +NYMEX Henry Hub +30,000 +$ +3.10 +73 +Table of Contents +Index to Financial Statements +For a portion of the natural gas fixed price swaps listed above, the counterparties had the option to extend the original terms an additional twelve months for the period January 2019 through December 2019 . In December 2018 , the counterparties chose to exercise all natural gas fixed price swaps, resulting in an additional 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu, which is included in the natural gas fixed price swaps listed above. +In addition, we have entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Transco Zone 4 to the NYMEX Henry Hub natural gas price. As of December 31, 2018 , we had the following natural gas basis swap positions for Transco Zone 4. +Location +Daily Volume (MMBtu/day) +Hedged Differential +2019 +Transco Zone 4 +60,000 +$ +(0.05 +) +2020 +Transco Zone 4 +60,000 +$ +(0.05 +) +In February 2019, we entered into a natural gas basis swap position for 2020, which settles on the pricing index to basis differential of Inside FERC to the NYMEX Henry Hub natural gas price, for approximately 10,000 MMBtu of natural gas per day at a differential of $0.54 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. We will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX Henry Hub for natural gas or Mont Belvieu for propane, pentane and ethane. +Under our 2019 contracts, we have hedged approximately 94% to 97% of our expected 2019 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. At December 31, 2018 , we had a net liability derivative position of $13.0 million as compared to a net asset derivative position of $52.0 million as of December 31, 2017 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $155.1 million , while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $154.6 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2018 , we had $45.0 million in borrowings outstanding under our credit facility which bore interest at the weighted average rate of 4.23% . A 1% increase in the average interest rate would have increased interest expense by approximately $0.8 million based on outstanding borrowings under our revolving credit facility throughout the year ended December 31, 2018 . As of December 31, 2018 , we did not have any interest rate swaps to hedge our interest risks. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this item appears beginning on page F-1 following the signature pages of this Report. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized +74 +Table of Contents +Index to Financial Statements +and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2018 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2018 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2018 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2018 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2018 , as stated in their accompanying report. +/s/ David M. Wood +/s/ Keri Crowell +Name: +David M. Wood +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +75 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 28, 2019 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 28, 2019 +76 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +None. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 11. +EXECUTIVE COMPENSATION +For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). +77 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +The following documents are filed as part of this report or incorporated by reference herein: +(1) +Financial Statements +Reference is made to the Index to Financial Statements appearing on Page F-1. +(2) +Financial Statement Schedules +All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto. +(3) +Exhibits +Exhibit +Number +Description +2.1## +Purchase and Sale Agreement, dated as of December 13, 2016, by and among Gulfport Energy Corporation, SCOOP Acquisition Company, LLC and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +3.1 +Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 6, 2009). +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.4 +Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 12, 2006). +3.5 +First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on July 23, 2013). +3.6 +Second Amendment to the Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 2, 2014). +4.1 +Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form SB-2, File No. 333-115396, filed by the Company with the SEC on July 22, 2004). +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 21, 2015). +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 19, 2016). +4.4 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 21, 2016). +4.5 +Indenture, dated as of October 11, 2017, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2026) (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 11, 2017). +4.6 +Registration Rights Agreement, dated as of February 17, 2017, by and between Gulfport Energy Corporation and Vitruvian II Woodford, LLC (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 24, 2017). +78 +Table of Contents +Index to Financial Statements +4.7 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company (incorporated by reference to Exhibit 4.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on June 12, 2015) +10.1+ +2013 Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form S-4, File No. 333-189992, filed by the Company with the SEC on July 17, 2013). +10.2+ +2014 Executive Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 7, 2014). +10.3+ +Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 26, 2006). +10.4+ +Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-K, File No. 000-19514, filed by the Company with the SEC on February 28, 2014). +10.5+ +Separation and Release Agreement, dated as of January 31, 2014, by and between the Company and James D. Palm (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 4, 2014). +10.6+ +Separation and Release Agreement, effective October 29, 2018, by and between Gulfport Energy Corporation and Michael G. Moore (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 1, 2018). +10.7 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on January 3, 2014). +10.8 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 28, 2014). +10.9 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 3, 2014). +10.10 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 15, 2015). +10.11 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 7, 2015). +10.12 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on September 24, 2015). +10.13 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 5, 2016). +10.14 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). +79 +Table of Contents +Index to Financial Statements +10.15 +Eighth Amendment to Amended and Restated Credit Agreement, entered into as of March 29, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on April 4, 2017). +10.16 +Ninth Amendment to Amended and Restated Credit Agreement, entered into as of May 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, the existing lenders named therein and JPMorgan Chase Bank, N.A., Commonwealth Bank of Australia, ABN, AMRO Capital USA LLC, Fifth Third Bank and Canadian Imperial Bank of Commerce, New York branch, as new lenders (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +10.17 +Tenth Amendment to Amended and Restated Credit Agreement, dated as of October 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on October 5, 2017). +10.18 +Eleventh Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on November 28, 2017). +10.19 +Twelfth Amendment to Amended and Restated Credit Agreement, dated as of May 21, 2018, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on May 25, 2018). +10.20 +Thirteenth Amendment to the Amended and Restated Credit Agreement, dated as of November 28, 2018, between Gulfport Energy Corporation, as Borrower, The Bank of Nova Scotia, as Administrative Agent and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 4, 2018). +10.21# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.22# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 5, 2015). +10.23 +Second Amendment to Sand Supply Agreement, dated as of August 6, 2018, between Gulfport Energy Corporation and Muskie Proppant LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 1, 2018). +10.24# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC (incorporated by reference to Exhibit 10.2 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 7, 2014). +10.25# +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10.26# +Amendment No. 2, dated as of July 10, 2018, between Stingray Pressure Pumping, LLC and Gulfport Energy Corporation to that certain Amended & Restated Master Services Agreement for Pressure Pumping Services, effective as of October 1, 2014, as amended effective January 1, 2016 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q, File No. 000-19514, filed by the Company with the SEC on August 2, 2018). +10.27+ +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4, File No. 333-199905, filed by the Company with the SEC on November 6, 2014). +10.28+ +Separation and Release Agreement by and between Gulfport Energy Corporation and Ross Kirtley entered into November 2, 2016 (incorporated by reference to Exhibit 10.1 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on November 3, 2016). +10.29+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Keri Crowell (incorporated by reference to Exhibit 10.3 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +80 +Table of Contents +Index to Financial Statements +10.30+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Stuart Maier (incorporated by reference to Exhibit 10.4 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +10.31+ +Employment Agreement, entered into as of April 28, 2017, effective as of January 1, 2017, by and between Gulfport Energy Corporation and Steve Baldwin (incorporated by reference to Exhibit 10.5 to the Form 10-Q, File No. 000-19514, filed by the Company with the SEC on May 9, 2017). +14 +Code of Ethics (incorporated by reference to Exhibit 14 of Form 8-K, File No. 000-19514, filed by the Company with the SEC on February 14, 2006). +21* +Subsidiaries of the Registrant. +23.1* +Consent of Grant Thornton LLP. +23.2* +Consent of Netherland, Sewell & Associates, Inc. +31.1* +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +31.2* +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +32.1** +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +32.2** +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +99.1* +Report of Netherland, Sewell & Associates, Inc . +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB* +XBRL Taxonomy Extension Labels Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* +Filed herewith. +** +Furnished herewith, not filed. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment with respect to certain portions of this agreement was granted by the SEC which portions have been omitted and filed separately with the SEC. +## +The schedules (or similar attachments) referenced in this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule (or similar attachment) will be furnished supplementally to the Securities and Exchange Commission. +81 +Table of Contents +Index to Financial Statements +ITEM 16. +FORM 10-K SUMMARY +None. +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 28, 2019 +GULFPORT ENERGY CORPORATION +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +82 +Table of Contents +Index to Financial Statements +Date: +February 28, 2019 +By: +/s/ DAVID M. WOOD +David M. Wood +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: +February 28, 2019 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 28, 2019 +By: +/s/ KERI CROWELL +Keri Crowell +Chief Financial Officer +(Principal Accounting and Financial Officer) +Date: +February 28, 2019 +By: +/s/ DEBORAH G. ADAMS +Deborah G. Adams +Director +Date: +February 28, 2019 +By: +/s/ CRAIG GROESCHEL +Craig Groeschel +Director +Date: +February 28, 2019 +By: +/s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: +February 28, 2019 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +Date: +February 28, 2019 +By: +/s/ SCOTT E. STRELLER +Scott E. Streller +Director +Date: +February 28, 2019 +By: +/s/ PAUL WESTERMAN +Paul Westerman +Director +S-1 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets, December 31, 2018 and December 31, 2017 +F-3 +Consolidated Statements of Operations, Years Ended December 31, 2018, 2017, and 2016 +F-4 +Consolidated Statements of Comprehensive Income (Loss), Years Ended December 31, 2018, 2017, and 2016 +F-5 +Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2018, 2017, and 2016 +F-6 +Consolidated Statements of Cash Flows, Year Ended December 31, 2018, 2017, and 2016 +F-7 +Notes to Consolidated Financial Statements +F-9 +F-1 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2019 expressed an unqualified opinion. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +February 28, 2019 +F-2 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, 2018 +December 31, 2017 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +52,297 +$ +99,557 +Accounts receivable—oil and natural gas sales +210,200 +146,773 +Accounts receivable—joint interest and other +22,497 +35,440 +Prepaid expenses and other current assets +10,607 +4,912 +Short-term derivative instruments +21,352 +78,847 +Total current assets +316,953 +365,529 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $2,873,037 and $2,912,974 excluded from amortization in 2018 and 2017, respectively +10,026,836 +9,169,156 +Other property and equipment +92,667 +86,754 +Accumulated depletion, depreciation, amortization and impairment +(4,640,098 +) +(4,153,733 +) +Property and equipment, net +5,479,405 +5,102,177 +Other assets: +Equity investments +236,121 +302,112 +Long-term derivative instruments +— +8,685 +Deferred tax asset +— +1,208 +Inventories +4,754 +8,227 +Other assets +13,803 +19,814 +Total other assets +254,678 +340,046 +Total assets +$ +6,051,036 +$ +5,807,752 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable and accrued liabilities +$ +518,380 +$ +553,609 +Asset retirement obligation—current +— +120 +Short-term derivative instruments +20,401 +32,534 +Current maturities of long-term debt +651 +622 +Total current liabilities +539,432 +586,885 +Long-term derivative instruments +13,992 +2,989 +Asset retirement obligation—long-term +79,952 +74,980 +Deferred tax liability +3,127 +— +Other non-current liabilities +— +2,963 +Long-term debt, net of current maturities +2,086,765 +2,038,321 +Total liabilities +2,723,268 +2,706,138 +Commitments and contingencies (Notes 16 and 17) +Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding +— +— +Stockholders’ equity: +Common stock, $.01 par value; 200,000,000 authorized, 162,986,045 issued and outstanding in 2018 and 183,105,910 in 2017 +1,630 +1,831 +Paid-in capital +4,227,532 +4,416,250 +Accumulated other comprehensive loss +(56,026 +) +(40,539 +) +Accumulated deficit +(845,368 +) +(1,275,928 +) +Total stockholders’ equity +3,327,768 +3,101,614 +Total liabilities and stockholders’ equity +$ +6,051,036 +$ +5,807,752 +See accompanying notes to consolidated financial statements. +F-3 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2018 +2017 +2016 +(In thousands, except share data) +Revenues: +Natural gas sales +$ +1,121,815 +$ +845,999 +$ +420,128 +Oil and condensate sales +177,793 +124,568 +81,173 +Natural gas liquid sales +178,915 +136,057 +59,115 +Net (loss) gain on natural gas, oil, and NGL derivatives +(123,479 +) +213,679 +(174,506 +) +1,355,044 +1,320,303 +385,910 +Costs and expenses: +Lease operating expenses +91,640 +80,246 +68,877 +Production taxes +33,480 +21,126 +13,276 +Midstream gathering and processing expenses +290,188 +248,995 +165,972 +Depreciation, depletion and amortization +486,664 +364,629 +245,974 +Impairment of oil and natural gas properties +— +— +715,495 +General and administrative expenses +56,633 +52,938 +43,409 +Accretion expense +4,119 +1,611 +1,057 +Acquisition expense +— +2,392 +— +962,724 +771,937 +1,254,060 +INCOME (LOSS) FROM OPERATIONS +392,320 +548,366 +(868,150 +) +OTHER (INCOME) EXPENSE: +Interest expense +135,273 +108,198 +63,530 +Interest income +(314 +) +(1,009 +) +(1,230 +) +Litigation settlement +1,075 +— +— +Insurance proceeds +(231 +) +— +(5,718 +) +Loss on debt extinguishment +— +— +23,776 +Gain on sale of equity method investments +(124,768 +) +(12,523 +) +(3,391 +) +(Income) loss from equity method investments, net +(49,904 +) +17,780 +37,376 +Other expense (income), net +698 +(1,041 +) +129 +(38,171 +) +111,405 +114,472 +INCOME (LOSS) BEFORE INCOME TAXES +430,491 +436,961 +(982,622 +) +INCOME TAX (BENEFIT) EXPENSE +(69 +) +1,809 +(2,913 +) +NET INCOME (LOSS) +$ +430,560 +$ +435,152 +$ +(979,709 +) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ +2.46 +$ +2.42 +$ +(7.97 +) +Diluted +$ +2.45 +$ +2.41 +$ +(7.97 +) +Weighted average common shares outstanding—Basic +174,675,840 +179,834,146 +122,952,866 +Weighted average common shares outstanding—Diluted +175,398,706 +180,253,024 +122,952,866 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +For the Year Ended December 31, +2018 +2017 +2016 +(In thousands) +Net income (loss) +$ +430,560 +$ +435,152 +$ +(979,709 +) +Foreign currency translation adjustment (1) +(15,487 +) +12,519 +2,119 +Other comprehensive (loss) income +(15,487 +) +12,519 +2,119 +Comprehensive income (loss) +$ +415,073 +$ +447,671 +$ +(977,590 +) +(1) Net of $1.3 million in taxes for the year ended December 31, 2016 . No taxes were recorded for the years ended December 31, 2018 and December 31, 2017 . +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Accumulated Deficit +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2016 +108,322,250 +$ +1,082 +$ +2,824,303 +$ +(55,177 +) +$ +(731,371 +) +$ +2,038,837 +Net Loss +— +— +— +— +(979,709 +) +(979,709 +) +Other Comprehensive Income +— +— +— +2,119 +— +2,119 +Stock-based Compensation +— +— +12,251 +— +— +12,251 +Issuance of Common Stock in public offerings, net of related expenses +50,255,000 +503 +1,109,891 +— +— +1,110,394 +Issuance of Restricted Stock +252,566 +3 +(3 +) +— +— +— +Balance at December 31, 2016 +158,829,816 +1,588 +3,946,442 +(53,058 +) +(1,711,080 +) +2,183,892 +Net Income +— +— +— +— +435,152 +435,152 +Other Comprehensive Income +— +— +— +12,519 +— +12,519 +Stock-based Compensation +— +— +10,615 +— +— +10,615 +Issuance of Common Stock for the Vitruvian Acquisition, net of related expenses +23,852,117 +239 +459,197 +— +— +459,436 +Issuance of Restricted Stock +423,977 +4 +(4 +) +— +Balance at December 31, 2017 +183,105,910 +1,831 +4,416,250 +(40,539 +) +(1,275,928 +) +3,101,614 +Net Income +— +— +— +— +430,560 +430,560 +Other Comprehensive Loss +— +— +— +(15,487 +) +— +(15,487 +) +Stock-based Compensation +— +— +11,332 +— +— +11,332 +Shares Repurchased +(20,746,536 +) +(207 +) +(200,044 +) +— +— +(200,251 +) +Issuance of Restricted Stock +626,671 +6 +(6 +) +— +— +— +Balance at December 31, 2018 +162,986,045 +$ +1,630 +$ +4,227,532 +$ +(56,026 +) +$ +(845,368 +) +$ +3,327,768 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2018 +2017 +2016 +(In thousands) +Cash flows from operating activities: +Net income (loss) +$ +430,560 +$ +435,152 +$ +(979,709 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Accretion expense +4,119 +1,611 +1,057 +Depletion, depreciation and amortization +486,664 +364,629 +245,974 +Impairment of oil and gas properties +— +— +715,495 +Stock-based compensation expense +6,799 +6,369 +7,351 +(Income) loss from equity investments +(49,625 +) +18,513 +37,788 +Gain on debt extinguishment +— +— +(1,108 +) +Change in fair value of derivative instruments +65,051 +(188,802 +) +323,303 +Deferred income tax expense +1,208 +1,690 +18,188 +Amortization of loan costs +6,121 +5,011 +3,660 +Amortization of note discount and premium +— +— +(1,716 +) +Gain on sale of equity method investments +(124,768 +) +(12,523 +) +(3,391 +) +Distributions from equity method investments +3,206 +— +— +Changes in operating assets and liabilities: +Increase in accounts receivable—oil and natural gas sales +(63,427 +) +(35,879 +) +(76,269 +) +Decrease (increase) in accounts receivable—joint interest and other +12,943 +(9,573 +) +11,380 +Decrease in accounts receivable—related parties +— +16 +— +Increase in prepaid expenses and other current assets +(5,695 +) +(1,777 +) +(3,734 +) +Decrease (increase) in other assets +4,066 +(7,866 +) +— +(Decrease) increase in accounts payable, accrued liabilities and other +(24,015 +) +106,375 +43,763 +Settlement of asset retirement obligation +(719 +) +(3,057 +) +(4,189 +) +Net cash provided by operating activities +752,488 +679,889 +337,843 +Cash flows from investing activities: +Deductions to cash held in escrow +— +8 +8 +Additions to other property and equipment +(7,870 +) +(19,372 +) +(33,152 +) +Acquisitions of oil and natural gas properties +— +(1,348,657 +) +— +Additions to oil and natural gas properties +(865,300 +) +(1,064,678 +) +(724,925 +) +Proceeds from sale of oil and gas properties +5,114 +4,866 +45,812 +Proceeds from sale of other property and equipment +351 +1,569 +— +Proceeds from sale of equity method investments +226,487 +— +— +Contributions to equity method investments +(2,319 +) +(55,280 +) +(26,472 +) +Distributions from equity method investments +446 +7,376 +18,147 +Net cash used in investing activities +(643,091 +) +(2,474,168 +) +(720,582 +) +Cash flows from financing activities: +Principal payments on borrowings +(220,575 +) +(365,276 +) +(87,685 +) +Borrowings on line of credit +265,000 +365,000 +86,000 +Proceeds from bond issuance +— +450,000 +1,250,000 +Repayment of bonds +— +— +(624,561 +) +Borrowings on term loan +— +2,951 +21,049 +Debt issuance costs and loan commitment fees +(831 +) +(14,350 +) +(24,718 +) +Payments on repurchase of stock +(200,251 +) +— +— +Proceeds from issuance of common stock, net of offering costs and exercise of stock options +— +(5,364 +) +1,110,555 +Net cash (used in) provided by financing activities +(156,657 +) +432,961 +1,730,640 +Net (decrease) increase in cash, cash equivalents and restricted cash +(47,260 +) +(1,361,318 +) +1,347,901 +Cash, cash equivalents and restricted cash at beginning of period +99,557 +1,460,875 +112,974 +Cash, cash equivalents and restricted cash at end of period +$ +52,297 +$ +99,557 +$ +1,460,875 +(Continued on next page) +F-7 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) +Supplemental disclosure of cash flow information: +Interest payments +$ +126,342 +$ +101,958 +$ +68,966 +Income tax receipts +$ +— +$ +(1,105 +) +$ +(19,770 +) +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation +$ +4,533 +$ +4,246 +$ +4,900 +Asset retirement obligation capitalized +$ +1,452 +$ +42,270 +$ +10,971 +Interest capitalized +$ +4,470 +$ +9,470 +$ +9,148 +Foreign currency translation (loss) gain on equity method investments +$ +(15,487 +) +$ +12,519 +$ +3,468 +See accompanying notes to consolidated financial statements. +F-8 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2018 , 2017 AND 2016 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the “Company”) is an independent oil and gas exploration, development and production company with its principal properties located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. The Company also holds an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay and Hackberry fields and has an interest in producing properties in Northwestern Colorado in the Niobrara Formation and in Western North Dakota in the Bakken Formation, and has investments in companies operating in the United States, Canada and Thailand. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, and Gulfport MidCon, LLC. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2018 and December 31, 2017 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for 2018 , 2017 and 2016 , adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense +F-9 +Table of Contents +Index to Financial Statements +would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company did not recognize a ceiling test impairment for the year ended December 31, 2018 . +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $2.9 billion at both December 31, 2018 and December 31, 2017 . These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, the Company has an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes. +(In thousands) +December 31, 2015 +$ +(55,175 +) +December 31, 2016 +$ +(51,709 +) +December 31, 2017 +$ +(39,190 +) +December 31, 2018 +$ +(54,677 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 12. +Income Taxes +F-10 +Table of Contents +Index to Financial Statements +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 2004 – 2017 U.S. federal and 1998 - 2017 state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2018 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. +On December 22, 2018, the Company finalized the provisional accounting for the Tax Cuts and Jobs Act ("Tax Act"), which was enacted in 2017. Further information on the tax impacts of the Tax Act is included in Note 11 of the Company's consolidated financial statements. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGLs. Sales of natural gas, oil and condensate and NGLs are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606") and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 10 for additional discussion of revenue from contracts with customers. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the statement of operations. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. The Company recognized an impairment charge of $23.1 million related to its investment in Grizzly Oil Sands ULC for the year ended December 31, 2016 . There were no impairment charges recorded for the years ended December 31, 2017 and December 31, 2018. +F-11 +Table of Contents +Index to Financial Statements +Accounting for Stock-based Compensation +Share-based payments to employees, including grants of restricted stock, are recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to four years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and natural gas liquid production. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net income (loss) or total operating cash flows. +Recent Accounting Pronouncements +In May 2014 , the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 , Revenue from Contracts with Customers , which supersedes the revenue recognition requirements in Topic 605 , Revenue Recognition, and most industry-specific guidance with Topic 606. Subsequent to ASU 2014-09, the FASB issued several related ASU's to clarify the application of the revenue recognition standard. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method applied to contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The impact of the adoption of the new revenue standard is not expected to be material to the Company’s net income on an ongoing basis. See Note 10 for further discussion of the revenue standard. +In February 2016 , the FASB issued ASU No. 2016-02 , Leases (Topic 842) . The standard supersedes the previous lease guidance by requiring lessees to recognize a right-to-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year while maintaining substantially similar classifications for financing and operating leases. The guidance is effective for periods after December 15, 2018, and the Company will adopt beginning January 1, 2019 using the transition method permitted by ASU No. 2018-11 , Leases (Topic 842): Targeted Improvements , issued in August 2018, which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. The Company +F-12 +Table of Contents +Index to Financial Statements +will also utilize the practical expedient provided by ASU 2018-11 to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components would be accounted for under ASC 606 and other conditions are met. +The Company has identified its portfolio of leased assets under the new standard and has evaluated the impact of this guidance on its consolidated financial statements and related disclosures. Offsetting right-of-use assets and corresponding lease liabilities recognized by the Company on the adoption date totaled approximately $110 million , representing minimum payment obligations associated with identified leases with contractual durations longer than one year. Adoption of the new standard will not result in a material impact to the consolidated statement of operations. The Company has implemented processes and controls needed to comply with the requirements of the new standard, which includes the implementation of a lease accounting software solution to support lease portfolio management and accounting and disclosures. +Additionally, in January 2018, the FASB issued ASU No. 2018-01 , Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 . The amendments in this update provide an optional expedient to not evaluate existing or expired land easements that were not previously accounted for under current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements beginning at the date of adoption. The Company does not currently account for any land easements under Topic 840 and plans to utilize this practical expedient in conjunction with the adoption of ASU 2016-02. +In June 2016 , the FASB issued ASU No. 2016-13 , Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The guidance is effective for periods after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures and does not anticipate it to have a material effect. +In August 2016 , the FASB issued ASU No. 2016-15 , Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments . This ASU clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. The Company adopted this standard in the first quarter of 2018 and has made an accounting policy election to classify distributions received from equity method investees using the nature of the distribution approach, which classifies distributions received from investees as either cash inflows from operating activities or cash inflows from investing activities in the statement of cash flows based on the nature of the activities of the investee that generated the distribution. The impact of adopting this ASU was not material to prior periods presented. +In November 2016 , the FASB issued ASU No. 2016-18 , Statement of Cash Flows (Topic 230): Restricted Cash . This ASU requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. The Company adopted this standard in the first quarter of 2018 using the retrospective transition method. The adoption of this standard had no impact on the statement of cash flows for the year ended December 31, 2018 . As a result of the adoption, $185.0 million in restricted cash was removed from net cash used in investing resulting in an increase to the ending cash balance for the year ended December 31, 2016 . The adoption also resulted in an addition of $185.0 million in restricted cash to the net cash used in investing activities for the year ended December 31, 2017 . This addition and the resulting decrease to ending cash was offset by the increase to beginning cash balance of $185.0 million due to the changes at December 31, 2016 . Therefore, there was no net impact on the statement of cash flows as of December 31, 2017 . +In January 2017 , the FASB issued ASU No. 2017-01 , Clarifying the Definition of a Business . Under the current business combination guidance, there are three elements of a business: inputs, processes and outputs. The revised guidance adds an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set of assets is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. The Company adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures. +F-13 +Table of Contents +Index to Financial Statements +In February 2018 , the FASB issued ASU No. 2018-02 , Income statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendment will be effective for reporting periods beginning after December 15, 2018 , and early adoption is permitted. The Company assessed the impact of the ASU on its consolidated financial statements and related disclosures, and determined there was no material impact. +In August 2018 , the FASB issued ASU No. 2018-13 , Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement , which removes, modifies, and adds certain disclosure requirements on fair value measurements. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. The Company is currently assessing the impact of the ASU on its consolidated financial statements and related disclosures. +In August 2018 , the FASB issued ASU No. 2018-15 , Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the accounting for costs associated with implementing a cloud computing arrangement in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. The Company is currently assessing the impact of the ASU on its consolidated financial statements and related disclosures. +In August 2018 , the Securities and Exchange Commission ("SEC") issued Final Rule Release No. 33-10532 , Disclosure Update and Simplification , which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded. Under these amendments, the annual disclosure requirements on the analysis of stockholders' equity is extended to interim financial statements. The Company will present an analysis of changes in stockholders' equity for the current and comparative year-to-date interim periods. The final rule is effective November 5, 2018 , and the Company will begin presenting this analysis beginning with the quarter ended March 31, 2019 . +In November 2018 , the FASB also issued ASU No. 2018-18 , Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 , which provides guidance on how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for within the ASU No. 2014-09 revenue recognition standard discussed above. The amendment will be effective for reporting periods beginning after December 15, 2019 , and early adoption is permitted. The Company is currently assessing the impact of the ASU on its consolidated financial statements and related disclosures. +2. +ACQUISITIONS +In December 2016, the Company, through its wholly-owned subsidiary Gulfport MidCon LLC (“Gulfport MidCon”) (formerly known as SCOOP Acquisition Company, LLC), entered into an agreement to acquire certain assets of Vitruvian II Woodford, LLC (“Vitruvian”), an unrelated third-party seller (the “Vitruvian Acquisition”). The assets included in the Vitruvian Acquisition include 46,400 net surface acres located in Grady, Stephens and Garvin Counties, Oklahoma. On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion , consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). The cash portion of the purchase price was funded with the net proceeds from the December 2016 common stock and senior note offerings and cash on hand. Acquisition costs of $2.4 million were incurred during the year ended December 31, 2017 related to the Vitruvian Acquisition. No acquisition costs were incurred during the year ended December 31, 2018 . +Purchase Price +The Vitruvian Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the February 17, 2017 acquisition date. The fair value of the assets acquired and liabilities assumed was estimated using assumptions that represent Level 3 inputs. See Note 14 for additional discussion of the measurement inputs. +The Company estimated that the consideration paid in the Vitruvian Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase. +F-14 +Table of Contents +Index to Financial Statements +The following table summarizes the consideration paid by the Company in the Vitruvian Acquisition to acquire the properties and the fair value amount of the assets acquired as of February 17, 2017. +(In thousands) +Consideration: +Cash, net of purchase price adjustments +$ +1,354,093 +Fair value of Gulfport’s common stock issued +464,639 +Total Consideration +$ +1,818,732 +Estimated Fair value of identifiable assets acquired and liabilities assumed: +Oil and natural gas properties +Proved properties +$ +362,264 +Unproved properties +1,462,957 +Asset retirement obligations +(6,489 +) +Total fair value of net identifiable assets acquired +$ +1,818,732 +The equity consideration included in the initial purchase price was based on an equity offering price of $20.96 on December 15, 2016. The decrease in the price of Gulfport’s common stock from $20.96 on December 15, 2016 to $19.48 on February 17, 2017 resulted in a decrease to the fair value of the total consideration paid as compared to the initial purchase price of approximately $35.3 million , which resulted in a closing date fair value lower than the initial purchase price. +Post-Acquisition Operating Results +For the period from the acquisition date of February 17, 2017 to December 31, 2017, the assets acquired in the Vitruvian Acquisition have contributed the following amounts of revenue to the Company’s consolidated statements of operations. The amount of net income contributed by the assets acquired is not presented below as it is impracticable to calculate due to the Company integrating the acquired assets into its overall operations using the full cost method of accounting. +Period from +February 17, 2017 +to +December 31, 2017 +(In thousands) +Revenue +$ +213,368 +Pro Forma Information (Unaudited) +The following unaudited pro forma combined financial information presents the Company’s results as though the Vitruvian Acquisition had been completed at January 1, 2016. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Vitruvian Acquisition taken place on January 1, 2016; furthermore, the financial information is not intended to be a projection of future results. +December 31, +2017 +2016 +(In thousands, except share data) +Pro forma revenue +$ +1,356,202 +$ +523,097 +Pro forma net income (loss) +$ +448,398 +$ +(1,190,481 +) +Pro forma earnings (loss) per share (basic) +$ +2.49 +$ +(8.11 +) +Pro forma earnings (loss) per share (diluted) +$ +2.49 +$ +(8.11 +) +F-15 +Table of Contents +Index to Financial Statements +3. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2018 and 2017 are as follows: +December 31, +2018 +2017 +(In thousands) +Oil and natural gas properties +$ +10,026,836 +$ +9,169,156 +Office furniture and fixtures +42,581 +37,369 +Buildings +44,565 +44,565 +Land +5,521 +4,820 +Total property and equipment +10,119,503 +9,255,910 +Accumulated depletion, depreciation, amortization and impairment +(4,640,098 +) +(4,153,733 +) +Property and equipment, net +$ +5,479,405 +$ +5,102,177 +No impairment of oil and natural gas properties was required under the ceiling test for the years ended December 31, 2018 and 2017 . At December 31, 2016 , the net book value of the Company's oil and natural gas properties was above the calculated ceiling as a result of the reduced commodity prices during the year ended December 31, 2016 . As a result, the Company recorded an impairment of its oil and natural gas properties under the full cost method of accounting in the amount of $715.5 million for the year ended December 31, 2016 . +Included in oil and natural gas properties at December 31, 2018 and 2017 is the cumulative capitalization of $203.3 million and $165.6 million , respectively, in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 37.7 million , $35.7 million and $29.3 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $0.96 , $0.90 and $0.92 per Mcfe for the years ended December 31, 2018 , 2017 and 2016 , respectively. +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2018 : +Costs Incurred in +2018 +2017 +2016 +Prior to 2016 +Total +(In thousands) +Acquisition costs +$ +128,415 +$ +1,469,820 +$ +122,399 +$ +1,128,975 +$ +2,849,609 +Exploration costs +9,027 +— +— +— +9,027 +Development costs +548 +869 +4,536 +5,789 +11,742 +Capitalized interest +2,120 +2,915 +(657 +) +(1,719 +) +2,659 +Total oil and natural gas properties not subject to amortization +$ +140,110 +$ +1,473,604 +$ +126,278 +$ +1,133,045 +$ +2,873,037 +F-16 +Table of Contents +Index to Financial Statements +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2018 : +December 31, 2018 +(In thousands) +Utica +$ +1,483,194 +MidContinent +1,388,706 +Niobrara +451 +Southern Louisiana +586 +Bakken +100 +$ +2,873,037 +As of December 31, 2017 , approximately $2.9 billion of non-producing leasehold costs was not subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company's non-producing leases in the Utica Shale have five year extension terms which could extend this time frame beyond five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2018 and 2017 is as follows: +December 31, +2018 +2017 +(In thousands) +Asset retirement obligation, beginning of period +$ +75,100 +$ +34,276 +Liabilities incurred +1,827 +16,300 +Liabilities settled +(719 +) +(3,057 +) +Accretion expense +4,119 +1,611 +Revisions in estimated cash flows +(375 +) +25,970 +Asset retirement obligation as of end of period +79,952 +75,100 +Less current portion +— +120 +Asset retirement obligation, long-term +$ +79,952 +$ +74,980 +F-17 +Table of Contents +Index to Financial Statements +4. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2018 and 2017 : +Carrying Value +(Income) loss from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2018 +2017 +2018 +2017 +2016 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +(241 +) +$ +(549 +) +$ +(412 +) +Investment in Tatex Thailand III, LLC +— +% +— +— +— +(183 +) +— +Investment in Grizzly Oil Sands ULC +24.9999 +% +44,259 +57,641 +510 +2,189 +25,150 +Investment in Timber Wolf Terminals LLC (3) +— +% +— +983 +536 +8 +8 +Investment in Windsor Midstream LLC +22.5 +% +39 +30 +(9 +) +25,233 +(13,618 +) +Investment in Stingray Cementing LLC (1) +— +% +— +— +— +205 +263 +Investment in Blackhawk Midstream LLC (4) +— +% +— +— +(38 +) +— +— +Investment in Stingray Energy Services LLC (1) +— +% +— +— +— +282 +1,044 +Investment in Sturgeon Acquisitions LLC (1) +— +% +— +— +(71 +) +993 +Investment in Mammoth Energy Services, Inc. (1) +21.9 +% +191,823 +165,715 +(49,969 +) +(11,288 +) +24,037 +Investment in Strike Force Midstream LLC (2) +— +% +— +77,743 +(693 +) +1,954 +(89 +) +$ +236,121 +$ +302,112 +$ +(49,904 +) +$ +17,780 +$ +37,376 +(1) +On June 5, 2017, Mammoth Energy Services, Inc. ("Mammoth Energy") acquired Stingray Cementing LLC, Stingray Energy Services LLC and Sturgeon Acquisitions LLC. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding these transactions. +(2) +On May 1, 2018, the Company sold its 25% interest in Strike Force Midstream to EQT Midstream Partners, LP. See below under under Strike Force Midstream LLC for information regarding this transaction. +(3) +On June 5, 2018, the Company received its final distribution from Timber Wolf Terminals LLC ("Timber Wolf"). See below under Timber Wolf Terminals LLC for information regarding this distribution. +(4) +On December 31, 2018, the Company received its final distribution from Blackhawk Midstream LLC ("Blackhawk"). See below under Blackhawk Midstream LLC for information regarding this distribution. +The tables below summarize financial information for the Company's equity investments, as of December 31, 2018 and 2017 . +Summarized balance sheet information: +December 31, +2018 +2017 +(In thousands) +Current assets +$ +471,733 +$ +415,032 +Noncurrent assets +$ +1,302,488 +$ +1,542,090 +Current liabilities +$ +239,975 +$ +261,086 +Noncurrent liabilities +$ +94,575 +$ +148,839 +F-18 +Table of Contents +Index to Financial Statements +Summarized results of operations: +December 31, +2018 +2017 +2016 +(In thousands) +Gross revenue +$ +1,729,778 +$ +755,374 +$ +287,733 +Net income (loss) +$ +253,451 +$ +(37,102 +) +$ +(65,070 +) +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. The Company received $0.2 million and $0.5 million in distributions from Tatex during the years ended December 31, 2018 and 2017 , respectively. +Tatex Thailand III, LLC +The Company had an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. As of December 31, 2014 , the Company reviewed its investment in Tatex III and, together with Tatex III, made the decision to allow the concession to expire in January 2015 . As such, the Company fully impaired the asset as of December 31, 2014 . In December 2017, Tatex III was dissolved and the Company received a final distribution of $0.2 million . +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of December 31, 2018 , Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase I steam-assisted gravity drainage ("SAGD") oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses start up plans for the facility. The Company reviewed its investment in Grizzly as of December 31, 2016 for impairment due to certain qualitative factors and as such, engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was required, resulting in an aggregate impairment loss of $23.1 million for the year ended December 31, 2016 , which is included in (income) loss from equity method investments, net in the accompanying consolidated statements of operations. As of and during the periods ended December 31, 2018 and 2017 , commodity prices had increased as compared to 2016. The Company engaged an independent third party to perform a sensitivity analysis based on updated pricing as of December 31, 2018, and concluded that there were no impairment indicators that required further evaluation for impairment. If commodity prices decline in the future however, further impairment of the investment in Grizzly may be necessary. Gulfport paid $ 2.3 million in cash calls during each of the years ended December 31, 2018 and December 31, 2017 . Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was decreased by a $15.2 million foreign currency translation loss for the year ended December 31, 2018 , and increased by a $12.3 million and $4.2 million foreign currency translation gain for the years ended December 31, 2017 and 2016 , respectively. +Effective October 5, 2012 , Grizzly entered into a $125.0 million revolving credit facility, of which Grizzly paid the outstanding balance in full in July 2016 . Gulfport paid its share of this amount on June 30, 2016 . +Timber Wolf Terminals LLC +During 2012 , the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio. During the years ended December 31, 2018 and 2017 , the +F-19 +Table of Contents +Index to Financial Statements +Company paid no cash calls to Timber Wolf. During the year ended December 31, 2018 , Timber Wolf was dissolved and the Company received a final distribution of $0.4 million . +Windsor Midstream LLC +At December 31, 2018 , the Company held a 22.5% interest in Windsor Midstream LLC (“Midstream”), an entity controlled and managed by an unrelated third party. The Company received no distributions from Midstream during the year ended December 31, 2018 and $0.5 million in distributions during the same period in 2017 . +Stingray Cementing LLC +During 2012 , the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017 , the Company contributed all of its membership interests in Stingray Cementing to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Blackhawk Midstream LLC +During 2012, the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinated gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. During the year ended December 31, 2018, Blackhawk was dissolved and the Company received a final distribution of $0.04 million . +Stingray Energy Services LLC +During 2013 , the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017 , the Company contributed all of its membership interests in Stingray Energy to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Sturgeon Acquisitions LLC +During 2014 , the Company invested in Sturgeon Acquisitions LLC ("Sturgeon") and received an ownership interest of 25% in Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. On June 5, 2017 , the Company contributed all of its membership interests in Sturgeon to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction. +Mammoth Energy Partners LP/Mammoth Energy Services, Inc. +In the fourth quarter of 2014 , the Company contributed its investments in four entities to Mammoth Energy Partners LP ("Mammoth") for a 30.5% interest in Mammoth. Mammoth originally intended to pursue its initial public offering in 2014 or 2015 ; however, due to low commodity prices, the offering was postponed. In October 2016 , Mammoth converted from a limited partnership into a limited liability company named Mammoth Energy Partners LLC ("Mammoth LLC") and the Company and the other members of Mammoth LLC contributed their interests in Mammoth LLC to Mammoth Energy. The Company received 9,150,000 shares of Mammoth Energy common stock in return for its contribution. Following the contribution, Mammoth Energy completed its initial public offering (the "IPO") of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by the Company for which it received net proceeds of $1.1 million . Immediately following the IPO, the Company owned an approximate 24.2% interest in Mammoth Energy. To reflect the dilution of the Company's shares of Mammoth Energy stock after the IPO, the Company recognized a gain of $3.4 million , which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations. +On June 5, 2017 , the Company contributed all of its membership interests in Sturgeon (which owns Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC), Stingray Energy and Stingray Cementing to Mammoth Energy in exchange for approximately 2.0 million shares of Mammoth Energy common stock (the "June 2017 Transactions"). +F-20 +Table of Contents +Index to Financial Statements +Following the June 2017 transactions, the Company held approximately 25.1% of Mammoth Energy’s outstanding common stock. The Company accounted for the transactions as a sale of financial assets. The Company valued the shares of Mammoth Energy common stock it received in the June 2017 Transactions at $18.50 per share, which was the closing price of Mammoth Energy common stock on June 5, 2017 . During the second quarter of 2017, the Company recognized a gain of $12.5 million from the June 2017 Transactions, which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations. +On June 29, 2018, the Company sold 1,235,600 shares of its Mammoth Energy common stock in an underwritten public offering for net proceeds of approximately $47.0 million . In connection with the Company's public offering of a portion of its shares of Mammoth Energy common stock, the Company granted the underwriters an option to purchase additional shares of its Mammoth Energy common stock. On July 26, 2018, the underwriters exercised this option, in part, and on July 30, 2018, the Company sold an additional 118,974 shares for net proceeds of approximately $4.5 million . Following the sales of these shares, the Company owned 9,829,548 shares, or 21.9% at December 31, 2018 , of Mammoth Energy's outstanding common stock. As a result of the sales, the Company recorded a gain of $28.3 million , which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations. The approximate fair value of the Company's investment in Mammoth Energy's common stock at December 31, 2018 was $176.7 million based on the quoted market price of Mammoth Energy's common stock. +The Company's investment in Mammoth Energy was decreased by a $0.4 million foreign currency loss and increased by a $0.2 million foreign currency gain resulting from Mammoth Energy's foreign subsidiary for the years ended December 31, 2018 and 2017 , respectively. During the year ended December 31, 2018 , Gulfport received distributions of $2.5 million from Mammoth Energy as a result of dividends in August 2018 and November 2018. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. +Strike Force Midstream LLC +In February 2016 , the Company, through its wholly-owned subsidiary Gulfport Midstream Holdings, LLC ("Midstream Holdings"), entered into an agreement with Rice Midstream Holdings LLC ("Rice"), a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio through an entity called Strike Force Midstream LLC ("Strike Force"). In 2017, Rice was acquired by EQT Corporation ("EQT"). Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest in Strike Force. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. Prior to the sale of its interest in Strike Force, the Company elected to report its proportionate share of Strike Force's earnings on a one-quarter lag as permitted under ASC 323. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. +During the year ended December 31, 2018 , Gulfport received distributions of $0.8 million from Strike Force. For the year ended December 31, 2017 , Gulfport paid $53.0 million in cash calls to Strike Force and received distributions of $6.9 million from Strike Force. +On May 1, 2018, the Company sold its 25% interest in Strike Force to EQT Midstream Partners, LP for proceeds of $175.0 million in cash. As a result of the sale, the Company recognized a gain of $96.4 million net of transaction fees, which is included in gain on sale of equity method investments in the accompanying consolidated statement of operations. +5. +VARIABLE INTEREST ENTITIES +As of December 31, 2018 , the Company held a variable interest in Midstream, a variable interest entity ("VIE"), but was not the primary beneficiary. This entity has governing provisions that are the functional equivalent of a limited partnership and is considered a VIE because the limited partners or non-managing members lack substantive kick-out or participating rights which causes the equity owners, as a group, to lack a controlling financial interest. The Company is a limited partner or non-managing member in this VIE and is not the primary beneficiary because it does not have a controlling financial interest. The general partner or managing member has power to direct the activities that most significantly impact the VIE's economic performance. The Company held a variable interest in Timber Wolf before the entity was dissolved. The Company was a limited partner or non-managing member in Timber Wolf and was not the primary beneficiary because it did not have a controlling financial interest. The Company also held a variable interest in Strike Force prior to the sale of that interest due to the fact that it does not have sufficient equity capital at risk. The Company was not the primary beneficiary of this entity. Prior to Mammoth Energy's IPO, Mammoth LLC was considered a VIE. As a result of the Company’s contribution of its interest in Mammoth LLC to Mammoth +F-21 +Table of Contents +Index to Financial Statements +Energy in exchange for Mammoth Energy common stock and the completion of Mammoth Energy’s IPO, the Company determined that it no longer held an interest in a VIE. Prior to the contribution of Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy, these entities were considered VIEs. As a result of the Company’s contribution of its membership interests in Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy in exchange for Mammoth Energy common stock, the Company determined that it no longer held an interest in a VIE. +The Company accounts for its investment in VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. See Note 4 for further discussion of these entities, including the carrying amounts of each investment. +6. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31 : +2018 +2017 +(In thousands) +Revolving credit agreement (1) +$ +45,000 +$ +— +6.625% senior unsecured notes due 2023 (2) +350,000 +350,000 +6.000% senior unsecured notes due 2024 (3) +650,000 +650,000 +6.375% senior unsecured notes due 2025 (4) +600,000 +600,000 +6.375% senior unsecured notes due 2026 (5) +450,000 +450,000 +Net unamortized debt issuance costs (6) +(30,733 +) +(34,781 +) +Construction loan (7) +23,149 +23,724 +Less: current maturities of long term debt +(651 +) +(622 +) +Debt reflected as long term +$ +2,086,765 +$ +2,038,321 +Maturities of long-term debt (excluding unamortized debt issuance costs) as of December 31, 2018 are as follows: +(In thousands) +2019 +$ +651 +2020 +629 +2021 +45,661 +2022 +692 +2023 +350,724 +Thereafter +1,719,792 +Total +$ +2,118,149 +(1) The Company has entered into a senior secured revolving credit facility as amended, with the Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 31, 2021 . On March 29, 2017 , the Company further amended its revolving credit facility to, among other things, amend the definition of the term EBITDAX to permit pro forma treatment of acquisitions that involve the payment of consideration by Gulfport and its subsidiaries in excess of $50.0 million and of dispositions of property or series of related dispositions of properties that yields gross proceeds to Gulfport or any of its subsidiaries in excess of $50.0 million . On May 4, 2017 , the revolving credit facility was further amended to increase the borrowing base from $700.0 million to $1.0 billion , adjust certain of the Company’s investment baskets and add five additional banks to the syndicate. On November 21, 2017 , the Company further amended its revolving credit facility to, among other things, (a) decrease the applicable rate for all loans by 0.5% and (b) add a provision that allows Gulfport to elect a commitment amount (the “Elected Commitment Amount”) that is less than the borrowing base. In connection with this amendment, the +F-22 +Table of Contents +Index to Financial Statements +borrowing base was set at $1.2 billion , with an elected commitment of $1.0 billion . On May 21, 2018, the Company further amended its revolving credit facility to, among other things, (a) decrease the applicable rate for all loans by 0.25% , (b) permit Gulfport and each of its subsidiaries to use the proceeds from dispositions of certain investments to acquire the common stock or other equity interests of Gulfport, subject to certain limitations and (c) increase the borrowing base to $1.4 billion , with an elected commitment of $1.0 billion . On November 28, 2018, the Company further amended its revolving credit facility to, amount other things, (a) permit Gulfport and each of its subsidiaries to directly or indirectly purchase, redeem or otherwise acquire equity interests of Gulfport, subject to certain limitations and (b) reaffirm the borrowing base of $1.4 billion , with an elected commitment of $1.0 billion . +As of December 31, 2018 , $45.0 million was outstanding under the revolving credit facility and the total availability for future borrowings under this facility, after giving effect to an aggregate of $316.6 million of letters of credit, was $638.4 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the revolving credit facility. +Advances under the revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25% , plus (2) the highest of: (a) the federal funds rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00% . The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25% , plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. At December 31, 2018 , amounts borrowed under the credit facility bore interest at a weighted average rate of 4.23% . +The revolving credit facility contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to: +• incur indebtedness; +• grant liens; +• pay dividends and make other restricted payments; +• make investments; +• make fundamental changes; +• enter into swap contracts; +• dispose of assets; +• change the nature of their business; and +• enter into transactions with affiliates. +The negative covenants are subject to certain exceptions as specified in the revolving credit facility. The revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: +(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received +F-23 +Table of Contents +Index to Financial Statements +from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00 ; and +(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00 . +The Company was in compliance with all covenants at December 31, 2018 . +(2) On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the " 2023 Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "2023 Notes Offering"). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses. +The 2023 Notes were issued under an indenture, dated as of April 21, 2015 , among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. In October 2015 , the 2023 Notes were exchanged for a new issue of substantially identical debt securities registered under the Securities Act. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, payable semi-annually on May 1 and November 1 of each year. The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. +In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +(3) On October 14, 2016 , the Company issued $650.0 million in aggregate principal amount of 6.000% Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were issued under an indenture, dated as of October 14, 2016 , among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the " 2024 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the “ 2024 Notes Offering”). Under the 2024 Indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016 , payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017 . The 2024 Notes will mature on October 15, 2024 . The Company received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer. +(4) On December 21, 2016 , the Company issued $600.0 million in aggregate principal amount of 6.375% Senior Notes due 2025 (the “ 2025 Notes”). The 2025 Notes were issued under an indenture, dated as of December 21, 2016 , among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the "2025 Indenture"), to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under the 2025 Indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016 , payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017 . The 2025 Notes will mature on May 15, 2025 . The Company received approximately $584.7 million in net proceeds from the offering of the 2025 Notes, which was used, together with the net proceeds from the Company's December 2016 common stock offering and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition. See Note 2 for additional discussion of the Vitruvian Acquisition. +In connection with each of the 2024 and 2025 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to offers to exchange the 2024 Notes and 2025 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and 2025 Notes were completed on September 12, 2017. +(5) On October 11, 2017 , the Company issued $450.0 million in aggregate principal amount of its 6.375% Senior Notes due 2026 (the “ 2026 Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from October 11, 2017 , payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018 . The 2026 Notes will mature on January 15, 2026 . The Company received +F-24 +Table of Contents +Index to Financial Statements +approximately $444.1 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans. +In connection with the 2026 Notes offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2026 Notes for a new issue of substantially identical debt securities registered under the Securities Act. On January 18, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. The exchange offer relating to the 2026 Notes closed on March 22, 2018. +(6) Loan issuance cost related to the 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes (collectively the "Notes") have been presented as a reduction to the Notes. At December 31, 2018 , total unamortized debt issuance costs were $4.4 million for the 2023 Notes, $8.7 million for the 2024 Notes, $12.5 million for the 2025 Notes and $5.0 million for the 2026 Notes. In addition, loan commitment fee costs for the construction loan agreement described immediately below were $0.1 million at December 31, 2018 . +(7) On June 4, 2015 , the Company entered into a construction loan agreement (the "Construction Loan") with InterBank for the construction of a new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The Construction Loan allows for maximum principal borrowings of $24.5 million and required the Company to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016 . Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017 . Starting June 30, 2017 , the Company began making monthly payments of principal and interest, with the final payment due June 4, 2025 . At December 31, 2018 , the total borrowings under the Construction loan were approximately $23.1 million . +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31 : +2018 +2017 +2016 +(In thousands) +Cash paid for interest +$ +126,342 +$ +101,958 +$ +68,966 +Change in accrued interest +7,280 +10,699 +1,768 +Capitalized interest +(4,470 +) +(9,470 +) +(9,148 +) +Amortization of loan costs +6,121 +5,011 +3,660 +Amortization of note discount and premium +— +— +(1,716 +) +Total interest expense +$ +135,273 +$ +108,198 +$ +63,530 +The Company capitalized approximately $4.5 million and $9.5 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2018 and 2017 , respectively. +7. +COMMON STOCK OPTIONS, RESTRICTED STOCK AND CHANGES IN CAPITALIZATION +Options +In January 2005 , the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”), which is administered by the Compensation Committee (the "Committee"). Under the terms of the 2005 Plan, the Committee may determine when options shall be granted, to which eligible participants options shall be granted, the number of shares covered by such options, the purchase price or exercise price of such options, the vesting periods of such options and the exercisable period of such options. Eligible participants are defined as employees, consultants, and directors of the Company. +On April 20, 2006 , the Company amended and restated the 2005 Plan to (i) include (a) incentive stock options, (b) nonstatutory stock options, (c) restricted awards (restricted stock and restricted stock units), (d) performance awards and (e) stock appreciation rights and (ii) increase the maximum aggregate amount of common stock that may be issued under the 2005 Plan from 1,904,606 shares to 3,000,000 shares, including the 627,337 shares underlying options granted to employees +F-25 +Table of Contents +Index to Financial Statements +under the Plan prior to adoption of the 2005 Plan. As of December 31, 2018 , the Company had granted 997,269 options for the purchase of shares of the Company’s common stock and 1,143,217 shares of restricted stock under the 2005 Plan. No additional securities will be issued under the Plan. +On April 19, 2013 , the Company amended and restated the 2005 Plan with the 2013 Restated Stock Incentive Plan ("2013 Plan"). The 2013 Plan increased the numbers of shares that may be awarded from 3,000,000 to 7,500,000 shares, including the 627,337 shares underlying options granted to employees under the 2005 Plan. The shares of stock issued once the options are exercised will be from authorized but unissued common stock. As of December 31, 2018 , the Company had granted 3,518,964 shares of restricted stock under the 2013 Plan. +Issuance of Common Stock +On March 15, 2016 , the Company issued 16,905,000 shares of its common stock in an underwritten public offering (which included 2,205,000 shares sold pursuant to an option to purchase additional shares of the Company's common stock granted by the Company to, and exercised in full by, the underwriters). The net proceeds from this equity offering were approximately $411.7 million , after underwriting discounts and commissions and offering expenses. The Company used the net proceeds from this offering primarily to fund a portion of its 2017 capital development plan and for general corporate purposes. +On December 21, 2016 , the Company issued an aggregate 33,350,000 shares of its common stock in an underwritten public offering (which included 4,350,000 shares subject to an option to purchase additional shares exercised by the underwriters). The net proceeds from this equity offering were approximately $698.8 million , after deducting underwriting discounts and commissions and estimated offering expenses. The Company used the net proceeds from this offering, together with the net proceeds from the offering of the 2025 Notes and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition (see Note 2). +On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion , consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares are subject to the indemnity escrow). See Note 2 for additional discussion of the Vitruvian Acquisition. +Stock Repurchases +In January 2018, the board of directors of the Company approved a stock repurchase program to acquire up to $100 million of the Company's outstanding stock during 2018. In May 2018, the Company's board of directors authorized the expansion of its stock repurchase program, authorizing the Company to acquire up to an additional $100 million of its outstanding common stock during 2018 for a total of up to $200 million . The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program was authorized to extend through December 31, 2018 and was fully executed. For the year ended December 31, 2018 , the Company repurchased 20.7 million shares for a cost of approximately $200.0 million under this repurchase program. Additionally, for the year ended December 31, 2018 , the Company repurchased approximately 29,000 shares for a cost of approximately $0.3 million to satisfy tax withholding requirements incurred upon the vesting of restricted stock. All repurchased shares have been canceled. +8. +STOCK-BASED COMPENSATION +During the years ended December 31, 2018 , 2017 and 2016 the Company’s stock-based compensation cost was $ 11.3 million , $10.6 million and $12.3 million , respectively, of which the Company capitalized $ 4.5 million , $4.2 million and $4.9 million , respectively, relating to its exploration and development efforts. +The following table summarizes restricted stock activity for the twelve months ended December 31, 2018 , 2017 and 2016 : +F-26 +Table of Contents +Index to Financial Statements +Number of +Unvested +Restricted Shares +Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2016 +484,239 +$ +43.51 +Granted +451,241 +27.78 +Vested +(252,566 +) +43.94 +Forfeited +(69,858 +) +33.43 +Unvested shares as of December 31, 2016 +613,056 +$ +32.90 +Granted +876,846 +$ +15.14 +Vested +(423,977 +) +29.90 +Forfeited +(89,898 +) +27.91 +Unvested shares as of December 31, 2017 +976,027 +$ +18.71 +Granted +1,579,911 +9.90 +Vested +(626,671 +) +18.05 +Forfeited +(393,456 +) +12.23 +Unvested shares as of December 31, 2018 +1,535,811 +$ +11.57 +Unrecognized compensation expense as of December 31, 2018 related to outstanding stock options and restricted shares was $ 13.9 million . The expense is expected to be recognized over a weighted average period of 1.60 years. +9. +FAIR VALUE OF FINANCIAL INSTRUMENTS +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Construction Loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +At December 31, 2018 , the carrying value of the outstanding debt represented by the Notes was $ 2.0 billion including the unamortized debt issuance cost of approximately $4.4 million related to the 2023 Notes, approximately $8.7 million related to the 2024 Notes, approximately $12.5 million related to the 2025 Notes, and approximately $5.0 million related to the 2026 Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $1.8 billion at December 31, 2018 . +10. +REVENUE FROM CONTRACTS WITH CUSTOMERS +On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition applied to contracts that were not completed as of that date. The adoption did not result in a material change in the Company’s accounting or have a material effect on the Company’s financial position, including measurement of revenue, the timing of revenue recognition and the recognition of contract assets, liabilities and related costs. For periods through December 31, 2017, the Company accounted for its revenue using ASC 605, Revenue Recognition . +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales +F-27 +Table of Contents +Index to Financial Statements +that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $210.2 million and $146.8 million as of December 31, 2018 and December 31, 2017 , respectively, and are reported in accounts receivable - oil and natural gas sales on the consolidated balance sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Contract Modifications +For contracts modified prior to the beginning of the earliest reporting period presented under ASC 606, the Company has elected to reflect the aggregate of the effect of all modifications that occurred before the beginning of the earliest period presented under the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contracts at transition. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain gas and NGLs sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. The Company has internal controls in place for the estimation process and any identified differences between revenue estimates and actual revenue received historically have not been significant. For the year ended December 31, 2018 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +11. +INCOME TAXES +The income tax provision consists of the following: +2018 +2017 +2016 +(In thousands) +Current: +State +$ +(1,530 +) +$ +2,167 +$ +(1,330 +) +Federal +253 +3,362 +(19,771 +) +Deferred: +State +1,530 +(118 +) +(386 +) +Federal +(322 +) +(3,602 +) +18,574 +Total income tax (benefit) expense provision +$ +(69 +) +$ +1,809 +$ +(2,913 +) +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +F-28 +Table of Contents +Index to Financial Statements +2018 +2017 +2016 +(In thousands) +Income (loss) before federal income taxes +$ +430,491 +$ +436,961 +$ +(982,622 +) +Expected income tax at statutory rate +90,403 +152,936 +(343,918 +) +State income taxes +(511 +) +2,299 +(5,883 +) +Other differences +1,078 +5,731 +4,293 +Intraperiod tax allocation +— +— +(1,349 +) +Remeasurement due to Tax Cut and Jobs Act +— +190,034 +— +Change in valuation allowance due to current year activity +(91,039 +) +(158,704 +) +343,944 +Change in valuation allowance due to Tax Cuts and Jobs Act +— +(190,487 +) +— +Income tax (benefit) expense recorded +$ +(69 +) +$ +1,809 +$ +(2,913 +) +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2018 , 2017 and 2016 are estimated as follows: +2018 +2017 +2016 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +164,363 +$ +120,626 +$ +162,073 +Oil and gas property basis difference +3,595 +151,260 +386,302 +Investment in pass through entities +8,620 +12,343 +27,469 +Stock-based compensation expense +616 +813 +2,084 +Business energy investment tax credit +369 +369 +369 +AMT credit +— +— +3,842 +Charitable contributions carryover +269 +255 +303 +Change in fair value of derivative instruments +2,761 +— +48,317 +Foreign tax credit carryforwards +2,009 +2,074 +2,074 +Accrued liabilities +834 +285 +397 +ARO liability +16,923 +15,897 +12,107 +Non-oil and gas property basis difference +104 +171 +— +State net operating loss carryover +11,526 +6,954 +5,351 +Total deferred tax assets +211,989 +311,047 +650,688 +Valuation allowance for deferred tax assets +(211,987 +) +(298,830 +) +(645,841 +) +Deferred tax assets, net of valuation allowance +2 +12,217 +4,847 +Deferred tax liabilities: +Non-oil and gas property basis difference +— +— +155 +Change in fair value of derivative instruments +2 +11,009 +— +Total deferred tax liabilities +2 +11,009 +155 +Net deferred tax asset +$ +— +$ +1,208 +$ +4,692 +There was a decrease to the valuation allowance of $86.8 million and $347.0 million during 2018 and 2017 , respectively, and an increase to the valuation allowance of $342.6 million during 2016 . The decrease in the valuation allowance in 2018 was primarily due to decreases in net deferred tax assets due to pretax income. The decrease in the valuation allowance in 2017 was primarily due to decreases in net deferred tax assets due to pretax income and remeasurement of deferred tax assets due to the Tax Cuts and Jobs Act. The increase in the valuation allowance in 2016 was primarily due to increases in deferred tax assets from pre-tax losses resulting from impairments to the full cost pool., +F-29 +Table of Contents +Index to Financial Statements +As December 31, 2018 , the Company maintains full valuation allowances related to the total net deferred tax assets, as they cannot objectively assert that these deferred tax assets are more likely than not to be realized. It is reasonably possible that a portion of this valuation allowance could be reversed within the next year due to increased book profitability levels. Future provisions for income taxes will include no tax benefits with respect to losses incurred and tax expense only to the extent of current taxes payable until the valuation allowances are eliminated. +All available positive and negative evidence is weighed to determine whether a valuation allowance should be recorded. The more significant evidential matter relates to the Company’s recent cumulative losses resulting from impairments to the full cost pool in 2016. Management currently estimates that pretax income in 2019 will result in the Company emerging from a cumulative loss position in the first quarter of 2019, at which point there may no longer be any significant negative evidence regarding the realizability of deferred tax assets and the determination around the need for a valuation allowance will primarily depend on management’s ability to objectively project sufficient future taxable income exclusive of reversing temporary differences to ensure realization of deferred tax assets. As such, it is reasonably possible that a material change in valuation allowance may be recorded during an interim period for the year ending December 31, 2019. +The Company has an available federal tax net operating loss carryforward estimated at approximately $782.7 million as of December 31, 2018 . This carryforward will begin to expire in the year 2023. Based upon the December 31, 2018 net deferred tax asset position and a recent history of cumulative losses, management believes that there is sufficient negative evidence to place a valuation allowance on the net deferred tax asset that may not be utilized based upon a more likely than not basis. The Company also has state net operating loss carryovers of $205.7 million that began to expire in 2017 and federal foreign tax credit carryovers of $1.8 million which began to expire in 2017 . The Company believes that it can utilize an Oklahoma state NOL through carrybacks. Therefore, the Company has recorded a total valuation allowance of $212.0 million related to the remaining net deferred tax asset. +The Company’s ability to utilize NOL carryforwards and other tax attributes to reduce future federal taxable income is subject to potential limitations under Internal Revenue Code Section 382 (“Section 382”) and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% stockholders (as defined in Treasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change or more than 50% in the beneficial ownership of Gulfport. The Company is currently conducting Section 382 analysis to determine if an ownership change has occurred. If it is determined that an ownership change has occurred under these rules, the Company would generally be subject to an annual limitation on the use of pre-ownership change NOL carryforwards and certain other losses and/or credits. In addition, certain future transactions regarding the Company's equity, including the cumulative effects of small transactions as well as transactions beyond the Company’s control, could cause an ownership change and therefore a potential limitation on the annual utilization of their deferred tax assets. +The Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21% effective January 1, 2018. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the statutory rate, the Company has remeasured its deferred tax balances, the effects of which are reflected in the rate reconciliation shown in the table above. The Company has applied the provisions of SEC Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. The Company finalized its accounting for the impact of the Tax Act within its December 31, 2018 financial statements. The net impact of the finalization was immaterial. +The Company's income tax benefit in 2016 was primarily attributable to the Company recording a full cost ceiling impairment of $715.5 million against the oil and gas assets. The Company's income tax expense in 2017 is primarily the result of a change in state income tax positions. +As of December 31, 2018 , the amount of unrecognized tax benefits related to federal and state tax liabilities associated with uncertain tax positions was immaterial. +F-30 +Table of Contents +Index to Financial Statements +12. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2018 +2017 +2016 +Income +Shares +Per +Share +Loss +Shares +Per +Share +Loss +Shares +Per Share +(In thousands, except share data) +Basic: +Net income (loss) +$ +430,560 +174,675,840 +$ +2.46 +$ +435,152 +179,834,146 +$ +2.42 +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +Effect of dilutive securities: +Stock options and awards +— +722,866 +— +418,878 +— +— +Diluted: +Net income (loss) +$ +430,560 +175,398,706 +$ +2.45 +$ +435,152 +180,253,024 +$ +2.41 +$ +(979,709 +) +122,952,866 +$ +(7.97 +) +There were no potential shares of common stock that were considered anti-dilutive for the years ended December 31, 2018 and 2017 . There were 539,988 shares of common stock that were considered anti-dilutive for the year ended 2016 . +F-31 +Table of Contents +Index to Financial Statements +13. +DERIVATIVE INSTRUMENTS +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments +The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and NGLs prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and NGLs prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2018 . +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +2019 +NYMEX Henry Hub +1,254,000 +$ +2.83 +2020 +NYMEX Henry Hub +204,000 +$ +2.77 +Location +Daily Volume (Bbls/day) +Weighted +Average Price +2019 +Mont Belvieu C2 +1,000 +$ +18.48 +2019 +Mont Belvieu C3 +4,000 +$ +28.87 +2019 +Mont Belvieu C5 +500 +$ +54.08 +During the fourth quarter of 2018 , the Company early terminated all of its fixed price swaps for oil based on both Argus Louisiana Light Sweet Crude and NYMEX West Texas Intermediate scheduled to settle during 2019 covering 5,000 Bbls/day. These early terminations resulted in approximately $0.4 million of settlement losses which are included in net (loss) gain on natural gas, oil, and NGL derivatives in the accompanying consolidated statement of operations. +The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Location +Daily Volume (MMBtu/day) +Weighted +Average Price +January 2019 - March 2019 +NYMEX Henry Hub +50,000 +$ +3.13 +April 2019 - December 2019 +NYMEX Henry Hub +30,000 +$ +3.10 +For a portion of the natural gas fixed price swaps listed above, the counterparties had the option to extend the original terms an additional twelve months for the period January 2019 through December 2019 . In December 2018 , the counterparties chose to exercise all natural gas fixed price swaps, resulting in an additional 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu, which is included in the natural gas fixed price swaps listed above. +In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Transco Zone 4 to NYMEX Henry Hub. As of December 31, 2018 , the Company had the following natural gas basis swap positions for Transco Zone 4. +F-32 +Table of Contents +Index to Financial Statements +Location +Daily Volume (MMBtu/day) +Hedged Differential +2019 +Transco Zone 4 +60,000 +$ +(0.05 +) +2020 +Transco Zone 4 +60,000 +$ +(0.05 +) +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2018 and 2017 : +December 31, +2018 +2017 +(In thousands) +Short-term derivative instruments - asset +$ +21,352 +$ +78,847 +Long-term derivative instruments - asset +$ +— +$ +8,685 +Short-term derivative instruments - liability +$ +20,401 +$ +32,534 +Long-term derivative instruments - liability +$ +13,992 +$ +2,989 +Gains and losses +The following table presents the gain and loss recognized in net (loss) gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2018 , 2017 , and 2016 . +Net (loss) gain on derivative instruments +For the Year Ended December 31, +2018 +2017 +2016 +(In thousands) +Natural gas derivatives +$ +(116,130 +) +$ +232,143 +$ +(165,933 +) +Oil derivatives +(13,084 +) +(3,350 +) +(5,387 +) +Natural gas liquids derivatives +5,735 +(15,114 +) +(3,186 +) +Total +$ +(123,479 +) +$ +213,679 +$ +(174,506 +) +The Company delivered approximately 78% of its 2018 production under fixed price swaps. +Offsetting of derivative assets and liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value. +As of December 31, 2018 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +21,352 +$ +(19,289 +) +$ +2,063 +Derivative liabilities +$ +(34,393 +) +$ +19,289 +$ +(15,104 +) +F-33 +Table of Contents +Index to Financial Statements +As of December 31, 2017 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +87,532 +$ +(22,199 +) +$ +65,333 +Derivative liabilities +$ +(35,523 +) +$ +22,199 +$ +(13,324 +) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +14. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +The following tables summarize the Company’s financial and non-financial liabilities by valuation level as of December 31, 2018 and 2017 : +December 31, 2018 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +21,352 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +34,393 +$ +— +F-34 +Table of Contents +Index to Financial Statements +December 31, 2017 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +87,532 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +35,523 +$ +— +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of the business combination were estimated using the same assumptions and methodology as described below. See Note 2 for further discussion of the Company's acquisitions. +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred and downward revisions recognized during the year ended December 31, 2018 were approximately $1.8 million and $0.4 million , respectively. +The fair value of the common stock received from Mammoth Energy in connection with the Company’s contribution of all of its membership interests in Sturgeon, Stingray Energy and Stingray Cementing was estimated using Level 1 inputs, as the price per share was a quoted price in an active market for identical Mammoth Energy common shares. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly was estimated using assumptions that represent Level 3 inputs. The Company estimated the fair value of the investment as of March 31, 2016 to be approximately $39.1 million . See Note 4 for further discussion of the Company's investment in Grizzly. +15. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +Stingray Cementing provides well cementing services. Stingray Cementing was previously 50% owned by the Company until its contribution to Mammoth Energy in June 2017 as discussed above in Note 4. At the date of the contribution, the Company owed Stingray Cementing approximately $0.5 million . +Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. Stingray Energy was previously 50% owned by the Company until its contribution to Mammoth Energy in June 2017 as discussed above in Note 4. At the date of the contribution, the Company owed Stingray Energy approximately $1.6 million . +As of December 31, 2018, the Company held approximately 21.9% of Mammoth Energy's outstanding common stock as discussed above in Note 4. Approximately $2.0 million and $2.1 million of services provided by Mammoth Energy are included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2018 and 2017 , respectively. Approximately $139.7 million and $196.5 million of services provided by Mammoth Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at +F-35 +Table of Contents +Index to Financial Statements +December 31, 2018 and 2017 , respectively. At December 31, 2018 and 2017 , the Company owed Mammoth Energy approximately $10.9 million and $32.0 million , respectively, related to these services. +The Company previously held a 25% interest in Strike Force, who develops natural gas gathering assets in dedicated areas. In May 2018, the Company sold its interest in Strike Force as discussed above in Note 4. At December 31, 2017 , the Company owed approximately $8.4 million to Strike Force for these related services. Approximately $18.5 million and $23.1 million of services provided by Strike Force are included in midstream gathering and processing on the accompanying consolidated statement of operations for the years ended December 31, 2018 and 2017 , respectively. +16. +COMMITMENTS +Plugging and Abandonment Funds +In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997 . Beginning in 2009 , the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of December 31, 2018 , the plugging and abandonment trust totaled approximately $3.1 million . At December 31, 2018 , the Company had plugged 555 wells at WCBB since it began its plugging program in 1997 , which management believes fulfills its current minimum plugging obligation. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100% of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company will make a bi-weekly contribution on behalf of each employee equal to at least 3% of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2018 , 2017 and 2016 , Gulfport incurred $2.6 million , $3.0 million , and $1.7 million , respectively, in contributions expense related to this plan. +Employment and Separation Agreements +The Company was party to an employment agreement with Michael G. Moore, its former Chief Executive Officer and President, which provided for a minimum salary level, subject to review and potential increases by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits. Effective October 29, 2018, Mr. Moore stepped down from his position as the Chief Executive Officer and President of the Company and as a member of its board of directors. In connection with Mr. Moore's departure, the Company entered into a separation and release agreement with Mr. Moore, effective as that date. Under the terms of his separation agreement the Company paid Mr. Moore separation payments in the aggregate amount of $400,000 in December 2018. Also, the Company agreed to reimburse Mr. Moore's portion of COBRA premiums for a maximum of six months, which reimbursement will cease at any time he becomes eligible for group medical coverage from another employer. The separation agreement also includes a release of claims by Mr. Moore against the Company, its directors, stockholders, employees, agents, attorneys, consultants and affiliates. +The Company has also entered into employment agreements with certain members of management that provide for one -year terms commencing as of January 1, 2017 (the “Initial Period”), which automatically extend for successive one -year periods unless the Company or the executive elects to not extend the term by giving written notice to the other party at least 30 days' prior to the end of the Initial Period or any anniversary thereof. The agreements provide for, among other things, compensation, benefits and severance payments. The employment agreements also contains certain termination and change of control provisions. +F-36 +Table of Contents +Index to Financial Statements +Firm Transportation and Sales Commitments +The Company had approximately 2,300,000 MMBtu per day of firm sales contracted with third parties. The table below presents these commitments at December 31, 2018 as follows: +(MMBtu per day) +2019 +663,000 +2020 +526,000 +2021 +372,000 +2022 +272,000 +2023 +255,000 +Thereafter +212,000 +Total +2,300,000 +The Company also had approximately $3.5 billion of firm transportation contracted with third parties. The table below presents these commitments at December 31, 2018 as follows: +(In thousands) +2019 +$ +251,644 +2020 +247,581 +2021 +246,620 +2022 +246,620 +2023 +244,352 +Thereafter +2,267,501 +Total +$ +3,504,318 +Operating Leases +The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at December 31, 2018 are as follows: +(In thousands) +2019 +$ +144 +2020 +90 +2021 +37 +Total +$ +271 +Presented below is rent expense for the years ended December 31, 2018 , 2017 and 2016 , respectively. +For the years ended December 31, +2018 +2017 +2016 +(In thousands) +Rent expense +$ +196 +$ +343 +$ +840 +Other Commitments +Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie Proppant LLC (“Muskie”), a subsidiary of Mammoth Energy. Effective August 3, 2018, the Company extended the agreement through December 31, 2021. +F-37 +Table of Contents +Index to Financial Statements +Pursuant to this agreement, as amended, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at agreed pricing plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $2.2 million related to non-utilization fees during the year ended December 31, 2018 . The Company did not incur any non-utilization fees during the year ended 2017 . +Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure Pumping LLC (“Stingray Pressure”), a subsidiary of Mammoth Energy. Pursuant to this agreement, as amended effective July 1, 2018, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. The Company has the right to suspend services of one crew and only one crew at any point in time without payment, fee or other obligation associated with the suspended crew, given appropriate notification of suspension. See Note 15 for further discussion of amounts paid by the Company to Mammoth Energy. +As of December 31, 2018 , the Company has drilling rig contracts with various terms extending to February 2021 to ensure rig availability in its key operating areas. A portion of these future costs will be borne by other interest owners. +Future minimum commitments under these agreements at December 31, 2018 are as follows: +(In thousands) +2019 +$ +89,022 +2020 +67,203 +2021 +48,744 +Total +$ +204,969 +17. +CONTINGENCIES +In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 , the Company was named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978 , as amended, and the rules, regulations, orders and ordinances adopted thereunder, which the Company referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon and Lac Blanc oil and gas fields, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest. +The Company was served with the Cameron complaint in early May 2016 and with the Vermilion complaint in early September 2016 . The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the +F-38 +Table of Contents +Index to Financial Statements +Cameron Parish suit and the Vermilion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs filed motions to remand the lawsuits to state court, which were ultimately granted by the district courts. However, on May 23, 2018, a group of defendants again removed the Cameron Parish and Vermilion Parish lawsuits to federal court. In response, the plaintiffs again filed motions to remand the cases to state court. The removing defendants have opposed plaintiffs’ motions to remand. On January 16, 2019, the federal district court held a hearing on plaintiffs motion to remand. The court took the matter under advisement and has not yet issued a ruling. Further action in the cases will be stayed until the courts rule on the motions to remand. Also, shortly after the May 23, 2018 removal, the removing defendants filed motions with the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) requesting that the Cameron Parish and Vermilion Parish lawsuits be consolidated with 40 similar lawsuits so that pre-trial proceedings in the cases could be coordinated. The MDL Panel denied the motion to consolidate the lawsuits. Due to the procedural posture of the lawsuits, the cases are still in their early stages and the parties have conducted very little discovery. As a result, the Company has not had the opportunity to evaluate the applicability of the allegations made in plaintiffs' complaints to the Company's operations and management cannot determine the amount of loss, if any, that may result. +In addition, due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities. While the outcome of the pending litigation, disputes or claims cannot be predicted with certainty, in the opinion of the Company's management, none of these matters, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations. +Insurance Proceeds +For the years ended December 31, 2018 and 2016 the Company was reimbursed $0.2 million and $5.7 million , respectively, net of related legal fees by its insurance provider, which is included in insurance proceeds in the accompanying consolidated statements of operations. There were no insurance proceeds received in the year ended December 31, 2017 . +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio, Oklahoma and Louisiana with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 . At December 31, 2018 , Gulfport held cash in excess of insured limits in these banks totaling $50.3 million . +During the year ended December 31, 2018 , two customers accounted for approximately 17% and 10% of the Company's total sales. During the year ended December 31, 2017 , one customer accounted for approximately 40% of the Company's total sales. During the year ended December 31, 2016 , three customers accounted for approximately 59% , 12% and 10% of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its oil, natural gas and NGL sales as alternative customers are readily available. +18. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +On April 21, 2015 , the Company issued $350.0 million in aggregate principal amount of the 2023 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015 , pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015 . +On October 14, 2016, the Company issued $650.0 million in aggregate principal amount of the 2024 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The net proceeds from the issuance of the 2024 Notes, together with cash on hand, were used to repurchase or redeem all of the then-outstanding 2020 Notes in October 2016. +F-39 +Table of Contents +Index to Financial Statements +On December 21, 2016, the Company issued $600.0 million in aggregate principal amount of the 2025 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The Company used the net proceeds from the issuance of the 2025 Notes, together with the net proceeds from the December 2016 underwritten offering of the Company’s common stock and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition. +In connection with the 2024 Notes Offering and the 2025 Notes Offering, the Company and its subsidiary guarantors entered into two registration rights agreements, pursuant to which the Company agreed to file a registration statement with respect to offers to exchange the 2024 Notes and the 2025 Notes for new issues of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and the 2025 Notes were completed on September 13, 2017. +On October 11, 2017, the Company issued $450.0 million in aggregate principal amount of the 2026 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. A portion of the net proceeds from the issuance of the 2026 Notes was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans. +In connection with the 2026 Notes offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2026 Notes for a new issue of substantially identical debt securities registered under the Securities Act. On January 18, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. The exchange offer relating to the 2026 notes closed on March 22, 2018. +The 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are not guaranteed by Grizzly Holdings, Inc. (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor. +F-40 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +25,585 +$ +26,711 +$ +1 +$ +— +$ +52,297 +Accounts receivable - oil and natural gas sales +146,075 +64,125 +— +— +210,200 +Accounts receivable - joint interest and other +16,212 +6,285 +— +— +22,497 +Accounts receivable - intercompany +671,633 +319,464 +— +(991,097 +) +— +Prepaid expenses and other current assets +8,433 +2,174 +— +— +10,607 +Short-term derivative instruments +21,352 +— +— +— +21,352 +Total current assets +889,290 +418,759 +1 +(991,097 +) +316,953 +Property and equipment: +Oil and natural gas properties, full-cost accounting +7,044,550 +2,983,015 +— +(729 +) +10,026,836 +Other property and equipment +91,916 +751 +— +— +92,667 +Accumulated depletion, depreciation, amortization and impairment +(4,640,059 +) +(39 +) +— +— +(4,640,098 +) +Property and equipment, net +2,496,407 +2,983,727 +— +(729 +) +5,479,405 +Other assets: +Equity investments and investments in subsidiaries +2,856,988 +— +44,259 +(2,665,126 +) +236,121 +Inventories +3,620 +1,134 +— +— +4,754 +Other assets +12,624 +1,178 +— +1 +13,803 +Total other assets +2,873,232 +2,312 +44,259 +(2,665,125 +) +254,678 +Total assets +$ +6,258,929 +$ +3,404,798 +$ +44,260 +$ +(3,656,951 +) +$ +6,051,036 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +419,107 +$ +99,273 +$ +— +$ +— +$ +518,380 +Accounts payable - intercompany +320,259 +670,708 +130 +(991,097 +) +— +Short-term derivative instruments +20,401 +— +— +— +20,401 +Current maturities of long-term debt +651 +— +— +— +651 +Total current liabilities +760,418 +769,981 +130 +(991,097 +) +539,432 +Long-term derivative instruments +13,992 +— +— +— +13,992 +Asset retirement obligation - long-term +66,859 +13,093 +— +— +79,952 +Deferred tax liability +3,127 +— +— +— +3,127 +Long-term debt, net of current maturities +2,086,765 +— +— +— +2,086,765 +Total liabilities +2,931,161 +783,074 +130 +(991,097 +) +2,723,268 +Stockholders' equity: +Common stock +1,630 +— +— +— +1,630 +Paid-in capital +4,227,532 +1,915,598 +261,626 +(2,177,224 +) +4,227,532 +Accumulated other comprehensive loss +(56,026 +) +— +(53,783 +) +53,783 +(56,026 +) +(Accumulated deficit) retained earnings +(845,368 +) +706,126 +(163,713 +) +(542,413 +) +(845,368 +) +Total stockholders' equity +3,327,768 +2,621,724 +44,130 +(2,665,854 +) +3,327,768 +Total liabilities and stockholders' equity +$ +6,258,929 +$ +3,404,798 +$ +44,260 +$ +(3,656,951 +) +$ +6,051,036 +F-41 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets +Cash and cash equivalents +$ +67,908 +$ +31,649 +$ +— +$ +— +$ +99,557 +Accounts receivable - oil and natural gas +112,686 +34,087 +— +— +146,773 +Accounts receivable - joint interest and other +15,435 +20,005 +— +— +35,440 +Accounts receivable - intercompany +554,439 +63,374 +— +(617,813 +) +— +Prepaid expenses and other current assets +4,719 +193 +— +— +4,912 +Short-term derivative instruments +78,847 +— +— +— +78,847 +Total current assets +834,034 +149,308 +— +(617,813 +) +365,529 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +6,562,147 +2,607,738 +— +(729 +) +9,169,156 +Other property and equipment +86,711 +43 +— +— +86,754 +Accumulated depletion, depreciation, amortization and impairment +(4,153,696 +) +(37 +) +— +— +(4,153,733 +) +Property and equipment, net +2,495,162 +2,607,744 +— +(729 +) +5,102,177 +Other assets: +Equity investments and investments in subsidiaries +2,361,575 +77,744 +57,641 +(2,194,848 +) +302,112 +Long-term derivative instruments +8,685 +— +— +— +8,685 +Deferred tax asset +1,208 +— +— +— +1,208 +Inventories +5,816 +2,411 +— +— +8,227 +Other assets +12,483 +7,331 +— +— +19,814 +Total other assets +2,389,767 +87,486 +57,641 +(2,194,848 +) +340,046 +Total assets +$ +5,718,963 +$ +2,844,538 +$ +57,641 +$ +(2,813,390 +) +$ +5,807,752 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +416,249 +$ +137,361 +$ +— +$ +(1 +) +$ +553,609 +Accounts payable - intercompany +63,373 +554,313 +127 +(617,813 +) +— +Asset retirement obligation - current +120 +— +— +— +120 +Short-term derivative instruments +32,534 +— +— +— +32,534 +Current maturities of long-term debt +622 +— +— +— +622 +Total current liabilities +512,898 +691,674 +127 +(617,814 +) +586,885 +Long-term derivative instruments +2,989 +— +— +— +2,989 +Asset retirement obligation - long-term +63,141 +11,839 +— +— +74,980 +Other non-current liabilities +— +2,963 +— +— +2,963 +Long-term debt, net of current maturities +2,038,321 +— +— +— +2,038,321 +Total liabilities +2,617,349 +706,476 +127 +(617,814 +) +2,706,138 +Stockholders' equity: +Common stock +1,831 +— +— +— +1,831 +Paid-in capital +4,416,250 +1,915,598 +259,307 +(2,174,905 +) +4,416,250 +Accumulated other comprehensive loss +(40,539 +) +— +(38,593 +) +38,593 +(40,539 +) +(Accumulated deficit) retained earnings +(1,275,928 +) +222,464 +(163,200 +) +(59,264 +) +(1,275,928 +) +Total stockholders' equity +3,101,614 +2,138,062 +57,514 +(2,195,576 +) +3,101,614 +Total liabilities and stockholders' equity +$ +5,718,963 +$ +2,844,538 +$ +57,641 +$ +(2,813,390 +) +$ +5,807,752 +F-42 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +839,241 +$ +515,803 +$ +— +$ +— +$ +1,355,044 +Costs and expenses: +Lease operating expenses +66,947 +24,693 +— +— +91,640 +Production taxes +17,140 +16,340 +— +— +33,480 +Midstream gathering and processing expenses +199,607 +90,581 +— +— +290,188 +Depreciation, depletion and amortization +486,661 +3 +— +— +486,664 +General and administrative expenses +59,303 +(2,673 +) +3 +— +56,633 +Accretion expense +3,228 +891 +— +— +4,119 +832,886 +129,835 +3 +— +962,724 +INCOME (LOSS) FROM OPERATIONS +6,355 +385,968 +(3 +) +— +392,320 +OTHER (INCOME) EXPENSE: +Interest expense +137,894 +(2,621 +) +— +— +135,273 +Interest income +(287 +) +(27 +) +— +— +(314 +) +Litigation settlement +1,075 +— +— +— +1,075 +Insurance proceeds +(231 +) +— +— +— +(231 +) +Gain on sale of equity method investments +(28,349 +) +(96,419 +) +— +— +(124,768 +) +(Income) loss from equity method investments and investments in subsidiaries +(532,869 +) +(694 +) +510 +483,149 +(49,904 +) +Other (income) expense, net +(1,369 +) +(33 +) +— +2,100 +698 +(424,136 +) +(99,794 +) +510 +485,249 +(38,171 +) +INCOME (LOSS) BEFORE INCOME TAXES +430,491 +485,762 +(513 +) +(485,249 +) +430,491 +INCOME TAX BENEFIT +(69 +) +— +— +— +(69 +) +NET INCOME (LOSS) +$ +430,560 +$ +485,762 +$ +(513 +) +$ +(485,249 +) +$ +430,560 +F-43 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +1,010,989 +$ +309,314 +$ +— +$ +— +$ +1,320,303 +Costs and expenses: +Lease operating expenses +65,793 +14,453 +— +— +80,246 +Production taxes +15,100 +6,026 +— +— +21,126 +Midstream gathering and processing expenses +187,678 +61,317 +— +— +248,995 +Depreciation, depletion and amortization +364,625 +4 +— +— +364,629 +General and administrative expenses +55,589 +(2,654 +) +3 +— +52,938 +Accretion expense +1,246 +365 +— +— +1,611 +Acquisition expense +— +2,392 +— +— +2,392 +690,031 +81,903 +3 +— +771,937 +INCOME (LOSS) FROM OPERATIONS +320,958 +227,411 +(3 +) +— +548,366 +OTHER (INCOME) EXPENSE: +Interest expense +112,732 +(4,534 +) +— +— +108,198 +Interest income +(988 +) +(21 +) +— +— +(1,009 +) +Gain on sale of equity method investments +(12,523 +) +— +— +— +(12,523 +) +(Income) loss from equity method investments and investments in subsidiaries +(213,607 +) +1,955 +2,189 +227,243 +17,780 +Other (income) expense, net +(1,617 +) +(324 +) +— +900 +(1,041 +) +(116,003 +) +(2,924 +) +2,189 +228,143 +111,405 +INCOME (LOSS) BEFORE INCOME TAXES +436,961 +230,335 +(2,192 +) +(228,143 +) +436,961 +INCOME TAX EXPENSE +1,809 +— +— +— +1,809 +NET INCOME (LOSS) +$ +435,152 +$ +230,335 +$ +(2,192 +) +$ +(228,143 +) +$ +435,152 +F-44 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +381,931 +$ +3,979 +$ +— +$ +— +$ +385,910 +Costs and expenses: +Lease operating expenses +68,034 +843 +— +— +68,877 +Production taxes +13,121 +155 +— +— +13,276 +Midstream gathering and processing expenses +165,400 +572 +— +— +165,972 +Depreciation, depletion and amortization +245,970 +4 +— +— +245,974 +Impairment of oil and natural gas properties +715,495 +— +— +— +715,495 +General and administrative expenses +43,896 +(490 +) +3 +— +43,409 +Accretion expense +1,057 +— +— +— +1,057 +1,252,973 +1,084 +3 +— +1,254,060 +(LOSS) INCOME FROM OPERATIONS +(871,042 +) +2,895 +(3 +) +— +(868,150 +) +OTHER (INCOME) EXPENSE: +Interest expense +63,529 +1 +— +— +63,530 +Interest income +(1,230 +) +— +— +— +(1,230 +) +Insurance proceeds +(5,718 +) +— +— +— +(5,718 +) +Loss on debt extinguishment +23,776 +— +— +— +23,776 +Gain on sale of equity method investments +(3,391 +) +— +— +— +(3,391 +) +Loss (income) from equity method investments and investments in subsidiaries +34,469 +(89 +) +25,150 +(22,154 +) +37,376 +Other expense (income), net +145 +(16 +) +— +— +129 +111,580 +(104 +) +25,150 +(22,154 +) +114,472 +(LOSS) INCOME BEFORE INCOME TAXES +(982,622 +) +2,999 +(25,153 +) +22,154 +(982,622 +) +INCOME TAX BENEFIT +(2,913 +) +— +— +— +(2,913 +) +NET (LOSS) INCOME +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +F-45 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(Amounts in thousands) +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +430,560 +$ +485,762 +$ +(513 +) +$ +(485,249 +) +$ +430,560 +Foreign currency translation adjustment +(15,487 +) +(297 +) +(15,190 +) +15,487 +(15,487 +) +Other comprehensive loss (income) +(15,487 +) +(297 +) +(15,190 +) +15,487 +(15,487 +) +Comprehensive income (loss) +$ +415,073 +$ +485,465 +$ +(15,703 +) +$ +(469,762 +) +$ +415,073 +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +435,152 +$ +230,335 +$ +(2,192 +) +$ +(228,143 +) +$ +435,152 +Foreign currency translation adjustment +12,519 +182 +12,337 +(12,519 +) +12,519 +Other comprehensive income (loss) +12,519 +182 +12,337 +(12,519 +) +12,519 +Comprehensive income (loss) +$ +447,671 +$ +230,517 +$ +10,145 +$ +(240,662 +) +$ +447,671 +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +(979,709 +) +$ +2,999 +$ +(25,153 +) +$ +22,154 +$ +(979,709 +) +Foreign currency translation adjustment +2,119 +778 +1,341 +(2,119 +) +$ +2,119 +Other comprehensive income (loss) +2,119 +778 +1,341 +(2,119 +) +2,119 +Comprehensive (loss) income +$ +(977,590 +) +$ +3,777 +$ +(23,812 +) +$ +20,035 +$ +(977,590 +) +F-46 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +543,817 +$ +208,670 +$ +— +$ +1 +$ +752,488 +Net cash (used in) provided by investing activities +(429,483 +) +(213,608 +) +(2,318 +) +2,318 +(643,091 +) +Net cash (used in) provided by financing activities +(156,657 +) +— +2,319 +(2,319 +) +(156,657 +) +Net (decrease) increase in cash and cash equivalents +(42,323 +) +(4,938 +) +1 +— +(47,260 +) +Cash and cash equivalents at beginning of period +67,908 +31,649 +— +— +99,557 +Cash and cash equivalents at end of period +$ +25,585 +$ +26,711 +$ +1 +$ +— +$ +52,297 +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +392,680 +$ +287,209 +$ +— +$ +— +$ +679,889 +Net cash (used in) provided by investing activities +(2,216,615 +) +(1,674,690 +) +(2,280 +) +1,419,417 +(2,474,168 +) +Net cash provided by (used in) financing activities +432,961 +1,417,137 +2,280 +(1,419,417 +) +432,961 +Net (decrease) increase in cash and cash equivalents +(1,390,974 +) +29,656 +— +— +(1,361,318 +) +Cash and cash equivalents at beginning of period +1,458,882 +1,993 +— +— +1,460,875 +Cash and cash equivalents at end of period +$ +67,908 +$ +31,649 +$ +— +$ +— +$ +99,557 +Year Ended December 31, 2016 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +336,330 +$ +(9,486 +) +$ +(2 +) +$ +11,001 +$ +337,843 +Net cash (used in) provided by investing activities +(720,582 +) +(22,500 +) +(15,472 +) +37,972 +(720,582 +) +Net cash provided by (used in)financing activities +1,730,640 +33,500 +15,473 +(48,973 +) +1,730,640 +Net increase (decrease) in cash and cash equivalents +1,346,388 +1,514 +(1 +) +— +1,347,901 +Cash and cash equivalents at beginning of period +112,494 +479 +1 +— +112,974 +Cash and cash equivalents at end of period +$ +1,458,882 +$ +1,993 +$ +— +$ +— +$ +1,460,875 +F-47 +Table of Contents +Index to Financial Statements +19. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company owns a 24.9999% interest in Grizzly, which interest is shown below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2018 +2017 +(In thousands) +Proven properties +$ +7,153,799 +$ +6,256,182 +Unproven properties +2,873,037 +2,912,974 +10,026,836 +9,169,156 +Accumulated depreciation, depletion, amortization and impairment reserve +(4,613,293 +) +(4,136,777 +) +Net capitalized costs +$ +5,413,543 +$ +5,032,379 +Equity investment in Grizzly Oil Sands ULC +Proven properties +$ +67,475 +$ +73,818 +Unproven properties +79,605 +86,540 +147,080 +160,358 +Accumulated depreciation, depletion, amortization and impairment reserve +(1,553 +) +(1,693 +) +Net capitalized costs +$ +145,527 +$ +158,665 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2018 +2017 +2016 +(In thousands) +Acquisition +$ +124,558 +$ +1,951,281 +$ +152,887 +Development +603,676 +994,237 +423,998 +Exploratory +21,840 +— +— +Recompletions +7,915 +14,289 +16,386 +Capitalized asset retirement obligation +1,452 +42,270 +10,971 +Total +$ +759,441 +$ +3,002,077 +$ +604,242 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +238 +$ +503 +$ +357 +Development +— +— +— +Exploratory +— +— +— +Capitalized asset retirement obligation +(285 +) +(524 +) +784 +Total +$ +(47 +) +$ +(21 +) +$ +1,141 +F-48 +Table of Contents +Index to Financial Statements +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +2018 +2017 +2016 +(In thousands) +Revenues +$ +1,355,044 +$ +1,320,303 +$ +385,910 +Production costs +(415,308 +) +(350,367 +) +(248,125 +) +Depletion +(476,517 +) +(358,792 +) +(243,098 +) +Impairment +— +— +(715,495 +) +463,219 +611,144 +(820,808 +) +Income tax expense (benefit) +Current +254 +3,362 +— +Deferred +(322 +) +(3,602 +) +— +(68 +) +(240 +) +— +Results of operations from producing activities +$ +463,287 +$ +611,384 +$ +(820,808 +) +Depletion per Mcf of gas equivalent (Mcfe) +$ +0.96 +$ +0.90 +$ +0.92 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +— +$ +— +$ +— +Production costs +— +— +(13 +) +Depletion +— +— +— +— +— +(13 +) +Income tax expense +— +— +— +Results of operations from producing activities +$ +— +$ +— +$ +(13 +) +Oil and Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2018 , 2017 and 2016 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2018 , 2017 and 2016 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (MBbls) and volumes for natural gas are stated in millions of cubic feet (MMcf). The prices used for the 2018 reserve report are $65.56 per barrel of oil, $3.10 per MMbtu and $32.02 per barrel for NGLs, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2017 and 2016 for reserve report purposes are $51.34 per barrel, $2.98 per MMbtu and $18.40 per barrel for NGLs and $42.75 per barrel, $2.48 per MMbtu and $9.91 per barrel for NGLs, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +F-49 +Table of Contents +Index to Financial Statements +2018 +2017 +2016 +Oil +Natural Gas +Natural Gas Liquids +Oil +Natural Gas +Natural Gas Liquids +Oil +Natural Gas +Natural Gas Liquids +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +(MBbls) +(MMcf) +(MBbls) +Proved Reserves +Beginning of the period +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +6,458 +1,560,145 +17,736 +Purchases in oil and natural gas reserves in place +— +— +— +15,132 +1,098,644 +53,617 +— +— +— +Extensions and discoveries +5,205 +622,271 +9,631 +951 +1,594,734 +4,619 +1,217 +1,082,220 +7,677 +Sales of oil and natural gas reserves in place +(134 +) +(43,444 +) +(112 +) +— +— +— +— +— +— +Revisions of prior reserve estimates +(377 +) +(826,506 +) +1,228 +107 +314,925 +2,737 +(3 +) +(247,703 +) +(1,439 +) +Current production +(2,801 +) +(443,742 +) +(5,993 +) +(2,579 +) +(350,061 +) +(5,334 +) +(2,126 +) +(227,594 +) +(3,847 +) +End of period +21,050 +4,133,889 +80,520 +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +Proved developed reserves +9,570 +1,813,184 +40,810 +10,245 +1,616,930 +36,247 +4,882 +744,797 +14,299 +Proved undeveloped reserves +11,480 +2,320,705 +39,710 +8,912 +3,208,380 +39,519 +664 +1,422,271 +5,828 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +— +— +— +— +— +— +— +— +— +Purchases in oil and natural gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +— +— +— +— +— +— +— +— +— +Current production +— +— +— +— +— +— +— +— +— +End of period +— +— +— +— +— +— +— +— +— +Proved developed reserves +— +— +— +— +— +— +— +— +— +Proved undeveloped reserves +— +— +— +— +— +— +— +— +— +In 2018, the Company experienced extensions and discoveries of 711.2 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica Shale and SCOOP acreages. Of the total extensions and discoveries, 556.3 Bcfe was attributable to the addition of 75 PUD locations in the Utica field, 90.1 Bcfe was attributable to the addition of 11 PUD locations in the SCOOP field and 3.0 Bcfe was attributable to the addition of 13 PUD locations in the Southern Louisiana fields as a result of the Company's current development plan that refocused some activity within existing fields. This change reflects the Company's ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +In 2018, the Company experienced downward revisions of 1.0 Tcfe in estimated proved reserves with the exclusion of 127 PUD locations in the Company's Utica field and 12 PUD locations in the Company's SCOOP field, which was primarily the result of changes in the Company's development schedule moving development in excess of five years from initial booking. The development plan change, as approved by the Company's senior management and board of directors, is a result of continued focus on free cash flow generation. This downward revision was partially offset by upward revisions of 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length, 67.6 Bcfe due to changes in ownership interest, 27.9 Bcfe due to an increase in pricing and 8.3 Bcfe due to changes in well performance. In addition, the Company sold +F-50 +Table of Contents +Index to Financial Statements +approximately 44.9 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in the Company's Utica field. +In 2017, the Company purchased 1.5 Tcfe through its acquisition of SCOOP properties discussed in Note 2. Also in 2017, the Company experienced extensions and discoveries of 1.6 Tcfe of estimated proved reserves primarily attributable to the continued development of the Company's Utica Shale acreage. In 2017, the Company experienced upward revisions of 201.3 Bcfe in estimated proved reserves due to an increase in well performance, 214.1 Bcfe due to the increase in pricing and 95.9 Bcfe due to changes in its ownership interests. These positive revisions are partially offset by downward revisions of 133.0 Bcfe due to a decline in well performance specific to one area in the Company's Utica field and a decline of 45.7 Bcfe in estimated proved reserves in 2017 primarily due to the exclusion of ten PUD locations in the Company's Utica field, five of which are operated by the Company and five of which are operated by other operators, that were excluded due to changes in drilling schedules. Additional downward revision of 0.6 Bcfe was due to the removal of two PUD locations in the Company's Southern Louisiana fields that had not been drilled within five years of initial booking. +In 2016, the Company experienced extensions and discoveries of 1.1 Tcfe of estimated proved reserves attributable to the continued development of the Company's Utica Shale acreage. The Company experienced downward revisions of 227.9 Bcfe due to lower commodity prices on 67 PUD locations, including the loss of 35 of the 67 PUD locations as they were no longer economic, as well as downward revisions of 17.4 Bcfe due to rescheduling the drilling timeline of four PUD locations in excess of five years of initial booking resulting in the removal of these four PUD locations. In addition, the Company experienced upward revisions of 26.7 Bcfe attributable to improved performance of 34 PUD locations as a result of 14.5% production increases due to well performance of offset producers as well as lower lease operated and capital expenditures. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2018 , 2017 and 2016 using an unweighted average first-of-the-month price for the period January through December 31, 2018 , 2017 and 2016 . +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2018 +2017 +2016 +(In thousands) +Future cash flows +$ +14,483,197 +$ +11,202,692 +$ +3,354,168 +Future development and abandonment costs +(2,437,853 +) +(3,005,217 +) +(1,165,025 +) +Future production costs +(5,067,554 +) +(2,152,821 +) +(924,167 +) +Future production taxes +(455,840 +) +(289,944 +) +(69,447 +) +Future income taxes +(943,293 +) +(573,965 +) +(14,545 +) +Future net cash flows +5,578,657 +5,180,745 +1,180,984 +10% discount to reflect timing of cash flows +(2,595,932 +) +(2,537,181 +) +(492,944 +) +Standardized measure of discounted future net cash flows +$ +2,982,725 +$ +2,643,564 +$ +688,040 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +— +$ +— +Future development and abandonment costs +— +— +— +Future production costs +— +— +— +Future production taxes +— +— +— +Future income taxes +— +— +— +Future net cash flows +— +— +— +10% discount to reflect timing of cash flows +Standardized measure of discounted future net cash flows +$ +— +$ +— +$ +— +F-51 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2018 +2017 +2016 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +(1,063,215 +) +$ +(756,257 +) +$ +(312,291 +) +Net changes in prices, production costs, and development costs +590,519 +913,714 +(146,518 +) +Acquisition of oil and gas reserves in place +— +703,866 +— +Extensions and discoveries +519,137 +618,039 +186,909 +Previously estimated development costs incurred during the period +402,156 +390,673 +176,218 +Revisions of previous quantity estimates, less related production costs +(356,933 +) +155,200 +(38,448 +) +Sales of oil and gas reserves in place +(25,882 +) +— +— +Accretion of discount +264,356 +68,804 +76,433 +Net changes in income taxes +(185,157 +) +(231,545 +) +(6,495 +) +Change in production rates and other +194,180 +93,030 +(12,099 +) +Total change in standardized measure of discounted future net cash flows +$ +339,161 +$ +1,955,524 +$ +(76,291 +) +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +— +$ +— +$ +— +Net changes in prices, production costs, and development costs +— +— +— +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +— +— +— +Previously estimated development costs incurred during the period +— +— +— +Revisions of previous quantity estimates, less related production costs +— +— +— +Accretion of discount +— +— +— +Net changes in income taxes +— +— +— +Change in production rates and other +— +— +— +Total change in standardized measure of discounted future net cash flows +$ +— +$ +— +$ +— +F-52 +Table of Contents +Index to Financial Statements +20. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2018 and 2017 : +2018 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +325,392 +$ +252,740 +$ +360,962 +$ +415,950 +Income from operations +110,318 +13,791 +113,576 +154,635 +Income tax benefit +(69 +) +— +— +— +Net income +90,090 +111,319 +95,150 +134,001 +Income per share: +Basic +$ +0.50 +$ +0.64 +$ +0.55 +$ +0.78 +Diluted +$ +0.50 +$ +0.64 +$ +0.55 +$ +0.78 +2017 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +333,004 +$ +323,953 +$ +265,498 +$ +397,848 +Income from operations +181,683 +143,175 +50,483 +173,025 +Income tax expense (benefit) +— +— +2,763 +(954 +) +Net income +154,455 +105,936 +18,235 +156,526 +Income per share: +Basic +$ +0.91 +$ +0.58 +$ +0.10 +$ +0.85 +Diluted +$ +0.91 +$ +0.58 +$ +0.10 +$ +0.85 +21. +SUBSEQUENT EVENTS +Derivatives +In February 2019, the Company entered into a natural gas basis swap position for 2020, which settles on the pricing index to basis differential of Inside FERC to the NYMEX Henry Hub natural gas price, for approximately 10,000 MMBtu of natural gas per day at a differential of $0.54 per MMBtu. +Stock Repurchase Program +In January 2019, the board of directors of the Company approved a stock repurchase program to acquire up to $400.0 million of the Company's outstanding common stock within the next 24 months. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. The Company intends to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund its 2019 capital development program. This repurchase program is authorized to extend through December 31, 2020 and may be suspended from time to time, modified, extended or discontinued by the board of directors of the Company at any time. The Company has no t made any such purchases of its common stock under this program as of February 28, 2019. +F-53 \ No newline at end of file diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/filing_metadata.csv b/raw/filings/0000874499/2018/0001628280-19-002242/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d42ac273b47b86d723e73b837af029b37fc5fa79 --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2019-02-28,2018-12-31,2019-02-28T19:49:21.000Z,0001628280-19-002242,gpor-12312018x10k.htm,10-K,19987656,1,0,https://www.sec.gov/Archives/edgar/data/874499/000162828019002242/gpor-12312018x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828019002242/,2018,2018,1 diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/item1.txt b/raw/filings/0000874499/2018/0001628280-19-002242/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..42182d073c2707e04e567bce7926abb23a97ff79 --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/item1.txt @@ -0,0 +1,535 @@ +ITEM 1. +BUSINESS +General +We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, crude oil and natural gas liquids, or NGLs, in the United States. Our corporate strategy is to internally identify prospects, acquire lands encompassing those prospects and evaluate those prospects using subsurface geology and geophysical data and exploratory drilling. Using this strategy, we have developed an oil and natural gas portfolio of proved reserves, as well as development and exploratory drilling opportunities on high potential conventional and unconventional oil and natural gas prospects. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plays in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an approximate 21.9% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, a company listed on the Nasdaq Global Select Market (TUSK) that serves the electric utility and oil and natural gas industries. We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. +As of February 15, 2019 , we held leasehold interests in approximately 241,000 gross ( 210,000 net) acres in the Utica Shale primarily in Eastern Ohio. In 2018 , we spud 23 gross ( 19.5 net) wells, of which three were completed as producing wells and, as of December 31, 2018 , 20 were in various stages of completion. We commenced sales from 35 gross and net wells in the Utica Shale during 2018 . During 2019 (through February 15, 2019 ), we spud five gross ( 3.7 net) wells. As of February 15, 2019 , three of these wells were in various stages of completion and the other two were still drilling. In addition, other operators drilled 28 gross ( 4.4 net) wells and commenced sales from 32 gross ( 9.4 net) wells on our Utica Shale acreage in 2018 . +We currently intend to drill 13 to 15 gross ( 10 to 11 net) horizontal wells, and commence sales fr om 47 to 51 gross ( 40 to 45 n et) horizontal wells on our Utica Shale acreage in 2019 . We currently anti cipate two to three net horizontal wells will be drilled, and sales commenced fro m two to three net horizo ntal wells, by other operators on our Utica Shale acreage in 2019 . +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2018 was approximately 102,665 million cubic feet of natural gas equivalent, or MMcfe, or 1,115.9 MMcfe per day, of which 97% was from natural gas and 3% was from oil and NGLs. +As of February 15, 2019 , we held leasehold interests in approximately 50,000 net surface acres in the SCOOP. In 2018 , we spud 13 gross ( 12.1 net) wells, of which four were completed as producing wells and, as of December 31, 2018 , nine were in various stages of completion. We commenced sales from 15 gross ( 12.8 net) wells in the SCOOP during 2018 . During 2019 (through February 15, 2019 ), we spud two gross ( 1.6 net) wells. As of February 15, 2019 , both of these wells were still drilling. In addition, other operators drilled 40 gross ( 3.1 net) wells and commenced sales from 47 gross ( 3.6 net) wells on our SCOOP acreage during 2018 . +We currently intend to drill nine to ten gross ( seven to eight net) horizontal wells, and commence sales from 15 to 17 gross ( 14 to 15 net) horizontal wells on our SCOOP acreage in 2019 . We currently anticipat e one to two net horizontal wells will be drilled, and sales commenced from one to two net hor izontal wells, by other operators on our SCOOP acreage in 2019 . +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2018 was approximately 24,406 MMcfe, or an average of 265.3 MMcfe per day, of which 70% was from natural gas and 30% was from oil and NGLs. +In 2018 , at our WCBB field, we did not spud any new wells and recompleted 32 existing wells. In the fourth quarter of 2018 , net production at WCBB was approximately 837 MMcfe, or an average of 9.1 MMcfe per day, all of which was from oil. +In 2018 , at our East Hackberry field, we did not spud any new wells and recompleted 15 existing wells. In the fourth quarter of 2018 , net production at East Hackberry was approximately 115 MMcfe, or an average of 1.2 MMcfe per day, all of which was from oil. +In 2018 , at our West Hackberry field, we did not spud any new wells. In the fourth quarter of 2018 , net production at West Hackberry was approximately 17 MMcfe, or an average of 186.2 thousand cubic feet of natural gas equivalent, or Mcfe, per day, all of which was from oil. +2 +Table of Contents +Index to Financial Statements +We do not anticipate any material activities in our Southern Louisiana fields during 2019 . +As of December 31, 2018 , we held leasehold interests in approximately 2,900 net acres in the Niobrara Formation in Northwestern Colorado. During the year ended December 31, 2018 , there were no wells spud on our Niobrara Formation acreage. In the fourth quarter of 2018 , net production from our Niobrara Formation acreage was approximately 23 MMcfe, or an average of 251.0 Mcfe per day, all of which was from oil. +As of December 31, 2018 , we held leasehold interests in approximately 780 net acres in the Bakken Formation of Western North Dakota and Eastern Montana, interests in 18 wells and overriding royalty interests in certain existing and future wells. In the fourth quarter of 2018 , our net production from this acreage was approximately 76 MMcfe, or an average of 827.1 Mcfe per day, of which 86% was from oil and 14% was from natural gas and natural gas liquids. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. For additional information regarding Grizzly, see "- Our Equity Investments–Grizzly Oil Sands " below. +We own a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. For additional information regarding Tatex II and our other activities in Southeast Asia, see "- Our Equity Investments–Thailand " below. +In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. For additional information regarding these entities, see "- Our Equity Investments–Other Investments " below. +As of December 31, 2018 , we had 4.7 trillion cubic feet of natural gas equivalent, or Tcfe, of proved reserves with a present value of estimated future net revenues, discounted at 10%, or PV-10, of approximately $3.4 billion and associated standardized measure of discounted future net cash flows of approximately $3.0 billion , excluding reserves attributable to our interests in Grizzly and Tatex II. See Item 2. " Properties-Proved Oil and Natural Gas Reserves ” for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Principal Oil and Natural Gas Properties +The following table presents certain information as of December 31, 2018 reflecting our net interest in our principal producing oil and natural gas properties in the Utica Shale primarily in Eastern Ohio, the SCOOP in Oklahoma, along the Louisiana Gulf Coast, in the Niobrara Formation in Northwestern Colorado and in the Bakken Formation in Western North Dakota and Eastern Montana. +Proved Reserves +Field +Average NRI/WI (1) +Productive +Wells +Non-Productive +Wells +Developed +Acreage (2) +Gas +Oil +NGLs +Total +Percentages +Gross +Net +Gross +Net +Gross +Net +MMcf +MBbls +MBbls +MMcfe +Utica Shale (3) +44.26/54.44 +567 +308 +5 +4.23 +92,594 +72,693 +3,123,629 +5,289 +32,500 +3,350,363 +SCOOP (4) +24.34/30.20 +576 +173.27 +33 +27.83 +48,658 +34,532 +1,009,971 +12,937 +48,020 +1,375,713 +West Cote Blanche Bay Field (5) +80.108/100 +69 +69 +146 +146 +5,668 +5,668 +18 +1,834 +— +11,022 +E. Hackberry Field (6) +82.33/100 +14 +14 +130 +130 +2,910 +2,910 +35 +276 +— +1,692 +W. Hackberry Field +87.50/100 +2 +2 +7 +7 +727 +727 +— +391 +— +2,346 +Niobrara Formation +34.52/48.61 +3 +1.46 +— +— +1,998 +999 +— +128 +— +768 +Bakken Formation +1.51/1.83 +18 +0.3 +— +— +386 +77 +227 +195 +— +1,398 +Overrides/Royalty Non-operated +Various +673 +0.9 +— +— +— +— +9 +— +— +9 +Total +1,922 +568.93 +321 +315.06 +152,941 +117,606 +4,133,889 +21,050 +80,520 +4,743,311 +3 +Table of Contents +Index to Financial Statements +(1) +Net Revenue Interest (NRI)/Working Interest (WI) for producing wells. +(2) +Developed acres are acres spaced or assigned to productive wells. Approximately 43% of our acreage is developed acreage and has been held by production. +(3) +Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 245 gross (41.44 net) wells drilled by other operators on our acreage. +(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 392 gross (30.02 net) wells drilled by other operators on our acreage. +(5) +We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). +(6) +NRI shown is for producing wells. +Utica Shale (primarily in Eastern Ohio) +Location and Land +As of December 31, 2018 , we held leasehold interests in approximately 241,000 gross ( 210,000 net) acres in the Utica Shale. +Area History +As of December 31, 2018 , the Ohio Department of Natural Resources reported that there were 2,138 producing horizontal wells, 246 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 116 horizontal wells that were being drilled and an additional 449 horizontal wells that had been permitted. +Geology +The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale. +The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 800 feet. There is a general thinning from east to west. Across our position, the Utica Shale ranges in thickness from over 600 to over 750 feet. +The application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, were the key technologies that unlocked development of the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region. +Facilities +There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2018 , had spud 385 gross wel ls, 290 of which were completed and were producing. In 2018 , we spud 23 gross ( 19.5 net) wells, of which three were completed as producing wells and, as of December 31, 2018 , 20 were in various stages of completion. We commenced sales from 35 gross and net wells in the Utica Shale during 2018 . During 2019 (through February 15, 2019 ), we spud five gross ( 3.7 net) wells. As of February 15, 2019 , three of these wells were in various stages of completion and the other two were still drilling. In addition, other operators drilled 28 gross ( 4.4 net) wells and commenced sales from 32 gross ( 9.4 net) wells on our Utica Shale acreage in 2018 . +4 +Table of Contents +Index to Financial Statements +We currently intend to dr ill 13 to 15 gross ( 10 to 11 net) horizontal wells, and commence sales from 47 to 51 gross ( 40 to 45 net) horizontal wells, on our Utica Shale acreage in 2019 . We currently anticipate two to three net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other o perators on our Utica Shale acreage during 2019 . As of February 15, 2019 , we had two operated horizontal rig drilling in the play. We plan to run, on average, approximately one operated horizontal rig in the Utica Shale in 2019. +Production Status +Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2018 was approximately 102,665 MMcfe, or 1,115.9 MMcfe per day, of which 97% was from natural gas and 3% was from oil and NGLs. +SCOOP (Oklahoma) +Location and Land +As of December 31, 2018 , we held leasehold interests in approximately 66,000 gross ( 50,000 net) surface acres in the SCOOP and approximately 92,000 net reservoir acres, which includes 50,000 net Woodford acres and 42,000 net Springer acres. +Area History +The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined province that encompasses many of the top hydrocarbon producing counties in Oklahoma. The area extends mainly across Grady, Caddo, McClain, Garvin, Stevens, Carter and Love Counties. The region was historically developed by vertical wells drilled through multiple stacked reservoirs ranging from the Cambrian to Permian Periods in age. The play represents the transition to mainly horizontal development targeting predominantly oil and condensate-rich hydrocarbons. The most prolific of these reservoirs include the, Springer (Goddard) Shale, Caney Shale, Woodford Shale and Sycamore Formation. +Geology +The SCOOP play of Oklahoma is located in the southeast portion of the prolific Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford Shale. The Woodford Shale is a silica and highly organic rich black shale that was deposited about 320 million to 370 million years ago. Across our position, the Woodford Shale ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation is age equivalent to the Meramec and Osage being developed in the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play and is located between the organic-rich Woodford and Caney Shales. The Sycamore formation is approximately 250 feet thick across our acreage position, presenting a significant development target. +Facilities +There are standard land oil and natural gas processing facilities in the SCOOP. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering. +Recent and Future Activities +On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon, LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. +Upon our acquisition of these assets, we focused on the high-grading of equipment for our rig fleet to drive efficiencies and lower drill days in the play. Improved well performance has also been realized with enhanced completion designs compared to +5 +Table of Contents +Index to Financial Statements +historical practices for the area. Our 2018 drilling program concentrated on SCOOP Woodford wells, however, during 2018, we also spud and commenced sales from one upper Sycamore well. +In 2018 , we spud 13 gross ( 12.1 net) wells, of which four were completed as producing wells and, as of December 31, 2018 , nine were in various stages of completion. We commenced sales from 15 gross ( 12.8 net) wells in the SCOOP during 2018 . During 2019 (through February 15, 2019 ), we spud two gross ( 1.6 net) wells. As of February 15, 2019 , both of these wells were still drilling. In addition, other operators drilled 40 gross ( 3.1 net) wells and commenced sales from 47 gross ( 3.6 ne t) wells on our SCOOP acreage in 2018 . +We currently intend to drill nine to ten gross ( seven to eight net) horizontal wells, and commence sales from 15 to 17 gross ( 14 to 15 net) horizontal wells, on our SCOOP acreage in 2019 . We currently anticipate one to two net horizontal wells will be drilled, and sales commenced from one to two net horizontal wells, by other operators on our SCOOP acreage during 2019 . As of February 15, 2019 , we had two operated horizontal rigs drilling in the play . We intend to run, on average, approximately 1.5 operated horizontal rigs in the SCOOP during 2019. +Production Status +Aggregate net production from our SCOOP acreage during the three months ended December 31, 2018 was approximately 24,406 net MMcfe, or 265.3 MMcfe per day, of which 70% was from natural gas and 30% was from oil and natural gas liquids. +West Cote Blanche Bay Field +Location and Land +The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres. +Area History and Production +Texaco, now part of Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,093 wells drilled as of December 31, 2018 , 980 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2018 , we drilled 273 new wells, 240 of which were productive, for an 88% success rate. As of December 31, 2018 , estimated field cumulative gross production was 200 MMBO and 238 Bcf of gas. Of the 1,093 wells drilled in WCBB as of December 31, 2018 , 69 were producing, 146 were shut-in, and six were being used as salt water disposal wells. The other 872 wells have been plugged and abandoned. +Geology +WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed. +There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,093 wells that had been drilled in the field as of December 31, 2018 , over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive. +WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connection with our drilling programs will be, directionally drilled using steering tools and downhole motors. +6 +Table of Contents +Index to Financial Statements +The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone. +Facilities +We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system. +Recent Activity +In 2018 , at our WCBB field, we recompleted 32 existing wells and spud no new wells. As of February 15, 2019 , no existing wells had been recompleted during 2019 in our WCBB field. +Production Status +In the fourth quarter of 2018 , our net production at WCBB was approximately 837 MMcfe, or an average of 9.1 MMcfe per day, all of which was from oil. +East Hackberry Field +Location and Land +The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.33% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2018 , we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu. +Area History and Production +The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2018 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 272 wells have been drilled on our portion of the field. As of December 31, 2018 , 14 wells had daily production, 130 were shut-in and three had been converted to salt water disposal wells. The remaining 125 wells had been plugged and abandoned. +Geology +The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet. +Facilities +We have a field office that serves both the East and West Hackberry fields. In addition, we own and operate two production facilities at East Hackberry that include one land based tank batteries, a production barge, two natural gas compressors, dehydration units and salt water disposal systems. +Recent Activity +7 +Table of Contents +Index to Financial Statements +During 2018 at East Hackberry, we recompleted 15 existing wells and spud no new wells. As of February 15, 2019 , no existing wells had been recompleted during 2019 in our East Hackberry field. +Production Status +In the fourth quarter of 2018 , our net production at East Hackberry was approximately 115 MM cfe, or an averag e of 1.2 MMcfe per day, all of which was from oil. +West Hackberry Field +Location and Land +The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 87.50% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves. +Area History +The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2018 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2018 , 42 wells had been drilled on our portion of West Hackberry. As of December 31, 2018 , two of such wells were producing, seven were shut-in and one was being used as a salt water disposal well. The remaining 32 wells have been plugged and abandoned. +Geology +Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE. +Recent Activity +During 2018 at West Hackberry, we did not spu d any new wells . As of February 15, 2019 , no existing wells had been recompleted during 2019 in our West Hackberry field. +Production Status +In the fourth quarter of 2018 , our net production at West Hackberry was approximately 17 MMcfe, or an average of 186.2 Mcfe per day, all of which was from oil. +Facilities +We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system. +We do not anticipate any material activities in our Southern Louisiana fields during 2019 . +Niobrara Formation (Northwestern Colorado) +Location and Land +Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2018 , we held leases for approximately 2,900 net acres. In 2018 , no wells were spud on our Niobrara Formation acreage. +8 +Table of Contents +Index to Financial Statements +Area History +The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature. +Geology +The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play. +Production Status +In the fourth quarter of 2018 , net production from our Niobrara Formation acreage was approximately 23 MMcfe, or an average of 251.0 Mcfe per day, all of which was from oil. +Facilities +There are typical land oil and natural gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +Recent Activity +There were no new wells drilled on our Niobrara Formation acreage in 2018 . We do not anticipate drilling any wells in the Niobrara Formation during 2019 . +Bakken Formation +Location and Land +The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2018 , we held approximately 780 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells. +Production Status +In the fourth quarter of 2018 , our net production from this acreage was approximatel y 76 MMcfe, or an average o f 827.1 Mcfe per day, of wh ich 86% was f rom oil and 14% was from natural gas and natural gas liquids. +Facilities +There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. +9 +Table of Contents +Index to Financial Statements +Recent Activities +There were no new wells drilled on our Bakken Formation acreage in 2018 . We do not anticipate drilling any wells in the Bakken Formation during 2019 . +Additional Properties +In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields in Louisiana, Texas and Oklahoma as described in the following table as of December 31, 2018 : +Field +State +Parish/County +Average Working +Interest +Overriding Royalty +Interests +Producing +Wells +Non-Producing +Wells +Deer Island +Louisiana +Terrebonne +3.13 +% +— +— +1 +Napoleonville +Louisiana +Assumption +— +2.5 +% +3 +— +Crest +Texas +Ochiltree +2.00 +% +— +1 +— +Eagle City South +Oklahoma +Dewey +1.04 +% +— +1 +— +Fay South +Oklahoma +Blaine +0.30 +% +— +1 +— +Fay East +Oklahoma +Blaine +0.15 +% +— +1 +— +Squaw Cheek +Oklahoma +Blaine +0.13 +% +— +1 +— +Watonga Chickasha Trend +Oklahoma +Canadian +0.05 +% +— +1 +— +Green River Basin +Colorado +Moffat +0.07 +% +— +2 +— +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and is awaiting final approval. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production, or CHOPS, at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas, or LPG, into the oil sands area for use in Thermal applications by SAGD producers. +Thailand . We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2018 , net gas production was approximately 78 MMcf per day and condensate production was 245 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information. +Other Investments . In connection with Mammoth Energy's initial public offering, or IPO, in October 2016, we received 9,150,000 shares of Mammoth Energy common stock in return for our contribution to Mammoth Energy of our 30.5% interest +10 +Table of Contents +Index to Financial Statements +in Mammoth Energy Partners LLC. In June 2017, we received an additional 2,000,000 shares of Mammoth Energy common stock in connection with our contribution of all of our equity interests in three other entities to Mammoth Energy. We sold 76,250 shares of our Mammoth Energy common stock in the IPO and an additional 1,354,574 shares in a subsequent underwritten public offering in 2018. As a result, as of December 31, 2018, we owned 9,829,548 shares, or approximately 21.9%, of Mammoth Energy’s outstanding common stock. +In February 2016 , we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through a new entity, Strike Force Midstream LLC, or Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016 . In May 2018, the Company sold its 25% interest in Strike Force to EQT Midstream Partners, LP for proceeds of $175.0 million in cash. +See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these and our other equity investments. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Marketing and Customers +The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management, including but not limited to the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. Both our Utica Shale and SCOOP natural gas production is sold to various counterparties through established NAESBs at the plant tailgates and various central delivery points owned and operated by third party midstream companies. Our natural gas production is sold under monthly, seasonal and long-term contracts and, as needed, through daily transactions. When sold in basin, pricing is typically based on Platts Gas Daily - Texas Eastern M2 Zone for our Utica Shale acreage and Platts Gas Daily - Panhandle Tx-Ok and NGPL Midcontinent for our SCOOP acreage. To maintain flow assurance and price stability, and as discussed under "– Transportation and Takeaway Capacity ," we have entered into agreements in both the Utica and SCOOP basins to transport a portion of our natural gas production to various delivery points. These agreements allow us to price the molecules at those various downstream markets less transportation charges. The majority of our Utica oil is sold to purchasers at the tailgate of a condensate stabilizer located near Cadiz, Ohio, owned and operated by MPLX Energy Logistics, or MPLX. Our SCOOP oil is sold at the lease to various purchasers at respective area postings. In Southern Louisiana, our oil is sold to parties taking custody at the lease or at the outlet from a Gulfport oil storage barge. Our NGLs in the Utica Shale are primarily fractionated at MPLX's Hopedale facility. The majority of the product is marketed by the operator with Gulfport receiving the benefit from the MPLX's aggregation and established logistic network. Our SCOOP NGLs are primarily sent to Mont Belvieu on our commitment to DCP Southern Hills and purchased at the fractionation facility. For the year ended December 31, 2018, sales to BP Energy Company, or BP, and ECO-Energy accounted for approximately 17% and 10% , respectively, of our total oil, natural gas and NGL revenues, before the effects of hedging. +As of December 31, 2018 , we had an average of approximately 663,000 MMBtu per day of firm sales contracted with third parties for 2019 . We had an average of approximately 526,000 MMBtu per day, 372,000 MMBtu per day, 272,000 MMBtu per day, 255,000 MMBtu per day and 212,000 MMBtu per day contracted with third parties for 2020 , 2021 , 2022 , 2023 and thereafter, respectively. +11 +Table of Contents +Index to Financial Statements +Transportation and Takeaway Capacity +In Ohio and Oklahoma, as of December 31, 2018 , we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 and 2020. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale and SCOOP acreage but expect additional long term contracts to be limited in 2019 . Our primary long-haul firm transportation commitments include the following: +• +520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets; +• +250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets; +• +194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets; +• +200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points; +• +275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets; +• +50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets; +• +20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets; +• +50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points; +• +54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2017 allowing additional access to Gulf Coast delivery points; +• +100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities which began in 2017 allowing additional access to Midwest delivery points; +• +150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities, 50,000 of which began in 2017 allowing additional access to Midwest delivery points, and 100,000 of which began in 2018 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and +• +100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities which began in late 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Enable Oklahoma Intrastate which was acquired in early 2017 through our SCOOP acquisition allowing additional connectivity to East Texas and Gulf Coast markets; and +• +30,000 MMBtu per day of firm capacity on Enable Gas Transmission facilities which was acquired in early 2017 through our SCOOP acquisition allowing additional access to East Texas delivery points; and +• +20,000 MMBtu per day of firm capacity on Midcontinent Express Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +• +50,000 MMBtu per day of firm capacity on Gulf Crossing Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and +12 +Table of Contents +Index to Financial Statements +• +200,000 MMBtu per day of firm capacity on Cheniere Midship Pipeline facilities which will begin in 2019 allowing additional access to East Texas delivery points. +Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin and Oklahoma positions. +Regulation +Regulation of Oil and Natural Gas Production +Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. +We own interests in producing oil and natural gas properties located in the Utica Shale primarily in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Colorado and the Bakken Formation in Western North Dakota and Eastern Montana. The states in which our fields are located regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis. +Environmental Regulation +Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future. +Waste Handling . The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent non-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in +13 +Table of Contents +Index to Financial Statements +December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances . The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released. +Water Discharges . The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers, or the Corps. On June 29, 2015, the EPA and the Corps jointly promulgated final rules redefining the scope of waters protected under the Clean Water Act. The rules are subject to ongoing litigation and have been stayed in more than half the States. Also, on December 11, 2018, the EPA and the Corps released a proposed rule that would replace the 2015 rule, and significantly reduce the waters subject to federal regulation under the Clean Water Act. Such proposal is currently subject to public review and comment, after which additional legal challenges are anticipated. As a result of such recent developments, substantial uncertainty exists regarding the scope of waters protected under the Clean Water Act. To the extent the rule expands the range of properties subject to the Clean Water Act’s jurisdiction, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas. +The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. +The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and +14 +Table of Contents +Index to Financial Statements +several for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil to surface waters. +Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws. +Air Emissions . The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “ -Regulation of Hydraulic Fracturing .” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects. +Climate Change . In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases. The EPA has finalized a series of greenhouse gas monitoring, reporting and emission control rules for the oil and natural gas industry and the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions. +In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process, whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore, in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the commitments set forth in the international accord. +Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit greenhouse gases directly, current and future laws or regulations limiting such emissions could increase our own costs. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +There have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any such litigation, we could be named in actions making similar +15 +Table of Contents +Index to Financial Statements +allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition. +Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations. +Endangered Species Act +Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act, though, in December 2017, the U.S. Fish and Wildlife Service provided guidance limiting the reach of the Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas. +Occupational Safety and Health Act +We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements. +Regulation of Hydraulic Fracturing +Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale and SCOOP acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells. +Additionally, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities. +On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission +16 +Table of Contents +Index to Financial Statements +standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rule making to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements. Also, on October 15, 2018, the EPA published a proposed rule to significantly reduce regulatory burdens imposed by the 2016 regulations, including, for example, reducing the monitoring frequency for fugitive emissions and revising the requirements for pneumatic pumps at well sites. The above standards, to the extent implemented, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions. +In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. Also, on November 15, 2016, the BLM finalized a waste prevention rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. On March 28, 2017, President Trump signed an executive order directing the BLM to review the above rules and, if appropriate, to initiate a rulemaking to rescind or revise them. Accordingly, on December 29, 2017, the BLM published a final rule to rescind the 2015 hydraulic fracturing rule; however, a coalition of environmentalists, tribal advocates and the state of California filed lawsuits challenging the rule rescission. Also, on February 22, 2018, the LM published proposed amendments to the waste prevention rule that would eliminate certain air quality provisions and, on April 4, 2018, a federal district court stayed certain provisions of the 2016 rule. At this time, it is uncertain when, or if, the rules will be implemented, and what impact they would have on our operations. +Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business. +Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are +17 +Table of Contents +Index to Financial Statements +adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing. +Other Regulation of the Oil and Natural Gas Industry +The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. +The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas. +Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices. +Drilling and Production . Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following: +• +the location of wells; +• +the method of drilling and casing wells; +• +the timing of construction or drilling activities, including seasonal wildlife closures; +• +the rates of production or “allowables”; +• +the surface use and restoration of properties upon which wells are drilled; +• +the plugging and abandoning of wells; and +• +notice to, and consultation with, surface owners and other third parties. +State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce +18 +Table of Contents +Index to Financial Statements +from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill. +Federal, state and local regulations provide detailed requirements for the plugging and abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areas where we operate. Although the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements. +Natural Gas Sales and Transportation . Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. +FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities. +Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations. +Oil Sales and Transportation . Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. +Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors. +Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors. +State Regulation . The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells +19 +Table of Contents +Index to Financial Statements +and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill. +In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of horizontal well pads. Under these new rules, operators must submit detailed horizontal well pad design packages prepared by a professional engineer for review and certification by the ODNR Division of Oil and Gas Resources Management prior to the commencement of any oil and natural gas activity. These rules resulted in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil and natural gas releases. Also, on November 20, 2018, Ohio EPA announced that it intends to develop new rules that would cover air pollution emissions associated with non-conventional oil and gas facilities. +The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us. +Operational Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations. +In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation, cyber and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Currently, we have general liability insurance coverage with an annual aggregate limit of up to $101.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $52.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $16.0 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.75 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations. +We carry control of well insurance for all of our Utica Shale and SCOOP wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by +20 +Table of Contents +Index to Financial Statements +applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2018 and 2017 were approximately $0.6 million and $0.2 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, Oklahoma and Louisiana, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases through the Ohio, Oklahoma and Louisiana Incident Notification Hotlines. We also participate in the Ohio, Oklahoma and Louisiana Emergency Planning and Community Right to Know Act (EPCRA) programs, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes. +Headquarters and Other Facilities +We own an office building with approximately 120,000 square feet of office space in Oklahoma City, Oklahoma that serves as our corporate headquarters. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma where some of our employees office. +We own an approximately 12,300 square foot building located in St. Clairsville, Ohio that serves as our headquarters for our Ohio operations. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We also lease an office in Lindsay, Oklahoma that serves as our Oklahoma production field office. Each of these properties is suitable and adequate for its use. +Employees +At December 31, 2018 , we had 350 employees. +Availability of Company Reports +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. \ No newline at end of file diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/item13.txt b/raw/filings/0000874499/2018/0001628280-19-002242/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2f04df11e3a34b80e43e7cb8a0c34418a99503 --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). \ No newline at end of file diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/item9a.txt b/raw/filings/0000874499/2018/0001628280-19-002242/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f68eb2c4a0da6c49507960a4b7dea0693aaadc9 --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/item9a.txt @@ -0,0 +1,44 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures . Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized +74 +Table of Contents +Index to Financial Statements +and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2018 , an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2018 , our disclosure controls and procedures are effective. +Changes in Internal Control over Financial Reporting . There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework , management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2018 . +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2018 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2018 , as stated in their accompanying report. +/s/ David M. Wood +/s/ Keri Crowell +Name: +David M. Wood +Name: +Keri Crowell +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +75 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 28, 2019 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 28, 2019 +76 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/rp_note.txt b/raw/filings/0000874499/2018/0001628280-19-002242/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2018/0001628280-19-002242/rpt_disclosure.txt b/raw/filings/0000874499/2018/0001628280-19-002242/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..7cb92854ee3dd3ad37c339268a6fefb90670be56 --- /dev/null +++ b/raw/filings/0000874499/2018/0001628280-19-002242/rpt_disclosure.txt @@ -0,0 +1,23 @@ +Certain Relationships and Related Transactions Review and +Approval of Related Party Transactions +The audit committee, as provided in its charter, reviews and approves related party transactions. The Company +does not have a formal set of standards to be substantively applied to each transaction reviewed by the audit committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether such +transactions are in the best interests of the Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the +review and approval of related party transactions. +The Company’s policy is that all of its employees and directors, as well as their family members, +must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive +officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the board of directors or a committee consisting solely of independent directors may +grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any +business relationship that may give rise to a conflict of interest. +Further, under the audit committee charter, the audit committee is responsible for +reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the board of directors. In addition, the board of directors and, pursuant to its written charter, the audit committee, reviews +and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their +family members, have a direct or indirect material interest. The board of directors and the audit committee approve only those transactions that, in light of known circumstances, are consistent, or are not inconsistent with, the Company’s best +interests, as they determine in the good faith exercise of their discretion. +Separation Agreement with Our Former Chief Executive Officer and +President and Other Related Party Transaction +Michael G. Moore stepped down from his position as our Chief Executive Officer and President, and as a +member of our board of directors, effective as of October 29, 2018. In connection with Mr. M. Moore’s departure, we entered into a separation agreement with Mr. M. Moore. For a description of Mr. M. Moore’s severance +and other provisions of his separation agreement with us, see “Severance Agreement with our Former Chief Executive Officer and President” above. +AMM Design, Inc., or AMM, provided landscape and related services to the third party building manager for our offices in Oklahoma City in 2018. We paid the +building manager approximately $149,000 in respect of these services. AMM is owned by the son of Michael G. 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+2020-02-27 +0000874499 +us-gaap:SeniorNotesMember +us-gaap:SubsequentEventMember +2020-01-31 +0000874499 +gpor:EarlyTerminationFixedPriceSwapsMember +us-gaap:SubsequentEventMember +2020-01-01 +2020-02-27 +utreg:acre +iso4217:USD +gpor:entity +utreg:Mcf +utreg:bbl +gpor:usd_per_mcf +xbrli:pure +xbrli:shares +iso4217:USD +xbrli:shares +iso4217:USD +utreg:bbl +gpor:violation +utreg:MMBTU +gpor:well +iso4217:USD +utreg:MMBTU +utreg:bbl +utreg:Tcfe +utreg:Mcf +utreg:Bcfe +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2019 +OR +☐ +TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 000-19514 +Gulfport Energy Corp oration +(Exact Name of Registrant As Specified in Its Charter) +Delaware +73-1521290 +(State or Other Jurisdiction of Incorporation or Organization) +(IRS Employer Identification Number) +3001 Quail Springs Parkway +Oklahoma City, +Oklahoma +73134 +(Address of Principal Executive Offices) +(Zip Code) +( 405 ) 252-4600 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Trading Symbol(s) +Name of Each Exchange on Which Registered +Common Stock, par value $0.01 per share +GPOR +The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of our common stock held by non-affiliates on June 28, 2019 was $ 782,634,443 . As of February 14, 2020 , there were 159,710,955 shares of our $0.01 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +PART I +2 +ITEM 1. +BUSINESS +2 +ITEM 1A. +RISK FACTORS +17 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +39 +ITEM 2. +PROPERTIES +39 +ITEM 3. +LEGAL PROCEEDINGS +39 +ITEM 4. +MINE SAFETY DISCLOSURES +41 +PART II +41 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +41 +ITEM 6. +SELECTED FINANCIAL DATA +41 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +42 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +55 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +59 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +107 +ITEM 9A. +CONTROLS AND PROCEDURES +107 +ITEM 9B. +OTHER INFORMATION +111 +PART III +111 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +111 +ITEM 11. +EXECUTIVE COMPENSATION +111 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +111 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +111 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +111 +PART IV +112 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +112 +ITEM 16. +FORM 10-K SUMMARY +117 +Signatures +S-0 +i +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), the effect of our remediation plan for a material weakness, business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +Investors should note that we announce financial information in SEC filings, press releases and public conference calls. We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. +BUSINESS +Our Business +A Delaware corporation formed in 1997, we are an independent natural gas-weighted exploration and production company focused on the exploration, development, acquisition and production of natural gas, crude oil and natural gas liquids ("NGL") in the United States with primary focus in the Appalachia and Mid-Continent basins. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. We also seek to opportunistically expand our inventory of economic drilling locations in the basins in which we operate. Our principal properties are located in Eastern Ohio, where we target development in the Utica formation (the “Utica”) and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations (the "SCOOP"). We seek to achieve reserve growth and increase our cash flow through our annual drilling programs. In addition, among other interests, we hold an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC ("Grizzly"), and an approximate 21.8% equity interest in Mammoth Energy Services, Inc. ("Mammoth Energy"), an energy services company listed on the Nasdaq Global Select Market (TUSK), both of which are non-core to our business strategy. +As of December 31, 2019 , we had 4.5 trillion cubic feet of natural gas equivalent ("Tcfe") of proved reserves with a standardized measure of discounted future net cash flows of approximately $1.7 billion and a present net value of estimated future net revenues, discounted at 10% ("PV-10"), of approximately $1.7 billion . See " Oil, Natural Gas and NGL Reserves " below for our definition of PV-10 (a non-GAAP financial measure) and a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Business Strategy +Gulfport aims to create shareholder value through the development of our significant resource plays. Our substantial inventory of hydrocarbon resources, including unproved acreage positions in each of our key basins, provides a strong foundation to create future value. Concentrated blocks of unproved acreage provide us the opportunity to apply best in class techniques including optimum well spacing, leading completion practices and lateral length optimization to maximize overall capital efficiency. We have improved our capital and operating efficiency metrics over the last several years and today have a low cost structure in both our Utica and SCOOP operating areas. We believe our low cost structure provides a significant competitive advantage in the current commodity price environment and it is our strategy to continue to seek capital and operating efficiencies to grow this advantage. +We continue to focus on reducing our leverage profile, increasing cash flow from operations, improving margins through financial discipline and operating efficiencies while at the same time maintaining strong environmental and safety performance. To accomplish these goals, we intend to allocate capital expenditures to projects we believe offer the highest rate of return, to deploy leading drilling and completion techniques and technologies in our development efforts, and to take advantage of merger, acquisition and divestiture opportunities to strengthen our cost structure, deepen our inventory and improve our asset portfolio. +We believe that our dedication to financial discipline, the flexibility and efficiency of our capital program, our low cost structure and our continued focus on safety and environmental stewardship provides opportunities for sustainable value creation. +2 +Table of Contents +Index to Financial Statements +Our 2020 capital expenditure program is expected to be $285 million to $310 million . We expect to fund these expenditures with our operating cash flow and borrowings under our revolving credit agreement. We expect this drilling program to result in 1,100 to 1,150 MMcfe per day of production in 2020. +We plan to run on average approximately one operated rig in our Utica area and 1.5 rigs in our SCOOP area in 2020. In the Utica, we intend to spud 16 gross operated horizontal wells ( 14.8 net), and commence sales on 18 gross and net horizontal wells in 2020 . In the SCOOP, we intend to spud 10 gross operated horizontal wells ( 7.8 net), and commence sales on four gross horizontal wells ( 3.8 net) in 2020 . +Operating Areas +We focus our development, production and acquisition efforts in the geographic operating areas described below. +Utica (primarily Eastern Ohio) - The Utica Shale is a hydrocarbon bearing rock formation located in the Appalachian Basin of the United States and Canada. We have approximately 205,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica Shale ranges in thickness from 600 to over 750 feet. During the fourth quarter of 2019 we produced approximately 1,090 MMcfe per day net to our interests in this area. +SCOOP (Oklahoma) - The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 76,000 net reservoir acres (comprised of approximately 41,500 in the Woodford formation and approximately 34,500 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During the fourth quarter of 2019, we produced approximately 255 MMcfe per day net to our interests in this area. +Additional Properties - In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields including the Bakken formation in North Dakota and Montana, the Niobrara formation in Colorado and other formations in Texas. We previously held interests located in the West Cote Blanche Bay ("WCBB") and Hackberry fields of Louisiana. However, we sold these non-core interests in July 2019. +Drilling Activity +The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +3 +Table of Contents +Index to Financial Statements +2019 +2018 +2017 +Gross +Net +Gross +Net +Gross +Net +Recompletions: +Productive +— +— +47 +47 +81 +81 +Dry +— +— +— +— +— +— +Total +— +— +47 +47 +81 +81 +Development: +Productive +25 +22.4 +34 +30 +124 +115.4 +Dry +— +— +— +— +2 +2 +Total +25 +22.4 +34 +30 +126 +117.4 +Exploratory: +Productive +1 +0.8 +2 +1.5 +— +— +Dry +— +— +— +— +— +— +Total +1 +0.8 +2 +1.5 +— +— +The following table presents activity by operating area for the year ended December 31, 2019 : +Operated +Non-Operated +Field +Drilled +Turned to Sales +Drilled +Turned to Sales +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale (1) +16 +14.6 +47 +41.6 +5 +0.9 +14 +3.3 +SCOOP (2) +10 +8.6 +14 +12.6 +42 +1.6 +39 +1.2 +Niobrara Formation +— +— +— +— +— +— +— +— +Bakken Formation +— +— +— +— +— +— +— +— +Total +26 +23.2 +61 +54.2 +47 +2.5 +53 +4.5 +_____________________ +(1) +Of the 16 gross wells we drilled in 2019 , six were completed as producing wells and 10 were in various stages of completion as of December 31, 2019 . +(2) +Of the 10 gross wells we drilled in 2019 , five were completed as producing wells, four were in various stages of completion and one was being drilled as of December 31, 2019 . +Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2019 . +4 +Table of Contents +Index to Financial Statements +Average NRI/WI (1) +Productive +Oil Wells +Productive +Gas Wells +Non-Productive +Oil Wells +Non-Productive +Gas Wells +Developed +Acreage +Undeveloped +Acreage +Field +Percentages +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Gross +Net +Utica Shale +45.93/56.32 +126 +40.36 +503 +313.41 +— +— +2 +1.58 +107,076 +85,381 +130,734 +119,428 +SCOOP +26.21/32.64 +118 +24.28 +480 +153.16 +13 +3.69 +56 +36.58 +50,721 +35,602 +7,373 +5,999 +Niobrara Formation +24.41/29.18 +5 +1.46 +— +— +— +— +— +— +1,998 +999 +1,292 +646 +Bakken Formation +1.11/1.97 +18 +0.35 +— +— +— +— +— +— +386 +77 +3,505 +701 +Overrides/Royalty Non-operated +Various +401 +0.02 +5 +0.02 +2 +— +— +— +— +— +— +— +Total +668 +66.47 +988 +466.59 +15 +3.69 +58 +38.16 +160,181 +122,059 +142,904 +126,774 +_____________________ +(1) +Net Revenue Interest (NRI)/Working Interest (WI). +Most of our leases have a three- to five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations and drilling to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2019 +Undeveloped Acres +Gross Acres +Net Acres +Years Ending December 31: +2020 +16,572 +14,803 +2021 +13,773 +12,685 +2022 +17,960 +16,039 +After 2022 +20,088 +18,975 +Held by production or operations +74,511 +64,272 +Total +142,904 +126,774 +Oil, Natural Gas and NGL Reserves +The tables below set forth information as of December 31, 2019 , with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure of discounted future net cash flows (“standardized measure”). None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2019 +Oil +(MMbbl) +Natural +Gas +(Bcf) +NGL (MMbbl) +Total (Bcfe) +Proved developed +8 +1,757 +30 +1,984 +Proved undeveloped +10 +2,291 +32 +2,544 +Total proved (1) +18 +4,048 +62 +4,528 +5 +Table of Contents +Index to Financial Statements +Proved Developed +Proved Undeveloped +Total Proved +($ in millions) +Estimated future net revenue (2) +$ +2,086 +$ +1,461 +$ +3,547 +Present value of estimated future net revenue (PV-10) (2) +$ +1,383 +$ +320 +$ +1,704 +Standardized measure (2) +$ +1,704 +_____________________ +(1) +Utica and SCOOP accounted for approximately 71% and 29% , respectively, of our estimated proved reserves by volume as of December 31, 2019 . +(2) +Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2019 , and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2019 . The prices used in our PV-10 measure were $55.85 per barrel and $2.58 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2019 . The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense. There was no effect of estimated future income tax expense as of December 31, 2019 , primarily as a result of significant net operating loss carryforwards that can be used to offset income taxes on future taxable income. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +_____________________ +Grizzly had no proved reserves as of December 31, 2019. For further discussion of our interest in Grizzly, see “ Our Equity Investments ” below. +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2019 . +The following table summarizes the changes in our estimated proved reserves during 2019 (in Bcfe): +6 +Table of Contents +Index to Financial Statements +Proved Reserves, December 31, 2018 +4,743 +Sales of oil and natural gas reserves in place +(77 +) +Extensions and discoveries +1,097 +Revisions of prior reserve estimates +(734 +) +Current production +(502 +) +Proved Reserves, December 31, 2019 +4,528 +Sales of oil and natural gas reserves in place. These are revisions to proved reserves resulting from the divestiture of minerals in place during a period. During 2019 , we sold approximately 76.8 Bcfe of proved oil and natural gas reserves through various sales of our Southern Louisiana assets, non-operated interests in our Utica assets and overriding royalty interests in North Dakota. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 1.1 Tcfe of proved reserves were primarily attributable to the continued development of our Utica Shale and SCOOP acreage. We added 72 drilling locations in our Utica acreage for 793.5 Bcfe and 37 drilling locations in our SCOOP acreage for 302.9 Bcfe. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 733.8 Bcfe in estimated proved reserves, of which 347.2 Bcfe was a result of the exclusion of nine PUD locations in our Utica field and 22 PUD locations in our SCOOP field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow. +An additional 296.4 Bcfe in downward revisions was the result of commodity price changes. Commodity prices experienced volatility throughout 2019 and the 12-month average price for natural gas decreased from $3.10 per MMBtu for 2018 to $2.58 per MMBtu for 2019 , the 12-month average price for NGL decreased from $32.02 per barrel for 2018 to $21.25 per barrel for 2019 , and the 12-month average price for crude oil decreased from $65.56 per barrel for 2018 to $55.85 per barrel for 2019 . +We also experienced downward revisions of 90.2 Bcfe from a combination of working interest changes, optimization of our well design in the current commodity price environment and well performance. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2019 , 2018 and 2017 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities , or Supplemental Information , in Note 19 of the notes to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2019 , our proved undeveloped reserves totaled 10 MMbbl of oil, 2,291 Bcf of natural gas and 32 MMbbl of NGL, for a total of 2,544 Bcfe. Approximately 70% and 30% of our PUD reserves at year-end 2019 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +7 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved undeveloped reserves during 2019 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2018 +2,628 +Sales of oil and natural gas reserves in place +(69 +) +Extensions and discoveries +1,078 +Conversion to proved developed reserves +(654 +) +Revisions of prior reserve estimates +(439 +) +Proved Undeveloped Reserves, December 31, 2019 +2,544 +Sales of oil and natural gas reserves in place. During 2019 , we sold approximately 68.8 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in our Utica field. +Extensions and discoveries. Our extensions of approximately 1.1 Tcfe were primarily attributed to the addition of 72 PUD drilling locations in the Utica field and 37 PUD drilling locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +Conversion to proved developed reserves. Our 2019 development activities resulted in the conversion of approximately 654.0 Bcfe into proved developed producing reserves, attributable to 49 PUD locations in the Utica field and 12 PUD locations in the SCOOP field. These 61 PUDs represent a conversion rate of 20% for 2019. +Revision of prior reserve estimates. We experienced proved undeveloped downward revisions of 347.2 Bcfe from the exclusion of 9 PUD locations in our Utica field and 22 PUD locations in our SCOOP field due to the SEC five-year development rule. The development plan change, as approved by our senior management and Board of Directors, reflects our commitment to capital discipline and funding future activities within cash flow. We also experienced 146.8 Bcfe of downward revisions as a result of commodity price changes. These downward revisions were partially offset by positive revisions of 54.8 Bcfe in estimated proved reserves from a combination of well performance, changes in ownership interest and development well design changes. +Costs incurred relating to the development of PUDs were approximately $353.1 million in 2019 . +All PUD drilling locations included in our 2019 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2019 , 1% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates at December 31, 2019 and December 31, 2018 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. Reserve estimates at December 31, 2017 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma and our WCBB and Hackberry fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests at December 31, 2017. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale, SCOOP, WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, +8 +Table of Contents +Index to Financial Statements +commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has approximately 100 years combined industry experience and our reservoir staff has approximately 40 years combined experience. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• +review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• +verification of property ownership by our land department; +• +preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• +direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer; +• +review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• +provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• +annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• +annual review and approval by our senior management and our board of directors of a multi-year development plan; +• +annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• +annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities. +As noted above, our December 31, 2019 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2019 of $55.85 per barrel and $2.58 per MMBtu. Holding production and development costs constant, if SEC pricing were $61.44 per barrel and $2.84 per MMBtu, or a 10% increase, this would have resulted in an increase of 69.6 Bcfe of our total proved reserves and a $0.7 billion increase in PV-10 value at December 31, 2019 . Holding production and development costs constant, if SEC pricing were $50.27 per barrel and $2.32 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 106.5 Bcfe of our total proved reserves and a $0.7 billion decrease in PV-10 value at December 31, 2019 . +Production, Prices and Production Costs +The following table presents our production volumes in our core operating areas during the periods indicated: +9 +Table of Contents +Index to Financial Statements +Year Ended December 31, +Field +2019 +Net Production +Natural Gas (MMcf) +Oil and Condensate (Mbbls) +NGL (MGal) +Natural gas equivalents (MMcfe) +MMcfe per Day +Utica Shale +387,473 +247 +76,112 +399,828 +1,095 +SCOOP +70,669 +1,610 +136,948 +99,891 +274 +Niobrara Formation +— +14 +— +86 +— +Bakken Formation +35 +41 +67 +292 +1 +Louisiana and Other +1 +274 +2 +1,645 +5 +Total +458,178 +2,186 +213,129 +501,742 +1,375 +10 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2019 +2018 +2017 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) +458,178 +443,742 +350,061 +Total natural gas sales +$ +918,263 +$ +1,121,815 +$ +845,999 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.00 +$ +2.53 +$ +2.42 +Impact from settled derivatives ($/Mcf) +$ +0.23 +$ +(0.04 +) +$ +0.07 +Average natural gas sales price, including settled derivatives +($/Mcf) +$ +2.23 +$ +2.49 +$ +2.49 +Oil and condensate sales +Oil and condensate production volumes (Mbbls) +2,186 +2,801 +2,579 +Total oil and condensate sales +$ +117,937 +$ +177,793 +$ +124,568 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +53.95 +$ +63.48 +$ +48.29 +Impact from settled derivatives ($/Bbl) +$ +1.86 +$ +(9.51 +) +$ +1.59 +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +55.81 +$ +53.97 +$ +49.88 +NGL sales +NGL production volumes (MGal) +213,129 +251,720 +224,038 +Total NGL sales +$ +101,448 +$ +178,915 +$ +136,057 +NGL sales without the impact of derivatives ($/Gal) +$ +0.48 +$ +0.71 +$ +0.61 +Impact from settled derivatives ($/Gal) +$ +0.06 +$ +(0.05 +) +$ +(0.03 +) +Average NGL sales price, including settled derivatives ($/Gal) +$ +0.54 +$ +0.66 +$ +0.58 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) +501,742 +496,505 +397,543 +Total natural gas, oil and condensate and NGL sales +$ +1,137,648 +$ +1,478,523 +$ +1,106,624 +Natural gas, oil and condensate and NGL sales without the impact of derivatives ($/Mcfe) +$ +2.27 +$ +2.98 +$ +2.78 +Impact from settled derivatives ($/Mcfe) +$ +0.24 +$ +(0.12 +) +$ +0.07 +Average natural gas, oil and condensate and NGL sales price, including settled derivatives ($/Mcfe) +$ +2.51 +$ +2.86 +$ +2.85 +Production Costs: +Average production costs ($/Mcfe) +$ +0.17 +$ +0.18 +$ +0.20 +Average production taxes ($/Mcfe) +$ +0.06 +$ +0.07 +$ +0.05 +Average midstream gathering and processing ($/Mcfe) +$ +0.58 +$ +0.58 +$ +0.63 +Total production costs, midstream costs and production taxes ($/Mcfe) +$ +0.81 +$ +0.83 +$ +0.88 +11 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2019 : +Year Ended December 31, +2019 +2018 +2017 +Utica Shale +Net Production +Natural gas (MMcf) +387,473 +379,417 +309,450 +Oil (Mbbls) +247 +299 +473 +NGL (Mgal) +76,112 +113,379 +139,634 +Total (MMcfe) +399,828 +397,406 +332,238 +Average Sales Price Without the Impact of Derivatives: +Natural gas ($/Mcf) +$ +1.99 +$ +2.50 +$ +2.38 +Oil ($/Bbl) +$ +51.11 +$ +60.22 +$ +44.26 +NGL ($/Gal) +$ +0.47 +$ +0.67 +$ +0.60 +Average Production Costs ($/Mcfe) +$ +0.14 +$ +0.14 +$ +0.15 +Year Ended December 31, +2019 +2018 +2017 (1) +SCOOP +Net Production +Natural gas (MMcf) +70,669 +64,258 +40,501 +Oil (Mbbls) +1,610 +1,710 +1,083 +NGL (Mgal) +136,948 +138,261 +84,283 +Total (MMcfe) +99,891 +94,268 +59,038 +Average Sales Price Without the Impact of Derivatives: +Natural gas ($/Mcf) +$ +2.08 +$ +2.67 +$ +2.68 +Oil ($/Bbl) +$ +53.32 +$ +62.36 +$ +48.70 +NGL ($/Gal) +$ +0.48 +$ +0.75 +$ +0.62 +Average Production Costs ($/Mcfe) +$ +0.18 +$ +0.20 +$ +0.19 +_____________________ +(1) +We acquired our SCOOP assets through an acquisition completed on February 17, 2017. See Note 2 in the notes to our consolidated financial statements for additional discussion of this acquisition. +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2019 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage ("SAGD") oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. In April 2015 , Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses future plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres prospective for oil sands development. An initial 12,000 barrel per day development application covering the eastern portion of the May River lease has been deemed complete from the Alberta Energy Regulator and received final approval in December 2019. If pursued, this project could begin production as early as 2023. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production ("CHOPS") at its Cadotte property in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to +12 +Table of Contents +Index to Financial Statements +premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas ("LPG") into the oil sands area for use in Thermal applications by SAGD producers. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to dilution of our equity ownership interest. +Mammoth Energy . In connection with Mammoth Energy's initial public offering ("IPO") in October 2016, we received 9,150,000 shares of Mammoth Energy common stock in return for our contribution to Mammoth Energy of our 30.5% interest in Mammoth Energy Partners LLC. In June 2017, we received an additional 2,000,000 shares of Mammoth Energy common stock in connection with our contribution of all of our equity interests in three other entities to Mammoth Energy. We sold 76,250 shares of our Mammoth Energy common stock in the IPO and an additional 1,354,574 shares in a subsequent underwritten public offering in 2018. As of December 31, 2019 , we owned 9,829,548 shares, or approximately 21.8% , of Mammoth Energy’s outstanding common stock. +See Note 4 of the notes to our consolidated financial statements included elsewhere in this report for additional information regarding these and our other equity investments. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating of commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for Gulfport’s interest and other interest owners in Gulfport-operated wells. In addition, there are a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our pipeline delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. +Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority being shorter term in nature. We have entered into long-term gathering, processing and transportation contracts with various parties that require us to deliver fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. See Note 16 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our commitments. +Major Customers +For the year ended December 31, 2019 , sales to Morgan Stanley Capital accounted for approximately 14% of our total natural gas, oil and NGL revenues, before the effects of hedging. For the year ended December 31, 2018 , sales to BP Energy Company ("BP") and ECO-Energy accounted for approximately 17% and 10% , respectively, of our total natural gas, oil and NGL revenues, before the effects of hedging. For the year ended December 31, 2017 , sales to BP accounted for approximately 40% of our total natural gas, oil and NGL revenues, before the effects of hedging. +Competition +The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +13 +Table of Contents +Index to Financial Statements +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• +reporting of workplace injuries and illnesses; +• +industrial hygiene monitoring; +• +worker protection and workplace safety; +• +approval or permits to drill and to conduct operations; +• +provision of financial assurances (such as bonds) covering drilling and well operations; +• +calculation and disbursement of royalty payments and production taxes; +• +seismic operations and data; +• +location, drilling, cementing and casing of wells; +• +well design and construction of pad and equipment; +• +construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• +method of completing wells; +• +hydraulic fracturing; +• +water withdrawal; +• +well production and operations, including processing and gathering systems; +• +emergency response, contingency plans and spill prevention plans; +• +air emissions and fluid discharges; +• +climate change; +• +use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• +surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• +plugging and abandoning of wells; and +• +transportation of production. +Failure to comply with these laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural +14 +Table of Contents +Index to Financial Statements +gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, permitting activities on federal lands are subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $101 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during each of 2019 and 2018 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. We pay these companies a retainer plus additional amounts when they provide us with clean up services. +15 +Table of Contents +Index to Financial Statements +Employees +At December 31, 2019 , we had 298 employees. +Executive Officers +David M. Wood, Chief Executive Officer, President and Director +David M. Wood , 62, has served as the Chief Executive Officer and President of the Company, and as a member of our board of directors, since December 2018. Prior to joining the Company, Mr. Wood served as the Chief Executive Officer and Chairman of the Board of Directors of Arsenal Resources LLC, which we refer to as Arsenal, a West Virginia focused natural gas producer and portfolio company of First Reserve Corporation ("First Reserve"), an energy-focused private equity firm, where he most recently served as Chairman of its board of directors and previously held the role of the Chief Executive Officer. Prior to his tenure at Arsenal, Mr. Wood served as a Senior Advisor to First Reserve from 2013 to 2016, serving on several of its portfolio company boards. Prior to his position at First Reserve, Mr. Wood spent more than 17 years at Murphy Oil Corporation (NYSE: MUR) ("Murphy Oil"), a global oil and natural gas exploration and production company, where he served as Chief Executive Officer, President and a member of the board of directors from 2009 to 2012. From 1980 to 1994, Mr. Wood held various senior positions with Ashland Exploration and Production, an oil and natural gas exploration and production company. Mr. Wood began his career as a well-site geologist in Saudi Arabia. Mr. Wood has served on the board of directors of Lilis Energy, Inc. (NYSE: LLEX), an exploration and development company operating in the Delaware Basin since June 2018. Mr. Wood also served on the board of directors of the general partner of Crestwood Equity Partners LP (NYSE: CEQP) and its wholly-owned subsidiary, Crestwood Midstream Partners LP, an owner and operator of crude oil and natural gas midstream assets. Mr. Wood also served on the board of directors of several private oil and natural gas companies, including Deep Gulf Energy LP (prior to its acquisition by Kosmos Energy Ltd.) and Berkana Energy Corp. (when it was majority owned by Murphy Oil). Mr. Wood previously served on the board of directors and as an executive committee member of the American Petroleum Institute. He was also a member of the National Petroleum Council and is a member of the Society of Exploration Geophysicists. Mr. Wood holds a B.S. in Geology from the University of Nottingham in England and completed Harvard University’s Advanced Management Program. +Quentin R. Hicks, Executive Vice President and Chief Financial Officer +Quentin R. Hicks , 45, has served as the Executive Vice President and Chief Financial Officer of the Company since August 2019. Prior to joining the Company, Mr. Hicks served as the Executive Vice President and Chief Financial Officer of Halcón Resources Corporation (“Halcón”), a position he held since March 2019, having previously served as Executive Vice President, Finance, Capital Markets and Investor Relations of Halcón since January 2018. Prior to that, Mr. Hicks held various roles at Halcón focused primarily on finance and investor relations. Prior to Halcón, Mr. Hicks worked for GeoResources Inc., where he served as Director of Acquisitions and Financial Planning from 2011 to 2012. From 2004 to 2011, he worked in investment banking with Bear Stearns, Sanders Morris Harris and Madison Williams, where he was a Director in their energy investment banking practice. Prior to that, Mr. Hicks worked as Manager of Financial Reporting for Continental Airlines. Mr. Hicks began his career in 1998 working as an auditor for Ernst and Young LLP. Mr. Hicks graduated from Texas A&M University with a Bachelor of Business Administration and a Master of Science degree in Accounting. In addition, Mr. Hicks holds a Master of Business Administration degree in Finance from Vanderbilt University and also holds a Certified Public Accountant license from the State of Texas. +Donnie G. Moore, Executive Vice President and Chief Operating Officer +Donnie G. Moore , 55, has served as Executive Vice President and Chief Operating Officer of the Company since January 2018. He also served as Interim Chief Executive Officer of the Company from October 29, 2018, the date our former Chief Executive Officer and President left the Company, to December 18, 2018, the date of the appointment of Mr. Wood as our new Chief Executive Officer and President. From 2007 until December 2017, Mr. Moore worked at Noble Energy, Inc. ("Noble"), where he most recently served as Vice President of Noble’s Texas operations for its Eagle Ford and Delaware Basin assets. Prior to that, Mr. Moore held various leadership roles at Noble including Vice President of the Marcellus Business Unit, Manager for Operations of the Wattenberg/DJ Business Unit, Manager of Operations for the Gunflint discovery in the Deepwater Gulf of Mexico and Development Manager for Noble’s Mid-Continent and Gulf Coast positions. From 1989 until 2007, Mr. Moore served in a variety of roles with ARCO Oil and Gas Company, Vastar Resources, Inc. and BP America. Mr. Moore holds a Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University. +16 +Table of Contents +Index to Financial Statements +Patrick K. Craine, Executive Vice President, General Counsel and Corporate Secretary +Patrick K. Craine , 47, has served as Executive Vice President, General Counsel and Corporate Secretary of the Company since May 2019. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. He joined Gulfport from Chesapeake Energy Corporation (NYSE: CHK) ("Chesapeake"), where he served as Deputy General Counsel – Chief Risk and Compliance Officer from 2013 until 2019. Prior to joining Chesapeake, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Michael J. Sluiter , 47, has served as Senior Vice President of Reservoir Engineering of the Company since December 2018. Mr. Sluiter joined the Company from Noble Energy, Inc., where he held various engineering and leadership positions from March 2007 to November 2018, including, most recently, the Permian Basin Business Unit Manager. Prior to, Noble Mr. Sluiter worked for Santos Australia and Santos USA from February 2000 to March 2007, and started his career as a wireline field services engineer for Schlumberger in Thailand. He has over 18 years combined of experience in unconventional resource development, reservoir engineering, subsurface development, business development and acquisitions. Mr. Sluiter holds a Bachelor of Science degree in Chemical Engineering from the University of Sydney, Australia. +ITEM 1A. +RISK FACTORS +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a description of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low oil, natural gas and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2018 , West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. During 2019 , WTI prices ranged from $46.31 to $66.24 per barrel and the Henry Hub spot market price of natural gas ranged from $1.75 to $4.25 per MMBtu. As of February 14, 2020 , the WTI price was $52.03 per barrel and the Henry Hub spot market price of natural gas was $1.93 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• +domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +17 +Table of Contents +Index to Financial Statements +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the expected rates of declining current production; +• +changes in the level of consumer and industrial demand; +• +the price and availability of alternative fuels; +• +technological advances affecting energy consumption; +• +risks associated with operating drilling rigs; +• +the effectiveness of worldwide conservation measures; +• +the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• +the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• +U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• +the price and level of foreign imports; +• +the nature and extent of domestic and foreign governmental regulations and taxes; +• +the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; +• +political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• +weather conditions; +• +acts of terrorism; and +• +domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. As of February 27, 2020 , including January and February derivative contracts that have settled, approximately 50% of our forecasted 2020 natural gas, oil and NGL production revenue was hedged, including 52% and 80% of our forecasted 2020 natural gas and oil production, at average prices of $2.86 per Mcf and $59.82 per Bbl, respectively. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2020 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2021 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +We have a significant amount of indebtedness. Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects. +As of December 31, 2019 , we had approximately $2.0 billion in principal amount of debt outstanding, primarily attributable to our senior notes. We also had $120.0 million in borrowings outstanding under our revolving credit facility and our borrowing base availability was $636.4 million after giving effect to an aggregate of $243.6 million of letters of credit. +Our outstanding indebtedness could have important consequences to you, including the following: +• +our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including their restrictive covenants, +18 +Table of Contents +Index to Financial Statements +could result in a default under our revolving credit facility or the indentures governing our senior notes; +• +the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• +our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• +we must use a substantial portion of our cash flow from operations to pay interest on our senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes; +• +our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• +our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• +our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• +we may be vulnerable to interest rate increases, as our borrowings under our revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Our ability to pay our expenses and fund our working capital needs and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as commodity prices, other economic conditions and governmental regulation. If our borrowing base under our revolving credit facility decreases as a result of lower prices of natural gas, oil or NGL, operating difficulties, declines in reserves or for any other reason, our liquidity and ability to conduct additional exploration and development activities may be limited. To the extent that the value of the collateral pledged under our revolving credit facility declines as a result of lower oil and natural gas prices, asset dispositions or otherwise, we may be required to pledge additional collateral to maintain the current availability of the commitments thereunder, and we cannot assure you that we will be able to maintain a sufficiently high valuation to maintain the current borrowing base. In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. Any of the above risks could materially adversely affect our business, financial condition, cash flows and results of operations. +We have significant capital needs, and our ability to access the capital and credit markets to raise capital on favorable terms is limited by our debt level and industry conditions. +Disruptions in the capital and credit markets, in particular with respect to the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Low commodity prices have caused and may continue to cause lenders to increase the interest rates under our revolving credit facility, enact tighter lending standards, refuse to refinance existing debt around maturity on favorable terms or at all and reduce or cease to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. Additionally, challenges in the economy have led and could further lead to reductions in the demand for natural gas, oil and NGL, or further reductions in the prices of natural gas, oil and NGL, which could have a negative impact on our financial position, results of operations and cash flows. +If we are unable to generate enough cash flow from operations to service our indebtedness or are unable to use future borrowings to refinance our indebtedness or fund other capital needs, we may have to undertake alternative financing plans, which may have onerous terms or may be unavailable. +19 +Table of Contents +Index to Financial Statements +Our earnings and cash flow could vary significantly from year to year due to the volatility of hydrocarbon commodity prices. As a result, the amount of debt that we can manage in some periods may not be appropriate for us in other periods. Additionally, our future cash flow may be insufficient to meet our debt obligations and commitments or to make necessary capital expenditures. A range of economic, competitive, business and industry factors will affect our future financial performance and, as a result, our ability to generate cash flow from operations and service our debt. Factors that may cause us to generate cash flow that is insufficient to meet our debt obligations include the events and risks related to our business, many of which are beyond our control. Any cash flow insufficiency would have a material adverse impact on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. +If we do not generate sufficient cash flow from operations to service our outstanding indebtedness, or if future borrowings are not available to us in an amount sufficient to enable us to pay or refinance our indebtedness, we may be required to undertake various alternative financing plans, which may include: +• refinancing or restructuring all or a portion of our debt; +• seeking alternative financing or additional capital investment; +• selling strategic assets; +• reducing or delaying capital investments; or +• revising or delaying our strategic plans. +We cannot assure you that we would be able to implement any alternative financing plans, if necessary, on commercially reasonable terms or at all, or that any such alternative financing plans would allow us to meet our debt obligations. If we are unable to generate sufficient cash flow to satisfy our debt obligations or to obtain necessary and sufficient alternative financing, our business, financial condition, results of operations, cash flows and liquidity could be materially and adversely affected. Any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could significantly harm our ability to incur additional indebtedness on acceptable terms. Further, if for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which would allow our creditors under those agreements to declare all outstanding indebtedness thereunder to be due and payable (which would in turn trigger cross-acceleration or cross-default rights between the relevant agreements), the lenders under our revolving credit facility could terminate their commitments to extend credit, and the lenders could foreclose against our assets securing their borrowings and we could be forced into bankruptcy or liquidation. In addition, our revolving credit facility and the indentures governing our senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair. If the amounts outstanding under our revolving credit facility or any of our other significant indebtedness were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the amounts owed to the lenders or to our other debt holders. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition. +Restrictive covenants in our revolving credit facility and the indentures governing our senior notes could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests. +Our revolving credit facility and the indentures governing our senior notes impose operating and financial restrictions on us. These restrictions limit our ability and that of our restricted subsidiaries to, among other things +• +incur or guarantee additional indebtedness; +• +make certain investments; +• +declare or pay dividends or make distributions on our capital stock; +• +prepay subordinated indebtedness; +• +sell assets, including capital stock of restricted subsidiaries; +20 +Table of Contents +Index to Financial Statements +• +agree to payment restrictions affecting our restricted subsidiaries; +• +consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; +• +enter into transactions with our affiliates; +• +incur liens; +• +engage in business other than the oil and gas business; and +• +designate certain of our subsidiaries as unrestricted subsidiaries. +We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indentures governing our senior notes. The restrictions contained in the covenants could: +• +limit our ability to plan for, or react to, market conditions, to meet capital needs or otherwise to restrict our activities or business plan; +• +adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our interest; or +• +withstand a continuing future downturn in our business. +Also, our revolving credit facility requires us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. Specifically, our revolving credit facility requires us to maintain a ratio of net funded debt to EBITDAX at the end of each fiscal quarter for a twelve-month period of not greater than 4.00 to 1.00, and a ratio of EBITDAX to interest expense at the end of each fiscal quarter for a twelve-month period of not less than 3.00 to 1.00. Our ability to comply with these ratios and financial condition tests may be affected by events beyond our control and, as a result, we may be unable to meet these ratios and financial condition tests. These financial ratio restrictions and financial condition tests could limit our ability to obtain future financings, make needed capital expenditures, withstand a continued downturn in our business or a downturn in the economy in general or otherwise conduct necessary corporate activities. Further declines in natural gas, oil and NGL prices, or a prolonged period of low natural gas, oil and NGL prices could eventually result in our failing to meet one or more of the financial covenants under our revolving credit facility, which could require us to refinance or amend such obligations resulting in the payment of consent fees or higher interest rates, or require us to raise additional capital at an inopportune time or on terms not favorable to us. +A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indentures governing our Notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness. +We could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit. +Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs. +Any significant reduction in our borrowing base under our revolving credit facility as a result of periodic borrowing base +21 +Table of Contents +Index to Financial Statements +redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination. +Availability under our revolving credit facility is currently subject to a borrowing base of $1.2 billion, with an elected commitment of $1.0 billion. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2019 , we had $120.0 million in borrowings and $243.6 million of letters of credit outstanding under our revolving credit facility. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results. +We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we face. +We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indentures governing our senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2019 , our borrowing base under our revolving credit facility was set at $1.2 billion, with an elected commitment of $1.0 billion, and we had $120.0 million in borrowings under this facility. Total funds available for borrowing under our revolving credit facility as of December 31, 2019 , after giving effect to $243.6 million of outstanding letters of credit, were $636.4 million . In addition, the indentures governing our Notes allow us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indentures governing our senior notes also allow us to incur certain other additional secured debt and allow us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to our senior notes. If new debt or other liabilities are added to our current debt levels, the related risks that we now face could intensify. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the London Interbank Offered Rate. At December 31, 2019 , amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 3.30% . A 1% increase in the average interest rate would have increased our interest expense by approximately $1.2 million based on outstanding borrowings under our revolving credit facility throughout the year ended December 31, 2019 . An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2019 , we did not hedge our interest rate risk. +Changes in the method of determining the London Interbank Offered Rate, or the replacement of the London Interbank Offered Rate with an alternative reference rate, may adversely affect interest expense related to outstanding debt. +Amounts drawn under our revolving credit facility may bear interest at rates based on the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Our revolving credit facility provides for a mechanism to amend the facility to reflect the establishment of an alternative rate of interest upon the occurrence of certain events related to the phase-out of LIBOR. However, we have not yet pursued any technical amendment or other contractual alternative to address this matter and are currently evaluating the impact of the potential replacement of the LIBOR interest rate. In addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Uncertainty as to the nature of such potential phase-out and alternative reference rates or disruption in the financial market could have a material adverse effect on our financial condition, results of operations and cash flows. +22 +Table of Contents +Index to Financial Statements +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the unweighted arithmetic average of the closing prices on the first day of each month for the 12-month period ending at the balance sheet date, adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recorded a ceiling test impairment of $2.0 billion for the year ended December 31, 2019 . If prices of natural gas, oil and natural gas liquids continue to decrease, we will be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our drilling and completions capital expenditures for 2020 to be in the range of $265 million to $285 million and an additional $20 million to $25 million for leasehold expenditures, primarily lease extensions and infill leasing within our Utica Shale and Scoop development plans. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• +our proved reserves; +• +the volume of oil and natural gas we are able to produce from existing wells; +• +the prices at which oil and natural gas are sold; +• +our ability to acquire, locate and produce economically new reserves; and +• +our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2020 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we +23 +Table of Contents +Index to Financial Statements +have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +If we are not able to replace reserves, we may not be able to sustain production. +Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful development, exploration or acquisition activities, our proved reserves and production will decline over time. Thus, our future oil and natural gas reserves and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing our current reserves and economically finding or acquiring additional recoverable reserves. +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +As of December 31, 2019 , approximately 56.2% of our total estimated proved reserves were proved undeveloped reserves ("PUDs") and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. You should be aware that the estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2019 present value is based on a $2.58 per MMBtu of gas price and a $55.85 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +24 +Table of Contents +Index to Financial Statements +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. Any changes in demand for oil and natural gas, governmental regulations or taxation will also affect the future net cash flows from our production. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire significant amounts of unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations. +25 +Table of Contents +Index to Financial Statements +As of December 31, 2019 , we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,505,000 MMBtu per day for 2020 and 2021. Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, taking into consideration the current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas, such as our SCOOP play in Oklahoma. The area was historically developed by vertical wells drilled through multiple stacked reservoirs and recent development has focused on the Woodford formation; however, development in the Sycamore and Springer formations has been limited. As emerging formations, our drilling results in this area are more uncertain than drilling results in areas that are more developed and have been producing for a longer period of time. Since limited production history from horizontal wells in the SCOOP Sycamore and Springer formations exists over our acreage position, it is difficult to predict our future drilling results. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized. +There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. +Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to +26 +Table of Contents +Index to Financial Statements +assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Approximately 20% of our Utica Shale undeveloped acreage that is subject to expiration will be subject to expiration in 2020 , with 17% of such acreage expiring in 2021 , 22% in 2022 and 41% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. Although 97% of our SCOOP acreage is held by existing production from both vertical and horizontal wells, the remaining acreage is subject to expiration. Of the remaining 3% of our SCOOP acreage not held by production, 59% will be be subject to expiration in 2020 , 17% in 2021 , 7% in 2022 and 17% thereafter. During the year ended December 31, 2019 , leases representing 66% of our total Niobrara Formation undeveloped acreage as of December 31, 2018 expired due to failure to establish production. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +The ultimate outcome of pending legal and governmental proceedings is uncertain, and there are significant costs associated with these matters. +We are defending against claims by royalty owners alleging, among other things, that we underpaid royalty owners. The resolution of disputes regarding past payments could cause our future obligations to royalty owners to increase and would negatively impact our future results of operations. +In addition, there is an ongoing SEC investigation with respect to certain actions by former Company management, including alleged improper personal use of Company assets, and potential violations by former management and the Company of the Sarbanes-Oxley Act of 2002. The outcome of any pending or future litigation or governmental regulatory matter is uncertain and may +27 +Table of Contents +Index to Financial Statements +adversely affect our results of operations. In addition, we have incurred substantial legal expenses in the past three years, and such expenses may continue to be significant in the future. Further, attention to these matters by members of our senior management has been required, reducing the time they have available to devote to managing our business. +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and natural gas operating activities are subject to numerous costs and risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. Drilling for oil, natural gas and NGL can be unprofitable, not only from dry holes, but from productive wells that do not return a profit because of insufficient revenue from production or high costs. Substantial costs are required to locate, acquire and develop oil and gas properties, and we are often uncertain as to the amount and timing of those costs. Our cost of drilling, completing, equipping and operating wells is often uncertain before drilling commences. Declines in commodity prices and overruns in budgeted expenditures are common risks that can make a particular project uneconomic or less economic than forecasted. While both exploratory and developmental drilling activities involve these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. For the 16% of our daily production volumes from properties which we did not serve as operator as of December 31, 2019, we are dependent on the operator for operational and regulatory compliance. In addition, our oil and gas properties can become damaged, our operations may be curtailed, delayed or canceled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• +unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• +loss of drilling fluid circulation; +• +equipment failures or accidents; +• +fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• +risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +• +adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures; +• +issues with title or in receiving governmental permits or approvals; +• +restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets; +• +environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• +restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• +shortages or delays in the availability of services or delivery of equipment; and +• +unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding +28 +Table of Contents +Index to Financial Statements +that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• +the timing and amount of capital expenditures; +• +the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• +the operator's expertise and financial resources; +• +approval of other participants in drilling wells; +• +selection of technology; and +• +the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +Recent decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties or result in the loss of some of our leasehold acreage in Ohio. +On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 version of the ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action to establish abandonment of mineral rights. After June 30, 2006, (the effective date of the 2006 version of the ODMA), surface owners are required to follow the statutory notice and recording procedures enacted in 2006. We have assessed the impact of these recent Ohio Supreme Court decisions on our operations in Ohio where the majority of our acreage and our producing properties are located and have taken steps to mitigate any potential risks identified as a result of our assessment. However, the Ohio Supreme Court decisions could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expense, subject us to payment of additional royalties or result in the loss of some of our leasehold acreage in Ohio, any of which could have an adverse effect on our results of operations and financial condition. +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. In addition, we may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or +29 +Table of Contents +Index to Financial Statements +orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Additional action by PHMSA with respect to pipeline integrity management requirements may occur in the future. In July 2018, PHMSA issued an advance notice of proposed rulemaking seeking comment on the class location requirements for natural gas transmission pipelines, and particularly the actions operators must take when class locations change due to population growth or building construction near the pipeline. PHMSA has not yet issued the final rule. In October 2019, three final rules making up the “Gas Mega Rule” - one establishing procedures to implement the expanded emergency order enforcement authority; the second, concerning gas transmission, extending the requirement to conduct integrity assessments beyond HCAs to pipelines in Moderate Consequence Areas (“MCAs”); and the third, concerning hazardous liquids, extending the required use of leak detection systems beyond HCAs to all regulated non-gathering hazardous liquid pipelines and updating reporting and inspection requirements - were finalized. The cost of these requirements or other potential new or amended regulations could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the Oklahoma Corporation Commission (OCC) issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. A decision is pending. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane. Policy makers at both the U.S. +30 +Table of Contents +Index to Financial Statements +federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions. Several states where we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. A carbon tax could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +In our Utica operations, we attempt to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle 100% of all produced water, we do inject water into third party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle. In the state of Ohio, all water used during drilling operations is disposed of through injection into third party salt water disposal wells regulated by applicable state agencies. +In our SCOOP operations, Oklahoma regulations allow for the storage of produced water in permitted lined impoundments. These storage impoundments allowed us to recycle approximately 75% of our produced water in 2019 from all of our producing wells. All of our wells completed in 2019 in our SCOOP asset were completed with recycled produced water from these impoundments with minimal use of local freshwater sources. These recycling facilities allowed us to dramatically reduce the amount of produced water that had to be injected into state regulated commercial disposal wells, and decreased our reliance of local freshwater sources required for our completions operations. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +31 +Table of Contents +Index to Financial Statements +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Substantially all of our producing properties are located in Eastern Ohio and Oklahoma, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio and Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The oil and gas exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including, but not limited to, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and, due to our debt levels and other factors, may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +32 +Table of Contents +Index to Financial Statements +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2019 accounted for approximately 14% of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +Risks related to potential acquisitions or dispositions may adversely affect our business. Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth. +From time to time, we evaluate acquisitions and dispositions of assets, businesses and other investments, including equity investments and joint ventures. These transactions involve various inherent risks, such as changes in prevailing market conditions, our ability to obtain the necessary regulatory approvals, the timing of and conditions that may be imposed on us by regulators and our ability to achieve benefits anticipated to result from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us to risks and uncertainties, such as committing us to fund operating or capital expenditures, the timing and amount of which we may not be able to control. These transactions may not result in the anticipated benefits or efficiencies. The counterparties to these transactions may not satisfy their obligations to the joint venture. Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position. In addition, acquisitions may be financed by borrowings, requiring us to incur more debt, or by the issuance of our common stock. Any such acquisition or disposition involves risks and we cannot assure you that: +• +any acquisition would be successfully integrated into our operations and internal controls; +• +the due diligence conducted prior to an acquisition would uncover situations that could result in financial or legal exposure, such as title defects and potential environmental and other liabilities; +• +post-closing purchase price adjustments will be realized in our favor; +• +any investment, acquisition, disposition or integration would not divert management resources from the operation of our business; and +• +any investment, acquisition, or disposition or integration would not have a material adverse effect on our financial condition, results of operations, cash flows or reserves. +If any of these risks materialize, the benefits of such acquisition or disposition may not be fully realized, if at all, and our financial condition, results of operations, cash flows and reserves could be negatively impacted. +Further, the successful acquisition of producing properties requires an assessment of several factors, including: +• +recoverable reserves; +• +future oil and natural gas prices and their applicable differentials; +• +operating costs; and +• +potential environmental and other liabilities. +The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms. +33 +Table of Contents +Index to Financial Statements +In addition, competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. +No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods. +We may be unable to dispose of nonstrategic assets on attractive terms and may be required to retain liabilities for certain matters . +We regularly review our property base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities and create organizational and operational efficiencies. Various factors could materially affect our ability to dispose of nonstrategic assets or complete announced dispositions, including the availability of purchasers willing to purchase the nonstrategic assets at prices acceptable to us and restrictions under our revolving credit facility. Sellers typically retain liabilities for certain matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction and ultimately may be material. Also, third parties are often unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a sale, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +Negative public perception regarding us or our industry could have an adverse effect on our operations. +34 +Table of Contents +Index to Financial Statements +Negative public perception regarding us or our industry resulting from, among other things, concerns raised by advocacy groups about hydraulic fracturing, waste disposal, oil spills, seismic activity, climate change, explosions of natural gas transmission lines and the development and operation of pipelines and other midstream facilities may lead to increased regulatory scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. Additionally, environmental groups, landowners, local groups and other advocates may oppose our operations through organized protests, attempts to block or sabotage our operations or those of our midstream transportation providers, intervene in regulatory or administrative proceedings involving our assets or those of our midstream transportation providers, or file lawsuits or other actions designed to prevent, disrupt or delay the development or operation of our assets and business or those of our midstream transportation providers. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits we require to conduct our operations to be withheld, delayed or burdened by requirements that restrict our ability to profitably conduct our business. +Recently, activists concerned about the potential effects of climate change have directed their attention towards sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in energy-related activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +With respect to our Utica Shale acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica and the other areas in which we operate. Until this new capacity is available, we may experience delays in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and +35 +Table of Contents +Index to Financial Statements +cash flows could be materially and adversely affected. +Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays may arise as a result of unpredictable factors, many of which are beyond our control, including: +• +denial of or delay in receiving requisite regulatory approvals or permits; +• +unplanned increases in the cost of construction materials or labor; +• +disruptions in transportation of components or construction materials; +• +adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; +• +shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; +• +market-related increases in a project's debt or equity financing costs; and +• +nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. +Any one or more of these factors could have a significant impact on our ongoing capital projects. +Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all. +We, through our wholly-owned subsidiary Grizzly Holdings Inc., own an approximate 24.9% interest in Grizzly. As of December 31, 2019 , Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 SAGD oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. At December 31, 2019 , we reviewed our investment in Grizzly for impairment, resulting in an aggregate other than temporary impairment write down of $32.4 million for the year ended December 31, 2019 . The Algar Lake and other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to dilution of our equity ownership interest. +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyber-attack involving our information systems and related +36 +Table of Contents +Index to Financial Statements +infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and enhanced consumer protections for those individuals, and provides for statutory fines for data security breaches or other CCPA violations. Meanwhile, over fifteen other states have considered privacy laws like the CCPA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +If our investments in entities are not successful or decrease in market value, we may be required to write off or lose the value of a portion or all of our investments, which could have a materially adverse effect on our results of operations. +Through our wholly owned subsidiaries, we have directly or indirectly made investments in certain entities that are accounted for by the equity method of accounting. We have recorded impairment charges to reflect the other than temporary decreases in the fair value of such entities, including an impairment loss of $160.8 million with respect to our investment in Mammoth Energy and an impairment loss of $32.4 million with respect to our investment in Grizzly recorded during the year ended December 31, 2019 . If the financial position of any such entity declines, we could be required to write down all or part of our investment in that entity, which could have a materially adverse effect on our results of operations. +An interruption in operations at our headquarters could adversely affect our business. +Our headquarters are located in Oklahoma City, Oklahoma, an area that experiences severe weather events, including tornadoes and earthquakes. Our information systems and administrative and management processes are primarily provided to our various drilling projects and producing wells throughout the United States from this location, which could be disrupted if a catastrophic event, such as a tornado, power outage or act of terror, destroyed or severely damaged our headquarters. Any such catastrophic event could harm our ability to conduct normal operations and could adversely affect our business. +We have identified a material weakness in internal controls. If we fail to remediate this material weakness or otherwise fail to develop, implement and maintain effective internal controls in future periods, our ability to report our financial condition and results of operations accurately and on a timely basis could be adversely affected. +We have identified a material weakness in our internal controls over the completeness and accuracy of the accounting of transfers of unevaluated capitalized costs into the amortization base. Accordingly, based on our management’s assessment, we believe that, as of December 31, 2019, our disclosure controls and procedures were not effective. We also determined that this +37 +Table of Contents +Index to Financial Statements +material weakness existed as of September 30, 2019. The material weakness and our remediation plans are described in Item 9A, Controls and Procedures . +A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. We cannot assure you that we will adequately remediate the material weakness or that additional material weaknesses in our internal controls will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation, could result in additional material weaknesses, or could result in material misstatements in our financial statements. These misstatements could result in restatements of our financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information. +We are in the process of remediating the identified material weakness in our internal controls, but we are unable at this time to estimate when the remediation will be completed. If we fail to remediate this material weakness, there will continue to be an increased risk that our future financial statements could contain errors that will be undetected. Further and continued determinations that there are material weaknesses in the effectiveness of our internal controls could reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of resources to comply with applicable requirements. +We do not anticipate paying dividends on our common stock in the near future. +We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We currently intend to retain any earnings for the future operation and development of our business, including exploration, development and acquisition activities or to retire outstanding debt. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future dividend payments will require approval by the board of directors. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock. +We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects. +We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. +Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock. +In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders. +Future sales of our common stock may depress our stock price. +We have registered a substantial number of shares of our common stock under a registration statement filed with the SEC for resale by certain of our stockholders. Sales of these or other shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 14, 2020 , there were 159,710,955 shares of our common stock issued and outstanding, excluding 5,871,991 shares of unvested restricted stock awarded under our 2019 Amended and Restated Stock Incentive Plan. +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2019, we had a net operating loss, or NOL, carryforward of approximately $1.3 billion for federal income tax purposes. If we were to experience an “ownership change,” as determined under Section 382 of the Internal +38 +Table of Contents +Index to Financial Statements +Revenue Code of 1986, as amended (or the "Code"), our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. +Our business could be disrupted as a result of actions of certain stockholders. +During 2019, stockholders made public statements critical of our performance and advocated that we make certain changes regarding our strategic plan, capital allocation, executive compensation and corporate governance, including the addition of a stockholder representative to our board of directors. They have also suggested that they could pursue the nomination of director candidates for election to our board of directors at our 2020 Annual Meeting of Stockholders. +If any of our stockholders commence a proxy contest, further advocate for change or engage in other similar activities, then our business could be adversely affected. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupt our operations and divert the attention of our board of directors and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of stockholder activism or changes to the composition of the board of directors may lead to the perception of a change in the direction of the business, instability or lack of continuity, and, if individuals are elected to our board of directors with a specific agenda, the execution of our strategic plan may be disrupted or a new strategic plan altogether may be implemented. This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. +We cannot predict, and no assurances can be given, as to the outcome or timing of any matters relating to the foregoing actions by stockholders or the ultimate impact on our business, financial condition or results of operations. Further, any of these matters or any further actions by this or other stockholders may impact and result in volatility of the price of our common stock, including if this stockholder were to exit its investment in our common stock. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 19 of the notes to our consolidated financial statements included in this report. +ITEM 3. +LEGAL PROCEEDINGS +Litigation and Regulatory Proceedings +We are involved in a number of litigation and regulatory proceedings that may result in material liabilities, including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. Our total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. +We, along with a number of other oil and gas companies, have been named as a defendant in two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 (together, the "Complaints"). The Complaints allege that certain of the defendants’ operations violated the State and Local Coastal Resources Management Act of +39 +Table of Contents +Index to Financial Statements +1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder (the "CZM Laws") by causing substantial damage to land and waterbodies located in the coastal zone of the relevant Parish. The plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. The United States District Court for the Western District of Louisiana issued orders remanding the cases to their respective state court, and the defendants have appealed the remand orders to the 5th Circuit Court of Appeals. +In July 2019, Pigeon Land Company, Inc., a successor in interest to certain of our legacy Louisiana properties, filed an action against us and a number of other oil and gas companies in the 16th Judicial District Court for the Parish of Iberia in Louisiana. The suit alleges negligence, strict liability and various violations of Louisiana statutes relating to property damage in connection with the historic development of our Louisiana properties and seeks unspecified damages (including punitive damages), an injunction to return the affected property to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. +In September 2019, a stockholder of Mammoth Energy filed a derivative action on behalf of Mammoth Energy against members of Mammoth Energy’s board of directors, including a director designated by us, and its significant stockholders, including us, in the United States District Court for the Western District of Oklahoma. In January 2020, plaintiffs consolidated actions against the same defendants in the United States District Court for the District of Delaware. The consolidated and amended complaint alleges, among other things, that we breached our fiduciary duties and misappropriated information as a controlling shareholder of Mammoth Energy in connection with Mammoth Energy’s activities in Puerto Rico following Hurricane Maria and our secondary offering of Mammoth Energy common stock in June 2018. The complaint seeks unspecified damages, the payment of reasonable attorney fees and legal expenses and interest and to force Mammoth Energy and its board of directors to make specified corporate governance reforms. +In October 2019, Saydee Resources, LLC, on behalf of itself and a class of similarly situated royalty holders, filed an action against us in the District Court of Grady County Oklahoma. The suit alleges that we underpaid royalty holders and seeks unspecified damages for breach of contract, tortious breach of contract, fraud and unjust enrichment. +In October 2019, Kelsie Wagner, in her capacity as trustee of various trusts and on behalf of the trusts and other similarly situated royalty owners, filed an action against us in the District Court of Grady County, Oklahoma. The suit alleges that we underpaid royalty owners and seeks unspecified damages for violations of the Oklahoma Production Revenue Standards Act and fraud. +SEC Investigation +The SEC has commenced an investigation with respect to certain actions by former Company management, including alleged improper personal use of Company assets, and potential violations by former management and the Company of the Sarbanes-Oxley Act of 2002 in connection with such actions. We have fully cooperated and intend to continue to cooperate fully with the SEC’s investigation. Although it is not possible to predict the ultimate resolution or financial liability with respect to this matter, we believe that the outcome of this matter will not have a material effect on our business, financial condition or results of operations. +Business Operations +We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property. +40 +Table of Contents +Index to Financial Statements +We received several Finding of Violation (“FOVs”) from the United States Environmental Protection Agency ("USEPA") alleging violations of the Clean Air Act in Ohio. The first FOV for one site was dated December 11, 2013. Two subsequent FOVs incorporated and expanded the scope on January 4, 2017 and April 15, 2019. We entered into a settlement with the Department of Justice and USEPA agreeing to pay $1.7 million and invest in improvements at 17 well pads. The settlement was filed with the U.S. District Court for the Southern District of Ohio in January 2020, and is pending approval. +Other Matters +Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations are likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +Our common stock trades on the Nasdaq Exchange under the symbol "GPOR". +Shareholders +At the close of business on February 14, 2020 , there were approximately 313 stockholders and 15,722 beneficial owners of our common stock. +Unregistered Sales of Equity Securities and Use of Proceeds +In January 2019, our board of directors approved a new stock repurchase program to acquire up to $400.0 million of our outstanding common stock within a 24 month period. During the year ended December 31, 2019, we repurchased approximately 3.8 million shares of our outstanding common stock pursuant to the plan for total consideration of approximately $30.0 million . In the fourth quarter of 2019, the program was suspended but may be reactivated in the future depending on our projected leverage profile, commodity price outlook and market conditions. The Company did not repurchase any shares of our common stock during the quarter ended December 31, 2019 and has $370.0 million of shares that may yet be repurchased under its announced program. +Dividends +We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock. +ITEM 6. +SELECTED FINANCIAL DATA +The following table sets forth selected consolidated financial data of Gulfport as of and for the years ended December 31, 2019 , 2018, 2017, 2016 and 2015. The data are derived from our audited consolidated financial statements. The table below should be read in connection with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes appearing elsewhere in Items 7 and 8, respectively, of this report. +Fiscal Year Ended December 31, +2019 +2018 +2017 +2016 +2015 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues +$ +1,346,008 +$ +1,355,044 +$ +1,320,303 +$ +385,910 +$ +708,990 +Costs and expenses: +Lease operating expenses +82,998 +91,640 +80,246 +68,877 +69,475 +Production taxes +28,571 +33,480 +21,126 +13,276 +14,740 +Midstream gathering and processing expenses +291,725 +290,188 +248,995 +165,972 +138,590 +Depreciation, depletion and amortization +550,108 +486,664 +364,629 +245,974 +337,694 +Impairment of oil and natural gas properties +2,039,770 +— +— +715,495 +1,440,418 +General and administrative expenses +47,979 +49,994 +45,523 +37,681 +38,086 +Restructuring costs +4,611 +— +— +— +— +Accretion expense +3,939 +4,119 +1,611 +1,057 +820 +Acquisition expense +— +— +2,392 +— +— +3,049,701 +956,085 +764,522 +1,248,332 +2,039,823 +(Loss) Income from Operations +(1,703,693 +) +398,959 +555,781 +(862,422 +) +(1,330,833 +) +Other Expense (Income): +Interest expense +141,786 +141,912 +115,613 +69,258 +55,102 +Interest income +(801 +) +(314 +) +(1,009 +) +(1,230 +) +(643 +) +(Gain) loss on debt extinguishment +(48,630 +) +— +— +23,776 +— +Gain on sale of equity method investments +— +(124,768 +) +(12,523 +) +(3,391 +) +— +Loss (income) from equity method investments, net +210,148 +(49,904 +) +17,780 +37,376 +106,093 +Other expense (income) +3,725 +1,542 +(1,041 +) +(5,589 +) +(10,500 +) +306,228 +(31,532 +) +118,820 +120,200 +150,052 +(Loss) Income from Continuing Operations before Income Taxes +(2,009,921 +) +430,491 +436,961 +(982,622 +) +(1,480,885 +) +Income Tax (Benefit) Expense +(7,563 +) +(69 +) +1,809 +(2,913 +) +(256,001 +) +(Loss) Income from Continuing Operations +(2,002,358 +) +430,560 +435,152 +(979,709 +) +(1,224,884 +) +Net (Loss) Income Available to Common Stockholders +$ +(2,002,358 +) +$ +430,560 +$ +435,152 +$ +(979,709 +) +$ +(1,224,884 +) +Net (Loss) Income Per Common Share—Basic: +$ +(12.49 +) +$ +2.46 +$ +2.42 +$ +(7.97 +) +$ +(12.27 +) +Net (Loss) Income Per Common Share—Diluted: +$ +(12.49 +) +$ +2.45 +$ +2.41 +$ +(7.97 +) +$ +(12.27 +) +41 +Table of Contents +Index to Financial Statements +At December 31, +2019 +2018 +2017 +2016 +2015 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets +$ +3,882,819 +$ +6,051,036 +$ +5,807,752 +$ +4,223,145 +$ +3,334,734 +Total debt, including current maturities +$ +1,978,651 +$ +2,087,416 +$ +2,038,943 +$ +1,593,875 +$ +946,263 +Total liabilities +$ +2,568,227 +$ +2,723,268 +$ +2,706,138 +$ +2,039,253 +$ +1,295,897 +Stockholders’ equity +$ +1,314,592 +$ +3,327,768 +$ +3,101,614 +$ +2,183,892 +$ +2,038,837 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following discussion and analysis generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in " Management's Discussion and Analysis of Financial Condition and Results of Operations " in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. +Overview +We are an independent natural gas-weighted exploration and production company focused on the exploration, acquisition and production of natural gas, crude oil and natural gas liquids ("NGL") in the United States with primary focus in the Appalachia and Mid-Continent basins. Our principal properties are located in Eastern Ohio targeting the Utica formation and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. +2019 Highlights +• +During the year ended December 31, 2019 , we entered into several agreements to divest of certain non-core assets as part of our strategic initiatives to focus development in our core operating areas. These non-core divestitures consisted of the following: +◦ +We sold our non-core assets located in the West Cote Blanche Bay ("WCBB") and Hackberry fields of Louisiana for a purchase price of approximately $19.7 million , subject to customary closing terms and adjustments. We received approximately $9.2 million in cash and retained contingent overriding royalty interests. In addition, we could also receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. The buyer assumed all plugging and abandonment liabilities associated with these assets, which totaled approximately $30.0 million at the divestiture date. The sale closed on July 3, 2019. +◦ +We sold certain non-operated interests in the Utica Shale for cash proceeds of $29.0 million subject to customary closing terms and adjustments. The sale closed on December 30, 2019 . +◦ +We sold certain overriding royalty interests associated with assets we held in the Bakken for cash proceeds of approximately $7.0 million subject to customary closing terms and adjustments. The sale closed on December 11, 2019 . +◦ +In December 2019 , we entered into an agreement to divest our water infrastructure assets across our SCOOP position to a third-party water service provider. This transaction closed on January 2, 2020 . We received $50.0 million in cash upon closing and have an opportunity to earn potential additional incentive payments over the next 15 years, subject to our ability to meet certain thresholds which will be driven by, among other things, our future development program and future water production levels. The agreement contains no +42 +Table of Contents +Index to Financial Statements +minimum volume commitments. The assets related to this transaction are included in our amortization base of the full cost pool and we do not expect to recognize a gain or loss in our statement of operations. +• +During the year ended December 31, 2019 , we used borrowings under our revolving credit facility to repurchase in the open market approximately $190.1 million aggregate principal amount of our outstanding 6.625% Senior Notes due 2023 ("2023 Notes"), 6.000% Senior Notes due 2024 ("2024 Notes"), 6.375% Senior Notes due 2025 ("2025 Notes"), and 6.375% Senior Notes due 2026 ("2026 Notes") (collectively the "Notes"), for $138.8 million . We recognized a $48.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. +• +Production increased 1% to approximately 501,742 MMcfe for the year ended December 31, 2019 from approximately 496,505 MMcfe for the year ended December 31, 2018 . +• +During 2019 , we spud 26 gross ( 23.2 net) wells, turned to sales 61 gross ( 54.1 net) operated wells, participated in an additional 47 gross ( 2.5 net) wells that were drilled by other operators on our Utica Shale and SCOOP acreage. Of our 26 new wells spud during 2019 , 11 were completed as producing wells and, at year end, 14 were in various stages of completion and one was being drilled. +• +During the year ended December 31, 2019 , we reduced our unit lease operating expense by 10% to $0.17 per Mcfe from $0.18 per Mcfe during the year ended December 31, 2018 . +• +During the year ended December 31, 2019 , we reduced our general and administrative expense by 4% to $48.0 million from $50.0 million during the year ended December 31, 2018 . +Liquidity and Capital Resources +Overview . Historically, our primary sources of capital funding and liquidity have been our operating cash flow, borrowings under our revolving credit facility and issuances of equity and debt securities. Our ability to access these sources of funds can be significantly impacted by changes in capital markets, decreases in commodity prices and decreases in our production levels. +Based on our cash balance, forecasted cash flows from operating activities and availability under our revolving credit facility, we expect to be able to fund our planned capital expenditures, meet our debt service requirements and fund our other commitments and obligations for the next 12 months. +As of December 31, 2019 , we had a cash balance of $6.1 million compared to $52.3 million as of December 31, 2018 , and a net working capital deficit of $145.3 million as of December 31, 2019 , compared to a net working capital deficit of $223.1 million as of December 31, 2018 . As of December 31, 2019 , our working capital deficit includes $0.6 million of debt due in the next 12 months. Our total principal debt as of December 31, 2019 was $2.0 billion compared to $2.1 billion as of December 31, 2018 . As of December 31, 2019 , we had $636.4 million of borrowing capacity available under the revolving credit facility, with outstanding borrowings of $120.0 million and $243.6 million utilized for various letters of credit. See Note 5 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our debt obligations, including principal and carrying amounts of our notes. +Derivatives and Hedging Activities . Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. +As of December 31, 2019 , we had the following open natural gas, oil and NGL derivative instruments: +43 +Table of Contents +Index to Financial Statements +Natural Gas Derivatives +Year +Type of Derivative Instrument +Index +Daily Volume (MMBtu/day) +Weighted +Average Price +2020 +Swaps +NYMEX Henry Hub +548,000 +$ +2.88 +2020 +Basis Swaps +Various +70,000 +$ +(0.12 +) +2022 +Sold Call Options +NYMEX Henry Hub +628,000 +$ +2.90 +2023 +Sold Call Options +NYMEX Henry Hub +628,000 +$ +2.90 +Oil Derivatives +Year +Type of Derivative Instrument +Index +Daily Volume (Bbls/day) +Weighted +Average Price +2020 +Swaps +NYMEX WTI +6,000 +$ +59.82 +NGL Derivatives +Year +Type of Derivative Instrument +Index +Daily Volume (Bbls/day) +Weighted +Average Price +2020 +Swaps +Mont Belvieu C3 +500 +$ +21.63 +See Note 12 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of derivatives and hedging activities. +Credit Facility . We have entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 13, 2021. As of December 31, 2019 , we had a borrowing base of $1.2 billion , with an elected commitment of $1.0 billion , and $120.0 million in borrowings outstanding under our revolving credit facility. Total funds available for borrowing, after giving effect to an aggregate of $243.6 million of letters of credit as of December 31, 2019 , were $636.4 million . This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries, excluding Grizzly Holdings Inc. ("Grizzly Holdings"), Mule Sky LLC ("Mule Sky") and GRUS, LLC ("GRUS"), guarantee our obligations under our revolving credit facility. Our next borrowing base redetermination is scheduled for the second quarter of 2020. +Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the administrative agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. As of December 31, 2019 , amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 3.30% . +Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries’ ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; agree to payment restrictions affecting our restricted subsidiaries; make investments; undertake fundamental changes including selling all or substantially all of our assets; enter into swap contracts and forward sales contracts; dispose of assets; change the nature of their business; enter into transactions with their affiliates; and engage in certain transactions with restricted subsidiaries. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (as defined under the revolving credit agreement) may not be greater than 4.00 to 1.00 for the twelve-month period of the end of each fiscal quarter; and (2) the ratio of EBITDAX to interest expense for the twelve-month period at the end of each fiscal quarter may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2019 . +44 +Table of Contents +Index to Financial Statements +Senior Notes . In April 2015, we issued an aggregate of $350.0 million in principal amount of our 2023 Notes. Interest on these senior notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, payable semi-annually on May 1 and November 1 of each year. As of December 31, 2019, after giving effect to 2019 open market repurchases of these 2023 Notes, $329.5 million principal amount remained outstanding. The 2023 Notes will mature on May 1, 2023. +On October 14, 2016, we issued an aggregate of $650.0 million in principal amount of our 2024 Notes. Interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof, payable semi-annually on April 15 and October 15 of each year. As of December 31, 2019, after giving effect to 2019 open market repurchases of these 2024 Notes, $603.4 million principal amount remained outstanding. The 2024 Notes will mature on October 15, 2024. +On December 21, 2016, we issued an aggregate of $600.0 million in principal amount of our 2025 Notes. Interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on May 15 and November 15 of each year. As of December 31, 2019, after giving effect to 2019 open market repurchases of these 2025 Notes, $529.5 million principal amount remained outstanding. The 2025 Notes will mature on May 15, 2025. +On October 11, 2017, we issued $450.0 million in aggregate principal amount of our 2026 Notes. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on January 15 and July 15 of each year. As of December 31, 2019, after giving effect to 2019 open market repurchases of these 2026 Notes, $397.5 million principal amount remained outstanding. The 2026 Notes will mature on January 15, 2026. +During the year ended December 31, 2019 , we used borrowings under our revolving credit facility to repurchase in the open market approximately $190.1 million aggregate principal amount of our outstanding Notes for $138.8 million . This included approximately $20.5 million principal amount of the 2023 Notes, $46.6 million principal amount of the 2024 Notes, $70.5 million principal amount of the 2025 Notes, and $52.5 million principal amount of the 2026 Notes. We recognized a $48.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. +We may use a combination of cash and borrowing under our revolving credit facility to retire our outstanding debt, through privately negotiated transactions, open market repurchases, redemptions, tender offers or otherwise, but we are under no obligation to do so. +All of our existing and future restricted subsidiaries that guarantee our revolving credit facility or certain other debt guarantee the Notes, provided, however, that the Notes are not guaranteed by Grizzly Holdings, Mule Sky or GRUS, and will not be guaranteed by any of our future unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the Notes. +If we experience a change of control (as defined in the senior note indentures relating to the Notes), we will be required to make an offer to repurchase the Notes and at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be required to use the remaining proceeds to make an offer to repurchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to: incur or guarantee additional indebtedness; make certain investments; declare or pay dividends or make distributions on capital stock; prepay subordinated indebtedness; sell assets, including capital stock of restricted subsidiaries; agree to payment restrictions affecting our restricted subsidiaries; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into transactions with affiliates; incur liens; engage in business other than the oil and gas business; and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the Notes are ranked as "investment grade." +Construction Loan. On June 4, 2015, we entered into a construction loan agreement (the "construction loan") with InterBank for the construction of our new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The construction loan allows for maximum principal borrowings of $24.5 million and required us to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016. Interest accrues daily on +45 +Table of Contents +Index to Financial Statements +the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017, after which date we began making monthly payments of interest and principal. The final payment is due June 4, 2025. As of December 31, 2019 , the total borrowings under the construction loan were approximately $22.5 million . +Contractual and Commercial Obligations . The following table sets forth our contractual and commercial obligations at December 31, 2019 : +Payment due by period +Contractual Obligations +Total +Less than 1 year +1-3 years +3-5 years +More than 5 +years +(In thousands) +Long-term debt (1): +Principal +$ +2,002,402 +$ +631 +$ +121,357 +$ +934,380 +$ +946,034 +Interest +613,260 +118,428 +236,198 +203,330 +55,304 +Firm transportation contracts (2) +3,560,504 +274,813 +573,252 +548,513 +2,163,926 +Operating lease liabilities (3) +57,438 +35,045 +22,275 +118 +— +Other +15,000 +7,500 +7,500 +— +— +Total contractual cash obligations (4) +$ +6,248,604 +$ +436,417 +$ +960,582 +$ +1,686,341 +$ +3,165,264 +_____________________ +(1) +See Note 5 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our long-term debt. +(2) +See Note 16 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our firm transportation contracts. +(3) +See Note 9 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our operating lease liabilities. +(4) +This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 12 and 3 of the notes to our consolidated financial statements included in Item 8 of this report, respectively. +Off-balance Sheet Arrangements . We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2019 , our material off-balance sheet arrangements and transactions include $243.6 million in letters of credit outstanding against our revolving credit facility and $105.1 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance on certain firm transportation agreements. Management believes these items will expire without being funded. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. See Note 17 to our consolidated financial statements for further discussion of the various financial guarantees we have issued. +Capital Expenditures . Our capital commitments have been primarily for the execution of our drilling programs, share repurchases, and discounted repurchases of our senior notes. Our capital investment strategy is focused on prudently developing our existing properties in an effort to generate sustainable cash flow considering current and forecasted commodity prices while also selectively pursuing mergers or acquisitions in our current operating regions in an effort to gain scale and deepen our drilling inventory. +Our capital expenditures for 2020 are currently estimated to be in the range of $265.0 million to $285.0 million for drilling and completion expenditures. In addition, we currently expect to spend $20.0 million to $25.0 million in 2020 for non-drilling and completion expenditures, which includes acreage expenses, primarily lease extensions in the Utica Shale. The midpoint of the 2020 range of capital expenditures is 51% lower than the $602.5 million spent in 2019 , primarily due to our decision to reduce capital activity in response to lower commodity prices, specifically natural gas prices, and our desire to fund our capital development program primarily with cash flow from operations. As a result of our decreased capital spending program for 2020 and the impact of our 2019 property divestitures, we expect our volumes in 2020 to be approximately 18% lower than 2019. Coupled with forecasted lower commodity prices, we expect 2020 revenues, operating cash flows and EBITDA to be lower in 2020 as compared to 2019. +46 +Table of Contents +Index to Financial Statements +We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months. We have the ability to react quickly to changing commodity prices and accelerate or decelerate our activity within our operating areas as market conditions warrant. Notwithstanding the foregoing, in the event commodity prices decline from current levels or our capital or other costs increase we may be required to obtain additional funds which we would seek to do through borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate merger, acquisition and divestiture opportunities. Capital may not be available to us on acceptable terms or at all in the future. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the current low commodity price environment worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected. +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2018 , WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. During 2019 , WTI prices ranged from $46.31 to $66.24 per barrel and the Henry Hub spot market price of natural gas ranged from $1.75 to $4.25 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2019 . +Cash Flow from Operating Activities . Net cash flow provided by operating activities was $724.0 million for the year ended December 31, 2019 as compared to $786.3 million for 2018 . This decrease was primarily the result of a decrease in cash receipts from our oil and natural gas purchasers due to a 23% decrease in net revenues after giving effect to settled derivative instruments, partially offset by a decrease in our operating expenses. +Divestitures . During 2019, we divested certain non-core assets and interests in operated and non-operated oil and natural gas properties for approximately $48.5 million . Proceeds from these transactions were primarily used to repay debt and fund our development program. See Note 2 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion. +Uses of Funds . The following table presents the uses of our cash and cash equivalents for the years ended December 31, 2019 and 2018: +47 +Table of Contents +Index to Financial Statements +Years Ended December 31, +2019 +2018 +(In thousands) +Oil and Natural Gas Property Expenditures: +Drilling and completion costs +654,407 +713,031 +Leasehold acquisitions +39,664 +125,585 +Other +25,986 +60,467 +Total oil and natural gas property expenditures +720,057 +899,083 +Other Uses of Cash and Cash Equivalents +Cash paid to repurchase senior notes +138,786 +— +Cash paid to repurchase common stock +30,688 +200,251 +Additions to other property and equipment +5,021 +7,870 +Contributions to equity method investments +432 +2,319 +Other +288 +831 +Total other uses of cash and cash equivalents +$ +175,215 +$ +211,271 +Total uses of cash and cash equivalents +$ +895,272 +$ +1,110,354 +Drilling and Completion Costs . During 2019 , we spud 16 gross ( 14.6 net) and commenced sales from 47 gross ( 41.6 net) wells in the Utica Shale for a total cost of approximately $318.3 million. In addition, five gross ( 0.9 net) wells were spud and 14 gross ( 3.3 net) wells were turned to sales by other operators on our Utica Shale acreage during 2019 for a total cost to us of approximately $44.2 million. +During 2019 , we spud 10 gross ( 8.6 net) and commenced sales from 14 gross ( 12.6 net) wells in the SCOOP for a total cost of approximately $124.8 million. In addition, 42 gross ( 1.6 net) wells were spud and 39 gross ( 1.2 net) wells were turned to sales by other operators on our SCOOP acreage during 2019 for a total cost to us of approximately $14.6 million. +Results of Operations +The markets for oil and natural gas have historically been, and will likely continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control. +48 +Table of Contents +Index to Financial Statements +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +Years Ended December 31, +2019 +2018 +(In thousands, unless otherwise stated) +Natural gas sales +Natural gas production volumes (MMcf) +458,178 +443,742 +Total natural gas sales +$ +918,263 +$ +1,121,815 +Natural gas sales without the impact of derivatives ($/Mcf) +$ +2.00 +$ +2.53 +Impact from settled derivatives ($/Mcf) +$ +0.23 +$ +(0.04 +) +Average natural gas sales price, including settled derivatives ($/Mcf) +$ +2.23 +$ +2.49 +Oil and condensate sales +Oil and condensate production volumes (Mbbls) +2,186 +2,801 +Total oil and condensate sales +$ +117,937 +$ +177,793 +Oil and condensate sales without the impact of derivatives ($/Bbl) +$ +53.95 +$ +63.48 +Impact from settled derivatives ($/Bbl) +$ +1.86 +$ +(9.51 +) +Average oil and condensate sales price, including settled derivatives ($/Bbl) +$ +55.81 +$ +53.97 +NGL sales +NGL production volumes (MGal) +213,129 +251,720 +Total NGL sales +$ +101,448 +$ +178,915 +NGL sales without the impact of derivatives ($/Gal) +$ +0.48 +$ +0.71 +Impact from settled derivatives ($/Gal) +$ +0.06 +$ +(0.05 +) +Average NGL price, including settled derivatives ($/Gal) +$ +0.54 +$ +0.66 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) +501,742 +496,505 +Total natural gas, oil and condensate and NGL sales +$ +1,137,648 +$ +1,478,523 +Natural gas, oil and condensate and NGL sales without the impact of derivatives ($/Mcfe) +$ +2.27 +$ +2.98 +Impact from settled derivatives ($/Mcfe) +$ +0.24 +$ +(0.12 +) +Average natural gas, oil and condensate and NGL sales price, including settled derivatives ($/Mcfe) +$ +2.51 +$ +2.86 +Production Costs: +Average production costs ($/Mcfe) +$ +0.17 +$ +0.18 +Average production taxes ($/Mcfe) +$ +0.06 +$ +0.07 +Average midstream gathering and processing ($/Mcfe) +$ +0.58 +$ +0.58 +Total production costs, midstream costs and production taxes ($/Mcfe) +$ +0.81 +$ +0.83 +49 +Table of Contents +Index to Financial Statements +The total natural gas, oil and NGL volumes hedged for 2019 and 2018 represented approximately 96% and 78% , respectively, of our total sales volumes for the applicable year. +From 2018 to 2019 , our net equivalent gas production increased 1% from 1,360 MMcfe per day to 1,375 MMcfe per day primarily as a result of our continued development of our Utica Shale and SCOOP acreage. We currently estimate that our 2020 production will be between 1,100 and 1,150 MMcfe per day. 2020 production levels are expected to be lower than 2019 levels as we have decided to reduce our 2020 capital spending as compared to 2019 levels given relatively low natural gas prices. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. See Item 1A. "Risk Factors." +Comparison of the Years Ended December 31, 2019 and December 31, 2018 +We reported net loss of $2.0 billion for the year ended December 31, 2019 as compared to net income of $430.6 million for the year ended December 31, 2018 . This decrease in period-to-period net income was due primarily to a $2.0 billion oil and natural gas properties impairment charge related primarily to the decline in commodity prices, a $260.1 million decrease in income from equity method investments, a $124.8 million decrease in gain on sale of equity method investments, a $63.4 million increase in depreciation, depletion and amortization expense, and a $9.0 million decrease in natural gas, oil and NGL revenues, partially offset by a $48.6 million increase in gain on debt extinguishment, an $8.6 million decrease in lease operating expenses, a $4.9 million decrease in production taxes, and a $2.0 million decrease in general and administrative expenses for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 . +Natural Gas, Oil and NGL Sales +Years Ended December 31, +2019 +2018 +change +($ In thousands) +Natural gas +918,263 +1,121,815 +(18 +)% +Oil and condensate +117,937 +177,793 +(34 +)% +NGL +101,448 +178,915 +(43 +)% +Natural gas, oil and NGL revenues +$ +1,137,648 +$ +1,478,523 +(23 +)% +The decrease in natural gas sales without the impact of derivatives was primarily due to a 21% decrease in natural gas market prices, partially offset by a 3% increase in natural gas sales volumes. +The decrease in oil and condensate sales without the impact of derivatives was due to a 22% decrease in oil and condensate sales volumes and a 15% decrease in oil and condensate market prices. +The decrease in NGL sales without the impact of derivatives was due to a 33% decrease in NGL market prices and a 15% decrease in NGL sales volumes. +Natural Gas, Oil and NGL Derivatives +50 +Table of Contents +Index to Financial Statements +Years Ended December 31, +2019 +2018 +($ In thousands) +Natural gas derivatives - fair value (gains) losses +$ +(89,576 +) +$ +98,130 +Natural gas derivatives - settlement (gains) losses +(104,874 +) +18,000 +Total (gains) losses on natural gas derivatives +(194,450 +) +116,130 +Oil and condensate derivatives - fair value (gains) losses +(2,952 +) +(13,546 +) +Oil and condensate derivatives - settlement (gains) losses +(4,083 +) +26,630 +Total (gains) losses on oil and condensate derivatives +(7,035 +) +13,084 +NGL derivatives - fair value (gains) losses +7,541 +(19,533 +) +NGL derivatives - settlement (gains) losses +(14,173 +) +13,798 +Total (gains) losses on NGL derivatives +(6,632 +) +(5,735 +) +Contingent consideration arrangement - fair value gains +(243 +) +— +Total (gains) losses on natural gas, oil and NGL derivatives +$ +(208,360 +) +$ +123,479 +See Note 12 to our consolidated financial statements for further discussion of our derivative activity. +Lease Operating Expenses +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +Lease operating expenses +Utica +$ +55,839 +$ +54,347 +3 +% +SCOOP +18,239 +18,385 +(1 +)% +WCBB +6,941 +14,178 +(51 +)% +Hackberry +1,679 +4,435 +(62 +)% +Other (1) +300 +295 +2 +% +Total lease operating expenses +$ +82,998 +$ +91,640 +(9 +)% +Lease operating expenses per Mcfe +Utica +$ +0.14 +$ +0.14 +2 +% +SCOOP +0.18 +0.20 +(6 +)% +WCBB +4.87 +3.87 +26 +% +Hackberry +7.65 +6.57 +16 +% +Other (1) +0.79 +0.60 +32 +% +Total lease operating expenses per Mcfe +$ +0.17 +$ +0.18 +(10 +)% +_____________________ +(1) +Includes Niobrara and Bakken +The decrease in total and per unit lease operating expenses ("LOE"), not including production taxes, in 2019 was mainly the result of our divesting of our Louisiana properties which have higher operating costs than our Utica and SCOOP areas. +Production Taxes +51 +Table of Contents +Index to Financial Statements +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +Production taxes +$ +28,571 +$ +33,480 +(15 +)% +Production taxes per Mcfe +$ +0.06 +$ +0.07 +(16 +)% +The decrease in production taxes was primarily related to a decrease in realized prices in 2019 as compared to 2018. +Midstream Gathering and Processing Expenses +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +Midstream gathering and processing expenses +$ +291,725 +$ +290,188 +1 +% +Midstream gathering and processing expenses per Mcfe +$ +0.58 +$ +0.58 +(1 +)% +Midstream gathering and processing expenses were relatively consistent in 2019 as compared to 2018 on both a total expense basis and a per unit basis. +Depreciation, Depletion and Amortization +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +Depreciation, depletion and amortization +$ +550,108 +$ +486,664 +13 +% +Depreciation, depletion and amortization per Mcfe +$ +1.10 +$ +0.98 +12 +% +Depreciation, depletion and amortization ("DD&A") expense consisted of $538.9 million in depletion of oil and natural gas properties and $11.2 million in depreciation of other property and equipment in 2019 , compared to $476.4 million in depletion of oil and natural gas properties and $10.3 million in depreciation of other property and equipment in 2018 . The increase in DD&A was due to an increase in our amount of oil and gas properties subject to amortization and a decrease in our total proved reserves volume used to calculate our total DD&A expense. +Impairment of Oil and Gas Properties. During the year ended December 31, 2019 , we had a $2.0 billion oil and natural gas properties impairment charge related primarily to the decline in commodity prices, compared to no impairment charge of oil and gas properties in 2018 . If prices of natural gas, oil and NGL continue to decline, the Company may be required to further write down the value of its oil and natural gas properties, which could negatively affect its results of operations. +Equity Investments +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +Gain on sale of equity method investments +$ +— +$ +(124,768 +) +(100 +)% +Loss (income) from equity method investments, net +$ +210,148 +$ +(49,904 +) +(521 +)% +Gain on sale of equity method investments during the year ended December 31, 2018 consisted of $96.4 million from the sale of our interest in Strike Force and $28.3 million from the sale of Mammoth Energy common stock. The decrease in income from equity method investments is primarily related to a $160.8 million impairment loss related to our investment in +52 +Table of Contents +Index to Financial Statements +Mammoth Energy and a $32.4 million impairment loss related to our investment in Grizzly for the year ended December 31, 2019 . See Note 4 to our consolidated financial statements for further discussion on our equity investments. +General and Administrative Expenses +Years Ended December 31, +2019 +2018 +change +($ In thousands, except per unit) +General and administrative expenses, gross +$ +89,291 +$ +97,526 +(8 +)% +Reimbursed from third parties +(11,173 +) +(9,820 +) +14 +% +Capitalized general and administrative expenses +(30,139 +) +(37,712 +) +(20 +)% +General and administrative expenses, net +$ +47,979 +$ +49,994 +(4 +)% +General and administrative expenses, net per Mcfe +$ +0.10 +$ +0.10 +(5 +)% +The decrease in total general and administrative expenses, net was due primarily to lower compensation and benefits and cost-focused initiatives. +Restructuring Costs . In the fourth quarter of 2019 , we announced and completed a workforce reduction representing approximately 13% of our headcount. In connection with the reduction, we incurred a total charge of approximately $4.6 million , primarily consisting of one-time employee-related termination benefits, with a remaining liability of $0.2 million at December 31, 2019 . +Accretion Expense . Accretion expense decreased to $3.9 million for the year ended December 31, 2019 from $4.1 million for the year ended December 31, 2018 , primarily as a result of a decrease in our asset retirement obligation due to the sale of our Louisiana properties. +Interest Expense +Years Ended December 31, +2019 +2018 +($ In thousands, except per unit) +Interest expense on senior notes +125,687 +129,125 +Interest expense on revolving credit agreement +12,088 +9,601 +Interest expense on construction loan and other +1,055 +1,535 +Capitalized interest +(3,372 +) +(4,470 +) +Amortization of loan costs +6,328 +6,121 +Total interest expense +$ +141,786 +$ +141,912 +Interest expense per Mcfe +$ +0.28 +$ +0.29 +Weighted average debt outstanding under revolving credit facility +$ +161,416 +$ +83,589 +Interest expense was relatively consistent in 2019 as compared to 2018 on both a total expense basis and a per unit basis. Total weighted debt outstanding under our revolving credit facility was $161.4 million for the year ended December 31, 2019 as compared to $83.6 million outstanding under such facility for 2018 ; however, this increase was largely offset by decreases in interest on our senior notes outstanding for 2019 as compared to 2018 due to senior notes repurchases. +Income Taxes . We recognized an income tax benefit of $7.6 million million in 2019 compared to an income tax benefit of $69 thousand in 2018. The income tax benefit for 2019 consists mainly of a partial release of valuation allowance that was +53 +Table of Contents +Index to Financial Statements +maintained against our Oklahoma deferred tax asset, as the Company believes that it can utilize a portion of its Oklahoma state NOL through carrybacks and carryforwards to offset Oklahoma sourced income from the sale of assets. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2019. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. During the year ended December 31, 2019 we recorded impairments of our oil and natural gas properties in the amount of $2.0 billion . No such impairments were required for the year ended December 31, 2018. See Oil and Natural Gas Properties in Note 1 of the notes to our consolidated financial statements included in Item 8 of this report for further information on the full cost method of accounting. +Oil, Natural Gas and NGL Reserves . Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 19 included in Item 8 of this report for further information. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2019 , a valuation allowance of $647.6 million had been established for the net deferred tax asset. +Revenue Recognition . We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments received have not significantly deviated from our accruals. +54 +Table of Contents +Index to Financial Statements +Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations. We currently account for our investments in Mammoth Energy Services, Inc. ("Mammoth Energy") and Grizzly Oil Sands ULC ("Grizzly") using the equity method. +We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment charge. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +See Item 7A. " Natural Gas, Oil and NGL Derivatives " for a summary of our derivative instruments in place as of December 31, 2019 . +Disclosures About Effects of Transactions with Related parties +Our equity method investees are considered related parties. See Notes 4 , 9 and 15 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of transactions with our equity method investees. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments. Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes are unsustainable for the long term, have material downside risk in the short term or provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the Board of Directors reviews our derivative program at its quarterly board meetings. We believe we have sufficient internal controls to prevent unauthorized trading. +We use derivative instruments to achieve our risk management objectives, including swaps and options. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls, taking advantage of premiums associated with market price volatility. +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions would be reversed. The actual fixed price on our derivative instruments is derived from the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow +55 +Table of Contents +Index to Financial Statements +NYMEX futures. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter into the original derivative position. Gains or losses related to closed positions will be recognized in the month specified in the original contract. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 12 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2019 , our natural gas, oil and NGL derivative instruments consistent of the following types of instruments: +• +Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +• +Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• +Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options, and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +56 +Table of Contents +Index to Financial Statements +As of December 31, 2019 , we had the following open natural gas, oil and NGL derivative instruments: +Weighted Average Price +Fair Value +Volume +Fixed +Call +Differential +Asset (Liability) +MMBtu/day +$/MMBtu +(in thousands) +Natural Gas: +Swaps: +Short-term +548,000 +$ +2.88 +$ +— +$ +— +$ +121,934 +Call Options (sold) (1) : +Long-term +628,000 +$ +— +$ +2.90 +$ +— +$ +(53,135 +) +Basis Swaps: +Short-term +70,000 +$ +— +$ +— +$ +(0.12 +) +$ +(267 +) +Total Natural Gas +$ +68,532 +Bbls/day +$/Bbl +Oil: +Swaps: +Short-term +6,000 +$ +59.82 +$ +— +$ +— +$ +2,952 +Total Oil +$ +2,952 +Bbls/day +$/Bbl +NGL: +Swaps: +Short-term +500 +$ +21.63 +$ +— +$ +— +$ +461 +Total NGL +$ +461 +Total Commodities +$ +71,945 +Contingent Consideration: +Louisiana Divestiture (2) : +Short-term +$ +818 +Long-term +$ +563 +Total +$ +1,381 +Total Derivative Asset +$ +73,326 +_____________________ +(1) +In the third quarter of 2019, we sold call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020 listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +(2) +The purchase and sale agreement for the sale of our non-core assets located in the WCBB and Hackberry fields of Louisiana included a contingent consideration arrangement that entitles us to receive bonus payments if commodity prices exceed specified thresholds. The calculated fair value of this contingent payment arrangement was approximately $1.1 million as of the closing date of the divestiture. +In January and February 2020, we early terminated certain fixed price swaps for natural gas scheduled to settle in August through November of 2020 covering an average of approximately 294,000 MMBtu of natural gas per day over this four month period. The value received from these early terminations was used to enhance the fixed price for new natural gas swaps for April and May of 2020 covering an average of approximately 472,000 MMBtu of natural gas per day over this two month period at a weighted average price of $2.85 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. We will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX Henry Hub for natural gas or Mont Belvieu for propane, pentane and ethane. +57 +Table of Contents +Index to Financial Statements +At February 27, 2020 , we have hedged approximately 49% to 52% of our expected 2020 production under our 2020 contracts. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodities prices increase. At December 31, 2019 , we had a net asset derivative position of $73.3 million as compared to a net liability derivative position of $13.0 million as of December 31, 2018 , related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $99.8 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $85.5 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Interest Rate Risk. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2019 , we had $120.0 million in borrowings outstanding under our credit facility which bore interest at the weighted average rate of 3.30% . A 1% increase in the average interest rate would have increased interest expense by approximately $1.2 million based on outstanding borrowings under our revolving credit facility at December 31, 2019 . As of December 31, 2019 , we did not have any interest rate swaps to hedge our interest risks. +58 +Table of Contents +Index to Financial Statements +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +60 +Consolidated Balance Sheets, December 31, 2019 and December 31, 2018 +63 +Consolidated Statements of Operations, Years Ended December 31, 2019, 2018, and 2017 +64 +Consolidated Statements of Comprehensive Income (Loss), Years Ended December 31, 2019, 2018, and 2017 +65 +Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2019, 2018, and 2017 +66 +Consolidated Statements of Cash Flows, Year Ended December 31, 2019, 2018, and 2017 +67 +Notes to Consolidated Financial Statements +69 +59 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2020 expressed an adverse opinion. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Change in accounting principle +As discussed in Note 9 to the consolidated financial statements, the Company has adopted new accounting guidance as of January 1, 2019, related to the adoption of Accounting Standards Codification Topic 842, Leases . Our opinion is not modified with respect to this matter. +Critical audit matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Depletion expense and impairment of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 to the financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil and gas properties (the full cost ceiling test). To estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and potential ceiling test impairment assessments. We identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense and the assessment of potential impairment as a critical audit matter. +60 +Table of Contents +Index to Financial Statements +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and/or impairment expense. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others. +• +We tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessing the Company’s oil and gas properties for potential ceiling test impairment. +• +We evaluated the independence, objectivity, and professional qualifications of the Company’s reserve specialists, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialists. +• +We evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated capital costs, and ownership interests. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ +Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for pricing differentials, where applicable; +◦ +Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ +Tested the model used to determine the future capital expenditures and compared estimated future capital expenditures used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ +Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ +Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ +Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +Valuation Allowance of Deferred Tax Assessment +As described further in Note 1 and 10 to the financial statements, the Company records a valuation allowance to reduce total net deferred tax assets when a judgment is made that is considered more likely than not that a tax benefit will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences will become deductible. The Company assesses the need for a valuation allowance by evaluating both positive and negative evidence that may exist. We identified the realizability of deferred tax assets as a critical audit matter. +The principal considerations for our determination that the realizability of deferred tax assets is a critical audit matter are that (a) the forecast of future taxable income is an accounting estimate subject to a high level of estimation and (b) the determination of any limitations on the utilization of net operating loss carryforwards involves complex calculations and judgment. There is inherent uncertainty and subjectivity related to management’s judgments and assumptions regarding the Company’s future taxable income, which are complex in nature and require significant auditor judgment. +Our audit procedures related to the valuation of deferred taxes included the following, among others. +• +We tested the effectiveness of controls over management’s estimates of the realization of the deferred tax assets, including those over management’s corporate model which was the basis for the forecast of future taxable income, management’s tax planning strategies and the determination of whether it is more likely than not that the deferred tax assets will be realized prior to expiration. +61 +Table of Contents +Index to Financial Statements +• +With the assistance of our income tax specialists, we evaluated the forecast of future taxable income considering whether the estimated future sources of taxable income were of the appropriate character to utilize the net operating loss carryforwards and other temporary differences giving rise to the deferred tax assets under current tax law. +• +With the assistance of our income tax specialists, we evaluated management’s Internal Revenue Code Section 382 ownership change calculations. +• +We tested the reasonableness of management’s corporate model used to estimate future taxable income by comparing the estimates to the following: +◦ +Historical taxable income. +◦ +Internal communications with the board of directors. +◦ +Evidence obtained in other areas of the audit. +◦ +Management’s history of carrying out its stated plans and its ability to carry out its plans considering contractual commitments, available financing, or debt covenants. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +February 27, 2020 +62 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +December 31, 2019 +December 31, 2018 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents +$ +6,060 +$ +52,297 +Accounts receivable—oil and natural gas sales +121,210 +210,200 +Accounts receivable—joint interest and other +47,975 +22,497 +Prepaid expenses and other current assets +4,431 +10,017 +Short-term derivative instruments +126,201 +21,352 +Total current assets +305,877 +316,363 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $1,686,666 and $2,873,037 excluded from amortization in 2019 and 2018, respectively +10,595,735 +10,026,836 +Other property and equipment +96,719 +92,667 +Accumulated depletion, depreciation, amortization and impairment +( 7,228,660 +) +( 4,640,098 +) +Property and equipment, net +3,463,794 +5,479,405 +Other assets: +Equity investments +32,044 +236,121 +Long-term derivative instruments +563 +— +Deferred tax asset +7,563 +— +Inventories +5,182 +5,344 +Operating lease assets +14,168 +— +Operating lease assets - related parties +43,270 +— +Other assets +10,358 +13,803 +Total other assets +113,148 +255,268 +Total assets +$ +3,882,819 +$ +6,051,036 +Liabilities and stockholders’ equity +Current liabilities: +Accounts payable and accrued liabilities +$ +415,218 +$ +518,380 +Short-term derivative instruments +303 +20,401 +Current portion of operating lease liabilities +13,826 +— +Current portion of operating lease liabilities - related parties +21,220 +— +Current maturities of long-term debt +631 +651 +Total current liabilities +451,198 +539,432 +Long-term derivative instruments +53,135 +13,992 +Asset retirement obligation—long-term +60,355 +79,952 +Uncertain tax position liability +3,127 +3,127 +Non-current operating lease liabilities +342 +— +Non-current operating lease liabilities - related parties +22,050 +— +Long-term debt, net of current maturities +1,978,020 +2,086,765 +Total liabilities +2,568,227 +2,723,268 +Commitments and contingencies (Notes 16 and 17) +Preferred stock, $.01 par value; 5,000,000 authorized (30,000 authorized as redeemable 12% cumulative preferred stock, Series A), and none issued and outstanding +— +— +Stockholders’ equity: +Common stock - $.01 par value, 200,000,000 shares authorized, 159,710,955 issued and outstanding in 2019 and 162,986,045 in 2018 +1,597 +1,630 +Paid-in capital +4,207,554 +4,227,532 +Accumulated other comprehensive loss +( 46,833 +) +( 56,026 +) +Accumulated deficit +( 2,847,726 +) +( 845,368 +) +Total stockholders’ equity +1,314,592 +3,327,768 +Total liabilities and stockholders’ equity +$ +3,882,819 +$ +6,051,036 +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +For the Year Ended December 31, +2019 +2018 +2017 +(In thousands, except share data) +Revenues: +Natural gas sales +$ +918,263 +$ +1,121,815 +$ +845,999 +Oil and condensate sales +117,937 +177,793 +124,568 +Natural gas liquid sales +101,448 +178,915 +136,057 +Net gain (loss) on natural gas, oil, and NGL derivatives +208,360 +( 123,479 +) +213,679 +1,346,008 +1,355,044 +1,320,303 +Costs and expenses: +Lease operating expenses +82,998 +91,640 +80,246 +Production taxes +28,571 +33,480 +21,126 +Midstream gathering and processing expenses +291,725 +290,188 +248,995 +Depreciation, depletion and amortization +550,108 +486,664 +364,629 +Impairment of oil and natural gas properties +2,039,770 +— +— +General and administrative expenses +47,979 +49,994 +45,523 +Restructuring costs +4,611 +— +— +Accretion expense +3,939 +4,119 +1,611 +Acquisition expense +— +— +2,392 +3,049,701 +956,085 +764,522 +(LOSS) INCOME FROM OPERATIONS +( 1,703,693 +) +398,959 +555,781 +OTHER EXPENSE (INCOME): +Interest expense +141,786 +141,912 +115,613 +Interest income +( 801 +) +( 314 +) +( 1,009 +) +Gain on debt extinguishment +( 48,630 +) +— +— +Gain on sale of equity method investments +— +( 124,768 +) +( 12,523 +) +Loss (income) from equity method investments, net +210,148 +( 49,904 +) +17,780 +Other expense (income), net +3,725 +1,542 +( 1,041 +) +306,228 +( 31,532 +) +118,820 +(LOSS) INCOME BEFORE INCOME TAXES +( 2,009,921 +) +430,491 +436,961 +INCOME TAX (BENEFIT) EXPENSE +( 7,563 +) +( 69 +) +1,809 +NET (LOSS) INCOME +$ +( 2,002,358 +) +$ +430,560 +$ +435,152 +NET (LOSS) INCOME PER COMMON SHARE: +Basic +$ +( 12.49 +) +$ +2.46 +$ +2.42 +Diluted +$ +( 12.49 +) +$ +2.45 +$ +2.41 +Weighted average common shares outstanding—Basic +160,341,125 +174,675,840 +179,834,146 +Weighted average common shares outstanding—Diluted +160,341,125 +175,398,706 +180,253,024 +See accompanying notes to consolidated financial statements. +64 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +For the Year Ended December 31, +2019 +2018 +2017 +(In thousands) +Net (loss) income +$ +( 2,002,358 +) +$ +430,560 +$ +435,152 +Foreign currency translation adjustment (1) +9,193 +( 15,487 +) +12,519 +Other comprehensive income (loss) +9,193 +( 15,487 +) +12,519 +Comprehensive (loss) income +$ +( 1,993,165 +) +$ +415,073 +$ +447,671 +_____________________ +(1) +No taxes were recorded for the years ended December 31, 2019 , 2018 and 2017 . +See accompanying notes to consolidated financial statements. +65 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Accumulated Deficit +Total +Stockholders’ +Equity +Common Stock +Shares +Amount +(In thousands, except share data) +Balance at January 1, 2017 +158,829,816 +1,588 +3,946,442 +( 53,058 +) +( 1,711,080 +) +2,183,892 +Net Income +— +— +— +— +435,152 +435,152 +Other Comprehensive Income +— +— +— +12,519 +— +12,519 +Stock-based Compensation +— +— +10,615 +— +— +10,615 +Issuance of Common Stock for the Vitruvian Acquisition, net of related expenses +23,852,117 +239 +459,197 +— +— +459,436 +Issuance of Restricted Stock +423,977 +4 +( 4 +) +— +— +— +Balance at December 31, 2017 +183,105,910 +1,831 +4,416,250 +( 40,539 +) +( 1,275,928 +) +3,101,614 +Net Income +— +— +— +— +430,560 +430,560 +Other Comprehensive Loss +— +— +— +( 15,487 +) +— +( 15,487 +) +Stock-based Compensation +— +— +11,332 +— +— +11,332 +Shares Repurchased +( 20,746,536 +) +( 207 +) +( 200,044 +) +— +— +( 200,251 +) +Issuance of Restricted Stock +626,671 +6 +( 6 +) +— +— +— +Balance at December 31, 2018 +162,986,045 +1,630 +4,227,532 +( 56,026 +) +( 845,368 +) +3,327,768 +Net Loss +— +— +— +— +( 2,002,358 +) +( 2,002,358 +) +Other Comprehensive Income +— +— +— +9,193 +— +9,193 +Stock-based Compensation +— +— +10,677 +— +— +10,677 +Shares Repurchased +( 3,951,198 +) +( 40 +) +( 30,648 +) +— +— +( 30,688 +) +Issuance of Restricted Stock +676,108 +7 +( 7 +) +— +— +— +Balance at December 31, 2019 +159,710,955 +$ +1,597 +$ +4,207,554 +$ +( 46,833 +) +$ +( 2,847,726 +) +$ +1,314,592 +See accompanying notes to consolidated financial statements. +66 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended December 31, +2019 +2018 +2017 +(In thousands) +Cash flows from operating activities: +Net (loss) income +$ +( 2,002,358 +) +$ +430,560 +$ +435,152 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Accretion expense +3,939 +4,119 +1,611 +Depletion, depreciation and amortization +550,108 +486,664 +364,629 +Impairment of oil and natural gas properties +2,039,770 +— +— +Stock-based compensation expense +4,911 +6,799 +6,369 +Loss (income) from equity investments, net +210,289 +( 49,625 +) +18,513 +Gain on debt extinguishment +( 48,630 +) +— +— +Change in fair value of derivative instruments +( 85,230 +) +65,051 +( 188,802 +) +Deferred income tax (benefit) expense +( 7,563 +) +1,208 +1,690 +Amortization of loan costs +6,328 +6,121 +5,011 +Gain on sale of equity method investments and other assets +( 220 +) +( 124,768 +) +( 12,523 +) +Distributions from equity method investments +2,457 +3,206 +— +Changes in operating assets and liabilities: +Decrease (increase) in accounts receivable—oil and natural gas sales +88,990 +( 63,427 +) +( 35,879 +) +(Increase) decrease in accounts receivable—joint interest and other +( 25,478 +) +12,943 +( 9,573 +) +Decrease in accounts receivable—related parties +— +— +16 +Decrease (increase) in prepaid expenses and other current assets +5,586 +( 5,695 +) +( 1,777 +) +Decrease (increase) in other assets +915 +4,066 +( 7,866 +) +(Decrease) increase in accounts payable, accrued liabilities and other +( 19,548 +) +9,768 +106,375 +Settlement of asset retirement obligation +( 273 +) +( 719 +) +( 3,057 +) +Net cash provided by operating activities +723,993 +786,271 +679,889 +Cash flows from investing activities: +Deductions to cash held in escrow +— +— +8 +Additions to other property and equipment +( 5,021 +) +( 7,870 +) +( 19,372 +) +Acquisitions of oil and natural gas properties +— +— +( 1,348,657 +) +Additions to oil and natural gas properties +( 720,057 +) +( 899,083 +) +( 1,064,678 +) +Proceeds from sale of oil and gas properties +48,527 +5,114 +4,866 +Proceeds from sale of other property and equipment +267 +351 +1,569 +Proceeds from sale of equity method investments +— +226,487 +— +Contributions to equity method investments +( 432 +) +( 2,319 +) +( 55,280 +) +Distributions from equity method investments +1,945 +446 +7,376 +Net cash used in investing activities +( 674,771 +) +( 676,874 +) +( 2,474,168 +) +Cash flows from financing activities: +Principal payments on borrowings +( 877,697 +) +( 220,575 +) +( 365,276 +) +Borrowings on line of credit +952,000 +265,000 +365,000 +Proceeds from bond issuance +— +— +450,000 +Repurchase of senior notes +( 138,786 +) +— +— +Borrowings on term loan +— +— +2,951 +Debt issuance costs and loan commitment fees +( 288 +) +( 831 +) +( 14,350 +) +Payments on repurchase of stock +( 30,688 +) +( 200,251 +) +— +Proceeds from issuance of common stock, net of offering costs and exercise of stock options +— +— +( 5,364 +) +Net cash (used in) provided by financing activities +( 95,459 +) +( 156,657 +) +432,961 +Net decrease in cash, cash equivalents and restricted cash +( 46,237 +) +( 47,260 +) +( 1,361,318 +) +Cash, cash equivalents and restricted cash at beginning of period +52,297 +99,557 +1,460,875 +Cash, cash equivalents and restricted cash at end of period +$ +6,060 +$ +52,297 +$ +99,557 +(Continued on next page) +67 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) +Supplemental disclosure of cash flow information: +Interest payments +$ +142,664 +$ +132,995 +$ +107,548 +Income tax receipts +$ +( 1,794 +) +$ +— +$ +( 1,105 +) +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation +$ +5,766 +$ +4,533 +$ +4,246 +Asset retirement obligation capitalized +$ +6,883 +$ +1,452 +$ +42,270 +Asset retirement obligation removed due to divestiture +$ +( 30,146 +) +$ +— +$ +— +Interest capitalized +$ +3,372 +$ +4,470 +$ +9,470 +Fair value of contingent consideration asset on date of divestiture +$ +( 1,137 +) +$ +— +$ +— +Foreign currency translation gain (loss) on equity method investments +$ +9,193 +$ +( 15,487 +) +$ +12,519 +See accompanying notes to consolidated financial statements. +68 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation (“Gulfport” or the "Company"), a Delaware corporation formed in 1997, is an independent natural gas-weighted exploration and production company focused on the exploration, acquisition and production of natural gas, crude oil and natural gas liquids ("NGL") in the United States. The Company's principal properties are located in Eastern Ohio targeting the Utica formation and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC, Mule Sky LLC and GRUS, LLC. All intercompany balances and transactions are eliminated in consolidation. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. No allowance was deemed necessary at December 31, 2019 and December 31, 2018 . +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 months. +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an +impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices at December 31, 2019 , the Company recognized a ceiling test impairment of $ 2.0 billion for the year ended December 31, 2019 . +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 1.7 billion and $ 2.9 billion at December 31, 2019 and December 31, 2018 , respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, the Company has an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes. +(In thousands) +December 31, 2016 +$ +( 51,709 +) +December 31, 2017 +$ +( 39,190 +) +December 31, 2018 +$ +( 54,677 +) +December 31, 2019 +$ +( 45,484 +) +Net Income per Common Share +Basic net income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income per common share are illustrated in Note 11 . +69 +Table of Contents +Index to Financial Statements +Income Taxes +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 2005 – 2018 U.S. federal and 1999 - 2018 state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2019 , the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606") and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 8 for additional discussion of revenue from contracts with customers. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the consolidated statements of operations. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. During the year ended December 31, 2019 , the Company recorded an impairment of $ 160.8 million related to its investment in Mammoth Energy Services, Inc. ("Mammoth Energy") and an impairment of $ 32.4 million related to its investment in Grizzly Oil Sands ULC ("Grizzly"). There were no impairment charges recorded for the years ended December 31, 2017 and December 31, 2018 . See Note 4 for further discussion of Mammoth Energy and Grizzly impairments. +70 +Table of Contents +Index to Financial Statements +Accounting for Stock-based Compensation +Share-based payments to employees, including grants of restricted stock, are recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to four years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net (loss) income or total operating cash flows. +Statements of Cash Flows +During the third quarter of 2019, the Company identified that certain activities were misclassified between cash flows from operating activities and cash flows from investing activities. These activities had been included in accounts payable, accrued liabilities and other and presented as cash flows from operating activities while they should have been presented as additions to oil and natural gas properties in cash flows from investing activities. The Company corrected the previously presented statements of cash flows for these additions and in doing so, for the year ended December 31, 2018 , the consolidated statements of cash flows and the condensed consolidating statements of cash flows were adjusted to increase net cash flows provided by operating activities by $ 33.8 million with a corresponding increase in net cash flows used in investing activities. The Company has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it did not have a material impact on any previously filed annual or quarterly consolidated financial statements. +Recent Accounting Pronouncements +In January 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 , Leases (Topic 842) on a prospective basis using the simplified transition method permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. See Note 9 for further discussion of the lease standard. +In June 2016 , the FASB issued ASU No. 2016-13 , Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. Subsequent to ASU 2016-13 , the FASB issued several related ASU’s to clarify the application of the credit loss standard. +71 +Table of Contents +Index to Financial Statements +The guidance is effective for periods after December 15, 2019, with early adoption permitted. The Company adopted the standard as of January 1, 2020 with no material effect on its consolidated financial statements and related disclosures. +In July 2019, the FASB issued ASU No. 2019-07 , Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates . This ASU amends various SEC sections within the FASB Codification to align with the updated requirements of certain SEC final rules and includes miscellaneous updates to agree the language in the Codification to the electronic Code of Federal Regulations. ASU No. 2019-07 is effective upon issuance, and the Company has adopted the changes with no material impacts. +2. +ACQUISITIONS AND DIVESTITURES +Sale of Southern Louisiana Assets +In December 2018, the Company entered into an agreement to sell its non-core assets located in the West Cote Blanche Bay ("WCBB") and Hackberry fields of Louisiana to an undisclosed third party for a purchase price of approximately $ 19.7 million . The sale closed on July 3, 2019, subject to customary post-closing terms and conditions, with an effective date of August 15, 2018. The Company received approximately $ 9.2 million in cash and retained contingent overriding royalty interests. In addition, the Company could also receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. See Note 12 for further discussion of the contingent consideration arrangement, which was determined to be an embedded derivative. The buyer assumed all plugging and abandonment liabilities associated with these assets which totaled approximately $ 30.0 million at the divestiture date. +Sale of Non-operated Utica Interests +In December 2019, the Company entered into an agreement to divest certain non-operated interests in the Utica Shale for approximately $ 29.0 million in cash subject to customary closing terms and adjustments. This sale closed on December 30, 2019 . +Sale of Bakken Overriding Royalty Interests +During 2019, the Company announced the sale of certain overriding royalty interests associated with assets the Company held in the Bakken. The sale closed on December 11, 2019 and, net of purchase price adjustments, the Company received approximately $ 7.0 million of total proceeds. +Vitruvian Acquisition +In December 2016, the Company, through its wholly-owned subsidiary Gulfport MidCon LLC (“Gulfport MidCon”) (formerly known as SCOOP Acquisition Company, LLC), entered into an agreement to acquire certain assets of Vitruvian II Woodford, LLC (“Vitruvian”), an unrelated third-party seller (the “Vitruvian Acquisition”). The assets included in the Vitruvian Acquisition include 46,400 net surface acres located in Grady, Stephens and Garvin Counties, Oklahoma. On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $ 1.85 billion , consisting of $ 1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). The cash portion of the purchase price was funded with the net proceeds from the December 2016 common stock and senior note offerings and cash on hand. Acquisition expenses of 2.4 million were incurred during the year ended December 31, 2017 related to the Vitruvian Acquisition. +For the period from the acquisition date of February 17, 2017 to December 31, 2017, the assets acquired in the Vitruvian Acquisition contributed the following amounts of revenue to the Company’s consolidated statements of operations. The amount of net income contributed by the assets acquired is not presented below as it is impracticable to calculate due to the +72 +Table of Contents +Index to Financial Statements +Company integrating the acquired assets into its overall operations using the full cost method of accounting. +Period from +February 17, 2017 +to +December 31, 2017 +(In thousands) +Revenue +$ +213,368 +The following unaudited pro forma combined financial information presents the Company’s results as though the Vitruvian Acquisition had been completed at January 1, 2016. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Vitruvian Acquisition taken place on January 1, 2016; furthermore, the financial information is not intended to be a projection of future results. +December 31, 2017 +(In thousands, except share data) +Pro forma revenue +$ +1,356,202 +Pro forma net income +$ +448,398 +Pro forma earnings per share (basic) +$ +2.49 +Pro forma earnings per share (diluted) +$ +2.49 +3. +PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2019 and 2018 are as follows: +December 31, +2019 +2018 +(In thousands) +Oil and natural gas properties +$ +10,595,735 +$ +10,026,836 +Other depreciable property and equipment +91,198 +87,146 +Land +5,521 +5,521 +Total property and equipment +10,692,454 +10,119,503 +Accumulated depletion, depreciation, amortization and impairment +( 7,228,660 +) +( 4,640,098 +) +Property and equipment, net +$ +3,463,794 +$ +5,479,405 +Under the full cost method of accounting, capitalized costs of oil and natural gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1 . During the year ended December 31, 2019 , the Company incurred $ 2.0 billion of impairments as a result of its oil and natural gas properties exceeding its calculated ceiling. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for natural gas, oil and NGL, which significantly reduced proved reserves values and, to a lesser degree, proved reserves. No impairment of oil and natural gas properties was required under the ceiling test for the years ended December 31, 2018 and 2017 . +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 30.1 million , $ 37.7 million and $ 35.7 million for the years ended December 31, 2019 , 2018 and 2017 , respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 1.08 , $ 0.96 and $ 0.90 per Mcfe for the years ended December 31, 2019 , 2018 and 2017 , respectively. +73 +Table of Contents +Index to Financial Statements +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2019 : +Costs Incurred in +2019 +2018 +2017 +Prior to 2017 +Total +(In thousands) +Acquisition costs +$ +9,089 +$ +98,870 +$ +756,963 +$ +806,982 +$ +1,671,904 +Exploration costs +259 +— +— +— +259 +Development costs +1,213 +548 +869 +10,325 +12,955 +Capitalized interest +888 +413 +247 +— +1,548 +Total oil and natural gas properties not subject to amortization +$ +11,449 +$ +99,831 +$ +758,079 +$ +817,307 +$ +1,686,666 +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2019 : +December 31, 2019 +(In thousands) +Utica +$ +976,593 +MidContinent +709,739 +Other +334 +$ +1,686,666 +As of December 31, 2018 , approximately $ 2.9 billion of non-producing leasehold costs was not subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years . However, the majority of the Company's non-producing leases in the Utica Shale have five year extension terms which could extend this time frame beyond five years. +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2019 and 2018 is as follows: +December 31, +2019 +2018 +(In thousands) +Asset retirement obligation, beginning of period +$ +79,952 +$ +75,100 +Liabilities incurred +5,935 +1,827 +Liabilities settled +( 273 +) +( 719 +) +Liabilities removed due to divestitures +( 30,146 +) +— +Accretion expense +3,939 +4,119 +Revisions in estimated cash flows +948 +( 375 +) +Asset retirement obligation as of end of period +$ +60,355 +$ +79,952 +74 +Table of Contents +Index to Financial Statements +4. +EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2019 and 2018 : +Carrying Value +Loss (income) from equity method investments +Approximate Ownership % +December 31, +For the Year Ended December 31, +2019 +2018 +2019 +2018 +2017 +(In thousands) +Investment in Tatex Thailand II, LLC +23.5 +% +$ +— +$ +— +$ +( 2,086 +) +$ +( 241 +) +$ +( 549 +) +Investment in Tatex Thailand III, LLC (1) +— +% +— +— +— +— +( 183 +) +Investment in Grizzly Oil Sands ULC +24.9999 +% +21,000 +44,259 +32,710 +510 +2,189 +Investment in Timber Wolf Terminals LLC (2) +— +% +— +— +— +536 +8 +Investment in Windsor Midstream LLC +22.5 +% +39 +39 +— +( 9 +) +25,233 +Investment in Stingray Cementing LLC (3) +— +% +— +— +— +— +205 +Investment in Blackhawk Midstream LLC (4) +— +% +— +— +— +( 38 +) +— +Investment in Stingray Energy Services LLC (3) +— +% +— +— +— +— +282 +Investment in Sturgeon Acquisitions LLC (3) +— +% +— +— +— +( 71 +) +Investment in Mammoth Energy Services, Inc. (3) +21.8 +% +11,005 +191,823 +179,524 +( 49,969 +) +( 11,288 +) +Investment in Strike Force Midstream LLC (5) +— +% +— +— +— +( 693 +) +1,954 +$ +32,044 +$ +236,121 +$ +210,148 +$ +( 49,904 +) +$ +17,780 +_____________________ +(1) +In December 2017, the Company received its final distribution from Tatex Thailand III, LLC ("Tatex III"), which was dissolved in 2017. +(2) +On June 5, 2018, the Company received its final distribution from Timber Wolf Terminals LLC ("Timber Wolf"), which was dissolved in 2018. +(3) +On June 5, 2017, Mammoth Energy acquired Stingray Cementing LLC, Stingray Energy Services LLC and Sturgeon Acquisitions LLC. See below under Mammoth Energy Services, Inc. for information regarding these transactions. +(4) +On December 31, 2018, the Company received its final distribution from Blackhawk Midstream LLC ("Blackhawk"), which was dissolved in 2018. +(5) +On May 1, 2018, the Company sold its 25 % interest in Strike Force Midstream LLC ("Strike Force") to EQT Midstream Partners, LP for proceeds of $ 175.0 million in cash. As a result of the sale, the Company recognized a gain of $ 96.4 million net of transaction fees, which is included in gain on sale of equity method investments in the accompanying consolidated statement of operations. +The tables below summarize financial information for the Company's equity investments, as of December 31, 2019 and 2018 . +Summarized balance sheet information: +December 31, +2019 +2018 +(In thousands) +Current assets +$ +421,326 +$ +471,733 +Noncurrent assets +$ +1,260,075 +$ +1,302,488 +Current liabilities +$ +132,569 +$ +239,975 +Noncurrent liabilities +$ +163,241 +$ +94,575 +Summarized results of operations: +75 +Table of Contents +Index to Financial Statements +December 31, +2019 +2018 +2017 +(In thousands) +Gross revenue +$ +625,012 +$ +1,729,778 +$ +755,374 +Net (loss) income +$ +( 76,523 +) +$ +253,451 +$ +( 37,102 +) +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”) and received $ 2.1 million in distributions from Tatex during the year ended December 31, 2019 , of which $ 1.9 million related to proceeds from the sale of its interest in APICO (“APICO”), an international oil and gas exploration company. The Company received $ 0.2 million in distributions from Tatex during the year ended December 31, 2018 . Tatex previously held an 8.5 % interest in APICO before selling its interest in June 2019. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns a 24.9999 % interest in Grizzly, a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. As of December 31, 2019 , Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. +The Company reviewed its investment in Grizzly at December 31, 2019 for impairment based on certain qualitative and quantitative factors. The Company engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was indicated. This resulted in recording an impairment loss of $ 32.4 million for the year ended December 31, 2019 , which is included in loss from equity method investments, net in the accompanying consolidated statements of operations. The Company reviewed its investment in Grizzly for impairment at December 31, 2018 and 2017 and determined no impairment was required. +The Company paid $ 0.4 million in cash calls during 2019 prior to its election to cease funding further capital calls. The Company paid $ 2.3 million in cash calls during the year ended December 31, 2018 . Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was increased by a $ 9.0 million foreign currency translation gain, decreased by a $ 15.2 million foreign currency translation loss and increased by a $ 12.3 million foreign currency translation gain for the years ended December 31, 2019 , 2018 and 2017 , respectively. The Company had $ 44.8 million and $ 53.8 million in accumulated other comprehensive loss in its accompanying consolidated balance sheets related to Grizzly at December 31, 2019 and December 31, 2018 , respectively, that will be included in the calculations of future charge related to a sale or abandonment. +Windsor Midstream LLC +At December 31, 2019 , the Company held a 22.5 % interest in Windsor Midstream LLC (“Midstream”), an entity controlled and managed by an unrelated third party. The Company received no distributions from Midstream during the years ended December 31, 2019 and 2018 . +The Company has determined that Midstream is a variable interest entity ("VIE") but that the Company is not the primary beneficiary because it does not have a controlling financial interest in Midstream. This entity is considered a VIE because the limited partners lack substantive kick-out or participating rights over the general partner. The general partner has power to direct the activities that most significantly impact Midstream's economic performance. The Company accounts for its investment in VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. +Mammoth Energy Services, Inc. +76 +Table of Contents +Index to Financial Statements +On June 5, 2017 , the Company contributed all of its membership interests in three entities to Mammoth Energy in exchange for approximately 2.0 million shares of Mammoth Energy common stock. The Company accounted for this contribution as a sale of financial assets and recognized a gain of $ 12.5 million , which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations for the year ended December 31, 2017 . +On June 29, 2018, the Company sold 1,235,600 shares of its Mammoth Energy common stock in an underwritten public offering for net proceeds of approximately $ 47.0 million . In connection with the Company's public offering of a portion of its shares of Mammoth Energy common stock, the Company granted the underwriters an option to purchase additional shares of its Mammoth Energy common stock. On July 26, 2018, the underwriters exercised this option, in part, and on July 30, 2018, the Company sold an additional 118,974 shares for net proceeds of approximately $ 4.5 million . Following the sales of these shares, the Company owned 9,829,548 shares, or 21.9 % at December 31, 2018 , of Mammoth Energy's outstanding common stock. As a result of the sales, the Company recorded a gain of $ 28.3 million , which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations. The approximate fair value of the Company's investment in Mammoth Energy's common stock at December 31, 2018 was $ 176.7 million based on the quoted market price of Mammoth Energy's common stock. +At December 31, 2019 , the Company owned 9,829,548 shares, or 21.8 % , of the outstanding common stock of Mammoth Energy. The Company reviewed its investment in Mammoth Energy during 2019 for impairment based on certain qualitative and quantitative factors. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was indicated. This resulted in recording an impairment loss of $ 160.8 million for the year ended December 31, 2019 , which is included in loss (income) from equity method investments, net in the accompanying consolidated statements of operations. If Mammoth Energy's common stock continues to trade below the Company's carrying value for a prolonged period of time, further impairment of the Company's investment in Mammoth Energy may be necessary. The Company's investment in Mammoth Energy was increased by a $ 0.2 million foreign currency gain , decreased by a $ 0.4 million foreign currency loss and increased by a $ 0.2 million foreign currency gain resulting from Mammoth Energy's foreign subsidiary for the years ended December 31, 2019 , 2018 and 2017, respectively. During the year ended December 31, 2019 , Gulfport received distributions of $ 2.5 million from Mammoth Energy as a result of $ 0.125 per share dividends in February 2019 and May 2019. During the year ended December 31, 2018 , Gulfport received distributions of $ 2.5 million from Mammoth Energy as a result of dividends in August 2018 and November 2018. The approximate fair value of the Company's investment in Mammoth Energy's common stock at December 31, 2019 was $ 21.6 million based on the quoted market price of Mammoth Energy's common stock. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +5. +LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31 : +2019 +2018 +(In thousands) +Revolving credit agreement (1) +$ +120,000 +$ +45,000 +6.625% senior unsecured notes due 2023 +329,467 +350,000 +6.000% senior unsecured notes due 2024 +603,428 +650,000 +6.375% senior unsecured notes due 2025 +529,525 +600,000 +6.375% senior unsecured notes due 2026 +397,529 +450,000 +Net unamortized debt issuance costs (2) +( 23,751 +) +( 30,733 +) +Construction loan +22,453 +23,149 +Less: current maturities of long term debt +( 631 +) +( 651 +) +Debt reflected as long term +$ +1,978,020 +$ +2,086,765 +77 +Table of Contents +Index to Financial Statements +Maturities of long-term debt (excluding unamortized debt issuance costs) as of December 31, 2019 are as follows: +(In thousands) +2020 +$ +631 +2021 +120,663 +2022 +694 +2023 +330,194 +2024 +604,186 +Thereafter +946,034 +Total +$ +2,002,402 +(1) The Company has entered into a senior secured revolving credit facility, as amended (the "revolving credit facility"), with The Bank of Nova Scotia, as the lead arranger and administrative agent and other lenders. The revolving credit facility matures on December 13, 2021. On June 3, 2019, the Company further amended its revolving credit facility to, among other things, allow the Company to designate certain of its subsidiaries as unrestricted subsidiaries and to include LIBOR replacement provisions. The borrowing base was reaffirmed at $ 1.4 billion , and the Company's elected commitment amount remained at $ 1.0 billion . On November 25, 2019, the borrowing base under the Company's revolving credit facility was reduced to $ 1.2 billion , and the Company's elected commitment remained at $ 1.0 billion . +As of December 31, 2019 , $ 120.0 million was outstanding under the revolving credit facility and the total availability for future borrowings under this facility, after giving effect to an aggregate of $ 243.6 million of letters of credit, was $ 636.4 million . The Company's wholly-owned subsidiaries have guaranteed the obligations of the Company under the revolving credit facility. +At December 31, 2019 , amounts borrowed under the credit facility bore interest at a weighted average rate of 3.30 % . +The Company was in compliance with all covenants related to its outstanding indebtedness at December 31, 2019 . +(2) Loan issuance costs related to the 6.625 % Senior Notes due 2023 (the "2023 Notes"), the 6.000 % Senior Notes due 2024 (the "2024 Notes"), the 6.375 % Senior Notes due 2025 (the "2025 Notes") and the 6.375 % Senior Notes due 2026 (the "2026 Notes") (collectively the “Notes”) have been presented as a reduction to the principal amount of the Notes. At December 31, 2019 , total unamortized debt issuance costs were $ 3.3 million for the 2023 Notes, $ 6.9 million for the 2024 Notes, $ 9.6 million for the 2025 Notes and $ 3.9 million for the 2026 Notes. In addition, loan commitment fee costs for the construction loan agreement described below were $ 0.1 million at December 31, 2019 . +Debt Repurchases +In July of 2019, the Company's Board of Directors authorized $ 100 million of cash to be used to repurchase its senior notes in the open market at discounted values to par. In December 2019, the Company's Board of Directors increased the authorized size of its senior note repurchase program to $ 200 million in total. During the year ended December 31, 2019 , the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $ 190.1 million aggregate principal amount of its outstanding Notes for $ 138.8 million in cash. This included approximately $ 20.5 million principal amount of the 2023 Notes, $ 46.6 million principal amount of the 2024 Notes, $ 70.5 million principal amount of the 2025 Notes, and $ 52.5 million principal amount of the 2026 Notes. The Company recognized a $ 48.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. This gain is included in gain on debt extinguishment in the accompanying consolidated statements of operations. +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31 : +78 +Table of Contents +Index to Financial Statements +2019 +2018 +2017 +(In thousands) +Cash paid for interest +$ +142,664 +$ +132,995 +$ +107,548 +Change in accrued interest +( 3,834 +) +7,266 +12,524 +Capitalized interest +( 3,372 +) +( 4,470 +) +( 9,470 +) +Amortization of loan costs +6,328 +6,121 +5,011 +Total interest expense +$ +141,786 +$ +141,912 +$ +115,613 +The Company capitalized approximately $ 3.4 million and $ 4.5 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2019 and 2018 , respectively. +Fair Value of Debt +At December 31, 2019 , the carrying value of the outstanding debt represented by the Notes was approximately $ 1.8 billion . Based on the quoted market prices (Level 1), the fair value of the Notes was determined to be approximately $ 1.3 billion at December 31, 2019 . +6. +CHANGES IN CAPITALIZATION +Stock Repurchases +In January 2018, the board of directors of the Company approved a stock repurchase program to acquire up to $ 100 million of the Company's outstanding stock during 2018. In May 2018, the Company's board of directors authorized the expansion of its stock repurchase program, authorizing the Company to acquire up to an additional $ 100 million of its outstanding common stock during 2018 for a total of up to $ 200 million . The repurchase program did not require the Company to acquire any specific number of shares. This repurchase program was authorized to extend through December 31, 2018 and the Company repurchased 20.7 million shares of common stock in 2018 for $ 200.0 million in aggregate consideration. +In January 2019, the board of directors of the Company approved a new stock repurchase program to acquire a portion of the Company's outstanding common stock within a 24 month period. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and are subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program is authorized to extend through December 31, 2020. The program was suspended in the fourth quarter of 2019, but may be reactivated in the future depending on our projected leverage profile, commodity price outlook and market conditions. +For the year ended December 31, 2019 , the Company repurchased 3.8 million shares for a cost of approximately $ 30.0 million under this repurchase program. Additionally, for the year ended December 31, 2019 , the Company repurchased approximately 0.1 million shares for a cost of approximately $ 0.7 million to satisfy tax withholding requirements incurred upon the vesting of restricted stock. All repurchased shares have been canceled and returned to the status of authorized but unissued shares. +7. +STOCK-BASED COMPENSATION +The Company adopted the 2005 Stock Incentive Plan ("2005 Plan") in January 2005. The 2005 Plan was amended and restated in April 2013 with the 2013 Restated Stock Incentive Plan ("2013 Plan"). During 2019, the Company further amended and restated the 2013 Plan with the 2019 Amended and Restated Stock Incentive Plan ("2019 Plan"). The 2019 Plan provides for grants of options, stock appreciation rights, restricted awards (restricted stock and restricted stock units) and performance awards to employees, consultants and directors of the Company that, in aggregate, do not exceed 12,500,000 shares. The 2019 Plan is administered by the Compensation Committee of the Company's board of directors (the "Committee"). Among other responsibilities, the Committee selects individuals to receive awards and establishes the terms of awards. As of December 31, 2019 , the Company has awarded 8,673,254 restricted stock units and 2,009,144 performance vesting restricted stock units under the 2019 Plan. +During the years ended December 31, 2019 , 2018 and 2017 the Company’s stock-based compensation cost was $ 10.7 million , $ 11.3 million and $ 10.6 million , respectively, of which the Company capitalized $ 5.8 million , $ 4.5 million and $ 4.2 +79 +Table of Contents +Index to Financial Statements +million, respectively, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations. +The following table summarizes restricted stock unit and performance vesting restricted stock unit activity for the twelve months ended December 31, 2019 , 2018 and 2017 : +Number of +Unvested +Restricted Stock Units +Weighted +Average +Grant Date +Fair Value +Number of +Unvested +Performance Vesting Restricted Stock Units +Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2017 +613,056 +$ +32.90 +$ +— +$ +— +Granted +876,846 +15.14 +— +— +Vested +( 423,977 +) +29.90 +— +— +Forfeited +( 89,898 +) +27.91 +— +— +Unvested shares as of December 31, 2017 +976,027 +$ +18.71 +$ +— +$ +— +Granted +1,579,911 +$ +9.90 +$ +— +$ +— +Vested +( 626,671 +) +18.05 +— +— +Forfeited +( 393,456 +) +12.23 +— +— +Unvested shares as of December 31, 2018 +1,535,811 +$ +11.57 +$ +— +$ +— +Granted +4,011,073 +3.74 +2,009,144 +2.85 +Vested +( 676,108 +) +12.89 +— +— +Forfeited +( 772,458 +) +6.05 +( 225,484 +) +1.98 +Unvested shares as of December 31, 2019 +4,098,318 +$ +4.73 +1,783,660 +$ +2.96 +Restricted Stock Units +Restricted stock units awarded under the 2019 Plan generally vest over a period of one year in the case of directors and three years in the case of employees and vesting is dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of grant. Unrecognized compensation expense as of December 31, 2019 related to outstanding restricted stock units was $ 14.6 million . The expense is expected to be recognized over a weighted average period of 2.10 years. +Performance Vesting Restricted Stock Units +During the year ended December 31, 2019 , the Company awarded performance vesting restricted stock units to certain of its executive officers under the 2019 Plan. The number of shares of common stock issued pursuant to the award will be based on relative total shareholder return ("RTSR"). RTSR is an incentive measure whereby participants will earn from 0 % to 200 % of the target award based on the Company’s RTSR ranking compared to the RTSR of the companies in the Company’s designated peer group at the end of the performance period. Awards will be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. The grant date fair value was determined using the Monte Carlo simulation method and is being recorded ratably over the performance period. Expected volatilities utilized in the Monte Carlo model were estimated using a historical period consistent with the remaining performance period of approximately two years . The risk-free interest rates were based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. The Company assumed a range of risk-free interest rates of 1.56 % to 2.42 % and a range of expected volatilities of 29.1 % to 85.1 % to estimate the fair value of performance vesting units granted during the year ended December 31, 2019 . Unrecognized compensation expense as of December 31, 2019 related to performance vesting restricted stock units was $ 4.2 million . The expense is expected to be recognized over a weighted average period of 2.38 years. +8. +REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural +80 +Table of Contents +Index to Financial Statements +gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 121.2 million and $ 210.2 million as of December 31, 2019 and December 31, 2018 , respectively, and are reported in accounts receivable - oil and natural gas sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For the year ended December 31, 2019 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +9. +LEASES +Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) . The new standard supersedes the previous lease guidance by requiring lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year while maintaining substantially similar classifications for financing and operating leases. The Company adopted the new standard on a prospective basis using the simplified transition method permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements . Offsetting right-of-use assets and corresponding lease liabilities recognized by the Company on the adoption date totaled approximately $ 110 million , representing minimum payment obligations associated with identified leases with contractual durations exceeding one year. No cumulative-effect adjustment to retained earnings was required upon adoption of the new standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the new standard, which among other things, allows for lease and non-lease components in a contract to be accounted for as a single lease component for all asset classes and the carry forward of historical lease classifications. +Nature of Leases +The Company has operating leases associated with drilling rig commitments, pressure pumping services, field offices and other equipment with remaining lease terms with contractual durations in excess of one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with third parties to ensure rig availability in its key operating areas. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the evaluation that the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one year to two years and expire at various dates through 2020. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of these costs are borne by other interest owners. +Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure Pumping LLC (“Stingray Pressure”), a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective July 1, 2018, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company through 2021 and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. The Company has the right to suspend services of one crew and only one crew at any point in time without payment, fee or other obligation associated with the suspended crew, given appropriate notification of suspension. The Company has determined that the agreement with Stingray Pressure is an operating lease due to the implicit identification of assets and the evaluation that the Company has the right to control the identified assets. The operating lease liability associated with this agreement is based on the minimum contractual obligations, which is the monthly service fee for one crew, and does not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of these costs are borne by other interest owners. On December 18, 2019, the Company filed a lawsuit against Stingray Pressure to terminate this agreement. As the outcome of this lawsuit is unknown, the related right of use asset and operating lease liability are still recognized as of December 31, 2019 in the accompanying consolidated balance sheets. +The Company rents office space for its field locations and certain other equipment from third parties, which expire at various dates through 2024. These agreements are typically structured with non-cancelable terms of one to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Maturities of operating lease liabilities as of December 31, 2019 were as follows: +81 +Table of Contents +Index to Financial Statements +(In thousands) +2020 +$ +36,415 +2021 +22,569 +2022 +115 +2023 +90 +2024 +30 +Total lease payments +$ +59,219 +Less: Imputed interest +( 1,781 +) +Total +$ +57,438 +Lease cost for the year ended December 31, 2019 consisted of the following: +(In thousands) +Operating lease cost +$ +24,960 +Operating lease cost - related party +22,440 +Variable lease cost +2,172 +Variable lease cost - related party +66,924 +Short-term lease cost +834 +Total lease cost (1) +$ +117,330 +_____________________ +(1) +The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in general and administrative expenses in the accompanying consolidated statements of operations. +Supplemental cash flow information for the year ended December 31, 2019 related to leases was as follows: +Cash paid for amounts included in the measurement of lease liabilities +(In thousands) +Operating cash flows from operating leases +182 +Investing cash flow from operating leases +24,263 +Investing cash flow from operating leases - related party +84,750 +The weighted-average remaining lease term as of December 31, 2019 was 1.75 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2019 was 3.52 % . +10. +INCOME TAXES +The income tax provision consists of the following: +2019 +2018 +2017 +(In thousands) +Current: +State +$ +— +$ +( 1,530 +) +$ +2,167 +Federal +( 7 +) +253 +3,362 +Deferred: +State +( 7,556 +) +1,530 +( 118 +) +Federal +— +( 322 +) +( 3,602 +) +Total income tax (benefit) expense provision +$ +( 7,563 +) +$ +( 69 +) +$ +1,809 +82 +Table of Contents +Index to Financial Statements +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2019 +2018 +2017 +(In thousands) +Income (loss) before federal income taxes +$ +( 2,009,921 +) +$ +430,491 +$ +436,961 +Expected income tax at statutory rate +( 422,083 +) +90,403 +152,936 +State income taxes +( 28,316 +) +( 511 +) +2,299 +Other differences +3,372 +1,078 +5,731 +Remeasurement due to Tax Cut and Jobs Act +— +— +190,034 +Change in valuation allowance due to current year activity +439,464 +( 91,039 +) +( 158,704 +) +Change in valuation allowance due to Tax Cuts and Jobs Act +— +— +( 190,487 +) +Income tax (benefit) expense recorded +$ +( 7,563 +) +$ +( 69 +) +$ +1,809 +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2019 , 2018 and 2017 are estimated as follows: +2019 +2018 +2017 +(In thousands) +Deferred tax assets: +Net operating loss carryforward +$ +269,851 +$ +164,363 +$ +120,626 +Oil and gas property basis difference +289,850 +3,595 +151,260 +Investment in pass through entities +58,951 +8,620 +12,343 +Stock-based compensation expense +1,440 +616 +813 +Business energy investment tax credit +370 +369 +369 +Charitable contributions carryover +297 +269 +255 +Change in fair value of derivative instruments +11,219 +2,761 +— +Foreign tax credit carryforwards +943 +2,009 +2,074 +Accrued liabilities +669 +834 +285 +ARO liability +12,744 +16,923 +15,897 +Non-oil and gas property basis difference +— +104 +171 +Lease liability +12,128 +— +— +State net operating loss carryover +13,258 +11,526 +6,954 +Interest expense carryforward +23,818 +— +— +Total deferred tax assets +695,538 +211,989 +311,047 +Valuation allowance for deferred tax assets +( 647,575 +) +( 211,987 +) +( 298,830 +) +Deferred tax assets, net of valuation allowance +47,963 +2 +12,217 +Deferred tax liabilities: +Non-oil and gas property basis difference +1,859 +— +— +Change in fair value of derivative instruments +26,410 +2 +11,009 +Right of use asset +12,128 +— +— +Other +3 +— +— +Total deferred tax liabilities +40,400 +2 +11,009 +Net deferred tax asset +$ +7,563 +$ +— +$ +1,208 +The company recognized an income tax benefit of $ 7.6 million in 2019 and an income tax benefit of $ 69.0 thousand in 2018. The income tax benefit for 2019 consists mainly of a partial release of valuation allowance that was maintained against +83 +Table of Contents +Index to Financial Statements +our Oklahoma deferred tax asset, as the Company believes that it can utilize a portion of its Oklahoma state NOL through carrybacks and carryforwards to offset Oklahoma sourced income from the sale of assets. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.3 billion as of December 31, 2019 . This carryforward will begin to expire in the year 2023. The Company also has state net operating loss carryovers of $ 244.5 million that began to expire in 2019 and federal foreign tax credit carryovers of $ 0.9 million which began to expire in 2019 . +At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. As a result of this analysis at December 31, 2019 , the Company determined a valuation allowance was necessary with respect to its deferred tax assets, except for its Oklahoma state NOL. The more significant evidential matter relates to the Company’s recent cumulative losses resulting primarily from impairments to the full cost pool during 2019 and the decline in commodity prices. At December 31, 2019 , the Company has recorded a total valuation allowance of $ 647.6 million related to the federal and state net deferred tax assets for which it believes do not meet the more likely than not threshold. +There was an increase of $ 439.5 million , a decrease of $ 86.8 million and a decrease of $ 347.0 million to the valuation allowance during 2019 , 2018 and 2017 , respectively. The increase in the valuation allowance in 2019 was primarily due to increases in net deferred tax assets from pre-tax losses resulting from impairments in the Company's oil and natural gas properties. The decrease in the valuation allowance in 2018 was primarily due to decreases in net deferred tax assets due to pre-tax income. The decrease in the valuation allowance in 2017 was primarily due to pre-tax income and remeasurement of deferred tax assets due to the Tax Cuts and Jobs Act. +The Company’s ability to utilize NOL carryforwards and other tax attributes to reduce future federal taxable income is subject to potential limitations under Internal Revenue Code Section 382 ("Section 382") and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% shareholders (as defined in Treasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change or more than 50% in the beneficial ownership of the Company. As of December 31, 2019 , the Company has completed a Section 382 analysis, which reflects that no ownership change has occurred to further limit the use of NOL carryforwards or other tax attributes. There are conditions that exist that are beyond the Company’s control which could cause an ownership change in the future and create a significant limitation on the Company's ability to utilize those tax attributes. +As of December 31, 2019 , the Company has recorded a liability associated with uncertain tax positions of $ 3.1 million . +84 +Table of Contents +Index to Financial Statements +11. +EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2019 +2018 +2017 +Loss +Shares +Per +Share +Income +Shares +Per +Share +Income +Shares +Per Share +(In thousands, except share data) +Basic: +Net (loss) income +$ +( 2,002,358 +) +160,341,125 +$ +( 12.49 +) +$ +430,560 +174,675,840 +$ +2.46 +$ +435,152 +179,834,146 +$ +2.42 +Effect of dilutive securities: +Stock options and awards +— +— +— +722,866 +— +418,878 +Diluted: +Net (loss) income +$ +( 2,002,358 +) +160,341,125 +$ +( 12.49 +) +$ +430,560 +175,398,706 +$ +2.45 +$ +435,152 +180,253,024 +$ +2.41 +There were 3,867,084 shares of common stock that were considered anti-dilutive for the year ended December 31, 2019 . There were no potential shares of common stock that were considered anti-dilutive for the years ended December 31, 2018 and 2017 . +85 +Table of Contents +Index to Financial Statements +12. +DERIVATIVE INSTRUMENTS +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments +The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective natural gas, oil and NGL prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2019 . +Index +Daily Volume (MMBtu/day) +Weighted +Average Price +2020 +NYMEX Henry Hub +548,000 +$ +2.88 +Index +Daily Volume +(Bbls/day) +Weighted +Average Price +2020 +NYMEX WTI +6,000 +59.82 +Index +Daily Volume (Bbls/day) +Weighted +Average Price +2020 +Mont Belvieu C3 +500 +$ +21.63 +In the third quarter of 2019, the Company sold call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020 listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Index +Daily Volume (MMBtu/day) +Weighted +Average Price +2022 +NYMEX Henry Hub +628,000 +$ +2.90 +2023 +NYMEX Henry Hub +628,000 +$ +2.90 +For a portion of the natural gas fixed price swaps listed above, the counterparties had the option to extend the original terms an additional twelve months for the period January 2019 through December 2019 . In December 2018 , the counterparties chose to exercise all natural gas fixed price swaps, resulting in an additional 100,000 MMBtu per day at a weighted average price of $ 3.05 per MMBtu, which is included in the natural gas fixed price swaps listed above. +In addition, the Company entered into natural gas basis swap positions. As of December 31, 2019 , the Company had the following natural gas basis swap positions open: +Gulfport Pays +Gulfport Receives +Daily Volume (MMBtu/day) +Weighted Average Fixed Spread +2020 +Transco Zone 4 +NYMEX Plus Fixed Spread +60,000 +$ +( 0.05 +) +2020 +Fixed Spread +ONEOK Minus NYMEX +10,000 +$ +( 0.54 +) +86 +Table of Contents +Index to Financial Statements +Contingent Consideration Arrangement +The purchase and sale agreement for the sale of the Company's non-core assets located in the WCBB and Hackberry fields of Louisiana included a contingent consideration arrangement that entitles the Company to receive bonus payments if commodity prices exceed specified thresholds. The calculated fair value of this contingent payment arrangement was approximately $ 1.1 million as of the closing date of the divestiture. See below for threshold and potential payment amounts. +Period +Threshold (1) +Payment to be received (2) +July 2020 - June 2021 +Greater than or equal to $60.65 +$ +150,000 +Between $52.62 - $60.65 +Calculated Value (3) +Less than or equal to $52.62 +$ +— +_____________________ +(1) +Based on the "WTI NYMEX + Argus LLS Differential," as published by Argus Media. +(2) +Payment will be assessed monthly from July 2020 through June 2021. If threshold is met, payment shall be received within five business days after the end of each calendar month. +(3) +If average daily price, as defined in (1), is greater than $ 52.62 but less than $ 60.65 , payment received will be $ 150,000 multiplied by a fraction, the numerator of which is the amount determined by subtracting $ 52.62 from such average daily price, and the denominator of which is $ 8.03 . +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2019 and 2018 : +December 31, +2019 +2018 +(In thousands) +Commodity derivative instruments +125,383 +21,352 +Contingent consideration arrangement +818 +— +Total short-term derivative instruments – asset +126,201 +21,352 +Commodity derivative instruments +— +— +Contingent consideration arrangement +563 +— +Total long-term derivative instruments – asset +563 +— +Total short-term derivative instruments – liability +303 +$ +20,401 +Total long-term derivative instruments – liability +53,135 +$ +13,992 +Gains and losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2019 , 2018 , and 2017 . +87 +Table of Contents +Index to Financial Statements +Net gain (loss) on derivative instruments +For the Year Ended December 31, +2019 +2018 +2017 +(In thousands) +Natural gas derivatives +$ +194,450 +$ +( 116,130 +) +$ +232,143 +Oil derivatives +7,035 +( 13,084 +) +( 3,350 +) +NGL derivatives +6,632 +5,735 +( 15,114 +) +Contingent consideration arrangement +243 +— +— +Total +$ +208,360 +$ +( 123,479 +) +$ +213,679 +Offsetting of derivative assets and liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value. +As of December 31, 2019 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +126,764 +$ +( 53,438 +) +$ +73,326 +Derivative liabilities +$ +( 53,438 +) +$ +53,438 +$ +— +As of December 31, 2018 +Derivative instruments, gross +Netting adjustments +Derivative instruments, net +(In thousands) +Derivative assets +$ +21,352 +$ +( 19,289 +) +$ +2,063 +Derivative liabilities +$ +( 34,393 +) +$ +19,289 +$ +( 15,104 +) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +13. +RESTRUCTURING COSTS +In the fourth quarter of 2019 , the Company announced and completed a workforce reduction representing approximately 13 % of its headcount. In connection with the reduction, the Company incurred a total charge of approximately $ 4.6 million , primarily consisting of one-time employee-related termination benefits, with a remaining liability of $ 0.2 million at December 31, 2019 . +14. +FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +The following tables summarize the Company’s financial and non-financial liabilities by valuation level as of December 31, 2019 and 2018 : +December 31, 2019 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +126,764 +$ +— +Liabilities: +Derivative Instruments +$ +— +53,438 +$ +— +December 31, 2018 +Level 1 +Level 2 +Level 3 +(In thousands) +Assets: +Derivative Instruments +$ +— +$ +21,352 +$ +— +Liabilities: +Derivative Instruments +$ +— +$ +34,393 +$ +— +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of the business combination were estimated using the same assumptions and methodology as described below. See Note 2 for further discussion of the Company's acquisitions. +88 +Table of Contents +Index to Financial Statements +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred and upward revisions recognized during the year ended December 31, 2019 were approximately $ 5.9 million and $ 0.9 million , respectively. +Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly as of December 31, 2019 was estimated using assumptions that represent Level 3 inputs. +The fair value of the Company's investment in Mammoth Energy as of December 31, 2019 was estimated using Level 1 inputs, as the price per share was a quoted price in an active market for identical Mammoth Energy common shares. +Fair value of financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's construction loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. See Note 5 for fair value of Company's long-term debt. +15. +RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As of December 31, 2019 , the Company held approximately 21.8 % of Mammoth Energy's outstanding common stock as discussed above in Note 4 . Approximately $ 0.6 million , $ 2.0 million , and $ 2.1 million of services provided by Mammoth Energy are included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2019 , 2018 and 2017 , respectively. Approximately $ 109.9 million and $ 139.7 million of services provided by Mammoth Energy are included in oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets at December 31, 2019 and 2018 , respectively. At December 31, 2019 and 2018 , the Company owed Mammoth Energy approximately $ 8.4 million and $ 10.9 million , respectively, related to these services. +The Company previously held a 25 % interest in Strike Force, who develops natural gas gathering assets in dedicated areas. In May 2018, the Company sold its interest in Strike Force as discussed above in Note 4 . Approximately $ 18.5 million and $ 23.1 million of services provided by Strike Force are included in midstream gathering and processing on the accompanying consolidated statement of operations for the years ended December 31, 2018 and December 31, 2017 , respectively. +16. +COMMITMENTS +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible employees may contribute up to 100 % of their total compensation up to the maximum pre-tax threshold through salary deferrals. Also under the plan, the Company made bi-weekly contributions on behalf of each employee equal to at least 3 % of his or her salary, regardless of the employee’s participation in salary deferrals and may also make additional discretionary contributions. During the years ended December 31, 2019 , 2018 and 2017 , Gulfport incurred $ 2.9 million , $ 2.6 million , and $ 3.0 million , respectively, in contributions expense related to this plan. +Future Sales Commitments +The Company has entered into various firm sales contracts to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's proved reserves have generally been sufficient to satisfy its delivery commitments during the three most recent years, and it expects such reserves will continue to be the primary means of fulfilling its future commitments. However, where the Company's proved reserves are not sufficient to satisfy its delivery commitments, it can and may use spot market purchases to satisfy the commitments. +89 +Table of Contents +Index to Financial Statements +A summary of these commitments at December 31, 2019 are set forth in the table below: +(MMBtu per day) +2020 +326,000 +2021 +192,000 +2022 +70,000 +2023 +17,000 +2024 +— +Thereafter +— +Total +605,000 +Future Firm Transportation Commitments +The Company has contractual commitments with pipeline carriers for future transportation of natural gas from the Company's production areas to downstream markets. Commitments related to future firm transportation agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, they are reflected in the Company's estimates of proved reserves. +A summary of these commitments at December 31, 2019 are set forth in the table below: +Total MMBtu +(In thousands) +2020 +505,080,000 +$ +274,813 +2021 +531,075,000 +286,626 +2022 +531,075,000 +286,626 +2023 +515,867,000 +282,945 +2024 +489,525,000 +265,568 +Thereafter +3,778,217,000 +2,163,926 +Total +6,350,839,000 +$ +3,560,504 +Other Commitments +Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie Proppant LLC (“Muskie”), a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective August 3, 2018, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at agreed pricing plus agreed costs and expenses through 2021. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $ 3.5 million and $ 2.2 million related to non-utilization fees during the years ended December 31, 2019 and 2018 . +Future minimum commitments under these agreements at December 31, 2019 are as follows: +(In thousands) +2020 +$ +7,500 +2021 +7,500 +Total +$ +15,000 +17. +CONTINGENCIES +Litigation and Regulatory Proceedings +The Company is involved in a number of litigation and regulatory proceedings that may result in material liabilities, including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. +The Company, along with a number of other oil and gas companies, has been named as a defendant in two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 (together, the "Complaints"). The Complaints allege that certain of the defendants’ operations violated the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder (the "CZM Laws") by causing substantial damage to land and waterbodies located in the coastal zone of the relevant Parish. The plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. The United States District Court for the Western District of Louisiana issued orders remanding the cases to their respective state court, and the defendants have appealed the remand orders to the 5th Circuit Court of Appeals. +In July 2019, Pigeon Land Company, Inc., a successor in interest to certain of the Company's legacy Louisiana properties, filed an action against the Company and a number of other oil and gas companies in the 16th Judicial District Court for the Parish of Iberia in Louisiana. The suit alleges negligence, strict liability and various violations of Louisiana statutes relating to property damage in connection with the historic development of the Company's Louisiana properties and seeks unspecified damages (including punitive damages), an injunction to return the affected property to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. +In September 2019, a stockholder of Mammoth Energy filed a derivative action on behalf of Mammoth Energy against members of Mammoth Energy’s board of directors, including a director designated by the Company, and its significant stockholders, including the Company, in the United States District Court for the Western District of Oklahoma. In January 2020, plaintiffs consolidated actions against the same defendants in the United States District Court for the District of Delaware. The consolidated and amended complaint alleges, among other things, that the Company breached its fiduciary duties and misappropriated information as a controlling shareholder of Mammoth Energy in connection with Mammoth Energy’s activities in Puerto Rico following Hurricane Maria and the Company's secondary offering of Mammoth Energy common stock in June 2018. The complaint seeks unspecified damages, the payment of reasonable attorney fees and legal expenses and interest and to force Mammoth Energy and its board of directors to make specified corporate governance reforms. +In October 2019, Saydee Resources, LLC, on behalf of itself and a class of similarly situated royalty holders, filed an action against the Company in the District Court of Grady County Oklahoma. The suit alleges that the Company underpaid royalty holders and seeks unspecified damages for breach of contract, tortious breach of contract, fraud and unjust enrichment. +In October 2019, Kelsie Wagner, in her capacity as trustee of various trusts and on behalf of the trusts and other similarly situated royalty owners, filed an action against us in the District Court of Grady County, Oklahoma. The suit alleges that the Company underpaid royalty owners and seeks unspecified damages for violations of the Oklahoma Production Revenue Standards Act and fraud. +SEC Investigation +The SEC has commenced an investigation with respect to certain actions by former Company management, including alleged improper personal use of Company assets, and potential violations by former management and the Company of the Sarbanes-Oxley Act of 2002 in connection with such actions. We have fully cooperated and intend to continue to cooperate fully with the SEC’s investigation. Although it is not possible to predict the ultimate resolution or financial liability with respect to this matter, the Company believes that the outcome of this matter will not have a material effect on the Company's business, financial condition or results of operations. +Business Operations +90 +Table of Contents +Index to Financial Statements +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. They have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. They conduct periodic reviews, on a company-wide basis, to assess changes in their environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, they may, among other things, exclude a property from the transaction, require the seller to remediate the property to their satisfaction in an acquisition or agree to assume liability for the remediation of the property. +The Company received several Finding of Violation (“FOVs”) from the United States Environmental Protection Agency ("USEPA") alleging violations of the Clean Air Act in Ohio. The first FOV for one site was dated December 11, 2013. Two subsequent FOVs incorporated and expanded the scope on January 4, 2017 and April 15, 2019. The Company entered into a settlement with the Department of Justice and USEPA agreeing to pay $ 1.7 million and invest in improvements at 17 well pads. The settlement was filed with the U.S. District Court for the Southern District of Ohio in January 2020, and is pending approval. +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +Insurance Proceeds +For the years ended December 31, 2019 and 2018 the Company was reimbursed $ 0.1 million and $ 0.2 million , respectively, net of related legal fees by its insurance provider, which is included in other expense (income) in the accompanying consolidated statements of operations. There were no insurance proceeds received in the year ended December 31, 2017 . +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $ 250,000 . At December 31, 2019 , Gulfport held cash in excess of insured limits in these banks totaling $ 5.6 million . +During the year ended December 31, 2019 , one customer accounted for approximately 14 % of the Company's total sales. During the year ended December 31, 2018 , two customers accounted for approximately 17 % and 10 % of the Company's total sales. During the year ended December 31, 2017 , one customer accounted for approximately 40 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +18. +CONDENSED CONSOLIDATING FINANCIAL INFORMATION +The 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's revolving credit facility or certain other debt (the "Guarantors"). The Notes are not guaranteed by Grizzly Holdings, Mule Sky LLC ("Mule Sky") or GRUS, LLC ("GRUS") +91 +Table of Contents +Index to Financial Statements +(the “Non-Guarantors”). The Guarantors are 100% owned by Gulfport (the “Parent”), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. Effective June 1, 2019, the Parent contributed interests in certain oil and gas assets and related liabilities to certain of the Guarantors. +The following condensed consolidating balance sheets, statements of operations, statements of comprehensive income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantors and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent’s ownership of the Guarantors and the Non-Guarantors. +92 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2019 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets: +Cash and cash equivalents +$ +2,768 +$ +3,097 +$ +195 +$ +— +$ +6,060 +Accounts receivable - oil and natural gas sales +859 +120,351 +— +— +121,210 +Accounts receivable - joint interest and other +5,279 +42,696 +— +— +47,975 +Accounts receivable - intercompany +1,065,593 +843,223 +— +( 1,908,816 +) +— +Prepaid expenses and other current assets +4,047 +308 +76 +— +4,431 +Short-term derivative instruments +126,201 +— +— +— +126,201 +Total current assets +1,204,747 +1,009,675 +271 +( 1,908,816 +) +305,877 +Property and equipment: +Oil and natural gas properties, full-cost accounting +1,314,933 +9,273,681 +7,850 +( 729 +) +10,595,735 +Other property and equipment +92,650 +50 +4,019 +— +96,719 +Accumulated depletion, depreciation, amortization and impairment +( 1,418,888 +) +( 5,808,254 +) +( 1,518 +) +— +( 7,228,660 +) +Property and equipment, net +( 11,305 +) +3,465,477 +10,351 +( 729 +) +3,463,794 +Other assets: +Equity investments and investments in subsidiaries +3,064,503 +6,332 +21,000 +( 3,059,791 +) +32,044 +Long-term derivative instruments +563 +— +— +— +563 +Deferred tax asset +7,563 +— +— +— +7,563 +Inventories +— +5,182 +— +— +5,182 +Operating lease assets +14,168 +— +— +— +14,168 +Operating lease assets - related parties +43,270 +— +— +— +43,270 +Other assets +10,026 +332 +10,358 +Total other assets +3,140,093 +11,846 +21,000 +( 3,059,791 +) +113,148 +Total assets +$ +4,333,535 +$ +4,486,998 +$ +31,622 +$ +( 4,969,336 +) +$ +3,882,819 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +48,006 +$ +367,088 +$ +124 +$ +— +$ +415,218 +Accounts payable - intercompany +878,283 +1,026,249 +4,285 +( 1,908,817 +) +— +Short-term derivative instruments +303 +— +— +— +303 +Current portion of operating lease liabilities +13,826 +— +— +— +13,826 +Current portion of operating lease liabilities - related parties +21,220 +— +— +— +21,220 +Current maturities of long-term debt +631 +— +— +— +631 +Total current liabilities +962,269 +1,393,337 +4,409 +( 1,908,817 +) +451,198 +Long-term derivative instruments +53,135 +— +— +— +53,135 +Asset retirement obligation - long-term +— +58,322 +2,033 +— +60,355 +Uncertain tax position liability +3,127 +— +— +— +3,127 +Non-current operating lease liabilities +342 +— +— +— +342 +Non-current operating lease liabilities - related parties +22,050 +— +— +— +22,050 +Long-term debt, net of current maturities +1,978,020 +— +— +— +1,978,020 +Total liabilities +3,018,943 +1,451,659 +6,442 +( 1,908,817 +) +2,568,227 +Stockholders' equity: +Common stock +1,597 +— +— +— +1,597 +Paid-in capital +4,207,554 +4,171,408 +267,557 +( 4,438,965 +) +4,207,554 +Accumulated other comprehensive loss +( 46,833 +) +— +( 44,763 +) +44,763 +( 46,833 +) +Accumulated deficit +( 2,847,726 +) +( 1,136,069 +) +( 197,614 +) +1,333,683 +( 2,847,726 +) +Total stockholders' equity +1,314,592 +3,035,339 +25,180 +( 3,060,519 +) +1,314,592 +Total liabilities and stockholders' equity +$ +4,333,535 +$ +4,486,998 +$ +31,622 +$ +( 4,969,336 +) +$ +3,882,819 +93 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING BALANCE SHEETS +(Amounts in thousands) +December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Assets +Current assets +Cash and cash equivalents +$ +25,585 +$ +26,711 +$ +1 +$ +— +$ +52,297 +Accounts receivable - oil and natural gas +146,075 +64,125 +— +— +210,200 +Accounts receivable - joint interest and other +16,212 +6,285 +— +— +22,497 +Accounts receivable - intercompany +671,633 +319,464 +— +( 991,097 +) +— +Prepaid expenses and other current assets +7,843 +2,174 +— +— +10,017 +Short-term derivative instruments +21,352 +— +— +— +21,352 +Total current assets +888,700 +418,759 +1 +( 991,097 +) +316,363 +Property and equipment: +Oil and natural gas properties, full-cost accounting, +7,044,550 +2,983,015 +— +( 729 +) +10,026,836 +Other property and equipment +91,916 +751 +— +— +92,667 +Accumulated depletion, depreciation, amortization and impairment +( 4,640,059 +) +( 39 +) +— +— +( 4,640,098 +) +Property and equipment, net +2,496,407 +2,983,727 +— +( 729 +) +5,479,405 +Other assets: +Equity investments and investments in subsidiaries +2,856,988 +— +44,259 +( 2,665,126 +) +236,121 +Inventories +4,210 +1,134 +— +— +5,344 +Other assets +12,624 +1,178 +— +1 +13,803 +Total other assets +2,873,822 +2,312 +44,259 +( 2,665,125 +) +255,268 +Total assets +$ +6,258,929 +$ +3,404,798 +$ +44,260 +$ +( 3,656,951 +) +$ +6,051,036 +Liabilities and stockholders' equity +Current liabilities: +Accounts payable and accrued liabilities +$ +419,107 +$ +99,273 +$ +— +$ +— +$ +518,380 +Accounts payable - intercompany +320,259 +670,708 +130 +( 991,097 +) +— +Short-term derivative instruments +20,401 +— +— +— +20,401 +Current maturities of long-term debt +651 +— +— +— +651 +Total current liabilities +760,418 +769,981 +130 +( 991,097 +) +539,432 +Long-term derivative instruments +13,992 +— +— +— +13,992 +Asset retirement obligation - long-term +66,859 +13,093 +— +— +79,952 +Uncertain tax position liability +3,127 +— +— +— +3,127 +Long-term debt, net of current maturities +2,086,765 +— +— +— +2,086,765 +Total liabilities +2,931,161 +783,074 +130 +( 991,097 +) +2,723,268 +Stockholders' equity: +Common stock +1,630 +— +— +— +1,630 +Paid-in capital +4,227,532 +1,915,598 +261,626 +( 2,177,224 +) +4,227,532 +Accumulated other comprehensive loss +( 56,026 +) +— +( 53,783 +) +53,783 +( 56,026 +) +(Accumulated deficit) retained earnings +( 845,368 +) +706,126 +( 163,713 +) +( 542,413 +) +( 845,368 +) +Total stockholders' equity +3,327,768 +2,621,724 +44,130 +( 2,665,854 +) +3,327,768 +Total liabilities and stockholders' equity +$ +6,258,929 +$ +3,404,798 +$ +44,260 +$ +( 3,656,951 +) +$ +6,051,036 +94 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2019 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +524,089 +$ +821,919 +$ +— +$ +— +$ +1,346,008 +Costs and expenses: +Lease operating expenses +26,923 +56,075 +— +— +82,998 +Production taxes +6,117 +22,454 +— +— +28,571 +Midstream gathering and processing expenses +71,420 +220,305 +— +— +291,725 +Depreciation, depletion and amortization +203,921 +345,504 +683 +— +550,108 +Impairment of oil and gas properties +— +2,039,770 +— +— +2,039,770 +General and administrative expenses +71,219 +( 23,748 +) +508 +— +47,979 +Restructuring costs +4,611 +— +— +— +4,611 +Accretion expense +1,390 +2,549 +— +— +3,939 +385,601 +2,662,909 +1,191 +— +3,049,701 +INCOME (LOSS) FROM OPERATIONS +138,488 +( 1,840,990 +) +( 1,191 +) +— +( 1,703,693 +) +OTHER (INCOME) EXPENSE: +Interest expense +144,645 +( 2,859 +) +— +— +141,786 +Interest income +( 501 +) +( 300 +) +— +— +( 801 +) +Gain on debt extinguishment +( 48,630 +) +— +— +— +( 48,630 +) +Loss (income) from equity method investments and investments in subsidiaries +2,053,533 +32,710 +( 1,876,095 +) +210,148 +Other (income) expense, net +( 638 +) +3,364 +— +999 +3,725 +2,148,409 +205 +32,710 +( 1,875,096 +) +306,228 +(LOSS) INCOME BEFORE INCOME TAXES +( 2,009,921 +) +( 1,841,195 +) +( 33,901 +) +1,875,096 +( 2,009,921 +) +INCOME TAX BENEFIT +( 7,563 +) +— +— +— +( 7,563 +) +NET (LOSS) INCOME +$ +( 2,002,358 +) +$ +( 1,841,195 +) +$ +( 33,901 +) +$ +1,875,096 +$ +( 2,002,358 +) +95 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +839,241 +$ +515,803 +$ +— +$ +— +$ +1,355,044 +Costs and expenses: +Lease operating expenses +66,947 +24,693 +— +— +91,640 +Production taxes +17,140 +16,340 +— +— +33,480 +Midstream gathering and processing expenses +199,607 +90,581 +— +— +290,188 +Depreciation, depletion and amortization +486,661 +3 +— +— +486,664 +General and administrative expenses +52,664 +( 2,673 +) +3 +— +49,994 +Accretion expense +3,228 +891 +— +— +4,119 +826,247 +129,835 +3 +— +956,085 +INCOME (LOSS) FROM OPERATIONS +12,994 +385,968 +( 3 +) +— +398,959 +OTHER (INCOME) EXPENSE: +Interest expense +144,533 +( 2,621 +) +— +— +141,912 +Interest income +( 287 +) +( 27 +) +— +— +( 314 +) +Gain on sale of equity method investments +( 28,349 +) +( 96,419 +) +— +— +( 124,768 +) +(Income) loss from equity method investments and investments in subsidiaries +( 532,869 +) +( 694 +) +510 +483,149 +( 49,904 +) +Other (income) expense, net +( 525 +) +( 33 +) +— +2,100 +1,542 +( 417,497 +) +( 99,794 +) +510 +485,249 +( 31,532 +) +INCOME (LOSS) BEFORE INCOME TAXES +430,491 +485,762 +( 513 +) +( 485,249 +) +430,491 +INCOME TAX BENEFIT +( 69 +) +— +— +— +( 69 +) +NET INCOME (LOSS) +$ +430,560 +$ +485,762 +$ +( 513 +) +$ +( 485,249 +) +$ +430,560 +96 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS +(Amounts in thousands) +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Total revenues +$ +1,010,989 +$ +309,314 +$ +— +$ +— +$ +1,320,303 +Costs and expenses: +Lease operating expenses +65,793 +14,453 +— +— +80,246 +Production taxes +15,100 +6,026 +— +— +21,126 +Midstream gathering and processing expenses +187,678 +61,317 +— +— +248,995 +Depreciation, depletion and amortization +364,625 +4 +— +— +364,629 +Impairment of oil and natural gas properties +— +— +— +— +— +General and administrative expenses +48,174 +( 2,654 +) +3 +— +45,523 +Accretion expense +1,246 +365 +— +— +1,611 +Acquisition expense +— +2,392 +— +— +2,392 +682,616 +81,903 +3 +— +764,522 +INCOME (LOSS) FROM OPERATIONS +328,373 +227,411 +( 3 +) +— +555,781 +OTHER (INCOME) EXPENSE: +Interest expense +120,147 +( 4,534 +) +— +— +115,613 +Interest income +( 988 +) +( 21 +) +— +— +( 1,009 +) +Gain on sale of equity method investments +( 12,523 +) +— +— +— +( 12,523 +) +(Income) loss from equity method investments and investments in subsidiaries +( 213,607 +) +1,955 +2,189 +227,243 +17,780 +Other (income) expense, net +( 1,617 +) +( 324 +) +— +900 +( 1,041 +) +( 108,588 +) +( 2,924 +) +2,189 +228,143 +118,820 +INCOME (LOSS) BEFORE INCOME TAXES +436,961 +230,335 +( 2,192 +) +( 228,143 +) +436,961 +INCOME TAX EXPENSE +1,809 +— +— +— +1,809 +NET INCOME (LOSS) +$ +435,152 +$ +230,335 +$ +( 2,192 +) +$ +( 228,143 +) +$ +435,152 +97 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(Amounts in thousands) +Year Ended December 31, 2019 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net (loss) income +$ +( 2,002,358 +) +$ +( 1,841,195 +) +$ +( 33,901 +) +$ +1,875,096 +$ +( 2,002,358 +) +Foreign currency translation adjustment +9,193 +173 +9,020 +( 9,193 +) +9,193 +Other comprehensive loss (income) +9,193 +173 +9,020 +( 9,193 +) +9,193 +Comprehensive income (loss) +$ +( 1,993,165 +) +$ +( 1,841,022 +) +$ +( 24,881 +) +$ +1,865,903 +$ +( 1,993,165 +) +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +430,560 +$ +485,762 +$ +( 513 +) +$ +( 485,249 +) +$ +430,560 +Foreign currency translation adjustment +( 15,487 +) +( 297 +) +( 15,190 +) +15,487 +( 15,487 +) +Other comprehensive (loss) income +( 15,487 +) +( 297 +) +( 15,190 +) +15,487 +( 15,487 +) +Comprehensive income (loss) +$ +415,073 +$ +485,465 +$ +( 15,703 +) +$ +( 469,762 +) +$ +415,073 +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net income (loss) +$ +435,152 +$ +230,335 +$ +( 2,192 +) +$ +( 228,143 +) +$ +435,152 +Foreign currency translation adjustment +12,519 +182 +12,337 +( 12,519 +) +$ +12,519 +Other comprehensive income (loss) +12,519 +182 +12,337 +( 12,519 +) +12,519 +Comprehensive income (loss) +$ +447,671 +$ +230,517 +$ +10,145 +$ +( 240,662 +) +$ +447,671 +98 +Table of Contents +Index to Financial Statements +CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS +(Amounts in thousands) +Year Ended December 31, 2019 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +64,037 +$ +656,443 +$ +3,510 +$ +3 +$ +723,993 +Net cash provided by (used in) investing activities +8,605 +( 680,057 +) +( 3,751 +) +432 +( 674,771 +) +Net cash (used in) provided by financing activities +( 95,459 +) +— +435 +( 435 +) +( 95,459 +) +Net (decrease) increase in cash and cash equivalents +( 22,817 +) +( 23,614 +) +194 +— +( 46,237 +) +Cash and cash equivalents at beginning of period +25,585 +26,711 +1 +— +52,297 +Cash and cash equivalents at end of period +$ +2,768 +$ +3,097 +$ +195 +$ +— +$ +6,060 +Year Ended December 31, 2018 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +560,203 +$ +226,067 +$ +— +$ +1 +$ +786,271 +Net cash (used in) provided by investing activities +( 445,869 +) +( 231,005 +) +( 2,318 +) +2,318 +( 676,874 +) +Net cash (used in) provided by financing activities +( 156,657 +) +— +2,319 +( 2,319 +) +( 156,657 +) +Net (decrease) increase in cash and cash equivalents +( 42,323 +) +( 4,938 +) +1 +— +( 47,260 +) +Cash and cash equivalents at beginning of period +67,908 +31,649 +— +— +99,557 +Cash and cash equivalents at end of period +$ +25,585 +$ +26,711 +$ +1 +$ +— +$ +52,297 +Year Ended December 31, 2017 +Parent +Guarantors +Non-Guarantor +Eliminations +Consolidated +Net cash provided by operating activities +$ +392,680 +$ +287,209 +$ +— +$ +— +$ +679,889 +Net cash (used in) provided by investing activities +( 2,216,615 +) +( 1,674,690 +) +( 2,280 +) +1,419,417 +( 2,474,168 +) +Net cash provided by (used in)financing activities +432,961 +1,417,137 +2,280 +( 1,419,417 +) +432,961 +Net (decrease) increase in cash and cash equivalents +( 1,390,974 +) +29,656 +— +— +( 1,361,318 +) +Cash and cash equivalents at beginning of period +1,458,882 +1,993 +— +— +1,460,875 +Cash and cash equivalents at end of period +$ +67,908 +$ +31,649 +$ +— +$ +— +$ +99,557 +99 +Table of Contents +Index to Financial Statements +19. +SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company owns a 24.9999 % interest in Grizzly, which interest is shown below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2019 +2018 +(In thousands) +Proved properties +$ +8,909,069 +$ +7,153,799 +Unproved properties +1,686,666 +2,873,037 +10,595,735 +10,026,836 +Accumulated depreciation, depletion, amortization and impairment +( 7,191,957 +) +( 4,613,293 +) +Net capitalized costs +$ +3,403,778 +$ +5,413,543 +Equity investment in Grizzly Oil Sands ULC +Proved properties +$ +64,476 +$ +67,475 +Unproved properties +85,395 +79,605 +149,871 +147,080 +Accumulated depreciation, depletion, amortization and impairment +( 1,634 +) +( 1,553 +) +Net capitalized costs +$ +148,237 +$ +145,527 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2019 +2018 +2017 +(In thousands) +Acquisition +$ +37,598 +$ +119,444 +$ +1,946,416 +Development +594,673 +714,269 +1,138,951 +Exploratory +9,762 +22,081 +9,058 +Total +$ +642,033 +$ +855,794 +$ +3,094,425 +Equity investment in Grizzly Oil Sands ULC +Acquisition +$ +— +$ +238 +$ +503 +Development +— +— +— +Exploratory +849 +— +— +Total +$ +849 +$ +238 +$ +503 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company capitalized $ 3.4 million , $ 4.5 million and $ 9.5 million during 2019, 2018, and 2017, respectively, based on the Company's weighted average cost of borrowings used to finance expenditures. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 30.1 million , $ 37.7 million and $ 35.7 million during 2019, 2018, and 2017, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +100 +Table of Contents +Index to Financial Statements +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +2019 +2018 +2017 +(In thousands) +Revenues +$ +1,137,648 +$ +1,478,523 +$ +1,106,624 +Production costs +( 403,294 +) +( 415,308 +) +( 350,367 +) +Depletion +( 539,379 +) +( 476,517 +) +( 358,792 +) +Impairment +( 2,039,770 +) +— +— +Income tax benefit +7,563 +68 +240 +Results of operations from producing activities +$ +( 1,837,232 +) +$ +586,766 +$ +397,705 +Depletion per Mcf of gas equivalent (Mcfe) +$ +1.08 +$ +0.96 +$ +0.90 +Results of Operations from equity method investment in Grizzly Oil Sands ULC +Revenues +$ +— +$ +— +$ +— +Production costs +— +— +— +Depletion +— +— +— +Income tax expense +— +— +— +Results of operations from producing activities +$ +— +$ +— +$ +— +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2019 , 2018 and 2017 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2019 , 2018 and 2017 , in accordance with guidelines of the SEC applicable to reserves estimates. Volumes for oil are stated in thousands of barrels (Mbbls) and volumes for natural gas are stated in millions of cubic feet (MMcf). The prices used for the 2019 reserve report are $ 55.85 per barrel of oil, $ 2.58 per MMbtu and $ 21.25 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2018 and 2017 for reserve report purposes are $ 65.56 per barrel, $ 3.10 per MMbtu and $ 32.02 per barrel for NGL and $ 51.34 per barrel, $ 2.98 per MMbtu and $ 18.40 per barrel for NGL, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +101 +Table of Contents +Index to Financial Statements +2019 +2018 +2017 +Oil +Natural Gas +NGL +Oil +Natural Gas +NGL +Oil +Natural Gas +NGL +(Mbbls) +(MMcf) +(Mbbls) +(Mbbls) +(MMcf) +(Mbbls) +(Mbbls) +(MMcf) +(Mbbls) +Proved Reserves +Beginning of the period +21,050 +4,133,889 +80,520 +19,157 +4,825,310 +75,766 +5,546 +2,167,068 +20,127 +Purchases in oil and natural gas reserves in place +— +— +— +— +— +— +15,132 +1,098,644 +53,617 +Extensions and discoveries +3,612 +997,014 +12,992 +5,205 +622,271 +9,631 +951 +1,594,734 +4,619 +Sales of oil and natural gas reserves in place +( 2,369 +) +( 62,557 +) +— +( 134 +) +( 43,444 +) +( 112 +) +— +— +— +Revisions of prior reserve estimates +( 1,749 +) +( 561,890 +) +( 26,909 +) +( 377 +) +( 826,506 +) +1,228 +107 +314,925 +2,737 +Current production +( 2,186 +) +( 458,178 +) +( 5,074 +) +( 2,801 +) +( 443,742 +) +( 5,993 +) +( 2,579 +) +( 350,061 +) +( 5,334 +) +End of period +18,357 +4,048,279 +61,528 +21,050 +4,133,889 +80,520 +19,157 +4,825,310 +75,766 +Proved developed reserves +7,887 +1,757,303 +29,898 +9,570 +1,813,184 +40,810 +10,245 +1,616,930 +36,247 +Proved undeveloped reserves +10,470 +2,290,976 +31,630 +11,480 +2,320,705 +39,710 +8,912 +3,208,380 +39,519 +Equity investment in Grizzly Oil Sands ULC +Beginning of the period +— +— +— +— +— +— +— +— +— +Purchases in oil and natural gas reserves in place +— +— +— +— +— +— +— +— +— +Extensions and discoveries +— +— +— +— +— +— +— +— +— +Revisions of prior reserve estimates +— +— +— +— +— +— +— +— +— +Current production +— +— +— +— +— +— +— +— +— +End of period +— +— +— +— +— +— +— +— +— +Proved developed reserves +— +— +— +— +— +— +— +— +— +Proved undeveloped reserves +— +— +— +— +— +— +— +— +— +In 2019, the Company experienced extensions of 1.1 Tcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica Shale and SCOOP acreages. Of the total extensions, 793.5 Bcfe was attributable to the addition of 72 PUD locations in the Utica field, 302.9 Bcfe was attributable to the addition of 37 PUD locations in the SCOOP field. The Company experienced total downward revisions of approximately 733.8 Bcfe in estimated proved reserves, of which 347.2 Bcfe was a result of the exclusion of nine PUD locations in the Utica field and 22 PUD locations in the SCOOP field, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment capital discipline and funding future activities within cash flow. An additional 296.4 Bcfe in downward revisions was the result of commodity price changes. Commodity prices experienced volatility throughout 2019 and the 12-month average price for natural gas decreased from $ 3.10 per MMBtu for 2018 to $ 2.58 per MMBtu for 2019 , the 12-month average price for NGL decreased from $ 32.02 per barrel for 2018 to $ 21.25 per barrel for 2019 , and the 12-month average price for crude oil decreased from $ 65.56 per barrel for 2018 to $ 55.85 per barrel for 2019 . The Company also experienced downward revisions of 90.2 Bcfe from a combination of working interest changes, optimization of well design in the current commodity price environment and well performance. +Subsequent to completion of estimates of proved reserves at December 31, 2019 , management lowered its 2020 budgeted capital expenditures due to the expectation of continued depressed commodities pricing. All PUD locations in the +102 +Table of Contents +Index to Financial Statements +December 31, 2019 proved reserve estimates remained in the development plan and are scheduled to be drilled within five years from the time of initial booking. However, development of several PUD locations was delayed. Management analyzed the impact of the timing of development and determined total proved reserves was materially unchanged and the total PV-10 value of reserves decreased by approximately 0.5 % . Management determined these changes were immaterial and did not adjust its estimates of proved reserves at December 31, 2019 for the impact of these timing changes. +In 2018, the Company experienced extensions and discoveries of 711.2 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica Shale and SCOOP acreages. Of the total extensions and discoveries, 556.3 Bcfe was attributable to the addition of 75 PUD locations in the Utica field, 90.1 Bcfe was attributable to the addition of 11 PUD locations in the SCOOP field and 3.0 Bcfe was attributable to the addition of 13 PUD locations in the Southern Louisiana fields as a result of the Company's current development plan that refocused some activity within existing fields. This change reflects the Company's ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +In 2018, the Company experienced downward revisions of 1.0 Tcfe in estimated proved reserves with the exclusion of 127 PUD locations in the Company's Utica field and 12 PUD locations in the Company's SCOOP field, which was primarily the result of changes in the Company's development schedule moving development in excess of five years from initial booking. The development plan change, as approved by the Company's senior management and board of directors, is a result of continued focus on free cash flow generation. This downward revision was partially offset by upward revisions of 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length, 67.6 Bcfe due to changes in ownership interest, 27.9 Bcfe due to an increase in pricing and 8.3 Bcfe due to changes in well performance. In addition, the Company sold approximately 44.9 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in the Company's Utica field. +In 2017, the Company purchased 1.5 Tcfe through its acquisition of SCOOP properties discussed in Note 2 . Also in 2017, the Company experienced extensions and discoveries of 1.6 Tcfe of estimated proved reserves primarily attributable to the continued development of the Company's Utica Shale acreage. In 2017, the Company experienced upward revisions of 201.3 Bcfe in estimated proved reserves due to an increase in well performance, 214.1 Bcfe due to the increase in pricing and 95.9 Bcfe due to changes in its ownership interests. These positive revisions were partially offset by downward revisions of 133.0 Bcfe due to a decline in well performance specific to one area in the Company's Utica field and a decline of 45.7 Bcfe in estimated proved reserves in 2017 primarily due to the exclusion of ten PUD locations in the Company's Utica field, five of which were operated by the Company and five of which were operated by other operators, that were excluded due to changes in drilling schedules. Additional downward revision of 0.6 Bcfe was due to the removal of two PUD locations in the Company's Southern Louisiana fields that had not been drilled within five years of initial booking. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2019 , 2018 and 2017 using an unweighted average first-of-the-month price for the period January through December 31, 2019 , 2018 and 2017 . +103 +Table of Contents +Index to Financial Statements +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2019 +2018 +2017 +(In thousands) +Future cash flows +$ +10,451,179 +$ +14,483,197 +$ +11,202,692 +Future development and abandonment costs +( 2,058,374 +) +( 2,437,853 +) +( 3,005,217 +) +Future production costs +( 4,512,940 +) +( 5,067,554 +) +( 2,152,821 +) +Future production taxes +( 332,525 +) +( 455,840 +) +( 289,944 +) +Future income taxes +— +( 943,293 +) +( 573,965 +) +Future net cash flows +3,547,340 +5,578,657 +5,180,745 +10% discount to reflect timing of cash flows +( 1,843,753 +) +( 2,595,932 +) +( 2,537,181 +) +Standardized measure of discounted future net cash flows +$ +1,703,587 +$ +2,982,725 +$ +2,643,564 +Equity investment in Grizzly Oil Sands ULC Standardized measure of discounted cash flows +Future cash flows +$ +— +$ +— +$ +— +Future development and abandonment costs +— +— +— +Future production costs +— +— +— +Future production taxes +— +— +— +Future income taxes +— +— +— +Future net cash flows +— +— +— +10% discount to reflect timing of cash flows +Standardized measure of discounted future net cash flows +$ +— +$ +— +$ +— +104 +Table of Contents +Index to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2019 +2018 +2017 +(In thousands) +Sales and transfers of oil and gas produced, net of production costs +$ +( 734,354 +) +$ +( 1,063,215 +) +$ +( 756,257 +) +Net changes in prices, production costs, and development costs +( 1,372,443 +) +590,519 +913,714 +Acquisition of oil and gas reserves in place +— +— +703,866 +Extensions and discoveries +388,151 +519,137 +618,039 +Previously estimated development costs incurred during the period +405,979 +402,156 +390,673 +Revisions of previous quantity estimates, less related production costs +( 321,397 +) +( 356,933 +) +155,200 +Sales of oil and gas reserves in place +( 48,547 +) +( 25,882 +) +— +Accretion of discount +298,273 +264,356 +68,804 +Net changes in income taxes +424,628 +( 185,157 +) +( 231,545 +) +Change in production rates and other +( 319,428 +) +194,180 +93,030 +Total change in standardized measure of discounted future net cash flows +$ +( 1,279,138 +) +$ +339,161 +$ +1,955,524 +Equity investment in Grizzly Oil Sands ULC Changes in standardized measure of discounted cash flows +Sales and transfers of oil and gas produced, net of production costs +$ +— +$ +— +$ +— +Net changes in prices, production costs, and development costs +— +— +— +Acquisition of oil and gas reserves in place +— +— +— +Extensions and discoveries +— +— +— +Previously estimated development costs incurred during the period +— +— +— +Revisions of previous quantity estimates, less related production costs +— +— +— +Accretion of discount +— +— +— +Net changes in income taxes +— +— +— +Change in production rates and other +— +— +— +Total change in standardized measure of discounted future net cash flows +$ +— +$ +— +$ +— +105 +Table of Contents +Index to Financial Statements +20. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2019 and 2018 : +2019 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +320,578 +$ +458,994 +$ +285,175 +$ +281,261 +Income (loss) from operations +93,011 +218,456 +( 570,955 +) +( 1,444,205 +) +Income tax (benefit) expense +— +( 179,331 +) +( 144,047 +) +315,815 +Net income (loss) +62,242 +234,956 +( 484,802 +) +( 1,814,754 +) +Income (loss) per share: +Basic +$ +0.38 +$ +1.47 +$ +( 3.04 +) +$ +( 11.36 +) +Diluted +$ +0.38 +$ +1.47 +$ +( 3.04 +) +$ +( 11.36 +) +2018 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(In thousands) +Revenues +$ +325,392 +$ +252,740 +$ +360,962 +$ +415,950 +Income from operations +111,990 +15,373 +115,116 +156,480 +Income tax benefit +( 69 +) +— +— +— +Net income +90,090 +111,319 +95,150 +134,001 +Income per share: +Basic +$ +0.50 +$ +0.64 +$ +0.55 +$ +0.78 +Diluted +$ +0.50 +$ +0.64 +$ +0.55 +$ +0.78 +21. +SUBSEQUENT EVENTS +Sale of Water Infrastructure Assets +In December 2019, the Company entered into an agreement to divest its water infrastructure assets across its SCOOP position to a third-party water service provider. This transaction closed on January 2, 2020. The Company received $ 50.0 million in cash upon closing and has an opportunity to earn potential additional incentive payments over the next 15 years, subject to the Company’s ability to meet certain thresholds which will be driven by, among other things, the Company’s future development program and future water production levels. The agreement contains no minimum volume commitments. The assets related to this transaction are included in the amortization base of the full cost pool and the Company does not expect to recognize a gain or loss in the statement of operations. +Derivatives +In January and February 2020, the Company early terminated some of its fixed price swaps for natural gas scheduled to settle in August through November of 2020 covering an average of approximately 294,000 MMBtu of natural gas per day over this four month period. The value of these early terminations was used to enhance the fixed price for new natural gas swaps for April and May of 2020 covering an average of approximately 472,000 MMBtu of natural gas per day over this two month period at a weighted average price of $ 2.85 per MMBtu. +Debt Repurchases +In January 2020, the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $ 10.2 million aggregate principal amount of its 2024 Notes, 2025 Notes, and 2026 Notes for $ 6.9 million . +106 +Table of Contents +Index to Financial Statements +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. +CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2019 because of the material weakness in our internal control over financial reporting described in Management’s Report on Internal Control Over Financial Reporting disclosed below. +Our Chief Executive Officer and Chief Financial Officer also determined that the material weakness existed at September 30, 2019 and also concluded that we did not maintain effective disclosure controls and procedures as of that date. Our Chief Executive Officer and Chief Financial Officer have concluded that the unaudited condensed consolidated financial statements included in the Form 10-Q filing for the reporting period ended September 30, 2019 were materially misstated as a result of the material weakness. The Company filed an amended Form 10-QA for the period ended September 30, 2019 with the restated amounts. +Remediation Plan for the Material Weakness +Our management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness identified. Specifically, our management is currently evaluating our policies and procedures related to its process of accounting for unevaluated oil and gas properties. We plan to design and implement additional controls to ensure that we are properly and timely identifying and transferring leasehold costs associated with acreage expirations, lease transfers and proved reserve additions from the unevaluated capitalized cost pool to the evaluated amortization base. We will do that through continued focus on (i) redesigning controls over the completeness and reconciliation of acreage movements; (ii) identifying new resources to execute and monitor the redesigned controls; (iii) process enhancements and (iv) additional technical training of our accounting staff. Our management believes that these actions will remediate the material weakness in internal control over financial reporting described above. The material weakness will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting, other than the material weakness described above. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +107 +Table of Contents +Index to Financial Statements +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +Management determined it did not effectively design and maintain controls over the completeness and accuracy of the accounting of transfers of unevaluated capitalized costs into the amortization base for the three and nine month periods ended September 30, 2019 and the twelve month period ended December 31, 2019. Specifically, we did not have an adequate process for monitoring that our accounting policies for transferring unevaluated oil and gas properties were consistently being performed timely and reconciled with the general ledger. This material weakness resulted in a material error in the amount of impairment expense booked in relation to our oil and gas properties for the nine months ended September 30, 2019 and resulted in the Company restating its consolidated financial statements as of and for the three and nine months ended September 30, 2019. +As a result of the material weakness in internal control over financial reporting described above, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2019 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2019, as stated in their accompanying report. +/s/ David M. Wood +/s/ Quentin Hicks +Name: +David M. Wood +Name: +Quentin Hicks +Title: +Chief Executive Officer and President +Title: +Chief Financial Officer +108 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. +A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: +The Company did not have effective internal control in place over the completeness and accuracy of the information used in determining the accounting for transfers of unevaluated capitalized costs into the amortization base. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated February 27, 2020 which expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +109 +Table of Contents +Index to Financial Statements +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 27, 2020 +110 +Table of Contents +Index to Financial Statements +ITEM 9B. +OTHER INFORMATION +Not applicable. +PART III +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than April 30, 2020 (the 2020 Proxy Statement). +ITEM 11. +EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2020 Proxy Statement. +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2020 Proxy Statement. +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2020 Proxy Statement. +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2020 Proxy Statement. +111 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. +Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. +Financial Statement Schedules. No financial statement schedules are applicable or required. +3. +Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number +Description +Form +SEC File Number +Exhibit +Filing Date +Filed or Furnished Herewith +3.1 +Restated Certificate of Incorporation. +8-K +000-19514 +3.1 +4/26/2006 +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation. +10-Q +000-19514 +3.2 +11/6/2009 +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation. +8-K +000-19514 +3.1 +7/23/2013 +3.4 +Second Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K +000-19514 +3.1 +2/27/2020 +4.1 +Form of Common Stock certificate. +SB-2 +333-115396 +4.1 +7/22/2004 +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023). +8-K +000-19514 +4.1 +4/21/2015 +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024). +8-K +000-19514 +4.1 +10/19/2016 +4.4 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025). +8-K +000-19514 +4.1 +12/21/2016 +4.5 +Indenture, dated as of October 11, 2017, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2026). +8-K +000-19514 +4.1 +10/11/2017 +112 +Table of Contents +Index to Financial Statements +4.6 +Registration Rights Agreement, dated as of February 17, 2017, by and between Gulfport Energy Corporation and Vitruvian II Woodford, LLC. +8-K +000-19514 +4.1 +2/24/2017 +4.7 +Voting Rights Waiver Agreement, dated June 10, 2015, by and among Gulfport Energy Corporation, Putnam Investment Management, LLC, The Putnam Advisory Company, LLC and Putnam Fiduciary Trust Company. +8-K +000-19514 +4.1 +6/12/2015 +4.8 +Description of Securities:Registered under Section 12(b) of the Exchange Act +X +10.1+ +2019 Amended and Restated Stock Incentive Plan +DEF 14A +000-19514 +Appendix A +4/30/19 +10.2+ +2019 Amended and Restated Stock Incentive Plan Form of Performance Share Award Agreement. +8-K +000-19514 +10.3 +8/12/19 +10.3+ +2014 Executive Annual Incentive Compensation Plan. +8-K +000-19514 +10.1 +4/7/2014 +10.4+ +Form of Stock Option Agreement. +8-K +000-19514 +10.2 +4/26/2006 +10.5+ +Form of Restricted Stock Award Agreement. +10-K +000-19514 +10.3 +2/28/2014 +10.6+ +2013 Restated Stock Incentive Plan. +S-4 +333-189992 +10.1 +7/17/2013 +10.7 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and David M. Wood. +10-Q +000-19514 +10.3 +8/2/2019 +10.8 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Donnie Moore. +10-Q +000-19514 +10.4 +8/2/2019 +10.9 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Patrick K. Craine. +10-Q +000-19514 +10.5 +8/2/2019 +10.10 +Employment Agreement, effective as of August 26, 2019, by and between Gulfport Energy Corporation and Quentin Hicks. +8-K +000-19514 +10.1 +8/12/19 +10.11 +Separation and Release Agreement, effective August 9, 2019, by and between Gulfport Energy Corporation and Keri Crowell. +8-K +000-19514 +10.2 +8/12/19 +10.12 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto. +8-K +000-19514 +10.1 +1/3/2014 +113 +Table of Contents +Index to Financial Statements +10.13 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto. +8-K +000-19514 +10.1 +4/28/2014 +10.14 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +12/3/2014 +10.15 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +4/15/2015 +10.16 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +10-Q +000-19514 +10.2 +8/7/2015 +10.17 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +9/24/2015 +10.18 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +10-Q +000-19514 +10.2 +5/5/2016 +10.19 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +12/15/2016 +10.20 +Eighth Amendment to Amended and Restated Credit Agreement, entered into as of March 29, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, and the lenders party thereto. +8-K +000-19514 +10.1 +4/4/2017 +10.21 +Ninth Amendment to Amended and Restated Credit Agreement, entered into as of May 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, the existing lenders named therein and JPMorgan Chase Bank, N.A., Commonwealth Bank of Australia, ABN, AMRO Capital USA LLC, Fifth Third Bank and Canadian Imperial Bank of Commerce, New York branch, as new lenders. +10-Q +000-19514 +10.2 +5/9/2017 +114 +Table of Contents +Index to Financial Statements +10.22 +Tenth Amendment to Amended and Restated Credit Agreement, dated as of October 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +10/5/2017 +10.23 +Eleventh Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +11/28/2017 +10.24 +Twelfth Amendment to Amended and Restated Credit Agreement, dated as of May 21, 2018, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K +000-19514 +10.1 +5/25/2018 +10.25 +Thirteenth Amendment to the Amended and Restated Credit Agreement, dated as of November 28, 2018, between Gulfport Energy Corporation, as Borrower, The Bank of Nova Scotia, as Administrative Agent and the lenders party thereto. +8-K +000-19514 +10.1 +12/4/2018 +10.26# +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation. +10-Q +000-19514 +10.1 +11/7/2014 +10.27# +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation. +10-Q +000-19514 +10.2 +11/5/2015 +10.28 +Second Amendment to Sand Supply Agreement, dated as of August 6, 2018, between Gulfport Energy Corporation and Muskie Proppant LLC. +10-Q +000-19514 +10.2 +11/1/2018 +10.29# +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10-Q +000-19514 +10.2 +11/7/2014 +10.30# +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10-K +000-19514 +10.19 +2/19/2016 +10.31# +Amendment No. 2, dated as of July 10, 2018, between Stingray Pressure Pumping, LLC and Gulfport Energy Corporation to that certain Amended & Restated Master Services Agreement for Pressure Pumping Services, effective as of October 1, 2014, as amended effective January 1, 2016. +10-Q +000-19514 +10.2 +8/2/2018 +10.32+ +Form of Indemnification Agreement. +S-4 +333-199905 +10.1 +11/6/2014 +14 +Code of Ethics. +8-K +000-19514 +14 +2/14/2006 +115 +Table of Contents +Index to Financial Statements +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Grant Thornton LLP. +X +23.2 +Consent of Netherland, Sewell & Associates, Inc. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS +Inline XBRL Instance Document. +X +11.SCH* +Inline XBRL Taxonomy Extension Schema Document. +X +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document. +X +101.DEF +Inline XBRL Taxonomy Extension Definition Linkbase Document. +X +101.LAB +Inline XBRL Taxonomy Extension Labels Linkbase Document. +X +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document. +X +* +Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. +** +The Company agrees to furnish a copy of any of its unfiled long-term debt instruments to the Securities and Exchange Commission upon request. ++ +Management contract, compensatory plan or arrangement. +# +Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission. +116 +Table of Contents +Index to Financial Statements +ITEM 16. +FORM 10-K SUMMARY +None. +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 27, 2020 +GULFPORT ENERGY CORPORATION +By: +/s/ Quentin Hicks +Quentin Hicks +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +117 +Table of Contents +Index to Financial Statements +Date: +February 27, 2020 +By: +/s/ DAVID M. WOOD +David M. Wood +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: +February 27, 2020 +By: +/s/ DAVID L. HOUSTON +David L. Houston +Chairman of the Board and Director +Date: +February 27, 2020 +By: +/s/ QUENTIN HICKS +Quentin Hicks +Chief Financial Officer +(Principal Accounting and Financial Officer) +Date: +February 27, 2020 +By: +/s/ DEBORAH G. ADAMS +Deborah G. Adams +Director +Date: +February 27, 2020 +By: +/s/ ALVIN BLEDSOE +Alvin Bledsoe +Director +Date: +February 27, 2020 +By: +/s/ VALERIE JOCHEN +Valerie Jochen +Director +Date: +February 27, 2020 +By: +/s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: +February 27, 2020 +By: +/s/ BEN T. MORRIS +Ben T. Morris +Director +Date: +February 27, 2020 +By: +/s/ PAUL WESTERMAN +Paul Westerman +Director +S-1 \ No newline at end of file diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/filing_metadata.csv b/raw/filings/0000874499/2019/0001628280-20-002453/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..633bb9fdcea72b9257a91f156080c6ca5cfc23c3 --- /dev/null +++ b/raw/filings/0000874499/2019/0001628280-20-002453/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2020-02-27,2019-12-31,2020-02-27T22:14:25.000Z,0001628280-20-002453,gpor-12312019x10k.htm,10-K,21779799,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828020002453/gpor-12312019x10k.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828020002453/,2019,2019,1 diff --git a/raw/filings/0000874499/2019/0001628280-20-002453/rpt_disclosure.txt b/raw/filings/0000874499/2019/0001628280-20-002453/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad5e529eb86f4755b84c823f968343b3b9243041 --- /dev/null +++ b/raw/filings/0000874499/2019/0001628280-20-002453/rpt_disclosure.txt @@ -0,0 +1,4 @@ +Approval of Related Party Transactions +The Audit Committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be substantively applied to each transaction reviewed by the Audit Committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether such transactions are in the best interests of the Company. The Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party transactions. +The Company’s policy is that all its employees and directors, as well as their family members, must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the Board of Directors or a committee consisting solely of independent directors may grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give rise to a conflict of interest. +Under the Audit Committee charter, the Audit Committee is responsible for reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the Board of Directors. In addition, the Board of Directors and, pursuant to its written charter, the Audit Committee, reviews and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. 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+Table of Contents +Index to Financial Statement s +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2020 +OR +☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 001-19514 +Gulfport Energy Corp oration +(Exact Name of Registrant As Specified in Its Charter) +Delaware 73-1521290 +(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number) +3001 Quail Springs Parkway +Oklahoma City, Oklahoma 73134 +(Address of Principal Executive Offices) (Zip Code) +( 405 ) 252-4600 +(Registrant Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +None (1) +(1) O n November 27, 2020, our common stock was suspended from trading on the NASDAQ Stock Market LLC ("NASDAQ"). On November 30, 2020, our common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “ GPORQ ". On February 2, 2021, NASDAQ filed a Form 25 delisting our common stock from trading on NASDAQ, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the de-registration of our common stock under section 12(b) of the Exchange Act became effective on February 12, 2021. +Securities registered pursuant to Section 12(g) of the Act: +Common Stock +(Title of Class) +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Table of Contents +Index to Financial Statement s +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of our common stock held by non-affiliates on June 30, 2020 was approximately $ 174.4 million. A s of February 22, 2021, there were 160,762,186 shares of our $0.01 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2021 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +SUMMARY RISK FACTORS +2 +PART I +4 +ITEM 1. +BUSINESS +4 +ITEM 1A. +RISK FACTORS +19 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +37 +ITEM 2. +PROPERTIES +37 +ITEM 3. +LEGAL PROCEEDINGS +37 +ITEM 4. +MINE SAFETY DISCLOSURES +37 +PART II +37 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +38 +ITEM 6. +SELECTED FINANCIAL DATA +38 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +38 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +56 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +58 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +105 +ITEM 9A. +CONTROLS AND PROCEDURES +105 +ITEM 9B. +OTHER INFORMATION +108 +PART III +108 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +108 +ITEM 11. +EXECUTIVE COMPENSATION +108 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +108 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +108 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +108 +PART IV +109 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +109 +Signatures +115 +DEFINITIONS +i +Table of Contents +Index to Financial Statement s +Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Gulfport,” the “Company” and “Registrant” refer to Gulfport Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in thousands of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K: +2005 Plan. 2005 Stock Incentive Plan. +2013 Plan. 2013 Restated Stock Incentive Plan. +2019 Plan. 2019 Amended and Restated Stock Incentive Plan. +2020 Plan. 2020 Incentive Plan, which provides incentive awards for select employees of the Company that were tied to the achievement of one or more performance goals relating to certain financial and operational metrics over a period of time. +2023 Notes. 6.625% Senior Notes due 2023. +2024 Notes. 6.000% Senior Notes due 2024. +2025 Notes. 6.375% Senior Notes due 2025. +2026 Notes. 6.375% Senior Notes due 2026. +ASC. Accounting Standards Codification. +ASU. Accounting Standards Update. +Bankruptcy Code . Chapter 11 of Title 11 of the United States Code. +Bankruptcy Court. The United States Bankruptcy Court for the Southern District of Texas. +Bankruptcy Rules . The Federal Rules of Bankruptcy Procedure. +Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. +Bcf . One billion cubic feet of natural gas. +Bcfe. One billion cubic feet of natural gas equivalent. +Btu . British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels. +Building Loan. Loan agreement for our corporate headquarters scheduled to mature in June 2025. +Chapter 11 Cases. Voluntary petitions filed on November 13, 2020 by Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas, oil and NGL. +DD&A. Depreciation, depletion and amortization. +Debtors. Collectively, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +Developed Acreage . The number of acres allocated or assignable to productive wells or wells capable of production. +Development well . A well drilled within the proved area of a natural gas or crude oil reservoir to the depth of a stratigraphic horizon known to be productive. +DIP Credit Facility. Senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $262.5 million. +Dry Hole . A well that does not produce crude oil and/or natural gas in economically producible quantities. +Exploratory Well . A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area. +Grizzly. Grizzly Oil Sands ULC. +Grizzly Holdings. Grizzly Holdings Inc. +Gross Acres or Gross Wells . Refers to the total acres or wells in which a working interest is owned. +Guarantors. All existing consolidated subsidiaries that guarantee the Company's revolving credit facility or certain other debt. +Held By Production . Refers to an oil and gas lease continued into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith. +Horizontal Drilling . A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval. +LIBOR. London Interbank Offered Rate. +ii +Table of Contents +Index to Financial Statement s +LOE. Lease operating expenses. +MBbl. One thousand barrels of crude oil, condensate or natural gas liquids. +Mcf . One thousand cubic feet of natural gas. +Mcfe. One thousand cubic feet of natural gas equivalent. +MMBbl. One million barrels of crude oil, condensate or natural gas liquids. +MMBtu. One million British thermal units. +MMcf. One million cubic feet of natural gas. +MMcfe. One million cubic feet of natural gas equivalent. +Natural Gas Liquids (NGL). Hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include ethane, propane, butane, isobutene, pentane, hexane and natural gasoline. +Net Acres or Net Wells . Refers to the sum of the fractional working interests owned in gross acres or gross wells. +Net Revenue Interest (NRI). An interest in an oil and natural gas property entitling the owner to a share of oil, natural gas or NGL production. +NYMEX. New York Mercantile Exchange. +OCC. Oklahoma Corporation Commission. +Petition Date . November 13, 2020. +Plan . Prearranged joint plan of reorganization under the Restructuring Support Agreement. +Pre-Petition Revolving Credit Facility . Senior secured revolving credit facility, as amended, with The Bank of Nova Scotia as the lead arranger and administrative agent and certain lenders from time to time party thereto with a maximum facility amount of $580 million. +Productive Well . A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes. +Proved Developed Reserves (PDPs) . Reserves expected to be recovered through existing wells with existing equipment and operating methods. +Proved Undeveloped Reserves (PUDs). Proved reserves expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. +PV-10. Present net value of estimated future net revenues, discounted at 10%. +Reservoir . A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. +Restructuring . Restructuring contemplated under the Restructuring Support Agreement including equitizing a significant portion of our pre-petition indebtedness and rejecting or renegotiating certain contracts. +Royalty Interest . Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property. +RSA . Restructuring Support Agreement. +SCOOP . Refers to the South Central Oklahoma Oil Province, a term used to describe a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. Our acreage is primarily in Garvin, Grady and Stephens Counties. +SEC . The United States Securities and Exchange Commission. +Section 382. Internal Revenue Code Section 382. +Senior Notes. Collectively, the 6.625% Senior Notes due 2023, the 6.000% Senior Notes due 2024, the 6.375% Senior Notes due 2025 and the 6.375% Senior Notes due 2026. +Standardized Measure. Standardized measure of discounted future net cash flows. +Tcfe. One trillion cubic feet of natural gas equivalent. +Undeveloped Acreage . Lease or mineral acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas. +USEPA. United States Environmental Protection Agency. +Utica . Refers to the hydrocarbon bearing rock formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio. +Working Interest (WI). The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. +iii +Table of Contents +Index to Financial Statement s +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as the potential effects of the Chapter 11 Cases on our operations, management, and employees, our ability to consummate the restructuring, our ability to continue as a going concern, the expected impact of the COVID-19 pandemic on our business, our industry and the global economy, estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +Investors should note that we announce financial information in SEC filings. We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Index to Financial Statement s +SUMMARY RISK FACTORS +Chapter 11 Cases Risks +• The Chapter 11 Cases may have a material adverse impact on our business, financial condition, results of operations and cash flows. In addition, the consummation of a plan of reorganization will result in the cancellation and discharge of our equity securities, including our common stock. +• Delays in the Chapter 11 Cases may increase the risk of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process. +• We are subject to certain risks and uncertainties if our exclusive right to file a plan of reorganization is terminated. +• Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses. +• Trading in our common stock during the Chapter 11 Cases is highly speculative and poses substantial risks. +• The RSA is subject to significant conditions and milestones that may be difficult for us to satisfy. +• A plan of reorganization may not become effective. +• The audited consolidated financial statements included in this Form 10-K for the period ended December 31, 2020 contain disclosures that express substantial doubt about our ability to continue as a going concern. +• Upon emergence from bankruptcy, the composition of our Board of Directors may change significantly. +Financial, Liquidity and Commodity Price Risks +• Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business +• Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +• We have a significant amount of indebtedness. Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects. +• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +• We have significant capital needs, and our ability to access the capital and credit markets to raise capital on favorable terms is limited by our debt level and industry conditions. +• If we are unable to generate enough cash flow from operations to service our indebtedness or are unable to use future borrowings to refinance our indebtedness or fund other capital needs, in each case following our restructuring, we may have to undertake alternative financing plans, which may have onerous terms or may be unavailable. +• Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +• Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +• A change of control could limit our use of net operating losses to reduce future taxable income. +Industry, Business and Operational Risks +• The oil and gas exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +• If we are not able to replace reserves, we may not be able to sustain production. +• The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +• Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +• Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +• Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +• Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +2 +Table of Contents +Index to Financial Statement s +• We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +• Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +• Substantially all of our producing properties are located in Eastern Ohio and Oklahoma, making us vulnerable to risks associated with operating in these regions. +• The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +• The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +• Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +• Our forecasted production is less than our firm transportation commitment levels under our firm transportation contracts due to decreased developmental activities, which will result in excess firm transportation costs and may have a material adverse effect on our operations. +• The outbreak of the novel coronavirus, or COVID-19, has affected and may materially adversely affect, and any future outbreak of any other highly infectious or contagious diseases may materially adversely affect, our operations, financial performance and condition, operating results and cash flows. +• A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +• Terrorist activities could materially and adversely affect our business and results of operations. +• Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Legal and Regulatory Risks +• The ultimate outcome of pending legal and governmental proceedings is uncertain, and there are significant costs associated with these matters. +• Decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties or result in the loss of some of our leasehold acreage in Ohio. +• We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +• Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +• Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +• Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +• We may have material liability related to plugging and abandonment, reclamation, civil lawsuits and regulatory fines related to our divested Louisiana assets. +3 +Table of Contents +Index to Financial Statement s +PART I +ITEM 1. BUSINESS +Our Business +A Delaware corporation formed in 1997, we are an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. Our principal properties are located in Eastern Ohio, where we target development in the Utica formation, and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations. +As of December 31, 2020, we had 2.6 Tcfe of proved reserves with a standardized measure of discounted future net cash flows of $540.0 million and a PV-10 of $540.0 million. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC filed voluntary petitions of relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases are being administered jointly under the caption In re Gulfport Energy Corporation, et al ., Case No. 20-35562 (DRJ). Information about our Chapter 11 cases is available at our website (www.gulfportenergy.com). +We are currently operating our business and managing our properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On November 14, 2020, the Bankruptcy Court entered an order authorizing the joint administration and procedural consolidation of these Chapter 11 Cases pursuant to Bankruptcy Rule 1015(b). At the first day hearing on November 16, 2020, the Bankruptcy Court granted certain requested relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, pay taxes and certain governmental fees and charges, continue to operate our cash management system in the ordinary course, remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and pay the pre-petition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. For goods and services provided following the Petition Date, we are permitted and intend to pay vendors in the ordinary course. +Subject to certain exceptions provided for in section 362 of the Bankruptcy Code, all judicial and administrative proceedings against us or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, the filing of new judicial or administrative actions against us or our property for claims arising prior to the date on which our Chapter 11 Cases were filed were automatically enjoined. This prohibits, for example, our lenders or noteholders from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts. Accordingly, unless the Bankruptcy Court agrees to lift the automatic stay, all of our pre-petition liabilities and obligations should be settled or compromised under the Bankruptcy Code as part of our Chapter 11 proceedings. +Our operations and ability to execute our business remain subject to the risks and uncertainties described in Item 1A.“Risk Factors”. In addition, our assets, liabilities, capital structure, shareholders, officers and directors could change materially because of our Chapter 11 Cases. In addition, the description of our operations, properties and capital plans included in this +4 +Table of Contents +Index to Financial Statement s +Annual Report on Form 10-K may not accurately reflect our operations, properties and capital plans after we emerge from Chapter 11. +Business Strategy +Gulfport aims to create sustainable value through the development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in a manner that generates sustainable cash flow and improves margins and operating efficiencies, while maintaining exceptional environmental and safety performance. To accomplish these goals, we allocate capital expenditures to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +As noted above, we are currently engaged in an in-court restructuring process to improve our balance sheet strength, cost structure and financial strength and flexibility. +Operating Areas +We foc us our development and production activities in the geographic operating areas described below. +Utica - The Utica is a hydrocarbon bearing rock formation located in the Appalachian Basin of the United States and Canada. We have approximately 193,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During the fourth quarter of 2020 we produced approximately 887 MMcfe per day net to our interests in this area and accounts for approximately 82% of our total production. +SCOOP - The SCOOP, or South Central Oklahoma Oil Province, is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 40,000 in the Woodford formation and approximately 33,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness fro m 50 to over 250 feet. During the fourth quarter of 2020, we produced approximately 189 MMcfe per day net to our interests in this area and accounts for approximately 18% of our total production. +Additional Properties - In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields including the Bakken formation in North Dakota that account for less than 1% of our total production and proved reserves. +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +5 +Table of Contents +Index to Financial Statement s +2020 2019 2018 +Gross Net Gross Net Gross Net +Recompletions: +Productive — — — — 47 47 +Dry — — — — — — +Total — — — — 47 47 +Development: +Productive 26 24.4 25 22.4 34 30 +Dry — — — — — — +Total 26 24.4 25 22.4 34 30 +Exploratory: +Productive — — 1 0.8 2 1.5 +Dry — — — — — — +Total — — 1 0.8 2 1.5 +The following table presents activity by operating area for the year ended December 31, 2020: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +16 16.0 25 23.8 — — — — +SCOOP (2) +10 8.4 4 3.8 19 0.05 12 0.04 +Total 26 24.4 29 27.6 19 0.05 12 0.04 +_____________________ +(1) Of the 16 gross wells we drilled in 2020, nine were completed as producing wells and seven were in various stages of completion as of December 31, 2020. +(2) Of the 10 gross wells we drilled in 2020, zero were completed as producing wells and 10 were in various stages of completion as of December 31, 2020. +Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2020. +Average NRI/WI Productive +Oil Wells Productive +Gas Wells Non-Productive +Oil Wells Non-Productive +Gas Wells Developed +Acreage Undeveloped +Acreage +Field Percentages Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net +Utica 46.78/57.29 146 42.1 501 328.7 2 0.7 11 6.6 120,699 93,598 106,418 99,265 +SCOOP 24.43/30.32 105 18.3 508 163.2 7 1.0 33 15.5 49,325 34,421 8,294 5,941 +Other Various 14 0.2 9 — — — — — 1,021 395 4,145 1,021 +Overrides/Royalty Non-operated 0.16/0.0 459 — 86 — 2 — 1 — — — — — +Total 724 60.6 1,104 491.9 11 1.7 45 22.1 171,045 128,414 118,857 106,227 +Of our leases that are not held by production, most have a three- to five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2020. +6 +Table of Contents +Index to Financial Statement s +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31: +2021 13,488 12,508 +2022 16,438 14,880 +2023 16,191 15,290 +After 2023 3,291 3,006 +Held by production or operations 69,449 60,543 +Total 118,857 106,227 +Oil, Natural Gas and NGL Reserves +The tables below set forth information as of December 31, 2020, with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2020 +Oil +(MMBbl) Natural +Gas +(Bcf) NGL (MMBbl) Total (Bcfe) +Proved developed 7 1,358 22 1,527 +Proved undeveloped 7 923 16 1,061 +Total proved (1) +13 2,281 38 2,588 +Totals may not sum or recalculate due to rounding. +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (2) +$ 679 $ 285 $ 964 +Present value of estimated future net revenue (PV-10) (2) +$ 504 $ 36 $ 540 +Standardized measure (2) +$ 540 +_____________________ +(1) Utica and SCOOP accounted for approximately 67% and 33%, respectively, of our estimated proved reserves by volume as of December 31, 2020. +(2) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2020, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2020. The prices used in our PV-10 measure were $39.54 per barrel and $1.99 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2020. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense. There was no effect of estimated future income tax expense as of December 31, 2020, primarily as a result of significant net operating loss carryforwards that can be used to offset income taxes on future taxable income. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also +7 +Table of Contents +Index to Financial Statement s +understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +_____________________ +Grizzly had no proved reserves as of December 31, 2020. For further discussion of our interest in Grizzly, see “ Our Equity Investments ” below. +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2020. +The following table summarizes the changes in our estimated proved reserves during 2020 (in Bcfe): +Proved Reserves, December 31, 2019 4,528 +Sales of oil and natural gas reserves in place (75) +Extensions and discoveries 240 +Revisions of prior reserve estimates (1,725) +Current production (380) +Proved Reserves, December 31, 2020 2,588 +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of minerals in place during a period. During 2020, we sold approximately 74.9 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our Utica assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 239.8 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 14 PUD locations in our Utica acreage for 150.6 Bcfe and eight PUD locations in our SCOOP acreage for 87.8 Bcfe. The commodity prices utilized for the 2020 reserves determination as well as our revised five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 1.7 Tcfe in estimated proved reserves, of which 1,268.4 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2020 and the 12-month average price for natural gas decreased from $2.58 per MMBtu for 2019 to $1.99 per MMBtu for 2020, the 12-month average price for NGL decreased from $21.25 per barrel for 2019 to $15.40 per barrel for 2020, and the 12-month average price for crude oil decreased from $55.85 per barrel for 2019 to $39.54 per barrel for 2020. +8 +Table of Contents +Index to Financial Statement s +An additional 720.3 Bcfe in downward revisions was a result of the exclusion of 48 PUD locations in our Utica field and 31 PUD locations in our SCOOP field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow and ongoing optimization of our development plan. +Positive revisions of 263.8 Bcfe were experienced from a combination of operating and development cost improvements, well performance and working interest changes. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2020, 2019 and 2018 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 19 of the notes to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2020, our proved undeveloped reserves totaled 7 MMBbl of oil, 923 Bcf of natural gas and 16 MMBbl of NGL, for a total of 1,061 Bcfe. Approximately 60% and 40% of our PUD reserves at year-end 2020 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2020 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2019 2,544 +Sales of oil and natural gas reserves in place (74) +Extensions and discoveries 238 +Conversion to proved developed reserves (368) +Revisions of prior reserve estimates (1,279) +Proved Undeveloped Reserves, December 31, 2020 1,061 +Sales of oil and natural gas reserves in place. During 2020, we sold approximately 74.2 Bcfe of proved undeveloped oil and natural gas reserves associated with various operated interests, the majority of which were in our Utica field. +Extensions and discoveries. Our extensions of approximately 238.4 Bcfe were primarily attributed to the addition of 14 PUD drilling locations in the Utica field and eight PUD drilling locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. The commodity prices utilized for the 2020 reserves determination and our revised five-year development plan focused on generating sustainable cash flow limited our ability to add well locations. +Conversion to proved developed reserves. Our 2020 development activities resulted in the conversion of approximately 367.7 Bcfe into proved developed producing reserves, attributable to 25 PUD locations in the Utica field and 10 PUD locations in the SCOOP field. These 35 PUDs represent a conversion rate of 14% for 2020. +Revision of prior reserve estimates. We experienced proved undeveloped downward revisions of 720.3 Bcfe from the exclusion of 48 PUD locations in our Utica field and 31 PUD locations in our SCOOP field due to the SEC five-year development rule. The development plan change, as approved by our senior management and Board of Directors, reflects our commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. +9 +Table of Contents +Index to Financial Statement s +We also experienced 842.9 Bcfe of downward revisions as a result of commodity price changes. These downward revisions were partially offset by positive revisions of 283.7 Bcfe in estimated proved reserves from a combination of operating and development cost improvements, well performance and working interest changes. +Costs incurred relating to the development of PUDs were approximately $182.3 million in 2020. +All PUD drilling locations included in our 2020 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2020, less than 1% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2020, 2019 and 2018 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has approximately 85 years combined industry experience and our reservoir staff has approximately 50 years combined experience. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our board of directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +10 +Table of Contents +Index to Financial Statement s +PV-10 Sensitivities +As noted above, our December 31, 2020 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2020 of $39.54 per barrel and $1.99 per MMBtu. Holding production and development costs constant, if SEC pricing were $43.49 per barrel and $2.19 per MMBtu, or a 10% increase, this would have resulted in an increase of 181.7 Bcfe of our total proved reserves and a $350 million increase in PV-10 value at December 31, 2020. Holding production and development costs constant, if SEC pricing were $35.59 per barrel and $1.79 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 839.9 Bcfe of our total proved reserves and a $228 million decrease in PV-10 value at December 31, 2020. For each of these scenarios, the 82 PUDs that were economic at SEC pricing were included. +Holding production and development costs constant while assuming SEC pricing closer to the long-term strip pricing of $50.00 per barrel for crude oil and $2.50 per MMBtu for natural gas results in an increase of 1,065 Bcfe of total proved reserves and a $989 million increase in PV-10 value at December 31, 2020. For this scenario, there were an additional 55 PUD locations included that were economic at these prices. +Production, Prices and Production Costs +The following table presents our production volumes during the periods indicated: +Year Ended December 31, 2020 +Net Production +Field Natural Gas (MMcf) Oil and Condensate (MBbl) NGL (MBbl) Natural gas equivalents (MMcfe) MMcfe per Day +Utica 291,133 393 1,077 299,955 820 +SCOOP 53,853 1,392 2,886 79,519 217 +Other 13 18 1 126 0.3 +Total 344,999 1,803 3,964 379,600 1,037 +11 +Table of Contents +Index to Financial Statement s +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2020 2019 2018 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) 344,999 458,178 443,742 +Natural gas production volumes (MMcf) per day 943 1,255 1,216 +Total sales $ 671,535 $ 1,135,381 $ 1,318,472 +Average price without the impact of derivatives ($/Mcf) $ 1.95 $ 2.48 $ 2.97 +Impact from settled derivatives ($/Mcf) (1) +$ 0.33 $ 0.23 $ (0.04) +Average price, including settled derivatives ($/Mcf) $ 2.28 $ 2.71 $ 2.93 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,803 2,186 2,801 +Oil and condensate production volumes (MBbl) per day 5 6 8 +Total sales $ 62,902 $ 117,937 $ 177,793 +Average price without the impact of derivatives ($/Bbl) $ 34.88 $ 53.95 $ 63.48 +Impact from settled derivatives ($/Bbl) (2) +$ 25.76 $ 1.86 $ (9.51) +Average price, including settled derivatives ($/Bbl) $ 60.64 $ 55.81 $ 53.97 +NGL sales +NGL production volumes (MBbl) 3,964 5,074 5,993 +NGL production volumes (MBbl) per day 11 14 16 +Total sales $ 66,814 $ 101,448 $ 178,915 +Average price without the impact of derivatives ($/Bbl) $ 16.86 $ 19.99 $ 29.85 +Impact from settled derivatives ($/Bbl) $ (0.04) $ 2.79 $ (2.30) +Average price, including settled derivatives ($/Bbl) $ 16.82 $ 22.78 $ 27.55 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 379,600 501,742 496,505 +Natural gas equivalents (MMcfe) per day 1,037 1,375 1,360 +Total sales $ 801,251 $ 1,354,766 $ 1,675,180 +Average price without the impact of derivatives ($/Mcfe) $ 2.11 $ 2.70 $ 3.37 +Impact from settled derivatives ($/Mcfe) $ 0.42 $ 0.24 $ (0.12) +Average price, including settled derivatives ($/Mcfe) $ 2.53 $ 2.94 $ 3.25 +Production Costs: +Avg. lease operating expenses ($/Mcfe) $ 0.14 $ 0.15 $ 0.16 +Avg. production taxes ($/Mcfe) $ 0.05 $ 0.06 $ 0.07 +Avg. midstream gathering, processing & firm transportation costs ($/Mcfe) $ 1.20 $ 1.01 $ 0.98 +Total LOE, midstream costs and production taxes ($/Mcfe) $ 1.39 $ 1.22 $ 1.21 +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statement s +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2020: +Year Ended December 31, +2020 2019 2018 +Utica +Net Production +Natural gas (MMcf) 291,133 387,473 379,417 +Oil (MBbl) 393 247 299 +NGL (MBbl) 1,077 1,812 2,700 +Total (MMcfe) 299,955 399,828 397,406 +Average Price Without the Impact of Derivatives: +Natural gas ($/Mcf) $ 1.97 $ 2.28 $ 2.77 +Oil ($/Bbl) $ 33.41 $ 51.11 $ 60.22 +NGL ($/Bbl) $ 18.55 $ 19.74 $ 27.99 +Average Lease Operating Expenses ($/Mcfe) $ 0.13 $ 0.13 $ 0.14 +Year Ended December 31, +2020 2019 2018 +SCOOP +Net Production +Natural gas (MMcf) 53,853 70,669 64,258 +Oil (MBbl) 1,392 1,610 1,710 +NGL (MBbl) 2,886 3,261 3,292 +Total (MMcfe) 79,519 99,891 94,268 +Average Price Without the Impact of Derivatives: +Natural gas ($/Mcf) $ 1.83 $ 2.13 $ 2.73 +Oil ($/Bbl) $ 35.31 $ 53.32 $ 62.36 +NGL ($/Bbl) $ 16.23 $ 20.13 $ 31.39 +Average Lease Operating Expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.18 +_____________________ +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2020, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2020. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to continued dilution of our equity ownership interest in Grizzly. +Mammoth Energy . As of December 31, 2020, we owned 9,829,548 shares, or approximately 21.5%, of the outstanding common stock of Mammoth Energy Services Inc. +See Note 5 of the notes to our consolidated financial statements included elsewhere in this report for additional information regarding our equity investments. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract +13 +Table of Contents +Index to Financial Statement s +administration and nomination services for production from Gulfport-operated wells. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. +Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. See Note 17 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL revenues, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2020, 2019 and 2018 were as follows: +% of Sales +Year Ended December 31, 2020 +ECO-Energy 12 % +Year Ended December 31, 2019 +Morgan Stanley Capital 14 % +Year Ended December 31, 2018 +BP Energy Company 17 % +ECO-Energy 10 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors and service providers and our ability to secure optimal pipeline access and end markets in which to sell our production. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +14 +Table of Contents +Index to Financial Statement s +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders may result in the development of additional regulations or changes to existing regulations. Failure to comply with these laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation +15 +Table of Contents +Index to Financial Statement s +and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. +Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2020 and 2019 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. We pay these companies a retainer plus additional amounts when they provide us with clean up services. +16 +Table of Contents +Index to Financial Statement s +Human Capital Management +As of December 31, 2020, we had 256 employees, all of which are non-bargaining. The commodity downturn in late 2019 and the broader economic downturn in 2020 led to significant headcount reductions in late 2019 and 2020. Retaining, replacing and developing talent is very important as our business becomes leaner and we navigate the bankruptcy process. We recognize that even though we are a natural resource company, our most valuable assets are our people. We are passionate about devoting the time, energy and resources required to attract, motivate, retain and develop our employees. +We understand that a workplace environment that embraces diversity and is inclusive of different ideas and perspectives is a healthy environment and one that provides the best solutions to complex challenges. While being an affirmative action employer assists us in locating qualified diversity candidates when filling positions and provides us with a metrics to reflect on how diverse we are, we have recently increased our focus on diversity across the organization including our board of directors. During 2020, our Board of Directors performed an exhaustive search as part of our board refreshment process, adding two highly qualified diversity candidates that add to the background and experience represented on our Board. Gulfport Energy Corporation’s diverse independent directors currently constitute 37.5% of the Board. The Board also reviewed and refreshed its Corporate Governance Guidelines and Diversity Principles to promote a more diverse and inclusive board and company. While 2020 was a year in which we added very few new employees, 33% of our newly hired employees were diverse hires. We also initiated a program to ensure that every employee across the company engages in peer-led, small group discussion on diversity topics. The results of these conversations will help shape initiatives in 2021, and it will also mature our diversity and inclusion practices. +We have numerous programs to ensure that our employees and external partners are adequately trained to perform the critical work we do safely and effectively. The programs also focus on respecting the environments where we operate. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We also provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Safety is at the forefront of everything we do. We hold regular safety briefings prior to any significant project and routinely have safety stand-down meetings to highlight potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates, preventable motor vehicle accidents). We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity for 2020. +Executive Officers +David M. Wood, Chief Executive Officer and President +David M. Wood , 64, has served as the Chief Executive Officer and President of the Company, and as a member of our board of directors, since December 2018. Prior to joining the Company, Mr. Wood served as the Chief Executive Officer and Chairman of the Board of Directors of Arsenal Resources LLC ("Arsenal"), a West Virginia-focused natural gas producer and portfolio company of First Reserve Corporation ("First Reserve"), an energy-focused private equity firm, where he most recently served as Chairman of its board of directors and previously held the role of the Chief Executive Officer. Prior to his tenure at Arsenal, Mr. Wood served as a Senior Advisor to First Reserve from 2013 to 2016, serving on several of its portfolio company boards. Prior to his position at First Reserve, Mr. Wood spent more than 17 years at Murphy Oil Corporation (NYSE: MUR) ("Murphy Oil"), a global oil and natural gas exploration and production company, where he served as Chief Executive Officer, President and a member of the board of directors from 2009 to 2012. From 1980 to 1994, Mr. Wood held various senior positions with Ashland Exploration and Production, an oil and natural gas exploration and production company. Mr. Wood began his career as a well-site geologist in Saudi Arabia. Mr. Wood also served on the Board of Directors of the general partner of Crestwood Equity Partners LP (NYSE: CEQP) and its wholly owned subsidiary, Crestwood Midstream Partners LP, an owner and operator of crude oil and natural gas midstream assets. In addition, Mr. Wood served as the Chairman of the Board of Directors for Lilis Energy, Inc. (NYSE: LLEX), an exploration and development company operating in the Delaware Basin. Mr. Wood also served on the Board of Directors of several private oil and natural gas companies, including Deep Gulf Energy LP (prior to its acquisition by Kosmos Energy Ltd.) and Berkana Energy Corp. (when it was majority owned by Murphy Oil). Mr. Wood previously served on the board of directors and as an executive committee member of the American Petroleum Institute. He was also a member of the National Petroleum Council and is a member of the Society of Exploration Geophysicists. Mr. Wood holds a B.S. in Geology from the University of Nottingham in England and completed Harvard University’s Advanced Management Program. +17 +Table of Contents +Index to Financial Statement s +Quentin R. Hicks, Executive Vice President and Chief Financial Officer +Quentin R. Hicks , 46, has served as the Executive Vice President and Chief Financial Officer of the Company since August 2019. Prior to joining the Company, Mr. Hicks served as the Executive Vice President and Chief Financial Officer of Halcón Resources Corporation (“Halcón”), a position he held since March 2019, having previously served as Executive Vice President, Finance, Capital Markets and Investor Relations of Halcón since January 2018. Prior to that, Mr. Hicks held various roles at Halcón focused primarily on finance and investor relations. Prior to Halcón, Mr. Hicks worked for GeoResources Inc., where he served as Director of Acquisitions and Financial Planning from 2011 to 2012. From 2004 to 2011, he worked in investment banking with Bear Stearns, Sanders Morris Harris and Madison Williams, where most recently worked as a Director in their energy investment banking practice. Prior to that, Mr. Hicks worked as Manager of Financial Reporting for Continental Airlines. Mr. Hicks began his career in 1998 working as an auditor for Ernst and Young LLP. Mr. Hicks graduated from Texas A&M University with a Bachelor of Business Administration and a Master of Science degree in Accounting. In addition, Mr. Hicks holds a Master of Business Administration degree in Finance from Vanderbilt University and also holds a Certified Public Accountant license from the State of Texas. +Donnie G. Moore, Executive Vice President and Chief Operating Officer +Donnie G. Moore , 56, has served as Executive Vice President, Chief Operating Officer since January 2018. Mr. Moore had also served as Interim Chief Executive Officer of the Company from October 29, 2018, the date our former Chief Executive Officer and President left the Company, to December 18, 2018, the date of the appointment of Mr. Wood as our new Chief Executive Officer and President. From 2007 until December 2017, Mr. Moore worked at Noble Energy, Inc. (“Noble”), an independent oil and gas exploration and production company, where he most recently served as Vice President of Noble’s Texas operations for its Eagle Ford and Delaware Basin assets. Prior to that, Mr. Moore held various leadership roles at Noble including Vice President of the Marcellus Business Unit, Manager for Operations of the Wattenberg/DJ Business Unit, Manager of Operations for the Gunflint discovery in the Deepwater Gulf of Mexico and Development Manager for Noble’s Mid-Continent and Gulf Coast positions. From 1989 until 2007, Mr. Moore served in a variety of roles with ARCO Oil and Gas Company, Vastar Resources, Inc. and BP America. Mr. Moore holds a Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University. +Patrick K. Craine, Executive Vice President, General Counsel and Corporate Secretary +Patrick K. Craine , 48, has served as Executive Vice President, General Counsel and Corporate Secretary of the Company since May 2019. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. He joined Gulfport from Chesapeake Energy Corporation (NYSE: CHK) (“Chesapeake”), a hydrocarbon exploration company, where he served as Deputy General Counsel – Chief Risk and Compliance Officer from 2013 until 2019. Prior to joining Chesapeake, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the SEC and the Financial Industry Regulatory Authority, where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Michael J. Sluiter , 48, has served as Senior Vice President of Reservoir Engineering of the Company since December 2018. Mr. Sluiter joined the Company from Noble Energy, Inc., where he held various engineering positions from 2007 to 2018, including, most recently, as the Permian Basin Business Unit Manager. Mr. Sluiter has over 20 years of experience in unconventional resource development, reservoir engineering, subsurface development, business development and acquisitions, as well as leadership skills, which he developed at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter holds a Bachelor of Science degree in Chemical Engineering from the University of Sydney, Australia. +18 +Table of Contents +Index to Financial Statement s +ITEM 1A. RISK FACTORS +Summary of Risk Factors +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a summary of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Chapter 11 Cases Risks +The Chapter 11 Cases may have a material adverse impact on our business, financial condition, results of operations and cash flows. In addition, the consummation of a plan of reorganization will result in the cancellation and discharge of our equity securities, including our common stock. +The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and cash flows. During the pendency of the Chapter 11 Cases, our management may be required to spend a significant amount of time and effort dealing with restructuring matters rather than focusing exclusively on our business operations. Bankruptcy Court protection and operating as debtors in possession also may make it more difficult to retain management and the key personnel necessary to the success of our business. In addition, during the pendency of the Chapter 11 Cases, our customers, vendors and service providers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, renegotiate the terms of our agreements, terminate their relationships with us or require financial assurances from us, subject to the automatic stay imposed by the Bankruptcy Code. +Other significant risks include or relate to the following: +• the effects of the filing of the Chapter 11 Cases on our business and the interests of various constituents, including our shareholders; +• Bankruptcy Court rulings in the Chapter 11 Cases, including with respect to our motions, as well as the outcome of other pending litigation; +• our ability to operate within the restrictions and the liquidity limitations of the DIP Credit Agreement and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases; +• our ability to maintain strategic control as debtors in possession during the pendency of the Chapter 11 Cases; +• the length of time that we will operate with Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases; +• increased advisory costs during the pendency of the Chapter 11 Cases; +• the risks associated with restrictions on our ability to pursue some of our business strategies during the pendency of the Chapter 11 Cases; +• our ability to satisfy the conditions precedent to consummation of a plan of reorganization; +• the potential adverse effects of the Chapter 11 Cases on our business, cash flows, liquidity, financial condition and results of operations; +• the ultimate outcome of the Chapter 11 Cases in general; +• the cancellation of our existing equity securities, including our outstanding shares of common stock in the Chapter 11 Cases; +• the potential material adverse effects of claims that may not be discharged in the Chapter 11 Cases; +• uncertainties regarding the reactions of our customers, prospective customers, vendors and service providers to the Chapter 11 Cases; +• uncertainties regarding our ability to retain and motivate key personnel; and +• uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern. +19 +Table of Contents +Index to Financial Statement s +Further, under Chapter 11, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events, to take advantage of certain opportunities or adapt to changing market or industry conditions. +Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we provide any assurance as to our ability to continue as a going concern. +As a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements. +Delays in the Chapter 11 Cases may increase the risk of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process. +There can be no assurance that a plan of reorganization will become effective in accordance with its terms on the timeline we anticipate, or at all. Prolonged Chapter 11 proceedings could adversely affect our relationships with customers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement a plan of reorganization (or any other Chapter 11 plan). If we are unable to consummate a plan of reorganization, we may be forced to liquidate. +We are subject to certain risks and uncertainties if our exclusive right to file a plan of reorganization is terminated. +At the outset of a Chapter 11 case, the Bankruptcy Code provides debtors in possession the exclusive right to file and solicit acceptance of a plan of reorganization for the first 120 days of the bankruptcy case, subject to extension at the discretion of the court. All other parties are prohibited from filing or soliciting a plan of reorganization during this period. If the Bankruptcy Court terminates that right or the exclusivity period expires, there could be a material adverse effect on our ability to achieve confirmation of a plan in order to achieve our stated goals. The possible decision of creditors and/or other third parties, whose interest may be inconsistent with our own, to file alternative plans of reorganization could further protract the Chapter 11 Cases, leading us to continue to incur significant professional fees and costs. Because of these risks and uncertainties associated with the termination or expiration of our exclusivity rights, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we predict the ultimate impact that events occurring during the Chapter 11 Cases may have on our corporate or capital structure. +Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses. +Adverse publicity or news coverage relating to us, including, but not limited to, publicity or news coverage in connection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote a positive image after emergence from the Chapter 11 Cases. +Trading in our common stock during the Chapter 11 Cases is highly speculative and poses substantial risks. +The RSA contemplates that our existing equity interests will be cancelled and discharged in connection with the Chapter 11 Cases and the holders of those equity interests will be entitled to no recovery. Accordingly, any trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock. +Since November 30, 2020, our common stock has been trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “GPORQ”. Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange, due to factors such as a reduction in the number of investors that will consider investing in the securities, the number of market makers in the securities, reduction in securities analyst and news media coverage and lower market prices than might otherwise be obtained. In addition to those factors, the market for the outstanding shares of our common stock has been adversely affected by the provisions of the RSA that contemplate that our existing equity interests will be cancelled and discharged in connection with the Chapter 11 Cases and the holders of those equity interests, including the holders of our outstanding shares of common stock, will be entitled to no recovery relating to those equity interests. We can provide no assurance that our common stock will continue to trade on the OTC Pink Marketplace, whether broker-dealers will continue to provide public quotes of our common stock on that market, +20 +Table of Contents +Index to Financial Statement s +whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue to be provided on that market in the future. +The RSA is subject to significant conditions and milestones that may be difficult for us to satisfy. +There are certain material conditions we must satisfy under the RSA, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummation of the financing contemplated by the Exit Credit Facilities and other transactions contemplated by a plan of reorganization. Our ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond our control. +A plan of reorganization may not become effective. +Even if a plan of reorganization is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied and, therefore, that a plan of reorganization will become effective and that the Debtors will emerge from the Chapter 11 Cases as contemplated by a plan of reorganization. If the effective date of a plan of reorganization is delayed, the Debtors may not have sufficient cash available to operate their businesses. In that case, the Debtors may need new or additional post-petition financing, which may increase the cost of consummating a plan of reorganization. There can be no assurance of the terms on which such financing may be available or if such financing will be available. If the transactions contemplated by a plan of reorganization are not completed, it may become necessary to amend the plan of reorganization. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Cases. +The audited consolidated financial statements included in this Form 10-K for the period ended December 31, 2020 contain disclosures that express substantial doubt about our ability to continue as a going concern. +The audited consolidated financial statements included in this Form 10-K for the period ended December 31, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business and does not include any adjustments that might result from uncertainty about our ability to continue as a going concern. Such assumption may not be justified. Our liquidity has been negatively impacted by the prolonged depressed price averages we receive for the oil, natural gas and NGL we sell and our substantial indebtedness and associated debt-related expenses. As a result of these and other factors, we entered into the RSA and commenced the Chapter 11 Cases. The RSA contemplates that our equity investors, including the holders of our common stock, will lose the entire value of their investment in our business. The inclusion of disclosures that express substantial doubt about our ability to continue as a going concern may negatively impact the trading price of our common stock and have an adverse impact on our relationships with third parties with whom we do business, including our customers, subcontractors, suppliers and employees, and could have a material adverse impact on our business, financial condition, results of operations and cash flows. +Upon emergence from bankruptcy, the composition of our Board of Directors will likely change significantly. +The composition of our Board of Directors is expected to change significantly following the Chapter 11 Cases. Any new directors may have different backgrounds, experiences and perspectives from those individuals who currently serve on our Board of Directors and, thus, may have different views on the issues that will determine the future of our company. As a result, our future strategy and plans may differ materially from those of the past. +Financial, Liquidity and Commodity Price Risks +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low oil, natural gas and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +21 +Table of Contents +Index to Financial Statement s +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2019, West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $46.31 to $66.24 per barrel and the Henry Hub spot market price of natural gas ranged from $1.75 to $4.25 per MMBtu. During 2020, WTI prices ranged from $(36.98) to $63.27 per barrel and the Henry Hub spot market price of natural gas ranged from $1.33 to $3.14 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• the level of prices, and expectations about future prices, of oil and natural gas; +• changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the expected rates of declining current production; +• changes in the level of consumer and industrial demand; +• the price and availability of alternative fuels; +• technological advances affecting energy consumption; +• risks associated with operating drilling rigs; +• the effectiveness of worldwide conservation measures; +• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• the price and level of foreign imports; +• the nature and extent of domestic and foreign governmental regulations and taxes; +• the ability of the members of the Organization of Petroleum Exporting Countries and others to agree to and maintain oil price and production controls; +• political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• weather conditions; +• acts of terrorism; and +• domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2021 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2022 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions +22 +Table of Contents +Index to Financial Statement s +for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +We have a significant amount of indebtedness. Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects. +As of December 31, 2020, we had approximately $1.8 billion in principal amount of debt outstanding, primarily attributable to our senior notes. We also had $292.9 million in borrowings outstanding under our Pre-Petition Revolving Credit Facility and $157.5 million in borrowings under our DIP Credit Facility. +Our outstanding indebtedness could have important consequences to you, including the following: +• our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including their restrictive covenants, could result in a default under our revolving credit facility or the indentures governing our senior notes; +• the restrictions imposed on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business; +• our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; +• our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; +• our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; +• our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and +• we may be vulnerable to interest rate increases, as our borrowings under our revolving credit facility are at variable interest rates. +Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Our ability to pay our expenses and fund our working capital needs and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as commodity prices, other economic conditions and governmental regulation. If our borrowing base under our revolving credit facility decreases as a result of lower prices of natural gas, oil or NGL, operating difficulties, declines in reserves or for any other reason, our liquidity and ability to conduct additional exploration and development activities may be limited. To the extent that the value of the collateral pledged under our revolving credit facility declines as a result of lower oil and natural gas prices, asset dispositions or otherwise, we may be required to pledge additional collateral to maintain the current availability of the commitments thereunder, and we cannot assure you that we will be able to maintain a sufficiently high valuation to maintain the current borrowing base. In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation. Any of the above risks could materially +23 +Table of Contents +Index to Financial Statement s +adversely affect our business, financial condition, cash flows and results of operations. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility and DIP credit facility. Our revolving credit facility and DIP Credit Facility are structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the London Interbank Offered Rate. At December 31, 2020, amounts borrowed under our revolving credit facility and DIP Credit Facility bore interest at the weighted average rates of 3.15% and 5.50%, respectively . A 1% increase in the average interest rate would have increased our interest expense by approximately $2.1 million based on outstanding borrowings under our revolving credit facility and DIP Credit Facility throughout the year ended December 31, 2020. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility and DIP Credit Facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2020, we did not hedge our interest rate risk. +We have significant capital needs, and our ability to access the capital markets to raise capital on favorable terms is limited by our debt level and industry conditions. +Disruptions in the capital and credit markets, in particular with respect to the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Low commodity prices have caused and may continue to cause lenders to increase the interest rates under our revolving credit facility, enact tighter lending standards, refuse to refinance existing debt around maturity on favorable terms or at all and reduce or cease to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. Additionally, challenges in the economy have led and could further lead to reductions in the demand for natural gas, oil and NGL, or further reductions in the prices of natural gas, oil and NGL, which could have a negative impact on our financial position, results of operations and cash flows. +If we are unable to generate enough cash flow from operations to service our indebtedness or are unable to use future borrowings to refinance our indebtedness or fund other capital needs, in each case following our restructuring, we may have to undertake alternative financing plans, which may have onerous terms or may be unavailable. +Our earnings and cash flow could vary significantly from year to year due to the volatility of hydrocarbon commodity prices. As a result, the amount of debt that we can manage in some periods may not be appropriate for us in other periods. Additionally, our future cash flow may be insufficient to meet our debt obligations and commitments or to make necessary capital expenditures. A range of economic, competitive, business and industry factors will affect our future financial performance and, as a result, our ability to generate cash flow from operations and service our debt. Factors that may cause us to generate cash flow that is insufficient to meet our debt obligations include the events and risks related to our business, many of which are beyond our control. Any cash flow insufficiency would have a material adverse impact on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. +If we do not generate sufficient cash flow from operations to service our indebtedness following our restructuring, or if future borrowings are not available to us in an amount sufficient to enable us to pay or refinance our indebtedness, we may be required to undertake various alternative financing plans, which may include: +• seeking alternative financing or additional capital investment; +• selling strategic assets; +• reducing or delaying capital investments; or +• revising or delaying our strategic plans. +We cannot assure you that we would be able to implement any alternative financing plans, if necessary, on commercially reasonable terms or at all, or that any such alternative financing plans would allow us to meet our debt obligations following our restructuring. If we are unable to generate sufficient cash flow to satisfy our debt obligations or to obtain necessary and sufficient alternative financing, our business, financial condition, results of operations, cash flows and liquidity could be materially and adversely affected. +24 +Table of Contents +Index to Financial Statement s +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2021 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the unweighted arithmetic average of the closing prices on the first day of each month for the 12-month period ending at the balance sheet date, adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost +25 +Table of Contents +Index to Financial Statement s +being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recorded a ceiling test impairment of $1.4 billion for the year ended December 31, 2020. If prices of natural gas, oil and natural gas liquids continue to decrease, we will be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations. +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2020, we had a net operating loss, or NOL, carryforward of approximately $1.9 billion for federal income tax purposes. If we were to experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (or the "Code"), our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. On April 30, 2020, the board of directors of the Company adopted a tax benefits preservation plan in order to protect against a possible limitation on the Company’s ability to use its tax net operating losses and certain other tax benefits to reduce potential future U.S. federal income tax obligations. The Tax Benefits Preservation Plan is intended to prevent against such an ownership change by deterring any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s securities. +Industry, Business and Operational Risks +The oil and gas exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including, but not limited to, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and, due to our debt levels and other factors, may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +If we are not able to replace reserves, we may not be able to sustain production. +Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful development, exploration or acquisition activities, our proved reserves and production will decline over time. Thus, our future oil and natural gas reserves and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing our current reserves and economically finding or acquiring additional recoverable reserves. +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +26 +Table of Contents +Index to Financial Statement s +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +As of December 31, 2020, approximately 41% of our total estimated proved reserves were PUDs and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. You should be aware that the estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2020 present value is based on a $1.99 per MMBtu of gas price and a $39.54 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. Any changes in demand for oil and natural gas, governmental regulations or taxation will also affect the future net cash flows from our production. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the +27 +Table of Contents +Index to Financial Statement s +property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire significant amounts of unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas, such as our SCOOP play in Oklahoma. The area was historically developed by vertical wells drilled through multiple stacked reservoirs and recent development has focused on the Woodford formation; however, development in the Sycamore and Springer formations has been limited. As emerging formations, our drilling results in this area are more uncertain than drilling results in areas that are more developed and have been producing for a longer period of time. Since limited production history from horizontal wells in the SCOOP Sycamore and Springer formations exists over our acreage position, it is difficult to predict our +28 +Table of Contents +Index to Financial Statement s +future drilling results. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Although 74% of our Utica acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 26% of our Utica acreage not held by production, 24% will be subject to expiration in 2021, 29% in 2022, 30% in 2023 and 17% thereafter, although our Utica leases generally grant us the right to extend these leases for an additional five-year period. Although 99% of our SCOOP acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 1% of our SCOOP acreage not held by production, 78% will be subject to expiration in 2021, 12% in 2022, 5% in 2023 and 5% thereafter. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and natural gas operating activities are subject to numerous costs and risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. Drilling for oil, natural gas and NGL can be unprofitable, not only from dry holes, but from productive wells that do not return a profit because of insufficient revenue from production or high costs. Substantial costs are required to locate, acquire and develop oil and gas properties, and we are often uncertain as to the amount and timing of those costs. Our cost of drilling, completing, equipping and operating wells is often uncertain before drilling commences. Declines in commodity prices and overruns in budgeted expenditures are common risks that can make a particular project uneconomic or less economic than forecasted. While both exploratory and developmental drilling activities involve these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. For the 11% of our daily production volumes from properties which we did not serve as operator as of December 31, 2020, we are dependent on the operator for operational and regulatory compliance. In addition, our oil and gas properties can become damaged, our operations may be curtailed, delayed or canceled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• loss of drilling fluid circulation; +• equipment failures or accidents; +• fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +• adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures; +• issues with title or in receiving governmental permits or approvals; +• restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained +29 +Table of Contents +Index to Financial Statement s +downstream markets; +• environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• shortages or delays in the availability of services or delivery of equipment; and +• unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• the timing and amount of capital expenditures; +• the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• the operator's expertise and financial resources; +• approval of other participants in drilling wells; +• selection of technology; and +• the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct +30 +Table of Contents +Index to Financial Statement s +operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids. +Substantially all of our producing properties are located in Eastern Ohio and Oklahoma, making us vulnerable to risks associated with operating in these regions. +Our largest fields by production are located in Eastern Ohio and Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2020 accounted for approximately 12% of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +With respect to our Utica acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica and the other areas in which we operate. Until this new capacity is available, we may experience delays in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +31 +Table of Contents +Index to Financial Statement s +Our forecasted production is less than our firm transportation commitment levels under our firm transportation contracts due to decreased developmental activities, which will result in excess firm transportation costs and may have a material adverse effect on our operations. +As of December 31, 2020, we had entered into firm transportation contracts to deliver approximately 1,399,000 and 1,467,000 MMBtu per day for 2021 and 2022, respectively. U nder these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. As a result of the reduced production from our Utica or SCOOP acreage due to decreased developmental activities, taking into consideration the current low commodity price environment, we expect that we will be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations. +The outbreak of the novel coronavirus, or COVID-19, has affected and may materially adversely affect, and any future outbreak of any other highly infectious or contagious diseases may materially adversely affect, our operations, financial performance and condition, operating results and cash flows. +The recent outbreak of COVID-19 has affected, and may materially adversely affect, our business and financial and operating results. The severity, magnitude and duration of the current COVID-19 outbreak is uncertain, rapidly changing and hard to predict. In 2020, the outbreak has significantly impacted economic activity and markets around the world, and COVID-19 or another similar outbreak could negatively impact our business in numerous ways, including, but not limited to, the following: +• our revenue may be reduced if the outbreak results in an economic downturn or recession, as many experts predict, to the extent it leads to a prolonged decrease in the demand for natural gas and, to a lesser extent, NGL and oil; +• our operations may be disrupted or impaired, thus lowering our production level, if a significant portion of our employees or contractors are unable to work due to illness or if our field operations are suspended or temporarily shut-down or restricted due to control measures designed to contain the outbreak; +• the operations of our midstream service providers, on whom we rely for the transmission, gathering and processing of a significant portion of our produced natural gas, oil and NGL, may be disrupted or suspended in response to containing the outbreak, and/or the difficult economic environment may lead to the bankruptcy or closing of the facilities and infrastructure of our midstream service providers, which may result in substantial discounts in the prices we receive for our produced natural gas, oil and NGL or result in the shut-in of producing wells or the delay or discontinuance of development plans for our properties; and +• the disruption and instability in the financial markets and the uncertainty in the general business environment may affect our ability to execute on our business strategy, including our focus on reducing our leverage profile. If we are not able to successfully execute our plan to reduce our leverage profile, our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including their restrictive covenants, could result in a default under our revolving credit facility or the indentures governing our senior notes. Additionally, our credit ratings may be lowered, we may reduce or delay our planned capital expenditures or investments, and we may revise or delay our strategic plans. +We expect that the principal areas of operational risk for us are availability of service providers and supply chain disruption. Active development operations, including drilling and fracking operations, represent the greatest risk for transmission given the number of personnel and contractors on site. While we believe that we are following best practices under COVID-19 guidance, the potential for transmission still exists. In certain instances, it may be necessary or determined advisable for us to delay development operations. +In addition, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, we may experience difficulty accessing the capital or financing needed to fund our exploration and production operations, which have substantial capital requirements, or refinance our upcoming maturities on satisfactory terms or at all. We typically fund our capital expenditures with existing cash and cash generated by operations (which is subject to a number of variables, including many beyond our control) and, to the extent our capital expenditures exceed our cash resources, from borrowings under our revolving credit facility and other external sources of capital. If our cash flows from operations or the borrowing capacity under our revolving credit facility are insufficient to fund our capital expenditures and we are unable to obtain the capital necessary for our planned capital budget or our operations, we could be required to curtail our operations and the development of our properties, which in turn could lead to a decline in our reserves and production, and could adversely affect our business, results of operations and financial position. +32 +Table of Contents +Index to Financial Statement s +To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks set forth in Item 1A., “Risk Factors” in our Annual Report on Form 10-K, such as those relating to our financial performance and debt obligations. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments that we are not able to predict, including the length of time that the pandemic continues, its effect on the demand for natural gas, NGL and oil, the response of the overall economy and the financial markets as well as the effect of governmental actions taken in response to the pandemic. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyber-attack involving our information systems and related infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +33 +Table of Contents +Index to Financial Statement s +Legal and Regulatory Risks +The ultimate outcome of pending legal and governmental proceedings is uncertain, and there are significant costs associated with these matters. +We are defending against claims by royalty owners alleging, among other things, that we underpaid royalty owners. The resolution of disputes regarding past payments could cause our future obligations to royalty owners to increase and would negatively impact our future results of operations. +The outcome of any pending or future litigation or governmental regulatory matter is uncertain and may adversely affect our results of operations. In addition, we have incurred substantial legal expenses in the past three years, and such expenses may continue to be significant in the future. Further, attention to these matters by members of our senior management has been required, reducing the time they have available to devote to managing our business. +Decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties or result in the loss of some of our leasehold acreage in Ohio. +On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 version of the ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action to establish abandonment of mineral rights. After June 30, 2006, (the effective date of the 2006 version of the ODMA), surface owners are required to follow the statutory notice and recording procedures enacted in 2006. We have assessed the impact of these recent Ohio Supreme Court decisions on our operations in Ohio where the majority of our acreage and our producing properties are located and have taken steps to mitigate any potential risks identified as a result of our assessment. However, the Ohio Supreme Court decisions could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expense, subject us to payment of additional royalties or result in the loss of some of our leasehold acreage in Ohio, any of which could have an adverse effect on our results of operations and financial condition. +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. In addition, we may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. +34 +Table of Contents +Index to Financial Statement s +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the OCC issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. A decision is pending. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane. Policy makers at both the U.S. federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions. Several states where we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of +35 +Table of Contents +Index to Financial Statement s +funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable in order to improve our sustainability performance and to meet the specific requirements to perform services for certain customers. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +In our Utica and SCOOP operations, we make an effort to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle or share 100% of all produced water, we do inject water into third-party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle once sharing opportunities with other operators have been exhausted. In the state of Ohio, all water used during drilling operations is disposed of through injection into third-party salt water disposal wells regulated by applicable state agencies. +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +36 +Table of Contents +Index to Financial Statement s +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs as we collect and store personal data related to royalty owners. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and enhanced consumer protections for those individuals, and provides for statutory fines for data security breaches or other CCPA violations. Meanwhile, over fifteen other states have considered privacy laws like the CCPA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +We may have material liability related to plugging and abandonment, reclamation, civil lawsuits and regulatory fines associated with our divested Louisiana assets. +Gulfport operated hundreds of wells in Louisiana before divesting substantially all Louisiana assets to PEL Gulf Coast, LLC (“Perdido”) in 2019. The Perdido Purchase Sale Agreement (“PSA”) contains a broad assumption of all obligations, as well as defense and indemnity obligations, in favor of Gulfport and against Perdido for all current and former Gulfport wells. To the extent Perdido files for bankruptcy protection or is unable to meet its obligations, Gulfport may have material liability related to plugging and abandonment, reclamation, civil lawsuits and regulatory fines. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 19 of the notes to our consolidated financial statements included in this report. +ITEM 3. LEGAL PROCEEDINGS +The information with respect to this Item 3. Legal Proceedings is set forth in Note 1 8 in the accompanying consolidated financial statements. Additionally, see Note 1 and Note 2 in the accompanying consolidated financial statements for additional discussion of on-going claims and disputes in our Chapter 11 proceedings, certain of which may be material. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +PART II +37 +Table of Contents +Index to Financial Statement s +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +On November 27, 2020, our common stock was suspended from trading on NASDAQ. On November 30, 2020, our common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “GPORQ". On February 2, 2021, NASDAQ filed a Form 25 delisting our common stock from trading on NASDAQ, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the de-registration of our common stock under section 12(b) of the Exchange Act became effective on February 12, 2021. +Shareholders +At the close of business on February 22, 2021, there were approximately 311 stockholders and 19,574 beneficial owners of our common stock. +Dividends +We have never paid dividends on our common stock. +ITEM 6. SELECTED FINANCIAL DATA +The following table sets forth selected consolidated financial data of Gulfport as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016. The data are derived from our audited consolidated financial statements. The table below should be read in connection with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes appearing elsewhere in Items 7 and 8, respectively, of this report. +Fiscal Year Ended December 31, +2020 2019 2018 2017 2016 +(In thousands, except share data) +Selected Consolidated Statements of Operations Data: +Revenues $ 866,542 $ 1,563,126 $ 1,551,701 $ 1,320,303 $ 385,910 +(Loss) Income from Operations (1,362,605) (1,703,693) 398,959 555,781 (862,422) +Income Tax Expense (Benefit) 7,290 (7,563) (69) 1,809 (2,913) +Net (Loss) Income Available to Common Stockholders $ (1,625,133) $ (2,002,358) $ 430,560 $ 435,152 $ (979,709) +Net (Loss) Income Per Common Share—Basic: $ (10.14) $ (12.49) $ 2.46 $ 2.42 $ (7.97) +Net (Loss) Income Per Common Share—Diluted: $ (10.14) $ (12.49) $ 2.45 $ 2.41 $ (7.97) +At December 31, +2020 2019 2018 2017 2016 +(In thousands) +Selected Consolidated Balance Sheet Data: +Total assets $ 2,539,871 $ 3,882,819 $ 6,051,036 $ 5,807,752 $ 4,223,145 +Total debt, including current maturities $ 253,743 $ 1,978,651 $ 2,087,416 $ 2,038,943 $ 1,593,875 +Total liabilities subject to compromise $ 2,293,480 $ — $ — $ — $ — +Total liabilities $ 2,840,371 $ 2,568,227 $ 2,723,268 $ 2,706,138 $ 2,039,253 +Stockholders’ (deficit) equity $ (300,500) $ 1,314,592 $ 3,327,768 $ 3,101,614 $ 2,183,892 +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis represents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current +38 +Table of Contents +Index to Financial Statement s +financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following discussion and analysis generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in " Management's Discussion and Analysis of Financial Condition and Results of Operations " in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. +Overview +We are an independent natural gas-weighted exploration and production company focused on the exploration, acquisition and production of natural gas, crude oil and NGL in the United States with primary focus in the Appalachia and Anadarko basins. Our principal properties are located in Eastern Ohio targeting the Utica formation and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. +Voluntary Reorganization Under Chapter 11 +On November 13, 2020, we and our subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases are being administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). We continue to operate our businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court, in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. +The Bankruptcy Court has granted first- and second- day motions filed by us that were designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, customers and employees. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing and are authorized to pay owner royalties, employee wages and benefits and certain vendors and suppliers in the ordinary course for goods and services provided. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court. +For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A. “Risk Factors.” As a result of these risks and uncertainties, the number of our shares of common stock and stockholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this Form 10-K may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases. +During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the Bankruptcy Filing. In addition, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 Cases. +See Note 2 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of the Chapter 11 Cases. +Delisting of our Common Stock from Nasdaq +On November 27, 2020, our common stock was suspended from trading on NASDAQ. On November 30, 2020, our common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “GPORQ". On February 2, 2021, NASDAQ filed a Form 25 delisting our common stock from trading on NASDAQ, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the de-registration of our common stock under section 12(b) of the Exchange Act became effective on February 12, 2021. +39 +Table of Contents +Index to Financial Statement s +COVID-19 Pandemic and Impact on Global Demand for Oil and Natural Gas +In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic and recommended containment and mitigation measures worldwide. The measures have led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world imposed regulations in efforts to control the spread of COVID-19 such as shelter-in-place orders, quarantines, executive orders and similar restrictions. +We remain focused on protecting the health and well-being of our employees and the communities in which we operate while assuring the continuity of our business operations. We have implemented preventative measures and developed corporate and field response plans to minimize unnecessary risk of exposure and prevent infection. We have a crisis management team for health, safety and environmental matters and personnel issues, and we have established a COVID-19 Response Team to address various impacts of the situation, as they have been developing. We also have modified certain business practices (including remote working for our corporate employees and restricted employee business travel) to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities. +In May 2020, we began our phased transition back to the office for our corporate employees. As part of this transition, we have put into place preventative measures to focus on social distancing and minimizing unnecessary risk of exposure. Such measures include, but are not limited to, daily health surveys, protective masks in public areas of the building, no outside visitors, limiting the number of employees on elevators and additional sanitizing. As of the date of this filing, we have transitioned a majority of our corporate employees back to the corporate office; however, we continue to provide a balanced work schedule that allows for a significant portion of the work week to be performed remotely. We will continue to monitor trends and governmental guidelines and may adjust our return to office plans accordingly to ensure the health and safety of our employees. +As a result of our business continuity measures, we have not experienced significant disruptions in executing our business operations during 2020. While we did not experience significant disruptions to our operations in 2020, we are unable to predict the impact on our business, including our cash flows, liquidity, and results of operations in future periods due to numerous uncertainties. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to slow the spread of the virus, such as large-scale travel bans and restrictions, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature may cause, us, our suppliers and other business counterparties to experience operational delays, or delays in the delivery of materials and supplies. We expect the principal areas of operational risk for us are the availability and reliability of service providers and potential supply chain disruption. Additionally, the operations of our midstream service providers, on whom we rely for the transmission, gathering and processing of a significant portion of our produced natural gas, NGL and oil, may be disrupted or suspended in response to containing the outbreak, or the difficult economic environment may lead to the bankruptcy or closing of the facilities and infrastructure of our midstream service providers. This may result in substantial discount in the prices we receive for our produced natural gas, NGL and oil or result in the shut-in of producing wells or the delay or discontinuance of development plans for our properties. +One of the impacts of the pandemic has been a significant reduction in global demand for oil and natural gas. The significant decline in demand has been met with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of Petroleum Exporting Countries, and other foreign, oil-exporting countries. The resulting supply/demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. These industry conditions, coupled with those resulting from the COVID-19 pandemic, has led to significant global economic contraction generally and in our industry in particular. We expect to see continued volatility in oil and natural gas prices for the foreseeable future, which may, over the long term, adversely impact our business. Continued depressed demand or prices for oil and natural gas would have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations. +Because of the sharp decline in oil prices since early March 2020, we chose to shut in a portion of our operated low margin, liquids-weighted production during the second quarter of 2020, largely consisting of legacy vertical production in the SCOOP. We also experienced shut-ins across both the SCOOP and Utica from our non-operated partners. All liquids-weighted volumes on both our operated assets and those of our non-operated partners have returned to production. A sharp decline in prices or a prolonged depressed environment may result in additional future shut ins. In addition, the COVID-19 pandemic creates risks of +40 +Table of Contents +Index to Financial Statement s +delays in new drilling and completion activities that could negatively impact us, our non-operated partners or our service providers. +In June 2020, in response to the depressed commodity price environment, we announced tiered salary reductions for most employees, senior management team and our Board of Directors as well as select furloughs to reduce costs and preserve liquidity. The employee salary reductions were re-instated in late September, while the senior management and Board of Directors reductions were re-instated at December 31, 2020. In addition, we reduced our workforce by approximately 10% in the third quarter of 2020 to align our workforce to the current and forecasted needs of operating our business plans. +We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development and distribution of effective treatments and vaccines, the duration of the outbreak, actions taken by members of OPEC and other foreign, oil-exporting countries, governmental authorities, customers, suppliers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. While we have seen meaningful recovery in demand during the second half of the year, significant uncertainty remains regarding the duration and extent of the impact of the pandemic on the energy industry, including demand and commodities pricing, although we expect to see further recovery as vaccines are distributed and more normal societal activity resumes. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. “Risk Factors” in this report. +2020 Operational and Financial Highlights +In the current depressed commodity price environment and period of economic uncertainty, we took the following operational and financial measures in 2020 to improve our balance sheet and preserve liquidity: +• Reduced 2020 capital spending by more than 50% as compared to 2019; +• Divested our SCOOP water infrastructure assets to a third-party water service provider for $50 million; +• Reduced long-term debt related to our senior unsecured notes by $73.3 million through discounted repurchases; +• Reduced certain corporate general and administrative costs through pay reductions, furloughs and reductions in force; +• Evaluated economics across our portfolio and shut-in certain non-economical production in the second quarter of 2020; +• Continued to significantly improve operational efficiencies and reduce drilling and completion costs in both our SCOOP and Utica operating areas. In the Utica, our average spud to rig release time was 18.7 days in 2020, which was a 5% improvement from 2019 levels. In the SCOOP, our average spud to rig release time was 35.5 days, representing a 35% improvement compared to 2019 levels. +Although management's actions listed above have helped to improve the company's liquidity and leverage profile, continued macro headwinds including the depressed state of energy capital markets and extraordinarily low commodity price environment presented significant risks to the Company's ability to fund its operations going forward. On October 8, 2020, the borrowing base under our revolving credit facility was reduced for the second time in 2020 from $700 million to $580 million, thereby significantly reducing available liquidity. Considering the facts above, we elected not to make interest payments of $17.4 million due October 15, 2020 and $10.8 million due November 2, 2020 on our 2024 Notes and 2023 Notes, respectively. On November 13, 2020, we filed voluntary petitions for relief under Chapter 11 as discussed above. +41 +Table of Contents +Index to Financial Statement s +Results of Operations +Comparison of the Years Ended December 31, 2020 and December 31, 2019 +We reported a net loss of $1.6 billion for the year ended December 31, 2020 as compared to a net loss of $2.0 billion for the year ended December 31, 2019. The graph below shows the change in the net loss from the year ended December 31, 2020 to the year ended December 31, 2019. The material changes are further discussed by category on the following pages. Some totals and changes throughout below section may not sum or recalculate due to rounding. +(1) Includes lease operating expenses, taxes other than income and midstream, gathering and processing expenses. +42 +Table of Contents +Index to Financial Statement s +Natural Gas, Oil and NGL Sales +Years Ended December 31, +2020 2019 change +(In thousands, unless otherwise stated) +Natural gas (MMcf/day) +Utica production volumes 795 1,062 (25) % +SCOOP production volumes 147 194 (24) % +Other production volumes (3) +— — (64) % +Total production volumes 943 1,255 (25) % +Total sales $ 671,535 $ 1,135,381 (41) % +Average price without the impact of derivatives ($/Mcf) $ 1.95 $ 2.48 (21) % +Impact from settled derivatives ($/Mcf) (1) +$ 0.33 $ 0.23 43 % +Average price, including settled derivatives ($/Mcf) $ 2.28 $ 2.71 (16) % +Oil and condensate (MBbl/day) +Utica production volumes 1 1 59 % +SCOOP production volumes 4 4 (14) % +Other production volumes (3) +— 1 (94) % +Total production volumes 5 6 (18) % +Total sales $ 62,902 $ 117,937 (47) % +Average price without the impact of derivatives ($/Bbl) $ 34.88 $ 53.95 (35) % +Impact from settled derivatives ($/Bbl) (2) +$ 25.76 $ 1.86 1285 % +Average price, including settled derivatives ($/Bbl) $ 60.64 $ 55.81 9 % +NGL (MBbl/day) +Utica production volumes 3 5 (41) % +SCOOP production volumes 8 9 (12) % +Other production volumes (3) +— — (50) % +Total production volumes 11 14 (22) % +Total sales $ 66,814 $ 101,448 (34) % +Average price without the impact of derivatives ($/Bbl) $ 16.86 $ 19.99 (16) % +Impact from settled derivatives ($/Bbl) $ (0.04) $ 2.79 (101) % +Average price, including settled derivatives ($/Bbl) $ 16.82 $ 22.78 (26) % +Total (MMcfe/day) +Utica production volumes 820 1,095 (25) % +SCOOP production volumes 217 274 (21) % +Other production volumes (3) +— 6 (94) % +Total production volumes 1,037 1,375 (25) % +Total sales $ 801,251 $ 1,354,766 (41) % +Average price without the impact of derivatives ($/Mcfe) $ 2.11 $ 2.70 (22) % +Impact from settled derivatives ($/Mcfe) $ 0.42 $ 0.24 75 % +Average price, including settled derivatives ($/Mcfe) $ 2.53 $ 2.94 (14) % +(1) In November 2020, the Company early terminated certain gas fixed price swaps which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +(3) Includes Niobrara, Bakken and Southern Louisiana. +43 +Table of Contents +Index to Financial Statement s +In 2020, our total unhedged natural gas, oil and NGL revenues decreased approximately $553.5 million, or 41%, as compared to 2019. A 25% decrease in total production volumes accounted for $323 million of lower natural gas, oil and NGL revenues. The decrease is production was primarily related to our significantly lower capital program beginning in the fourth quarter of 2019 into 2020. The remainder of the decrease in natural gas, oil and NGL revenues is related to a significant decrease in the realized prices for each of our commodities as compared to 2019 realized prices driven by depressed commodity market conditions. +The total natural gas, oil and NGL volumes hedged for 2020 and 2019 represented approximately 70% and 96%, respectively, of our total sales volumes for the applicable year. +Natural Gas, Oil and NGL Derivatives +Years Ended December 31, +2020 2019 +($ In thousands) +Natural gas derivatives - fair value (losses) gains $ (89,310) $ 89,576 +Natural gas derivatives - settlement gains 113,075 104,874 +Total gains on natural gas derivatives 23,765 194,450 +Oil and condensate derivatives - fair value (losses) gains (2,952) 2,952 +Oil and condensate derivatives - settlement gains 46,462 4,083 +Total gains on oil and condensate derivatives 43,510 7,035 +NGL derivatives - fair value losses (461) (7,541) +NGL derivatives - settlement (losses) gains (142) 14,173 +Total (losses) gains on NGL derivatives (603) 6,632 +Contingent consideration arrangement - fair value (losses) gains (1,381) 243 +Total gains on natural gas, oil and NGL derivatives $ 65,291 $ 208,360 +Settlement gains (losses) in the table above represent realized cash gains or losses to the instruments described in Note 13 to our consolidated financial statements. Our hedging program provided cash settlements of $159.4 million in 2020 as compared to $123.1 million in 2019. +44 +Table of Contents +Index to Financial Statement s +Lease Operating Expenses +Years Ended December 31, +2020 2019 change +($ In thousands, except per unit) +Lease operating expenses +Utica $ 40,071 $ 50,832 (21) % +SCOOP 14,156 18,249 (22) % +Other (1) +8 4,415 (100) % +Total lease operating expenses $ 54,235 $ 73,496 (26) % +Lease operating expenses per Mcfe +Utica $ 0.13 $ 0.13 5 % +SCOOP 0.18 0.18 (3) % +Other (1) +0.06 2.18 (97) % +Total lease operating expenses per Mcfe $ 0.14 $ 0.15 (2) % +_____________________ +(1) Includes Niobrara, Bakken and Southern Louisiana +The decrease in total LOE in 2020 was primarily driven by the 25% decrease in our production resulting from production declines from our Utica and SCOOP properties as a result of reduced development activities in addition to the divestiture of our Southern Louisiana properties as discussed in Note 3 to our consolidated financial statements. LOE on a per unit basis was slightly lower for the year ended December 31, 2020 as compared to 2019 as a result of increased focus on reducing lease operating expenses within the organization as well as the divestiture of the Southern Louisiana properties which had a higher operating cost structure relative to our other assets. +Taxes Other Than Income +Years Ended December 31, +2020 2019 change +($ In thousands, except per unit) +Production taxes $ 17,511 $ 28,571 (39) % +Property taxes $ 9,510 $ 9,470 — % +Other $ 1,488 $ 2,469 (40) % +Total Taxes other than income $ 28,509 $ 40,510 (30) % +Production taxes per Mcfe +$ 0.05 $ 0.06 (19) % +The decrease in production taxes in 2020 was primarily related to a decrease in revenue and production in 2020 as compared to 2019. +Midstream Gathering and Processing Expenses +Years Ended December 31, +2020 2019 change +($ In thousands, except per unit) +Midstream gathering and processing expenses $ 456,318 $ 508,843 (10) % +Midstream gathering and processing expenses per Mcfe +$ 1.20 $ 1.01 19 % +45 +Table of Contents +Index to Financial Statement s +The decrease in midstream gathering and processing expenses in 2020 was primarily related to the 25% decrease in our production volumes. The increase in per unit midstream gathering and processing expenses in 2020 is primarily related to Utica production volumes falling below the minimum volume commitments we have on certain of our firm transportation agreements with pipeline companies and the resulting deficiency payments. +Depreciation, Depletion and Amortization +Years Ended December 31, +2020 2019 change +($ In thousands, except per unit) +Depreciation, depletion and amortization of oil and gas properties $ 229,703 $ 538,894 (57) % +Depreciation, depletion and amortization of other property and equipment $ 10,041 $ 11,214 (10) % +Total Depreciation, depletion and amortization $ 239,744 $ 550,108 (56) % +Depreciation, depletion and amortization per Mcfe +$ 0.63 $ 1.10 (42) % +The decrease in DD&A in 2020 was due to a decrease in the depletion rate, driven primarily by impairment charges in 2019 and 2020, which decreased the depletion base. The decrease was further driven by an approximate 25% decrease in production. +Impairment of Oil and Gas Properties. During 2020, we had $1.4 billion oil and natural gas properties impairment charges related primarily to the continued decline in commodity prices, compared to $2.0 billion impairment charges of oil and gas properties in 2019. +General and Administrative Expenses +Years Ended December 31, +2020 2019 change +($ In thousands, except per unit) +General and administrative expenses, gross +$ 95,904 $ 86,854 10 % +Reimbursed from third parties +(11,567) (11,173) 4 % +Capitalized general and administrative expenses +(25,008) (30,139) (17) % +General and administrative expenses, net +$ 59,329 $ 45,542 30 % +General and administrative expenses, net per Mcfe +$ 0.16 $ 0.09 72 % +The increase in general and administrative expenses, gross in 2020 was primarily due to an increase in non-recurring legal and consulting charges and compensation expense as a result of cash retention incentives paid to our employees during the third quarter of 2020. See Note 8 to our consolidated financial statements for further discussion on these cash retention incentive payments. This increase was partially offset by lower salary costs resulting from the reduction in workforce that was completed in the fourth quarter of 2019 and third quarter of 2020 as well as certain furloughs and pay reductions as discussed in the overview. The decrease in capitalized general and administrative expenses in 2020 was due to lower development activities for 2020 as compared to 2019. +Restructuring and Liability Management Expenses. In the third quarter of 2020 and fourth quarter of 2019, the Company announced and completed workforce reductions representing approximately 10% and 13%, respectively, of its headcount. In connection with the reduction, the Company incurred total restructuring charges of approximately $1.5 million and $4.6 million, primarily consisting of one-time employee-related termination benefits, for 2020 and 2019, respectively. Additionally, the Company incurred charges related to financial and legal advisors engaged to assist with the evaluation of a range of liability management alternatives during 2020 prior to the filing of the Chapter 11 Cases. While we expect to continue to incur significant financial and legal advisor fees throughout the Chapter 11 process, these costs will be presented in Reorganization Items, Net in our consolidated statements of operations. +Accretion Expense. Accretion expense decreased to $3.1 million for the 2020 from $3.9 million for the 2019, primarily as a result of asset divestitures discussed in N ote 3 . +46 +Table of Contents +Index to Financial Statement s +Interest Expense +Years Ended December 31, +2020 2019 +($ In thousands, except per unit) +Interest expense on senior notes 98,528 125,687 +Interest expense on pre-petition revolving credit facility 14,224 12,088 +Interest expense on building loan and other 1,861 1,055 +Capitalized interest (907) (3,372) +Interest on DIP credit facility 810 — +Amortization of loan costs 5,563 6,328 +Total interest expense $ 120,079 $ 141,786 +Interest expense per Mcfe $ 0.32 $ 0.28 +Weighted average debt outstanding under revolving credit facility $ 193,182 $ 161,416 +The decrease in interest on senior notes in 2020 as compared to 2019 is primarily due to the Chapter 11 proceedings. As of the Petition Date, we are not paying or recognizing interest expense on any of our outstanding debt other than any post-petition amounts drawn on the Pre-Petition Revolving Credit Facility and the DIP Credit Facility. +Gain on Debt Extinguishment. In July of 2019, our Board of Directors authorized $100 million of cash to be used to repurchase its senior notes in the open market at discounted values to par. In December 2019, our Board of Directors increased the authorized size of the senior note repurchase program to $200 million in total. During 2020, we repurchased in the open market $73.3 million aggregate principal amount of our outstanding Senior Notes for $22.8 million in cash and recognized a $49.6 million gain on debt extinguishment. During 2019, we repurchased $190.1 aggregate principal amount of our outstanding Senior Notes for $138.8 million in cash and recognized a $48.6 million gain on debt extinguishment. +Equity Investments +Years Ended December 31, +2020 2019 change +($ In thousands) +Loss (income) from equity method investments, net $ 11,055 $ 210,148 (95) % +For 2020, the loss from equity method investments stems primarily from a $10.6 million loss related to our investment in Mammoth Energy, with no impairments recorded. The loss from equity method investments during 2019 was primarily the result of a $160.8 million impairment loss related to our investment in Mammoth Energy and a $32.4 million impairment loss related to our investment in Grizzly. See Note 5 to our consolidated financial statements for further discussion on our equity investments. +47 +Table of Contents +Index to Financial Statement s +Reorganization Items, Ne t. The following table summarizes the components in reorganization items, net included in our consolidated statements of operations for the year ended December 31, 2020: +Year Ended December 31, 2020 +(in thousands) +Adjustment for allowed claims $ 104,943 +Legal and professional fees 24,905 +Write off of unamortized debt issuance costs 21,956 +DIP credit facility financing fees 2,988 +Gain on settlement of pre-petition accounts payable (2,433) +Reorganization items, net $ 152,359 +We expect to incur significant legal and professional fees related to our ongoing Chapter 11 case in 2021. +Other Expense, Net +Years Ended December 31, +2020 2019 change +($ In thousands) +Other expense, net $ 21,738 $ 3,725 484 % +The increase in other expense in 2020 is primarily the result of a $16.6 million loss on the change in fair value of our contingent consideration agreement related to the sale of our SCOOP water infrastructure assets to a third-party water service provider. See Note 15 to our consolidated financial statements for further discussion on our contingent consideration agreement. +Income Taxes +Years Ended December 31, +2020 2019 change +($ In thousands) +Income tax expense (benefit) $ 7,290 $ (7,563) (196) % +The change in income tax in 2020 is primarily the result of the recognition of a valuation allowance against a state deferred tax asset. At December 31, 2020, we had a federal net operating loss carryforward of $1.9 billion, in addition to numerous temporary differences, which gave rise to a net deferred tax asset, and a valuation allowance of $985.5 million maintained against the net deferred asset. +Liquidity and Capital Resources +Overview . Historically, our primary sources of capital funding and liquidity have been our operating cash flow, borrowings under our Pre-Petition Revolving Credit Facility and issuances of equity and debt securities. Our ability to issue additional indebtedness, dispose of assets or access the capital markets may be substantially limited or nonexistent during the Chapter 11 Cases and will require court approval in most instances. Accordingly, our liquidity will depend mainly on cash generated from operating activities and available funds under the DIP Credit Facility as discussed below. +Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, the creditors are stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code. +48 +Table of Contents +Index to Financial Statement s +As of December 31, 2020, we had a cash balance of $89.9 million compared to $6.1 million as of December 31, 2019, and a net working capital deficit of $100.5 million as of December 31, 2020, compared to a net working capital deficit of $145.3 million as of December 31, 2019. As of December 31, 2020, our working capital deficit includes $253.7 million of debt due in the next 12 months. Our total principal debt as of December 31, 2020 was $2.3 billion compared to $2.0 billion as of December 31, 2019. Additionally, as of December 31, 2020, we had outstanding borrowings of $157.5 million on our DIP credit facility with $105.0 million of incremental borrowing capacity. See Note 6 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our debt obligations, including principal and carrying amounts of our notes. +We believe our cash flow from operations, borrowing capacity under the DIP Credit Facility and cash on hand will provide sufficient liquidity during the Chapter 11 process. We expect to incur significant costs related to our ongoing Chapter 11 Cases in 2021, including fees for legal, financial and restructuring advisors to the Company, certain of our creditors and royalty interest owners. Therefore, our ability to obtain confirmation of the Plan in a timely manner is critical to ensuring our liquidity is sufficient during the bankruptcy process. +Our ability to continue as a going concern is contingent on our ability to comply with the financial and other covenants contained in our DIP Credit Facility, the Bankruptcy Court's approval of the Plan and our ability to successfully implement the Plan and obtain exit financing, among other factors. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, we may settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Facility), for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Plan could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements. +Debtor-In-Possession Credit Facility . Pursuant to the RSA, the Consenting RBL Lenders have agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $262.5 million consisting of $105 million of new money and $157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. +Advances under our DIP Credit Facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate of 3.50%, plus (2) the base rate. The interest rate for eurodollar loans is equal to (1) the applicable rate of 4.50%, plus (2) the highest of: (a) 1% or (b) the eurodollar rate. As of December 31, 2020, amounts borrowed under our DIP Credit Facility bore interest at the weighted average rate of 5.50%. +The DIP Credit Facility includes negative covenants that, subject to significant exceptions, limit our ability and the ability of our restricted subsidiaries to, among other things, (i) create liens on assets, property revenues, (ii) make investments, (iii) incur additional indebtedness, (iv) engage in mergers, consolidations, liquidations and dissolutions, (v) sell assets, (vi) pay dividends and distributions or repurchase capital stock, (vii) cease for any reason to be the operator of its properties, (viii) enter into letters of credit without prior written consent, (ix) enter into certain commodity hedging contracts except commodity hedging contracts with terms approved by the Bankruptcy Court in the hedging order or certain interest rate contracts, (x) change lines of business, (xi) engage in certain transactions with affiliates and (xii) incur more than a certain amount in capital expenditures in any calendar month. The DIP Credit Facility includes certain customary representations and warranties, affirmative covenants and events of default, including but not limited to defaults on account of nonpayment, breaches of representations and warranties and covenants, certain bankruptcy-related events, certain events under ERISA, material judgments and a change in control. If an event of default occurs, the lenders under the DIP Credit Facility will be entitled to take various actions, including the acceleration of all amounts due under the DIP Credit Facility and all actions permitted to be taken under the loan documents or application of law. In addition, the DIP Credit Facility is subject to various other financial performance covenants, including compliance with certain financial metrics and adherence to a budget approved by our DIP Credit Facility lenders. +Pre-Petition Revolving Credit Facility . We have entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum borrowing base amount of $580 million and matures on December 31, 2021. The $292.9 million of outstanding borrowings under the Pre-Petition Revolving Credit Facility as of December 31, +49 +Table of Contents +Index to Financial Statement s +2020 that were not rolled up into the DIP Credit Facility will remain outstanding throughout the Chapter 11 Cases and will continue to accrue interest on amounts drawn after the Petition Date. Additionally, as of December 31, 2020, we had an aggregate of $147.5 million of letters of credit outstanding under our Pre-Petition Revolving Credit Facility. This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries, excluding Grizzly Holdings and Mule Sky, guarantee our obligations under our revolving credit facility. +Advances under our Pre-Petition Revolving Credit Facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the administrative agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. As of December 31, 2020, amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 3.15%. +Senior Notes . In April 2015, we issued an aggregate of $350.0 million in principal amount of our 2023 Notes. Interest on these senior notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, payable semi-annually on May 1 and November 1 of each year. As of December 31, 2020, after giving effect to open market repurchases of these 2023 Notes, $324.6 million principal amount remained outstanding. The 2023 Notes mature on May 1, 2023. +On October 14, 2016, we issued an aggregate of $650.0 million in principal amount of our 2024 Notes. Interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof, payable semi-annually on April 15 and October 15 of each year. As of December 31, 2020, after giving effect to open market repurchases of these 2024 Notes, $579.6 million principal amount remained outstanding. The 2024 Notes mature on October 15, 2024. +On December 21, 2016, we issued an aggregate of $600.0 million in principal amount of our 2025 Notes. Interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on May 15 and November 15 of each year. As of December 31, 2020, after giving effect to open market repurchases of these 2025 Notes, $507.9 million principal amount remained outstanding. The 2025 Notes mature on May 15, 2025. +On October 11, 2017, we issued $450.0 million in aggregate principal amount of our 2026 Notes. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on January 15 and July 15 of each year. As of December 31, 2020, after giving effect to open market repurchases of these 2026 Notes, $374.6 million principal amount remained outstanding. The 2026 Notes mature on January 15, 2026. +All amounts outstanding on our Senior Notes have been classified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020. +During the year ended December 31, 2020, we used borrowings under our revolving credit facility to repurchase in the open market approximately $73.3 million aggregate principal amount of our outstanding Notes for $22.8 million. We recognized a $49.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. +Building Loan. On June 4, 2015, we entered into a loan for the construction of our corporate headquarters in Oklahoma City, which was substantially completed in December 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum. The building loan matures on June 4, 2025. As of December 31, 2020, the total borrowings under the building loan were approximately $21.9 million, which has been classified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020. +Supplemental Guarantor Financial Information . The 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our secured revolving credit facility or certain other debt (the “Guarantors”). The Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC (the “Non- +50 +Table of Contents +Index to Financial Statement s +Guarantors”). The Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the Notes. Effective June 1, 2019, the Parent contributed interests in certain oil and gas assets and related liabilities to certain of the Guarantors. +SEC Regulation S-X Rule 13-01 requires the presentation of "Summarized Financial Information" to replace the "Condensed Consolidating Financial Information" required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements. +Derivatives and Hedging Activities . We seek to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, collars and various types of option contracts. These contracts allow us to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in floor price for a certain level of our production. However, these hedge contracts also limit the benefit to us in periods when the future market prices of natural gas, oil and NGL that are higher than the hedged prices. +As of December 31, 2020, we had the following open natural gas derivative instruments (we had no oil or NGL derivative instruments in place): +Year Type of Derivative Instrument Index Daily Volume (MMBtu/day) Weighted +Average Price +2021 Swaps NYMEX Henry Hub 410,000 $2.75 +2021 Basis Swaps Rex Zone 3 35,000 $(0.21) +2021 Costless Collars NYMEX Henry Hub 250,000 +$2.46/$2.81 +2021 Basis Swaps Tetco M2 60,000 $(0.67) +2022 Sold Call Options NYMEX Henry Hub 153,000 $2.90 +2022 Costless Collars NYMEX Henry Hub 20,000 +$2.80/$3.40 +2023 Sold Call Options NYMEX Henry Hub 628,000 $2.90 +See Note 13 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of derivatives and hedging activities. +51 +Table of Contents +Index to Financial Statement s +Subsequent to December 31, 2020 and as of March 1, 2021, we entered into the following natural gas, oil, and NGL derivative contracts as we work toward fulfilling minimum hedging requirements as provided for in the RSA: +Period Type of Derivative Instrument Index +Daily Volume (1) +Weighted +Average Price +July 2021 - December 2021 Swaps NYMEX WTI 2,250 $53.07 +July 2021 - December 2021 Swaps Mont Belvieu C3 3,100 $27.80 +January 2022 - June 2022 Swaps Mont Belvieu C3 1,000 $27.30 +April 2021 - May 2021 Basis Swaps Tetco M2 36,443 $(0.61) +February 2021 - October 2021 Basis Swaps Rex Zone 3 94,505 $(0.22) +July 2021 - December 2021 Costless Collars NYMEX Henry Hub 210,000 +$2.67/$3.15 +January 2022 - March 2022 Costless Collars NYMEX Henry Hub 340,000 +$2.82/$3.40 +(1) Volume units for gas instruments are presented as MMBtu/day while oil and NGL is presented in Bbls/day. +Contractual and Commercial Obligations . The following table sets forth our contractual and commercial obligations at December 31, 2020: +Payment due by period +Contractual Obligations Total 2021 2022-2023 2024-2025 2026 and Thereafter +(In thousands) +Long-term debt (1): +Principal $ 2,258,962 $ 451,159 $ 326,003 $ 1,107,183 $ 374,617 +Interest (2) +518,752 184,106 212,606 121,111 929 +Firm transportation and gathering contracts (3) +3,774,725 370,343 760,150 631,113 2,013,119 +Operating lease liabilities (4) +342 117 195 30 — +Total contractual cash obligations (5) +$ 6,552,781 $ 1,005,725 $ 1,298,954 $ 1,859,437 $ 2,388,665 +_____________________ +(1) The maturities of our debt obligations and associated interest reflect their original expiration dates and do not reflect any acceleration due to any events of default pertaining to these obligations. See Note 6 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our long-term debt. +(2) Includes all contractual interest on amounts classified as liabilities subject to compromise, including interest accrued on Senior Notes as of the Petition Date. +(3) Our commitments under our firm transportation and gathering contracts do not reflect contracts expected to be rejected through our Chapter 11 proceedings. See Note 17 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our firm transportation and gathering contracts. +(4) See Note 10 of the notes to our consolidated financial statements included in Item 8 of this report for a description of our operating lease liabilities. +(5) This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 13 and 4 of the notes to our consolidated financial statements included in Item 8 of this report, respectively. +Off-balance Sheet Arrangements . We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2020, our material off-balance sheet arrangements and transactions include $147.5 million in letters of credit outstanding against our revolving credit facility and $111.4 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance on certain firm transportation agreements. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. +52 +Table of Contents +Index to Financial Statement s +Capital Expenditures . Our capital commitments have been primarily for the execution of our operations. Our capital investment strategy is focused on prudently developing our existing properties in an effort to generate sustainable cash flow considering current and forecasted commodity prices. +We continually monitor market conditions and are prepared to adjust our development program if commodity prices dictate. We believe our cash flow from operations, borrowing capacity under the DIP Credit Facility and cash on hand will provide sufficient liquidity during the Chapter 11 process. We expect to incur significant costs associated with our ongoing Chapter 11 Cases in 2021, including fees for legal, financial and restructuring advisors to the Company, certain of our creditors and royalty interest owners. Therefore, our ability to obtain confirmation of the Plan in a timely manner is critical to ensuring our liquidity is sufficient during the bankruptcy process. +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2019, WTI prices ranged from $46.31 to $66.24 per barrel and the Henry Hub spot market price of natural gas ranged from $1.75 to $4.25 per MMBtu. During 2020, WTI prices ranged from $(36.98) to $63.27 per barrel and the Henry Hub spot market price of natural gas ranged from $1.33 to $3.14 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2020. +Cash Flow from Operating Activities . Net cash flow provided by operating activities was $95.3 million for the year ended December 31, 2020 as compared to $724.0 million for 2019. This decrease was primarily the result of a decrease in cash receipts from our oil and natural gas purchasers due to a 41% decrease in net natural gas, oil and NGL sales excluding the impact of derivatives and, to a lesser extent, reorganization items related to our Chapter 11 Cases. +Divestitures . During 2020, we divested certain non-core assets and interests in operated and non-operated oil and natural gas properties for approximately cash proceeds of $51.0 million. Proceeds from these transactions were primarily used to repay debt and fund our development program. See Note 3 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion. +Uses of Funds . The following table presents the uses of our cash and cash equivalents for the years ended December 31, 2020 and 2019: +53 +Table of Contents +Index to Financial Statement s +Years Ended December 31, +2020 2019 +(In thousands) +Oil and Natural Gas Property Expenditures: +Drilling and completion costs +$ 321,811 $ 654,407 +Leasehold acquisitions +18,135 39,664 +Other +27,341 25,986 +Total oil and natural gas property expenditures +$ 367,287 $ 720,057 +Other Uses of Cash and Cash Equivalents +Cash paid to repurchase senior notes +22,827 138,786 +Cash paid to repurchase common stock +— 30,000 +Additions to other property and equipment +799 5,021 +DIP credit facility financing fees 2,988 — +Other +738 720 +Total other uses of cash and cash equivalents +$ 27,352 $ 174,527 +Total uses of cash and cash equivalents $ 394,639 $ 894,584 +Drilling and Completion Costs . During 2020, we spud 16 gross (16 net) wells and commenced sales from 25 gross (23.8 net) wells in the Utica for a total cost of approximately $192.2 million. +During 2020, we spud 10 gross (8.4 net) and commenced sales from 4 gross (3.8 net) wells in the SCOOP for a total cost of approximately $53.9 million. In addition, 19 gross (0.05 net) wells were spud and 12 gross (0.04 net) wells were turned to sales by other operators on our SCOOP acreage during 2020 for a total cost to us of approximately $0.6 million. +Drilling and completion costs presented in this section reflect incurred costs while drilling and completion costs presented above in Uses of Funds section reflect cash payments for drilling and completions. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +The Company has applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings have been classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness are recorded as reorganization items, net in the consolidated statements of operations for the year ended December 31, 2020. Refer to Note 2 for more information on the events of the bankruptcy proceedings as well as the accounting and reporting impacts of the reorganization. +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +54 +Table of Contents +Index to Financial Statement s +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2020. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. During the year ended December 31, 2020 we recorded impairments of our oil and natural gas properties in the amount of $1.4 billion compared to $2.0 billion during the year ended December 31, 2019. See Oil and Natural Gas Properties in Note 1 of the notes to our consolidated financial statements included in Item 8 of this report for further information on the full cost method of accounting. +Oil, Natural Gas and NGL Reserves . Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 19 included in Item 8 of this report for further information. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2020, a valuation allowance of $985.5 million had been established to fully offset our net deferred tax asset on our accompanying consolidated balance sheet. +Revenue Recognition . We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments received have not significantly deviated from our accruals. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +See Item 7A. " Natural Gas, Oil and NGL Derivatives " for a summary of our derivative instruments in place as of December 31, 2020. +55 +Table of Contents +Index to Financial Statement s +Disclosures About Effects of Transactions with Related parties +Our equity method investees are considered related parties. See Notes 5 , 10 and 16 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of transactions with our equity method investees. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Commodity Price Risk. Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL, which have been historically volatile and are even more volatile as a result of COVID-19 and decisions of the Organization of Petroleum Exporting Countries and other high oil-exporting countries ("OPEC+") discussed in this Form 10-K. To mitigate a portion of our exposure to adverse price changes, we enter into various derivative instruments, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes are unsustainable for the long term, have material downside risk in the short term or provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the Board of Directors reviews our derivative program at its quarterly board meetings. We believe we have sufficient internal controls to prevent unauthorized trading. +We use derivative instruments to achieve our risk management objectives, including swaps and options. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls, taking advantage of premiums associated with market price volatility. +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions would be reversed. The actual fixed price on our derivative instruments is derived from the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow NYMEX futures. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter into the original derivative position. Gains or losses related to closed positions will be recognized in the month specified in the original contract. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 13 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2020, our natural gas derivative instruments consistent of the following types of instruments: +56 +Table of Contents +Index to Financial Statement s +• Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +• Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options, and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +• Costless Collars : Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodities prices increase. At December 31, 2020, we had a net liability derivative position of $20.8 million as compared to a net asset derivative position of $73.3 million as of December 31, 2019. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $69.0 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $66.0 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. +Interest Rate Risk. Our Pre-Petition Revolving Credit Facility and DIP Credit Facility are structured under floating rate terms, as advances under these facilities may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2020, we had $292.9 million in borrowings outstanding under our revolving credit facility which bore interest at the weighted average rate of 3.15%. At December 31, 2020, we had $157.5 million in borrowings under our DIP credit facility which bore interest at the weighted average rate of 5.50%. A 1% increase in the average interest rate would have increased interest expense by approximately $2.1 million based on outstanding borrowings under our revolving credit facility and DIP credit facility at December 31, 2020. As of December 31, 2020, we did not have any interest rate swaps to hedge our interest risks. +57 +Table of Contents +Index to Financial Statement s +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm +59 +Consolidated Balance Sheets, December 31, 2020 and December 31, 2019 +61 +Consolidated Statements of Operations, Years Ended December 31, 2020, 2019, and 2018 +62 +Consolidated Statements of Comprehensive (Loss) Income, Years Ended December 31, 2020, 2019, and 2018 +63 +Consolidated Statements of Stockholders' (Deficit) Equity, Years Ended December 31, 2020, 2019, and 2018 +64 +Consolidated Statements of Cash Flows, Year Ended December 31, 2020, 2019, and 2018 +65 +Notes to Consolidated Financial Statements +66 +58 +Table of Contents +Index to Financial Statement s +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (Debtor-in-Possession) (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 5, 2021 expressed an unqualified opinion. +Going Concern +The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code during the year ended December 31, 2020, which constituted an event of default that accelerated the Company's obligations under the Company's pre-petition revolving credit facility and the indentures governing the Company's senior notes, resulting in the principal and interest due thereunder becoming immediately due and payable. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Depletion expense and impairment of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 to the financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil and gas properties (the full cost ceiling test). To estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial +59 +Table of Contents +Index to Financial Statement s +performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and potential ceiling test impairment assessments. We identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense and the assessment of potential impairment as a critical audit matter. +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and/or impairment expense. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others: +• We tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessing the Company’s oil and gas properties for potential ceiling test impairment; +• We evaluated the independence, objectivity, and professional qualifications of the Company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgements made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialist; +• We evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated capital costs, and ownership interest. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for pricing differentials, where applicable; +◦ Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ Tested the model used to determine the future capital expenditures and compared estimated future capital expenditures used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +March 5, 2021 +60 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +(DEBTOR-IN-POSSESSION) +December 31, 2020 December 31, 2019 +(In thousands, except share data) +Assets +Current assets: +Cash and cash equivalents $ 89,861 $ 6,060 +Accounts receivable—oil and natural gas sales 119,879 121,210 +Accounts receivable—joint interest and other 12,200 47,975 +Prepaid expenses and other current assets 160,664 4,431 +Short-term derivative instruments 27,146 126,201 +Total current assets 409,750 305,877 +Property and equipment: +Oil and natural gas properties, full-cost accounting, $ 1,457,043 and $ 1,686,666 excluded from amortization in 2020 and 2019, respectively +10,816,909 10,595,735 +Other property and equipment 88,538 96,719 +Accumulated depletion, depreciation, amortization and impairment ( 8,819,178 ) ( 7,228,660 ) +Property and equipment, net 2,086,269 3,463,794 +Other assets: +Equity investments 24,816 32,044 +Long-term derivative instruments 322 563 +Deferred tax asset — 7,563 +Operating lease assets 342 14,168 +Operating lease assets - related parties — 43,270 +Other assets 18,372 15,540 +Total other assets 43,852 113,148 +Total assets $ 2,539,871 $ 3,882,819 +Liabilities and stockholders’ (deficit) equity +Current liabilities: +Accounts payable and accrued liabilities $ 244,903 $ 415,218 +Short-term derivative instruments 11,641 303 +Current portion of operating lease liabilities — 13,826 +Current portion of operating lease liabilities - related parties — 21,220 +Current maturities of long-term debt 253,743 631 +Total current liabilities 510,287 451,198 +Non-current liabilities: +Long-term derivative instruments 36,604 53,135 +Asset retirement obligation—long-term — 60,355 +Uncertain tax position liability — 3,127 +Non-current operating lease liabilities — 342 +Non-current operating lease liabilities - related parties — 22,050 +Long-term debt, net of current maturities — 1,978,020 +Total non-current liabilities 36,604 2,117,029 +Liabilities subject to compromise 2,293,480 — +Total liabilities 2,840,371 2,568,227 +Commitments and contingencies (Notes 17 and 18) +Preferred stock, $ 0.01 par value; 5,000,000 authorized ( 30,000 authorized as redeemable 12 % cumulative preferred stock, Series A), and none issued and outstanding +— — +Stockholders’ (deficit) equity: +Common stock - $ 0.01 par value, 200,000,000 shares authorized, 160,762,186 issued and outstanding in 2020 and 159,710,955 in 2019 +1,607 1,597 +Paid-in capital 4,213,752 4,207,554 +Accumulated other comprehensive loss ( 43,000 ) ( 46,833 ) +Accumulated deficit ( 4,472,859 ) ( 2,847,726 ) +Total stockholders’ (deficit) equity ( 300,500 ) 1,314,592 +Total liabilities and stockholders’ (deficit) equity $ 2,539,871 $ 3,882,819 +See accompanying notes to consolidated financial statements. +61 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(DEBTOR-IN-POSSESSION) +For the Year Ended December 31, +2020 2019 2018 +(In thousands, except share data) +REVENUES: +Natural gas sales $ 671,535 $ 1,135,381 $ 1,318,472 +Oil and condensate sales 62,902 117,937 177,793 +Natural gas liquid sales 66,814 101,448 178,915 +Net gain (loss) on natural gas, oil, and NGL derivatives 65,291 208,360 ( 123,479 ) +Total Revenues 866,542 1,563,126 1,551,701 +OPERATING EXPENSES: +Lease operating expenses 54,235 73,496 79,716 +Taxes other than income 28,509 40,510 48,298 +Midstream gathering and processing expenses 456,318 508,843 486,845 +Depreciation, depletion and amortization 239,744 550,108 486,664 +Impairment of oil and natural gas properties 1,357,099 2,039,770 — +General and administrative expenses 59,329 45,542 47,100 +Restructuring and liability management expenses 30,847 4,611 — +Accretion expense 3,066 3,939 4,119 +Total Operating Expenses 2,229,147 3,266,819 1,152,742 +(LOSS) INCOME FROM OPERATIONS ( 1,362,605 ) ( 1,703,693 ) 398,959 +OTHER EXPENSE (INCOME): +Interest expense 120,079 141,786 141,912 +Interest income ( 414 ) ( 801 ) ( 314 ) +Gain on debt extinguishment ( 49,579 ) ( 48,630 ) — +Gain on sale of equity method investments — — ( 124,768 ) +Loss (income) from equity method investments, net 11,055 210,148 ( 49,904 ) +Reorganization items, net 152,359 — — +Other expense, net 21,738 3,725 1,542 +Total Other Expense (Income) 255,238 306,228 ( 31,532 ) +(LOSS) INCOME BEFORE INCOME TAXES ( 1,617,843 ) ( 2,009,921 ) 430,491 +INCOME TAX EXPENSE (BENEFIT) 7,290 ( 7,563 ) ( 69 ) +NET (LOSS) INCOME $ ( 1,625,133 ) $ ( 2,002,358 ) $ 430,560 +NET (LOSS) INCOME PER COMMON SHARE: +Basic $ ( 10.14 ) $ ( 12.49 ) $ 2.46 +Diluted $ ( 10.14 ) $ ( 12.49 ) $ 2.45 +Weighted average common shares outstanding—Basic 160,231,335 160,341,125 174,675,840 +Weighted average common shares outstanding—Diluted 160,231,335 160,341,125 175,398,706 +See accompanying notes to consolidated financial statements. +62 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +(DEBTOR-IN-POSSESSION) +For the Year Ended December 31, +2020 2019 2018 +(In thousands) +Net (loss) income $ ( 1,625,133 ) $ ( 2,002,358 ) $ 430,560 +Foreign currency translation adjustment (1) +3,833 9,193 ( 15,487 ) +Other comprehensive income (loss) 3,833 9,193 ( 15,487 ) +Comprehensive (loss) income $ ( 1,621,300 ) $ ( 1,993,165 ) $ 415,073 +_____________________ +(1) No taxes were recorded for the years ended December 31, 2020, 2019 and 2018. +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY +(DEBTOR-IN-POSSESSION) +Paid-in +Capital Accumulated +Other +Comprehensive +Loss Accumulated Deficit Total +Stockholders’ +(Deficit) Equity +Common Stock +Shares Amount +(In thousands, except share data) +Balance at January 1, 2018 183,105,910 $ 1,831 $ 4,416,250 $ ( 40,539 ) $ ( 1,275,928 ) $ 3,101,614 +Net Income — — — — 430,560 430,560 +Other Comprehensive Loss — — — ( 15,487 ) — ( 15,487 ) +Stock-based Compensation — — 11,332 — — 11,332 +Shares Repurchased ( 20,746,536 ) ( 207 ) ( 200,044 ) — — ( 200,251 ) +Issuance of Restricted Stock 626,671 6 ( 6 ) — — — +Balance at December 31, 2018 162,986,045 $ 1,630 $ 4,227,532 $ ( 56,026 ) $ ( 845,368 ) $ 3,327,768 +Net Loss — — — — ( 2,002,358 ) ( 2,002,358 ) +Other Comprehensive Income — — — 9,193 — 9,193 +Stock-based Compensation — — 10,677 — — 10,677 +Shares Repurchased ( 3,951,198 ) ( 40 ) ( 30,648 ) — — ( 30,688 ) +Issuance of Restricted Stock 676,108 7 ( 7 ) — — — +Balance at December 31, 2019 159,710,955 $ 1,597 $ 4,207,554 $ ( 46,833 ) $ ( 2,847,726 ) $ 1,314,592 +Net Loss — — — — ( 1,625,133 ) ( 1,625,133 ) +Other Comprehensive Income — — — 3,833 — 3,833 +Stock-based Compensation — — 6,444 — — 6,444 +Shares Repurchased ( 243,054 ) ( 3 ) ( 233 ) — — ( 236 ) +Issuance of Restricted Stock 1,294,285 13 ( 13 ) — — — +Balance at December 31, 2020 160,762,186 $ 1,607 $ 4,213,752 $ ( 43,000 ) $ ( 4,472,859 ) $ ( 300,500 ) +See accompanying notes to consolidated financial statements. +64 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(DEBTOR-IN-POSSESSION) +Year Ended December 31, +2020 2019 2018 +(In thousands) +Cash flows from operating activities: +Net (loss) income $ ( 1,625,133 ) $ ( 2,002,358 ) $ 430,560 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depletion, depreciation and amortization 239,744 550,108 486,664 +Impairment of oil and natural gas properties 1,357,099 2,039,770 — +Loss (income) from equity investments, net 11,055 210,289 ( 49,625 ) +Gain on debt extinguishment ( 49,579 ) ( 48,630 ) — +Net loss (gain) on derivative instruments ( 65,291 ) ( 208,360 ) 123,479 +Net cash receipts on settled derivative instruments 159,394 123,130 ( 58,428 ) +Non-cash reorganization items, net 21,956 — — +Deferred income tax expense (benefit) 7,290 ( 7,563 ) 1,208 +Gain on sale of equity method investments and other assets — ( 220 ) ( 124,768 ) +Distributions from equity method investments — 2,457 3,206 +Other, net 31,984 15,178 17,039 +Changes in operating assets and liabilities, net 6,785 50,192 ( 43,064 ) +Net cash provided by operating activities 95,304 723,993 786,271 +Cash flows from investing activities: +Additions to oil and natural gas properties ( 367,287 ) ( 720,057 ) ( 899,083 ) +Proceeds from sale of oil and gas properties 50,971 48,527 5,114 +Proceeds from sale of equity method investments — — 226,487 +Other, net 1,729 ( 3,241 ) ( 9,392 ) +Net cash used in investing activities ( 314,587 ) ( 674,771 ) ( 676,874 ) +Cash flows from financing activities: +Principal payments on pre-petition revolving credit facility ( 383,290 ) ( 877,000 ) ( 220,000 ) +Borrowings on pre-petition revolving credit facility 713,701 952,000 265,000 +Principal payments on DIP credit facility ( 90,000 ) — — +Borrowings on DIP credit facility 90,000 — — +Repurchase of senior notes ( 22,827 ) ( 138,786 ) — +DIP credit facility financing fees ( 2,988 ) — — +Payments on repurchase of stock under approved stock repurchase programs — ( 30,000 ) ( 200,251 ) +Other, net ( 1,512 ) ( 1,673 ) ( 1,406 ) +Net cash provided (used in) by financing activities 303,084 ( 95,459 ) ( 156,657 ) +Net increase (decrease) in cash, cash equivalents and restricted cash 83,801 ( 46,237 ) ( 47,260 ) +Cash, cash equivalents and restricted cash at beginning of period 6,060 52,297 99,557 +Cash, cash equivalents and restricted cash at end of period $ 89,861 $ 6,060 $ 52,297 +See accompanying notes to consolidated financial statements. +65 +Table of Contents +Index to Financial Statement s +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +(DEBTOR-IN-POSSESSION) +1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Business +Gulfport Energy Corporation, a Delaware corporation formed in 1997, is an independent natural gas-weighted exploration and production company focused on the production of natural gas, crude oil and NGL in the United States. The Company's principal properties are located in Eastern Ohio targeting the Utica formation and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC filed voluntary petitions of relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases are being administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The debtors continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court, in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. +The commencement of a voluntary proceeding in bankruptcy constituted an event of default that accelerated the Company's obligations under the Company's Pre-Petition Revolving Credit Facility and the indentures governing the Company's senior notes, resulting in the principal and interest due thereunder becoming immediately due and payable. Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code. +The Company has applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings have been classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness are recorded as reorganization items, net in the consolidated statements of operations for the year ended December 31, 2020. Refer to Note 2 for more information on the events of the bankruptcy proceedings as well as the accounting and reporting impacts of the reorganization. +Ability to Continue as a Going Concern +The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. +As discussed above, the filing of the Chapter 11 Cases constituted an event of default under the Company’s Pre-Petition Revolving Credit Facility and the indentures governing the Company's senior notes (the "Default"), resulting in the principal and interest due thereunder becoming immediately due and payable. The Company does not have sufficient cash on hand or available liquidity to repay these amounts due. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. +As part of the Chapter 11 Cases, the Company submitted the Plan to the Bankruptcy Court. The Company’s operations and its ability to develop and execute its business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. +66 +Table of Contents +Index to Financial Statement s +There can be no assurance that the Company will confirm and consummate the plan of reorganization as contemplated by the RSA with certain holders of the Company’s senior notes or complete another plan of reorganization with respect to the Chapter 11 Cases. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. +While operating as a debtor-in-possession, the Company may settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Plan or other bankruptcy proceedings could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements, including liabilities subject to compromise which will be resolved in connection with the Chapter 11 Cases. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. +Risks and Uncertainties +I n March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic and recommended containment and mitigation measures worldwide. The measures have led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world have imposed regulations in efforts to control the spread of COVID-19 such as shelter-in-place orders, quarantines, executive orders and similar restrictions. +Gulfport remains focused on protecting the health and well-being of its employees and the communities in which it operates while assuring the continuity of its business operations. The Company implemented preventative measures and developed corporate and field response plans to minimize unnecessary risk of exposure and prevent infection. Additionally, the Company has a crisis management team for health, safety and environmental matters and personnel issues, and has established a COVID-19 Response Team to address various impacts of the situation, as they have been developing. Gulfport has modified certain business practices (including remote working for its corporate employees and restricted employee business travel) to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities. In May 2020, the Company began its phased transition back to the office for its corporate employees. As part of this transition, the Company put into place preventative measures to focus on social distancing and minimizing unnecessary risk of exposure. As of the date of this filing, Gulfport has transitioned the vast majority of its employees back to the corporate office; however, the Company continues to provide a balanced work schedule that allows for a significant portion of the work week to be performed remotely. The Company will continue to monitor trends and governmental guidelines and may adjust its return to office plans accordingly to ensure the health and safety of its employees. As a result of its business continuity measures, the Company has not experienced significant disruptions in executing its business operations in 2020. +On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act did not have a material impact on the Company’s consolidated financial statements. Gulfport is closely monitoring the impact of COVID-19 on all aspects of its business and the current commodity price environment and is unable to predict the impact it will have on its future financial position or operating results. +Decreased demand for oil and natural gas as a result of the COVID-19 pandemic has put further downward pressure on commodity pricing. In the current depressed commodity price environment and period of economic uncertainty, the Company has taken the following operational and financial measures in 2020 to improve its balance sheet and preserve liquidity: +• Reduced 2020 capital spending by more than 50 % as compared to 2019 +• Focused on operational efficiencies to reduce operating costs; including significant improvements in development and completion costs per lateral foot +• Repurchased $ 73.3 million of unsecured notes at a discount +• Evaluated economics across our portfolio and shut-in certain non-economical production in the second quarter of 2020 +• Reduced recurring corporate general and administrative costs significantly through pay reductions, furloughs and reductions in force. +67 +Table of Contents +Index to Financial Statement s +Although management’s actions listed above have helped to improve the Company's liquidity and leverage profile, continued macro headwinds including the depressed state of energy capital markets and the extraordinarily low commodity price environments resulted in the Company filing for protection under Bankruptcy Rules as noted above. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC and Mule Sky LLC. All intercompany balances and transactions are eliminated in consolidation. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. No material allowance was deemed necessary at December 31, 2020 and December 31, 2019. +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 months. +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices throughout 2020, the Company recognized ceiling test impairments of $ 1.4 billion for the year ended December 31, 2020. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 1.5 billion and $ 1.7 billion at December 31, 2020 and December 31, 2019, respectively. These costs are reviewed quarterly by management for impairment. If impairment +68 +Table of Contents +Index to Financial Statement s +has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. The assets and liabilities of the Canadian investment are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, the Company has an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ (deficit) equity. The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes. +(In thousands) +December 31, 2017 ( 39,190 ) +December 31, 2018 ( 54,677 ) +December 31, 2019 ( 45,484 ) +December 31, 2020 ( 41,651 ) +Net (Loss) Income per Common Share +Basic net (loss) income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net (loss) income per common share are illustrated in Note 12 . +Income Taxes +Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 2003 – 2019 U.S. federal and 2009 - 2019 state income tax returns remain open to examination by tax authorities, due to net operating +69 +Table of Contents +Index to Financial Statement s +losses. As of December 31, 2020, the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as midstream, gathering and processing expense in the accompanying consolidated statements of operations. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of ASC 606, Revenue from Contracts with Customers and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 9 for additional discussion of revenue from contracts with customers. +Investments—Equity Method +Investments in entities in which the Company owns an equity interest greater than 20% and less than 50% and/or investments in which it has significant influence are accounted for under the equity method. Under the equity method, the Company’s share of investees’ earnings or loss is recognized in the consolidated statements of operations. +The Company reviews its investments annually to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company recognizes an impairment provision. The Company did no t record any impairment charges related to its investments in Mammoth and Grizzly for the year ended December 31, 2020. During the year ended December 31, 2019, the Company recorded impairments of $ 160.8 million related to its investment in Mammoth Energy and $ 32.4 million related to its investment in Grizzly. There were no impairment charges recorded for the year ended December 31, 2018. See Note 5 for further discussion of Mammoth Energy and Grizzly impairments. +Accounting for Stock-based Compensation +Share-based payments to employees, including grants of restricted stock, are recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to three years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. The Company will continue to account for its share-based payments consistent with prior periods until the Bankruptcy Court takes specific actions to modify or cancel existing awards. +70 +Table of Contents +Index to Financial Statement s +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. +Supplemental cash flow and non-cash information +Year Ended December 31, +2020 2019 2018 +Supplemental disclosure of cash flow information: (In thousands) +Cash paid for reorganization items, net $ 24,553 $ — $ — +Interest payments $ 84,823 $ 142,664 $ 132,995 +Income tax receipts $ — $ ( 1,794 ) $ — +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation $ 2,860 $ 5,766 $ 4,533 +Asset retirement obligation capitalized $ 2,358 $ 6,883 $ 1,452 +Asset retirement obligation removed due to divestiture $ ( 2,213 ) $ ( 30,146 ) $ — +Interest capitalized $ 907 $ 3,372 $ 4,470 +Pre-petition revolver principal transfer to DIP credit facility $ 157,500 $ — $ — +Fair value of contingent consideration asset on date of divestiture $ 23,090 $ ( 1,137 ) $ — +Foreign currency translation gain (loss) on equity method investments $ 3,833 $ 9,193 $ ( 15,487 ) +Reclassifications +In the fourth quarter of 2020, the Company updated the presentation of certain costs on its consolidated statements of operations to better align its cost reporting with industry peers. In particular, the Company created a new expense line item titled “Taxes other than income” in its consolidated statement of operations. This new line item includes production taxes, property taxes and certain other non-income tax related costs incurred. Prior period amounts have been reclassified to align to this new approach. The reclassifications have no impact on previously reported total assets, liabilities, net (loss) income or total operating cash flows. +Impact on Previously Reported Results +During the third quarter of 2020, the Company identified that certain transportation activities during the years ended December 31, 2019 and 2018 were misclassified between "natural gas sales" and "midstream gathering and processing expenses" on its consolidated statements of operations. The Company assessed the materiality of this presentation on prior periods’ consolidated financial statements in accordance with the SEC Staff Accounting Bulletin No. 99, “Materiality”, codified in Accounting Standards Codification Topic 250, “Accounting Changes and Error Corrections". Based on this assessment, the Company concluded that the correction is not material to any previously issued financial statements. The correction had no impact on its consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of stockholders' equity or consolidated statements of cash flows. Additionally, the error had no impact on net loss or net loss per share. The Company will conform presentation of previously reported consolidated statements of operations in future filings. +71 +Table of Contents +Index to Financial Statement s +The following tables present the effect of the correction on all affected line items of our previously issued consolidated financial statements of operations for the years ended December 31, 2019 and 2018. +Year Ended December 31, 2019 +As Reported Adjustments As Revised +(In thousands) +Natural gas sales $ 918,263 $ 217,118 $ 1,135,381 +Total Revenues $ 1,346,008 $ 217,118 $ 1,563,126 +Midstream gathering and processing expenses $ 291,725 $ 217,118 $ 508,843 +Total Operating Expenses $ 3,049,701 $ 217,118 $ 3,266,819 +Year Ended December 31, 2018 +As Reported Adjustments As Revised +(In thousands) +Natural gas sales $ 1,121,815 $ 196,657 $ 1,318,472 +Total Revenues $ 1,355,044 $ 196,657 $ 1,551,701 +Midstream gathering and processing expenses $ 290,188 $ 196,657 $ 486,845 +Total Operating Expenses $ 956,085 $ 196,657 $ 1,152,742 +Recent Adopted Accounting Pronouncements +On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted the new standard using the prospective transition method, and it did not have a material impact on the Company's consolidated financial statements and related disclosures. +2. CHAPTER 11 PROCEEDINGS +Restructuring Support Agreement +On November 13, 2020, the Debtors commenced the Chapter 11 Cases as described in Note 1 above. To ensure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for certain "first day" motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date. In addition, the Debtors have received authority to use cash collateral of the lenders under the DIP Credit Facility. +On November 13, 2020, the Debtors entered into a restructuring support agreement with (i) over 95 % of the lenders (the “Consenting RBL Lenders”) party to the Pre-Petition Revolving Credit Facility, dated as of December 27, 2013, by and among the Company, as borrower, each of the lenders party thereto, the Bank of Nova Scotia, as administrative agent and issuing bank, the joint lead arrangers and joint bookrunners, the co-syndication agents, and the co-documentation agents and (ii) certain holders (the “Consenting Noteholders,” and, together with the Consenting RBL Lenders, the “Consenting Stakeholders”) holding over two-thirds of the Company’s (a) 6.625 % senior notes due 2023, issued under that certain Indenture, dated as of April 21, 2015, (b) 6.000 % senior notes due 2024, issued under that certain Indenture, dated as of October 14, 2016, (c) 6.375 % senior notes due 2025, issued under that certain Indenture, dated as of December 21, 2016, and (d) 6.375 % senior notes due 2026, issued under that certain Indenture, dated as of October 11, 2017 (collectively, the “Unsecured Notes”), each by and among the Company, the subsidiary guarantors party thereto, and UMB Bank, N.A. as successor trustee. +The RSA outlines the key elements and actions the Company plans to take as part of Chapter 11 process, including equitizing a significant portion of its prepetition indebtedness and rejecting or renegotiating certain contracts which will result in a materially improved balance sheet and cost structure. The RSA contains certain covenants on the part of each of Gulfport and the Consenting Stakeholders, including commitments by the Consenting Stakeholders to vote in favor of the Plan and commitments of Gulfport and the Consenting Stakeholders to negotiate in good faith to finalize the documents and agreements +72 +Table of Contents +Index to Financial Statement s +governing the Restructuring. The RSA also places certain conditions on the obligations of the parties and provides that the RSA may be terminated upon the occurrence of certain events, including, without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA. One such condition is the requirement to obtain sufficient savings on certain midstream obligations (as set forth in the RSA) through rejection of such contracts and/or renegotiation of their terms. +Although Gulfport intends to pursue the Restructuring in accordance with the terms set forth in the RSA, there can be no assurance that Gulfport will be successful in completing a restructuring or any other similar transaction on the terms set forth in the RSA, on different terms, or at all. +Plan of Reorganization +The Restructuring contemplated under the RSA will be pursued by Gulfport pursuant to a prearranged joint plan of reorganization (the “Plan”). Capitalized terms used under this heading titled “Joint Prearranged Chapter 11 Plan of Reorganization” but not otherwise defined herein shall have the meaning given to such terms in the Plan. The Plan can be found as an exhibit to this Form 10-K. +Below is a summary of the treatment that the stakeholders of the Company would receive under the Plan: +• each Holder of an Allowed Other Secured Claim shall receive, at the option of the applicable Debtor and with the consent of the Required Consenting Stakeholders (such consent not to be unreasonably withheld): (a) payment in full in Cash of its Allowed Other Secured Claim; (b) the collateral securing its Allowed Other Secured Claim; (c) Reinstatement of its Allowed Other Secured Claim; or (d) such other treatment rendering its Allowed Other Secured Claim unimpaired in accordance with section 1124 of the Bankruptcy Code; +• each Holder of an Allowed Other Priority Claim shall receive treatment in a manner consistent with section 1129(a)(9) of the Bankruptcy Code; +• each Holder of an Allowed RBL Claim shall receive, at the option of each such Holder, either (a) its Pro Rata share of the Exit RBL/Term Loan A Facility, if such Holder elects to participate in the Exit RBL/Term Loan A Facility or (b) its Pro Rata share of the Exit Term Loan B Facility, if such Holder does not elect to participate in the Exit RBL/Term Loan A Facility (including by not making any election with respect to the Exit Facility on the ballot); +• each Holder of an Allowed General Unsecured Claim against Gulfport Parent shall receive in full and final satisfaction of such Claim, its Pro Rata share of the Gulfport Parent Equity Pool; provided, however, that once the Holders of Notes Claims receive distributions of 94 % of the New Common Stock (prior to and not including any dilution by the Management Incentive Plan or any conversion of New Preferred Stock into New Common Stock) in the aggregate on account of their Notes Claims against all Debtors, the Holders of Notes Claims shall waive any excess recovery on account of their Pro Rata share of the Gulfport Parent Equity Pool until Holders of Allowed General Unsecured Claims against Gulfport Parent have received New Common Stock with a value sufficient to satisfy their Allowed General Unsecured Claims against Gulfport Parent in full (based on Plan Value); +• each Holder of an Allowed General Unsecured Claim against Gulfport Subsidiaries shall receive in full and final satisfaction of such Claim, its Pro Rata share of: (a) the Gulfport Subsidiaries Equity Pool; (b) the Rights Offering Subscription Rights; and (c) the New Unsecured Notes; +• each Holder of an Allowed Notes Claim against Gulfport Parent shall receive, in full and final satisfaction of such Claim, its Pro Rata share of the Gulfport Parent Equity Pool; provided, however, that once the Holders of Notes Claims receive distributions of 94 % of the New Common Stock (prior to and not including any dilution by the Management Incentive Plan or any conversion of New Preferred Stock into New Common Stock) in the aggregate on account of their Notes Claims against all Debtors, the Holders of Notes Claims shall waive any excess recovery on account of their Pro Rata share of the Gulfport Parent Equity Pool until Holders of Allowed General Unsecured Claims against Gulfport Parent have received New Common Stock with a value sufficient to satisfy their Allowed General Unsecured Claims against Gulfport Parent in full (based on Plan Value); provided further, however, distributions to any Holder of a Notes Claim against Gulfport Parent shall be subject to the rights and terms of the Notes Indentures and the rights of the Notes Trustee to assert the Notes Trustee Charging Lien; +• each Holder of an Allowed Notes Claim against Gulfport Subsidiaries shall receive, in full and final satisfaction of such Claim, its Pro Rata share of the: (i) Gulfport Subsidiaries Equity Pool, (ii) Rights Offering Subscription Rights, and (iii) New Unsecured Notes; provided, however, distributions to any Holder of a Notes Claim against Gulfport +73 +Table of Contents +Index to Financial Statement s +Subsidiaries shall be subject to the rights and terms of the Notes Indentures and the rights of the Notes Trustee to assert the Notes Trustee Charging Lien; +• each Intercompany Claim shall be cancelled in exchange for the distributions contemplated by the Plan to Holders of Claims against and Interests in the respective Debtor entities and shall be considered settled pursuant to Bankruptcy Rule 9019; +• each Holder of an Intercompany Interest shall receive no recovery or distribution and shall be Reinstated solely to the extent necessary to maintain the Debtors’ prepetition corporate structure for the ultimate benefit of the Holders of New Common Stock and New Preferred Stock; and +• all Existing Interests (i.e. equity) in Gulfport Parent and all Allowed Section 510(b) Claims, if any, shall be cancelled, released, extinguished, and of no further force or effect. +DIP Credit Facility +Pursuant to the RSA, the Consenting RBL Lenders have agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $ 262.5 million consisting of (a) $ 105 million of new money and (b) $ 157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. In the current period, the Company incurred $ 3.0 million of fees related to the arrangement and funding of the DIP Credit Facility. The DIP Credit Facility was approved by the Bankruptcy Court on a final basis on December 18, 2020. See Note 6 for additional information. +Executory Contracts +Subject to certain exceptions, under the Bankruptcy Code, the Company may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company from performing its future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the Company's estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Company to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Company, including where applicable a quantification of the Company's obligations under any such executory contract or unexpired lease of the Company, is qualified by any overriding rejection rights it has under the Bankruptcy Code. +Potential Claims +The Company has filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of the Company and each of its subsidiaries, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims, which was set by the Bankruptcy Court as January 26, 2021. Governmental units are required to file proof of claims by May 12, 2021, the deadline that was set by the Bankruptcy Court. +As of February 25, 2021, the Debtors have received approximately 2,200 proofs of claim for an aggregate amount of approximately $ 12.5 billion. The Company will continue to evaluate these claims throughout the Chapter 11 process and recognize or adjust amounts in future financial statements as necessary using the best information available at such time. Differences between amounts scheduled by the Company and claims by creditors will ultimately be reconciled and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after the Company emerges from bankruptcy. +Financial Statement Classification of Liabilities Subject to Compromise +The accompanying audited consolidated balance sheet as of December 31, 2020, includes amounts classified as liabilities subject to compromise, which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. +74 +Table of Contents +Index to Financial Statement s +These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. +Liabilities subject to compromise includes amounts related to the rejection of various executory contracts. Additional amounts may be included in liabilities subject to compromise in future periods if additional executory contracts and/or unexpired leases are rejected. The nature of many of the potential claims arising under the Company's executory contracts and unexpired leases has not been determined at this time, and therefore, such claims are not reasonably estimable at this time and may be material. Damages related to rejected contracts are accounted for after they have been approved for rejection by the Bankruptcy Court. +The following table summarizes the components of liabilities subject to compromise included on the Company's audited consolidated balance sheet as of December 31, 2020: +December 31, 2020 +(in thousands) +Debt subject to compromise $ 2,005,219 +Accounts payable and accrued liabilities 164,939 +Asset retirement obligations 63,566 +Accrued interest on debt subject to compromise 55,634 +Other liabilities 4,122 +Liabilities subject to compromise $ 2,293,480 +Interest Expense +The Company has discontinued recording interest on debt instruments classified as liabilities subject to compromise as of the Petition Date. The contractual interest expense on liabilities subject to compromise not accrued in the consolidated statements of operations was approximately $ 15.3 million from the Petition Date through December 31, 2020. +Reorganization Items, Net +The Company has incurred and will continue to incur significant expenses, gains and losses associated with the reorganization, primarily the write-off of unamortized debt issuance costs, debt and equity financing fees, adjustments to allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The amount of these items, which are being incurred in reorganization items, net within the Company's accompanying audited consolidated statements of operations, are expected to significantly affect the Company's statements of operations. The Company has incurred adjustments for allowable claims related to its legal proceedings and executory contracts approved for rejections by the Bankruptcy Court, with additional adjustments possible in future periods. +The following table summarizes the components in reorganization items, net included in the Company's audited consolidated statements of operations for the year ended December 31, 2020: +Year Ended December 31, 2020 +(in thousands) +Adjustment to allowed claims $ 104,943 +Legal and professional fees 24,905 +Write off of unamortized issuance costs on debt subject to compromise 21,956 +DIP credit facility financing fees 2,988 +Gain on settlement of pre-petition accounts payable ( 2,433 ) +Reorganization items, net $ 152,359 +75 +Table of Contents +Index to Financial Statement s +3. DIVESTITURES +Sale of Water Infrastructure Assets +On January 2, 2020, the Company closed on the sale of its SCOOP water infrastructure assets to a third-party water service provider. The Company received $ 50.0 million in cash proceeds upon closing and has an opportunity to earn potential additional incentive payments over the next 15 years, subject to the Company's ability to meet certain thresholds which will be driven by, among other things, the Company's future development program and water production levels. The agreement contained no minimum volume commitments. The fair value of the contingent consideration as of the closing date was $ 23.1 million. See Note 15 for additional discussion of the fair value of the contingent consideration. +The divested assets were included in the amortization base of the full cost pool and no gain or loss was recognized in the accompanying consolidated statements of operations as a result of the sale. +Sale of Non-operated Utica Interests +In December 2019, the Company entered into an agreement to divest certain non-operated interests in the Utica for approximately $ 29.0 million in cash subject to customary closing terms and adjustments. This sale closed on December 30, 2019. +Sale of Bakken Overriding Royalty Interests +During 2019, the Company announced the sale of certain overriding royalty interests associated with assets the Company held in the Bakken. The sale closed on December 11, 2019 and, net of purchase price adjustments, the Company received approximately $ 7.0 million of total proceeds. +Sale of Southern Louisiana Assets +In December 2018, the Company entered into an agreement to sell its non-core assets located in the West Cote Blanche Bay and Hackberry fields of southern Louisiana to an undisclosed third party for a purchase price of approximately $ 19.7 million. The sale closed on July 3, 2019, subject to customary post-closing terms and conditions, with an effective date of August 15, 2018. The Company received approximately $ 9.2 million in cash and retained contingent overriding royalty interests. In addition, the Company could also receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. See Note 13 for further discussion of the contingent consideration arrangement, which was determined to be an embedded derivative. The buyer assumed all plugging and abandonment liabilities associated with these assets which totaled approximately $ 30.0 million at the divestiture date. +4. PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2020 and 2019 are as follows: +December 31, +2020 2019 +(In thousands) +Oil and natural gas properties $ 10,816,909 $ 10,595,735 +Other depreciable property and equipment 85,530 91,198 +Land 3,008 5,521 +Total property and equipment 10,905,447 10,692,454 +Accumulated depletion, depreciation, amortization and impairment ( 8,819,178 ) ( 7,228,660 ) +Property and equipment, net $ 2,086,269 $ 3,463,794 +Under the full cost method of accounting, capitalized costs of oil and natural gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1 . During the years ended December 31, 2020 and 2019, the Company incurred $ 1.4 billion and $ 2.0 billion of impairments, respectively, as a result of its oil and natural gas properties exceeding its calculated +76 +Table of Contents +Index to Financial Statement s +ceiling. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for natural gas, oil and NGL, which significantly reduced proved reserves values and proved reserves. No impairment of oil and natural gas properties was required under the ceiling test for the year ended December 31, 2018. +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 25.0 million, $ 30.1 million and $ 37.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 0.61 , $ 1.08 and $ 0.96 per Mcfe for the years ended December 31, 2020, 2019 and 2018, respectively. +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2020: +Costs Incurred in +2020 2019 2018 Prior to 2018 Total +(In thousands) +Acquisition costs $ 18,485 $ 8,067 $ 98,876 $ 1,330,895 $ 1,456,323 +Exploration costs — — — — — +Development costs — — — — — +Capitalized interest — 121 172 427 720 +Total oil and natural gas properties not subject to amortization $ 18,485 $ 8,188 $ 99,048 $ 1,331,322 $ 1,457,043 +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2020: +December 31, 2020 +(In thousands) +Utica $ 793,441 +SCOOP 662,614 +Other 988 +$ 1,457,043 +As of December 31, 2019, approximately $ 1.7 billion of non-producing property costs were subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years . However, the majority of the Company's non-producing leases in the Utica have five-year extension terms which could extend this time frame beyond five years . +77 +Table of Contents +Index to Financial Statement s +A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2020 and 2019 is as follows: +December 31, +2020 2019 +(In thousands) +Asset retirement obligation, beginning of period $ 60,355 $ 79,952 +Liabilities incurred 2,358 5,935 +Liabilities settled — ( 273 ) +Liabilities removed due to divestitures ( 2,213 ) ( 30,146 ) +Accretion expense 3,066 3,939 +Revisions in estimated cash flows — 948 +Total asset retirement obligation as of end of period 63,566 60,355 +Less: amounts reclassified to liabilities subject to compromise ( 63,566 ) — +Total asset retirement obligation reflected as non-current liabilities $ — $ 60,355 +5. EQUITY INVESTMENTS +Investments accounted for by the equity method consist of the following as of December 31, 2020 and 2019: +Carrying Value Loss (income) from equity method investments +Approximate Ownership % December 31, For the Year Ended December 31, +2020 2019 2020 2019 2018 +(In thousands) +Investment in Grizzly Oil Sands ULC 24.5 % $ 24,816 $ 21,000 $ 377 $ 32,710 $ 510 +Investment in Mammoth Energy Services, Inc. 21.5 % — 11,005 10,646 179,524 ( 49,969 ) +Investment in Tatex Thailand II, LLC 23.5 % — — — ( 2,086 ) ( 241 ) +Other equity investments (1) +— % — 39 32 — ( 204 ) +$ 24,816 $ 32,044 $ 11,055 $ 210,148 $ ( 49,904 ) +_____________________ +(1) Consists of sold/dissolved investments, including Windsor Midstream, LLC, which was dissolved as of December 31, 2020. Additionally, this includes the Company's investment in Strike Force that was sold in 2018, from which the Company recognized a gain of $ 96.4 million net of transaction fees, which is included in gain on sale of equity method investments in the accompanying consolidated statement of operations for the year ended December 31, 2018. +The tables below summarize financial information for the Company's equity investments, as of December 31, 2020 and 2019. +Summarized balance sheet information: +December 31, +2020 2019 +(In thousands) +Current assets $ 483,303 $ 421,326 +Noncurrent assets $ 1,092,495 $ 1,260,075 +Current liabilities $ 132,978 $ 132,569 +Noncurrent liabilities $ 148,240 $ 163,241 +78 +Table of Contents +Index to Financial Statement s +Summarized results of operations: +December 31, +2020 2019 2018 +(In thousands) +Gross revenue $ 313,076 $ 625,012 $ 1,729,778 +Net (loss) income $ ( 106,072 ) $ ( 76,523 ) $ 253,451 +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings, owns a 24.5 % interest in Grizzly, a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. As of December 31, 2020, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. +The Company reviewed its investment in Grizzly at December 31, 2020 and December 31, 2019 for impairment based on certain qualitative and quantitative factors. This resulted in recording no impairment losses and $ 32.4 million for the years ended December 31, 2020 and 2019, respectively, which is included in loss from equity method investments, net in the accompanying consolidated statements of operations. The Company reviewed its investment in Grizzly for impairment at December 31, 2018 and determined no impairment was required. +The Company did no t pay any cash calls during 2020 as a result of its election to cease funding further capital calls in 2019. The Company paid $ 0.4 million in cash calls during the year ended December 31, 2019 prior to this election. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was increased by a $ 4.2 million foreign currency translation gain, increased by a $ 9.0 million foreign currency translation gain and decreased by a $ 15.2 million foreign currency translation loss for the years ended December 31, 2020, 2019 and 2018, respectively. The Company had $ 40.6 million and $ 44.8 million in accumulated other comprehensive loss in its accompanying consolidated balance sheets related to Grizzly at December 31, 2020 and December 31, 2019, respectively, that will be included in the calculations of future charge related to a sale or abandonment. +Mammoth Energy Services, Inc. +On June 29, 2018, the Company sold 1,235,600 shares of its Mammoth Energy common stock in an underwritten public offering for net proceeds of approximately $ 47.0 million. In connection with the Company's public offering of a portion of its shares of Mammoth Energy common stock, the Company granted the underwriters an option to purchase additional shares of its Mammoth Energy common stock. On July 26, 2018, the underwriters exercised this option, in part, and on July 30, 2018, the Company sold an additional 118,974 shares for net proceeds of a pproximately $ 4.5 million. Following the sales of these shares, the Company owned 9,829,548 shares, or 21.5 % at December 31, 2018, of Mammoth Energy's outstanding common stock. As a result of the sales, the Company recorded a gain of $ 28.3 million, which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations. The approximate fair value of the Company's investment in Mammoth Energy's common stock at December 31, 2019 was $ 21.6 million based on the quoted market price of Mammoth Energy's common stock. +At December 31, 2020, the Company owned 9,829,548 shares, or 21.5 %, of the outstanding common stock of Mammoth Energy. As a result of the net loss Mammoth sustained in the first quarter of 2020, we recorded a loss of $ 10.6 million for the year ended December 31, 2020 which reduced the Company's investment balance in Mammoth to zero . This is included in loss (income) from equity method investments, net in the accompanying consolidated statements of operations. The Company's investment in Mammoth Energy was increased by a $ 0.2 million foreign currency gain and decreased by a $ 0.4 million foreign currency loss resulting from Mammoth Energy's foreign subsidiary for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, Gulfport received distributions of $ 2.5 million from Mammoth Energy as a result of dividends in February 2019 and May 2019. The approximate fair value of the Company's investment in Mammoth Energy's common stock at December 31, 2020 was $ 43.7 million based on the quoted market price of Mammoth Energy's common stock. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations. +79 +Table of Contents +Index to Financial Statement s +Tatex Thailand II, LLC +The Company has an indirect ownership interest in Tatex Thailand II, LLC ("Tatex") and received no distributions from Tatex during the year ended December 31, 2020. The Company received $ 2.1 million in distributions from Tatex during the year ended December 31, 2019. Tatex previously held an 8.5 % interest in an entity holding a reserve base in Southeast Asia, including the Phu Horm Field, before selling its interest in June 2019. +6. LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31: +2020 2019 +(In thousands) +DIP credit facility $ 157,500 $ — +Pre-petition revolving credit facility 292,910 120,000 +6.625 % senior unsecured notes due 2023 +324,583 329,467 +6.000 % senior unsecured notes due 2024 +579,568 603,428 +6.375 % senior unsecured notes due 2025 +507,870 529,525 +6.375 % senior unsecured notes due 2026 +374,617 397,529 +Building loan 21,914 22,453 +Net unamortized debt issuance costs — ( 23,751 ) +Total Debt, net 2,258,962 1,978,651 +Less: current maturities of long term debt ( 253,743 ) ( 631 ) +Less: amounts reclassified to liabilities subject to compromise ( 2,005,219 ) — +Total Debt reflected as long term $ — $ 1,978,020 +Chapter 11 Proceedings +Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stays the creditors from taking any action as a result of the default. +The principal amounts from the Senior Notes, Building Loan and Pre-Petition Revolving Credit Facility, other than letters of credit drawn on the Pre-Petition Revolving Credit Facility after the Petition Date, have been classified as liabilities subject to compromise on the accompanying audited consolidated balance sheet as of December 31, 2020. Additionally, non-cash adjustments were made to write off all of the related unamortized debt issuance costs of $ 22.0 million, which are included in reorganization items, net in the accompanying audited consolidated statements of operations for the year ended December 31, 2020, as discussed in Note 2 . +Debtor-in-Possession Credit Agreement +Pursuant to the RSA, the Consenting RBL Lenders have agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $ 262.5 million consisting of (a) $ 105 million of new money and (b) $ 157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The terms and conditions of the DIP Credit Facility are set forth in that certain form of credit agreement governing the DIP Credit Facility. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. In the current period, the Company incurred $ 3.0 million of fees related to the arrangement and funding of the DIP Credit Facility. The DIP Credit Facility was approved by the Bankruptcy Court on a final basis on December 18, 2020. +Borrowings under the DIP Credit Facility will mature, and the lending commitments thereunder will terminate, upon the earliest to occur of: (a) August 30, 2021; (b) three ( 3 ) business days after the Petition Date, if the Interim Order and Hedging +80 +Table of Contents +Index to Financial Statement s +Order have not been entered prior to the expiration of such period; (c) thirty five ( 35 ) days (or a later date consented to by the Administrative Agent and the Majority Lenders in their sole discretion) after the entry of the Interim Order, if the Bankruptcy Court has not entered the Final Order on or prior to such date; (d) the effective date of an Approved Plan of Reorganization, (e) the consummation of a sale of all or substantially all of the equity and/or assets of the Debtors and budgeted and necessary expenses of the estates; (f) the date of the payment in full, in cash, of all Obligations (and the termination of all Commitments in accordance with the terms hereof); and (g) the date of termination of all Commitments and/or the acceleration of all of the Obligations under the Agreement and the other Loan Documents following the occurrence and during the continuance of an Event of Default. +Borrowings under the DIP Credit Facility bear interest at a eurodollar rate or base rate, at our election, plus an applicable margin of 4.50 % per annum for eurodollar loans and 3.50 % per annum for base rate loans. At December 31, 2020, amounts borrowed under the DIP credit facility bore interest at a weighted average rate of 5.50 %. In addition to paying interest on outstanding principal and letters of credit posted under the DIP Credit Facility, we are required to pay a commitment fee of 0.50 % per annum to the lenders of the DIP Credit Facility in respect of the unutilized DIP commitments thereunder and a letter of credit fee equal to 0.20 % per annum. +The DIP Credit Facility includes negative covenants that, subject to significant exceptions, limit the Company's ability and the ability of its restricted subsidiaries to, among other things, (i) create liens on assets, property revenues, (ii) make investments, (iii) incur additional indebtedness, (iv) engage in mergers, consolidations, liquidations and dissolutions, (v) sell assets, (vi) pay dividends and distributions or repurchase capital stock, (vii) cease for any reason to be the operator of its properties, (viii) enter into letters of credit without prior written consent, (ix) enter into certain commodity hedging contracts except commodity hedging contracts with terms approved by the Bankruptcy Court in the hedging order or certain interest rate contracts, (x) change lines of business, (xi) engage in certain transactions with affiliates and (xii) incur more than a certain amount in capital expenditures in any calendar month. The DIP Credit Facility includes certain customary representations and warranties, affirmative covenants and events of default, including but not limited to defaults on account of nonpayment, breaches of representations and warranties and covenants, certain bankruptcy-related events, certain events under ERISA, material judgments and a change in control. If an event of default occurs, the lenders under the DIP Credit Facility will be entitled to take various actions, including the acceleration of all amounts due under the DIP Credit Facility and all actions permitted to be taken under the loan documents or application of law. In addition, the DIP Credit Facility is subject to various other financial performance covenants, including compliance with certain financial metrics and adherence to a budget approved by the Company's DIP Credit Facility lenders. +Pre-Petition Revolving Credit Facility +The Company has entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. On May 1, 2020, the Company entered into the fifteenth amendment to the Amended and Restated Credit Agreement. As part of the amendment, the Company's borrowing base and elected commitment were reduced from $ 1.2 billion and $ 1.0 billion, respectively, to $ 700.0 million. Additionally, the amendment added a requirement to maintain a ratio of Net Secured Debt to EBITDAX (as defined under the revolving credit agreement) not exceeding 2.00 to 1.00, deferred the requirement to maintain a ratio of Net Funded Debt to EBITDAX of 4.00 to 1.00 until September 30, 2021, and added a limitation on the repurchase of unsecured notes, among other amendments. +On July 27, 2020, the Company entered into the sixteenth amendment to the Amended and Restated Credit Agreement. Among other changes, the Sixteenth Amendment amends the Credit Agreement to: (i) require that, in the event of any issuances of Senior Notes, including Second Lien Notes, after the effective date, the then effective borrowing base will be reduced by a variable amount prescribed in the Credit Agreement to the extent the proceeds are not used to satisfy previously issued senior notes within 90 days of such issuance; (ii) require that each Loan Notice specify the amount of the then effective Borrowing Base and Pro Forma Borrowing Base, the Aggregate Elected Commitment Amount, and the current Total Outstandings, both with and without regard to the requested Borrowing; (iii) permit the Borrower or any Restricted Subsidiary to enter into obligations in connection with a Permitted Bond Hedge Transaction or Permitted Warrant Transaction; (iv) permit the Borrower to make any payments of Senior Notes and Subordinated Obligation prior to their scheduled maturity, in any event not to exceed $ 750 million or, if lesser, the net cash proceeds of any Senior Notes issued within 90 days before such payment; (v) require that the Senior Notes have a stated maturity date of no earlier than March 13, 2024, as well as not require payment of principal prior to such date, in order for the Borrower to be permitted to secure indebtedness under the Senior Notes; (vi) permit certain additional liens securing obligations in respect of the incurrence or issuance of any Permitted Refinancing Notes (as such term is defined in the Credit Agreement) not to exceed $ 750 million, subject to the terms of an intercreditor agreement; and (vii) amend and restate the Applicable Rate Grid. +81 +Table of Contents +Index to Financial Statement s +On October 8, 2020, the Company's borrowing base under its Pre-Petition Revolving Credit Facility was reduced for the second time in 2020 from $ 700 million to $ 580 million, thereby significantly reducing the Company's available liquidity. On October 15, 2020, the Company elected to not pay interest on certain Senior Notes outstanding triggering a default under the credit agreement. There was $ 292.9 million of outstanding borrowings under the Pre-Petition Revolving Credit Facility as of December 31, 2020 that were not rolled up into the DIP Credit Facility. This amount of indebtedness will remain outstanding throughout the Chapter 11 Cases and will continue to accrue interest at the default interest rate on amounts drawn after the Petition Date. The Company made certain adequate protection payments of $ 1.3 million on its Pre-Petition Revolving Credit Facility between the Petition Date and December 31, 2020 which reduced the amount of outstanding borrowings under the Pre-Petition Revolving Credit Facility classified as liabilities subject to compromise as of December 31, 2020 in the accompanying consolidated balance sheets. +Additionally, as of December 31, 2020, we had an aggregate of $ 147.5 million of letters of credit outstanding under our Pre-Petition Revolving Credit Facility. This facility is secured by substantially all of our assets. All of our wholly-owned subsidiaries, excluding Grizzly Holdings and Mule Sky, guarantee our obligations under our revolving credit facility. +During the fourth quarter of 2020, $ 171.8 million was drawn on letters of credit secured by the Company's Pre-Petition Revolving Credit Facility by its firm transportation providers. Of these drawn letters of credit, $ 96.2 million were drawn after the Petition Date. As these were post-petition activities, the post-petition letters of credit drawn are included in current portion of long-term debt, in the accompanying consolidated balance sheets. The pre-petition amounts are included in borrowings outstanding as of December 31, 2020 which are included in liabilities subject to compromise in the accompanying consolidated balance sheets. At December 31, 2020 the Company included $ 111.8 million in prepaid and other current assets in the accompanying consolidated balance sheets as an offset for the drawn letters of credit. A portion of the drawn letters of credit were netted against pre-petition accounts payable to the Company's firm transportation providers and another portion was charged to reorganization items, net in the accompanying consolidated statements of operations. +As of December 31, 2020, amounts borrowed under the Pre-Petition Revolving Credit Facility bore interest at the weighted average rate of 3.15 %. +Senior Unsecured Notes +Loan issuance costs related to the Senior Notes have been presented as a reduction to the principal amount of the Senior Notes at December 31, 2019. At December 31, 2020, there were no remaining unamortized loan issuance costs related to the Senior Notes. The Company expensed approximately $ 22.0 million in unamortized loan issuance costs related to the Senior Notes to reorganization items, net as a result of the Chapter 11 filing and the application of ASC 852. +Building Loan +In June 2015, the Company entered into a loan for the construction of its corporate headquarters in Oklahoma City, which was substantially completed in December 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50 % per annum. The building loan matures on June 4, 2025. As of December 31, 2020, the total borrowings under the building loan were approximately $ 21.9 million, which has been classified as liabilities subject to compromise in the accompanying consolidated balance sheets as of December 31, 2020. +Debt Repurchases +In July of 2019, the Company's Board of Directors authorized $ 100 million of cash to be used to repurchase its Senior Notes in the open market at discounted values to par. In December 2019, the Company's Board of Directors increased the authorized size of its senior note repurchase program to $ 200 million in total. During the year ended December 31, 2020, the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $ 73.3 million aggregate principal amount of its outstanding Notes for $ 22.8 million in cash and recognized a $ 49.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. This gain is included in gain on debt extinguishment in the accompanying consolidated statements of operations. +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31: +82 +Table of Contents +Index to Financial Statement s +2020 2019 2018 +(In thousands) +Cash paid for interest $ 84,823 $ 142,664 $ 132,995 +Change in accrued interest 30,600 ( 3,834 ) 7,266 +Capitalized interest ( 907 ) ( 3,372 ) ( 4,470 ) +Amortization of loan costs 5,563 6,328 6,121 +Total interest expense $ 120,079 $ 141,786 $ 141,912 +The Company capitalized approximately $ 0.9 million and $ 3.4 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2020 and 2019, respectively. +Fair Value of Debt +At December 31, 2020, the carrying value of the outstanding debt represented by the Notes was approximately $ 1.8 billion. Based on the quoted market prices (Level 1), the fair value of the Notes was determined to be approximately $ 1.2 billion at December 31, 2020. +7. CHANGES IN CAPITALIZATION +Stock Repurchases +In January 2018, the board of directors of the Company approved a stock repurchase program to acquire up to $ 100 million of the Company's outstanding stock during 2018. In May 2018, the Company's board of directors authorized the expansion of its stock repurchase program, authorizing the Company to acquire up to an additional $ 100 million of its outstanding common stock during 2018 for a total of up to $ 200 million. This repurchase program was authorized to extend through December 31, 2018 and the Company repurchased 20.7 million shares of common stock in 2018 for $ 200.0 million in aggregate consideration. +In January 2019, the board of directors of the Company approved a new stock repurchase program to acquire a portion of the Company's outstanding common stock within a 24 -month period. During 2019, the Company repurchased 3.8 million shares for a cost of approximately $ 30 million under this board approved program. The program was suspended in the fourth quarter of 2019, and no further repurchases were made under this program. +For the years ended December 31, 2020 and 2019, the Company repurchased approximately 0.2 million and 0.1 million shares for approximately $ 0.2 million and $ 0.7 million, respectively, to satisfy tax withholding requirements incurred upon the vesting of restricted stock. All repurchased shares have been canceled and returned to the status of authorized but unissued shares. +8. STOCK-BASED COMPENSATION +The Company adopted the 2005 Plan in January 2005. The 2005 Plan was amended and restated in April 2013 with the 2013 Plan. During 2019, the Company further amended and restated the 2013 Plan with the 2019 Plan. The 2019 Plan provides for grants of options, stock appreciation rights, restricted awards (restricted stock and restricted stock units) and performance awards to employees, consultants and directors of the Company that, in aggregate, do not exceed 12,500,000 shares. The 2019 Plan is administered by the Compensation Committee of the Company's board of directors (the "Committee"). Among other responsibilities, the Committee selects individuals to receive awards and establishes the terms of awards. As of December 31, 2020, the Company has awarded an aggregate of 7,630,554 restricted stock units and 840,595 performance vesting restricted stock units under the 2019 Plan. +During the years ended December 31, 2020, 2019 and 2018 the Company’s stock-based compensation cost was $ 16.3 million, $ 10.7 million and $ 11.3 million, respectively, of which the Company capitalized $ 2.9 million, $ 5.8 million and $ 4.5 million, respectively, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations. +83 +Table of Contents +Index to Financial Statement s +The following table summarizes restricted stock unit and performance vesting restricted stock unit activity for the twelve months ended December 31, 2020, 2019 and 2018: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2018 976,027 $ 18.71 — $ — +Granted 1,579,911 9.90 — — +Vested ( 626,671 ) 18.05 — — +Forfeited ( 393,456 ) 12.23 — — +Unvested shares as of December 31, 2018 1,535,811 $ 11.57 — $ — +Granted 4,011,073 $ 3.74 2,009,144 2.85 +Vested ( 676,108 ) 12.89 — — +Forfeited ( 772,458 ) 6.05 ( 225,484 ) 1.98 +Unvested shares as of December 31, 2019 4,098,318 $ 4.73 1,783,660 $ 2.96 +Granted 3,069,521 0.85 — — +Vested ( 1,294,285 ) 5.73 — — +Forfeited ( 4,171,041 ) 1.68 ( 943,065 ) 1.98 +Unvested shares as of December 31, 2020 1,702,513 $ 4.74 840,595 $ 4.07 +Restricted Stock Units +Restricted stock units awarded under the 2019 Plan generally vest over a period of one year in the case of directors and three years in the case of employees and vesting is dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of grant. Unrecognized compensation expense as of December 31, 2020 related to outstanding restricted stock units was $ 5.2 million. The expense is expected to be recognized over a weighted average period of 1.31 years. +Performance Vesting Restricted Stock Units +During the year ended December 31, 2019, the Company awarded performance vesting restricted stock units to certain of its executive officers under the 2019 Plan. The number of shares of common stock issued pursuant to the award will be based on Relative Total Shareholder Return ("RTSR"). RTSR is an incentive measure whereby participants will earn from 0 % to 200 % of the target award based on the Company’s RTSR ranking compared to the RTSR of the companies in the Company’s designated peer group at the end of the performance period. Awards will be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. The grant date fair value was determined using the Monte Carlo simulation method and is being recorded ratably over the performance period. Expected volatilities utilized in the Monte Carlo model were estimated using a historical period consistent with the remaining performance period of approximately two years . The risk-free interest rates were based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. The Company assumed a range of risk-free interest rates of 1.56 % to 2.42 % and a range of expected volatilities of 29.1 % to 85.1 % to estimate the fair value of performance vesting units granted during the year ended December 31, 2020. Unrecognized compensation expense as of December 31, 2020 related to performance vesting restricted stock units was $ 1.4 million. The expense is expected to be recognized over a weighted average period of 1.27 years. +Cash Incentive Awards +On March 16, 2020, the Board of Directors of the Company approved the Company's 2020 Incentive Plan (the "2020 Incentive Plan"). The 2020 Incentive Plan provided for incentive compensation opportunities ("Incentive Awards") for select employees of the Company that were tied to the achievement of one or more performance goals relating to certain financial and operational metrics over a period of time. During March 2020, the Company awarded Incentive Awards to certain of its executive officers under the 2020 Incentive Plan. The cash amount of each award to be ultimately received was based on the attainment of certain financial, operational and total shareholder return performance targets and was subject to the recipient's +84 +Table of Contents +Index to Financial Statement s +continuous employment. The Incentive Awards were considered liability awards as the ultimate amount of the award was based, at least in part, on the price of the Company's shares, and as such, were remeasured to fair value at the end of each reporting period. In August 2020 all previous unpaid amounts related to the Incentive Awards issued under the 2020 Incentive Plan were canceled and replaced with cash retention incentives, as discussed below. +2020 Compensation Adjustments +On August 4, 2020, the Company's Board of Directors authorized a redesign of the incentive compensation program for the Company's workforce, including for its current named executive officers. In connection with a comprehensive review of the Company’s compensation programs and in consultation with its independent compensation consultant and legal advisors, the Board of Directors determined that significant changes were appropriate to retain and motivate the Company’s employees as a result of the ongoing uncertainty and unprecedented disruption in the oil and gas industry. +All unpaid amounts previously awarded pursuant to the 2020 Incentive Plan and all restricted stock units granted in March 2020 to the Company's named executive officers were cancelled and replaced with cash retention incentives. These cash retention incentives are equally weighted between achievement of certain specified performance metrics and a service period. Of the cash retention incentives, 50 % may be clawed back on an after-tax basis if an executive officer terminates employment for any reason other than a qualifying termination prior to the earlier of July 31, 2021, a change in control or completion of a restructuring, and the remaining 50 % will be subject to repayment on an after-tax basis if established performance metrics are not met over performance periods from August 1, 2020 through July 31, 2021. In total, $ 13.5 million in cash retention incentives were paid to the Company's executives in August 2020. +The transactions were considered a modification to the previously issued equity- and liability-classified awards, and the previously issued equity-classified awards were reclassified as liability awards. The after-tax value of the cash incentives paid to the Company's executives of $ 3.6 million as of December 31, 2020 was capitalized to prepaid expenses and other current assets in the accompanying consolidated balance sheets and will be amortized over the remaining service period. The Company immediately expensed the difference between the cash and after-tax value of the prepaid cash incentives of $ 4.8 million, which is not subject to the clawback provisions, and recognized an additional $ 1.5 million in stock compensation expense to adjust for the difference in cash retention amounts paid and expense previously recognized on the modified awards at the modification date. +9. REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +85 +Table of Contents +Index to Financial Statement s +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 119.9 million and $ 121.2 million as of December 31, 2020 and December 31, 2019, respectively, and are reported in accounts receivable - oil and natural gas sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For the year ended December 31, 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +10. LEASES +Nature of Leases +The Company has operating leases on certain equipment and field offices with remaining lease durations in excess of one year. The Company recognizes a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one year to two years , although at December 31, 2020, the Company did not have any active long-term drilling rig contracts in place. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells. +Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray, a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective July 1, 2018, Stingray has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company through 2021 and the Company has agreed to pay Stingray a monthly service fee plus the associated costs of the services provided. As discussed further in Note 18 , the Company terminated the Master Services Agreement for pressure pumping with Stingray. As a result, in the first quarter of 2020, Gulfport removed the related right of use assets and lease liabilities associated with the terminated contract. +The Company rents office space for its field locations and certain other equipment from third parties, which expire at various dates through 2024. These agreements are typically structured with non-cancelable terms of one to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. +As of December 31, 2020, all lease liabilities have been classified as liabilities subject to compromise in the accompanying consolidated balance sheet. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's +86 +Table of Contents +Index to Financial Statement s +incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Future amounts due under operating lease liabilities as of December 31, 2020 were as follows: +(In thousands) +2021 $ 129 +2022 115 +2023 90 +2024 30 +Total lease payments 364 +Less: Imputed interest ( 22 ) +Less: amounts reclassified to liabilities subject to compromise ( 342 ) +Total lease liabilities $ — +Lease costs incurred for the years ended December 31, 2020 and 2019 consisted of the following: +For the Year Ended December 31, +2020 2019 +(In thousands) +Operating lease cost $ 9,658 $ 24,960 +Operating lease cost - related party — 22,440 +Variable lease cost 586 2,172 +Variable lease cost - related party — 66,924 +Short-term lease cost 9,361 834 +Total lease cost (1) +$ 19,605 $ 117,330 +_____________________ +(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in general and administrative expenses in the accompanying consolidated statements of operations. +Supplemental cash flow information for the years ended December 31, 2020 and 2019 related to leases was as follows: +For the Year Ended December 31, +2020 2019 +Cash paid for amounts included in the measurement of lease liabilities (In thousands) +Operating cash flows from operating leases 140 182 +Investing cash flow from operating leases 10,272 24,263 +Investing cash flow from operating leases - related party 6,800 84,750 +The weighted-average remaining lease term as of December 31, 2020 was 3.03 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2020 was 4.22 %. +87 +Table of Contents +Index to Financial Statement s +11. INCOME TAXES +The income tax provision consists of the following: +2020 2019 2018 +(In thousands) +Current: +State $ — $ — $ ( 1,530 ) +Federal ( 273 ) ( 7 ) 253 +Deferred: +State 7,563 ( 7,556 ) 1,530 +Federal — — ( 322 ) +Total income tax expense (benefit) provision $ 7,290 $ ( 7,563 ) $ ( 69 ) +A reconciliation of the statutory federal income tax amount to the recorded expense follows: +2020 2019 2018 +(In thousands) +(Loss) income before federal income taxes $ ( 1,617,843 ) $ ( 2,009,921 ) $ 430,491 +Expected income tax at statutory rate ( 339,747 ) ( 422,083 ) 90,403 +State income taxes ( 14,696 ) ( 28,316 ) ( 511 ) +Other differences 10,800 3,372 1,078 +Change in valuation allowance due to current year activity 350,933 439,464 ( 91,039 ) +Income tax expense (benefit) recorded $ 7,290 $ ( 7,563 ) $ ( 69 ) +88 +Table of Contents +Index to Financial Statement s +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2020, 2019 and 2018 are estimated as follows: +2020 2019 2018 +(In thousands) +Deferred tax assets: +Net operating loss carryforward $ 392,318 $ 269,851 $ 164,363 +Oil and gas property basis difference 463,705 289,850 3,595 +Investment in pass through entities 61,078 58,951 8,620 +Stock-based compensation expense 1,223 1,440 616 +Business energy investment tax credit 370 370 369 +Charitable contributions carryover 318 297 269 +Change in fair value of derivative instruments 7,656 11,219 2,761 +Foreign tax credit carryforwards 523 943 2,009 +Accrued liabilities 868 669 834 +ARO liability 13,414 12,744 16,923 +Non-oil and gas property basis difference — — 104 +Lease liability 72 12,128 — +Reorganization items 25,714 — — +State net operating loss carryover 22,191 13,258 11,526 +Interest expense carryforward — 23,818 — +Total deferred tax assets 989,450 695,538 211,989 +Valuation allowance for deferred tax assets ( 985,528 ) ( 647,575 ) ( 211,987 ) +Deferred tax assets, net of valuation allowance 3,922 47,963 2 +Deferred tax liabilities: +Non-oil and gas property basis difference 575 1,859 — +Change in fair value of derivative instruments 3,272 26,410 2 +Right of use asset 72 12,128 — +Other 3 3 — +Total deferred tax liabilities 3,922 40,400 2 +Net deferred tax asset $ — $ 7,563 $ — +The company recognized income tax expense of $ 7.3 million in 2020 and an income tax benefit of $ 7.6 million in 2019. The net change is primarily related to the recognition of the valuation allowance against the Oklahoma state tax deferred asset that was not realized as a result of the Oklahoma water asset sale as previously expected. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.9 billion as of December 31, 2020. These federal net operating loss carryforwards generated in tax years prior to 2018 will begin to expire in 2023. As a result of the Tax Cuts and Jobs Act, the 2018 through 2020 federal NOL carryforwards have no expiration. The Company also has state net operating loss carryovers of $ 441.0 million that began to expire in 2019 and federal foreign tax credit carryovers of $ 0.5 million that will expire in 2021. +At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. As a result of this analysis at December 31, 2020, the Company determined a valuation allowance was necessary with respect to its net deferred tax assets totaling $ 985.5 million. +There was an increase of $ 338.0 million, an increase of $ 439.5 million and a decrease of $ 86.8 million to the valuation allowance during 2020, 2019 and 2018, respectively. The increase in the valuation allowance in 2020 and 2019 was primarily due to increases in net deferred tax assets from pre-tax losses resulting from impairments in the Company's oil and natural gas properties. The decrease in the valuation allowance in 2018 was primarily due to decreases in net deferred tax assets due to pre-tax income. +89 +Table of Contents +Index to Financial Statement s +On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The Act includes several significant provisions for corporations including allowing companies to carryback certain NOLs, increasing the amount of NOLs that corporations can use to offset income, and increasing the amount of deductible interest under section 163(j). The Company does not expect to be materially impacted by the CARES Act provision and does not anticipate the CARES Act to have a material effect on its ability to realized deferred tax assets. +The Company’s ability to utilize NOL carryforwards and other tax attributes to reduce future federal taxable income is subject to potential limitations under Section 382 and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% shareholders (as defined in Treasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change or more than 50% in the beneficial ownership of the Company. As of December 31, 2020, the Company has completed a Section 382 analysis, which reflects that no ownership change has occurred to further limit the use of NOL carryforwards or other tax attributes. There are conditions that exist that are beyond the Company’s control which could cause an ownership change in the future and create a significant limitation on the Company's ability to utilize those tax attributes. On April 30, 2020, the board of directors of the Company adopted a tax benefits preservation plan in order to protect against a possible limitation on the Company’s ability to use its tax net operating losses and certain other tax benefits to reduce potential future U.S. federal income tax obligations. The Tax Benefits Preservation Plan is intended to prevent against such an ownership change by deterring any person or group from acquiring beneficial ownership of 4.9 % or more of the Company’s securities. +As of December 31, 2020, the Company has recorded a liability associated with uncertain tax positions of $ 3.8 million, which is included in liabilities subject to compromise in the accompanying consolidated balance sheet as of December 31, 2020. +12. EARNINGS PER SHARE +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below: +For the Year Ended December 31, +2020 2019 2018 +(In thousands, except share data) +Net (loss) income $ ( 1,625,133 ) $ ( 2,002,358 ) $ 430,560 +Basic Shares 160,231,335 160,341,125 174,675,840 +Basic EPS $ ( 10.14 ) $ ( 12.49 ) $ 2.46 +Effect of dilutive securities: +Stock options and awards — — 722,866 +Dilutive Shares 160,231,335 160,341,125 175,398,706 +Dilutive EPS $ ( 10.14 ) $ ( 12.49 ) $ 2.45 +There were no potential shares of common stock that were considered anti-dilutive for the year ended December 31, 2020, 3,867,084 shares for the year ended December 31, 2019, and no potential shares of common stock that were considered anti-dilutive for the year ended December 31, 2018. +13. DERIVATIVE INSTRUMENTS +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments +The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods when the future market prices of natural gas, oil and NGL that are higher than the hedged prices. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on +90 +Table of Contents +Index to Financial Statement s +the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas. Below is a summary of the Company's open fixed price swap positions as of December 31, 2020. +Index Daily Volume (MMBtu/day) Weighted +Average Price +2021 NYMEX Henry Hub 410,000 $ 2.75 +The Company entered into costless collars based off the NYMEX Henry Hub natural gas index. Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +Index Daily Volume (MMBtu/day) Weighted Average Floor/Ceiling Price +2021 NYMEX Henry Hub 250,000 +$ 2.46 /$ 2.81 +2022 NYMEX Henry Hub 20,000 +$ 2.80 /$ 3.40 +In the third quarter of 2019, the Company sold call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. +Index Daily Volume (MMBtu/day) Weighted +Average Price +2022 NYMEX Henry Hub 153,000 $ 2.90 +2023 NYMEX Henry Hub 628,000 $ 2.90 +In addition, the Company entered into natural gas basis swap positions. As of December 31, 2020, the Company had the following natural gas basis swap positions open: +Gulfport Pays Gulfport Receives Daily Volume (MMBtu/day) Weighted Average Fixed Spread +2021 Rex Zone 3 NYMEX Plus Fixed Spread 35,000 $ ( 0.21 ) +2021 Tetco M2 NYMEX Plus Fixed Spread 60,000 $ ( 0.67 ) +Contingent Consideration Arrangement +The purchase and sale agreement for the sale of the Company's non-core assets located in the WCBB and Hackberry fields of Louisiana included a contingent consideration arrangement that entitles the Company to receive bonus payments if commodity prices exceed specified thresholds. The calculated fair value of this contingent payment arrangement was approximately $ 1.1 million as of the closing date of the divestiture. See below for threshold and potential payment amounts. +Period +Threshold (1) +Payment to be received (2) +January 2021 - June 2021 +Greater than or equal to $ 60.65 +$ 150,000 +Between $ 52.62 - $ 60.65 +Calculated Value (3) +Less than or equal to $ 52.62 +$ — +_____________________ +(1) Based on the "WTI NYMEX + Argus LLS Differential," as published by Argus Media. +(2) Payment will be assessed monthly from July 2020 through June 2021. If threshold is met, payment shall be received within five business days after the end of each calendar month. +(3) If average daily price, as defined in (1), is greater than $ 52.62 but less than $ 60.65 , payment received will be $ 150,000 multiplied by a fraction, the numerator of which is the amount determined by subtracting $ 52.62 from such average daily price, and the denominator of which is $ 8.03 . +91 +Table of Contents +Index to Financial Statement s +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2020 and 2019: +December 31, +2020 2019 +(In thousands) +Commodity derivative instruments $ 27,146 $ 125,383 +Contingent consideration arrangement — 818 +Total short-term derivative instruments – asset $ 27,146 $ 126,201 +Commodity derivative instruments 322 — +Contingent consideration arrangement — 563 +Total long-term derivative instruments – asset $ 322 $ 563 +Total short-term derivative instruments – liability $ 11,641 $ 303 +Total long-term derivative instruments – liability $ 36,604 $ 53,135 +Gains and losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2020, 2019, and 2018. +Net gain (loss) on derivative instruments +For the Year Ended December 31, +2020 2019 2018 +(In thousands) +Natural gas derivatives $ 23,765 $ 194,450 $ ( 116,130 ) +Oil derivatives 43,510 7,035 ( 13,084 ) +NGL derivatives ( 603 ) 6,632 5,735 +Contingent consideration arrangement ( 1,381 ) 243 — +Total $ 65,291 $ 208,360 $ ( 123,479 ) +Offsetting of derivative assets and liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value. +As of December 31, 2020 +Derivative instruments, gross Netting adjustments Derivative instruments, net +(In thousands) +Derivative assets $ 27,468 $ ( 25,730 ) $ 1,738 +Derivative liabilities $ ( 48,245 ) $ 25,730 $ ( 22,515 ) +92 +Table of Contents +Index to Financial Statement s +As of December 31, 2019 +Derivative instruments, gross Netting adjustments Derivative instruments, net +(In thousands) +Derivative assets $ 126,764 $ ( 53,438 ) $ 73,326 +Derivative liabilities $ ( 53,438 ) $ 53,438 $ — +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +14. RESTRUCTURING AND LIABILITY MANAGEMENT EXPENSES +In the third quarter of 2020 and fourth quarter of 2019, the Company announced and completed workforce reductions representing approximately 10 % and 13 %, respectively, of its headcount. Restructuring charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. Additionally, the Company incurred charges related to financial and legal advisors engaged to assist with the evaluation of a range of liability management alternatives during 2020 prior to the filing of the Chapter 11 Cases. +The following table summarizes the expenses related to the Company's reductions in workforce as well as expenses incurred related to liability management efforts in the accompanying consolidated statements of operations for the years ended December 31, 2020 and 2019: +For the Year Ended December 31, +2020 2019 +(in thousands) +Reduction in workforce $ 1,460 $ 4,611 +Liability management 29,387 — +Total restructuring and liability management expenses $ 30,847 $ 4,611 +15. FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices in active markets for identical assets and liabilities. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +93 +Table of Contents +Index to Financial Statement s +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +Financial assets and liabilities +The following tables summarize the Company’s financial assets and liabilities by valuation level as of December 31, 2020 and 2019: +December 31, 2020 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments +$ — $ 27,468 $ — +Contingent consideration arrangement $ — $ — $ 6,200 +Total assets $ — $ 27,468 $ 6,200 +Liabilities: +Derivative Instruments +$ — $ 48,245 $ — +December 31, 2019 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments $ — $ 126,764 $ — +Liabilities: +Derivative Instruments +$ — $ 53,438 $ — +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +As discussed in Note 3 , the water infrastructure sale included a contingent consideration arrangement. As of December 31, 2020, the fair value of the contingent consideration was $ 6.2 million, of which $ 1.1 million is included in prepaid expenses and other assets and $ 5.1 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. As a result of a reduction in the future anticipated contingent consideration since the acquisition date, the Company recognized a loss of $ 16.6 million on changes in fair value of the contingent consideration during the year ended December 31, 2020, which is included in other expense (income) in the accompanying consolidated statements of operations. Settlements under the contingent consideration arrangement totaled $ 0.3 million during the year ended December 31, 2020. +Non-financial assets and liabilities +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 4 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the year ended December 31, 2020 were approximately $ 2.4 million. +94 +Table of Contents +Index to Financial Statement s +The Company did not record any other than temporary impairments on its equity method investments during the year ended December 31, 2020, however the Company recorded impairments on its investments during the year ended December 31, 2019. Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly as of December 31, 2019 was estimated using assumptions that represent Level 3 inputs. The fair value of the Company's investment in Mammoth Energy as of December 31, 2019 was estimated using Level 1 inputs, as the price per share was a quoted price in an active market for identical Mammoth Energy common shares. +Fair value of other financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's construction loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. See Note 6 for fair value of Company's long-term debt. +16. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As of December 31, 2020, the Company held approximately 21.5 % of Mammoth Energy's outstanding common stock as discussed above in Note 5 . Approximately $ 0.6 million, and $ 2.0 million of services provided by Mammoth Energy were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2019 and 2018, respectively, with no material amounts for the year ended December 31, 2020. Approximately $ 3.1 million and $ 109.9 million of services provided by Mammoth Energy were capitalized to oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets during the years ended December 31, 2020 and 2019, respectively. At December 31, 2019, the Company owed Mammoth Energy approximately $ 8.4 million related to these services. Amounts owed to Mammoth Energy as of December 31, 2020 were immaterial. +See Note 18 for additional information on litigation proceedings with Mammoth Energy entities. +17. COMMITMENTS +Firm Transportation and Gathering Agreements +The Company has contractual commitments with pipeline carriers for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing its potential liability. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, they are reflected in the Company's estimates of proved reserves. +Additionally, one of the requirements provided for in the RSA is that the Company must permanently reduce its future demand reservation fees owed over the life of all of its firm transportation agreements, taken as a whole, by at least 50 % of the amount of all such fees owed on October 31, 2020, as calculated on a PV-10 basis. Additionally, the Company must reduce the future firm transportation demand reservation volumes over the life of all of its firm transportation agreements, taken as a whole, by at least 35 %. The below table reflects the Company's obligations as of December 31, 2020 excluding contemplation of contracts to be rejected throughout the Chapter 11 Cases. +A summary of these commitments at December 31, 2020 are set forth in the table below: +95 +Table of Contents +Index to Financial Statement s +(In thousands) +2021 $ 370,343 +2022 380,979 +2023 379,171 +2024 358,990 +2025 272,123 +Thereafter 2,013,119 +Total $ 3,774,725 +Future Sales Commitments +The Company has entered into various firm sales contracts with third parties to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's proved reserves have generally been sufficient to satisfy its delivery commitments during the three most recent years, and it expects such reserves will continue to be the primary means of fulfilling its future commitments. However, where the Company's proved reserves are not sufficient to satisfy its delivery commitments, it can and may use spot market purchases of third party production to satisfy these commitments. +A summary of these commitments at December 31, 2020 are set forth in the table below: +(MMBtu per day) +2021 88,000 +2022 58,000 +2023 17,000 +2024 — +2025 — +Thereafter — +Total 163,000 +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) plan under which eligible employees may contribute a portion of their total compensation up to the maximum pre-tax threshold through salary deferrals. The plan is considered a Safe Harbor 401(k) and provides a company match on 100 % of salary deferrals that do not exceed 4 % of compensation in addition to a match of 50 % of salary deferrals that exceed 4 % but do not exceed 6 % of compensation. The Company may also make discretionary elective contributions to the plan. During the years ended December 31, 2020, 2019 and 2018, Gulfport incurred $ 2.6 million, $ 2.9 million, and $ 2.6 million, respectively, in contributions expense related to this plan. +18. CONTINGENCIES +Litigation and Regulatory Proceedings +The Company is involved in a number of litigation and regulatory proceedings that may result in material liabilities, including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. +The Company, along with a number of other oil and gas companies, has been named as a defendant in two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District +96 +Table of Contents +Index to Financial Statement s +of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 (together, the "Complaints"). The Complaints allege that certain of the defendants’ operations violated the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder (the "CZM Laws") by causing substantial damage to land and waterbodies located in the coastal zone of the relevant Parish. The plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. The United States District Court for the Western District of Louisiana issued orders remanding the cases to their respective state court, and the defendants have appealed the remand orders to the 5th Circuit Court of Appeals. +In July 2019, Pigeon Land Company, Inc., a successor in interest to certain of the Company's legacy Louisiana properties, filed an action against the Company and a number of other oil and gas companies in the 16th Judicial District Court for the Parish of Iberia in Louisiana. The suit alleged negligence, strict liability and various violations of Louisiana statutes relating to property damage in connection with the historic development of the Company's Louisiana properties and sought unspecified damages (including punitive damages), an injunction to return the affected property to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. This matter was voluntarily dismissed without prejudice on December 8, 2020. +In September 2019, a stockholder of Mammoth Energy filed a derivative action on behalf of Mammoth Energy against members of Mammoth Energy’s board of directors, including a director designated by the Company, and its significant stockholders, including the Company, in the United States District Court for the Western District of Oklahoma. In January 2020, plaintiffs consolidated actions against the same defendants in the United States District Court for the District of Delaware. The consolidated and amended complaint alleges, among other things, that the Company breached its fiduciary duties and misappropriated information as a controlling shareholder of Mammoth Energy in connection with Mammoth Energy’s activities in Puerto Rico following Hurricane Maria and the Company's secondary offering of Mammoth Energy common stock in June 2018. The complaint seeks unspecified damages, the payment of reasonable attorney fees and legal expenses and interest and to force Mammoth Energy and its board of directors to make specified corporate governance reforms. +In October 2019, Kelsie Wagner, in her capacity as trustee of various trusts and on behalf of the trusts and other similarly situated royalty owners, filed an action against us in the District Court of Grady County, Oklahoma. The suit alleged that the Company underpaid royalty owners and seeks unspecified damages for violations of the Oklahoma Production Revenue Standards Act and fraud. This matter is settled in principal and a voluntary dismissal without prejudice is anticipated. +In March 2020, Robert F. Woodley, individually and on behalf of all others similarly situated, filed a federal securities class action against the Company, David M. Wood, Keri Crowell and Quentin R. Hicks in the United States District Court for the Southern District of New York. The complaint alleges that the Company made materially false and misleading statements regarding the Company’s business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, pre-judgment and post-judgment interest, and such other and further relief that may be deemed just and proper. +In June 2020, Sam L. Carter, derivatively on behalf of the Company, filed an action against certain of our current and former executive officers and directors in the United States District Court for the District of Delaware. The complaint alleged that the defendants breached their fiduciary duties to the Company in connection with certain alleged materially false and misleading statements regarding our business and operations in violation of the federal securities laws. The complaint sought to recover unspecified damages from the defendants, the implementation of specified corporate governance reforms, reasonable attorneys’ and experts’ fees, costs and expenses, and such other relief as may be deemed just and proper. The complaint was voluntarily dismissed without prejudice on October 6, 2020. +The Company filed a lawsuit against Stingray Pressure Pumping LLC, a subsidiary of Mammoth Energy (“Stingray”), for breach of contract and to terminate the Master Services Agreement for pressure pumping services, effective as of October 1, 2014, as amended (the “Master Services Agreement”), between Stingray and the Company. In March 2020, Stingray filed a counterclaim against the Company in the Superior Court of the State of Delaware. The counterclaim alleges that the Company has breached the Master Services Agreement. The counterclaim seeks actual damages, and Stingray filed claims in the Chapter 11 proceedings totaling $ 43.4 million related to breach of contract damages, attorneys' fees and interest. +In April 2020, Bryon Lefort, individually and on behalf of similarly situated individuals, filed an action against the Company in the United States District Court for the Southern District of Ohio Eastern Division. The complaint alleges that the Company violated the Fair Labor Standards Act (“FLSA”), the Ohio Wage Act and the Ohio Prompt Pay Act by classifying the plaintiffs as independent contractors and paying them a daily rate with no overtime compensation for hours worked in excess of 40 hours per week. The complaint seeks to recover unpaid regular and overtime wages, liquidated damages in an amount equal +97 +Table of Contents +Index to Financial Statement s +to six of all unpaid overtime compensation, the payment of reasonable attorney fees and legal expenses and pre-judgment and post-judgment interest, and such other damages that may be owed to the workers. +In August 2020, Muskie filed an action against the Company in the Superior Court of the State of Delaware for breach of contract. The complaint alleges that the Company breached its obligation to purchase a certain amount of proppant sand each month or make designated shortfall payments under the Sand Supply Agreement, effective October 1, 2014, as amended (the “Sand Supply Agreement”), between Muskie and the Company, and seeks payment of unpaid shortfall payments, and Muskie filed a claim in the Chapter 11 proceedings for $ 3.4 million. +SEC Investigation +The SEC has commenced an investigation with respect to certain actions by former Company management, including alleged improper personal use of Company assets, and potential violations by former management and the Company of the Sarbanes-Oxley Act of 2002 in connection with such actions. On February 24, 2021, without admitting or denying any of findings contained in the order, Gulfport resolved the SEC investigation through an administrative order that Gulfport violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9. Under the administrative order and pursuant to Section 21C of the Exchange Act, Gulfport agreed to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder. Based on the company’s extensive cooperation and prompt remedial efforts, the SEC did not impose a monetary penalty. +Business Operations +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. They have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. They conduct periodic reviews, on a company-wide basis, to assess changes in their environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, they may, among other things, exclude a property from the transaction, require the seller to remediate the property to their satisfaction in an acquisition or agree to assume liability for the remediation of the property. +The Company received several Finding of Violation ("FOVs") from the USEPA alleging violations of the Clean Air Act in Ohio. The Company entered into a settlement with the Department of Justice and USEPA agreeing to pay $ 1.7 million and invest in improvements at 17 well pads. The settlement was filed with the U.S. District Court for the Southern District of Ohio in January 2020 and was fully paid in October 2020. +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2020, Gulfport held no cash in excess of insured limits in these banks. +98 +Table of Contents +Index to Financial Statement s +During the year ended December 31, 2020, one customer accounted for approximately 12 % of the Company's total sales. During the year ended December 31, 2019, one customer accounted for approximately 14 % of the Company's total sales. During the year ended December 31, 2018, two customers accounted for approximately 17 % and 10 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +19. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company owns a 24.5 % interest in Grizzly. However, Grizzly did not have any material activity or proved reserves in the years presented below. As such, amounts related to Grizzly have been omitted below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities +2020 2019 +(In thousands) +Proved properties $ 9,359,866 $ 8,909,069 +Unproved properties 1,457,043 1,686,666 +10,816,909 10,595,735 +Accumulated depreciation, depletion, amortization and impairment ( 8,778,759 ) ( 7,191,957 ) +Net capitalized costs $ 2,038,150 $ 3,403,778 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities +2020 2019 2018 +(In thousands) +Acquisition $ 15,260 $ 37,598 $ 119,444 +Development 276,622 594,673 714,269 +Exploratory — 9,762 22,081 +Total $ 291,882 $ 642,033 $ 855,794 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company capitalized $ 0.9 million, $ 3.4 million and $ 4.5 million during 2020, 2019, 2018, respectively, based on the Company's weighted average cost of borrowings used to finance expenditures. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 25.0 million, $ 30.1 million and $ 37.7 million during 2020, 2019, and 2018, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +99 +Table of Contents +Index to Financial Statement s +Results of Operations for Producing Activities +The following schedule sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +2020 2019 2018 +(In thousands) +Revenues $ 801,251 $ 1,354,766 $ 1,675,180 +Production costs ( 537,609 ) ( 620,412 ) ( 611,965 ) +Depletion ( 229,702 ) ( 539,379 ) ( 476,517 ) +Impairment ( 1,357,099 ) ( 2,039,770 ) — +Income tax (expense) benefit ( 7,290 ) 7,563 68 +Results of operations from producing activities $ ( 1,330,449 ) $ ( 1,837,232 ) $ 586,766 +Depletion per Mcf of gas equivalent (Mcfe) $ 0.61 $ 1.08 $ 0.96 +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2020, 2019 and 2018 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2020, 2019 and 2018, in accordance with guidelines of the SEC applicable to reserves estimates. The prices used for the 2020 reserve report are $ 39.54 per barrel of oil, $ 1.99 per MMbtu and $ 15.40 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2019 and 2018 for reserve report purposes are $ 55.85 per barrel, $ 2.58 per MMbtu and $ 21.25 per barrel for NGL and $ 65.56 per barrel, $ 3.10 per MMbtu and $ 32.02 per barrel for NGL, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +100 +Table of Contents +Index to Financial Statement s +Oil (MMBbl) Natural Gas (Bcf) NGL (MMBbl) Natural Gas Equivalent (Bcfe) +Proved Reserves +December 31, 2017 19 4,825 76 5,395 +Purchases of reserves — — — — +Extensions and discoveries 5 622 10 711 +Sales of reserves — ( 43 ) — ( 45 ) +Revisions of prior reserve estimates — ( 827 ) 1 ( 821 ) +Current production ( 3 ) ( 444 ) ( 6 ) ( 497 ) +December 31, 2018 21 4,134 81 4,743 +Purchases of reserves — — — — +Extensions and discoveries 4 997 13 1,097 +Sales of reserves ( 2 ) ( 63 ) — ( 77 ) +Revisions of prior reserve estimates ( 2 ) ( 562 ) ( 27 ) ( 734 ) +Current production ( 2 ) ( 458 ) ( 5 ) ( 502 ) +December 31, 2019 18 4,048 62 4,528 +Purchases of reserves — — — — +Extensions and discoveries 1 216 3 240 +Sales of reserves — ( 74 ) — ( 75 ) +Revisions of prior reserve estimates ( 4 ) ( 1,564 ) ( 23 ) ( 1,725 ) +Current production ( 2 ) ( 345 ) ( 4 ) ( 380 ) +December 31, 2020 13 2,281 38 2,588 +Proved developed reserves +December 31, 2018 10 1,813 41 2,115 +December 31, 2019 8 1,757 30 1,984 +December 31, 2020 7 1,358 22 1,527 +Proved undeveloped reserves +December 31, 2018 11 2,321 40 2,628 +December 31, 2019 10 2,291 32 2,544 +December 31, 2020 7 923 16 1,061 +Totals may not sum or recalculate due to rounding. +In 2020, the Company experienced extensions of 239.8 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 150.6 Bcfe was attributable to the addition of 14 PUD locations in the Utica field, 87.8 Bcfe was attributable to the addition of eight PUD locations in the SCOOP field. The Company experienced total downward revisions of approximately 1.7 Tcfe in estimated proved reserves, of which 1,268.4 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2020 and the 12-month average price for natural gas decreased from $ 2.58 per MMBtu for 2019 to $ 1.99 per MMBtu for 2020, the 12-month average price for NGL decreased from $ 21.25 per barrel for 2019 to $ 15.40 per barrel for 2020, and the 12-month average price for crude oil decreased from $ 55.85 per barrel for 2019 to $ 39.54 per barrel for 2020. An additional 720.3 Bcfe in downward revisions was a result of the exclusion of 48 PUD locations in the Utica field and 31 PUD locations in the SCOOP field, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Positive revisions of 263.8 Bcfe were experienced from a combination of operating and development cost improvements, well performance and working interest changes. +In 2019, the Company experienced extensions of 1.1 Tcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 793.5 Bcfe was attributable to the addition of 72 PUD locations in the Utica field, 302.9 Bcfe was attributable to the addition of 37 PUD locations in the SCOOP field. The Company experienced total downward revisions of approximately 733.8 Bcfe in estimated proved reserves, of which 347.2 Bcfe was a result of the exclusion of nine PUD locations in the Utica field and 22 PUD locations in the SCOOP +101 +Table of Contents +Index to Financial Statement s +field, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment capital discipline and funding future activities within cash flow. An additional 296.4 Bcfe in downward revisions was the result of commodity price changes. Commodity prices experienced volatility throughout 2019 and the 12-month average price for natural gas decreased from $ 3.10 per MMBtu for 2018 to $ 2.58 per MMBtu for 2019, the 12- month average price for NGL decreased from $ 32.02 per barrel for 2018 to $ 21.25 per barrel for 2019, and the 12-month average price for crude oil decreased from $ 65.56 per barrel for 2018 to $ 55.85 per barrel for 2019. The Company also experienced downward revisions of 90.2 Bcfe from a combination of working interest changes, optimization of well design in the current commodity price environment and well performance. +In 2018, the Company experienced extensions and discoveries of 711.2 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions and discoveries, 556.3 Bcfe was attributable to the addition of 75 PUD locations in the Utica field, 90.1 Bcfe was attributable to the addition of 11 PUD locations in the SCOOP field and 3.0 Bcfe was attributable to the addition of 13 PUD locations in the Southern Louisiana fields as a result of the Company's current development plan that refocused some activity within existing fields. This change reflects the Company's ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations. +In 2018, the Company experienced downward revisions of 1.0 Tcfe in estimated proved reserves with the exclusion of 127 PUD locations in the Company's Utica field and 12 PUD locations in the Company's SCOOP field, which was primarily the result of changes in the Company's development schedule moving development in excess of five years from initial booking. The development plan change, as approved by the Company's senior management and board of directors, is a result of continued focus on free cash flow generation. This downward revision was partially offset by upward revisions of 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length, 67.6 Bcfe due to changes in ownership interest, 27.9 Bcfe due to an increase in pricing and 8.3 Bcfe due to changes in well performance. In addition, the Company sold approximately 44.9 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in the Company's Utica field. +Discounted Future Net Cash Flows +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2020, 2019 and 2018 using an unweighted average first-of-the-month price for the period January through December 31, 2020, 2019 and 2018. +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2020 2019 2018 +(In millions) +Future cash flows $ 4,079 $ 10,451 $ 14,483 +Future development and abandonment costs ( 652 ) ( 2,058 ) ( 2,438 ) +Future production costs ( 2,325 ) ( 4,513 ) ( 5,068 ) +Future production taxes ( 137 ) ( 333 ) ( 456 ) +Future income taxes — — ( 943 ) +Future net cash flows 965 3,547 5,578 +10% discount to reflect timing of cash flows ( 425 ) ( 1,844 ) ( 2,596 ) +Standardized measure of discounted future net cash flows $ 540 $ 1,703 $ 2,982 +102 +Table of Contents +Index to Financial Statement s +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +Year ended December 31, +2020 2019 2018 +(In millions) +Sales and transfers of oil and gas produced, net of production costs $ ( 264 ) $ ( 734 ) $ ( 1,063 ) +Net changes in prices, production costs, and development costs ( 954 ) ( 1,372 ) 591 +Acquisition of oil and gas reserves in place — — — +Extensions and discoveries 38 388 519 +Previously estimated development costs incurred during the period 215 406 402 +Revisions of previous quantity estimates, less related production costs ( 255 ) ( 321 ) ( 357 ) +Sales of oil and gas reserves in place ( 6 ) ( 49 ) ( 26 ) +Accretion of discount 170 298 264 +Net changes in income taxes — 425 ( 185 ) +Change in production rates and other ( 109 ) ( 319 ) 194 +Total change in standardized measure of discounted future net cash flows $ ( 1,165 ) $ ( 1,278 ) $ 339 +20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table summarizes quarterly financial data for the years ended December 31, 2020 and 2019: +2020 +First +Quarter Second +Quarter Third +Quarter Fourth +Quarter +(In thousands) +Revenues $ 299,338 $ 186,301 $ 136,176 $ 244,727 +(Loss) income from operations ( 480,087 ) ( 555,750 ) ( 346,400 ) 19,632 +Income tax expense 7,290 — — — +Net loss ( 517,538 ) ( 561,068 ) ( 380,963 ) ( 165,564 ) +Loss per share: +Basic $ ( 3.24 ) $ ( 3.51 ) $ ( 2.37 ) $ ( 1.03 ) +Diluted $ ( 3.24 ) $ ( 3.51 ) $ ( 2.37 ) $ ( 1.03 ) +2019 +First +Quarter Second +Quarter Third +Quarter Fourth +Quarter +(In thousands) +Revenues $ 372,462 $ 512,451 $ 341,745 $ 336,468 +(Loss) income from operations 93,011 218,456 ( 570,955 ) ( 1,444,205 ) +Income tax (benefit) expense — ( 179,331 ) ( 144,047 ) 315,815 +Net income (loss) 62,242 234,956 ( 484,802 ) ( 1,814,754 ) +Income (loss) per share: +Basic $ 0.38 $ 1.47 $ ( 3.04 ) $ ( 11.36 ) +Diluted $ 0.38 $ 1.47 $ ( 3.04 ) $ ( 11.36 ) +103 +Table of Contents +Index to Financial Statement s +21. SUBSEQUENT EVENTS +Subsequent to December 31, 2020 and as of March 1, 2021, the Company entered into the following natural gas, oil, and NGL derivative contracts as it works toward fulfilling minimum hedging requirements as provided for in the RSA: +Period Type of Derivative Instrument Index +Daily Volume (1) +Weighted +Average Price +July 2021 - December 2021 Swaps NYMEX WTI 2,250 $ 53.07 +July 2021 - December 2021 Swaps Mont Belvieu C3 3,100 $ 27.80 +January 2022 - June 2022 Swaps Mont Belvieu C3 1,000 $ 27.30 +April 2021 - May 2021 Basis Swaps Tetco M2 36,443 $( 0.61 ) +February 2021 - October 2021 Basis Swaps Rex Zone 3 94,505 $( 0.22 ) +July 2021 - December 2021 Costless Collars NYMEX Henry Hub 210,000 +$ 2.67 /$ 3.15 +January 2022 - March 2022 Costless Collars NYMEX Henry Hub 340,000 +$ 2.82 /$ 3.40 +(1) Volume units for gas instruments are presented as MMBtu/day while oil and NGL is presented in Bbls/day. +104 +Table of Contents +Index to Financial Statement s +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2020, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2020, our disclosure controls and procedures are effective. +Remediation of Previously Identified Material Weakness +As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, our management determined that a material weakness existed in our internal control over financial reporting over the review of the evaluation of our unevaluated oil and gas properties . +We have taken the necessary steps to enhance the underlying control activities, which now include redesigned processes and controls to timely identify the transfer of leasehold costs associated with acreage expirations, lease transfers, and proved reserve additions in conjunction with our current development plans. +Based on the results of management's evaluation, we have concluded that the controls are designed and operating effectively as of December 31, 2020 and, therefore, the previously disclosed material weakness has been remediated. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2020, we added certain key controls related to our ongoing reorganization. +Except as described above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2020, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, +105 +Table of Contents +Index to Financial Statement s +management did not identify and material weakness in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2020. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2020 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2020, as stated in their accompanying report. +/s/ David M. Wood /s/ Quentin Hicks +Name: David M. Wood Name: Quentin Hicks +Title: Chief Executive Officer and President, Director Title: Chief Financial Officer +106 +Table of Contents +Index to Financial Statement s +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (Debtor-in-Possession) (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 5, 2021 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 5, 2021 +107 +Table of Contents +Index to Financial Statement s +ITEM 9B. OTHER INFORMATION +Not applicable. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than April 30, 2021 (the 2021 Proxy Statement). +ITEM 11. EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2021 Proxy Statement. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2021 Proxy Statement. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2021 Proxy Statement. +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2021 Proxy Statement. +108 +Table of Contents +Index to Financial Statement s +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. Financial Statement Schedules. No financial statement schedules are applicable or required. +3. Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith +3.1 +Restated Certificate of Incorporation. +8-K 000-19514 3.1 4/26/2006 +3.2 +Certificate of Amendment No. 1 to Restated Certificate of Incorporation. +10-Q 000-19514 3.2 11/6/2009 +3.3 +Certificate of Amendment No. 2 to Restated Certificate of Incorporation. +8-K 000-19514 3.1 7/23/2013 +3.4 +Second Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K 000-19514 3.1 2/27/2020 +3.5 +First Amendment to the Second Amended and Restated Bylaws of Gulfport Energy Corporation +8-K 001-19514 3.1 5/29/2020 +3.6 +Certificate of Designation of Series B Junior Participating Preferred Stock of Gulfport Energy Corporation +8-A 001-19514 3.1 4/30/2020 +4.1 +Form of Common Stock certificate. +SB-2 333-115396 4.1 7/22/2004 +4.2 +Indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of the Company’s 6.625% Senior Notes due 2023). +8-K 000-19514 4.1 4/21/2015 +4.3 +Indenture, dated as of October 14, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.000% Senior Notes due 2024). +8-K 000-19514 4.1 10/19/2016 +4.4 +Indenture, dated as of December 21, 2016, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2025). +8-K 000-19514 4.1 12/21/2016 +109 +Table of Contents +Index to Financial Statement s +4.5 +Indenture, dated as of October 11, 2017, among Gulfport Energy Corporation, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (including the form of Gulfport Energy Corporation’s 6.375% Senior Notes due 2026). +8-K 000-19514 4.1 10/11/2017 +4.6 +Tax Benefits Preservation Plan, dated as of April 30, 2020, between Gulfport Energy Corporation and Computershare Trust Company, N.A., as rights agent (which includes the Form of Rights Certificate as Exhibit B thereto) +8-A 001-19514 4.1 4/30/2020 +10.1+ +2019 Amended and Restated Stock Incentive Plan +DEF 14A 000-19514 Appendix A 4/30/19 +10.2+ +2019 Amended and Restated Stock Incentive Plan Form of Performance Share Award Agreement. +8-K 000-19514 10.3 8/12/19 +10.3+ +2014 Executive Annual Incentive Compensation Plan. +8-K 000-19514 10.1 4/7/2014 +10.4+ +Form of Stock Option Agreement. +8-K 000-19514 10.2 4/26/2006 +10.5+ +Form of Restricted Stock Award Agreement. +10-K 000-19514 10.3 2/28/2014 +10.6+ +2013 Restated Stock Incentive Plan. +S-4 333-189992 10.1 7/17/2013 +10.7+ +Gulfport Energy Corporation 2020 Incentive Plan. +8-K 000-19514 10.1 3/17/2020 +10.8+ +Form of 2020 Cash Award under Gulfport Energy Corporation 2020 Incentive Plan. +8-K 000-19514 10.2 3/17/2020 +10.9 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and David M. Wood. +10-Q 000-19514 10.3 8/2/2019 +10.10 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Donnie Moore. +10-Q 000-19514 10.4 8/2/2019 +10.11 +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Patrick K. Craine. +10-Q 000-19514 10.5 8/2/2019 +10.12 +Employment Agreement, effective as of August 26, 2019, by and between Gulfport Energy Corporation and Quentin Hicks. +8-K 000-19514 10.1 8/12/19 +10.13 +Employment Agreement dated November 13, 2020, by and between the Company and Michael Sluiter. +8-K 001-19514 10.4 11/16/2020 +10.14 +Amended and Restated Credit Agreement, dated as of December 27, 2013, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto. +8-K 000-19514 10.1 1/3/2014 +110 +Table of Contents +Index to Financial Statement s +10.15 +First Amendment to Amended and Restated Credit Agreement, dated as of April 23, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication agent, KeyBank National Association, as documentation agent, and the other lenders party thereto. +8-K 000-19514 10.1 4/28/2014 +10.16 +Second Amendment to Amended and Restated Credit Agreement, dated as of November 26, 2014, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 12/3/2014 +10.17 +Third Amendment to Amended and Restated Credit Agreement, dated as of April 10, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 4/15/2015 +10.18 +Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 29, 2015, among the Company, as borrower, the Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +10-Q 000-19514 10.2 8/7/2015 +10.19 +Fifth Amendment to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 9/24/2015 +10.20 +Sixth Amendment, dated February 19, 2016, to Amended and Restated Credit Agreement, dated as of September 18, 2015, among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +10-Q 000-19514 10.2 5/5/2016 +10.21 +Seventh Amendment to Amended and Restated Credit Agreement, dated as of December 13, 2016, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 12/15/2016 +10.22 +Eighth Amendment to Amended and Restated Credit Agreement, entered into as of March 29, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, and the lenders party thereto. +8-K 000-19514 10.1 4/4/2017 +10.23 +Ninth Amendment to Amended and Restated Credit Agreement, entered into as of May 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent and L/C issuer, the existing lenders named therein and JPMorgan Chase Bank, N.A., Commonwealth Bank of Australia, ABN, AMRO Capital USA LLC, Fifth Third Bank and Canadian Imperial Bank of Commerce, New York branch, as new lenders. +10-Q 000-19514 10.2 5/9/2017 +111 +Table of Contents +Index to Financial Statement s +10.24 +Tenth Amendment to Amended and Restated Credit Agreement, dated as of October 4, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 10/5/2017 +10.25 +Eleventh Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2017, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 11/28/2017 +10.26 +Twelfth Amendment to Amended and Restated Credit Agreement, dated as of May 21, 2018, among Gulfport Energy Corporation, as borrower, The Bank of Nova Scotia, as administrative agent, and the lenders party thereto. +8-K 000-19514 10.1 5/25/2018 +10.27 +Thirteenth Amendment to the Amended and Restated Credit Agreement, dated as of November 28, 2018, between Gulfport Energy Corporation, as Borrower, The Bank of Nova Scotia, as Administrative Agent and the lenders party thereto. +8-K 000-19514 10.1 12/4/2018 +10.28 +Fourteenth Amendment to the Amended and Restated Credit Agreement, dated as of June 3, 2019, between Gulfport Energy Corporation, as Borrower, The Bank of Nova Scotia, as Administrative Agent and the lenders party thereto. +8-K 000-19514 10.1 6/7/2019 +10.29 +Fifteenth Amendment to the Amended and Restated Credit Agreement, dated as of May 1, 2020, between Gulfport Energy Corporation, as Borrower, the Bank of Nova Scotia, as Administrative Agent and the lenders party thereto. +10-Q 001-19514 10.3 8/7/2020 +10.30 +Sixteenth Amendment to the Amended and Restated Credit Agreement, dated as of July 27, 2020, between Gulfport Energy Corporation, as Borrower, the Bank of Nova Scotia, as Administrative Agent and the lenders party thereto +8-K 001-19514 10.1 7/30/2020 +10.31 +First Forbearance Agreement and Amendment to Amended and Restated Credit Agreement, dated as of October 15, 2020, by and among the Gulfport Energy Corporation, as Borrower, the Bank of Nova Scotia, as Administrative Agent and the lender party thereto. +8-K 001-19514 10.1 10/16/2020 +10.32 +Second Forbearance Agreement and Amendment to Amended and Restated Credit Agreement, dated as of October 26, 2020, by and among the Gulfport Energy Corporation, as Borrower, the Bank of Nova Scotia, as Administrative Agent and the lender party thereto. +8-K 001-19514 10.1 10/29/2020 +10.33 +Restructuring Support Agreement, dated November 13, 2020. +8-K 001-19514 10.2 11/16/2020 +10.34 +Backstop Commitment Agreement, dated November 13, 2020 (incorporated by reference to Exhibit D of the Restructuring Support Agreement attached as Exhibit 10.33 hereto). +8-K 001-19514 10.2 11/16/2020 +112 +Table of Contents +Index to Financial Statement s +10.35 +Form of DIP Credit Agreement (incorporated by reference to Exhibit E of the Restructuring Support Agreement attached as Exhibit 10.33 hereto). +8-K 001-19514 10.4 11/16/2020 +10.36 +Senior Secured Super Priority Debtor-in-Possession Credit Agreement, dated as of November 17, 2020, by and among the Company, as borrower, The Bank of Nova Scotia, as administrative agent, and the other lenders party thereto. +8-K 001-19514 10.1 11/20/2020 +10. 37 # +Sand Supply Agreement, effective as of October 1, 2014, by and between Muskie Proppant LLC and Gulfport Energy Corporation. +10-Q 000-19514 10.1 11/7/2014 +10. 38 # +Amendment to Sand Supply Agreement, dated as of November 3, 2015, by and between Muskie Proppant LLC and Gulfport Energy Corporation. +10-Q 000-19514 10.2 11/5/2015 +10.39 +Second Amendment to Sand Supply Agreement, dated as of August 6, 2018, between Gulfport Energy Corporation and Muskie Proppant LLC. +10-Q 000-19514 10.2 11/1/2018 +10. 40 # +Amended and Restated Master Services Agreement, effective as of October 1, 2014, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10-Q 000-19514 10.2 11/7/2014 +10. 41 # +Amendment to Amended and Restated Master Services Agreement, dated as of February 18, 2016 to be effective as of January 1, 2016, by and between Gulfport Energy Corporation and Stingray Pressure Pumping LLC. +10-K 000-19514 10.19 2/19/2016 +10. 42 # +Amendment No. 2, dated as of July 10, 2018, between Stingray Pressure Pumping, LLC and Gulfport Energy Corporation to that certain Amended & Restated Master Services Agreement for Pressure Pumping Services, effective as of October 1, 2014, as amended effective January 1, 2016. +10-Q 000-19514 10.2 8/2/2018 +10. 43 + +Form of Indemnification Agreement. +S-4 333-199905 10.1 11/6/2014 +14 +Code of Ethics. +8-K 000-19514 14 2/14/2006 +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Grant Thornton LLP. +X +23.2 +Consent of Netherland, Sewell & Associates, Inc. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +113 +Table of Contents +Index to Financial Statement s +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS Inline XBRL Instance Document. X +11.SCH* Inline XBRL Taxonomy Extension Schema Document. X +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X +101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X +* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. +** The Company agrees to furnish a copy of any of its unfiled long-term debt instruments to the Securities and Exchange Commission upon request. ++ Management contract, compensatory plan or arrangement. +# Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission. +114 +Table of Contents +Index to Financial Statement s +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: March 5, 2021 +GULFPORT ENERGY CORPORATION +By: /s/ QUENTIN HICKS +Quentin Hicks +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: March 5, 2021 By: /s/ DAVID M. WOOD +David M. Wood +Chief Executive Officer and President, Director +(Principal Executive Officer) +Date: March 5, 2021 By: /s/ ALVIN BLEDSOE +Alvin Bledsoe +Chairman of the Board and Director +Date: March 5, 2021 By: /s/ QUENTIN HICKS +Quentin Hicks +Chief Financial Officer +(Principal Accounting and Financial Officer) +Date: March 5, 2021 By: /s/ DEBORAH G. ADAMS +Deborah G. Adams +Director +Date: March 5, 2021 By: /s/ SAMANTHA HOLROYD +Samantha Holroyd +Director +Date: March 5, 2021 By: /s/ VALERIE JOCHEN +Valerie Jochen +Director +Date: March 5, 2021 By: /s/ C. DOUG JOHNSON +C. Doug Johnson +Director +Date: March 5, 2021 By: /s/ BEN T. MORRIS +Ben T. Morris +Director +Date: March 5, 2021 By: /s/ JOHN W. SOMERHALDER II +John W. Somerhalder II +Director +115 \ No newline at end of file diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/filing_metadata.csv b/raw/filings/0000874499/2020/0001628280-21-004026/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..03a3f181f7168bce33ce7bdd272e2dfebea125d6 --- /dev/null +++ b/raw/filings/0000874499/2020/0001628280-21-004026/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2021-03-05,2020-12-31,2021-03-05T20:43:14.000Z,0001628280-21-004026,gpor-20201231.htm,10-K,15840838,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828021004026/gpor-20201231.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828021004026/,2020,2020,1 diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/item1.txt b/raw/filings/0000874499/2020/0001628280-21-004026/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e6aba0843ced99793d2098f0f65fe29ee83ec8a --- /dev/null +++ b/raw/filings/0000874499/2020/0001628280-21-004026/item1.txt @@ -0,0 +1,348 @@ +ITEM 1. BUSINESS +Our Business +A Delaware corporation formed in 1997, we are an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. Our principal properties are located in Eastern Ohio, where we target development in the Utica formation, and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations. +As of December 31, 2020, we had 2.6 Tcfe of proved reserves with a standardized measure of discounted future net cash flows of $540.0 million and a PV-10 of $540.0 million. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC filed voluntary petitions of relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases are being administered jointly under the caption In re Gulfport Energy Corporation, et al ., Case No. 20-35562 (DRJ). Information about our Chapter 11 cases is available at our website (www.gulfportenergy.com). +We are currently operating our business and managing our properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On November 14, 2020, the Bankruptcy Court entered an order authorizing the joint administration and procedural consolidation of these Chapter 11 Cases pursuant to Bankruptcy Rule 1015(b). At the first day hearing on November 16, 2020, the Bankruptcy Court granted certain requested relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, pay taxes and certain governmental fees and charges, continue to operate our cash management system in the ordinary course, remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and pay the pre-petition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. For goods and services provided following the Petition Date, we are permitted and intend to pay vendors in the ordinary course. +Subject to certain exceptions provided for in section 362 of the Bankruptcy Code, all judicial and administrative proceedings against us or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, the filing of new judicial or administrative actions against us or our property for claims arising prior to the date on which our Chapter 11 Cases were filed were automatically enjoined. This prohibits, for example, our lenders or noteholders from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts. Accordingly, unless the Bankruptcy Court agrees to lift the automatic stay, all of our pre-petition liabilities and obligations should be settled or compromised under the Bankruptcy Code as part of our Chapter 11 proceedings. +Our operations and ability to execute our business remain subject to the risks and uncertainties described in Item 1A.“Risk Factors”. In addition, our assets, liabilities, capital structure, shareholders, officers and directors could change materially because of our Chapter 11 Cases. In addition, the description of our operations, properties and capital plans included in this +4 +Table of Contents +Index to Financial Statement s +Annual Report on Form 10-K may not accurately reflect our operations, properties and capital plans after we emerge from Chapter 11. +Business Strategy +Gulfport aims to create sustainable value through the development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in a manner that generates sustainable cash flow and improves margins and operating efficiencies, while maintaining exceptional environmental and safety performance. To accomplish these goals, we allocate capital expenditures to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +As noted above, we are currently engaged in an in-court restructuring process to improve our balance sheet strength, cost structure and financial strength and flexibility. +Operating Areas +We foc us our development and production activities in the geographic operating areas described below. +Utica - The Utica is a hydrocarbon bearing rock formation located in the Appalachian Basin of the United States and Canada. We have approximately 193,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During the fourth quarter of 2020 we produced approximately 887 MMcfe per day net to our interests in this area and accounts for approximately 82% of our total production. +SCOOP - The SCOOP, or South Central Oklahoma Oil Province, is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 40,000 in the Woodford formation and approximately 33,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness fro m 50 to over 250 feet. During the fourth quarter of 2020, we produced approximately 189 MMcfe per day net to our interests in this area and accounts for approximately 18% of our total production. +Additional Properties - In addition to our core properties discussed above, we also own working interests and overriding royalty interest in various fields including the Bakken formation in North Dakota that account for less than 1% of our total production and proved reserves. +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +5 +Table of Contents +Index to Financial Statement s +2020 2019 2018 +Gross Net Gross Net Gross Net +Recompletions: +Productive — — — — 47 47 +Dry — — — — — — +Total — — — — 47 47 +Development: +Productive 26 24.4 25 22.4 34 30 +Dry — — — — — — +Total 26 24.4 25 22.4 34 30 +Exploratory: +Productive — — 1 0.8 2 1.5 +Dry — — — — — — +Total — — 1 0.8 2 1.5 +The following table presents activity by operating area for the year ended December 31, 2020: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +16 16.0 25 23.8 — — — — +SCOOP (2) +10 8.4 4 3.8 19 0.05 12 0.04 +Total 26 24.4 29 27.6 19 0.05 12 0.04 +_____________________ +(1) Of the 16 gross wells we drilled in 2020, nine were completed as producing wells and seven were in various stages of completion as of December 31, 2020. +(2) Of the 10 gross wells we drilled in 2020, zero were completed as producing wells and 10 were in various stages of completion as of December 31, 2020. +Acreage +The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2020. +Average NRI/WI Productive +Oil Wells Productive +Gas Wells Non-Productive +Oil Wells Non-Productive +Gas Wells Developed +Acreage Undeveloped +Acreage +Field Percentages Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net +Utica 46.78/57.29 146 42.1 501 328.7 2 0.7 11 6.6 120,699 93,598 106,418 99,265 +SCOOP 24.43/30.32 105 18.3 508 163.2 7 1.0 33 15.5 49,325 34,421 8,294 5,941 +Other Various 14 0.2 9 — — — — — 1,021 395 4,145 1,021 +Overrides/Royalty Non-operated 0.16/0.0 459 — 86 — 2 — 1 — — — — — +Total 724 60.6 1,104 491.9 11 1.7 45 22.1 171,045 128,414 118,857 106,227 +Of our leases that are not held by production, most have a three- to five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2020. +6 +Table of Contents +Index to Financial Statement s +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31: +2021 13,488 12,508 +2022 16,438 14,880 +2023 16,191 15,290 +After 2023 3,291 3,006 +Held by production or operations 69,449 60,543 +Total 118,857 106,227 +Oil, Natural Gas and NGL Reserves +The tables below set forth information as of December 31, 2020, with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2020 +Oil +(MMBbl) Natural +Gas +(Bcf) NGL (MMBbl) Total (Bcfe) +Proved developed 7 1,358 22 1,527 +Proved undeveloped 7 923 16 1,061 +Total proved (1) +13 2,281 38 2,588 +Totals may not sum or recalculate due to rounding. +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (2) +$ 679 $ 285 $ 964 +Present value of estimated future net revenue (PV-10) (2) +$ 504 $ 36 $ 540 +Standardized measure (2) +$ 540 +_____________________ +(1) Utica and SCOOP accounted for approximately 67% and 33%, respectively, of our estimated proved reserves by volume as of December 31, 2020. +(2) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2020, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2020. The prices used in our PV-10 measure were $39.54 per barrel and $1.99 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2020. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense. There was no effect of estimated future income tax expense as of December 31, 2020, primarily as a result of significant net operating loss carryforwards that can be used to offset income taxes on future taxable income. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also +7 +Table of Contents +Index to Financial Statement s +understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +_____________________ +Grizzly had no proved reserves as of December 31, 2020. For further discussion of our interest in Grizzly, see “ Our Equity Investments ” below. +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year. +Changes in Proved Reserves during 2020. +The following table summarizes the changes in our estimated proved reserves during 2020 (in Bcfe): +Proved Reserves, December 31, 2019 4,528 +Sales of oil and natural gas reserves in place (75) +Extensions and discoveries 240 +Revisions of prior reserve estimates (1,725) +Current production (380) +Proved Reserves, December 31, 2020 2,588 +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of minerals in place during a period. During 2020, we sold approximately 74.9 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our Utica assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 239.8 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 14 PUD locations in our Utica acreage for 150.6 Bcfe and eight PUD locations in our SCOOP acreage for 87.8 Bcfe. The commodity prices utilized for the 2020 reserves determination as well as our revised five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 1.7 Tcfe in estimated proved reserves, of which 1,268.4 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2020 and the 12-month average price for natural gas decreased from $2.58 per MMBtu for 2019 to $1.99 per MMBtu for 2020, the 12-month average price for NGL decreased from $21.25 per barrel for 2019 to $15.40 per barrel for 2020, and the 12-month average price for crude oil decreased from $55.85 per barrel for 2019 to $39.54 per barrel for 2020. +8 +Table of Contents +Index to Financial Statement s +An additional 720.3 Bcfe in downward revisions was a result of the exclusion of 48 PUD locations in our Utica field and 31 PUD locations in our SCOOP field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow and ongoing optimization of our development plan. +Positive revisions of 263.8 Bcfe were experienced from a combination of operating and development cost improvements, well performance and working interest changes. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2020, 2019 and 2018 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 19 of the notes to our consolidated financial statements included in this report. +Proved Undeveloped Reserves (PUDs) +As of December 31, 2020, our proved undeveloped reserves totaled 7 MMBbl of oil, 923 Bcf of natural gas and 16 MMBbl of NGL, for a total of 1,061 Bcfe. Approximately 60% and 40% of our PUD reserves at year-end 2020 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2020 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2019 2,544 +Sales of oil and natural gas reserves in place (74) +Extensions and discoveries 238 +Conversion to proved developed reserves (368) +Revisions of prior reserve estimates (1,279) +Proved Undeveloped Reserves, December 31, 2020 1,061 +Sales of oil and natural gas reserves in place. During 2020, we sold approximately 74.2 Bcfe of proved undeveloped oil and natural gas reserves associated with various operated interests, the majority of which were in our Utica field. +Extensions and discoveries. Our extensions of approximately 238.4 Bcfe were primarily attributed to the addition of 14 PUD drilling locations in the Utica field and eight PUD drilling locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. The commodity prices utilized for the 2020 reserves determination and our revised five-year development plan focused on generating sustainable cash flow limited our ability to add well locations. +Conversion to proved developed reserves. Our 2020 development activities resulted in the conversion of approximately 367.7 Bcfe into proved developed producing reserves, attributable to 25 PUD locations in the Utica field and 10 PUD locations in the SCOOP field. These 35 PUDs represent a conversion rate of 14% for 2020. +Revision of prior reserve estimates. We experienced proved undeveloped downward revisions of 720.3 Bcfe from the exclusion of 48 PUD locations in our Utica field and 31 PUD locations in our SCOOP field due to the SEC five-year development rule. The development plan change, as approved by our senior management and Board of Directors, reflects our commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. +9 +Table of Contents +Index to Financial Statement s +We also experienced 842.9 Bcfe of downward revisions as a result of commodity price changes. These downward revisions were partially offset by positive revisions of 283.7 Bcfe in estimated proved reserves from a combination of operating and development cost improvements, well performance and working interest changes. +Costs incurred relating to the development of PUDs were approximately $182.3 million in 2020. +All PUD drilling locations included in our 2020 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2020, less than 1% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2020, 2019 and 2018 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has approximately 85 years combined industry experience and our reservoir staff has approximately 50 years combined experience. +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our board of directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +10 +Table of Contents +Index to Financial Statement s +PV-10 Sensitivities +As noted above, our December 31, 2020 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2020 of $39.54 per barrel and $1.99 per MMBtu. Holding production and development costs constant, if SEC pricing were $43.49 per barrel and $2.19 per MMBtu, or a 10% increase, this would have resulted in an increase of 181.7 Bcfe of our total proved reserves and a $350 million increase in PV-10 value at December 31, 2020. Holding production and development costs constant, if SEC pricing were $35.59 per barrel and $1.79 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 839.9 Bcfe of our total proved reserves and a $228 million decrease in PV-10 value at December 31, 2020. For each of these scenarios, the 82 PUDs that were economic at SEC pricing were included. +Holding production and development costs constant while assuming SEC pricing closer to the long-term strip pricing of $50.00 per barrel for crude oil and $2.50 per MMBtu for natural gas results in an increase of 1,065 Bcfe of total proved reserves and a $989 million increase in PV-10 value at December 31, 2020. For this scenario, there were an additional 55 PUD locations included that were economic at these prices. +Production, Prices and Production Costs +The following table presents our production volumes during the periods indicated: +Year Ended December 31, 2020 +Net Production +Field Natural Gas (MMcf) Oil and Condensate (MBbl) NGL (MBbl) Natural gas equivalents (MMcfe) MMcfe per Day +Utica 291,133 393 1,077 299,955 820 +SCOOP 53,853 1,392 2,886 79,519 217 +Other 13 18 1 126 0.3 +Total 344,999 1,803 3,964 379,600 1,037 +11 +Table of Contents +Index to Financial Statement s +The following table presents our production volumes, average prices received and average production costs during the periods indicated: +2020 2019 2018 +($ In thousands) +Natural gas sales +Natural gas production volumes (MMcf) 344,999 458,178 443,742 +Natural gas production volumes (MMcf) per day 943 1,255 1,216 +Total sales $ 671,535 $ 1,135,381 $ 1,318,472 +Average price without the impact of derivatives ($/Mcf) $ 1.95 $ 2.48 $ 2.97 +Impact from settled derivatives ($/Mcf) (1) +$ 0.33 $ 0.23 $ (0.04) +Average price, including settled derivatives ($/Mcf) $ 2.28 $ 2.71 $ 2.93 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,803 2,186 2,801 +Oil and condensate production volumes (MBbl) per day 5 6 8 +Total sales $ 62,902 $ 117,937 $ 177,793 +Average price without the impact of derivatives ($/Bbl) $ 34.88 $ 53.95 $ 63.48 +Impact from settled derivatives ($/Bbl) (2) +$ 25.76 $ 1.86 $ (9.51) +Average price, including settled derivatives ($/Bbl) $ 60.64 $ 55.81 $ 53.97 +NGL sales +NGL production volumes (MBbl) 3,964 5,074 5,993 +NGL production volumes (MBbl) per day 11 14 16 +Total sales $ 66,814 $ 101,448 $ 178,915 +Average price without the impact of derivatives ($/Bbl) $ 16.86 $ 19.99 $ 29.85 +Impact from settled derivatives ($/Bbl) $ (0.04) $ 2.79 $ (2.30) +Average price, including settled derivatives ($/Bbl) $ 16.82 $ 22.78 $ 27.55 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 379,600 501,742 496,505 +Natural gas equivalents (MMcfe) per day 1,037 1,375 1,360 +Total sales $ 801,251 $ 1,354,766 $ 1,675,180 +Average price without the impact of derivatives ($/Mcfe) $ 2.11 $ 2.70 $ 3.37 +Impact from settled derivatives ($/Mcfe) $ 0.42 $ 0.24 $ (0.12) +Average price, including settled derivatives ($/Mcfe) $ 2.53 $ 2.94 $ 3.25 +Production Costs: +Avg. lease operating expenses ($/Mcfe) $ 0.14 $ 0.15 $ 0.16 +Avg. production taxes ($/Mcfe) $ 0.05 $ 0.06 $ 0.07 +Avg. midstream gathering, processing & firm transportation costs ($/Mcfe) $ 1.20 $ 1.01 $ 0.98 +Total LOE, midstream costs and production taxes ($/Mcfe) $ 1.39 $ 1.22 $ 1.21 +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statement s +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2020: +Year Ended December 31, +2020 2019 2018 +Utica +Net Production +Natural gas (MMcf) 291,133 387,473 379,417 +Oil (MBbl) 393 247 299 +NGL (MBbl) 1,077 1,812 2,700 +Total (MMcfe) 299,955 399,828 397,406 +Average Price Without the Impact of Derivatives: +Natural gas ($/Mcf) $ 1.97 $ 2.28 $ 2.77 +Oil ($/Bbl) $ 33.41 $ 51.11 $ 60.22 +NGL ($/Bbl) $ 18.55 $ 19.74 $ 27.99 +Average Lease Operating Expenses ($/Mcfe) $ 0.13 $ 0.13 $ 0.14 +Year Ended December 31, +2020 2019 2018 +SCOOP +Net Production +Natural gas (MMcf) 53,853 70,669 64,258 +Oil (MBbl) 1,392 1,610 1,710 +NGL (MBbl) 2,886 3,261 3,292 +Total (MMcfe) 79,519 99,891 94,268 +Average Price Without the Impact of Derivatives: +Natural gas ($/Mcf) $ 1.83 $ 2.13 $ 2.73 +Oil ($/Bbl) $ 35.31 $ 53.32 $ 62.36 +NGL ($/Bbl) $ 16.23 $ 20.13 $ 31.39 +Average Lease Operating Expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.18 +_____________________ +Our Equity Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2020, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2020. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to continued dilution of our equity ownership interest in Grizzly. +Mammoth Energy . As of December 31, 2020, we owned 9,829,548 shares, or approximately 21.5%, of the outstanding common stock of Mammoth Energy Services Inc. +See Note 5 of the notes to our consolidated financial statements included elsewhere in this report for additional information regarding our equity investments. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract +13 +Table of Contents +Index to Financial Statement s +administration and nomination services for production from Gulfport-operated wells. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. +Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. See Note 17 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL revenues, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2020, 2019 and 2018 were as follows: +% of Sales +Year Ended December 31, 2020 +ECO-Energy 12 % +Year Ended December 31, 2019 +Morgan Stanley Capital 14 % +Year Ended December 31, 2018 +BP Energy Company 17 % +ECO-Energy 10 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors and service providers and our ability to secure optimal pipeline access and end markets in which to sell our production. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +14 +Table of Contents +Index to Financial Statement s +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders may result in the development of additional regulations or changes to existing regulations. Failure to comply with these laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation +15 +Table of Contents +Index to Financial Statement s +and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. +Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2020 and 2019 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. We pay these companies a retainer plus additional amounts when they provide us with clean up services. +16 +Table of Contents +Index to Financial Statement s +Human Capital Management +As of December 31, 2020, we had 256 employees, all of which are non-bargaining. The commodity downturn in late 2019 and the broader economic downturn in 2020 led to significant headcount reductions in late 2019 and 2020. Retaining, replacing and developing talent is very important as our business becomes leaner and we navigate the bankruptcy process. We recognize that even though we are a natural resource company, our most valuable assets are our people. We are passionate about devoting the time, energy and resources required to attract, motivate, retain and develop our employees. +We understand that a workplace environment that embraces diversity and is inclusive of different ideas and perspectives is a healthy environment and one that provides the best solutions to complex challenges. While being an affirmative action employer assists us in locating qualified diversity candidates when filling positions and provides us with a metrics to reflect on how diverse we are, we have recently increased our focus on diversity across the organization including our board of directors. During 2020, our Board of Directors performed an exhaustive search as part of our board refreshment process, adding two highly qualified diversity candidates that add to the background and experience represented on our Board. Gulfport Energy Corporation’s diverse independent directors currently constitute 37.5% of the Board. The Board also reviewed and refreshed its Corporate Governance Guidelines and Diversity Principles to promote a more diverse and inclusive board and company. While 2020 was a year in which we added very few new employees, 33% of our newly hired employees were diverse hires. We also initiated a program to ensure that every employee across the company engages in peer-led, small group discussion on diversity topics. The results of these conversations will help shape initiatives in 2021, and it will also mature our diversity and inclusion practices. +We have numerous programs to ensure that our employees and external partners are adequately trained to perform the critical work we do safely and effectively. The programs also focus on respecting the environments where we operate. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We also provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Safety is at the forefront of everything we do. We hold regular safety briefings prior to any significant project and routinely have safety stand-down meetings to highlight potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates, preventable motor vehicle accidents). We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity for 2020. +Executive Officers +David M. Wood, Chief Executive Officer and President +David M. Wood , 64, has served as the Chief Executive Officer and President of the Company, and as a member of our board of directors, since December 2018. Prior to joining the Company, Mr. Wood served as the Chief Executive Officer and Chairman of the Board of Directors of Arsenal Resources LLC ("Arsenal"), a West Virginia-focused natural gas producer and portfolio company of First Reserve Corporation ("First Reserve"), an energy-focused private equity firm, where he most recently served as Chairman of its board of directors and previously held the role of the Chief Executive Officer. Prior to his tenure at Arsenal, Mr. Wood served as a Senior Advisor to First Reserve from 2013 to 2016, serving on several of its portfolio company boards. Prior to his position at First Reserve, Mr. Wood spent more than 17 years at Murphy Oil Corporation (NYSE: MUR) ("Murphy Oil"), a global oil and natural gas exploration and production company, where he served as Chief Executive Officer, President and a member of the board of directors from 2009 to 2012. From 1980 to 1994, Mr. Wood held various senior positions with Ashland Exploration and Production, an oil and natural gas exploration and production company. Mr. Wood began his career as a well-site geologist in Saudi Arabia. Mr. Wood also served on the Board of Directors of the general partner of Crestwood Equity Partners LP (NYSE: CEQP) and its wholly owned subsidiary, Crestwood Midstream Partners LP, an owner and operator of crude oil and natural gas midstream assets. In addition, Mr. Wood served as the Chairman of the Board of Directors for Lilis Energy, Inc. (NYSE: LLEX), an exploration and development company operating in the Delaware Basin. Mr. Wood also served on the Board of Directors of several private oil and natural gas companies, including Deep Gulf Energy LP (prior to its acquisition by Kosmos Energy Ltd.) and Berkana Energy Corp. (when it was majority owned by Murphy Oil). Mr. Wood previously served on the board of directors and as an executive committee member of the American Petroleum Institute. He was also a member of the National Petroleum Council and is a member of the Society of Exploration Geophysicists. Mr. Wood holds a B.S. in Geology from the University of Nottingham in England and completed Harvard University’s Advanced Management Program. +17 +Table of Contents +Index to Financial Statement s +Quentin R. Hicks, Executive Vice President and Chief Financial Officer +Quentin R. Hicks , 46, has served as the Executive Vice President and Chief Financial Officer of the Company since August 2019. Prior to joining the Company, Mr. Hicks served as the Executive Vice President and Chief Financial Officer of Halcón Resources Corporation (“Halcón”), a position he held since March 2019, having previously served as Executive Vice President, Finance, Capital Markets and Investor Relations of Halcón since January 2018. Prior to that, Mr. Hicks held various roles at Halcón focused primarily on finance and investor relations. Prior to Halcón, Mr. Hicks worked for GeoResources Inc., where he served as Director of Acquisitions and Financial Planning from 2011 to 2012. From 2004 to 2011, he worked in investment banking with Bear Stearns, Sanders Morris Harris and Madison Williams, where most recently worked as a Director in their energy investment banking practice. Prior to that, Mr. Hicks worked as Manager of Financial Reporting for Continental Airlines. Mr. Hicks began his career in 1998 working as an auditor for Ernst and Young LLP. Mr. Hicks graduated from Texas A&M University with a Bachelor of Business Administration and a Master of Science degree in Accounting. In addition, Mr. Hicks holds a Master of Business Administration degree in Finance from Vanderbilt University and also holds a Certified Public Accountant license from the State of Texas. +Donnie G. Moore, Executive Vice President and Chief Operating Officer +Donnie G. Moore , 56, has served as Executive Vice President, Chief Operating Officer since January 2018. Mr. Moore had also served as Interim Chief Executive Officer of the Company from October 29, 2018, the date our former Chief Executive Officer and President left the Company, to December 18, 2018, the date of the appointment of Mr. Wood as our new Chief Executive Officer and President. From 2007 until December 2017, Mr. Moore worked at Noble Energy, Inc. (“Noble”), an independent oil and gas exploration and production company, where he most recently served as Vice President of Noble’s Texas operations for its Eagle Ford and Delaware Basin assets. Prior to that, Mr. Moore held various leadership roles at Noble including Vice President of the Marcellus Business Unit, Manager for Operations of the Wattenberg/DJ Business Unit, Manager of Operations for the Gunflint discovery in the Deepwater Gulf of Mexico and Development Manager for Noble’s Mid-Continent and Gulf Coast positions. From 1989 until 2007, Mr. Moore served in a variety of roles with ARCO Oil and Gas Company, Vastar Resources, Inc. and BP America. Mr. Moore holds a Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University. +Patrick K. Craine, Executive Vice President, General Counsel and Corporate Secretary +Patrick K. Craine , 48, has served as Executive Vice President, General Counsel and Corporate Secretary of the Company since May 2019. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. He joined Gulfport from Chesapeake Energy Corporation (NYSE: CHK) (“Chesapeake”), a hydrocarbon exploration company, where he served as Deputy General Counsel – Chief Risk and Compliance Officer from 2013 until 2019. Prior to joining Chesapeake, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the SEC and the Financial Industry Regulatory Authority, where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Michael J. Sluiter , 48, has served as Senior Vice President of Reservoir Engineering of the Company since December 2018. Mr. Sluiter joined the Company from Noble Energy, Inc., where he held various engineering positions from 2007 to 2018, including, most recently, as the Permian Basin Business Unit Manager. Mr. Sluiter has over 20 years of experience in unconventional resource development, reservoir engineering, subsurface development, business development and acquisitions, as well as leadership skills, which he developed at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter holds a Bachelor of Science degree in Chemical Engineering from the University of Sydney, Australia. +18 +Table of Contents +Index to Financial Statement s \ No newline at end of file diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/item13.txt b/raw/filings/0000874499/2020/0001628280-21-004026/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9901f27fc90e636d24dc7cb521da3c0b0e35b934 --- /dev/null +++ b/raw/filings/0000874499/2020/0001628280-21-004026/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2021 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/item9a.txt b/raw/filings/0000874499/2020/0001628280-21-004026/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..de889bfe88cc7bd01b92aa65e1adf10cb0a88661 --- /dev/null +++ b/raw/filings/0000874499/2020/0001628280-21-004026/item9a.txt @@ -0,0 +1,43 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2020, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2020, our disclosure controls and procedures are effective. +Remediation of Previously Identified Material Weakness +As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, our management determined that a material weakness existed in our internal control over financial reporting over the review of the evaluation of our unevaluated oil and gas properties . +We have taken the necessary steps to enhance the underlying control activities, which now include redesigned processes and controls to timely identify the transfer of leasehold costs associated with acreage expirations, lease transfers, and proved reserve additions in conjunction with our current development plans. +Based on the results of management's evaluation, we have concluded that the controls are designed and operating effectively as of December 31, 2020 and, therefore, the previously disclosed material weakness has been remediated. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2020, we added certain key controls related to our ongoing reorganization. +Except as described above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2020, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, +105 +Table of Contents +Index to Financial Statement s +management did not identify and material weakness in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2020. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2020 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2020, as stated in their accompanying report. +/s/ David M. Wood /s/ Quentin Hicks +Name: David M. Wood Name: Quentin Hicks +Title: Chief Executive Officer and President, Director Title: Chief Financial Officer +106 +Table of Contents +Index to Financial Statement s +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (Debtor-in-Possession) (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 5, 2021 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 5, 2021 +107 +Table of Contents +Index to Financial Statement s \ No newline at end of file diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/rp_note.txt b/raw/filings/0000874499/2020/0001628280-21-004026/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..f51d61ceb93050782e59d5a4e8f73e0710f91884 --- /dev/null +++ b/raw/filings/0000874499/2020/0001628280-21-004026/rp_note.txt @@ -0,0 +1,4 @@ +16. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As of December 31, 2020, the Company held approximately 21.5 % of Mammoth Energy's outstanding common stock as discussed above in Note 5 . Approximately $ 0.6 million, and $ 2.0 million of services provided by Mammoth Energy were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2019 and 2018, respectively, with no material amounts for the year ended December 31, 2020. Approximately $ 3.1 million and $ 109.9 million of services provided by Mammoth Energy were capitalized to oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets during the years ended December 31, 2020 and 2019, respectively. At December 31, 2019, the Company owed Mammoth Energy approximately $ 8.4 million related to these services. Amounts owed to Mammoth Energy as of December 31, 2020 were immaterial. +See Note 18 for additional information on litigation proceedings with Mammoth Energy entities. \ No newline at end of file diff --git a/raw/filings/0000874499/2020/0001628280-21-004026/rpt_disclosure.txt b/raw/filings/0000874499/2020/0001628280-21-004026/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/filing.txt b/raw/filings/0000874499/2021/0001628280-22-004445/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..cbbaadb06e319de3336131ff3463d9993b2da11e --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/filing.txt @@ -0,0 +1,2873 @@ +gpor-20211231 +false 0000874499 2021 FY P1Y P3Y P1Y P1Y 0000874499 2021-01-01 2021-12-31 0000874499 2021-06-30 iso4217:USD 0000874499 2022-02-25 xbrli:shares 0000874499 2021-12-31 0000874499 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+Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, $0.0001 par value per share GPOR The New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +Table of Contents +Index to Financial Statements +Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ☒ No ☐ +The aggregate market value of our common stock held by non-affiliates on June 30, 2021 was approximately $ 703.9 million. As of February 25, 2022, there were 21,477,000 shares of our $0.0001 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2022 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +SUMMARY RISK FACTORS +2 +PART I +4 +ITEM 1. +BUSINESS +4 +ITEM 1A. +RISK FACTORS +20 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +37 +ITEM 2. +PROPERTIES +37 +ITEM 3. +LEGAL PROCEEDINGS +37 +ITEM 4. +MINE SAFETY DISCLOSURES +37 +PART II +37 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +37 +ITEM 6. +RESERVED +39 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +39 +RESULTS OF OPERATIONS +42 +LIQUIDITY AND CAPITAL RESOURCES +48 +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +52 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +53 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +56 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +111 +ITEM 9A. +CONTROLS AND PROCEDURES +111 +ITEM 9B. +OTHER INFORMATION +114 +ITEM 9C. +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +114 +PART III +114 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +114 +ITEM 11. +EXECUTIVE COMPENSATION +114 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +114 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +114 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +114 +PART IV +115 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +115 +Signatures +118 +i +Table of Contents +Index to Financial Statements +DEFINITIONS +Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Gulfport,” the “Company” and “Registrant” refer to Gulfport Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in thousands of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K: +2019 Plan. 2019 Amended and Restated Stock Incentive Plan. +2020 Plan. 2020 Incentive Plan, which provides incentive awards for select employees of the Company that were tied to the achievement of one or more performance goals relating to certain financial and operational metrics over a period of time. +2023 Notes. 6.625% Senior Notes due 2023. +2024 Notes. 6.000% Senior Notes due 2024. +2025 Notes. 6.375% Senior Notes due 2025. +2026 Notes. 6.375% Senior Notes due 2026. +ASC. Accounting Standards Codification. +ASU. Accounting Standards Update. +Bankruptcy Code . Chapter 11 of Title 11 of the United States Code. +Bankruptcy Court. The United States Bankruptcy Court for the Southern District of Texas. +Bankruptcy Rules . The Federal Rules of Bankruptcy Procedure. +Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. +Bcf . One billion cubic feet of natural gas. +Bcfe. One billion cubic feet of natural gas equivalent. +Btu . British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels. +Building Loan. Loan agreement for our corporate headquarters scheduled to mature in June 2025. +Chapter 11 Cases. Voluntary petitions filed on November 13, 2020 by Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +CODI . Cancellation of indebtedness income. +Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas, oil and NGL. +Combined Period. Combined Successor Period and Predecessor Period. +DD&A. Depreciation, depletion and amortization. +Debtors. Collectively, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +ii +Table of Contents +Index to Financial Statements +Developed Acreage . The number of acres allocated or assignable to productive wells or wells capable of production. +Development Well . A well drilled within the proved area of a natural gas or crude oil reservoir to the depth of a stratigraphic horizon known to be productive. +DIP Credit Facility. Senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $262.5 million. +Dry Hole . A well that does not produce crude oil and/or natural gas in economically producible quantities. +Exploratory Well . A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area. +Emergence Date . May 17, 2021. +Exit Credit Agreement . The Second Amended and Restated Credit Agreement with the Bank of Nova Scotia as lead administrative agent and various lender parties providing for the Exit Facility and the First-Out Term Loan. +Exit Credit Facility . Collectively, the First-Out Term Loan and the Exit Facility, with an initial borrowing base and elected commitment amount of up to $580 million. +Exit Facility. Senior secured reserve-based revolving credit facility with The Bank of Nova Scotia as the lead arranger and administrative agent and various lender parties. +First-Out Term Loan. Senior secured term loan in an aggregate maximum principal amount of $180 million. +GAAP . Accounting principles generally accepted in the United States of America. +Grizzly. Grizzly Oil Sands ULC. +Grizzly Holdings. Grizzly Holdings Inc. +Gross Acres or Gross Wells . Refers to the total acres or wells in which a working interest is owned. +Guarantors. All existing consolidated subsidiaries that guarantee the Company's revolving credit facility or certain other debt. +Held By Production . Refers to an oil and gas lease continued into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith. +Horizontal Drilling . A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval. +Indentures . Collectively, the 1145 Indenture and the 4(a)(2) Indenture governing the Successor Senior Notes. +IRC . The Internal Revenue Code of 1986, as amended. +LIBOR. London Interbank Offered Rate. +LOE. Lease operating expenses. +MBbl. One thousand barrels of crude oil, condensate or natural gas liquids. +Mcf . One thousand cubic feet of natural gas. +Mcfe. One thousand cubic feet of natural gas equivalent. +MMBbl. One million barrels of crude oil, condensate or natural gas liquids. +MMBtu. One million British thermal units. +MMcf. One million cubic feet of natural gas. +MMcfe. One million cubic feet of natural gas equivalent. +iii +Table of Contents +Index to Financial Statements +Natural Gas Liquids (NGL). Hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include ethane, propane, butane, isobutene, pentane, hexane and natural gasoline. +Net Acres or Net Wells . Refers to the sum of the fractional working interests owned in gross acres or gross wells. +Net Revenue Interest (NRI). An interest in an oil and natural gas property entitling the owner to a share of oil, natural gas or NGL production. +New Common Stock . $0.0001 par value common stock issued by the Successor on the Emergence Date. +New Credit Facility . The Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. as administrative agent and various lender parties, providing for a new money senior secured reserve-based revolving credit facility effective as of October 14, 2021. +New Preferred Stock . $0.0001 par value preferred stock issued by the Successor on the Emergence Date. +NYMEX. New York Mercantile Exchange. +OCC. Oklahoma Corporation Commission. +Petition Date . November 13, 2020. +Plan . The Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and Its Debtor Subsidiaries. +Predecessor Period . Period from January 1, 2021 through May 17, 2021. +Predecessor Senior Notes. Collectively, the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes. +Pre-Petition Revolving Credit Facility . Senior secured revolving credit facility, as amended, with The Bank of Nova Scotia as the lead arranger and administrative agent and certain lenders from time-to-time party thereto with a maximum facility amount of $580 million. +Productive Well . A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes. +Proved Developed Reserves (PDPs) . Reserves expected to be recovered through existing wells with existing equipment and operating methods. +Proved Reserves . Quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +Proved Undeveloped Reserves (PUDs). Proved reserves expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. +PV-10. Present net value of estimated future net revenues, discounted at 10%. +Repurchase Program . A stock repurchase program to acquire up to $100 million of Gulfport's outstanding New Common Stock. It is authorized to extend through December 31, 2022, and may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. +Reservoir . A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. +iv +Table of Contents +Index to Financial Statements +Royalty Interest . Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property. +RSA . Restructuring Support Agreement. +SCOOP . Refers to the South Central Oklahoma Oil Province, a term used to describe a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. Our acreage is primarily in Garvin, Grady and Stephens Counties. +SEC . The United States Securities and Exchange Commission. +Section 382. Internal Revenue Code Section 382. +Standardized Measure. Standardized measure of discounted future net cash flows. +Successor Period . Period from May 18, 2021 through December 31, 2021. +Successor Senior Notes . 8.000% Senior Notes due 2026. +Tcfe . One trillion cubic feet of natural gas equivalent. +Undeveloped Acreage . Lease or mineral acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas. +USEPA. United States Environmental Protection Agency. +Utica . Refers to the Utica Play that includes the hydrocarbon bearing rock formations commonly referred to as the Utica formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio. +Working Interest (WI). The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. +WTI. Refers to West Texas Intermediate. +v +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as the expected impact of the novel coronavirus disease (COVID-19) pandemic on our business, our industry and the global economy, estimated future production and net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), the impact of our emergence from bankruptcy, share repurchases, business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +Investors should note that we announce financial information in SEC filings. We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Index to Financial Statements +SUMMARY RISK FACTORS +Financial, Liquidity and Commodity Price Risks +• Natural gas, oil and NGL prices fluctuate widely, and lower prices for extended time periods are likely to have a material adverse effect on our business. +• Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +• Our debt and other financial commitments may limit our financial and operating flexibility. +• Our development, acquisition and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +• Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +• A change of control could limit our use of net operating losses to reduce future taxable income. +Industry, Business and Operational Risks +• The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +• If we are not able to replace reserves, we may not be able to sustain production. +• The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +• Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +• Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +• Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +• Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +• Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +• We are not the operator of all our oil and natural gas properties and therefore are not positioned to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +• Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +• Substantially all of our producing properties are located in Eastern Ohio and Oklahoma, making us vulnerable to risks associated with operating in only these regions. +• The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +• The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +• Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +• We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +2 +Table of Contents +Index to Financial Statements +• The outbreak of the novel coronavirus, or COVID-19, has affected and may materially adversely affect, and any future outbreak of any other highly infectious or contagious diseases may materially adversely affect, our operations, financial performance and condition, operating results and cash flows. +• A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +• Terrorist activities could materially and adversely affect our business and results of operations. +• Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +• We may engage in acquisition and divestiture activities that involve substantial risks. +Legal and Regulatory Risks +• We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +• Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +• Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +• Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +Risks Associated with our Emergence from Bankruptcy +• We recently emerged from bankruptcy, which may adversely affect our business and relationships. +• Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information because of the implementation of the Plan and the transactions contemplated thereby. +• Upon emergence from bankruptcy, the composition of our board of directors changed significantly. +Risks Associated with an Investment in Us +• The market price of our securities is subject to volatility. +• Future sales or the availability for sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and could impair our ability to raise capital through future sales of equity securities. +• Certain of our stockholders own a significant portion of our outstanding debt and equity securities, and their interests may not always coincide with the interests of other holders of the New Common Stock. +• There may be future dilution of our common stock, which could adversely affect the market price of our common stock. +• Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +3 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in Eastern Ohio, where we target development in what is commonly referred to as the Utica formation, and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations. Gulfport's predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2021, we had 3.9 Tcfe of proved reserves with a Standardized Measure of $4.1 billion and a PV-10 of $4.3 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Although we are no longer a debtor-in-possession, we operated as debtors-in-possession through the pendency of the Chapter 11 Cases. See Note 2 and Note 3 of our consolidated financial statements for a complete discussion of the Chapter 11 Cases. +We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger company, built to generate sustainable free cash flow, with a strengthened balance sheet. As a result of the Chapter 11 Cases, we reduced our total indebtedness by $1.4 billion by issuing equity in a reorganized entity to the holders of our unsecured notes and allowed general unsecured claimants. In addition, Gulfport reassessed its organizational needs post emergence and significantly reduced its general and administrative expense to ensure its cost structure is competitive with industry peers. We continue to focus on optimizing development of our resource plays, reducing our operating costs, per well drilling costs, general and administrative costs, and managing our liquidity. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet and return capital to shareholders. +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in an environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital expenditures to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +4 +Table of Contents +Index to Financial Statements +2022 Outlook +Our 2022 capital expenditure program is expected to be in a range of $340 million to $380 million. We plan to operate on average approximately one operated rig in each of our Utica and SCOOP development areas. In the Utica, we intend to spud 15 gross (13.4 net) operated horizontal wells, complete drilling on 24 gross (21.7 net) operated horizontal wells and commence sales on 17 gross (15.6 net) horizontal wells. In the SCOOP, we intend to spud five gross (3.6 net) operated horizontal wells, complete drilling on 8 gross (5.5 net) operated horizontal wells and commence sales on 13 gross (10.3 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our revolving credit agreement. +We expect this drilling program to result in approximately 975 to 1,025 MMcfe per day of production in 2022. +Additionally, in 2022, we expect to focus on our strategy of returning capital to our shareholders. In the fourth quarter of 2021, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock and we paid our first cash dividend payment on our New Preferred Stock. +Operating Areas +Utica - The Utica covers hydrocarbon bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 187,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During the Combined Period, we produced approximately 772 MMcfe per day net to our interests in this area and it accounts for approximately 77% of our total production. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 74,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 33,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During the Combined Period, we produced approximately 231 MMcfe per day net to our interests in this area and it accounts for approximately 23% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2021, with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2021 +Oil +(MMBbl) Natural +Gas +(Bcf) NGL (MMBbl) Total (Bcfe) +Utica +Proved developed 2 1,482 9 1,550 +Proved undeveloped 4 1,073 4 1,123 +Total proved 7 2,555 13 2,673 +SCOOP +Proved developed 6 445 22 613 +Proved undeveloped 4 477 18 610 +Total proved 10 921 40 1,223 +Total +Proved developed (1) +8 1,928 31 2,165 +Proved undeveloped 8 1,550 22 1,733 +Total proved 16 3,478 54 3,898 +Totals may not sum or recalculate due to rounding. +(1) Includes approximately 2 Bcfe of net reserves located in non-core operating districts. +Successor +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 4,649 $ 3,585 $ 8,234 +Present value of estimated future net revenue (PV-10) (1) +$ 2,655 $ 1,660 $ 4,316 +Standardized measure (1) +$ 4,138 +Totals may not sum due to rounding. +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2021, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2021. The prices used in our PV-10 measure were $66.55 per barrel and $3.60 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2021. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $178 million as of December 31, 2021. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Index to Financial Statements +Proved Reserves +Estimates of proved reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2021 (in Bcfe): +Proved Reserves, December 31, 2020 (Predecessor) 2,588 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 695 +Revisions of prior reserve estimates 982 +Current production (366) +Proved Reserves, December 31, 2021 (Successor) 3,898 +Total may not sum due to rounding. +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of minerals in place during a period. During 2021, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 694.6 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 29 PUD locations in our Utica acreage for 352.2 Bcfe and 34 PUD locations in our SCOOP acreage for 342.2 Bcfe. The five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total upward revisions of 982.2 Bcfe in estimated proved reserves, of which 889.2 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2021 and the 12-month average price for natural gas increased from $1.99 per MMBtu for 2020 to $3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $15.40 per barrel for 2020 to $31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $39.54 per barrel for 2020 to $66.55 per barrel for 2021. +Upward revisions of 157.6 Bcfe were a result of a combination of well performance, operating and development cost improvements and working interest changes. A small downward revision of 64.6 Bcfe was also experienced as a result of the exclusion of 4 PUD locations in our Utica field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow and ongoing optimization of our development plan. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2021, 2020 and 2019 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +7 +Table of Contents +Index to Financial Statements +Proved Undeveloped Reserves (PUDs) +As of December 31, 2021, our proved undeveloped reserves totaled 1,550 Bcf of natural gas, 8 MMBbl of oil and 22 MMBbl of NGL, for a total of 1,733 Bcfe. Approximately 65% and 35% of our PUD reserves at year-end 2021 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2021 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2020 (Predecessor) 1,061 +Extensions and discoveries 694 +Conversion to proved developed reserves (362) +Revisions of prior reserve estimates 341 +Proved Undeveloped Reserves, December 31, 2021 (Successor) 1,733 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 694.4 Bcfe were primarily attributed to the addition of 29 PUD drilling locations in the Utica field and 34 PUD drilling locations in the SCOOP field as a result of our current five-year development plan that is focused on generating sustainable cash flow. +Conversion to proved developed reserves. Our 2021 development activities resulted in the conversion of approximately 362.4 Bcfe into proved developed producing reserves, attributable to 12 PUD locations in the Utica field and 11 PUD locations in the SCOOP field. These 23 PUDs represent a conversion rate of 28% for 2021. +Revision of prior reserve estimates. We experienced total upward revisions of 340.8 Bcfe in estimated proved undeveloped reserves, of which 340.8 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $1.99 per MMBtu for 2020 to $3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $15.40 per barrel for 2020 to $31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $39.54 per barrel for 2020 to $66.55 per barrel for 2021. +We also experienced 67.6 Bcfe of downward revisions as a result of the exclusion of 4 PUD locations in our Utica field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. These downward revisions were offset by upward revisions of 67.6 Bcfe in estimated proved reserves from a combination of working interest changes, well development design updates and operating and development cost improvements. +Costs incurred relating to the development of PUDs were approximately $268.1 million in 2021. +All PUD drilling locations included in our 2021 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2021, 0.01% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2021, 2020 and 2019 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +8 +Table of Contents +Index to Financial Statements +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geoscience staff has approximately 85 years combined industry experience and our reservoir staff has approximately 75 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our board of directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our December 31, 2021 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for the period January through December 2021 of $66.55 per barrel and $3.60 per MMBtu. Holding production and development costs constant, if SEC pricing were $73.21 per barrel and $3.96 per MMBtu, or a 10% increase, this would have resulted in an increase of 16.2 Bcfe of our total proved reserves and a $787 million increase in PV-10 value at December 31, 2021. Holding production and development costs constant, if SEC pricing were $59.90 per barrel and $3.24 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 23.8 Bcfe of our total proved reserves and a $787 million decrease in PV-10 value at December 31, 2021. For each of these scenarios, the 139 PUDs that were economic at SEC pricing were included. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2021: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica 127,590 101,979 91,033 85,330 +SCOOP 49,104 34,934 7,959 5,673 +Other 1,021 395 4,377 1,253 +Total 177,715 137,308 103,369 92,256 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2021: +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31: +2022 15,960 14,494 +2023 13,937 13,045 +2024 261 253 +After 2024 2,637 2,565 +Held by production or operations 70,342 61,667 +Total (1) +103,137 92,024 +(1) Does not include acreage not subject to expiration. +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2021: +Average NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica 48.75/59.71 147 42.8 514 352.0 661 394.7 +SCOOP 23.17/28.80 105 16.7 516 161.8 621 178.6 +Other Various 20 1.3 8 0.1 28 1.4 +Total (1) +331 60.8 1,141 513.9 1,472 574.7 +(1) We also have override/royalty interests in 162 wells with an average NRI of 0.5%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2021 2020 2019 +Gross Net Gross Net Gross Net +Development: +Productive 29 26.6 26 24.4 25 22.4 +Dry — — — — — — +Total 29 26.6 26 24.4 25 22.4 +Exploratory: +Productive — — — — 1 0.8 +Dry — — — — — — +Total — — — — 1 0.8 +The following table presents activity by operating area for the year ended December 31, 2021: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +20 18.9 17 17.0 — — — — +SCOOP (2) +9 7.7 11 9.4 25 1.77 21 0.05 +Total 29 26.6 28 26.4 25 1.77 21 0.05 +_____________________ +(1) Of the 20 gross wells drilled in 2021, 10 were completed as producing wells, nine were in various stages of drilling and one was waiting on completion as of December 31, 2021. +(2) Of the nine gross wells drilled in 2021, four were in various stages of drilling and five were in various stages of completion as of December 31, 2021. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Natural gas sales +Natural gas production volumes (MMcf) 208,641 124,279 332,921 344,999 458,178 +Natural gas production volumes (MMcf/d) 915 907 912 943 1,255 +Total sales $ 906,096 $ 344,390 $ 1,250,486 $ 671,535 $ 1,135,381 +Avg. price without the impact of derivatives ($/Mcf) $ 4.34 $ 2.77 $ 3.76 $ 1.95 $ 2.48 +Impact from settled derivatives ($/Mcf) (1) +$ (1.44) $ (0.03) $ (0.91) $ 0.33 $ 0.23 +Avg. price, including settled derivatives ($/Mcf) $ 2.90 $ 2.74 $ 2.85 $ 2.28 $ 2.71 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,167 531 1,699 1,803 2,186 +Oil and condensate production volumes (MBbl/d) 5 4 5 5 6 +Total sales $ 81,347 $ 29,106 $ 110,453 $ 62,902 $ 117,937 +Avg. price without the impact of derivatives ($/Bbl) $ 69.71 $ 54.81 $ 65.01 $ 34.88 $ 53.95 +Impact from settled derivatives ($/Bbl) $ (8.33) $ — $ (5.72) $ 25.76 $ 1.86 +Avg. price, including settled derivatives ($/Bbl) $ 61.38 $ 54.81 $ 59.29 $ 60.64 $ 55.81 +NGL sales +NGL production volumes (MBbl) 2,658 1,211 3,869 3,964 5,074 +NGL production volumes (MBbl/d) 12 9 11 11 14 +Total sales $ 105,141 $ 36,780 $ 141,921 $ 66,814 $ 101,448 +Avg. price without the impact of derivatives ($/Bbl) $ 39.56 $ 30.37 $ 36.68 $ 16.86 $ 19.99 +Impact from settled derivatives ($/Bbl) (2) +$ (4.88) $ — $ (3.35) $ (0.04) $ 2.79 +Avg. price, including settled derivatives ($/Bbl) $ 34.68 $ 30.37 $ 33.33 $ 16.82 $ 22.78 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 231,594 134,735 366,329 379,600 501,742 +Natural gas equivalents (MMcfe/d) 1,016 983 1,004 1,037 1,375 +Total sales $ 1,092,584 $ 410,276 $ 1,502,860 $ 801,251 $ 1,354,766 +Avg. price without the impact of derivatives ($/Mcfe) $ 4.72 $ 3.05 $ 4.10 $ 2.11 $ 2.70 +Impact from settled derivatives ($/Mcfe) $ (1.39) $ (0.02) $ (0.89) $ 0.42 $ 0.24 +Avg. price, including settled derivatives ($/Mcfe) $ 3.33 $ 3.03 $ 3.21 $ 2.53 $ 2.94 +Production Costs: +Avg. lease operating expenses ($/Mcfe) $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.15 +Avg. taxes other than income ($/Mcfe) $ 0.13 $ 0.09 $ 0.12 $ 0.08 $ 0.08 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.92 $ 1.20 $ 1.02 $ 1.20 $ 1.01 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.19 $ 1.43 $ 1.28 $ 1.42 $ 1.24 +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2021: +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Utica +Net production +Natural gas (MMcf) 166,906 106,968 273,874 291,133 387,473 +Oil (MBbl) 220 183 403 393 247 +NGL (MBbl) 562 361 924 1,077 1,812 +Total (MMcfe) 171,598 110,235 281,833 299,955 399,828 +Avg. price without the impact of derivatives: +Natural gas ($/Mcf) $ 4.33 $ 2.64 $ 3.67 $ 1.97 $ 2.28 +Oil ($/Bbl) $ 66.94 $ 52.43 $ 60.35 $ 33.41 $ 51.11 +NGL ($/Bbl) $ 47.16 $ 37.21 $ 43.27 $ 18.55 $ 19.74 +Production costs: +Avg. lease operating expenses ($/Mcfe) $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.12 +Avg. taxes other than income ($/Mcfe) $ 0.07 $ 0.06 $ 0.07 $ 0.07 $ 0.07 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.98 $ 1.26 $ 1.09 $ 1.29 $ 1.07 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.18 $ 1.45 $ 1.29 $ 1.49 $ 1.26 +SCOOP +Net production +Natural gas (MMcf) 41,724 17,302 59,026 53,853 70,669 +Oil (MBbl) 933 344 1,276 1,392 1,610 +NGL (MBbl) 2,095 849 2,945 2,886 3,261 +Total (MMcfe) 59,893 24,461 84,353 79,519 99,891 +Avg. price without the impact of derivatives: +Natural gas ($/Mcf) $ 4.40 $ 3.59 $ 4.16 $ 1.83 $ 2.13 +Oil ($/Bbl) $ 70.37 $ 56.05 $ 66.51 $ 35.31 $ 53.32 +NGL ($/Bbl) $ 37.51 $ 27.46 $ 34.61 $ 16.23 $ 20.13 +Production costs: +Avg. lease operating expenses ($/Mcfe) $ 0.17 $ 0.22 $ 0.19 $ 0.18 $ 0.18 +Avg. taxes other than income ($/Mcfe) $ 0.29 $ 0.20 $ 0.26 $ 0.10 $ 0.14 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.74 $ 0.90 $ 0.78 $ 0.86 $ 0.80 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.20 $ 1.32 $ 1.23 $ 1.14 $ 1.12 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2021, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2021. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to continued dilution of our equity ownership interest in Grizzly. Upon emergence from bankruptcy, we determined that we no longer had the ability to exercise significant influence over operating and financial policies of Grizzly. As such, we discontinued equity method of accounting for our investment in Grizzly. +13 +Table of Contents +Index to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the Successor Period, Predecessor Period, and years ended December 31, 2020 and 2019 were as follows: +% of Sales +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Year Ended December 31, 2020 (Predecessor) +ECO-Energy 12 % +Year Ended December 31, 2019 (Predecessor) +Morgan Stanley Capital 14 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors and service providers, to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Index to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders in part led to the US again depositing an instrument of acceptance of the Paris Agreement, created in 2015 during the United Nations (“U.N.”) Climate Change Conference, which thereafter re-entered into force for the US on February 19, 2021. The Paris Agreement requires countries to review and “represent a progression” in their nationally determined contributions, which set emissions reduction goals, every five years beginning in 2020. The terms of the Paris Agreement and the executive orders are expected to result in +15 +Table of Contents +Index to Financial Statements +additional regulations or changes to existing regulations, which could have a material adverse effect on our business. In addition, incentives to conserve energy or use alternative energy sources could have a negative impact on our business. The executive orders and international accord may result in the development of additional regulations or changes to existing regulations. Failure to comply with laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. +Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +16 +Table of Contents +Index to Financial Statements +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2021 and 2020 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2021, we had 212 employees, a reduction from 256 employees the previous year. The reduction was due to the rightsizing of our organization through a controlled hiring program and a small reduction in workforce in August of 2021. All of our employees are non-bargaining. Attraction and retention of people remains one of the highest strategic goals of the organization. We remain focused on the retention and development of existing employees, as their continued commitment is critical to our success. +During 2021, we continued to adapt to the changing nature of the COVID-19 pandemic, by regularly assessing COVID-19 employee protocols, minimizing the numbers of people in our offices at times, conducting daily health screenings for all employees and visitors, and completing thorough contact tracing. These efforts helped protect the safety of employees, minimize the risk of transmission at Gulfport locations and keep our operations online with minimal disruption. +Inclusion & Diversity +During 2021, we continued to work on the diversity and inclusion projects that we announced in 2020 and held peer-led, small group discussions for all employees aimed at understanding how they view diversity and ways we could continue to focus on it in a meaningful way going forward. Based partly on feedback from those discussions, the Company delivered an unconscious bias training program for all employees to better help them understand themselves and how they view those around them. The results of these efforts have been overwhelmingly positive and have positioned us to further our diversity and inclusion initiatives in 2022 and beyond. +During 2021, our Board of Directors completely turned over as a result of the bankruptcy process and is now comprised of 40% of highly qualified diverse candidates as of the end of 2021. While 2021 was a year in which we again added very few new employees, approximately 29% of our newly hired employees were diverse hires. We are committed to evaluating our hiring and promotion practices to make sure that a diversity and inclusion mindset is considered and included throughout the Company. +In 2021, many Gulfport policies were added or revised, and a new Business Code of Conduct and Ethics training was provided to all employees. We are committed to maintaining the highest standards of business ethics and the employee training provided a clear review of our expectations. +17 +Table of Contents +Index to Financial Statements +Health, Safety & Environment (HSE) +Safety is at the forefront of everything we do. We have a robust annual training program, which includes environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings to highlight potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity for 2021. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our Work Safe Program and provided training to leaders on reinforcement strategies. Additionally, we launched the Work Green program in 2021, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and by providing training and development opportunities. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We continue to provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +Timothy J. Cutt, Chief Executive Officer and Chairman of the Board +Mr. Cutt, 61, joined Gulfport as the Interim Chief Executive Officer in May 2021, and assumed the role of Chief Executive Officer in September 2021. Mr. Cutt is a Petroleum Engineer with 38 years of energy experience. He served as Chief Executive Officer and as a director of QEP Resources from January 2019 to March 2021. Prior to joining QEP, Mr. Cutt was the Chief Executive Officer and a director of Cobalt International Energy from 2016 to 2018. Previously, Mr. Cutt held several executive positions with BHP Billiton before serving as President of the Petroleum Division from 2013 to 2016. During this time, he was also a member of BHP Billiton’s Corporate Leadership Team. Mr. Cutt began his career with Mobil and worked for ExxonMobil for 24 years and served in various management roles including President of ExxonMobil de Venezuela, President ExxonMobil Canada Energy and President Hibernia Management & Development Company. Mr. Cutt served as a board member of the American Petroleum Institute (API) from 2013 to 2018. +William J. Buese, Chief Financial Officer +Mr. Buese, 50, joined Gulfport as the Chief Financial Officer in May 2021. Most recently, Mr. Buese served as Vice President, Chief Financial Officer and Treasurer of QEP Resources from January 2020 to March 2021. He joined QEP Resources in 2012 and held positions of increasing responsibility over a nine-year period, including Vice President of Finance and Treasurer and Director of Finance. Prior to joining QEP, Mr. Buese was Director of Finance at MarkWest Energy Partners, LP and served in various finance, treasury, accounting and investor relations roles from 2005 to 2012. Mr. Buese holds over 16 years of financial expertise in the energy industry and more than 25 years of financial experience overall. Mr. Buese received his Bachelor of Arts degree in Accounting from Michigan State University and Master of Science degree in Information Systems from the University of Colorado Denver. +Patrick K. Craine, Chief Legal and Administrative Officer +Mr. Craine, 49, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as +18 +Table of Contents +Index to Financial Statements +Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 49, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager at Noble Energy, Inc. Prior to joining Noble in 2007, he spent over 17 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +RJ Moses, Senior Vice President of Operations and Drilling +Mr. Moses, 42, has served as Senior Vice President of Operations and Drilling since March 2020 and joined Gulfport Energy as the Vice President of Operations, Appalachia in August 2019. Prior to joining the Company, Mr. Moses spent over 15 years at Noble Energy, Inc., where he most recently served as a Director of Operations for Noble’s Eagleford and Denver-Julesburg (DJ) business units, managing approximately one-third of Noble’s total production at the time. Prior to that, he held various leadership roles including Operations Manager for Noble’s Marcellus business unit along with several international roles including Asset Manager for the Tamar asset (offshore Israel), Project Manager for West Africa subsea development and Lead Reservoir Engineer for West Africa. In addition, Mr. Moses served as a Senior Financial Analyst in the International division and also spent four years as an international drilling and completion engineer for Noble. Mr. Moses graduated from Texas A&M University with a Bachelor of Science degree in Petroleum Engineering and holds a Master of Business Administration degree from Texas Christian University. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Index to Financial Statements +ITEM 1A. RISK FACTORS +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a summary of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Financial, Liquidity and Commodity Price Risks +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low oil, natural gas and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2020, West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $(36.98) to $63.27 per barrel and the Henry Hub spot market price of natural gas ranged from $1.33 to $3.14 per MMBtu. During 2021, WTI prices ranged from $47.47 to $85.64 per barrel and the Henry Hub spot market price of natural gas ranged from $2.43 to $23.86 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• the level of prices, and expectations about future prices, of oil and natural gas; +• changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the expected rates of declining current production; +• the price and availability of alternative fuels; +• technological advances affecting energy consumption; +• risks associated with operating drilling rigs; +• the effectiveness of worldwide conservation measures; +• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• the price and level of foreign imports; +• the nature and extent of domestic and foreign governmental regulations and taxes; +• the ability of the members of the Organization of Petroleum Exporting Countries and others to agree to and maintain oil price and production controls; +• political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• weather conditions; +• acts of terrorism; and +20 +Table of Contents +Index to Financial Statements +• domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2022 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2023 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We also may be unable to mitigate price volatility due to our exposure to long-dated call options and restrictions in our credit facility. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the London Interbank Offered Rate. At December 31, 2021, amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 3.19%. A 1% increase in the average interest rate would increase our interest expense by approximately $2 million based on outstanding borrowings under our revolving credit facility at December 31, 2021. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2021, we did not hedge our interest rate risk. +We have exposure to LIBOR through credit agreements. Certain tenors of LIBOR began being phased out in late 2021, with full discontinuation planned for mid-2023. We believe the rate selected as the preferred alternative to LIBOR will be an acceptable replacement rate when LIBOR is fully discontinued. However, we are still currently evaluating the impact of any such potential benchmark replacements or unavailability of LIBOR. In addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Uncertainty as to the nature of such potential phase-out and alternative benchmark rates or disruption in the financial markets could materially and adversely affect our financial condition, results of operations and cash flows. +Our debt and other financial commitments may limit our financial and operating flexibility. +Our total principal debt was approximately $714 million at December 31, 2021. We also had various commitments for leases, drilling contracts, derivative contracts, firm transportation, and purchase obligations for services, products and +21 +Table of Contents +Index to Financial Statements +properties. Our financial commitments could have important consequences to our business, including, but not limited to, limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, to pay dividends, to repurchase shares of our common and preferred stock, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to make payments on our debt or to comply with restrictive terms of our debt. Higher levels of debt may make us more vulnerable to general adverse economic and industry conditions. Additionally, the agreement governing our credit facility and the indentures governing our senior notes contain a number of covenants that impose constraints on us, including requirements to comply with certain financial covenants and restrictions on our ability to dispose of assets, make certain investments, incur liens and additional debt, and engage in consolidations, mergers and acquisitions. If commodity prices decline and we reduce our level of capital spending and production declines or we incur additional impairment expense or the value of our proved reserves declines, we may not be able to incur additional indebtedness, may need to repay outstanding indebtedness and may not be in compliance with the financial covenants in our debt instruments in the future. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K and Note 6 of our consolidated financial statements for more information regarding the financial covenants and our revolving credit agreement. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2022 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies. +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of +22 +Table of Contents +Index to Financial Statements +oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting oil and NGLs to one MCF of natural gas at the ratio of six Mcf of natural gas to one barrel of oil. +Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the unweighted arithmetic average of the closing prices on the first day of each month for the 12-month period ending at the balance sheet date, adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash write-down is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. Future non-cash asset impairments could negatively affect our results of operations. +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2021, we had a net operating loss, or NOL, carryforward of approximately $1.4 billion for federal income tax purposes. If we were to experience an “ownership change,” as determined under IRC Section 382, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. +Emergence from Chapter 11 bankruptcy proceedings resulted in an ownership change for purposes of IRC Section 382. We currently expect to apply rules under IRC Section 382(l)(5) that would allow us to mitigate the limitations imposed under IRC Section 382 with respect to our NOLs that existed at the time of such ownership change. However, if we were to experience a second ownership change, then our ability to utilize our NOLs could potentially be subject to a more restrictive limitation under IRC Section 382. +Industry, Business and Operational Risks +The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including, but not limited to, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and, due to our debt levels and other factors, may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively +23 +Table of Contents +Index to Financial Statements +may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +If we are not able to replace reserves, we may not be able to sustain production. +Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful development, exploration or acquisition activities, our proved reserves and production will decline over time. Thus, our future oil and natural gas reserves and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing our current reserves and economically finding or acquiring additional recoverable reserves. +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +As of December 31, 2021, approximately 44% of our total estimated proved reserves were PUDs and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. You should be aware that the estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2021 present value is based on a $3.60 per MMBtu of gas price and a $66.55 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. Any changes in demand for oil and natural gas, governmental regulations or taxation will also affect the future net cash flows from our production. In +24 +Table of Contents +Index to Financial Statements +addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire significant amounts of unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or cancelled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of +25 +Table of Contents +Index to Financial Statements +the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Although 80% of our Utica acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 20% of our Utica acreage not held by production, 39% will be subject to expiration in 2022, 35% in 2023, 8% in 2024 and 18% thereafter, although a portion of our Utica leases generally grant us the right to extend these leases for an additional five-year period. Although 99% of our SCOOP acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 1% of our SCOOP acreage not held by production, 17% will be subject to expiration in 2022, 6% in 2023, 77% in 2024 and none thereafter. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and natural gas operating activities are subject to numerous costs and risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. Drilling for oil, natural gas and NGL can be unprofitable, not only from dry holes, but from productive wells that do not return a profit because of insufficient revenue from production or high costs. Substantial costs are required to locate, acquire and develop oil and gas properties, and we are often uncertain as to the amount and timing of those costs. Our cost of drilling, completing, equipping and operating wells is often uncertain before drilling commences. Declines in commodity prices and overruns in budgeted expenditures are common risks that can make a particular project uneconomic or less economic than forecasted. While both exploratory and developmental drilling activities involve these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. For the 9% of our daily production volumes from properties which we did not serve as operator as of December 31, 2021, we are dependent on the operator for operational and regulatory compliance. In addition, our oil and gas properties can become damaged, our operations may be curtailed, delayed or cancelled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• loss of drilling fluid circulation; +• equipment failures or accidents; +26 +Table of Contents +Index to Financial Statements +• fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +• adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures; +• issues with title or in receiving governmental permits or approvals; +• restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets; +• environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• shortages or delays in the availability of services or delivery of equipment; and +• unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, cybersecurity breaches, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +We utilize multi-well pad drilling where practical. For example, in the Utica we drill multiple wells from a single pad. Wells drilled on a pad are not turned to sales until all wells on the pad are drilled and cased and the drilling rig is moved from the location. In addition, existing wells that offset newly drilled wells may be temporarily shut-in during the drilling and completion process. As a result, multi-well pad drilling delays the completion of wells and the commencement of production from new wells, and may negatively affect the production from existing offset wells, all of which may cause volatility in our operating results from period to period. Finally, delays in completion of wells may impact planned conversion of PUD reserves to PDP reserves. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• the timing and amount of capital expenditures; +• the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• the operator's expertise and financial resources; +• approval of other participants in drilling wells; +• selection of technology; and +27 +Table of Contents +Index to Financial Statements +• the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids. +Substantially all of our producing properties are located in Eastern Ohio and Oklahoma, making us vulnerable to risks associated with operating in only these regions. +Our largest fields by production are located in Eastern Ohio and Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the Predecessor Period and Successor Period accounted for approximately 14% and 20%, respectively, of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of and increased costs for drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities +28 +Table of Contents +Index to Financial Statements +and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +With respect to our Utica acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica and the other areas in which we operate. Until this new capacity is available, we may experience delays in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +We have contracts with some of our third-party service providers for gathering, processing and transportation services with minimum volume delivery commitments under which we are obligated to pay certain fees on minimum volumes regardless of actual volume throughput. As of December 31, 2021, our aggregate long-term contractual obligation under these agreements was approximately $1.8 billion. These fees could be significant and may have a material adverse effect on our results of operations. +The outbreak of the novel coronavirus, or COVID-19, has affected and may materially adversely affect, and any future outbreak of any other highly infectious or contagious diseases may materially adversely affect, our operations, financial performance and condition, operating results and cash flows. +The recent outbreak of COVID-19 has affected, and may materially adversely affect, our business and financial and operating results. The severity, magnitude and duration of the current COVID-19 outbreak is uncertain, rapidly changing and hard to predict. In 2021, the outbreak has significantly impacted economic activity and markets around the world, and COVID-19 or another similar outbreak could negatively impact our business in numerous ways, including, but not limited to, the following: +• our revenue may be reduced if the outbreak results in an economic downturn or recession, as many experts predict, to the extent it leads to a prolonged decrease in the demand for natural gas and, to a lesser extent, NGL and oil; +• our operations may be disrupted or impaired, thus lowering our production level, if a significant portion of our employees or contractors are unable to work due to illness or if our field operations are suspended or temporarily shut-down or restricted due to control measures designed to contain the outbreak; +• the operations of our midstream service providers, on whom we rely for the transmission, gathering and processing of a significant portion of our produced natural gas, oil and NGL, may be disrupted or suspended in response to containing the outbreak, and/or the difficult economic environment may lead to the bankruptcy or closing of the facilities and infrastructure of our midstream service providers, which may result in substantial discounts in the prices we receive for our produced natural gas, oil and NGL or result in the shut-in of producing wells or the delay or discontinuance of development plans for our properties; and +29 +Table of Contents +Index to Financial Statements +• the disruption and instability in the financial markets and the uncertainty in the general business environment may affect our ability to execute on our business strategy, including our focus on reducing our leverage profile. If we are not able to successfully execute our plan to reduce our leverage profile, our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including their restrictive covenants, could result in a default under our revolving credit facility or the indentures governing our senior notes. Additionally, our credit ratings may be lowered, we may reduce or delay our planned capital expenditures or investments, and we may revise or delay our strategic plans. +We expect that the principal areas of operational risk for us are availability of service providers and supply chain disruption, which has recently become more acute. Active development operations, including drilling and fracking operations, represent the greatest risk for transmission given the number of personnel and contractors on site. While we believe that we are following best practices under COVID-19 guidance, the potential for transmission still exists. In certain instances, it may be necessary or determined advisable for us to delay development operations. +In addition, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, we may experience difficulty accessing the capital or financing needed to fund our exploration and production operations, which have substantial capital requirements, or refinance our upcoming maturities on satisfactory terms or at all. We typically fund our capital expenditures with existing cash and cash generated by operations (which is subject to a number of variables, including many beyond our control) and, to the extent our capital expenditures exceed our cash resources, from borrowings under our revolving credit facility and other external sources of capital. If our cash flows from operations or the borrowing capacity under our revolving credit facility are insufficient to fund our capital expenditures and we are unable to obtain the capital necessary for our planned capital budget or our operations, we could be required to curtail our operations and the development of our properties, which in turn could lead to a decline in our reserves and production, and could adversely affect our business, results of operations and financial position. +To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks set forth in Item 1A., “Risk Factors” in our Annual Report on Form 10-K, such as those relating to our financial performance and debt obligations. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments that we are not able to predict, including the length of time that the pandemic continues, its effect on the demand for natural gas, NGL and oil, the response of the overall economy and the financial markets as well as the effect of governmental actions taken in response to the pandemic. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +30 +Table of Contents +Index to Financial Statements +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyber-attack involving our information systems and related infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +We may engage in acquisition and divestiture activities that involve substantial risks. +We may make acquisitions that complement or expand our current areas of operations. If we are unable to make attractive acquisitions, our future growth could be limited. Furthermore, even if we do make acquisitions, they may not result in an increase in our cash flow from operations or otherwise result in the benefits anticipated due to various risks, including, but not limited to: +• mistaken estimates or assumptions about reserves, potential drilling locations, revenues and costs, including synergies and the overall costs of equity or debt; +• difficulties in integrating the operations, technologies, products and personnel of the acquired assets or business; and +• unknown and unforeseen liabilities or other issues related to any acquisition for which contractual protections prove inadequate, including environmental liabilities and title defects. +In addition, from time to time, we may sell or otherwise dispose of certain of our properties or businesses as a result of an evaluation of our asset portfolio or to help enhance our liquidity. These transactions also have inherent risks, including possible delays in closing, the risk of lower-than-expected sales proceeds for the disposed assets or businesses and potential post-closing claims for indemnification. Moreover, volatility in commodity prices may result in fewer potential bidders, unsuccessful sales efforts and a higher risk that buyers may seek to terminate a transaction prior to closing. +Legal and Regulatory Risks +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or +31 +Table of Contents +Index to Financial Statements +conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. In addition, we may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the OCC issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of +32 +Table of Contents +Index to Financial Statements +regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane and incentivize energy conservation or the use of alternative energy sources. Policy makers at both the U.S. federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions and encourage consumers to the alternative energy sources. The Build Back Better Act, passed by the US House of Representatives and supported by President Biden, includes incentives to increase wind and solar electric generation and encourage consumers to use these alternative energy sources. States in which we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level or other initiatives to incentivize the use of renewable energy could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable to improve our sustainability performance and to meet the specific requirements to perform services for certain customers. If we are unable to meet the ESG standard or investment, lending, ratings, or voting criteria and policies set by these parties, we may lose investors, investors may allocate a portion of their capital away from us, we may become a target for ESG-focused activism, our cost of capital may increase, the price of our securities may be negatively impacted, and our reputation may also be negatively affected. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Severe weather events, such as storms, hurricanes, droughts, or floods, could have an adverse effect on our operations and could increase our costs. If climate changes result in more intense or frequent severe weather events, the physical and disruptive effects could have a material adverse impact on our operations and assets. +Air Emissions. The US Federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and natural gas operations. New facilities may be required to obtain permits before operations can commence, and existing facilities may be required to obtain additional permits, and incur capital costs, in order to remain in compliance. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations. In general, we believe that compliance with the Clean Air Act and similar state laws and regulations will not have a material impact on our operations or financial condition. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their +33 +Table of Contents +Index to Financial Statements +habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +In our Utica and SCOOP operations, we make an effort to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle or share 100% of all produced water, we do inject water into third-party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle once sharing opportunities with other operators have been exhausted. In the state of Ohio, all water used during drilling operations is disposed of through injection into third-party salt water disposal wells regulated by applicable state agencies. +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs as we collect and store personal data related to royalty owners. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and enhanced consumer protections for those individuals, and provides for statutory fines for data security breaches or other CCPA violations. Meanwhile, over fifteen other states have considered privacy laws like the CCPA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us +34 +Table of Contents +Index to Financial Statements +to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +Risks Associated with our Emergence from Bankruptcy +We recently emerged from bankruptcy, which may adversely affect our business and relationships. +It is possible that our having filed for bankruptcy and our recent emergence from bankruptcy may adversely affect our business and relationships with customers, vendors, contractors or employees. Due to uncertainties, many risks exist, including the following: +• key vendors or other contract counterparties may terminate their relationships with us or require additional financial assurances or enhanced performance from us; +• our ability to renew existing contracts and compete for new business may be adversely affected; +• our ability to attract, motivate and/or retain key executives may be adversely affected; and +• competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted. +The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been subject to bankruptcy protection will not adversely affect our operations in the future. +Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the Plan and the transactions contemplated thereby. +In connection with the disclosure statement we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon our emergence from bankruptcy. Those projections were prepared solely for the purpose of bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections. +Upon emergence from bankruptcy, the composition of our board of directors changed significantly. +The composition of our board of directors changed significantly upon emergence from bankruptcy. Our new board is comprised of five directors, including the Company's Chief Executive Officer, Timothy Cutt, and four non-employee directors, David Wolf, Guillermo Martinez, Jason Martinez and David Reganato. While we expect to engage in an orderly transition process as we integrate newly appointed board members, our new board of directors may change views on strategic initiatives and a range of issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past. +Risks Associated with an Investment in Us +The market price of our securities is subject to volatility. +Upon our emergence from bankruptcy, our old common stock was cancelled and we issued New Common Stock. The market price of our New Common Stock could be subject to wide fluctuations in response to, and the level of trading that develops with our New Common Stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our new capital structure as a result of the transactions contemplated by the Plan, our +35 +Table of Contents +Index to Financial Statements +limited trading history subsequent to our emergence from bankruptcy, our limited trading volume, the lack of comparable historical financial information due to our adoption of fresh start accounting, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this Part I, Item 1A of this Annual Report on Form 10-K. +Future sales or the availability for sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and could impair our ability to raise capital through future sales of equity securities. +A large percentage of our common stock is held by a relatively small number of investors. In connection with our emergence from bankruptcy protection, we entered into the Registration Rights Agreement pursuant to which we have agreed to file a registration statement with the SEC to facilitate potential future sales of our common stock by such investors. Sales of a substantial number of shares of our common stock in the public markets, or even the perception that these sales might occur (such as upon the filing of the aforementioned registration statement), could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. +We cannot predict the effect that future sales of our common stock will have on the price at which the common stock trades. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect the trading price of our common stock. +Certain of our stockholders own a significant portion of our outstanding debt and equity securities and their interests may not always coincide with the interests of other holders of the New Common Stock. +A large percentage of our debt and equity are held by a relatively small number of investors. As a result, these investors could have significant influence over all matters presented to our stockholders and debt holders for approval, including election and removal of our directors, change in control transactions and the outcome of all actions requiring majority stockholder approval. +The interests of these investors may not always coincide with the interests of the other holders of the New Common Stock and other debt holders, and the concentration of control in these investors may limit other stockholders' ability to influence corporate matters. The concentration of ownership and voting power of these investors may also delay, defer or even prevent an acquisition by a third party or other change of control transactions of our Company. This may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. In addition, the concentration of voting power may adversely affect the trading price and liquidity of the New Common Stock. +There may be future dilution of our common stock, which could adversely affect the market price of our common stock. +We are not restricted from issuing additional shares of our common stock. In the future, we may issue shares of our common stock to raise cash for future capital expenditures, acquisitions or for general corporate purposes. We may also issue securities that are convertible into, exchangeable for or that represent the right to receive our common stock. Lastly, we currently issue restricted stock units and performance vesting restricted stock units to certain employees and directors as part of their compensation. Any of these events will dilute our shareholders' ownership interest in Gulfport and may reduce our earnings per share and have an adverse effect on the price of our common stock. +Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us, our stockholders, our creditors or other constituents; (iii) any action asserting a claim against us, any director or our officers arising pursuant to any provision of the DGCL, our certificate of incorporation or our by-laws; or (iv) any action asserting a claim against us, any director or our officers that is governed by the internal affairs doctrine. This choice of forum +36 +Table of Contents +Index to Financial Statements +provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors or officers or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 20 of our consolidated financial statements. +ITEM 3. LEGAL PROCEEDINGS +The Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. +While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on us, cannot be predicted with certainty, we believe that none of these matters, if ultimately decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +The information with respect to this Item 3. Legal Proceedings is set forth in Note 19 of our consolidated financial statements. Additionally, see Note 1 and Note 2 of our consolidated financial statements for additional discussion of on-going claims and disputes from our Chapter 11 proceedings, certain of which may be material. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +On November 27, 2020, our predecessor common stock was suspended from trading on NASDAQ. On November 30, 2020, our predecessor common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “GPORQ". On February 2, 2021, NASDAQ filed a Form 25 delisting our predecessor common stock from trading on NASDAQ, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the de-registration of our predecessor common stock under section 12(b) of the Exchange Act became effective on February 12, 2021. +On the Emergence Date, the predecessor common stock noted above was cancelled and we issued shares of new common stock. Shares of our new common stock are listed on the NYSE under the symbol "GPOR". See Note 7 of our consolidated financial statements for further discussion of our new common stock. +Shareholders +At the close of business on February 25, 2022, there were approximately 450 holders of record of our New Common Stock. +Dividends +We never paid dividends on our predecessor common stock. Subsequent to our emergence, we did not pay dividends on our New Common Stock in 2021. The declaration and payment of any future common stock dividend will be at the full discretion of the Board of Directors and will depend on our financial results, cash requirements, future prospects and other +37 +Table of Contents +Index to Financial Statements +factors deemed relevant by our Board. Our New Credit Facility also requires us to meet certain financial covenants at the time dividend payments are made. +During the Successor Period, the company paid dividends on its New Preferred Stock, which included 3,071 shares of New Preferred Stock paid in kind, approximately $55 thousand of cash-in-lieu of fractional shares, and $1.5 million of cash dividends to holders of our New Preferred Stock. +Issuer Purchases of Equity Securities +On November 2, 2021, Gulfport announced the authorization by its Board of Directors to repurchase up to $100 million of the Company's outstanding shares of common stock through December 31, 2022. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require us to acquire any specific number of shares of New Common Stock. We intend to purchase shares under our Repurchase Program opportunistically with available funds while maintaining sufficient liquidity to fund our capital development program. +The Company did not repurchase any common stock during the year ended December 31 2021. +Recent Sales of Unregistered Securities +None. +Stock Performance Graph +The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission (“SEC”), nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filings. +The performance graph below illustrates changes over the period of May 19, 2021 through December 31, 2021, in cumulative total stockholder return on the Successor common stock as measured against the cumulative total return of the S&P 500 Index and the S&P Oil & Gas Exploration and Production Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends for the index securities) from May 19, 2021 to December 31, 2021. +38 +Table of Contents +Index to Financial Statements +ITEM 6. [RESERVED] +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis represents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following information updates the discussion of Gulfport's financial condition provided in its 2020 Annual Report on Form 10-K filing and analyzes the changes in the results of operations between the years ended December 31, 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in " Management's Discussion and Analysis of Financial Condition and Results of Operations " in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. +Our results of operations as reported in our consolidated financial statements for the Successor Period and the Predecessor Period are in accordance with GAAP. Although GAAP requires that we report on our results for these periods separately, management views our operating results for the twelve months ended December 31, 2021, by combining the results of the Successor Period and the Predecessor Period ("Combined Period"). While these combined results do not comply with GAAP and have not been prepared as pro forma results under applicable regulations, they are presented because we believe they provide the most meaningful comparison of our results to prior periods. We do not believe reviewing these periods in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. We believe the key performance indicators such as operating revenues and operating expenses for the Successor Period combined with the Predecessor Period provide more meaningful comparisons to other periods and are useful in understanding operational trends. Additionally, there were no material changes in policies between the periods and any material impacts as a result of fresh start accounting were included within the discussion of these changes. +Overview +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in Eastern Ohio targeting the Utica and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +Recent Developments +Emergence from voluntary reorganization under Chapter 11 +On November 13, 2020, we and our subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the New York Stock Exchange under the symbol "GPOR." +Although we are no longer a debtor-in-possession, we operated as debtors-in-possession through the pendency of the Chapter 11 Cases. See Note 1 and Note 2 of our consolidated financial statements for a complete discussion of the Chapter 11 Cases. +We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger company, built to generate sustainable free cash flow with a strengthened balance sheet. As a result of the Chapter 11 Cases, we reduced our total indebtedness by $1.4 billion by issuing equity in a reorganized entity to the holders of our unsecured notes and allowed general unsecured claimants. In addition, we reassessed our organizational needs post emergence and significantly reduced our general and administrative expense to ensure our cost structure is competitive with industry peers. We continue to focus on reducing our operating costs, per well drilling costs, general and administrative costs and managing our liquidity. We believe our plan to +39 +Table of Contents +Index to Financial Statements +generate free cash flow on an annual basis will allow us to further strengthen our balance sheet and return capital to shareholders. +Changes in Chief Executive Officer and Chief Financial Officer +On May 17, 2021, the Board reached agreements with David M. Wood and Quentin R. Hicks that Messrs. Wood and Hicks would no longer serve as Chief Executive Officer and a member of the Board, in the case of Mr. Wood, and Chief Financial Officer, in the case of Mr. Hicks. +On May 17, 2021, the Board appointed Timothy J. Cutt as Interim Chief Executive Officer and Chair of the Board. On September 2, 2021, we reached agreement with Mr. Cutt, effective immediately, to fully assume the role of Chief Executive Officer, dropping the "Interim" designation from his title. +On May 17, 2021, the Board appointed William J. Buese as Chief Financial Officer. +New Credit Facility +On October 14, 2021, we entered into the New Credit Facility for an aggregate maximum principal amount of up to $1.5 billion, an initial borrowing base of $850.0 million and an initial aggregate elected commitment amount of $700.0 million. The New Credit Facility amended and refinanced the Exit Credit Facility. See Note 6 of our consolidated financial statements for additional discussion of the New Credit Facility. +Stock Repurchase Program +On November 1, 2021, our board of directors approved a stock repurchase program to acquire up to $100 million of our outstanding New Common Stock. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of New Common Stock. The Company intends to purchase shares under the Repurchase Program opportunistically with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program is authorized to extend through December 31, 2022, and may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. Any shares of New Common Stock repurchased are expected to be cancelled. We have not repurchased any shares under this program as of December 31, 2021. +COVID-19 Pandemic and Impact on Global Demand for Oil and Natural Gas +As a result of our business continuity measures, we have not experienced significant disruptions in executing our business operations due to COVID-19. While we did not experience significant disruptions to our operations in 2021, we are unable to predict the impact on our business, including our cash flows, liquidity, and results of operations in future periods due to numerous uncertainties. Restrictions may cause us, our suppliers and other business counterparties to experience operational delays, or delays in the delivery of materials and supplies. We expect the principal areas of operational risk for us are the availability and reliability of service providers and potential supply chain disruption. Additionally, the operations of our midstream service providers, on whom we rely for the transmission, gathering and processing of a significant portion of our produced natural gas, NGL and oil, may be disrupted or suspended in response to containing the outbreak, or the difficult economic environment may lead to the bankruptcy or closing of the facilities and infrastructure of our midstream service providers. This may result in substantial discount in the prices we receive for our produced natural gas, NGL and oil or result in the shut-in of producing wells or the delay or discontinuance of development plans for our properties. +We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments and the timing and extent to which normal economic and operating conditions resume. +40 +Table of Contents +Index to Financial Statements +2021 Operational and Financial Highlights +During 2021, we had the following notable achievements: +• Emerged from Chapter 11 proceedings in May 2021 with improved balance sheet and fixed-cost structure. +• In September 2021, we finalized a settlement agreement with TC Energy which rejected the firm transportation contracts between us and TC Energy without any further payment or obligation by us or TC. In exchange, we paid $43.8 million in cash to TC and expect to receive back a significant portion of such amount through future distributions with respect to the assigned claims. +• In October 2021, we amended and refinanced our Exit Credit Facility with the New Credit Facility. The amendment increased our elected commitment from $580 million to $700 million and increased our liquidity by more than $160 million. +• In December 2021, we reached an agreement with Stingray Pressure Pumping LLC that fully resolved the longstanding litigation between the parties. +• Turned to sales 28 gross (26.4 net); including the Angelo pad which flowed at a sustained, gross peak rate of 250 MMcfe per day after it was brought online in early October. +• Reported year-end estimated net proved reserves of 3.9 Tcfe. +Business and Industry Outlook +As discussed above, we emerged from voluntary reorganization under Chapter 11 in May 2021. Through our restructuring we were able to emerge with a strengthened balance sheet and materially improved fixed-cost structure. Gulfport is beginning this new chapter with a strategy focused on continuing to reduce costs and generating sustainable free cash flow in an effort to drive shareholder value. In addition, we are committed to an emphasis on sustainability, and we will continue to prioritize safety, environmental stewardship, and maintaining strong relationships with the communities in which we operate. As we enter 2022, we believe we are positioned for sustainable long-term success. +In 2021, natural gas prices improved significantly, but continue to be volatile as spot prices ranged from $2.43 to $23.86 per MMBtu. Henry Hub averaged $3.89 per MMBtu in 2021 vs $2.03 per MMBtu in 2020. As we look into 2022, we expect continued volatility in natural gas prices. To mitigate our exposure to commodity market volatility and ensure our continued financial strength we have entered into financial hedges representing approximately 86% of our expected 2022 production. +Our 2022 capital expenditure program is expected to be in a range of $340 million to $380 million. Prior to 2021, general inflation was moderate; however, our capital and operating costs were influenced to a large extent by the volatility in commodity prices. With the improved commodity price environment, we have experienced and expect to continue to experience inflationary pressures during 2022. We continue to monitor and manage inflationary pressures caused by increased activities in the field as well as supply chain pressures. +41 +Table of Contents +Index to Financial Statements +Results of Operations +Comparison of the Predecessor Period, Successor Period and the Year Ended December 31, 2020 +We reported net income of $251.0 million for the Predecessor Period and a net loss of $112.8 million for the Successor Period, as compared to a net loss of $1.6 billion for the year ended December 31, 2020. The material changes that lead to the increase in net income are further discussed by category on the following pages. Some totals and changes throughout below section may not sum or recalculate due to rounding. +Natural Gas, Oil and NGL Sales (sales totals in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Natural gas (MMcf/day) +Utica production volumes 732 781 750 795 +SCOOP production volumes 183 126 162 147 +Total production volumes 915 907 912 943 +Total sales $ 906,096 $ 344,390 $ 1,250,486 $ 671,535 +Average price without the impact of derivatives ($/Mcf) $ 4.34 $ 2.77 $ 3.76 $ 1.95 +Impact from settled derivatives ($/Mcf) (1) +$ (1.44) $ (0.03) $ (0.91) $ 0.33 +Average price, including settled derivatives ($/Mcf) $ 2.90 $ 2.74 $ 2.85 $ 2.28 +Oil and condensate (MBbl/day) +Utica production volumes 1 1 1 1 +SCOOP production volumes 4 3 3 4 +Total production volumes 5 4 4 5 +Total sales $ 81,347 $ 29,106 $ 110,453 $ 62,902 +Average price without the impact of derivatives ($/Bbl) $ 69.71 $ 54.81 $ 65.01 $ 34.88 +Impact from settled derivatives ($/Bbl) (2) +$ (8.33) $ — $ (5.72) $ 25.76 +Average price, including settled derivatives ($/Bbl) $ 61.38 $ 54.81 $ 59.29 $ 60.64 +NGL (MBbl/day) +Utica production volumes 2 3 3 3 +SCOOP production volumes 9 6 8 8 +Total production volumes 11 9 11 11 +Total sales $ 105,141 $ 36,780 $ 141,921 $ 66,814 +Average price without the impact of derivatives ($/Bbl) $ 39.56 $ 30.37 $ 36.68 $ 16.86 +Impact from settled derivatives ($/Bbl) $ (4.88) $ — $ (3.35) $ (0.04) +Average price, including settled derivatives ($/Bbl) $ 34.68 $ 30.37 $ 33.33 $ 16.82 +Total (MMcfe/day) +Utica production volumes 753 805 772 820 +SCOOP production volumes 263 179 231 217 +Total production volumes 1,016 983 1,003 1,037 +Total sales $ 1,092,584 $ 410,276 $ 1,502,860 $ 801,251 +Average price without the impact of derivatives ($/Mcfe) $ 4.72 $ 3.05 $ 4.10 $ 2.11 +Impact from settled derivatives ($/Mcfe) $ (1.39) $ (0.02) $ (0.89) $ 0.42 +Average price, including settled derivatives ($/Mcfe) $ 3.33 $ 3.03 $ 3.21 $ 2.53 +42 +Table of Contents +Index to Financial Statements +(1) In November 2020, the Company early terminated certain gas fixed-price swaps which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed-price swaps which resulted in a cash receipt of $40.5 million. +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Natural gas sales $ 906,096 $ 344,390 $ 1,250,486 $ 671,535 +Oil and condensate sales 81,347 29,106 110,453 62,902 +Natural gas liquid sales 105,141 36,780 141,921 66,814 +Total natural gas, oil and condensate, and NGL sales $ 1,092,584 $ 410,276 $ 1,502,860 $ 801,251 +In the Combined Period, our total unhedged natural gas, oil and NGL revenues increased approximately $701.6 million, or 88%, as compared to the year ended December 31, 2020. The increase was primarily driven by significant increases in oil, natural gas and NGL indexes. Most notably, the Henry Hub index increased from $2.03 per MMBtu in 2020 to $3.89 per MMBtu in 2021. The impact of the realized price increases was partially offset by a decrease in volumes of 3%, or $28.7 million, as a result of natural declines partially offset by wells that were turned to sales during 2021. +The total natural gas, oil and NGL volumes hedged for the Combined Period and the year ended December 31, 2020, represented approximately 87% and 70%, respectively, of our total sales volumes for the applicable year. +Natural Gas, Oil and NGL Derivatives (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Natural gas derivatives - fair value (losses) gains $ (223,512) $ (123,080) $ (346,592) $ (89,310) +Natural gas derivatives - settlement (losses) gains (300,172) (3,362) (303,534) 113,075 +Total (losses) gains on natural gas derivatives (523,684) (126,442) (650,126) 23,765 +Oil and condensate derivatives - fair value losses (5,128) (6,126) (11,254) (2,952) +Oil and condensate derivatives - settlement (losses) gains (9,720) — (9,720) 46,462 +Total (losses) gains on oil and condensate derivatives (14,848) (6,126) (20,974) 43,510 +NGL derivatives - fair value losses (5,322) (4,671) (9,993) (461) +NGL derivatives - settlement losses (12,965) — (12,965) (142) +Total (losses) gains on NGL derivatives (18,287) (4,671) (22,958) (603) +Contingent consideration arrangement - fair value losses — — — (1,381) +Total (losses) gains on natural gas, oil and NGL derivatives $ (556,819) $ (137,239) $ (694,058) $ 65,291 +Settlement (losses) gains in the table above represent realized cash gains or losses to the instruments described in Note 13 of our consolidated financial statements. Our hedging program incurred cash settlements of $326.2 million for the Combined Period, as compared to $159.4 million provided in 2020. +43 +Table of Contents +Index to Financial Statements +Lease Operating Expenses (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Lease operating expenses +Utica $ 21,841 $ 13,991 $ 35,832 $ 40,071 +SCOOP 10,247 5,449 15,696 14,156 +Other 84 84 168 8 +Total lease operating expenses $ 32,172 $ 19,524 $ 51,696 $ 54,235 +Lease operating expenses per Mcfe +Utica $ 0.13 $ 0.13 $ 0.13 $ 0.13 +SCOOP 0.17 0.22 0.19 0.18 +Other 0.81 2.15 1.17 0.06 +Total lease operating expenses per Mcfe $ 0.14 $ 0.14 $ 0.14 $ 0.14 +The decrease in total LOE when comparing the Combined Period to the year ended December 31, 2020, was primarily driven by a 3% decrease in our production. LOE on a per unit basis in 2021 was consistent with 2020. +Taxes Other Than Income (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Production taxes $ 22,793 $ 8,459 $ 31,252 $ 17,511 +Property taxes 5,266 2,590 7,856 9,510 +Other 2,184 1,300 3,484 1,488 +Total taxes other than income $ 30,243 $ 12,349 $ 42,592 $ 28,509 +Total taxes other than income per Mcfe $ 0.13 $ 0.09 $ 0.12 $ 0.08 +The increase in total and per unit taxes other than income when comparing the Combined Period to the year ended December 31, 2020, was primarily related to an increase in production taxes resulting from the significant increase in our natural gas, oil and NGL revenues excluding the impact of hedges discussed above. +Transportation, Gathering, Processing and Compression (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Transportation, gathering, processing and compression $ 212,013 $ 161,086 $ 373,099 $ 456,318 +Transportation, gathering, processing and compression per Mcfe $ 0.92 $ 1.20 $ 1.02 $ 1.20 +44 +Table of Contents +Index to Financial Statements +The decrease in transportation, gathering, processing and compression when comparing the Combined Period to the year ended December 31, 2020, was primarily related to a 3% decrease in our production and savings associated with midstream contract rejections and renegotiations through the bankruptcy process. The decrease in per unit transportation, gathering, processing and compression when comparing the Combined Period to the year ended December 31, 2020, was primarily related to midstream contract rejections and renegotiations through the bankruptcy process. +Depreciation, Depletion and Amortization (in thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Depreciation, depletion and amortization of oil and gas properties $ 159,518 $ 60,831 $ 229,703 +Depreciation, depletion and amortization of other property and equipment $ 1,395 $ 1,933 $ 10,041 +Total depreciation, depletion and amortization $ 160,913 $ 62,764 $ 239,744 +Total depreciation, depletion and amortization per Mcfe $ 0.69 $ 0.47 $ 0.63 +The decrease in depreciation, depletion and amortization of our oil and gas properties is primarily the result of impairments taken in 2020 which decreased the depletion rate, partially offset by an increase in the depletion rate for the Successor Period as a result of the fresh start valuations on our oil and gas properties. See Note 3 of our consolidated financial statements for more information on fresh start adjustments. +Impairment of Oil and Gas Properties. During the Successor Period, we had $117.8 million oil and natural gas properties impairment charges, compared to $1.4 billion impairment charges of oil and gas properties in 2020. Upon the application of fresh start accounting, the value of our oil and natural gas properties was determined using forward strip oil and natural gas prices as of the emergence date. These prices were higher than the 12-month weighted average prices used in the full cost ceiling limitation at June 30, 2021, which led to the Successor Period impairment charge. +Impairment of Other Property and Equipment. We recognized a $14.6 million impairment charge on the Company's corporate headquarters during the Predecessor Period as a result in a change in expected future use. +General and Administrative Expenses (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +General and administrative expenses, gross $ 53,711 $ 32,152 $ 85,863 $ 95,904 +Reimbursed from third parties (7,373) (4,957) (12,330) (11,567) +Capitalized general and administrative expenses (11,873) (8,020) (19,893) (25,008) +General and administrative expenses, net $ 34,465 $ 19,175 $ 53,640 $ 59,329 +General and administrative expenses, net per Mcfe $ 0.15 $ 0.14 $ 0.15 $ 0.16 +The decrease in total general and administrative expenses during the Combined Period compared to the year ended December 31, 2020, was primarily driven by retention payments made in 2020 and our continued focus on workforce and leadership structure to ensure our cost structure is competitive with industry peers. +Restructuring and Liability Management Expenses. During the Successor Period and the year ended December 31, 2020, we incurred restructuring charges related to reductions in workforce as we continued to align our workforce and leadership structure to our current operating environment. Additionally, during the year ended December 31, 2020, we incurred liability +45 +Table of Contents +Index to Financial Statements +management charges related to legal advisors engaged to assist with the evaluation of a range of liability management alternatives prior to our ultimate Chapter 11 filing. +The following table summarizes the restructuring and liability management charges incurred (in thousands): +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Reduction in workforce $ 2,858 $ — $ 2,858 $ 1,460 +Liability management — — — 29,387 +Total restructuring and liability management $ 2,858 $ — $ 2,858 $ 30,847 +Accretion Expense. Accretion expense decreased to $2.4 million for the Combined Period, from $3.1 million for the year ended December 31, 2020. The decrease in accretion expense stems primarily from a decrease in our asset retirement obligation as a result of fresh start adjustments upon emergence. See Note 3 of our consolidated financial statements for more information on fresh start adjustments. +Interest Expense (in thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Interest expense on Predecessor Senior Notes $ — $ — $ 98,528 +Interest expense on Pre-Petition Revolving Credit Facility — 2,044 14,224 +Interest expense on Building Loan and other 560 (989) 1,861 +Capitalized interest (198) — (907) +Amortization of loan costs 1,663 — 5,563 +Interest on DIP Credit Facility — 3,104 810 +Interest on Exit Facility 5,810 — — +Interest on First-Out Term Loan 3,564 — — +Interest on Successor Senior Notes 27,476 — — +Interest on New Credit Facility 1,978 — — +Total interest expense $ 40,853 $ 4,159 $ 120,079 +Interest expense per Mcfe $ 0.18 $ 0.03 $ 0.32 +The decrease in interest expense during the Successor Period compared to the year ended December 31, 2020, was due the changes in our debt structure upon emergence from Chapter 11. +Loss (Gain) on Debt Extinguishment. During the Successor Period, the Company recognized a loss of $3.0 million associated with the extinguishment of capitalized commitment fees related to the Exit Credit Facility as discussed in Note 6 of our consolidated financial statements. During 2020, we repurchased in the open market $73.3 million aggregate principal amount of our Predecessor Senior Notes for $22.8 million in cash and recognized a $49.6 million gain on debt extinguishment. +46 +Table of Contents +Index to Financial Statements +Equity Investments (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Loss from equity method investments, net $ — $ 342 $ 342 $ 11,055 +We, through our wholly owned subsidiary Grizzly Holdings, own an approximate 24.5% interest in Grizzly, a Canadian unlimited liability company. Effective as of the Emergence Date, we evaluated our investment in Grizzly and determined that we no longer have the ability to exercise significant influence over operating and financial policies of Grizzly Holdings. As such, we discontinued the equity method of accounting for our investment in Grizzly and we will use our previous carrying value of zero as our initial basis and will subsequently measure at fair value while recording any changes in fair value in earnings. +During the year ended December 31, 2020, our share of net loss from Mammoth Energy Services, Inc. was in excess of the carrying value of our investment, which reduced our investment to zero. Our carrying value remained at zero through the Predecessor Period until the use of Mammoth Shares to settle Class 4A claims at the Emergence Date. See Note 15 of our consolidated financial statements for further discussion on our equity investments. +Reorganization Items, Ne t. The following table summarizes the components in reorganization items, net included in our consolidated statements of operations for the Combined Period and the year ended December 31, 2020 (in thousands): +Successor Predecessor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Legal and professional advisory fees $ — $ (81,565) $ (24,905) +Adjustment for allowed claims — — (104,943) +Net gain on liabilities subject to compromise — 575,182 — +Fresh start adjustments, net — (160,756) — +Elimination of predecessor accumulated other comprehensive income — (40,430) — +Debt issuance costs — (3,150) (21,956) +Other items, net — (22,383) (555) +Reorganization items, net $ — $ 266,898 $ (152,359) +We do not expect to incur any reorganization costs in 2022. See Note 3 of our consolidated financial statements for further discussion of the components of reorganization items, net. +Other Expense, Net (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Other expense, net $ 13,049 $ 1,713 $ 14,762 $ 21,324 +The decrease in other expense for the Combined Period compared to the year ended December 31, 2020 is primarily the result of a $16.6 million loss on the change in fair value of our contingent consideration agreement related to the sale of our SCOOP water infrastructure assets to a third-party water service provider during the year ended December 31, 2020. +47 +Table of Contents +Index to Financial Statements +Income Taxes (in thousands) +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Income tax (benefit) expense $ (39) $ (7,968) $ (8,007) $ 7,290 +For the Predecessor Period, we had an effective tax rate of (3.3)% and an income tax benefit of $8.0 million. The tax benefit is entirely attributable to an Oklahoma refund claim associated with an examination relating to historical tax returns. The effective tax rate differs from the statutory tax rate due to the Company’s valuation allowance position and the permanent adjustments relating to the Chapter 11 Emergence. For the Successor Period, we had an effective tax rate of 0.03% and tax expense of $39 thousand. The tax expense is entirely attributable to the Oklahoma refund claim that was filed during the third quarter, resulting in an adjustment to the benefit recorded during the Predecessor Period. We did not record any additional income tax expense for the Successor Period as a result of maintaining a full valuation allowance against our net deferred tax asset. The change in income tax expense relative to 2020 is primarily the result of the recognition of a valuation allowance against a state deferred tax asset. +Liquidity and Capital Resources +Overview . We strive to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility, fund our development projects, operations and capital expenditures and return capital to shareholders. We utilize derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company's cash flows. Historically, we have generally funded our operations, planned capital expenditures and any debt or share repurchases with cash flow from our operating activities, cash on hand, borrowings under our revolving credit facility and issuances of equity and debt securities. +For the Successor Period, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been for net principal payments under the New Credit Facility and the development of our oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been our operating cash flow, borrowings under our credit agreements and issuances of equity and debt securities. Our ability to issue additional indebtedness, dispose of assets or access the capital markets was substantially limited or nonexistent during the Chapter 11 Cases and required court approval in most instances. Accordingly, our liquidity in the Predecessor periods depended mainly on cash generated from operating activities and available funds under the DIP Credit Facility in the 2021 Predecessor Period and Pre-Petition Revolving Credit Facility in the 2020 Predecessor Period. +We believe our annual free cash flow generation, borrowing capacity under the New Credit Facility and cash on hand will provide sufficient liquidity to fund our operations, capital expenditures, interest expense, debt repayments and any return of capital to shareholders authorized by the Board, during the next 12 months. +To the extent actual operating results, realized commodity prices or uses of cash differ from our assumptions, our liquidity could be adversely affected. See Note 6 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +As of December 31, 2021, we had a cash balance of $3.3 million compared to $89.9 million as of December 31, 2020, and a net working capital deficit of $361.4 million as of December 31, 2021, compared to a net working capital deficit of $100.5 million as of December 31, 2020. As of December 31, 2021, our working capital deficit includes no debt due in the next 12 months. Our total principal debt as of December 31, 2021, was $714.0 million compared to $2.3 billion as of December 31, 2020. See Note 6 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +As of February 25, 2022, we had $7.1 million of cash and cash equivalents, zero borrowings under our New Credit Facility, $109.8 million of letters of credit outstanding, and $550 million of outstanding 2026 Notes. +48 +Table of Contents +Index to Financial Statements +Post-Emergence Debt. On the Emergence Date, pursuant to the terms of the Plan, we entered into a reserve-based credit agreement providing for the Exit Credit Facility, which featured an initial borrowing base of $580.0 million. The Exit Credit Facility consisted of the Exit Facility and the First-Out Term Loan. In October 2021, we amended and refinanced the Exit Credit Facility with the New Credit Facility. +As discussed in Note 6 of our consolidated financial statements, on October 14, 2021, we entered into the Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties. The New Credit Facility provides for an aggregate maximum principal amount of up to $1.5 billion, an initial borrowing base of $850.0 million and an initial aggregate elected commitment amount of $700.0 million. The credit agreement also provides for a $175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. +Additionally, on the Emergence Date, pursuant to the terms of the Plan, we issued $550 million aggregate principal amount of our Successor Senior Notes. +The Successor Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the New Credit Facility. +See Note 6 of our consolidated financial statements for additional discussion of our post-emergence debt. +Preferred Dividends . As discussed in Note 7 of our consolidated financial statements, holders of New Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the liquidation preference with respect to cash dividends and 15% per annum of the liquidation preference with respect to dividends paid in kind as additional shares of New Preferred Stock (“PIK Dividends”). +Supplemental Guarantor Financial Information . The Successor Senior Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our New Credit Facility or certain other debt (the “Guarantors”). The Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC (the “Non-Guarantors”). The Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The Successor Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the Successor Senior Notes. +SEC Regulation S-X Rule 13-01 requires the presentation of "Summarized Financial Information" to replace the "Condensed Consolidating Financial Information" required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements. +49 +Table of Contents +Index to Financial Statements +Derivatives and Hedging Activities . Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. See Item 7A Quantitative and Qualitative Disclosures About Market Risk for further discussion on the impact of commodity price risk on our financial position. Additionally, see Note 13 of our consolidated financial statements for further discussion of derivatives and hedging activities. Subsequent to December 31, 2021 and as of February 25, 2022, we entered into the following natural gas, oil, and NGL derivative contracts: +Period Type of Derivative Instrument Index +Daily Volume (1) +Weighted +Average Price +January 2023 - December 2023 Swaps NYMEX WTI 1,000 $69.78 +January 2023 - December 2023 Swaps NYMEX Henry Hub 40,082 $3.56 +January 2023 - December 2023 Swaps Mont Belvieu C3 1,000 $36.33 +January 2023 - December 2023 Basis Swaps Rex Zone 3 10,000 $(0.20) +(1) Volumes for gas instruments are presented in MMBtu while oil and NGL volumes are presented in Bbls. +Contractual and Commercial Obligations . The following table sets forth our contractual and commercial obligations at December 31, 2021 (in thousands): +Payment due by period +Contractual Obligations Total 2022 2023-2024 2025-2026 2027 and Thereafter +Long-term debt (1): +Principal $ 714,000 $ — $ — $ 714,000 $ — +Interest 192,500 44,000 88,000 60,500 — +Firm transportation and gathering contracts (2) +1,778,093 225,200 438,514 268,131 846,248 +Operating lease liabilities (3) +322 182 140 — — +Total contractual cash obligations (4) +$ 2,684,915 $ 269,382 $ 526,654 $ 1,042,631 $ 846,248 +_____________________ +(1) The maturities of our debt obligations and associated interest reflect their original expiration dates and do not reflect any acceleration due to any events of default pertaining to these obligations. See Note 6 of our consolidated financial statements for a description of our long-term debt. +(2) Our commitments under our firm transportation and gathering contracts do not reflect contracts recently rejected or in the process of being rejected as discussed in the Litigation and Regulatory Proceedings section in Note 19 of our consolidated financial statements. See Note 18 of our consolidated financial statements for further discussion of our firm transportation and gathering commitments. +(3) See Note 10 of our consolidated financial statements for a description of our operating lease liabilities. +(4) This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 13 and 5 of our consolidated financial statements, respectively. +Off-balance Sheet Arrangements . We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2021, our material off-balance sheet arrangements and transactions include $122.1 million in letters of credit outstanding against our revolving credit facility and $32.7 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance on certain firm transportation agreements. The Company expects to enter into similar contractual arrangements in the future in order to support the Company's business plans. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. +Capital Expenditures . Our capital expenditures have been primarily for the acquisition and development of oil and gas properties. Our capital investment strategy is focused on prudently developing our existing properties in an effort to generate sustainable cash flow considering current and forecasted commodity prices. +Our 2022 drilling and completion capital expenditure program is expected to be in a range of $320 million to $360 million. In addition, we expect to spend approximately $20 million on leasehold and land expenses, primarily associated with lease extensions in the Utica. The midpoint of the 2022 range of capital expenditures is approximately 23% higher than the $292.9 million spent in 2021, primarily due to inflation and our efforts to run a more continuous development program in the Utica, allowing for increased operational efficiencies and opportunities for incremental cost reductions. +50 +Table of Contents +Index to Financial Statements +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2021, WTI prices ranged from $47.47 to $85.64 per barrel and the Henry Hub spot market price of natural gas ranged from $2.43 to $23.86 per MMBtu. During 2020, WTI prices ranged from $(36.98) to $63.27 per barrel and the Henry Hub spot market price of natural gas ranged from $1.33 to $3.14 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for further information regarding our open derivative instruments at December 31, 2021. +Cash Flow from Operating Activities . Net cash flow provided by operating activities was $465.1 million for the Combined Period as compared to $95.3 million for the year ended December 31, 2020. This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to an 88% increase in net natural gas, oil and NGL sales excluding the impact of derivatives. +Divestitures . During the Successor Period and 2020, we divested certain water infrastructure assets and non-core assets and interests in operated and non-operated oil and natural gas properties for approximately cash proceeds $4.3 million and $51.0 million, respectively. Proceeds from these transactions were primarily used to repay debt and fund our development program. See Note 4 of our consolidated financial statements for further discussion. +Uses of Funds . The following table presents the uses of our cash and cash equivalents for the Successor Period, Predecessor Period, and year ended December 31, 2020 (in thousands): +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 +Oil and Natural Gas Property Cash Expenditures: +Drilling and completion costs $ 183,333 $ 94,128 $ 277,461 $ 321,811 +Leasehold acquisitions 13,022 2,752 15,774 18,135 +Other 10,758 5,450 16,208 27,341 +Total oil and natural gas property expenditures $ 207,113 $ 102,330 $ 309,443 $ 367,287 +Other Uses of Cash and Cash Equivalents: +Principal payments on Pre-Petition Revolving Credit Facility, net $ — $ 292,911 $ 292,911 $ — +Principal payments on DIP credit facility — 157,500 157,500 — +Principal payments on Exit Credit Facility, net 302,751 — 302,751 — +Cash paid to repurchase senior notes — — — 22,827 +DIP Credit Facility Financing Fees — — — 2,988 +Debt issuance costs and loan commitment fees 8,783 7,100 15,883 738 +Other 1,753 397 2,150 1,034 +Total other uses of cash and cash equivalents $ 313,287 $ 457,908 $ 771,195 $ 27,587 +Total uses of cash and cash equivalents $ 520,400 $ 560,238 $ 1,080,638 $ 394,874 +Drilling and Completion Costs . During the Combined Period, we spud 20 gross (19 net) wells and commenced sales from 17 gross and net wells in the Utica for a total cost of approximately $191.5 million. +51 +Table of Contents +Index to Financial Statements +During the Combined Period, we spud 9 gross (7.7 net) and commenced sales from 11 gross (9.4 net) wells in the SCOOP for a total cost of approximately $83.5 million. In addition, 25 gross (1.77 net) wells were spud and 21 gross (0.05 net) wells were turned to sales by other operators on our SCOOP acreage during 2021 for a total cost to us of approximately $6.0 million. +Drilling and completion costs presented in this section reflect incurred costs while drilling and completion costs presented above in Uses of Funds section reflect cash payments for drilling and completions. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +Reorganization and Fresh Start Accounting . The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements included distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings were classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that were realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness were recorded as reorganization items, net in the consolidated statements of operations for the year ended December 31, 2020 and the Predecessor Period. +Upon emergence from the Chapter 11 Cases, ASC 852 required us to allocate our reorganization value to our individual assets based on their estimated fair values, resulting in a new entity for financial reporting purposes. After the Effective Date, the accounting and reporting requirements of ASC 852 are no longer applicable and have no impact on the Successor periods. Refer to Note 2 and Note 3 of our consolidated financial statements for more information on the events of the bankruptcy proceedings as well as the accounting and reporting impacts of the reorganization. +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2021. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. During the Successor Period, we recorded impairments of our oil and natural gas properties in the amount of $117.8 million compared to $1.4 billion during the year ended December 31, 2020. See Oil and Natural Gas Properties in Note 1 of our consolidated financial statements for further information on the full cost method of accounting. +Oil, Natural Gas and NGL Reserves . Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. +52 +Table of Contents +Index to Financial Statements +Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 20 of our consolidated financial statements for further information. +Income Taxes . We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2021, a valuation allowance of $907.4 million had been established to fully offset our net deferred tax asset on our accompanying consolidated balance sheet. +Revenue Recognition . We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. Historically, our actual payments received have not significantly deviated from our accruals. +Derivative Instruments . We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Commodity Price Risk. Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL, which have been historically volatile and are even more volatile as a result of COVID-19 and decisions of the Organization of Petroleum Exporting Countries and other high oil-exporting countries ("OPEC+") discussed in this Form 10-K. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes are unsustainable for the long term, have material downside risk in the short term or provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the board of directors reviews our derivative program at its quarterly board meetings. We believe we have sufficient internal controls to prevent unauthorized trading. +We use derivative instruments to achieve our risk management objectives, including swaps and options. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls, taking advantage of premiums associated with market price volatility. +53 +Table of Contents +Index to Financial Statements +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions would be reversed. The actual fixed price on our derivative instruments is derived from the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow NYMEX futures. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter into the original derivative position. Gains or losses related to closed positions will be recognized in the month specified in the original contract. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 16 of our consolidated financial statements for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2021, our natural gas derivative instruments consistent of the following types of instruments: +• Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +• Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options, and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +• Costless Collars : Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodities prices increase. At December 31, 2021, we had a net liability derivative position of $402.0 million as compared to a net liability derivative position of $20.8 million as of December 31, 2020. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have increased our liability by approximately $182.7 million, while a 10% decrease in underlying commodity prices would have decreased our liability by approximately $171.0 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. For more information regarding the Company's commodity derivative transactions, refer to Note13 of our consolidated financial statements. +Counterparty Credit Risk. The Company routinely monitors and manages its exposure to counterparty risk related to derivative contracts by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties public credit ratings, and avoiding concentration of credit exposure by transacting with multiple counterparties. The Company's commodity derivative contract counterparties are typically financial institutions with investment-grade credit ratings. The Company enters into International Swap Dealers Association Master Agreements (ISDA) with each of its derivative counterparties prior to executing derivative contracts. The terms of the ISDA provide, among other things, the Company and the counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or counterparty to a derivative contract. +54 +Table of Contents +Index to Financial Statements +Interest Rate Risk. Our New Credit Facility is structured under floating rate terms, as advances under these facilities may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2021, we had $164.0 million in borrowings outstanding under our revolving credit facility which bore interest at the weighted average rate of 3.19%. A 1% increase in the average interest rate would increase interest expense by approximately $2 million based on outstanding borrowings under our revolving credit facility at December 31, 2021. As of December 31, 2021, we did not have any interest rate swaps to hedge our interest risks. +55 +Table of Contents +Index to Financial Statements +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) +55 +Consolidated Balance Sheets +58 +Consolidated Statements of Operations +60 +Consolidated Statements of Comprehensive (Loss) Income +61 +Consolidated Statements of Stockholders' Equity (Deficit) +62 +Consolidated Statements of Cash Flows +64 +Notes to Consolidated Financial Statements +65 +1. Summary of Significant Accounting Policies +65 +2. Chapter 11 Emergence +71 +3. Fresh Start Accounting +72 +4. Divestitures +80 +5. Property and Equipment +81 +6. Long-Term Debt +83 +7. Equity +86 +8. Stock-Based Compensation +88 +9. Revenue From Contracts With Customers +90 +10. Leases +90 +11. Income Taxes +92 +12. Earnings Per Share +94 +13. Derivative Instruments +95 +14. Restructuring And Liability Management Expenses +98 +15. Equity Investments +98 +16. Fair Value Measurements +99 +17. Related Party Transactions +101 +18. Commitments +101 +19. Contingencies +102 +20. Supplemental Information On Oil And Gas Exploration And Production Activities +105 +21. Subsequent Events +110 +56 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 (Successor) and 2020 (Predecessor), the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows for the period from May 18, 2021 through December 31, 2021 (Successor), the period from January 1, 2021 through May 17, 2021 (Predecessor) and the years ended December 31, 2020 and 2019 (Predecessor), and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 (Successor) and 2020 (Predecessor), and the results of its operations and its cash flows for the period from May 18, 2021 through December 31, 2021 (Successor), the period from January 1, 2021 through May 17, 2021 (Predecessor) and for the years ended December 31, 2020 and 2019 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2022 expressed an unqualified opinion. +Emergence from bankruptcy +As discussed in Note 1 to the financial statements, the United States Bankruptcy Court for the District of Delaware entered an order confirming the plan for reorganization on April 28, 2021, and the Company emerged from bankruptcy on May 17, 2021. Accordingly, the accompanying financial statements have been prepared in conformity with FASB Accounting Standards Codification 852, Reorganizations, for the Successor as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods, as described in Note 3. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Depletion, depreciation and amortization expense and impairment of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 to the financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil and gas +55 +Table of Contents +Index to Financial Statements +properties (the full cost ceiling test). To estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and potential ceiling test impairment assessments. We identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense and the assessment of potential impairment as a critical audit matter. +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and/or impairment expense. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others: +• We tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessing the Company’s oil and gas properties for potential ceiling test impairment. +• We evaluated the independence, objectivity, and professional qualifications of the Company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgements made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialist. +• We evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated future development costs, and ownership interest. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for pricing differentials, where applicable; +◦ Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ Tested the model used to determine the future development costs and compared estimated future development costs used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +Valuation of oil and natural gas properties in association with fresh start accounting +As described further in Notes 1, 2 and 3 to the financial statements, on May 17, 2021, the Company emerged from Chapter 11 bankruptcy. In connection with its emergence, the Company qualified for and applied fresh start accounting. Management calculated a reorganization value, which represents the estimated fair value of the Successor's assets before considering liabilities and allocated the value to its individual assets based on their estimated fair values with the assistance of third-party valuation advisors. We identified the valuation of oil and natural gas properties associated with fresh start accounting to be a critical audit matter. +56 +Table of Contents +Index to Financial Statements +The principal considerations for our determination that the valuation of oil and natural gas properties associated with fresh start accounting are that there were significant management judgements made with respect to assumptions used to estimate the fair value of the oil and natural gas properties, including the cash flows related to recoverable reserves, production rates, future operating and development costs, future commodity prices, discount rate and risk adjustments. These inputs and assumptions involved increased auditor subjectivity in evaluating the appropriateness of those assumptions. +Our audit procedures related to the valuation of oil and natural gas properties in association with fresh start accounting included the following, among others. +• We tested the design and operating effectiveness of controls for management's review of the significant assumptions used in the third-party valuation report and valuation methodologies applied. +• We evaluated the qualifications and objectivity of the Company’s third-party valuation advisors. +• With the assistance of valuation professionals with specialized skills and knowledge, we evaluated the methodology used by management to develop oil and natural gas reserve quantities and discounted future net cash flows and key assumptions including the risk adjustment factors applied to reserves, the discount rate and income tax rate. +• We performed procedures similar to those described above on the estimated oil and gas reserves that were a key input to the valuation of proved and unproved oil and natural gas properties. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +March 1, 2022 +57 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +(In thousands) +Successor Predecessor +December 31, 2021 December 31, 2020 +Assets +Current assets: +Cash and cash equivalents $ 3,260 $ 89,861 +Accounts receivable—oil and natural gas sales 232,854 119,879 +Accounts receivable—joint interest and other 20,383 12,200 +Prepaid expenses and other current assets 12,359 160,664 +Short-term derivative instruments 4,695 27,146 +Total current assets 273,551 409,750 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 1,917,833 9,359,866 +Unproved properties 211,007 1,457,043 +Other property and equipment 5,329 88,538 +Total property and equipment 2,134,169 10,905,447 +Less: accumulated depletion, depreciation and amortization ( 278,341 ) ( 8,819,178 ) +Total property and equipment, net 1,855,828 2,086,269 +Other assets: +Equity investments — 24,816 +Long-term derivative instruments 18,664 322 +Operating lease assets 322 342 +Other assets 19,867 18,372 +Total other assets 38,853 43,852 +Total assets $ 2,168,232 $ 2,539,871 +58 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS–CONTINUED +(In thousands) +Successor Predecessor +December 31, 2021 December 31, 2020 +Liabilities, Mezzanine Equity and Stockholders’ Equity (Deficit) +Current liabilities: +Accounts payable and accrued liabilities $ 394,011 $ 244,903 +Short-term derivative instruments 240,735 11,641 +Current portion of operating lease liabilities 182 — +Current maturities of long-term debt — 253,743 +Total current liabilities 634,928 510,287 +Non-current liabilities: +Long-term derivative instruments 184,580 36,604 +Asset retirement obligation 28,264 — +Non-current operating lease liabilities 140 — +Long-term debt, net of current maturities 712,946 — +Total non-current liabilities 925,930 36,604 +Liabilities subject to compromise — 2,293,480 +Total liabilities $ 1,560,858 $ 2,840,371 +Commitments and contingencies (Notes 18 and 19) +Mezzanine Equity: +New Preferred Stock - $ 0.0001 par value, 110 thousand shares authorized, 57.9 thousand issued and outstanding at December 31, 2021 +57,896 — +Stockholders’ Equity (Deficit): +Predecessor common stock - $ 0.01 par value, 200.0 million shares authorized, 160.8 million issued and outstanding at December 31, 2020 +— 1,607 +Predecessor accumulated other comprehensive loss — ( 43,000 ) +New Common Stock - $ 0.0001 par value, 42.0 million shares authorized, 20.6 million issued and outstanding at December 31, 2021 +2 — +Additional paid-in capital 692,521 4,213,752 +New Common Stock held in reserve, 938 thousand shares +( 30,216 ) — +Accumulated deficit ( 112,829 ) ( 4,472,859 ) +Total stockholders’ equity (deficit) $ 549,478 $ ( 300,500 ) +Total liabilities, mezzanine equity and stockholders’ equity (deficit) $ 2,168,232 $ 2,539,871 +See accompanying notes to consolidated financial statements. +59 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(In thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +REVENUES: +Natural gas sales $ 906,096 $ 344,390 $ 671,535 $ 1,135,381 +Oil and condensate sales 81,347 29,106 62,902 117,937 +Natural gas liquid sales 105,141 36,780 66,814 101,448 +Net (loss) gain on natural gas, oil and NGL derivatives ( 556,819 ) ( 137,239 ) 65,291 208,360 +Total Revenues 535,765 273,037 866,542 1,563,126 +OPERATING EXPENSES: +Lease operating expenses 32,172 19,524 54,235 73,496 +Taxes other than income 30,243 12,349 28,509 40,510 +Transportation, gathering, processing and compression 212,013 161,086 456,318 508,843 +Depreciation, depletion and amortization 160,913 62,764 239,744 550,108 +Impairment of oil and natural gas properties 117,813 — 1,357,099 2,039,770 +Impairment of other property and equipment — 14,568 — — +General and administrative expenses 34,465 19,175 59,329 45,542 +Restructuring and liability management expenses 2,858 — 30,847 4,611 +Accretion expense 1,214 1,229 3,066 3,939 +Total Operating Expenses 591,691 290,695 2,229,147 3,266,819 +INCOME (LOSS) FROM OPERATIONS ( 55,926 ) ( 17,658 ) ( 1,362,605 ) ( 1,703,693 ) +OTHER EXPENSE (INCOME): +Interest expense 40,853 4,159 120,079 141,786 +Loss (Gain) on debt extinguishment 3,040 — ( 49,579 ) ( 48,630 ) +Loss from equity method investments, net — 342 11,055 210,148 +Reorganization items, net — ( 266,898 ) 152,359 — +Other expense 13,049 1,713 21,324 2,924 +Total Other Expense 56,942 ( 260,684 ) 255,238 306,228 +INCOME (LOSS) BEFORE INCOME TAXES ( 112,868 ) 243,026 ( 1,617,843 ) ( 2,009,921 ) +Income Tax (Benefit) Expense ( 39 ) ( 7,968 ) 7,290 ( 7,563 ) +NET (LOSS) INCOME $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +Dividends on New Preferred Stock $ ( 4,573 ) $ — $ — $ — +NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ ( 117,402 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +NET (LOSS) INCOME PER COMMON SHARE: +Basic $ ( 5.71 ) $ 1.56 $ ( 10.14 ) $ ( 12.49 ) +Diluted $ ( 5.71 ) $ 1.56 $ ( 10.14 ) $ ( 12.49 ) +Weighted average common shares outstanding—Basic 20,545 160,834 160,231 160,341 +Weighted average common shares outstanding—Diluted 20,545 160,834 160,231 160,341 +See accompanying notes to consolidated financial statements. +60 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +(In thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Net (loss) income $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +Foreign currency translation adjustment — 2,570 3,833 9,193 +Other comprehensive income — 2,570 3,833 9,193 +Comprehensive (loss) income $ ( 112,829 ) $ 253,564 $ ( 1,621,300 ) $ ( 1,993,165 ) +See accompanying notes to consolidated financial statements. +61 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT) +(In thousands) +Common Stock Held in Reserve Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Common Stock +Shares Amount Shares Amount +Balance at January 1, 2019 (Predecessor) 162,986 $ 1,630 — $ — $ 4,227,532 $ ( 56,026 ) $ ( 845,368 ) $ 3,327,768 +Net loss — — — — — — ( 2,002,358 ) ( 2,002,358 ) +Other comprehensive income — — — — — 9,193 — 9,193 +Stock compensation — — — — 10,677 — — 10,677 +Shares repurchased ( 3,951 ) ( 40 ) — — ( 30,648 ) — — ( 30,688 ) +Issuance of restricted stock 676 7 — — ( 7 ) — — — +Balance at December 31, 2019 (Predecessor) 159,711 $ 1,597 — $ — $ 4,207,554 $ ( 46,833 ) $ ( 2,847,726 ) $ 1,314,592 +Net loss — — — — — — ( 1,625,133 ) ( 1,625,133 ) +Other comprehensive income — — — — — 3,833 — 3,833 +Stock compensation — — — — 6,444 — — 6,444 +Shares repurchased ( 243 ) ( 3 ) — — ( 233 ) — — ( 236 ) +Issuance of restricted stock 1,294 13 — — ( 13 ) — — — +Balance at December 31, 2020 (Predecessor) 160,762 $ 1,607 — $ — $ 4,213,752 $ ( 43,000 ) $ ( 4,472,859 ) $ ( 300,500 ) +62 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY–CONTINUED +(In thousands) +Common Stock Held in Reserve Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Common Stock +Shares Amount Shares Amount +Balance at January 1, 2021 (Predecessor) 160,762 $ 1,607 — $ — $ 4,213,752 $ ( 43,000 ) $ ( 4,472,859 ) $ ( 300,500 ) +Net income — — — — — — 250,994 250,994 +Other comprehensive income — — — — — 2,570 — 2,570 +Stock compensation — — — — 6,514 — — 6,514 +Shares repurchased ( 96 ) ( 1 ) — — ( 7 ) — — ( 8 ) +Issuance of restricted stock 228 3 — — ( 2 ) — — 1 +Accumulated other comprehensive income extinguishment — — — — — 40,430 — 40,430 +Cancellation of predecessor equity ( 160,894 ) ( 1,609 ) — — ( 4,220,256 ) — 4,221,865 — +Issuance of New Common Stock 21,525 2 — — 693,773 — — 693,775 +Shares of New Common Stock held in reserve — — ( 1,679 ) ( 54,109 ) — — — ( 54,109 ) +Balance at May 17, 2021 (Predecessor) 21,525 $ 2 ( 1,679 ) $ ( 54,109 ) $ 693,774 $ — $ — $ 639,667 +Balance at May 18, 2021 (Successor) 21,525 $ 2 ( 1,679 ) $ ( 54,109 ) $ 693,774 $ — $ — $ 639,667 +Net loss — — — — — — ( 112,829 ) ( 112,829 ) +Release of New Common Stock held in reserve — — 741 23,893 — — — 23,893 +Conversion of New Preferred Stock 12 — — — 171 — — 171 +Dividends on New Preferred Stock — — — — ( 4,573 ) — — ( 4,573 ) +Stock compensation — — — — 3,149 — — 3,149 +Balance at December 31, 2021 (Successor) 21,537 $ 2 ( 938 ) $ ( 30,216 ) $ 692,521 $ — $ ( 112,829 ) $ 549,478 +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(In thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Cash flows from operating activities: +Net (loss) income $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depletion, depreciation and amortization 160,913 62,764 239,744 550,108 +Impairment of oil and natural gas properties 117,813 — 1,357,099 2,039,770 +Impairment of other property and equipment — 14,568 — — +Loss from equity investments — 342 11,055 210,289 +Gain on sale of equity method investments — — — ( 220 ) +Distributions from equity method investments — — — 2,457 +Loss (Gain) on debt extinguishment 3,040 — ( 49,579 ) ( 48,630 ) +Net loss (gain) on derivative instruments 556,819 137,239 ( 65,291 ) ( 208,360 ) +Net cash (payments) receipts on settled derivative instruments ( 322,857 ) ( 3,361 ) 159,394 123,130 +Non-cash reorganization items, net — ( 446,012 ) 21,956 — +Deferred income tax expense — — 7,290 ( 7,563 ) +Other, net 3,130 1,727 31,984 15,178 +Changes in operating assets and liabilities, net ( 113,044 ) 153,894 6,785 50,192 +Net cash provided by operating activities $ 292,985 $ 172,155 $ 95,304 $ 723,993 +Cash flows from investing activities: +Additions to oil and natural gas properties $ ( 207,113 ) $ ( 102,330 ) $ ( 367,287 ) $ ( 720,057 ) +Proceeds from sale of oil and natural gas properties 4,339 15 50,971 48,527 +Other, net 2,669 4,484 1,729 ( 3,241 ) +Net cash used in investing activities $ ( 200,105 ) $ ( 97,831 ) $ ( 314,587 ) $ ( 674,771 ) +Cash flows from financing activities: +Principal payments on Pre-Petition Revolving Credit Facility $ — $ ( 318,961 ) $ ( 383,290 ) $ ( 877,000 ) +Borrowings on Pre-Petition Revolving Credit Facility — 26,050 713,701 952,000 +Borrowings on Exit Credit Facility 406,277 302,751 — — +Principal payments on Exit Credit Facility ( 709,028 ) — — — +Principal payments on DIP credit facility — ( 157,500 ) ( 90,000 ) — +Borrowings on DIP Credit facility — — 90,000 — +Principal payments on New Credit Facility ( 477,000 ) — — — +Borrowings on New Credit Facility 641,000 — — — +Debt issuance costs and loan commitment fees ( 8,783 ) ( 7,100 ) — — +Repurchase of senior notes — — ( 22,827 ) ( 138,786 ) +Payments on Repurchase of Stock — — — ( 30,000 ) +Proceeds from issuance of New Preferred Stock — 50,000 ( 2,988 ) — +Other, net ( 1,503 ) ( 8 ) ( 1,512 ) ( 1,673 ) +Net cash (used in) provided by in financing activities $ ( 149,037 ) $ ( 104,768 ) $ 303,084 $ ( 95,459 ) +Net (decrease) increase in cash, cash equivalents and restricted cash $ ( 56,157 ) $ ( 30,444 ) $ 83,801 $ ( 46,237 ) +Cash, cash equivalents and restricted cash at beginning of period $ 59,417 $ 89,861 $ 6,060 $ 52,297 +Cash, cash equivalents and restricted cash at end of period $ 3,260 $ 59,417 $ 89,861 $ 6,060 +See accompanying notes to consolidated financial statements. +64 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Description of Company +Gulfport Energy Corporation is an independent natural gas-weighted exploration and production company focused on the production of natural gas, crude oil and NGL in the United States. The Company's principal properties are located in Eastern Ohio targeting the Utica and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. Gulfport filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on November 13, 2020, and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until its emergence on May 17, 2021. The Company refers to the post-emergence reorganized organization in the condensed financial statements and footnotes as the "Successor" for periods subsequent to May 17, 2021, and the pre-emergence organization as "Predecessor" for periods on or prior to May 17, 2021. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On the Petition Date, the Debtors filed voluntary petitions of relief under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). +The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021. The Debtors emerged from the Chapter 11 Cases on the Emergence Date. The Company's bankruptcy proceedings and related matters have been summarized below. +During the pendency of the Chapter 11 Cases, the Company continued to operate its business in the ordinary course as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief requested by the Company that was designed primarily to mitigate the impact of the Chapter 11 Cases on its operations, vendors, suppliers, customers and employees. As a result, the Company was able to conduct normal business activities and satisfy all associated obligations for the period following the Petition Date and was also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court. +Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Emergence Date. +The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements for the period ended May 17, 2021. ASC 852 specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings were classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded as reorganization items, net. Refer to Note 3 for more information regarding reorganization items. +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence date. See Note 3 for more information regarding the application of fresh start accounting. +65 +Table of Contents +Index to Financial Statements +Risks and Uncertainties +The Company's revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil, gas and NGL, which are affected by many factors outside of Gulfport’s control, including changes in market supply and demand. The COVID-19 pandemic and related shut-down of various sectors of the global economy resulted in a significant reduction in global demand for natural gas and crude oil since 2020. Changes in market supply and demand are also impacted by OPEC+ production levels, weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials, export capacity, strength of the U.S. dollar and other factors. Field-level prices received for Gulfport’s production have historically been volatile and may be subject to significant fluctuations in the future. The Company's derivative contracts serve to mitigate in part the effect of this price volatility on the Company's cash flows, and the Company has derivative contracts in place for a portion of its expected future natural gas, crude oil and NGL production. See Note 13 for further discussion of the Company's commodity derivative contracts. +Gulfport remains focused on protecting the health and well-being of its employees and the communities in which it operates while assuring the continuity of its business operations. The Company implemented preventative measures and developed corporate and field response plans to minimize unnecessary risk of exposure and prevent infection. Additionally, the Company has a crisis management team for health, safety and environmental matters and personnel issues, and has established a COVID-19 Response Team to address various impacts of the situation, as they have been developing. Gulfport has modified certain business practices (including remote working for its corporate employees and restricted employee business travel) to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities. The Company will continue to monitor trends and governmental guidelines and will adjust plans accordingly to ensure the health and safety of its employees. As a result of its business continuity measures, the Company has not experienced significant disruptions in executing its business operations in 2021. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Gulfport Energy Operating Corporation, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC and Mule Sky LLC. All intercompany balances and transactions are eliminated in consolidation. +Segments +The Company's assets and operations consist of one reportable segment. The Company has a single management team that administers all properties as a whole rather than by geographic operating area. Further, the Company measures financial performance as a single enterprise and not on an area-by-area basis. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. No material allowance was deemed necessary at December 31, 2021 and December 31, 2020. +66 +Table of Contents +Index to Financial Statements +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 to 18 months. +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash write-down is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company recognized a ceiling test impairment of $ 117.8 million in the second quarter of 2021. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 211.0 million and $ 1.5 billion at December 31, 2021 and December 31, 2020, respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 5 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company has an equity investment in a Canadian entity whose functional currency is the Canadian dollar. As of the Emergence Date, this investment is no longer accounted for under the equity method of accounting. Under the equity method of accounting, the assets and liabilities of the Canadian investment were translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses were translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, until the Emergence Date, the Company had an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ (deficit) equity. +67 +Table of Contents +Index to Financial Statements +The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes: +(In thousands) +December 31, 2019 $ ( 45,484 ) +December 31, 2020 $ ( 41,651 ) +December 31, 2021 $ — +Net (Loss) Income per Common Share +Basic net (loss) income per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net (loss) income per common share are illustrated in Note 12 . +Income Taxes +The amount of income taxes recorded by Gulfport requires interpretations of complex rules and regulations of various tax jurisdictions throughout the United States. Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple jurisdictions. The Company’s 2016 – 2021 U.S. federal and 2016 - 2021 state income tax returns remain open to examination by tax authorities, due to net operating losses. As of December 31, 2021, the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. See Note 11 for further discussion of the Company's income taxes. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression in the accompanying consolidated statements of operations. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of ASC 606, Revenue from Contracts with Customers and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial +68 +Table of Contents +Index to Financial Statements +or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 9 for additional discussion of revenue from contracts with customers. +Accounting for Stock-based Compensation +Share-based payments to employees, including grants of restricted stock units and performance vesting restricted stock units, are recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to four years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. Although management believes these estimates are reasonable, actual results could differ from these estimates. +69 +Table of Contents +Index to Financial Statements +Supplemental cash flow and non-cash information (in thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Supplemental disclosure of cash flow information: +Cash paid for reorganization items, net $ 85,706 $ 87,199 $ 24,553 $ — +Interest payments 33,295 7,272 84,823 142,664 +Income Tax Receipts ( 9,381 ) — — ( 1,794 ) +Changes in operating assets and liabilities: +(Increase) decrease in accounts receivable - oil and natural gas sales ( 52,143 ) ( 60,832 ) 1,331 88,990 +(Increase) decrease in accounts receivable - joint interest and other ( 5,178 ) ( 3,005 ) 36,055 ( 25,478 ) +(Decrease) increase in accounts payable and accrued liabilities ( 72,912 ) 79,193 126,434 ( 19,821 ) +Decrease (increase) in prepaid expenses 13,559 135,471 ( 154,948 ) 5,586 +Decrease (increase) in other assets 3,630 3,067 ( 2,087 ) 915 +Total changes in operating assets and liabilities $ ( 113,044 ) $ 153,894 $ 6,785 $ 50,192 +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation $ 1,101 $ 930 $ 2,860 $ 5,766 +Asset retirement obligation capitalized 7,964 546 2,358 6,883 +Asset retirement obligation removed due to divestiture — — ( 2,213 ) ( 30,146 ) +Interest capitalized 198 — 907 3,372 +Pre-petition revolver principal transfer to DIP credit facility — — 157,500 — +Fair value of contingent consideration asset on date of divestiture — — 23,090 ( 1,137 ) +Release of New Common Stock Held in Reserve 23,893 — — — +Foreign currency translation gain on equity method investments — 2,570 3,833 9,193 +Accounts Payable and Accrued Liabilities +Accounts payable and accrued liabilities consisted of the following at December 31, 2021 and December 31, 2020 (in thousands): +Successor Predecessor +December 31, 2021 December 31, 2020 +Accounts payable and other accrued liabilities $ 143,938 $ 120,275 +Revenue payable and suspense 180,857 124,628 +Accrued contract rejection damages and shares held in reserve 69,216 — +Total accounts payable and accrued liabilities $ 394,011 $ 244,903 +Recent Adopted Accounting Pronouncements +In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This new standard simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments. It eliminates the treasury stock method for convertible instruments and requires application of the “if-converted” method for certain agreements. In addition, the standard eliminates the beneficial conversion +70 +Table of Contents +Index to Financial Statements +and cash conversion accounting models that require separate accounting for embedded conversion features and the recognition of a debt discount and related amortization to interest expense of those embedded features. +The Company elected to early adopt this standard effective on the Emergence Date. The Company adopted the new standard using the modified retrospective approach transition method. No cumulative-effect adjustment to retained earnings was required upon adoption of the new standard. The consolidated financial statements for the Successor Period are presented under the new standard, while the predecessor periods and comparative periods are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. +2. CHAPTER 11 EMERGENCE +As described in Note 1 , on November 13, 2020, the Debtors filed the Chapter 11 Cases and the Plan, which was subsequently amended, and entered the confirmation order on April 28, 2021. The Debtors then emerged from bankruptcy upon effectiveness of the Plan on May 17, 2021. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan. +Plan of Reorganization +In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company's emergence from bankruptcy on May 17, 2021: +• Shares of the Predecessor's common stock outstanding immediately prior to the Emergence Date were cancelled, and on the Emergence Date, the Company issued 19,845,780 shares of New Common Stock and 55,000 shares of New Preferred Stock, which were the result of the transactions described below. The Company also entered into a registration rights agreement and amended its articles of incorporation and bylaws for the authorization of the New Common Stock and New Preferred Stock among other corporate governance actions. See Note 7 for further discussion of the Company's post-emergence equity; +• All outstanding obligations under the Predecessor Senior Notes were cancelled; +• The Predecessor effectuated certain restructuring transactions, including entering into a plan of Merger with Gulfport Merger Sub, Inc., a newly formed, wholly owned subsidiary of Gulfport ("Merger Sub"), pursuant to which Merger Sub was merged with and into Predecessor, resulting in the Predecessor becoming a wholly owned subsidiary of Gulfport; +• The Debtors entered into a Second Amended and Restated Credit Agreement (the "Exit Credit Agreement") with the Bank of Nova Scotia as administrative agent, various lender parties and acknowledged and agreed to by certain of Gulfport's subsidiaries, as guarantors, providing for (i) a new money senior secured reserve-based revolving credit facility in an aggregate maximum principal amount of up to $ 1.5 billion (the "Exit Facility"); (ii) a senior secured term loan in an aggregate maximum principal amount of up to $ 180 million (the "First-Out Term Loan") and together with the Exit Facility (the "Exit Credit Facility"), collectively with an initial borrowing base and elected commitment amount of up to $ 580 million (less the amount of any term loan deemed funded by any RBL Lender that is not a Consenting RBL Lender); +• The Company entered into an indenture to issue up to $ 550 million aggregate principal amount of its 8.000 % senior notes due 2026, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “1145 Indenture,” and such senior notes issued thereunder, the “1145 Notes”), under section 1145 of the Bankruptcy Code (“Section 1145”). Certain eligible holders have made an election (the “4(a)(2) Election”) entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “4(a)(2) Indenture,” and such senior notes issued thereunder, the “4(a)(2) Notes”), under Section 4(a)(2) of the Securities Act of 1933, as amended as opposed to its share of the up to $ 550 million aggregate principal amount of 1145 Notes. The 4(a)(2) Indenture's terms are substantially similar to the terms of the 1145 Indenture. The 1145 Indenture and the 4(a)(2) Indenture are referred to together as the "Indentures". The 1145 Notes and the 4(a)(2) Notes are collectively referred to as the "Successor Senior Notes"; +• The DIP Credit Facility indefeasibly converted into the Exit Facility, and all commitments under the DIP Credit Facility terminated. Each holder of an Allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility; +• Each holder of an Allowed Notes Claim received its pro rata share of 19,714,204 shares of New Common Stock, 54,967 shares of New Preferred Stock and New Unsecured Senior Notes; +71 +Table of Contents +Index to Financial Statements +• 1,678,755 shares of New Common Stock were issued to the Disputed Claims reserve; +• Each holder of a Class 4A Claim greater than the Convenience Claim Threshold received its pro rata share of 119,679 shares of New Common Stock (which were issued to the Unsecured Claims Distribution Trust), $ 10 million in cash, subject to adjustment by the Unsecured Claims Distribution Trustee, and 100 % of the Mammoth Shares; +• Each holder of a Class 4B claim greater than the Convenience Claim Threshold received its pro rata share of 11,897 shares of New Common Stock, 33 shares of New Preferred Stock, the Rights Offering Subscription Rights and the Successor Senior Notes; +• Each holder of a Convenience Class Claim will share in a $ 3 million cash distribution pool, which the Unsecured Claims Distribution Trustee may increase by an additional $ 2 million by reducing the Gulfport Parent Cash Pool; +• Each intercompany claim was cancelled on the Emergence Date and holders of intercompany interests received no recovery or distribution; +• The Company conducted a Rights Offering and issued 50,000 shares of New Preferred Stock at $ 1,000 per share to holders of claims against the Predecessor Subsidiaries, raising $ 50 million in proceeds. Additionally, 5,000 shares were issued to the Back Stop Commitment counterparties in lieu of cash consideration as per the Backstop Commitment Agreement; and +• The Company adopted the Gulfport Energy Corporation 2021 Stock Incentive Plan (the "Incentive Plan") effective on the Emergence Date and reserved 2,828,123 shares of New Common Stock for issuance to Gulfport's employees and non-employee directors pursuant to equity incentive awards to be granted under the Incentive Plan. +Additionally, pursuant to the Plan confirmed by the Bankruptcy Court, the Company's post-emergence Board of Directors is comprised of five directors, including the Company's Chief Executive Officer, Timothy Cutt, and four non-employee directors, David Wolf, Guillermo Martinez, Jason Martinez and David Reganato. +Executory Contracts +Subject to certain exceptions, under the Bankruptcy Code the Debtors were entitled to assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. Generally, the rejection of an executory contract was treated as a pre-petition breach of such contract and, subject to certain exceptions, relieved the Debtors from performing future obligations under such contract but entitled the counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease required the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights thereto. Refer to Note 19 for more information on potential future rejection damages related to general unsecured claims. +3. FRESH START ACCOUNTING +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence Date. The Company qualified for fresh start accounting because (1) the holders of existing voting shares of the Company prior to the Emergence Date received less than 50% of the voting shares of the Successor's equity following its emergence from bankruptcy and (2) the reorganization value of the Company's assets immediately prior to confirmation of the Plan of approximately $ 2.3 billion was less than the post-petition liabilities and allowed claims of $ 3.1 billion. +In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations . Accordingly, the consolidated financial statements after May 17, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Emergence Date fair values of the Successor's assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor. +72 +Table of Contents +Index to Financial Statements +Reorganization Value +Reorganization value is derived from an estimate of enterprise value, or fair value of the Company's interest-bearing debt and stockholders' equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $ 1.3 billion and $ 1.9 billion. With the assistance of third-party valuation advisors, the Company determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. Deferred income taxes were determined in accordance with FASB ASC Topic 740 - Income Taxes . For GAAP purposes, the Company valued the Successor's individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $ 1.6 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process. +The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of May 17, 2021. As estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties, the resolution of contingencies is beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially. +The following table reconciles the enterprise value to the implied fair value of the Successor's equity as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Less: Fair value of debt ( 852,751 ) +Successor equity value (2) +$ 748,775 +(1) Restricted cash is not included in the above table. +(2) Inclusive of $ 55 million of mezzanine equity. +The following table reconciles the enterprise value to the reorganization value as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Plus: Current and other liabilities 686,489 +Plus: Asset retirement obligations 19,084 +Less: Common stock reserved for settlement of claims post Emergence Date ( 54,109 ) +Reorganization value of Successor assets $ 2,252,990 +(1) Restricted cash is not included in the above table. +The fair values of our oil and natural gas properties, other property and equipment, derivative instruments, equity investments and asset retirement obligations were estimated as of the Emergence Date. +Oil and natural gas properties . The Company's principal assets are its oil and natural gas properties, which are accounted for under the full cost method of accounting. The Company determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all developed wells and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future +73 +Table of Contents +Index to Financial Statements +commodity prices escalated by an inflationary rate after seven years, adjusted for differentials and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area. +Other property and equipmen t. The fair value of other property and equipment, such as land, buildings, vehicles, computer equipment and other equipment, was maintained at net book value as the carrying value reasonably approximated the fair value of the assets. +Asset retirement obligation s. In accordance with FASB ASC Topic 410 - Asset Retirement and Environmental Obligations ("ASC 410"), the asset retirement obligations associated with the Company's oil and gas assets was valued using the income approach. The fair value of the Company’s asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, updated estimates of timing of reclamation obligations, an appropriate long-term inflation adjustment, and the Company's revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of the Company's credit standing. +Derivative Instruments. The fair value of derivative instruments was adjusted based on the change in the Company’s credit rating reflecting the Company’s credit standing at the Emergence Date. +Equity Investments . The fair value of the Company's investment in Grizzly was reduced by $ 27 million. The reduction in valuation was based upon the assessment of the investment by the Company's new management and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls which will lead to further dilution of its equity ownership interest. +74 +Table of Contents +Index to Financial Statements +Consolidated Balance Sheet +The following consolidated balance sheet is as of May 17, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Emergence Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets and liabilities. +As of May 17, 2021 +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Assets +Current assets: +Cash and cash equivalents $ 146,545 $ ( 145,019 ) (a) $ — $ 1,526 +Restricted cash — 57,891 (b) — 57,891 +Accounts receivable—oil and natural gas sales 180,711 — — 180,711 +Accounts receivable—joint interest and other 15,431 — — 15,431 +Prepaid expenses and other current assets 86,189 ( 60,894 ) (c) — 25,295 +Short-term derivative instruments 3,324 — 141 (r) 3,465 +Total current assets 432,200 ( 148,022 ) 141 284,319 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 9,558,121 — ( 7,860,713 ) (s) 1,697,408 +Unproved properties 1,375,681 — ( 1,145,507 ) (s) 230,174 +Other property and equipment 38,026 — ( 31,133 ) (t) 6,893 +Total property and equipment 10,971,828 — ( 9,037,353 ) 1,934,475 +Accumulated depletion, depreciation and amortization ( 8,870,723 ) — 8,870,723 (u) — +Total property and equipment, net 2,101,105 — ( 166,630 ) 1,934,475 +Other assets: +Equity investments 27,044 — ( 27,044 ) (v) — +Long-term derivative instruments 7,468 — 715 (w) 8,183 +Operating lease assets 47 — — 47 +Other assets 18,866 7,100 (d) — 25,966 +Total other assets 53,425 7,100 ( 26,329 ) 34,196 +Total assets $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +75 +Table of Contents +Index to Financial Statements +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Liabilities and Stockholders’ Equity (Deficit) +Current liabilities: +Accounts payable and accrued liabilities $ 384,200 $ 122,599 (e) $ — $ 506,799 +Short-term derivative instruments 96,116 — 2,784 (x) 98,900 +Current portion of operating lease liabilities — 38 (f) — 38 +Current maturities of long-term debt 280,251 ( 220,251 ) (g) — 60,000 +Total current liabilities 760,567 ( 97,614 ) 2,784 665,737 +Non-current liabilities: +Long-term derivative instruments 69,331 — 11,411 (y) 80,742 +Asset retirement obligation — 65,341 (h) ( 46,257 ) (z) 19,084 +Non-current operating lease liabilities — 9 (i) — 9 +Long-term debt, net of current maturities — 792,751 (j) — 792,751 +Total non-current liabilities 69,331 858,101 ( 34,846 ) 892,586 +Liabilities subject to compromise 2,224,449 ( 2,224,449 ) (k) — — +Total liabilities $ 3,054,347 $ ( 1,463,962 ) $ ( 32,062 ) $ 1,558,323 +Commitments and contingencies +Mezzanine Equity: +New Preferred Stock $ — $ 55,000 (l) $ — $ 55,000 +Stockholders’ equity (deficit): +Predecessor common stock 1,609 ( 1,609 ) (m) — — +New Common Stock — 2 (n) — 2 +Additional paid-in capital 4,215,838 ( 3,522,064 ) (o) — 693,774 +New Common Stock held in reserve — ( 54,109 ) (p) — ( 54,109 ) +Accumulated other comprehensive loss ( 40,430 ) 40,430 (q) — — +Retained earnings (accumulated deficit) ( 4,644,634 ) 4,805,390 (q) ( 160,756 ) (aa) — +Total stockholders’ equity (deficit) $ ( 467,617 ) $ 1,268,040 $ ( 160,756 ) $ 639,667 +Total liabilities, mezzanine equity and stockholders’ equity (deficit) $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +76 +Table of Contents +Index to Financial Statements +Reorganization Adjustments (in thousands) +(a) The table below reflects changes in cash and cash equivalents on the Emergence Date from implementation of the Plan: +Release of escrow funds by counterparties as a result of the Plan $ 63,068 +New Preferred Stock rights offering proceeds 50,000 +Funds required to rollover the DIP Credit Facility and Pre-Petition Revolving Credit Facility into the Exit Facility ( 175,000 ) +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest ( 1,022 ) +Payment of issuance costs related to the Exit Credit Facility ( 10,250 ) +Funding of the Professional Fee Escrow ( 43,891 ) +Payment of professional fees at Emergence Date ( 7,964 ) +Transfer to restricted cash for the Unsecured Claims Distribution Trust ( 1,000 ) +Transfer to restricted cash for the Convenience Claims Cash Pool ( 3,000 ) +Transfer to restricted cash for the Parent Cash Pool ( 10,000 ) +Payment of severance costs at Emergence Date ( 5,960 ) +Net change in cash and cash equivalents $ ( 145,019 ) +(b) Changes in restricted cash reflect the net effect of transfers from cash and cash equivalents for the Professional Fee Escrow and various claims class cash pools. +(c) Changes in prepaid expenses and other current assets include the following: +Release of escrow funds as a result of the Plan $ ( 63,068 ) +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Prepaid compensation earned at Emergence ( 2,073 ) +Net change in prepaid expenses and other current assets $ ( 60,894 ) +(d) Changes in other assets were due to capitalization of debt issuance costs related to the Exit Credit Facility. +(e) Changes in accounts payable and accrued liabilities included the following: +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest $ ( 1,022 ) +Payment of professional fees at emergence ( 7,964 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust 1,000 +Accrued payable for claims to be settled via Convenience Claims Cash Pool 3,000 +Accrued payable for claims to be settled via Parent Cash Pool 10,000 +Professional fees payable at Emergence 18,047 +Accrued payable for General Unsecured Claims against Gulfport Parent to be settled via 4A Claims distribution from common shares held in reserve 23,894 +Accrued payable for General Unsecured Claims against Gulfport Subsidiary to be settled via 4B Claims distribution from common shares held in reserve 30,216 +Reinstatement of payables due to Plan effects 45,428 +Net change in accounts payable and accrued liabilities $ 122,599 +(f) Changes to current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +77 +Table of Contents +Index to Financial Statements +(g) Changes in the current maturities of long-term debt include the following: +Current portion of Term Notes issued under the Exit Facility $ 60,000 +Payment of DIP Facility to effectuate Exit Facility ( 157,500 ) +Transfer of post-petition RBL borrowings to Exit Facility ( 122,751 ) +Net changes to current maturities of long-term debt $ ( 220,251 ) +(h) Reflects the reclassification of asset retirement obligations from liabilities subject to compromise. +(i) Changes to non-current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +(j) Changes in long-term debt include the following: +Emergence Date draw on Exit Facility $ 122,751 +Noncurrent portion of First-Out Term Loan issued under the Exit Credit Facility 120,000 +Issuance of Successor Senior Notes 550,000 +Net impact to long-term debt, net of current maturities $ 792,751 +(k) On the Emergence Date, liabilities subject to compromise were settled in accordance with the Plan as follows: +General Unsecured Claims settled via Class 4A, 4B, and 5B distributions $ 74,098 +Predecessor Senior Notes and associated interest 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Reinstatement of Predecessor Claims as Successor liabilities 45,475 +Reinstatement of Predecessor asset retirement obligations 65,341 +Total liabilities subject to compromise settled in accordance with the Plan $ 2,224,449 +The resulting gain on liabilities subject to compromise was determined as follows: +Pre-petition General Unsecured Claims Settled at Emergence $ 74,098 +Predecessor Senior Notes Claims settled at Emergence 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Rollover of Pre-Petition Revolving Credit Facility into Exit RBL Facility ( 197,500 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust ( 1,000 ) +Accrued payable for claims to be settled via Convenience Claims Cash Pool ( 3,000 ) +Accrued payable for claims to be settled via Parent Cash Pool ( 10,000 ) +Accrued payable for shares to be transferred to trust ( 54,109 ) +Issuance of New Common Stock to settle Predecessor liabilities ( 639,666 ) +Issuance of Successor Senior Notes in settlement of Class 4B and 5B claims ( 550,000 ) +Gain on settlement of liabilities subject to compromise $ 658,358 +(l) Changes to New Preferred Stock reflect the fair value of preferred shares issued in the Rights Offering. +(m) Changes in Predecessor common stock reflect the extinguishment of Predecessor equity as per the Plan. +78 +Table of Contents +Index to Financial Statements +(n) Changes in New Common Stock included the following: +Issuance of common stock to settle General Unsecured Claims against Gulfport Parent (par value) $ — +Issuance of common stock to settle General Unsecured Claims against Gulfport Subsidiaries (par value) 2 +Common stock reserved for settlement of claims post Emergence Date (par value) — +Net change to New Common Stock $ 2 +(o) Changes to paid in capital included the following: +Issuance of common stock to settle General Unsecured Claims against Gulfport Parent $ 27,751 +Issuance of common stock to settle General Unsecured Claims against Gulfport Subsidiaries 666,022 +Extinguishment of Predecessor stock-based compensation 4,419 +Extinguishment of Predecessor paid in capital ( 4,220,256 ) +Net change to paid in capital $ ( 3,522,064 ) +(p) New Common Stock held in reserve to settle Allowed General Unsecured Claims include: +Shares held in reserve to settle Allowed Claims against Gulfport Parent ( 23,894 ) +Shares held in reserve to settle Allowed Claims against Gulfport Subsidiary ( 30,215 ) +Total New Common Stock held in reserve $ ( 54,109 ) +(q) Change to retained earnings (accumulated deficit) included the following: +Gain on settlement of liabilities subject to compromise $ 658,358 +Extinguishment of Predecessor common stock and paid in capital 4,221,864 +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Deferred compensation earned at Emergence ( 2,073 ) +Extinguishment of Predecessor accumulated other comprehensive income ( 40,430 ) +Write-off of debt issuance costs related to First-Out Term Loan ( 3,150 ) +Severance costs incurred as a result of the Plan ( 5,961 ) +Professional fees earned at Emergence ( 18,047 ) +Rights offering backstop commitment fee ( 5,000 ) +Extinguishment of Predecessor stock-based compensation ( 4,418 ) +Net change to retained earnings (accumulated deficit) $ 4,805,390 +Fresh Start Adjustments +(r) The change in fair value of short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(s) The change in oil and natural gas properties represents the fair value adjustment to the Company's properties due to the adoption of fresh start accounting. +(t) Predecessor accumulated depreciation and amortization for other property and equipment was net against the gross value of the assets with the adoption of fresh start accounting. +(u) Predecessor accumulated depreciation and amortization was eliminated with the adoption of fresh start accounting. +(v) The change in equity investments is due to the fair value adjustment to the Company's Grizzly investment. +79 +Table of Contents +Index to Financial Statements +(w) The change in fair value of long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(x) The change in fair value of liabilities related to short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(y) The change in fair value of liabilities related to long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(z) The fair value of asset retirement obligations was reduced due to the change in the Company's credit adjusted risk-free rate and expected economic life estimates. +(aa) Changes to retained earnings represent the total impact of fresh start adjustments to the post-reorganization balance sheet. +Reorganization Items, Net +The Company has incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, the estimate of liabilities related to the rejection of certain midstream contracts reflects the best estimate of the most probable outcomes of ongoing litigation and settlement negotiations. The amount of these items, which were incurred in reorganization items, net within the accompanying unaudited condensed consolidated statements of operations, have significantly affected the Company's statements of operations. +The following table summarizes the components in reorganization items, net included in the Company's unaudited consolidated statements of operations (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Legal and professional advisory fees $ — $ ( 81,565 ) +Net gain on liabilities subject to compromise — 575,182 +Fresh start adjustments, net — ( 160,756 ) +Elimination of predecessor accumulated other comprehensive income — ( 40,430 ) +Debt issuance costs — ( 3,150 ) +Other items, net — ( 22,383 ) +Total reorganization items, net $ — $ 266,898 +4. DIVESTITURES +Sale of Water Infrastructure Assets +On January 2, 2020, the Company closed on the sale of its SCOOP water infrastructure assets to a third-party water service provider. The Company received $ 50.0 million in cash proceeds upon closing and has an opportunity to earn potential additional incentive payments over the next 14 years, subject to the Company's ability to meet certain thresholds which will be driven by, among other things, the Company's future development program and water production levels. The agreement contained no minimum volume commitments. The fair value of the contingent consideration as of the closing date was $ 23.1 million. See Note 16 for additional discussion of the fair value of the contingent consideration. +The divested assets were included in the amortization base of the full cost pool and no gain or loss was recognized in the accompanying consolidated statements of operations as a result of the sale. +80 +Table of Contents +Index to Financial Statements +5. PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2021 and 2020 are as follows (in thousands): +Successor Predecessor +December 31, 2021 December 31, 2020 +Proved oil and natural gas properties $ 1,917,833 $ 9,359,866 +Unproved properties 211,007 1,457,043 +Other depreciable property and equipment 4,943 85,530 +Land 386 3,008 +Total property and equipment 2,134,169 10,905,447 +Accumulated depletion, depreciation, amortization and impairment ( 278,341 ) ( 8,819,178 ) +Property and equipment, net $ 1,855,828 $ 2,086,269 +As discussed in Note 3 . the Company recorded its property, plant and equipment at fair value as of the Emergence Date. +Oil and Natural Gas Properties +Under the full cost method of accounting, capitalized costs of oil and natural gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1 . During the Successor Period and the years ended December 31, 2020, and 2019, the Company incurred $ 117.8 million, $ 1.4 billion, and $ 2.0 billion of impairments, respectively, as a result of its oil and natural gas properties exceeding its calculated ceiling. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for natural gas, oil and NGL, which significantly reduced proved reserves values and proved reserves. The Company did not record an impairment of its oil and natural gas properties during the 2021 Predecessor Period. +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 8.0 million, $ 11.9 million, $ 25.0 million and $ 30.1 million for the Predecessor Period, the Successor Period, and the years ended December 31, 2020 and 2019, respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 0.69 , $ 0.45 , $ 0.61 and $ 1.08 per Mcfe for the Successor Period, the Predecessor Period, and the years ended December 31, 2020 and 2019, respectively. +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2021 (in thousands): +Costs Incurred in +Period from May 18, 2021 through December 31, 2021 +Fresh Start Adjustments (May 17, 2021) (1) +Total +Acquisition costs $ 8,687 $ 202,296 $ 210,983 +Exploration costs — — — +Development costs 18 — 18 +Capitalized interest 6 — 6 +Total oil and natural gas properties not subject to amortization $ 8,711 $ 202,296 $ 211,007 +_____________________ +(1) Reflects carrying values of our unproved properties as a result of the application of fresh start accounting upon emergence from bankruptcy (see Note 3 for additional information) that remain in unproved properties as of December 31, 2021. +81 +Table of Contents +Index to Financial Statements +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2021: +Successor +December 31, 2021 +(In thousands) +Utica $ 175,028 +SCOOP 35,975 +Other 4 +$ 211,007 +As of December 31, 2020, approximately $ 1.5 billion of non-producing property costs were subject to amortization. +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years . However, the majority of the Company's non-producing leases in the Utica have five-year extension terms which could extend this time frame beyond five years . +Asset Retirement Obligation +A reconciliation of the Company's asset retirement obligation for the Predecessor Period, the Successor Period, and the year ended December 31, 2020 is as follows (in thousands): +Asset retirement obligation, January 1, 2020 (Predecessor) $ 60,355 +Liabilities incurred 2,358 +Liabilities removed due to divestitures ( 2,213 ) +Accretion expense 3,066 +Total asset retirement obligation, December 31, 2020 (Predecessor) 63,566 +Less: amounts reclassified to liabilities subject to compromise ( 63,566 ) +Total asset retirement obligation reflected as non-current liabilities, December 31, 2020 (Predecessor) $ — +Asset retirement obligation at January 1, 2021 (Predecessor) $ 63,566 +Liabilities incurred 546 +Accretion expense 1,229 +Ending balance as of May 17, 2021 (Predecessor) $ 65,341 +Fresh start adjustments (1) +( 46,257 ) +Asset retirement obligation at May 18, 2021 (Successor) $ 19,084 +Liabilities incurred 204 +Accretion expense 1,214 +Revisions in estimated cash flows (2) +7,762 +Asset retirement obligation at December 31, 2021 (Successor) $ 28,264 +(1) As discussed in Note 3 , the Company recorded its asset retirement obligation at fair value as of the Emergence Date. +(2) Revisions represent changes in the present value of liabilities resulting from changes in estimated costs. +82 +Table of Contents +Index to Financial Statements +6. LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31, 2021 and 2020 (in thousands): +Successor Predecessor +December 31, 2021 December 31, 2020 +New Credit Facility $ 164,000 $ — +8.000 % senior unsecured notes due 2026 +550,000 — +DIP credit facility — 157,500 +Pre-petition revolving credit facility — 292,910 +6.625 % senior unsecured notes due 2023 +— 324,583 +6.000 % senior unsecured notes due 2024 +— 579,568 +6.375 % senior unsecured notes due 2025 +— 507,870 +6.375 % senior unsecured notes due 2026 +— 374,617 +Building loan — 21,914 +Net unamortized debt issuance costs ( 1,054 ) — +Total Debt, net 712,946 2,258,962 +Less: current maturities of long term debt — ( 253,743 ) +Less: amounts reclassified to liabilities subject to compromise — ( 2,005,219 ) +Total Debt reflected as long term $ 712,946 $ — +Of the total debt outstanding on December 31, 2021, the New Credit Facility, which matures October 14, 2025, and the 8.000 % Senior Notes due May 17, 2026, will mature within the next five years. +Successor Debt +Our post-emergence debt consisted of the Successor Senior Notes and the Exit Credit Facility, which was amended and refinanced in October 2021 with the New Credit Facility. +New Credit Facility +On October 14, 2021, the Company entered into the Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties ("New Credit Facility"). The New Credit Facility provides for an aggregate maximum principal amount of up to $ 1.5 billion, an initial borrowing base of $ 850.0 million and an initial aggregate elected commitment amount of $ 700.0 million. The credit agreement also provides for a $ 175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The New Credit Facility amended and refinanced the Exit Credit Facility. +As of December 31, 2021, the Company had $ 164.0 million outstanding borrowings under the New Credit Facility and $ 122.1 million in letters of credit outstanding. As of December 31, 2021, the Company was in compliance with all covenants under the New Credit Facility. +The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year, with the first scheduled redetermination to be on or around May 1, 2022. +The New Credit Facility bears interest at a rate equal to, at the Company’s election, either (a) LIBOR plus an applicable margin that varies from 2.75 % to 3.75 % per annum or (b) a base rate plus an applicable margin that varies from 1.75 % to 2.75 % per annum, based on borrowing base utilization. The New Credit Facility will mature on October 14, 2025. The Company is required to pay a commitment fee of 0.50 % per annum on the average daily unused portion of the current aggregate commitments under the New Credit Facility. The Company is also required to pay customary letter of credit and fronting fees. +As of December 31, 2021, the New Credit Facility bore interest at a weighted average rate of 3.19 %. +83 +Table of Contents +Index to Financial Statements +The credit agreement requires the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.25 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00. +The obligations under the New Credit Facility, certain swap obligations and certain cash management obligations, are guaranteed by the Company and the wholly-owned domestic material subsidiaries of the Borrower (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and secured by substantially all of the Loan Parties’ assets (subject to customary exceptions). +The credit agreement also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements and borrowing base certificates, conduct of business, maintenance of property, maintenance of insurance, entry into certain derivatives contracts, restrictions on the incurrence of liens, indebtedness, asset dispositions, restricted payments, and other customary covenants. These covenants are subject to a number of limitations and exceptions. +Successor Senior Notes +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company issued $ 550 million aggregate principal amount of its 8.000 % senior notes due 2026. +The notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the New Credit Facility. +Interest on the Successor Senior Notes will be payable semi-annually, on June 1 and December 1 of each year. +The Successor Senior Notes were issued under the Indentures, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the Guarantors. +The covenants of the 1145 Indenture (other than the payment covenant) require that the Company comply with the covenants of the 4(a)(2) Indenture, as amended. The 4(a)(2) Indenture contains covenants limiting the Issuer’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) pay dividends or distributions in respect of certain equity interests or redeem, repurchase or retire certain equity interests or subordinated indebtedness, (iii) make certain investments, (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in certain lines of business, (viii) engage in consolidations, mergers and acquisitions, (ix) create unrestricted subsidiaries and (x) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the Successor Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply. +Exit Credit Facility +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company entered into the Exit Credit Agreement, which provided for (i) the Exit Facility in an aggregate principal amount of up to $ 1.5 billion and (ii) the First-Out Term Loan in an aggregate maximum amount of up to $ 180.0 million. The Exit Facility had an initial borrowing base and elected commitment amount of up to $ 580.0 million. +Loans drawn under the Exit Facility were not subject to amortization, while loans drawn under the First-Out Term Loan amortized with $ 15.0 million quarterly installments, commencing on the closing date and occurring every three months after the closing date. The Exit Credit Facility was scheduled to mature on May 17, 2024. +The Exit Facility provided for a $ 150.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The Exit Facility also included a $ 40 million availability blocker that was to remain in place until Successful Midstream Resolution (as defined in the Exit Credit Agreement). The New Credit Facility amended and refinanced the Exit Credit Facility. +Chapter 11 Proceedings - Predecessor Debt +Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became +84 +Table of Contents +Index to Financial Statements +immediately due and payable. However, Section 362 of the Bankruptcy Code stayed the creditors from taking any action as a result of the default. +The principal amounts from the Predecessor Senior Notes, Building Loan and Pre-Petition Revolving Credit Facility, other than letters of credit drawn on the Pre-Petition Revolving Credit Facility after the Petition Date, were classified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020. +Debtor-in-Possession Credit Agreement +Pursuant to the RSA, the Consenting RBL Lenders agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $ 262.5 million consisting of (a) $ 105 million of new money and (b) $ 157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The terms and conditions of the DIP Credit Facility are set forth in that certain form of credit agreement governing the DIP Credit Facility. The proceeds of the DIP Credit Facility were used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. On the Emergence Date, the DIP Facility was terminated and the lenders indefeasibly converted into the Exit Facility. Each holder of an allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Pre-Petition Revolving Credit Facility +Prior to the Emergence Date, the Company had entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The Pre-Petition Revolving Credit Facility had a borrowing base of $ 580 million. On the Emergence Date, the Pre-Petition Revolving Credit Facility was terminated and the lenders indefeasibly converted into the Exit Credit Facility. Each holder of an allowed claim under the Pre-Petition Revolving Credit Facility received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Predecessor Senior Notes +On the Emergence Date, all outstanding obligations under the Predecessor Senior Notes were cancelled in accordance with the Plan and each holder of an allowed unsecured notes claim received their pro-rata share of 19.7 million shares of New Common Stock and $ 550 million of the Successor Senior Notes. +Predecessor Building Loan +In June 2015, the Company entered into a loan for the construction of the Company's corporate headquarters in Oklahoma City, which was substantially completed in December 2016. On the Emergence Date, ownership of the Company's corporate headquarters reverted to the Building Loan lender and the Company entered into a short-term lease agreement for the headquarters with the lender. As a result, the building loan liability was discharged as of the Emergence Date. +Predecessor Debt Repurchases +In July of 2019, the Company's Board of Directors authorized $ 100 million of cash to be used to repurchase its Senior Notes in the open market at discounted values to par. In December 2019, the Company's Board of Directors increased the authorized size of its senior note repurchase program to $ 200 million in total. During the year ended December 31, 2020, the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $ 73.3 million aggregate principal amount of its outstanding Predecessor Senior Notes for $ 22.8 million in cash and recognized a $ 49.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. This gain is included in gain on debt extinguishment in the accompanying consolidated statements of operations. +85 +Table of Contents +Index to Financial Statements +Interest Expense +The following schedule shows the components of interest expense for the Successor Period, Predecessor Period, and the years ended December 31, 2020, and 2019 (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Cash paid for interest $ 33,295 $ 7,272 $ 84,823 $ 142,664 +Change in accrued interest 6,061 ( 1,503 ) 30,600 ( 3,834 ) +Capitalized interest ( 198 ) — ( 907 ) ( 3,372 ) +Amortization of loan costs 1,663 — 5,563 6,328 +Other 32 ( 1,610 ) — — +Total interest expense $ 40,853 $ 4,159 $ 120,079 $ 141,786 +The Company capitalized approximately $ 0.2 million and $ 0.9 million in interest expense to undeveloped oil and natural gas properties during the Successor Period and the year ended December 31, 2020, respectively. The Company did not capitalize interest expense for the Predecessor Period. +Fair Value of Debt +At December 31, 2021, the carrying value of the outstanding debt represented by the Successor Senior Notes was approximately $ 548.9 million. Based on the quoted market prices (Level 1), the fair value of the Successor Senior Notes was determined to be approximately $ 603.8 million at December 31, 2021. +7. EQUITY +As discussed in Note 2 , the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on the Emergence Date to provide for, among other things, (i) the authority to issue 42 million shares of New Common Stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of New Preferred Stock, with a par value of $ 0.0001 per share and a liquidation preference of $ 1,000 per share. +New Common Stock +On the Emergence Date, all existing shares of the Predecessor's common stock were cancelled. The Successor issued approximately 19.8 million shares of New Common Stock and 1.7 million shares of New Common Stock were issued to the Disputed Claims reserve. +New Preferred Stock +On the Emergence Date, the Successor issued 55,000 shares of New Preferred Stock. +Holders of New Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10 % per annum of the Liquidation Preference (as defined below) with respect to cash dividends and 15 % per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of New Preferred Stock (“PIK Dividends”). Gulfport was required to pay PIK Dividends for so long as the quotient obtained by dividing (i) Total Net Funded Debt (as defined in the Exit Credit Facility) by (ii) the last twelve months of EBITDAX (as defined in the Exit Credit Facility) calculated as at the applicable record date is equal to or greater than 1.50 . If such ratio is less than 1.50 such dividend may be paid in either cash or as PIK Dividends, subject to certain conditions under the Company's credit agreement. This requirement with respect to PIK Dividends is no longer applicable upon the effective date of the New Credit Facility. +86 +Table of Contents +Index to Financial Statements +Each holder of shares of New Preferred Stock has the right (the “Conversion Right”), at its option and at any time, to convert all or a portion of the shares of New Preferred Stock that it holds into a number of shares of Common Stock equal to the quotient obtained by dividing (x) the product obtained by multiplying (i) the Liquidation Preference times (ii) an amount equal to one (1) plus the Per Share Makewhole Amount (as defined in the Preferred Terms) on the date of conversion, by (y) $ 14.00 per share (as may be adjusted under the Preferred Terms) (the “Conversion Price”). The shares of New Preferred Stock outstanding at December 31, 2021 would convert to 4.1 million shares of New Common Stock if all holders of New Preferred Stock exercised their Conversion Right. +Gulfport shall have the right, but not the obligation, to redeem all, but not less than all, of the outstanding shares of New Preferred Stock by notice to the holders of New Preferred Stock, at the greater of (i) the aggregate value of the New Preferred Stock, calculated by the Current Market Price (as defined in the Preferred Terms) of the number of shares of Common Stock into which, subject to redemption, such New Preferred Stock would have been converted if such shares were converted pursuant to the Conversion Right at the time of such redemption and (ii) (y) if the date of such redemption is on or prior to the three year anniversary of the Emergence Date, the sum of the Liquidation Preference plus the sum of all unpaid PIK Dividends through the three year anniversary of the Emergence Date, or (x) if the date of such redemption is after the three year anniversary of the Emergence Date, the Liquidation Preference (the “Redemption Price”). +Following the Emergence Date, if there is a Fundamental Change (as defined in the Preferred Terms), Gulfport is required to redeem all, but not less than all, of the outstanding shares of New Preferred Stock by cash payment of the Redemption Price per share of New Preferred Stock within three ( 3 ) business days of the occurrence of such Fundamental Change. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if Gulfport lacks sufficient cash to redeem all outstanding shares of New Preferred Stock, the Company is required to redeem a pro rata portion of each holder’s shares of New Preferred Stock. +The New Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by Gulfport or converted into Common Stock. +The New Preferred Stock has been classified as mezzanine equity in the accompanying consolidated balance sheets due to the redemption features noted above. +Dividends +During the Successor Period, the company paid dividends on its New Preferred Stock, which included 3,071 shares of New Preferred Stock paid in kind, approximately $ 55 thousand of cash-in-lieu of fractional shares, and $ 1.5 million of cash dividends to holders of our New Preferred Stock. The following table summarizes PIK dividends and conversions of the Company’s New Preferred Stock subsequent to the Emergence Date: +New Preferred Stock at May 18, 2021 (Successor) 55,000 +Issuance of New Preferred Stock 3,071 +Conversion of New Preferred Stock ( 175 ) +New Preferred Stock at December 31, 2021 57,896 +Share Repurchase Program +On November 1, 2021, the Company's Board of Directors approved a stock repurchase program to acquire up to $ 100.0 million of its New Common Stock. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of New Common Stock. The Company intends to purchase shares under the Repurchase Program opportunistically with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program is authorized to extend through December 31, 2022 and may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. Any shares of New Common Stock repurchased are expected to be cancelled. No shares have been repurchased under the Repurchase Program as of December 31, 2021. +87 +Table of Contents +Index to Financial Statements +8. STOCK-BASED COMPENSATION +As discussed in Note 2 , on the Emergence Date, the Company's Predecessor common stock was cancelled and New Common Stock was issued. Accordingly, the Company's then existing stock-based compensation awards were also cancelled, which resulted in the recognition of previously unamortized expense of $ 4.4 million related to the cancelled awards on the date of cancellation, which was included in reorganization items, net on the accompanying consolidated statements of operations. Stock-based compensation for the Predecessor and Successor periods are not comparable. +Successor Stock-Based Compensation +As of the Emergence Date, the board of directors adopted the Incentive Plan with a share reserve equal to 2,828,123 shares of New Common Stock. The Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and performance awards or any combination of the foregoing. The Company has granted both restricted stock units and performance vesting restricted stock units to employees and directors pursuant to the Incentive Plan, as discussed below. During the Successor Period, the Company's stock-based compensation expense was $ 3.1 million, of which the Company capitalized $ 1.1 million relating to its exploration and development efforts. Stock compensation expense, net of the amounts capitalized, is included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2021, the Company has awarded an aggregate of 198 thousand restricted stock units and 153 thousand performance vesting restricted stock units under the Incentive Plan. +The following table summarizes restricted stock unit and performance vesting restricted stock unit activity for the Successor Period: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of May 18, 2021 — $ — — $ — +Granted 200,484 66.05 153,138 48.54 +Vested — — — — +Forfeited/cancelled ( 2,071 ) 66.89 — — +Unvested shares as of December 31, 2021 198,413 $ 66.04 153,138 $ 48.54 +Successor Restricted Stock Units +Restricted stock units awarded under the Incentive Plan generally vest over a period of 1 to 4 years in the case of employees and 4 years in the case of directors upon the recipient meeting applicable service requirements. Stock-based compensation expense is recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of the grant. Unrecognized compensation expense as of December 31, 2021, was $ 11.1 million. The expense is expected to be recognized over a weighted average period of 2.8 years. +Successor Performance Vesting Restricted Stock Units +The Company has awarded performance vesting restricted stock units to certain of its executive officers under the Incentive Plan. The number of shares of common stock issued pursuant to the award will be based on a combination of (i) the Company's total shareholder return ("TSR") and (ii) the Company's relative total shareholder return ("RTSR") for the performance period. Participants will earn from 0 % to 200 % of the target award based on the Company's TSR and RTSR ranking compared to the TSR of the companies in the Company's designated peer group at the end of the performance period. Awards will be earned and vested over a performance period from May 17, 2021 to May 17, 2024, subject to earlier termination of the performance period in the event of a change in control. The grant date fair values were determined using the Monte Carlo simulation method and are being recorded ratably over the performance period. Expected volatilities utilized in the Monte Carlo models were estimated using a historical period consistent with the remaining performance period of approximately 3 years. The risk-free interest rates were based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. The Company assumed a range of risk-free interest rates between 0.35 % and 0.67 % and a range of expected volatilities between 87.0 % and 87.1 % to estimate the fair value. Unrecognized compensation expense as of December 31, 2021, related to performance vesting restricted shares was $ 6.3 million. The expense is expected to be recognized over a weighted average period of 2.4 years. +88 +Table of Contents +Index to Financial Statements +Predecessor Stock-Based Compensation +The Predecessor granted restricted stock units to employees and directors pursuant to the 2019 Plan. During the Predecessor Period, the Company’s stock-based compensation cost was $ 4.4 million, of which the Company capitalized $ 0.9 million, relating to its exploration and development efforts. During the years ended December 31, 2020 and December 31, 2019, the Company’s stock-based compensation cost was $ 16.3 million and $ 10.7 million, respectively, of which the Company capitalized $ 2.9 million and $ 5.8 million, respectively, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations. +The following table summarizes restricted stock unit activity for the Predecessor Period and the Predecessor years ended December 31, 2020 and 2019: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of December 31, 2018 1,535,811 $ 11.57 — $ — +Granted 4,011,073 $ 3.74 2,009,144 2.85 +Vested ( 676,108 ) 12.89 — — +Forfeited ( 772,458 ) 6.05 ( 225,484 ) 1.98 +Unvested shares as of December 31, 2019 4,098,318 $ 4.73 1,783,660 $ 2.96 +Granted 3,069,521 0.85 — — +Vested ( 1,294,285 ) 5.73 — — +Forfeited ( 4,171,041 ) 1.68 ( 943,065 ) 1.98 +Unvested shares as of December 31, 2020 1,702,513 $ 4.74 840,595 $ 4.07 +Granted — — — — +Vested ( 227,132 ) 8.45 — — +Forfeited/canceled ( 1,475,381 ) 4.16 ( 840,595 ) 4.07 +Unvested shares as of May 17, 2021 — $ — — $ — +Predecessor Restricted Stock Units +Restricted stock units awarded under the 2019 Plan generally vested over a period of one year in the case of directors and three years in the case of employees and vesting was dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of grant. All unrecognized compensation expense was recognized as of the Emergence Date. +Predecessor Performance Vesting Restricted Stock Units +The Company previously awarded performance vesting restricted stock units to certain of its executive officers under the 2019 Plan. The number of shares of common stock issued pursuant to the award was based on RTSR. RTSR is an incentive measure whereby participants will earn from 0 % to 200 % of the target award based on the Company’s TSR ranking compared to the TSR of the companies in the Company’s designated peer group at the end of the performance period. Awards were to be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. All unrecognized compensation expense was recognized as of the Emergence Date. +89 +Table of Contents +Index to Financial Statements +9. REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 232.9 million and $ 119.9 million as of December 31, 2021 and December 31, 2020, respectively, and are reported in accounts receivable - oil and natural gas sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For the year ended December 31, 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +10. LEASES +Nature of Leases +The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes right-of-use asset and current and non-current lease liabilities on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one to two years , although at December 31, 2021, the +90 +Table of Contents +Index to Financial Statements +Company did not have any active long-term drilling rig contracts in place. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells. +The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2023. These agreements are typically structured with non-cancelable terms of one to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. The lease for the Company's corporate headquarters has a primary term of one year and is classified as a short-term operating lease. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Future amounts due under operating lease liabilities as of December 31, 2021 were as follows: +(In thousands) +2022 $ 187 +2023 142 +Total lease payments 329 +Less: Imputed interest ( 7 ) +Total lease liabilities $ 322 +Lease costs incurred for the Successor Period, Predecessor Period, and the year ended December 31, 2020 consisted of the following (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Operating lease cost $ 48 $ 41 $ 9,658 +Variable lease cost 3 — 586 +Short-term lease cost 11,507 4,496 9,361 +Total lease cost (1) +$ 11,558 $ 4,537 $ 19,605 +_____________________ +(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations. +91 +Table of Contents +Index to Financial Statements +Supplemental cash flow information for the Successor Period, Predecessor Period, and the year ended December 31, 2020 related to leases was as follows (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Cash paid for amounts included in the measurement of lease liabilities +Operating cash flows from operating leases $ 78 $ 48 $ 140 +Investing cash flow from operating leases — — 10,272 +Investing cash flow from operating leases - related party — — 6,800 +The weighted-average remaining lease term as of December 31, 2021 was 1.78 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2021 was 2.42 %. +11. INCOME TAXES +Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables. +The components of income tax benefits and expense were as follows (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Current: +State $ ( 39 ) $ ( 7,968 ) $ — $ — +Federal — — ( 273 ) ( 7 ) +Deferred: +State — — 7,563 ( 7,556 ) +Federal — — — — +Total income tax (benefit) expense provision $ ( 39 ) $ ( 7,968 ) $ 7,290 $ ( 7,563 ) +A reconciliation of the statutory federal income tax amount to the recorded expense follows (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +(Loss) income before federal income taxes $ ( 112,868 ) $ 243,026 $ ( 1,617,843 ) $ ( 2,009,921 ) +Expected income tax at statutory rate ( 23,702 ) 51,036 ( 339,747 ) ( 422,083 ) +State income taxes ( 3,177 ) ( 12,484 ) ( 14,696 ) ( 28,316 ) +Bankruptcy adjustments 44,748 ( 111,285 ) +Remeasurement of state deferred tax asset ( 7,966 ) — +Other differences 2,841 445 10,800 3,372 +Change in valuation allowance due to current year activity ( 12,783 ) 64,320 350,933 439,464 +Income tax (benefit) expense recorded $ ( 39 ) $ ( 7,968 ) $ 7,290 $ ( 7,563 ) +92 +Table of Contents +Index to Financial Statements +For the Predecessor period ending May 17, 2021, the Company has an effective tax rate of ( 3.3 )% and an income tax benefit of $ 8.0 million. The tax benefit is entirely attributable to an Oklahoma refund claim associated with an examination relating to historical tax returns. The effective tax rate differs from the statutory tax rate due to the Company’s valuation allowance position and the permanent adjustments relating to the Chapter 11 Emergence. For the Successor Period, the Company has an effective tax rate of 0.03 % and tax expense of $ 39 thousand. The tax expense is entirely attributable to the Oklahoma refund claim that was filed during the third quarter, resulting in an adjustment to the benefit recorded during the Predecessor Period. We did not record any additional income tax expense for the Successor Period as a result of maintaining a full valuation allowance against our net deferred tax asset. +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2021, and 2020 are estimated as follows (in thousands): +Successor Predecessor +December 31, 2021 December 31, 2020 +Deferred tax assets: +Net operating loss carryforward and tax credits $ 298,127 $ 415,719 +Oil and gas property basis difference 432,959 463,705 +Investment in pass through entities 58,751 61,078 +Change in fair value of derivative instruments 86,296 7,656 +Other 31,298 41,292 +Total deferred tax assets 907,431 989,450 +Valuation allowance for deferred tax assets ( 907,358 ) ( 985,528 ) +Deferred tax assets, net of valuation allowance 73 3,922 +Deferred tax liabilities: +Other 73 3,922 +Total deferred tax liabilities 73 3,922 +Net deferred tax asset $ — $ — +Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $ 907.4 million has been recorded. The amount of the DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. +As discussed in Note 2 , elements of the Plan provided that the Company’s indebtedness related to Predecessor Senior Notes and certain general unsecured claims were exchanged for New Common Stock in settlement of those claims. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The IRC provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income, but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI and historical interest expense haircut is approximately $ 661 million, which will reduce the value of the Company’s net operating losses. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2022. The reduction of net operating losses is expected to be fully offset by a corresponding decrease in valuation allowance. As of December 31, 2021, the Company had an estimated federal net operating loss carryforward of approximately $ 1.4 billion after giving effect to the estimated reduction in tax attributes as discussed above. +Emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of IRC Section 382. The Company currently expects to apply rules under IRC Section 382(l)(5) that would allow the Company to mitigate the limitations imposed under the regulations with respect to the Company’s remaining tax attributes. The Company’s deferred tax +93 +Table of Contents +Index to Financial Statements +assets and liabilities, prior to the valuation allowance, have been computed on such basis. Taxpayers who qualify for this provision may, at their option, elect not to apply the election. If the provision does not apply, the Company’s ability to realize the value of its tax attributes would be subject to limitation and the amount of deferred tax assets and liabilities, prior to the valuation allowance, may differ. Additionally, under IRC Section 382(l)(5), an ownership change subsequent to the Company’s emergence could severely limit or effectively eliminate its ability to realize the value of its tax attributes. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.4 billion as of December 31, 2021. These federal net operating loss carryforwards of approximately $ 278 million generated in tax years prior to 2018 will begin to expire in 2036. As a result of the Tax Cuts and Jobs Act, the 2018 through 2021 federal NOL carryforwards of $ 1.1 billion have no expiration. The Company also has state net operating loss carryovers of approximately $ 199 million that began to expire in 2022. +As of December 31, 2021, we had no liability for uncertain tax positions. As of December 31, 2020, the Company recorded a liability associated with uncertain tax positions of $ 3.8 million, which was settled in 2021. We recognize interest and penalties related to unrecognized tax benefits in the income tax expense line in the accompanying consolidated statement of operations, which are not material. +12. EARNINGS PER SHARE +Basic income or loss per share attributable to common stockholders is computed as (i) net income or loss less (ii) dividends paid to holders of New Preferred Stock less (iii) net income or loss attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common stockholders is computed as (i) basic net income or loss attributable to common stockholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The "if-converted" method is used to determine the dilutive impact for the Company's convertible New Preferred Stock and the treasury stock method is used to determine the dilutive impact of unvested restricted stock. +There were no potential shares of common stock that were considered dilutive for the Successor Period, Predecessor Period, or the year ended December 31, 2020. There were 3.9 million shares that were considered anti-dilutive for the year ended December 31, 2019. There were 4.1 million shares of potential common shares issuable due to the Company's New Preferred Stock that were considered anti-dilutive for the Successor Period due to the Company's net loss. There were 0.1 million shares of restricted stock that were considered anti-dilutive during the Successor Period due to the Company's net loss. +Reconciliations of the components of basic and diluted net income per common share are presented in the tables below (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Net (loss) income $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +Dividends on New Preferred Stock ( 4,573 ) — — — +Participating securities - New Preferred Stock (1) +— — — — +Net (loss) income attributable to common stockholders $ ( 117,402 ) $ 250,994 $ ( 1,625,133 ) $ ( 2,002,358 ) +Basic shares 20,545 160,834 160,231 160,341 +Basic and dilutive EPS $ ( 5.71 ) $ 1.56 $ ( 10.14 ) $ ( 12.49 ) +_____________________ +(1) New Preferred Stock represents participating securities because they participate in any dividends on shares of common stock on a pari passu , pro rata basis. However, New Preferred Stock does not participate in undistributed net losses. +94 +13. DERIVATIVE INSTRUMENTS +Natural Gas, Oil and NGL Derivative Instruments +The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods of favorable price movements. +The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its New Credit Facility, 90% of its forecasted annual production for 2022 and 2023. The Company generally enters into commodity derivative contracts for approximately 50% to 75% of its forecasted annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 24 months. Gulfport does not enter into commodity derivative contracts for speculative purposes. +Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, the NYMEX WTI for oil and Mont Belvieu for propane. +The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation. +Below is a summary of the Company's open fixed price swap positions as of December 31, 2021. +Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2022 NYMEX Henry Hub 140,740 $ 2.88 +2023 NYMEX Henry Hub 94,932 $ 3.41 +Oil (Bbl/d) ($/Bbl) +2022 NYMEX WTI 2,104 $ 66.23 +2023 NYMEX WTI 1,000 $ 66.00 +NGL (Bbl/d) ($/Bbl) +2022 Mont Belvieu C3 3,378 $ 35.09 +2023 Mont Belvieu C3 1,000 $ 33.77 +The Company entered into costless collars based off the NYMEX WTI and Henry Hub oil and natural gas indices. Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. Below is a summary of the Company's open collars as of December 31, 2021. +95 +Index Daily Volume Weighted Average Floor Price Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) ($/MMBtu) +2022 NYMEX Henry Hub 476,664 $ 2.64 $ 3.22 +2023 NYMEX Henry Hub 85,000 $ 2.75 $ 4.25 +Oil (Bbl/d) ($/Bbl) ($/Bbl) +2022 NYMEX WTI 1,500 $ 55.00 $ 60.00 +In the third quarter of 2019, the Company sold call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call options as of December 31, 2021. +Index Daily Volume Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) +2022 NYMEX Henry Hub 152,675 $ 2.90 +2023 NYMEX Henry Hub 507,925 $ 2.90 +2024 NYMEX Henry Hub 162,000 $ 3.00 +In addition, the Company entered into natural gas basis swap positions. As of December 31, 2021, the Company had the following natural gas basis swap positions open: +Gulfport Pays Gulfport Receives Daily Volume Weighted Average Fixed Spread +Natural Gas (MMBtu/d) ($/MMBtu) +2022 Rex Zone 3 NYMEX Plus Fixed Spread 24,658 $ ( 0.10 ) +2022 ONG NYMEX Plus Fixed Spread 7,397 $ 0.50 +2023 Rex Zone 3 NYMEX Plus Fixed Spread 10,000 $ ( 0.22 ) +Balance sheet presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2021 and 2020 (in thousands): +Successor Predecessor +December 31, 2021 December 31, 2020 +Total short-term derivative instruments – asset $ 4,695 $ 27,146 +Total long-term derivative instruments – asset $ 18,664 $ 322 +Total short-term derivative instruments – liability $ 240,735 $ 11,641 +Total long-term derivative instruments – liability $ 184,580 $ 36,604 +96 +Gains and losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the Successor Period, Predecessor Period, and the years ended December 31, 2020, and 2019 (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Natural gas derivatives - fair value losses $ ( 223,512 ) $ ( 123,080 ) $ ( 89,310 ) $ 89,576 +Natural gas derivatives - settlement (losses) gains ( 300,172 ) ( 3,362 ) 113,075 104,874 +Total (losses) gains on natural gas derivatives ( 523,684 ) ( 126,442 ) 23,765 194,450 +Oil and condensate derivatives - fair value losses ( 5,128 ) ( 6,126 ) ( 2,952 ) 2,952 +Oil and condensate derivatives - settlement (losses) gains ( 9,720 ) — 46,462 4,083 +Total (losses) gains on oil and condensate derivatives ( 14,848 ) ( 6,126 ) 43,510 7,035 +NGL derivatives - fair value losses ( 5,322 ) ( 4,671 ) ( 461 ) ( 7,541 ) +NGL derivatives - settlement (losses) gains ( 12,965 ) — ( 142 ) 14,173 +Total losses on NGL derivatives ( 18,287 ) ( 4,671 ) ( 603 ) 6,632 +Contingent consideration arrangement - fair value losses — — ( 1,381 ) 243 +Total (losses) gains on natural gas, oil and NGL derivatives $ ( 556,819 ) $ ( 137,239 ) $ 65,291 $ 208,360 +Offsetting of derivative assets and liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value. +Successor +As of December 31, 2021 +Derivative instruments, gross Netting adjustments Derivative instruments, net +(In thousands) +Derivative assets $ 23,359 $ ( 20,265 ) $ 3,094 +Derivative liabilities $ ( 425,315 ) $ 20,265 $ ( 405,050 ) +Predecessor +As of December 31, 2020 +Derivative instruments, gross Netting adjustments Derivative instruments, net +(In thousands) +Derivative assets $ 27,468 $ ( 25,730 ) $ 1,738 +Derivative liabilities $ ( 48,245 ) $ 25,730 $ ( 22,515 ) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates +97 +credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +14. RESTRUCTURING AND LIABILITY MANAGEMENT EXPENSES +In the third quarter of 2020 and fourth quarter of 2019, the Company announced and completed workforce reductions representing approximately 10 % and 13 %, respectively, of its headcount. Restructuring charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. Additionally, the Company incurred charges related to financial and legal advisors engaged to assist with the evaluation of a range of liability management alternatives during 2020 prior to the filing of the Chapter 11 Cases. +In the third quarter of 2021, the Company announced and completed a workforce reduction representing approximately 3 % of its headcount. Charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. +The following table summarizes the expenses related to the Company's reductions in workforce as well as expenses incurred related to liability management efforts in the accompanying consolidated statements of operations for the Successor Period, Predecessor Period and the years ended December 31, 2020 and 2019 (in thousands): +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Reduction in workforce $ 2,858 $ — $ 1,460 $ 4,611 +Liability management — — 29,387 — +Total restructuring and liability management expenses $ 2,858 $ — $ 30,847 $ 4,611 +15. EQUITY INVESTMENTS +The Company had no investments accounted for by the equity method as of December 31, 2021. The following table summarizes the Company's equity investments for the Predecessor Period and the years ended December 31, 2020 and 2019 (in thousands): +Carrying Value Loss from Equity Method Investments +Predecessor Predecessor +December 31, 2020 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Investment in Grizzly Oil Sands ULC $ 24,816 $ 342 $ 377 $ 32,710 +Investment in Mammoth Energy Services, Inc. — — 10,646 179,524 +Other equity investments — — 32 ( 2,086 ) +Total equity investments $ 24,816 $ 342 $ 11,055 $ 210,148 +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings, owns an approximate 24.5 % interest in Grizzly, a Canadian unlimited liability company. As of December 31, 2021, Grizzly had approximately 830,000 acres under lease in the +98 +Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company has no t paid any cash calls since its decision to cease funding further capital calls in 2019. Grizzly’s functional currency is the Canadian dollar. +Effective as of the Emergence Date, the Company evaluated its investment in Grizzly and determined that the Company no longer has the ability to exercise significant influence over operating and financial policies of Grizzly. As such, the equity method of accounting for its investment was no longer applicable. As a result, the Company will use its previous carrying value of zero (as discussed below) as its initial basis and will subsequently measure at fair value while recording any changes in fair value in earnings. +As discussed in Note 3 , the Company reduced the carrying value of its investment in Grizzly to zero upon the Emergence Date. The reduction in valuation was based upon the Company's new management's assessment of the investment and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls, which will lead to further dilution of its equity ownership interest. +Mammoth Energy Services, Inc. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims. The Company's investment carrying value was reduced to zero in the first quarter of 2020 due to the Company's share of cumulative net loss and impairments and the carrying value remained at zero through the Emergence Date. +16. FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +99 +Financial assets and liabilities +The following tables summarize the Company’s financial assets and liabilities by valuation level as of December 31, 2021 and 2020: +Successor +December 31, 2021 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments +$ — $ 23,359 $ — +Contingent consideration arrangement $ — $ — $ 5,800 +Total assets $ — $ 23,359 $ 5,800 +Liabilities: +Derivative Instruments +$ — $ 425,315 $ — +Predecessor +December 31, 2020 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments $ — $ 27,468 $ — +Contingent consideration arrangement $ — $ — $ 6,200 +Total assets $ — $ 27,468 $ 6,200 +Liabilities: +Derivative Instruments $ — $ 48,245 $ — +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +As discussed in Note 3 , the water infrastructure sale included a contingent consideration arrangement. As of December 31, 2021, the fair value of the contingent consideration was $ 5.8 million, of which $ 1.0 million is included in prepaid expenses and other assets and $ 4.8 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. As a result of a reduction in the future anticipated contingent consideration since the acquisition date, the Company recognized a gain of $ 0.4 million and a nominal gain for the Successor Period and the Predecessor Period, respectively, on changes in fair value of the contingent consideration, which is included in other expense (income) in the accompanying consolidated statements of operations. Settlements under the contingent consideration arrangement totaled $ 0.6 million and $ 0.2 million for the Successor Period and the Predecessor Period, respectively. +Non-financial assets and liabilities +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 5 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred were $ 0.2 million and $ 0.5 million for the Successor Period and the Predecessor Period, respectively. +100 +The Company did not record any other than temporary impairments on its equity method investments during the Predecessor Period, Successor Period, or the year ended December 31, 2020. However, the Company recorded impairments on its investments during the year ended December 31, 2019. Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly as of December 31, 2020 was estimated using assumptions that represent Level 3 inputs. +Fair value of other financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. See Note 6 for fair value of Company's long-term debt. +Chapter 11 Emergence and Fresh Start Accounting +On the Emergence Date, the Company adopted fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh start accounting, the Company’s assets and liabilities were recorded at their fair values as of May 17, 2021. The inputs utilized in the valuation of the Company’s most significant asset, its oil and natural gas properties and related assets, included mostly unobservable inputs which fall within Level 3 of the fair value hierarchy. Such inputs included estimates of future oil and gas production from the Company’s reserve reports, commodity prices based on forward strip price curves (adjusted for basis differentials) as of May 17, 2021, operating and development costs, expected future development plans for the properties and discount rates based on a weighted-average cost of capital computation. The Company also recorded its asset retirement obligations at fair value as a result of fresh start accounting. The inputs utilized in valuing the asset retirement obligations were mostly Level 3 unobservable inputs, including estimated economic lives of oil and natural gas wells as of the Emergence Date, anticipated future plugging and abandonment costs and an appropriate credit-adjusted risk free rate to discount such costs. Refer to Note 3 for a detailed discussion of the fair value approaches used by the Company. +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. As of December 31, 2021, the Company held no shares of Mammoth Energy's outstanding common stock. As of December 31, 2020, the Company owned approximately 21.5 % of Mammoth Energy's outstanding common stock. There were no material amounts and $ 0.6 million of services provided by Mammoth Energy that were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively. +Approximately $ 3.1 million of services provided by Mammoth Energy were capitalized to oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets during the year ended December 31, 2020. +18. COMMITMENTS +Firm Transportation and Gathering Agreements +The Company has contractual commitments with midstream and pipeline companies for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing the cost of these commitments. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, costs associated with utilized future firm transportation and gathering agreements are reflected in the Company's estimates of proved reserves. +101 +A summary of these commitments at December 31, 2021, are set forth in the table below, excluding contracts recently rejected or in the process of being rejected as discussed in the Litigation and Regulatory Proceedings section in Note 19 : +(In thousands) +2022 $ 225,200 +2023 222,683 +2024 215,831 +2025 137,082 +2026 131,049 +Thereafter 846,248 +Total $ 1,778,093 +Future Sales Commitments +The Company has entered into various firm sales contracts with third parties to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's proved reserves have generally been sufficient to satisfy its delivery commitments during the three most recent years, and it expects such reserves will continue to be the primary means of fulfilling its future commitments. However, where the Company's proved reserves are not sufficient to satisfy its delivery commitments, it can and may use spot market purchases of third-party production to satisfy these commitments. +A summary of these commitments at December 31, 2021, are set forth in the table below: +(MMBtu per day) +2022 4,000 +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) plan under which eligible employees may contribute a portion of their total compensation up to the maximum pre-tax threshold through salary deferrals. The plan is considered a Safe Harbor 401(k) and provides a company match on 100 % of salary deferrals that do not exceed 4 % of compensation in addition to a match of 50 % of salary deferrals that exceed 4 % but do not exceed 6 % of compensation. The Company may also make discretionary elective contributions to the plan. During the Successor Period, Predecessor Period, and the years ended December 31, 2020 and 2019, Gulfport incurred $ 0.7 million, $ 0.7 million, $ 2.6 million, and $ 2.9 million, respectively, in contributions expense related to this plan. +19. CONTINGENCIES +The Company is involved in litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. In accordance with ASC Topic 450, Contingencies , an accrual is recorded for a material loss contingency when its occurrence is probable and damages are reasonably estimable based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. +Litigation and Regulatory Proceedings +Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company's bankruptcy estates. The Plan in the Chapter 11 Cases, which became effective on May 17, 2021, provided for the treatment of claims against the Company's bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. +102 +As part of its Chapter 11 Cases and restructuring efforts as discussed in Note 2 , the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation ("TC") and Rover Pipeline LLC ("Rover") or jointly as the “Pending Motions to Reject”. The Pending Motions to Reject were removed to the United States District Court for the Southern District of Texas. While the Pending Motions to Reject are litigated, the Company isn’t required to perform under these firm transportation agreements. During the third quarter of 2021, Gulfport finalized a settlement agreement with TC that was approved by the Bankruptcy Court on September 21, 2021. Pursuant to the settlement agreement, Gulfport and TC agreed that the firm transportation contracts between Gulfport and TC would be rejected without any further payment or obligation by Gulfport or TC, and TC assigned its damages claims from such rejection to Gulfport. In exchange, Gulfport agreed to make a payment of $ 43.8 million in cash to TC. The $ 43.8 million was paid to TC on October 7, 2021. Gulfport expects to receive distributions for a significant portion of such amounts through future distributions with respect to the assigned claims pursuant to Gulfport’s Chapter 11 plan of reorganization that became effective in May 2021. Any future distributions will be recognized once received by Gulfport. In February 2022, Gulfport received an initial distribution of $ 11.5 million from the above mentioned claim. The timing and amount of any future distributions are not certain, and the total amount received will be impacted by the bankruptcy trustee's liquidation of Mammoth Energy shares and other bankruptcy claims. The Company believes that the Pending Motion to Reject with respect to Rover will be ultimately granted, and that the Company does not have any ongoing obligation pursuant to the contract; however, in the event that the Company is not permitted to reject the Rover firm transportation contract, it could be liable for demand charges, attorneys' fees and interest in excess of approximately $ 55 million. +The Company, along with a number of other oil and gas companies, has been named as a defendant in two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15 th Judicial District of the State of Louisiana in the 15 th Judicial District Court for the Parish of Vermilion on July 29, 2016 (together, the "Complaints"). The Complaints allege that certain of the defendants’ operations violated the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder (the "CZM Laws") by causing substantial damage to land and waterbodies located in the coastal zone of the relevant Parish. The plaintiffs seek damages and other relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and interest. The case is stayed pending a ruling on plaintiff's motion to remand the lawsuit to state court. On September 9, 2021, the State of Louisiana and Cameron Parish dismissed all claims against Gulfport without prejudice. +In March 2020, Robert F. Woodley, individually and on behalf of all others similarly situated, filed a federal securities class action against the Company, David M. Wood, Keri Crowell and Quentin R. Hicks in the United States District Court for the Southern District of New York. The complaint alleges that the Company made materially false and misleading statements regarding the Company’s business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, pre-judgment and post-judgment interest, and such other and further relief that may be deemed just and proper. On January 11, 2022, the court granted Gulfport's motion to dismiss and the case was closed by the court on February 14, 2022. The plaintiff's deadline to appeal the dismissal is March 16, 2022. +In September 2019, a stockholder of Mammoth Energy filed a derivative action on behalf of Mammoth Energy against members of Mammoth Energy’s Board of Directors, including a director designated by the Company, and its significant stockholders, including the Company, in the United States District Court for the Western District of Oklahoma. The complaint alleges, among other things, that the members of Mammoth Energy’s Board of Directors breached their fiduciary duties and violated the Securities Exchange Act of 1934, as amended, in connection with Mammoth Energy’s activities in Puerto Rico following Hurricane Maria. The complaint seeks unspecified damages, the payment of reasonable attorney fees and legal expenses and interest and to force Mammoth Energy and its Board of Directors to make specified corporate governance reforms. On January 25, 2022, the court signed a final order and judgment dismissing all claims against Gulfport. +In December 2019, the Company filed a lawsuit against Stingray Pressure Pumping LLC, a subsidiary of Mammoth Energy (“Stingray”), for breach of contract and to terminate the Master Services Agreement for pressure pumping services, effective as of October 1, 2014, as amended (the “Master Services Agreement”), between Stingray and the Company. In March 2020, Stingray filed a counterclaim against the Company in the Superior Court of the State of Delaware. The counterclaim alleges that the Company has breached the Master Services Agreement. The counterclaim seeks actual damages, and Stingray filed claims in the Chapter 11 proceedings exceeding $ 80 million related to breach of contract damages, attorneys' fees and interest. In September 2021, Gulfport reached an agreement in principle with Stingray that fully resolves the litigation between the parties. Pursuant to the settlement, Stingray and Gulfport have agreed to drop all of the claims brought against each other in Delaware Court and Bankruptcy Court. On September 22, 2021, the parties announced to the bankruptcy court that all Stingray claims +103 +would be withdrawn. On December 15, 2021, the parties filed a Joint Stipulation and Agreed Order with the bankruptcy court resolving all claims. +In August 2020, Muskie filed an action against the Company in the Superior Court of the State of Delaware for breach of contract. The complaint alleges that the Company breached its obligation to purchase a certain amount of proppant sand each month or make designated shortfall payments under the Sand Supply Agreement, effective October 1, 2014, as amended (the “Sand Supply Agreement”), between Muskie and the Company, and seeks payment of unpaid shortfall payments, and Muskie filed a claim in the Chapter 11 proceedings for $ 3.4 million. On September 22, 2021, the parties announced to the bankruptcy court that an agreed claim for $ 3.1 million would resolve the matter. On December 15, 2021, the parties filed a Joint Stipulation and Agreed Order with the bankruptcy court resolving all claims. +In April 2020, Bryon Lefort, individually and on behalf of similarly situated individuals, filed an action against the Company in the United States District Court for the Southern District of Ohio Eastern Division. The complaint alleges that the Company violated the Fair Labor Standards Act (“FLSA”), the Ohio Wage Act and the Ohio Prompt Pay Act by classifying the plaintiffs as independent contractors and paying them a daily rate with no overtime compensation for hours worked in excess of 40 hours per week. The complaint seeks to recover unpaid regular and overtime wages, liquidated damages in an amount equal to six percent of all unpaid overtime compensation, the payment of reasonable attorney fees and legal expenses and pre-judgment and post-judgment interest, and such other damages that may be owed to the workers, and claims were filed in the Chapter 11 proceedings totaling $ 5.8 million. On October 1, 2021, the bankruptcy court approved the parties' settlement resolving all claims for a bankruptcy claim of approximately $ 0.7 million. The United States District Court for the Southern District of Ohio Eastern Division terminated the civil case on November 3, 2021. +The Company, along with other oil and gas companies, have been named as a defendant in J&R Passmore, LLC, individually and on behalf of all others similarly situated, in the United States District Court for the Southern District of Ohio on December 6, 2018. Plaintiffs assert their respective leases are limited to the Marcellus and Utica shale geological formations and allege that Defendants have willfully trespassed and illegally produced oil, natural gas, and other hydrocarbon products beyond these respective formations. Plaintiffs seek the full value of any production from below the Marcellus and Utica shale formations, unspecified damages from the diminution of value to their mineral estate, unspecified punitive damages, and the payment of reasonable attorney fees, legal expenses, and interest. On April 27, 2021, the Bankruptcy Court for the Southern District of Texas approved a settlement agreement in which the plaintiffs fully released the Company from all claims for amounts allegedly owed to the plaintiffs through the effective date of the Company’s chapter 11 plan, which occurred on May 17, 2021. The plaintiffs are continuing to pursue alleged damages after May 17, 2021. +Business Operations +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. Gulfport and its subsidiaries have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. The Company conducts periodic reviews, on a company-wide basis, to assess changes in their environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, they may, among other things, exclude a property from the transaction, require the seller to remediate the property to their satisfaction in an acquisition or agree to assume liability for the remediation of the property. +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +104 +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2021, Gulfport held no cash in excess of insured limits in these banks. +During the Predecessor Period, three customers accounted for approximately 37 % of the Company's total sales. During the Successor Period, two customers accounted for approximately 30 % of the Company's total sales. During the year ended December 31, 2020, one customer accounted for approximately 12 % of the Company's total sales. During the year ended December 31, 2019, one customer accounted for approximately 14 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +20. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company is making the following supplemental disclosures of oil and gas activities, in accordance with the full cost method of accounting for its oil and gas exploration and development activities. The Company owns a 24.5 % interest in Grizzly. However, Grizzly did not have any material activity or proved reserves in the years presented below. As such, amounts related to Grizzly have been omitted below. +The following is historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities (in thousands) +Year ended December 31, +Successor Predecessor +2021 2020 +Proved properties $ 1,917,833 $ 9,359,866 +Unproved properties 211,007 1,457,043 +Total oil and natural gas properties 2,128,840 10,816,909 +Accumulated depreciation, depletion, amortization and impairment ( 277,331 ) ( 8,778,759 ) +Net capitalized costs $ 1,851,509 $ 2,038,150 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities (in thousands) +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Acquisition $ 13,411 $ 3,922 $ 15,260 $ 37,598 +Development 191,193 112,986 276,622 594,673 +Exploratory — — — 9,762 +Total $ 204,604 $ 116,908 $ 291,882 $ 642,033 +105 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company did not capitalize interest expense for the 2021 Predecessor Period, and capitalized $ 0.2 million, $ 0.9 million and $ 3.4 million during the Successor Period, 2020, 2019, respectively, based on the Company's weighted average cost of borrowings used to finance expenditures. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 8.0 million, $ 11.9 million, $ 25.0 million and $ 30.1 million during the Predecessor Period, the Successor Period, and the years ended December 31, 2020, and 2019, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +Results of Operations for Producing Activities (in thousands) +The following schedule sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +Successor Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Revenues $ 1,092,584 $ 410,276 $ 801,251 $ 1,354,766 +Production costs ( 274,428 ) ( 192,959 ) ( 537,609 ) ( 620,412 ) +Depletion ( 159,518 ) ( 60,831 ) ( 229,702 ) ( 539,379 ) +Impairment ( 117,813 ) — ( 1,357,099 ) ( 2,039,770 ) +Income tax benefit (expense) 39 7,968 ( 7,290 ) 7,563 +Results of operations from producing activities $ 540,864 $ 164,454 $ ( 1,330,449 ) $ ( 1,837,232 ) +Depletion per Mcf of gas equivalent (Mcfe) $ 0.69 $ 0.45 $ 0.61 $ 1.08 +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2021, 2020 and 2019 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2021, 2020 and 2019, in accordance with guidelines of the SEC applicable to reserves estimates. The prices used for the 2021 reserve report are $ 66.55 per barrel of oil, $ 3.60 per MMbtu and $ 31.90 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2020 and 2019 for reserve report purposes are $ 39.54 per barrel, $ 1.99 per MMbtu and $ 15.40 per barrel for NGL and $ 55.85 per barrel, $ 2.58 per MMbtu and $ 21.25 per barrel for NGL, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +106 +Oil (MMBbl) Natural Gas (Bcf) NGL (MMBbl) Natural Gas Equivalent (Bcfe) +Proved Reserves +December 31, 2018 (Predecessor) 21 4,134 81 4,743 +Purchases of reserves — — — — +Extensions and discoveries 4 997 13 1,097 +Sales of reserves ( 2 ) ( 63 ) — ( 77 ) +Revisions of prior reserve estimates ( 2 ) ( 562 ) ( 27 ) ( 734 ) +Current production ( 2 ) ( 458 ) ( 5 ) ( 502 ) +December 31, 2019 (Predecessor) 18 4,048 62 4,528 +Purchases of reserves — — — — +Extensions and discoveries 1 216 3 240 +Sales of reserves — ( 74 ) — ( 75 ) +Revisions of prior reserve estimates ( 4 ) ( 1,564 ) ( 23 ) ( 1,725 ) +Current production ( 2 ) ( 345 ) ( 4 ) ( 380 ) +December 31, 2020 (Predecessor) 13 2,281 38 2,588 +Purchases of reserves — — — — +Extensions and discoveries 2 617 11 695 +Sales of reserves — — — — +Revisions of prior reserve estimates 2 913 9 982 +Current production ( 2 ) ( 333 ) ( 4 ) ( 366 ) +December 31, 2021 (Successor) 16 3,478 54 3,898 +Proved developed reserves +December 31, 2019 (Predecessor) 8 1,757 30 1,984 +December 31, 2020 (Predecessor) 7 1,358 22 1,527 +December 31, 2021 (Successor) 8 1,928 31 2,165 +Proved undeveloped reserves +December 31, 2019 (Predecessor) 10 2,291 32 2,544 +December 31, 2020 (Predecessor) 7 923 16 1,061 +December 31, 2021 (Successor) 8 1,550 22 1,733 +Totals may not sum or recalculate due to rounding. +In 2021, the Company experienced extensions of 694.6 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 352.2 Bcfe was attributable to the addition of 29 PUD locations in the Utica field, 342.2 Bcfe was attributable to the addition of 34 PUD locations in the SCOOP field. The Company experienced total upward revisions of approximately 982.2 Bcfe in estimated proved reserves, of which 889.2 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 1.99 per MMBtu for 2020 to $ 3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $ 15.40 per barrel for 2020 to $ 31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $ 39.54 per barrel for 2020 to $ 66.55 per barrel for 2021. Upward revisions of 157.6 Bcfe were experienced from a combination of well performance, operating and development cost improvements and working interest changes. This was partially offset by a downward revision of 64.6 Bcfe, which was primarily a result of the exclusion of 4 PUD locations in the Company's Utica field when changes in the Company's schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Finally, during 2021, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +In 2020, the Company experienced extensions of 239.8 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 150.6 Bcfe was attributable to the addition of 14 PUD locations in the Utica field, 87.8 Bcfe was attributable to the addition of eight PUD locations in the SCOOP field. The Company experienced total downward revisions of approximately 1.7 Tcfe in estimated proved reserves, of which 1,268.4 Bcfe was the result of commodity price changes. Commodity prices experienced volatility +107 +throughout 2020 and the 12-month average price for natural gas decreased from $ 2.58 per MMBtu for 2019 to $ 1.99 per MMBtu for 2020, the 12-month average price for NGL decreased from $ 21.25 per barrel for 2019 to $ 15.40 per barrel for 2020, and the 12-month average price for crude oil decreased from $ 55.85 per barrel for 2019 to $ 39.54 per barrel for 2020. An additional 720.3 Bcfe in downward revisions was a result of the exclusion of 48 PUD locations in the Utica field and 31 PUD locations in the SCOOP field, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflected the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Positive revisions of 263.8 Bcfe were experienced from a combination of operating and development cost improvements, well performance and working interest changes. +In 2019, the Company experienced extensions of 1.1 Tcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 793.5 Bcfe was attributable to the addition of 72 PUD locations in the Utica field, 302.9 Bcfe was attributable to the addition of 37 PUD locations in the SCOOP field. The Company experienced total downward revisions of approximately 733.8 Bcfe in estimated proved reserves, of which 347.2 Bcfe was a result of the exclusion of nine PUD locations in the Utica field and 22 PUD locations in the SCOOP field, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment capital discipline and funding future activities within cash flow. An additional 296.4 Bcfe in downward revisions was the result of commodity price changes. Commodity prices experienced volatility throughout 2019 and the 12-month average price for natural gas decreased from $ 3.10 per MMBtu for 2018 to $ 2.58 per MMBtu for 2019, the 12- month average price for NGL decreased from $ 32.02 per barrel for 2018 to $ 21.25 per barrel for 2019, and the 12-month average price for crude oil decreased from $ 65.56 per barrel for 2018 to $ 55.85 per barrel for 2019. The Company also experienced downward revisions of 90.2 Bcfe from a combination of working interest changes, optimization of well design in the current commodity price environment and well performance. +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2021, 2020 and 2019 using an unweighted average first-of-the-month price for the period January through December 31, 2021, 2020 and 2019. The average gas prices used were $ 3.60 , $ 1.99 , and $ 2.58 for the periods ended December 31, 2021, 2020, and 2019, respectively. The average oil prices used were $ 66.55 , $ 39.54 , and $ 55.85 , for the periods ended December 31, 2021, 2020, and 2019, respectively. The average NGL prices used were $ 31.90 , $ 15.40 , and $ 21.25 , for the periods ended December 31, 2021, 2020, and 2019, respectively. +Year ended operating expenses, development costs and appropriate statutory income tax rates, with consideration of future tax rates, were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties. The estimated future costs to develop proved undeveloped reserves are approximately $ 234.1 million in 2022, $ 184.0 million in 2023 and $ 178.7 million in 2024. Estimated future development costs include capital spending on major development projects. Gulfport believes cash flow from its operating activities, cash on hand and borrowings under its New Credit Facility will be sufficient to cover these estimated future development costs. +The assumptions used to derive the standardized measure of discounted future net cash flows are those required by accounting standards and do not necessarily reflect the Company's expectations. The information may be useful for certain comparative purposes but should not be solely relied upon in evaluating Gulfport or its performance. Furthermore, information contained in the following table may not represent realistic assessments of future cash flows, nor should the standardized measure of discounted future net cash flows be viewed as representative of the current value of the Company's reserves. Management believes that the following factors should be considered when reviewing the information below: +• Future commodity prices received for selling the Company's net production will likely differ from those required to be used in these calculations. +• Future operating and capital costs will likely differ from those required to be used in these calculations and do not reflect cost savings of Company owned midstream operations on future operating expenses. +• Future market conditions, government regulations, reservoir conditions and risks inherent in the production of oil and condensate and gas may cause production rates in future years to vary significantly from those rates used in the calculations. +• Future revenues may be subject to different production, severance and property taxation rates. +• The selection of a 10% discount rate is arbitrary and may not be a reasonable factor in adjusting for future economic conditions or in considering the risk that is part of realizing future net cash flows from the reserves. +108 +The following table summarizes estimated future net cash flows from natural gas and crude oil reserves (in millions): +Year ended December 31, +Successor Predecessor +2021 2020 2019 +Future cash flows $ 14,938 $ 4,079 $ 10,451 +Future development and abandonment costs ( 1,141 ) ( 652 ) ( 2,058 ) +Future production costs ( 5,227 ) ( 2,325 ) ( 4,513 ) +Future production taxes ( 336 ) ( 137 ) ( 333 ) +Future income taxes ( 437 ) — — +Future net cash flows 7,797 965 3,547 +10% discount to reflect timing of cash flows ( 3,659 ) ( 425 ) ( 1,844 ) +Standardized measure of discounted future net cash flows $ 4,138 $ 540 $ 1,703 +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The principal source of change in the standardized measure of discounted future net cash flows relating to proved reserves is presented in the table below (in millions): +Year ended December 31, +Successor Predecessor +2021 2020 2019 +Sales and transfers of oil and gas produced, net of production costs $ ( 1,035 ) $ ( 264 ) $ ( 734 ) +Net changes in prices, production costs, and development costs 2,596 ( 954 ) ( 1,372 ) +Acquisition of oil and gas reserves in place — — — +Extensions and discoveries 639 38 388 +Previously estimated development costs incurred during the period 149 215 406 +Revisions of previous quantity estimates, less related production costs 858 ( 255 ) ( 321 ) +Sales of oil and gas reserves in place ( 1 ) ( 6 ) ( 49 ) +Accretion of discount 54 170 298 +Net changes in income taxes ( 178 ) — 425 +Change in production rates and other 516 ( 109 ) ( 319 ) +Total change in standardized measure of discounted future net cash flows $ 3,598 $ ( 1,165 ) $ ( 1,278 ) +109 +21. SUBSEQUENT EVENTS +Natural gas, Oil and NGL Derivative Instruments +Subsequent to December 31, 2021 and as of February 25, 2022, the Company entered into the following natural gas, oil, and NGL derivative contracts: +Period Type of Derivative Instrument Index +Daily Volume (1) +Weighted +Average Price +January 2023 - December 2023 Swaps NYMEX WTI 1,000 $ 69.78 +January 2023 - December 2023 Swaps NYMEX Henry Hub 40,082 $ 3.56 +January 2023 - December 2023 Swaps Mont Belvieu C3 1,000 $ 36.33 +January 2023 - December 2023 Basis Swaps Rex Zone 3 10,000 $( 0.20 ) +(1) Volumes for gas instruments are presented in MMBtu while oil and NGL volumes are presented in Bbls. +Release of Shares Held in Reserve +In January 2022, approximately 876 thousand shares held for reserve at December 31, 2021, were issued to certain claimants. As of February 25, 2022. approximately 62 thousand shares continue to be held in reserve and will be issued upon finalization of remaining claims. +110 +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2021, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +During the second quarter ended June 30, 2021, we added certain key controls related to our reorganization discussed in Note 2 of our consolidated financial statements. +Except as described above, there were no changes in our internal control over financial reporting during the year ended December 31, 2021, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2021. +111 +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2021 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2021, as stated in their accompanying report. +/s/ Timothy J. Cutt /s/ William J. Buese +Name: Timothy J. Cutt Name: William J. Buese +Title: Chief Executive Officer Title: Chief Financial Officer +112 +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2021 (Successor) and for the period from May 18, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through May 17, 2021 (Predecessor), and our report dated March 1, 2022 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 1, 2022 +113 +ITEM 9B. OTHER INFORMATION +2022 Annual Meeting of Stockholders +The Board of Directors of the Company has determined that the Company’s 2022 Annual Meeting of Stockholders (the “2022 Annual Meeting”) will be held on June 14, 2022. The time and location of the 2022 Annual Meeting will be specified in the Company’s 2022 proxy statement. +In accordance with the Company’s Amended and Restated Bylaws (the “Bylaws”), any nomination by a stockholder of a person for election to the Board must be made by notice delivered to the Company not later than the close of business on March 16, 2022. Such notices of director nominations must comply with the requirements set forth in the Bylaws and the rules of SEC. Stockholders are urged to read the complete text of such notice provisions. +Any stockholder who, in accordance with Rule 14a-8 under the 1934 Act wishes to submit a proposal for inclusion in the proxy statement for the 2022 Annual Meeting must submit their proposal in writing, along with proof of eligibility, to the Company’s principal executive offices in care of the Corporate Secretary by mail to 3001 Quail Springs Parkway, Oklahoma City, Oklahoma 73134. Proposal submissions must be received no later than the close of business on March 16, 2022, which the Company has determined to be a reasonable time before it expects to begin to print and send its proxy materials, to be considered timely. Such proposals also need to comply with the rules of the SEC regarding the inclusion of stockholder proposals in the Company’s proxy materials, and may be omitted if not in compliance with applicable requirements. +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than 120 days after the close of our fiscal year ended December 31, 2021 (the 2022 Proxy Statement). +ITEM 11. EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2022 Proxy Statement. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2022 Proxy Statement. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2022 Proxy Statement. +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2022 Proxy Statement. +114 +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. Financial Statement Schedules. No financial statement schedules are applicable or required. +3. Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith +2.1 +Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and its Debtor Subsidiaries. +8-K 001-19514 2.2 4/29/2021 +3.1 +Amended and Restated Certificate of Incorporation of Gulfport Energy Corporation. +8-K 001-19514 3.1 5/17/2021 +3.2 +Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K 001-19514 3.2 5/17/2021 +4.2 +1145 Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.1 5/17/2021 +4.3 +4(a)(2) Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.2 5/17/2021 +10.1*+ +Gulfport Energy Corporation 2021 Stock Incentive Plan. +8-K 001-19514 10.6 5/17/2021 +10.2*+ +Form of Employee Restricted Stock Unit Award Agreement +10-Q 001-19514 10.7 8/9/2021 +10.3*+ +Form of Director Restricted Stock Unit Award Agreement +10-Q 001-19514 10.8 8/9/2021 +10.4*+ +Form of Performance-Based Restricted Stock Unit Award Agreement +10-Q 001-19514 10.9 8/9/2021 +10.5*+ +CEO Agreement Amendment by and among Timothy Cutt and Gulfport, effective as of September 2, 2021. +8-K 001-19514 10.1 9/7/2021 +10.6*+ +Employment Agreement by and among William Buese and Gulfport, effective as of May 17, 2021. +8-K 001-19514 10.5 5/17/2021 +10.7*+ +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Patrick K. Craine. +10-Q 000-19514 10.5 8/2/2019 +10.8 +Employment Agreement dated November 13, 2020, by and between the Company and Michael Sluiter. +8-K 001-19514 10.4 11/16/2020 +115 +10.9* +Third Amended and Restated Credit Agreement, dated as of October 14, 2021, by and among Gulfport Energy Corporation, as holdings, Gulfport Energy Operating Corporation, as the borrower, JPMorgan Chase Bank, N.A., the lenders party thereto, and the guarantors party thereto. +8-K 001-19514 10.1 10/14/2021 +10.12 +Cooperation Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and Silver Point Capital, L.P. +8-K 001-19514 10.3 5/17/2021 +10.13 +Registration Rights Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and the holders party thereto. +8-K 001-19514 10.2 5/17/2021 +10.14+ +Form of Indemnification Agreement. +S-4 333-199905 10.1 11/6/2014 +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Netherland, Sewell & Associates, Inc. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS Inline XBRL Instance Document. X +101.SCH* Inline XBRL Taxonomy Extension Schema Document. X +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X +101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X +* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. +116 +** The Company agrees to furnish a copy of any of its unfiled long-term debt instruments to the Securities and Exchange Commission upon request. ++ Management contract, compensatory plan or arrangement. +# Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission. +117 +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: March 1, 2022 +GULFPORT ENERGY CORPORATION +By: /s/ WILLIAM J. BUESE +William J. Buese +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: March 1, 2022 By: /s/ TIMOTHY J. CUTT +Timothy J. Cutt +Chief Executive Officer and Chairman of the Board +Date: March 1, 2022 By: /s/ DAVID WOLF +David Wolf +Lead Independent Director +Date: March 1, 2022 By: /s/ WILLIAM J. BUESE +William J. Buese +Chief Financial Officer +Date: March 1, 2022 By: /s/ GUILLERMO MARTINEZ +Guillermo Martinez +Director +Date: March 1, 2022 By: /s/ JASON MARTINEZ +Jason Martinez +Director +Date: March 1, 2022 By: /s/ DAVID REGANATO +David Reganato +Director +118 \ No newline at end of file diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/filing_metadata.csv b/raw/filings/0000874499/2021/0001628280-22-004445/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f7b512723f60d637e750835bf732fb953835d87c --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2022-03-01,2021-12-31,2022-03-01T19:45:28.000Z,0001628280-22-004445,gpor-20211231.htm,10-K,18657052,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828022004445/gpor-20211231.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828022004445/,2021,2021,1 diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/item1.txt b/raw/filings/0000874499/2021/0001628280-22-004445/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..7510697d6811258b174bc3e429b509153689e12f --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/item1.txt @@ -0,0 +1,375 @@ +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in Eastern Ohio, where we target development in what is commonly referred to as the Utica formation, and Central Oklahoma where we target development in the SCOOP Woodford and Springer formations. Gulfport's predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2021, we had 3.9 Tcfe of proved reserves with a Standardized Measure of $4.1 billion and a PV-10 of $4.3 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Although we are no longer a debtor-in-possession, we operated as debtors-in-possession through the pendency of the Chapter 11 Cases. See Note 2 and Note 3 of our consolidated financial statements for a complete discussion of the Chapter 11 Cases. +We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger company, built to generate sustainable free cash flow, with a strengthened balance sheet. As a result of the Chapter 11 Cases, we reduced our total indebtedness by $1.4 billion by issuing equity in a reorganized entity to the holders of our unsecured notes and allowed general unsecured claimants. In addition, Gulfport reassessed its organizational needs post emergence and significantly reduced its general and administrative expense to ensure its cost structure is competitive with industry peers. We continue to focus on optimizing development of our resource plays, reducing our operating costs, per well drilling costs, general and administrative costs, and managing our liquidity. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet and return capital to shareholders. +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in an environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital expenditures to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +4 +Table of Contents +Index to Financial Statements +2022 Outlook +Our 2022 capital expenditure program is expected to be in a range of $340 million to $380 million. We plan to operate on average approximately one operated rig in each of our Utica and SCOOP development areas. In the Utica, we intend to spud 15 gross (13.4 net) operated horizontal wells, complete drilling on 24 gross (21.7 net) operated horizontal wells and commence sales on 17 gross (15.6 net) horizontal wells. In the SCOOP, we intend to spud five gross (3.6 net) operated horizontal wells, complete drilling on 8 gross (5.5 net) operated horizontal wells and commence sales on 13 gross (10.3 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our revolving credit agreement. +We expect this drilling program to result in approximately 975 to 1,025 MMcfe per day of production in 2022. +Additionally, in 2022, we expect to focus on our strategy of returning capital to our shareholders. In the fourth quarter of 2021, our board of directors authorized the repurchase of up to $100 million of our outstanding common stock and we paid our first cash dividend payment on our New Preferred Stock. +Operating Areas +Utica - The Utica covers hydrocarbon bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 187,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in Eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During the Combined Period, we produced approximately 772 MMcfe per day net to our interests in this area and it accounts for approximately 77% of our total production. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 74,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 33,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During the Combined Period, we produced approximately 231 MMcfe per day net to our interests in this area and it accounts for approximately 23% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2021, with respect to our estimated proved reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2021 +Oil +(MMBbl) Natural +Gas +(Bcf) NGL (MMBbl) Total (Bcfe) +Utica +Proved developed 2 1,482 9 1,550 +Proved undeveloped 4 1,073 4 1,123 +Total proved 7 2,555 13 2,673 +SCOOP +Proved developed 6 445 22 613 +Proved undeveloped 4 477 18 610 +Total proved 10 921 40 1,223 +Total +Proved developed (1) +8 1,928 31 2,165 +Proved undeveloped 8 1,550 22 1,733 +Total proved 16 3,478 54 3,898 +Totals may not sum or recalculate due to rounding. +(1) Includes approximately 2 Bcfe of net reserves located in non-core operating districts. +Successor +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 4,649 $ 3,585 $ 8,234 +Present value of estimated future net revenue (PV-10) (1) +$ 2,655 $ 1,660 $ 4,316 +Standardized measure (1) +$ 4,138 +Totals may not sum due to rounding. +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2021, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2021. The prices used in our PV-10 measure were $66.55 per barrel and $3.60 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2021. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $178 million as of December 31, 2021. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Index to Financial Statements +Proved Reserves +Estimates of proved reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2021 (in Bcfe): +Proved Reserves, December 31, 2020 (Predecessor) 2,588 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 695 +Revisions of prior reserve estimates 982 +Current production (366) +Proved Reserves, December 31, 2021 (Successor) 3,898 +Total may not sum due to rounding. +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of minerals in place during a period. During 2021, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 694.6 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 29 PUD locations in our Utica acreage for 352.2 Bcfe and 34 PUD locations in our SCOOP acreage for 342.2 Bcfe. The five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total upward revisions of 982.2 Bcfe in estimated proved reserves, of which 889.2 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2021 and the 12-month average price for natural gas increased from $1.99 per MMBtu for 2020 to $3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $15.40 per barrel for 2020 to $31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $39.54 per barrel for 2020 to $66.55 per barrel for 2021. +Upward revisions of 157.6 Bcfe were a result of a combination of well performance, operating and development cost improvements and working interest changes. A small downward revision of 64.6 Bcfe was also experienced as a result of the exclusion of 4 PUD locations in our Utica field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to capital discipline and funding future activities within cash flow and ongoing optimization of our development plan. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2021, 2020 and 2019 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +7 +Table of Contents +Index to Financial Statements +Proved Undeveloped Reserves (PUDs) +As of December 31, 2021, our proved undeveloped reserves totaled 1,550 Bcf of natural gas, 8 MMBbl of oil and 22 MMBbl of NGL, for a total of 1,733 Bcfe. Approximately 65% and 35% of our PUD reserves at year-end 2021 were located in Utica and SCOOP, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2021 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2020 (Predecessor) 1,061 +Extensions and discoveries 694 +Conversion to proved developed reserves (362) +Revisions of prior reserve estimates 341 +Proved Undeveloped Reserves, December 31, 2021 (Successor) 1,733 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 694.4 Bcfe were primarily attributed to the addition of 29 PUD drilling locations in the Utica field and 34 PUD drilling locations in the SCOOP field as a result of our current five-year development plan that is focused on generating sustainable cash flow. +Conversion to proved developed reserves. Our 2021 development activities resulted in the conversion of approximately 362.4 Bcfe into proved developed producing reserves, attributable to 12 PUD locations in the Utica field and 11 PUD locations in the SCOOP field. These 23 PUDs represent a conversion rate of 28% for 2021. +Revision of prior reserve estimates. We experienced total upward revisions of 340.8 Bcfe in estimated proved undeveloped reserves, of which 340.8 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $1.99 per MMBtu for 2020 to $3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $15.40 per barrel for 2020 to $31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $39.54 per barrel for 2020 to $66.55 per barrel for 2021. +We also experienced 67.6 Bcfe of downward revisions as a result of the exclusion of 4 PUD locations in our Utica field when changes in our schedule moved development of these PUD locations beyond five years of initial booking. These downward revisions were offset by upward revisions of 67.6 Bcfe in estimated proved reserves from a combination of working interest changes, well development design updates and operating and development cost improvements. +Costs incurred relating to the development of PUDs were approximately $268.1 million in 2021. +All PUD drilling locations included in our 2021 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2021, 0.01% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2021, 2020 and 2019 were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +8 +Table of Contents +Index to Financial Statements +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geoscience staff has approximately 85 years combined industry experience and our reservoir staff has approximately 75 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our board of directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our December 31, 2021 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for the period January through December 2021 of $66.55 per barrel and $3.60 per MMBtu. Holding production and development costs constant, if SEC pricing were $73.21 per barrel and $3.96 per MMBtu, or a 10% increase, this would have resulted in an increase of 16.2 Bcfe of our total proved reserves and a $787 million increase in PV-10 value at December 31, 2021. Holding production and development costs constant, if SEC pricing were $59.90 per barrel and $3.24 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 23.8 Bcfe of our total proved reserves and a $787 million decrease in PV-10 value at December 31, 2021. For each of these scenarios, the 139 PUDs that were economic at SEC pricing were included. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2021: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica 127,590 101,979 91,033 85,330 +SCOOP 49,104 34,934 7,959 5,673 +Other 1,021 395 4,377 1,253 +Total 177,715 137,308 103,369 92,256 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2021: +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31: +2022 15,960 14,494 +2023 13,937 13,045 +2024 261 253 +After 2024 2,637 2,565 +Held by production or operations 70,342 61,667 +Total (1) +103,137 92,024 +(1) Does not include acreage not subject to expiration. +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2021: +Average NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica 48.75/59.71 147 42.8 514 352.0 661 394.7 +SCOOP 23.17/28.80 105 16.7 516 161.8 621 178.6 +Other Various 20 1.3 8 0.1 28 1.4 +Total (1) +331 60.8 1,141 513.9 1,472 574.7 +(1) We also have override/royalty interests in 162 wells with an average NRI of 0.5%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2021 2020 2019 +Gross Net Gross Net Gross Net +Development: +Productive 29 26.6 26 24.4 25 22.4 +Dry — — — — — — +Total 29 26.6 26 24.4 25 22.4 +Exploratory: +Productive — — — — 1 0.8 +Dry — — — — — — +Total — — — — 1 0.8 +The following table presents activity by operating area for the year ended December 31, 2021: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +20 18.9 17 17.0 — — — — +SCOOP (2) +9 7.7 11 9.4 25 1.77 21 0.05 +Total 29 26.6 28 26.4 25 1.77 21 0.05 +_____________________ +(1) Of the 20 gross wells drilled in 2021, 10 were completed as producing wells, nine were in various stages of drilling and one was waiting on completion as of December 31, 2021. +(2) Of the nine gross wells drilled in 2021, four were in various stages of drilling and five were in various stages of completion as of December 31, 2021. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Natural gas sales +Natural gas production volumes (MMcf) 208,641 124,279 332,921 344,999 458,178 +Natural gas production volumes (MMcf/d) 915 907 912 943 1,255 +Total sales $ 906,096 $ 344,390 $ 1,250,486 $ 671,535 $ 1,135,381 +Avg. price without the impact of derivatives ($/Mcf) $ 4.34 $ 2.77 $ 3.76 $ 1.95 $ 2.48 +Impact from settled derivatives ($/Mcf) (1) +$ (1.44) $ (0.03) $ (0.91) $ 0.33 $ 0.23 +Avg. price, including settled derivatives ($/Mcf) $ 2.90 $ 2.74 $ 2.85 $ 2.28 $ 2.71 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,167 531 1,699 1,803 2,186 +Oil and condensate production volumes (MBbl/d) 5 4 5 5 6 +Total sales $ 81,347 $ 29,106 $ 110,453 $ 62,902 $ 117,937 +Avg. price without the impact of derivatives ($/Bbl) $ 69.71 $ 54.81 $ 65.01 $ 34.88 $ 53.95 +Impact from settled derivatives ($/Bbl) $ (8.33) $ — $ (5.72) $ 25.76 $ 1.86 +Avg. price, including settled derivatives ($/Bbl) $ 61.38 $ 54.81 $ 59.29 $ 60.64 $ 55.81 +NGL sales +NGL production volumes (MBbl) 2,658 1,211 3,869 3,964 5,074 +NGL production volumes (MBbl/d) 12 9 11 11 14 +Total sales $ 105,141 $ 36,780 $ 141,921 $ 66,814 $ 101,448 +Avg. price without the impact of derivatives ($/Bbl) $ 39.56 $ 30.37 $ 36.68 $ 16.86 $ 19.99 +Impact from settled derivatives ($/Bbl) (2) +$ (4.88) $ — $ (3.35) $ (0.04) $ 2.79 +Avg. price, including settled derivatives ($/Bbl) $ 34.68 $ 30.37 $ 33.33 $ 16.82 $ 22.78 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 231,594 134,735 366,329 379,600 501,742 +Natural gas equivalents (MMcfe/d) 1,016 983 1,004 1,037 1,375 +Total sales $ 1,092,584 $ 410,276 $ 1,502,860 $ 801,251 $ 1,354,766 +Avg. price without the impact of derivatives ($/Mcfe) $ 4.72 $ 3.05 $ 4.10 $ 2.11 $ 2.70 +Impact from settled derivatives ($/Mcfe) $ (1.39) $ (0.02) $ (0.89) $ 0.42 $ 0.24 +Avg. price, including settled derivatives ($/Mcfe) $ 3.33 $ 3.03 $ 3.21 $ 2.53 $ 2.94 +Production Costs: +Avg. lease operating expenses ($/Mcfe) $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.15 +Avg. taxes other than income ($/Mcfe) $ 0.13 $ 0.09 $ 0.12 $ 0.08 $ 0.08 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.92 $ 1.20 $ 1.02 $ 1.20 $ 1.01 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.19 $ 1.43 $ 1.28 $ 1.42 $ 1.24 +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2021: +Successor Predecessor Non-GAAP Combined Predecessor +Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 +Utica +Net production +Natural gas (MMcf) 166,906 106,968 273,874 291,133 387,473 +Oil (MBbl) 220 183 403 393 247 +NGL (MBbl) 562 361 924 1,077 1,812 +Total (MMcfe) 171,598 110,235 281,833 299,955 399,828 +Avg. price without the impact of derivatives: +Natural gas ($/Mcf) $ 4.33 $ 2.64 $ 3.67 $ 1.97 $ 2.28 +Oil ($/Bbl) $ 66.94 $ 52.43 $ 60.35 $ 33.41 $ 51.11 +NGL ($/Bbl) $ 47.16 $ 37.21 $ 43.27 $ 18.55 $ 19.74 +Production costs: +Avg. lease operating expenses ($/Mcfe) $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.12 +Avg. taxes other than income ($/Mcfe) $ 0.07 $ 0.06 $ 0.07 $ 0.07 $ 0.07 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.98 $ 1.26 $ 1.09 $ 1.29 $ 1.07 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.18 $ 1.45 $ 1.29 $ 1.49 $ 1.26 +SCOOP +Net production +Natural gas (MMcf) 41,724 17,302 59,026 53,853 70,669 +Oil (MBbl) 933 344 1,276 1,392 1,610 +NGL (MBbl) 2,095 849 2,945 2,886 3,261 +Total (MMcfe) 59,893 24,461 84,353 79,519 99,891 +Avg. price without the impact of derivatives: +Natural gas ($/Mcf) $ 4.40 $ 3.59 $ 4.16 $ 1.83 $ 2.13 +Oil ($/Bbl) $ 70.37 $ 56.05 $ 66.51 $ 35.31 $ 53.32 +NGL ($/Bbl) $ 37.51 $ 27.46 $ 34.61 $ 16.23 $ 20.13 +Production costs: +Avg. lease operating expenses ($/Mcfe) $ 0.17 $ 0.22 $ 0.19 $ 0.18 $ 0.18 +Avg. taxes other than income ($/Mcfe) $ 0.29 $ 0.20 $ 0.26 $ 0.10 $ 0.14 +Avg. transportation, gathering, processing and compression ($/Mcfe) $ 0.74 $ 0.90 $ 0.78 $ 0.86 $ 0.80 +Total LOE, midstream costs and taxes ($/Mcfe) $ 1.20 $ 1.32 $ 1.23 $ 1.14 $ 1.12 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2021, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2021. We elected to cease funding capital calls in 2019, and we have no obligation to fund any of the projects Grizzly is pursuing. Failure to fund capital calls may lead to continued dilution of our equity ownership interest in Grizzly. Upon emergence from bankruptcy, we determined that we no longer had the ability to exercise significant influence over operating and financial policies of Grizzly. As such, we discontinued equity method of accounting for our investment in Grizzly. +13 +Table of Contents +Index to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the Successor Period, Predecessor Period, and years ended December 31, 2020 and 2019 were as follows: +% of Sales +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Year Ended December 31, 2020 (Predecessor) +ECO-Energy 12 % +Year Ended December 31, 2019 (Predecessor) +Morgan Stanley Capital 14 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors and service providers, to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Index to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders in part led to the US again depositing an instrument of acceptance of the Paris Agreement, created in 2015 during the United Nations (“U.N.”) Climate Change Conference, which thereafter re-entered into force for the US on February 19, 2021. The Paris Agreement requires countries to review and “represent a progression” in their nationally determined contributions, which set emissions reduction goals, every five years beginning in 2020. The terms of the Paris Agreement and the executive orders are expected to result in +15 +Table of Contents +Index to Financial Statements +additional regulations or changes to existing regulations, which could have a material adverse effect on our business. In addition, incentives to conserve energy or use alternative energy sources could have a negative impact on our business. The executive orders and international accord may result in the development of additional regulations or changes to existing regulations. Failure to comply with laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental protection and of safety and health compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. +Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +16 +Table of Contents +Index to Financial Statements +We maintain a control of well insurance policy with a $25 million single well limit and a $35 million multiple wells limit that insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance policy. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2021 and 2020 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2021, we had 212 employees, a reduction from 256 employees the previous year. The reduction was due to the rightsizing of our organization through a controlled hiring program and a small reduction in workforce in August of 2021. All of our employees are non-bargaining. Attraction and retention of people remains one of the highest strategic goals of the organization. We remain focused on the retention and development of existing employees, as their continued commitment is critical to our success. +During 2021, we continued to adapt to the changing nature of the COVID-19 pandemic, by regularly assessing COVID-19 employee protocols, minimizing the numbers of people in our offices at times, conducting daily health screenings for all employees and visitors, and completing thorough contact tracing. These efforts helped protect the safety of employees, minimize the risk of transmission at Gulfport locations and keep our operations online with minimal disruption. +Inclusion & Diversity +During 2021, we continued to work on the diversity and inclusion projects that we announced in 2020 and held peer-led, small group discussions for all employees aimed at understanding how they view diversity and ways we could continue to focus on it in a meaningful way going forward. Based partly on feedback from those discussions, the Company delivered an unconscious bias training program for all employees to better help them understand themselves and how they view those around them. The results of these efforts have been overwhelmingly positive and have positioned us to further our diversity and inclusion initiatives in 2022 and beyond. +During 2021, our Board of Directors completely turned over as a result of the bankruptcy process and is now comprised of 40% of highly qualified diverse candidates as of the end of 2021. While 2021 was a year in which we again added very few new employees, approximately 29% of our newly hired employees were diverse hires. We are committed to evaluating our hiring and promotion practices to make sure that a diversity and inclusion mindset is considered and included throughout the Company. +In 2021, many Gulfport policies were added or revised, and a new Business Code of Conduct and Ethics training was provided to all employees. We are committed to maintaining the highest standards of business ethics and the employee training provided a clear review of our expectations. +17 +Table of Contents +Index to Financial Statements +Health, Safety & Environment (HSE) +Safety is at the forefront of everything we do. We have a robust annual training program, which includes environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings to highlight potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity for 2021. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our Work Safe Program and provided training to leaders on reinforcement strategies. Additionally, we launched the Work Green program in 2021, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and by providing training and development opportunities. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We continue to provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +Timothy J. Cutt, Chief Executive Officer and Chairman of the Board +Mr. Cutt, 61, joined Gulfport as the Interim Chief Executive Officer in May 2021, and assumed the role of Chief Executive Officer in September 2021. Mr. Cutt is a Petroleum Engineer with 38 years of energy experience. He served as Chief Executive Officer and as a director of QEP Resources from January 2019 to March 2021. Prior to joining QEP, Mr. Cutt was the Chief Executive Officer and a director of Cobalt International Energy from 2016 to 2018. Previously, Mr. Cutt held several executive positions with BHP Billiton before serving as President of the Petroleum Division from 2013 to 2016. During this time, he was also a member of BHP Billiton’s Corporate Leadership Team. Mr. Cutt began his career with Mobil and worked for ExxonMobil for 24 years and served in various management roles including President of ExxonMobil de Venezuela, President ExxonMobil Canada Energy and President Hibernia Management & Development Company. Mr. Cutt served as a board member of the American Petroleum Institute (API) from 2013 to 2018. +William J. Buese, Chief Financial Officer +Mr. Buese, 50, joined Gulfport as the Chief Financial Officer in May 2021. Most recently, Mr. Buese served as Vice President, Chief Financial Officer and Treasurer of QEP Resources from January 2020 to March 2021. He joined QEP Resources in 2012 and held positions of increasing responsibility over a nine-year period, including Vice President of Finance and Treasurer and Director of Finance. Prior to joining QEP, Mr. Buese was Director of Finance at MarkWest Energy Partners, LP and served in various finance, treasury, accounting and investor relations roles from 2005 to 2012. Mr. Buese holds over 16 years of financial expertise in the energy industry and more than 25 years of financial experience overall. Mr. Buese received his Bachelor of Arts degree in Accounting from Michigan State University and Master of Science degree in Information Systems from the University of Colorado Denver. +Patrick K. Craine, Chief Legal and Administrative Officer +Mr. Craine, 49, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as +18 +Table of Contents +Index to Financial Statements +Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 49, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager at Noble Energy, Inc. Prior to joining Noble in 2007, he spent over 17 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +RJ Moses, Senior Vice President of Operations and Drilling +Mr. Moses, 42, has served as Senior Vice President of Operations and Drilling since March 2020 and joined Gulfport Energy as the Vice President of Operations, Appalachia in August 2019. Prior to joining the Company, Mr. Moses spent over 15 years at Noble Energy, Inc., where he most recently served as a Director of Operations for Noble’s Eagleford and Denver-Julesburg (DJ) business units, managing approximately one-third of Noble’s total production at the time. Prior to that, he held various leadership roles including Operations Manager for Noble’s Marcellus business unit along with several international roles including Asset Manager for the Tamar asset (offshore Israel), Project Manager for West Africa subsea development and Lead Reservoir Engineer for West Africa. In addition, Mr. Moses served as a Senior Financial Analyst in the International division and also spent four years as an international drilling and completion engineer for Noble. Mr. Moses graduated from Texas A&M University with a Bachelor of Science degree in Petroleum Engineering and holds a Master of Business Administration degree from Texas Christian University. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/item13.txt b/raw/filings/0000874499/2021/0001628280-22-004445/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b51ba6a5c13027418312fdba5f1438330459c7a --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2022 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/item9a.txt b/raw/filings/0000874499/2021/0001628280-22-004445/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..befd65c7b813825c4b922bdd33d947b23c1174da --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/item9a.txt @@ -0,0 +1,33 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2021, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +During the second quarter ended June 30, 2021, we added certain key controls related to our reorganization discussed in Note 2 of our consolidated financial statements. +Except as described above, there were no changes in our internal control over financial reporting during the year ended December 31, 2021, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2021. +111 +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2021 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2021, as stated in their accompanying report. +/s/ Timothy J. Cutt /s/ William J. Buese +Name: Timothy J. Cutt Name: William J. Buese +Title: Chief Executive Officer Title: Chief Financial Officer +112 +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2021 (Successor) and for the period from May 18, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through May 17, 2021 (Predecessor), and our report dated March 1, 2022 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 1, 2022 +113 \ No newline at end of file diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/rp_note.txt b/raw/filings/0000874499/2021/0001628280-22-004445/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..3bec081065f76ae51dfb9a4fc1f8de6f43df4a0c --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/rp_note.txt @@ -0,0 +1,4 @@ +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. As of December 31, 2021, the Company held no shares of Mammoth Energy's outstanding common stock. As of December 31, 2020, the Company owned approximately 21.5 % of Mammoth Energy's outstanding common stock. There were no material amounts and $ 0.6 million of services provided by Mammoth Energy that were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively. +Approximately $ 3.1 million of services provided by Mammoth Energy were capitalized to oil and natural gas properties before elimination of intercompany profits on the accompanying consolidated balance sheets during the year ended December 31, 2020. \ No newline at end of file diff --git a/raw/filings/0000874499/2021/0001628280-22-004445/rpt_disclosure.txt b/raw/filings/0000874499/2021/0001628280-22-004445/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..6f09fbaef9556eafa7a955be9c40806dc4036eb8 --- /dev/null +++ b/raw/filings/0000874499/2021/0001628280-22-004445/rpt_disclosure.txt @@ -0,0 +1,4 @@ +Approval of Related Party Transactions +The Audit Committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be substantively applied to each transaction reviewed by the Audit Committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether such transactions are in the best interests of the Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party transactions. +The Company’s policy is that all its employees and directors, as well as their family members, must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the Board of Directors or a committee consisting solely of independent directors may grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give rise to a conflict of interest. +Further, under the Audit Committee charter, the Audit Committee is responsible for reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the Board of Directors. In addition, the Board of Directors and, pursuant to its written charter, the Audit Committee, reviews and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. 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Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, $0.0001 par value per share GPOR The New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): +Large Accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Table of Contents +Index to Financial Statements +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ☒ No ☐ +The aggregate market value of our common stock held by non-affiliates on June 30, 2022 was approximately $ 911.7 million. As of February 23, 2023, there were 18,847,841 shares of our $0.0001 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +SUMMARY RISK FACTORS +2 +PART I +4 +ITEM 1. +BUSINESS +4 +ITEM 1A. +RISK FACTORS +21 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +36 +ITEM 2. +PROPERTIES +36 +ITEM 3. +LEGAL PROCEEDINGS +36 +ITEM 4. +MINE SAFETY DISCLOSURES +36 +PART II +37 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +37 +ITEM 6. +RESERVED +38 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +38 +RESULTS OF OPERATIONS +41 +LIQUIDITY AND CAPITAL RESOURCES +47 +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +52 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +53 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +56 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +112 +ITEM 9A. +CONTROLS AND PROCEDURES +112 +ITEM 9B. +OTHER INFORMATION +115 +ITEM 9C. +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +117 +PART III +117 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +117 +ITEM 11. +EXECUTIVE COMPENSATION +117 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +117 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +117 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +117 +PART IV +118 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +118 +ITEM 16. +FORM 10-K SUMMARY +121 +Signatures +122 +Table of Contents +Index to Financial Statements +DEFINITIONS +Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Gulfport,” the “Company” and “Registrant” refer to Gulfport Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in thousands of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K: +1145 Indenture . Agreement dated May 17, 2021 between the Company, UMB Bank, National Association, as trustee, and the guarantors party thereto, under section 1145 of the Bankruptcy Code for our 8.000% Senior Notes due 2026. +2019 Plan. 2019 Amended and Restated Stock Incentive Plan. +2023 Notes. 6.625% Senior Notes due 2023. +2024 Notes. 6.000% Senior Notes due 2024. +2025 Notes. 6.375% Senior Notes due 2025. +2026 Notes. 6.375% Senior Notes due 2026. +2026 Senior Notes . 8.000% Senior Notes due 2026. +4(a)(2) Indenture . Certain eligible holders have made an election entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among the Company, UMB Bank, National Association, as trustee, and the guarantors party thereto, under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) as opposed to its share of the up to $550 million aggregate principal amount of our Senior Notes due 2026. The 4(a)(2) Indenture’s terms are substantially similar to the terms of the 1145 Indenture. The primary differences between the terms of the 4(a)(2) Indenture and the terms of the 1145 Indenture are that (i) affiliates of the Issuer holding 4(a)(2) Notes are permitted to vote in determining whether the holders of the required principal amount of indenture securities have concurred in any direction or consent under the 4(a)(2) Indenture, while affiliates of the Issuer holding 1145 Notes will not be permitted to vote on such matters under the 1145 Indenture, (ii) the covenants of the 1145 Indenture (other than the payment covenant) require that the Issuer comply with the covenants of the 4(a)(2) Indenture, as amended, and (iii) the 1145 Indenture requires that the 1145 Securities be redeemed pro rata with the 4(a)(2) Securities and that the 1145 Indenture be satisfied and discharged if the 4(a)(2) Indenture is satisfied and discharged. +ASC. Accounting Standards Codification. +ASU. Accounting Standards Update. +Bankruptcy Code . Chapter 11 of Title 11 of the United States Code. +Bankruptcy Court. The United States Bankruptcy Court for the Southern District of Texas. +Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. +Bcf . One billion cubic feet of natural gas. +Bcfe. One billion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Board of Directors (Board) . The board of directors of Gulfport Energy Corporation. +Btu . British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels. +Building Loan. Loan agreement for our corporate headquarters scheduled to mature in June 2025. +Chapter 11 Cases. Voluntary petitions filed on November 13, 2020 by Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +CODI . Cancellation of indebtedness income. +Table of Contents +Index to Financial Statements +Common Stock . $0.0001 par value common stock issued by the Successor on the Emergence Date. +Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas, oil and NGL. +Credit Facility . The Existing Credit Facility, as amended by the Borrowing Base Redetermination Agreement and First Amendment to Credit Agreement dated as of May 2, 2022. +DD&A. Depreciation, depletion and amortization. +Debtors. Collectively, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +Developed Acreage . The number of acres allocated or assignable to productive wells or wells capable of production. +DIP Credit Facility. Senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $262.5 million. +Disputed Claims Reserve. Reserve used to settle any pending claims of unsecured creditors that were in dispute as of the effective date of the Plan. +Dry Hole . A well that does not produce crude oil and/or natural gas in economically producible quantities. +Existing Credit Facility. The Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. as administrative agent and various lender parties, providing for a new money senior secured reserve-based revolving credit facility effective as of October 14, 2021. +Exploratory Well . A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area. +Emergence Date . May 17, 2021. +Exit Credit Agreement . The Second Amended and Restated Credit Agreement with The Bank of Nova Scotia as lead administrative agent and various lender parties providing for the Exit Facility and the First-Out Term Loan. +Exit Credit Facility . Collectively, the First-Out Term Loan and the Exit Facility, with an initial borrowing base and elected commitment amount of up to $580 million. +Exit Facility. Senior secured reserve-based revolving credit facility with The Bank of Nova Scotia as the lead arranger and administrative agent and various lender parties. +First-Out Term Loan. Senior secured term loan in an aggregate maximum principal amount of $180 million. +GAAP . Accounting principles generally accepted in the United States of America. +Grizzly. Grizzly Oil Sands ULC. +Grizzly Holdings. Grizzly Holdings Inc. +Gross Acres or Gross Wells . Refers to the total acres or wells in which a working interest is owned. +Guarantors. All existing consolidated subsidiaries that guarantee the Company's Credit Facility or certain other debt. +Held By Production . Refers to an oil and gas lease continued into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith. +Horizontal Drilling . A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval. +Incentive Plan . Gulfport Energy Corporation 2021 Stock Incentive Plan, effective on the Emergence Date. +Indentures . Collectively, the 1145 Indenture and the 4(a)(2) Indenture governing the 2026 Senior Notes. +Table of Contents +Index to Financial Statements +IRC . The Internal Revenue Code of 1986, as amended. +LIBOR. London Interbank Offered Rate. +LOE. Lease operating expenses. +Marcellus. Refers to the Marcellus Play that includes the hydrocarbon bearing rock formations commonly referred to as the Marcellus formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont County in eastern Ohio. +MBbl. One thousand barrels of crude oil, condensate or natural gas liquids. +Mcf . One thousand cubic feet of natural gas. +Mcfe. One thousand cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +MMBbl. One million barrels of crude oil, condensate or natural gas liquids. +MMBtu. One million British thermal units. +MMcf. One million cubic feet of natural gas. +MMcfe. One million cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Natural Gas Liquids (NGL). Hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include ethane, propane, butane, isobutene, pentane, hexane and natural gasoline. +Net Acres or Net Wells . Refers to the sum of the fractional working interests owned in gross acres or gross wells. +Net Revenue Interest (NRI). An interest in an oil and natural gas property entitling the owner to a share of oil, natural gas or NGL production. +NYMEX. New York Mercantile Exchange. +OCC. Oklahoma Corporation Commission. +Parent. Gulfport Energy Corporation or its successor to the Credit Facility. +Petition Date . November 13, 2020. +Plan . The Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and Its Debtor Subsidiaries. +Predecessor. The pre-emergence from bankruptcy organization for periods on or prior to May 17, 2021. +Predecessor Senior Notes. Collectively, the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes. +Preferred Stock . $0.0001 par value preferred stock issued by the Successor on the Emergence Date. +Pre-Petition Revolving Credit Facility . Senior secured revolving credit facility, as amended, with The Bank of Nova Scotia as the lead arranger and administrative agent and certain lenders from time-to-time party thereto with a maximum facility amount of $580 million. +Prior Predecessor Period . Period from January 1, 2021 through May 17, 2021. +Prior Successor Period . Period from May 18, 2021 through December 31, 2021. +Productive Well . A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes. +Table of Contents +Index to Financial Statements +Proved Developed Reserves (PDP) . Reserves expected to be recovered through existing wells with existing equipment and operating methods. +Proved Reserves . Quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +Proved Undeveloped Reserves (PUD). Proved reserves expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. +PV-10. Present net value of estimated future net revenues, discounted at 10%. +Repurchase Program . A stock repurchase program to acquire up to $300 million of Gulfport's outstanding Common Stock. It is authorized to extend through June 30, 2023, and may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. +Reservoir . A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. +Royalty Interest . Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property. +RSA . Restructuring Support Agreement. +SCOOP . Refers to the South Central Oklahoma Oil Province, a term used to describe a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. Our acreage is primarily in Garvin, Grady and Stephens Counties. +SEC . The United States Securities and Exchange Commission. +Section 382. Internal Revenue Code Section 382. +SOFR . Secured Overnight Financing Rate. +Standardized Measure. Standardized measure of discounted future net cash flows. +Successor. The post-emergence from bankruptcy reorganized organization for periods subsequent to May 17, 2021. +Tcfe . One trillion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Undeveloped Acreage . Lease or mineral acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas. +Utica . Refers to the Utica Play that includes the hydrocarbon bearing rock formations commonly referred to as the Utica formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio. +Working Interest (WI). The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. +WTI. Refers to West Texas Intermediate. +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including the expected impact of the novel coronavirus disease (COVID-19) pandemic and the war in Ukraine on our business, our industry and the global economy, estimated future production and net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), the impact of our emergence from bankruptcy, share repurchases, business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +Investors should note that we announce financial information in SEC filings. We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Index to Financial Statements +SUMMARY RISK FACTORS +Financial, Liquidity and Commodity Price Risks +• Natural gas, oil and NGL prices fluctuate widely, and lower prices for extended time periods are likely to have a material adverse effect on our business. +• Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +• Our debt and other financial commitments may limit our financial and operating flexibility. +• Our development, acquisition and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +• Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +• A change of control could limit our use of net operating losses to reduce future taxable income. +Industry, Business and Operational Risks +• The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +• If we are not able to replace reserves, we may not be able to sustain production. +• The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +• Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +• Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +• Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +• Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +• Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +• We are not the operator of all our oil and natural gas properties and therefore are not positioned to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +• Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +• All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +• The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +• The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +• Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +• We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +• The COVID-19 pandemic has negatively affected, and may in the future negatively affect, our operations, financial performance and condition, operating results and cash flows. +2 +Table of Contents +Index to Financial Statements +• A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +• Terrorist activities could materially and adversely affect our business and results of operations. +• Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +• We may engage in acquisition and divestiture activities that involve substantial risks. +Environmental, Legal and Regulatory Risks +• We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +• Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +• Increased attention to Environmental, Social and Governance ("ESG") matters may impact our business, financial results, or stock price. +• Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +• Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +Risks Associated with an Investment in Us +• The market price of our securities is subject to volatility. +• Future sales or the availability for sale of substantial amounts of our Common Stock, or the perception that these sales may occur, could adversely affect the trading price of our Common Stock and could impair our ability to raise capital through future sales of equity securities. +• Certain of our stockholders own a significant portion of our outstanding debt and equity securities, and their interests may not always coincide with the interests of other holders of the Common Stock. +• There may be future dilution of our Common Stock, which could adversely affect the market price of our Common Stock. +• Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +3 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio, where we target development in what is commonly referred to as the Utica formation, and central Oklahoma where we target development in the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's Common Stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2022, we had 4.0 Tcfe of proved reserves with a Standardized Measure of $8.3 billion and a PV-10 of $9.5 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in a manner that generates sustainable cash flow, improves margins and operating efficiencies, while improving our ESG and safety performance. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2023 Outlook +Our 2023 capital expenditure program is expected to be in a range of $425 million to $475 million. In the Utica, we intend to spud 15 to 17 gross (13 to 15 net) operated horizontal wells, complete drilling on 15 to 17 gross (13 to 15 net) operated horizontal wells and commence sales on 18 to 20 gross (16 to 18 net) horizontal wells. In the Marcellus, we intend to spud, complete drilling and commence sales on two gross (1.9 net) operated horizontal wells. In the SCOOP, we intend to spud, complete drilling and commence sales on two gross (1.6 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,000 to 1,040 MMcfe per day of production in 2023. +4 +Table of Contents +Index to Financial Statements +Additionally, in 2023, we expect continuation of shareholder return actions through our common share repurchase program. During 2022, we repurchased 2.9 million shares for $250.8 million, leaving $49.2 million remaining on our Repurchase Program. +Operating Areas +Utica - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 188,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During 2022, we produced approximately 693 MMcfe per day net to our interests in this area and it accounts for approximately 70% of our total production. +The Marcellus covers hydrocarbon bearing rock formations that overlay the Utica. We have identified 15,000 net reservoir acres in Belmont County in eastern Ohio for Marcellus development and in 2022 we added 8 PUD Marcellus locations within our Utica operating area. Our Marcellus development area is 3,500 to 4,500 feet shallower than the Utica. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 32,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2022, we produced approximately 290 MMcfe per day net to our interests in this area and it accounts for approximately 30% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2022, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2022 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica +Proved developed 2 1,523 9 1,591 +Proved undeveloped (1) +7 1,256 6 1,335 +Total proved 9 2,779 15 2,926 +SCOOP +Proved developed 7 511 25 704 +Proved undeveloped 2 322 14 417 +Total proved 9 833 39 1,121 +Total +Proved developed 9 2,034 34 2,295 +Proved undeveloped 9 1,578 20 1,752 +Total proved 18 3,612 54 4,048 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 72 Bcfe of net reserves located in the Marcellus target formation. +December 31, 2022 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 10,712 $ 7,951 $ 18,663 +Present value of estimated future net revenue (PV-10) (1) +$ 5,803 $ 3,721 $ 9,524 +Standardized measure (1) +$ 8,279 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2022, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2022. The prices used in our PV-10 measure were $94.14 per barrel and $6.36 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2022. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $1.2 billion as of December 31, 2022. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Index to Financial Statements +Proved Reserves +Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2022 (in Bcfe): +Proved Reserves, December 31, 2021 (Successor) 3,898 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 439 +Revisions of prior reserve estimates 70 +Current production (359) +Proved Reserves, December 31, 2022 (Successor) 4,048 +Total may not sum due to rounding. +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of proved reserves during a period. During 2022, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 438.9 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 44 PUD locations in the Utica which included 36 PUD locations in our Utica acreage for 295.9 Bcfe and 8 PUD locations in our Marcellus acreage for 72.1 Bcfe. In our SCOOP acreage we added 5 PUD locations for 65.4 Bcfe. New to 2022 was the addition of the 8 Marcellus PUD locations, which we have grouped into the Utica for this report. The five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total upward revisions of 69.7 Bcfe in estimated proved reserves, of which 47.7 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2022 and the 12-month average price for natural gas increased from $3.60 per MMBtu for 2021 to $6.36 per MMBtu for 2022, the 12-month average price for NGL increased from $31.90 per barrel for 2021 to $47.86 per barrel for 2022, and the 12-month average price for crude oil increased from $66.55 per barrel for 2021 to $94.14 per barrel for 2022. +Upward revisions of 144.5 Bcfe were a result of an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2022. Downward revisions of 95.6 Bcfe were experienced as a result of the exclusion of 4 PUD locations in the Utica and 5 PUD locations in the SCOOP when changes in our schedule moved the development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to optimizing the long-term development schedule to maximize cash flow and overall economic returns. Finally, a small downward revision of 26.9 Bcfe was primarily a result of performance changes to several wells or PUD location forecasts. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2022, 2021 and 2020, and changes in proved reserves during the last three years are contained in the +7 +Table of Contents +Index to Financial Statements +Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +Proved Undeveloped Reserves +As of December 31, 2022, our PUDs totaled 1,578 Bcf of natural gas, 9 MMBbl of oil and 20 MMBbl of NGL, for a total of 1,752 Bcfe. Approximately 76% and 24% of our PUDs at year-end 2022 were located in Utica and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD drilling locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD drilling locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2022 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2021 (Successor) 1,733 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 433 +Conversion to proved developed reserves (474) +Revisions of prior reserve estimates 60 +Proved Undeveloped Reserves, December 31, 2022 (Successor) 1,752 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 433.4 Bcfe were primarily attributed to the addition of 49 PUD drilling locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 36 PUD drilling locations in our Utica acreage, 8 PUD drilling locations in our Marcellus acreage and 5 PUD drilling locations in the SCOOP. The Marcellus PUD drilling locations have been grouped into the Utica for this report. +Conversion to proved developed reserves. Our 2022 development activities resulted in the conversion of approximately 474.2 Bcfe into proved developed producing reserves, attributable to 15 PUD locations in the Utica and 31 PUD locations in the SCOOP. These 46 PUDs represent a conversion rate of 33% for 2022. +Revision of prior reserve estimates. We experienced total upward revisions of 59.7 Bcfe in estimated proved undeveloped reserves. This included 92.3 Bcfe of downward revisions as a result of the exclusion of 4 PUD locations in the Utica and 5 PUD locations in the SCOOP when changes in our schedule moved development of these PUD locations beyond five years of initial booking. These downward revisions were offset by upward revisions of 152.0 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest, well development design and well forecasts. +Costs incurred relating to the development of PUDs were approximately $271.6 million in 2022. +All PUD drilling locations included in our 2022 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2022, 0.60% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2022, 2021 and 2020, were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the +8 +Table of Contents +Index to Financial Statements +requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 25 years of reservoir and operations experience. In addition, our geoscience staff has approximately 46 years combined industry experience and our reservoir staff has approximately 55 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our Board of Directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2022, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2022 of $94.14 per barrel and $6.36 per MMBtu. Holding production and development costs constant, if SEC pricing were $103.55 per barrel and $6.99 per MMBtu, or a 10% increase, this would have resulted in an increase of 4.2 Bcfe of our total proved reserves and a $1.4 billion increase in PV-10 value at December 31, 2022. Holding production and development costs constant, if SEC pricing were $84.73 per barrel and $5.72 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 6.1 Bcfe of our total proved reserves and a $1.4 billion decrease in PV-10 value at December 31, 2022. For each of these scenarios, the 133 PUDs that were economic at SEC pricing were included. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2022: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica 135,817 109,797 83,166 78,185 +SCOOP 50,041 35,783 7,975 5,718 +Other — — 232 232 +Total 185,858 145,580 91,373 84,135 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2022: +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31, +2023 12,292 11,418 +2024 3,522 3,323 +2025 4,296 4,283 +After 2025 5,782 5,660 +Held by production 65,248 59,219 +Total (1) +91,140 83,903 +_____________________ +(1) Does not include acreage not subject to expiration. +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2022: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica 48.78/60.19 146 41.9 526 362.5 672 404.4 +SCOOP 20.71/27.76 106 16.1 556 167.7 662 183.8 +Total (1) +309 58.0 1,189 530.2 1,498 588.2 +_____________________ +(1) We also have override/royalty interests in 164 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2022 2021 2020 +Gross Net Gross Net Gross Net +Development: +Productive 25 21.7 29 26.6 26 24.4 +Dry — — — — — — +Total 25 21.7 29 26.6 26 24.4 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2022: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +19 17.4 15 13.4 — — — — +SCOOP (2) +6 4.3 13 10.3 13 0.1 40 2.7 +Total 25 21.7 28 23.7 13 0.1 40 2.7 +_____________________ +(1) Of the 19 gross wells drilled in 2022, five were completed as producing wells, eight were in various stages of drilling and six were waiting on completion as of December 31, 2022. +(2) All six gross wells that were drilled in 2022 had turned to sales as of December 31, 2022. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Natural gas sales +Natural gas production volumes (MMcf) 322,366 208,641 124,279 344,999 +Natural gas production volumes (MMcf/d) 883 915 907 943 +Total sales $ 1,998,452 $ 906,096 $ 344,390 $ 671,535 +Average price without the impact of derivatives ($/Mcf) $ 6.20 $ 4.34 $ 2.77 $ 1.95 +Impact from settled derivatives ($/Mcf) (1) +$ (3.11) $ (1.44) $ (0.03) $ 0.33 +Average price, including settled derivatives ($/Mcf) $ 3.09 $ 2.90 $ 2.74 $ 2.28 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,610 1,167 531 1,803 +Oil and condensate production volumes (MBbl/d) 4 5 4 5 +Total sales $ 147,444 $ 81,347 $ 29,106 $ 62,902 +Average price without the impact of derivatives ($/Bbl) $ 91.58 $ 69.71 $ 54.81 $ 34.88 +Impact from settled derivatives ($/Bbl) (2) +$ (24.32) $ (8.33) $ — $ 25.76 +Average price, including settled derivatives ($/Bbl) $ 67.26 $ 61.38 $ 54.81 $ 60.64 +NGL sales +NGL production volumes (MBbl) 4,483 2,658 1,211 3,964 +NGL production volumes (MBbl/d) 12 12 9 11 +Total sales $ 184,963 $ 105,141 $ 36,780 $ 66,814 +Average price without the impact of derivatives ($/Bbl) $ 41.26 $ 39.56 $ 30.37 $ 16.86 +Impact from settled derivatives ($/Bbl) $ (2.80) $ (4.88) $ — $ (0.04) +Average price, including settled derivatives ($/Bbl) $ 38.46 $ 34.68 $ 30.37 $ 16.82 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 358,924 231,594 134,735 379,600 +Natural gas equivalents (MMcfe/d) 983 1,016 983 1,037 +Total sales $ 2,330,859 $ 1,092,584 $ 410,276 $ 801,251 +Average price without the impact of derivatives ($/Mcfe) $ 6.49 $ 4.72 $ 3.05 $ 2.11 +Impact from settled derivatives ($/Mcfe) $ (2.94) $ (1.39) $ (0.02) $ 0.42 +Average price, including settled derivatives ($/Mcfe) $ 3.55 $ 3.33 $ 3.03 $ 2.53 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.14 $ 0.14 $ 0.14 +Average taxes other than income ($/Mcfe) $ 0.17 $ 0.13 $ 0.09 $ 0.08 +Average transportation, gathering, processing and compression ($/Mcfe) $ 1.00 $ 0.92 $ 1.20 $ 1.20 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.34 $ 1.19 $ 1.43 $ 1.42 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2022: +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Utica +Net Production +Natural gas (MMcf) 246,123 166,906 106,968 291,133 +Oil (MBbl) 244 220 183 393 +NGL (MBbl) 885 562 361 1,077 +Total (MMcfe) 252,895 171,598 110,235 299,955 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 6.14 $ 4.33 $ 2.64 $ 1.97 +Oil ($/Bbl) $ 90.60 $ 66.94 $ 52.43 $ 33.41 +NGL ($/Bbl) $ 48.21 $ 47.16 $ 37.21 $ 18.55 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.17 $ 0.13 $ 0.13 $ 0.13 +Average taxes other than income ($/Mcfe) $ 0.06 $ 0.07 $ 0.06 $ 0.07 +Average transportation, gathering, processing and compression ($/Mcfe) $ 1.08 $ 0.98 $ 1.26 $ 1.29 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.31 $ 1.18 $ 1.45 $ 1.49 +SCOOP +Net Production +Natural gas (MMcf) 76,242 41,724 17,302 53,853 +Oil (MBbl) 1,366 933 344 1,392 +NGL (MBbl) 3,598 2,095 849 2,886 +Total (MMcfe) 106,024 59,893 24,461 79,519 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 6.38 $ 4.40 $ 3.59 $ 1.83 +Oil ($/Bbl) $ 91.71 $ 70.37 $ 56.05 $ 35.31 +NGL ($/Bbl) $ 39.56 $ 37.51 $ 27.46 $ 16.23 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.20 $ 0.17 $ 0.22 $ 0.18 +Average taxes other than income ($/Mcfe) $ 0.38 $ 0.29 $ 0.20 $ 0.10 +Average transportation, gathering, processing and compression ($/Mcfe) $ 0.78 $ 0.74 $ 0.90 $ 0.86 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.36 $ 1.20 $ 1.32 $ 1.14 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2022, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2022. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. Upon emergence from bankruptcy, we determined that we no longer had the ability to exercise significant influence over operating and financial policies of Grizzly. As such, we discontinued the equity method of accounting for our investment in Grizzly. +13 +Table of Contents +Index to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and year ended December 31, 2020 were as follows: +% of Sales +Year Ended December 31, 2022 (Successor) +ECO-Energy 20 % +Clearwater 11 % +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Year Ended December 31, 2020 (Predecessor) +ECO-Energy 12 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Index to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders in part led to the US again depositing an instrument of acceptance of the Paris Agreement, created in 2015 during the United Nations (“U.N.”) Climate Change Conference, which thereafter re-entered into force for the US on February 19, 2021. The Paris Agreement requires countries to review and “represent a progression” in their nationally determined contributions, which set emissions reduction goals, every five years beginning in 2020. The terms of the Paris Agreement and the executive orders are expected to result in additional regulations or changes to existing regulations, which could have a material adverse effect on our business. In +15 +Table of Contents +Index to Financial Statements +addition, incentives to conserve energy or use alternative energy sources could have a negative impact on our business. The executive orders and international accord may result in the development of additional regulations or changes to existing regulations. Failure to comply with laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and up to a $37.5 million limit on multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million +16 +Table of Contents +Index to Financial Statements +comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2022 and 2021 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Enterprise Risk Management +Through our Enterprise Risk Management (ERM) program, internal risk committees comprised of senior management and subject matter experts across the Company review and assess the Company’s risks. Our Board of Directors plays a key role in risk management, providing oversight of the Company’s management team, strategic initiatives, and operations. The Board committees oversee corporate governance, risk management, regulatory compliance and ESG matters. +Cybersecurity remains a top identified enterprise-wide risk for our business and is overseen by our Chief Information Officer who is responsible for identifying and mitigating information security risks. The Audit Committee receives a detailed cybersecurity update annually from the Chief Information Officer and receives a cybersecurity update quarterly through the ERM program as a key risk. The Company provides an information security training program to all employees and regularly conducts external audits of its cybersecurity program. There have not been any material information security incidents over the last three years. +Human Capital Management +Employees +As of December 31, 2022, we had 223 employees, an increase of approximately 5% from the 212 employees at December 31, 2021. The increase in 2022 was driven by hiring across our business throughout the year. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2022, we continued making significant investments in our hiring and retention processes, including increasing funds allocated to our annual merit process and increasing our 401(k) match for all employees. We remain committed to providing development opportunities to existing employees as an additional retention tool, as their continued commitment to the Company is critical to our success. +We continue to respond quickly to situations that might be conducive to the spread of COVID-19 or other airborne pathogens. In 2022, our focus on healthy working conditions helped protect the safety of employees, minimize the risk of disease transmission at Gulfport locations and keep our operations online with minimal disruption. +17 +Table of Contents +Index to Financial Statements +Inclusion & Diversity +During 2022, we continued to build on our previously-announced diversity and inclusiveness initiatives, including by training all managers and supervisors to identify and eliminate bias in the workplace. We also partnered with a third-party recruiting website and utilized other tools to expand our reach to diverse candidates, which represented almost 33% of our new hires in 2022, an increase of approximately 10% over 2021. We are also pleased by growing numbers of diverse employees in key managerial, supervisory, and professional positions throughout the Company. +There were no changes to the composition of our Board of Directors in 2022 and it remains a group of highly qualified directors, 40% of whom are diverse candidates. We remain committed to evaluating our hiring and promotion practices to ensure that diversity and inclusion are considered and included throughout the Company. +Over the course of 2022, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual or refresher trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE Program and provided training to leaders on reinforcement strategies. Additionally, we launched the WORK GREEN Program in 2021, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We continue to provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President and Chief Executive Officer +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 54, as President and Chief Executive Officer, effective as of January 24, 2023. Mr. Reinhart joins the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating +18 +Table of Contents +Index to Financial Statements +Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Timothy J. Cutt, Executive Chairman of the Board +On January 24, 2023, Mr. Cutt resigned as Chief Executive Officer of the Company and was appointed as Executive Chairman of the Company. Mr. Cutt, 62, joined Gulfport as the Interim Chief Executive Officer in May 2021, and assumed the role of Chief Executive Officer in September 2021. Mr. Cutt is a Petroleum Engineer with 38 years of energy experience. He served as Chief Executive Officer and as a director of QEP Resources from January 2019 to March 2021. Prior to joining QEP, Mr. Cutt was the Chief Executive Officer and a director of Cobalt International Energy from 2016 to 2018. Previously, Mr. Cutt held several executive positions with BHP Billiton before serving as President of the Petroleum Division from 2013 to 2016. During this time, he was also a member of BHP Billiton’s Corporate Leadership Team. Mr. Cutt began his career with Mobil and worked for ExxonMobil for 24 years and served in various management roles including President of ExxonMobil de Venezuela, President ExxonMobil Canada Energy and President Hibernia Management & Development Company. Mr. Cutt served as a board member of the American Petroleum Institute (API) from 2013 to 2018. +William J. Buese, Chief Financial Officer +Mr. Buese, 51, joined Gulfport as the Chief Financial Officer in May 2021. Most recently, Mr. Buese served as Vice President, Chief Financial Officer and Treasurer of QEP Resources from January 2020 to March 2021. He joined QEP Resources in 2012 and held positions of increasing responsibility over a nine-year period, including Vice President of Finance and Treasurer and Director of Finance. Prior to joining QEP, Mr. Buese was Director of Finance at MarkWest Energy Partners, LP and served in various finance, treasury, accounting and investor relations roles from 2005 to 2012. Mr. Buese holds over 16 years of financial expertise in the energy industry and more than 25 years of financial experience overall. Mr. Buese received his Bachelor of Arts degree in Accounting from Michigan State University and Master of Science degree in Information Systems from the University of Colorado Denver. +Patrick K. Craine, Chief Legal and Administrative Officer +Mr. Craine, 50, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 50, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to joining Noble in 2007, he spent over 20 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from +19 +Table of Contents +Index to Financial Statements +the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +20 +Table of Contents +Index to Financial Statements +ITEM 1A. RISK FACTORS +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a summary of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Financial, Liquidity and Commodity Price Risks +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low natural gas, oil, and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2021, West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $47.47 to $85.64 per barrel and the Henry Hub spot market price of natural gas ranged from $2.43 to $23.86 per MMBtu. During 2022, WTI prices ranged from $71.05 to $123.64 per barrel and the Henry Hub spot market price of natural gas ranged from $3.46 to $9.85 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• the level of prices, and expectations about future prices, of oil and natural gas; +• changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the expected rates of declining current production; +• the price and availability of alternative fuels; +• technological advances affecting energy consumption; +• risks associated with operating drilling rigs; +• the effectiveness of worldwide conservation measures; +• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• the price and level of foreign imports; +• the nature and extent of domestic and foreign governmental regulations and taxes; +• the ability of the members of the Organization of Petroleum Exporting Countries and others to agree to and maintain oil price and production controls; +• political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia; +• weather conditions; +• acts of terrorism; and +• domestic and global economic conditions. +21 +Table of Contents +Index to Financial Statements +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2023 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2024 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We also may be unable to mitigate price volatility due to our exposure to long-dated call options and restrictions in our credit facility. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our Credit Facility, which is structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the SOFR benchmark. At December 31, 2022, amounts borrowed under our Credit Facility bore interest at the weighted average rate of 7.39%. A 1% increase in the average interest rate would increase our interest expense by approximately $1.5 million based on outstanding borrowings under our Credit Facility at December 31, 2022. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our Credit Facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2022, we did not hedge our interest rate risk. +Our debt and other financial commitments may limit our financial and operating flexibility. +Our total principal debt was approximately $695.0 million at December 31, 2022. We also had various commitments for leases, drilling contracts, derivative contracts, firm transportation, and purchase obligations for services, products and properties. Our financial commitments could have important consequences to our business, including, but not limited to, limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, to pay dividends, to repurchase shares of our common and preferred stock, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to make payments on our debt or to comply with restrictive terms of our debt. Higher levels of debt may make us more vulnerable to general adverse economic and industry conditions. Additionally, the agreement governing our credit facility and the indentures governing our senior notes contain a number of covenants that impose constraints on us, including requirements to comply with certain financial covenants and restrictions on our ability to dispose of assets, make certain investments, incur liens and additional debt, and engage in consolidations, mergers and acquisitions. If commodity prices decline and we reduce our level of capital spending and production declines or we incur additional impairment expense or the value of our proved reserves declines, we may not be able to incur additional indebtedness, may need to repay outstanding indebtedness and may not be in +22 +Table of Contents +Index to Financial Statements +compliance with the financial covenants in our debt instruments in the future. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K and Note 5 of our consolidated financial statements for more information regarding the financial covenants and our Credit Facility. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital through a variety of means. We cannot guarantee that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves. In addition, we may be unable to implement our development plan, complete acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting oil and NGL to one MCF of natural gas at the ratio of six Mcf of natural gas to one barrel of oil. +Under the full cost method of accounting for oil and gas properties, we are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash write-down is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. Future non-cash asset impairments could negatively affect our results of operations. +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2022, we had a net operating loss, or NOL, carryforward of approximately $1.6 billion for federal +23 +Table of Contents +Index to Financial Statements +income tax purposes. If we were to experience an “ownership change,” as determined under IRC Section 382, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. +Emergence from Chapter 11 bankruptcy proceedings resulted in an ownership change for purposes of IRC Section 382. We currently expect to apply rules under IRC Section 382(l)(5) that would allow us to mitigate the limitations imposed under IRC Section 382 with respect to our NOLs that existed at the time of such ownership change. However, if we were to experience a second ownership change, then our ability to utilize our NOLs could potentially be subject to a more restrictive limitation under IRC Section 382. +Industry, Business and Operational Risks +The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +As of December 31, 2022, approximately 43% of our total estimated proved reserves were PUDs and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. Estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved +24 +Table of Contents +Index to Financial Statements +undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2022 present value is based on a $6.36 per MMBtu of gas price and a $94.14 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire significant amounts of unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or cancelled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and +25 +Table of Contents +Index to Financial Statements +liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Although 84% of our Utica acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 16% of our Utica acreage not held by production, 37% will be subject to expiration in 2023, 10% in 2024, 14% in 2025 and 39% thereafter, although a portion of our Utica leases generally grant us the right to extend these leases for an additional five-year period. Although 99% of our SCOOP acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 1% of our SCOOP acreage not held by production, 6% will be subject to expiration in 2023, 91% in 2024, 3% in 2025 and none thereafter. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +26 +Table of Contents +Index to Financial Statements +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and gas properties can become damaged, our operations may be curtailed, delayed or cancelled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• loss of drilling fluid circulation; +• equipment failures or accidents; +• fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +• adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures; +• issues with title or in receiving governmental permits or approvals; +• restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets; +• environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• shortages or delays in the availability of services or delivery of equipment; and +• unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, cybersecurity breaches, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +We utilize multi-well pad drilling where practical. For example, in the Utica we drill multiple wells from a single pad. Wells drilled on a pad are not turned to sales until all wells on the pad are drilled and cased and the drilling rig is moved from the location. In addition, existing wells that offset newly drilled wells may be temporarily shut-in during the drilling and completion process. As a result, multi-well pad drilling delays the completion of wells and the commencement of production from new wells, and may negatively affect the production from existing offset wells, all of which may cause volatility in our operating results from period to period. Finally, delays in completion of wells may impact planned conversion of PUD reserves to PDP reserves. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +27 +Table of Contents +Index to Financial Statements +• the timing and amount of capital expenditures; +• the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• the operator's expertise and financial resources; +• approval of other participants in drilling wells; +• selection of technology; and +• the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids. +All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +Our largest fields by production are located in eastern Ohio and central Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2022 accounted for approximately 20% of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of and increased costs for drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could +28 +Table of Contents +Index to Financial Statements +delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines, trucks and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +With respect to our Utica acreage where we are focusing a portion of our exploration and development activity, operations may be delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica and the other areas in which we operate. As a result, we may experience delays or curtailments in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in or curtail our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +We have contracts with some of our third-party service providers for gathering, processing and transportation services with minimum volume delivery commitments under which we are obligated to pay certain fees on minimum volumes regardless of actual volume throughput. As of December 31, 2022, our aggregate long-term contractual obligation under these agreements was approximately $1.6 billion. These fees could be significant and may have a material adverse effect on our results of operations. +The COVID-19 pandemic has affected, and may in the future materially adversely affect, our operations, financial performance and condition, operating results and cash flows. +We are subject to public health crises such as the COVID-19 pandemic, which has previously significantly impacted, and may in the future impact, our business and results of operations. For example, the COVID-19 pandemic resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines and shelter-in-place orders, which have previously caused, and may in the future cause, business slowdowns or shutdowns in certain affected countries and regions. These developments led to volatility in the demand for and pricing of natural gas, oil and NGL at various points throughout the pandemic, and we may experience similar effects in the future. In addition to potentially negative impacts on our sales and revenue, the pandemic exposes our business, operations, and workforce to a variety of other risks, including: +• volatility and disruption of global financial markets, which could negatively impact our ability to access capital in the future; +• illnesses to key employees or a significant portion of our workforce, which may result in inefficiencies, delays or disruptions that could lower our production volumes; +• disruptions to the third-party midstream services that we rely on for the transmission, gathering and processing of a significant portion of our produced natural gas, oil and NGL; and +• potentially heightened exposure to many of the other risks set forth in Item 1A., “Risk Factors” in our Annual Report on Form 10-K, such as those relating to our financial performance and debt obligations. +29 +Table of Contents +Index to Financial Statements +The rapid development and fluidity of COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments that we are not able to predict, including the length of time that the pandemic continues, its effect on the demand for natural gas, NGL and oil, the response of the overall economy and the financial markets as well as the effect of governmental actions taken in response to the pandemic. Any of these developments may in the future negatively affect our operations, financial performance and condition, operating results and cash flows. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyber-attack involving our information systems and related infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems for protecting against cyber security risks may not be sufficient. As cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber-attacks. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +30 +Table of Contents +Index to Financial Statements +We may engage in acquisition and divestiture activities that involve substantial risks. +We may make acquisitions that complement or expand our current areas of operations. If we are unable to make attractive acquisitions, our future growth could be limited. Furthermore, even if we do make acquisitions, they may not result in an increase in our cash flow from operations or otherwise result in the benefits anticipated due to various risks, including, but not limited to: +• mistaken estimates or assumptions about reserves, potential drilling locations, revenues and costs, including synergies and the overall costs of equity or debt; +• difficulties in integrating the operations, technologies, products and personnel of the acquired assets or business; and +• unknown and unforeseen liabilities or other issues related to any acquisition for which contractual protections prove inadequate, including environmental liabilities and title defects. +In addition, from time to time, we may sell or otherwise dispose of certain of our properties or businesses as a result of an evaluation of our asset portfolio or to help enhance our liquidity. These transactions also have inherent risks, including possible delays in closing, the risk of lower-than-expected sales proceeds for the disposed assets or businesses and potential post-closing claims for indemnification. Moreover, volatility in commodity prices may result in fewer potential bidders, unsuccessful sales efforts and a higher risk that buyers may seek to terminate a transaction prior to closing. +Environmental, Legal and Regulatory Risks +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, on December 6, 2022, the United States Environmental Protection Agency (USEPA), proposed a new methane rule which established guidelines for existing sources of methane emissions from existing facilities. Constrained supply chain for environmental control devices along with the significant estimated costs of compliance could have a material impact on our operations. Further, the Bureau for Land Management (BLM) issued a proposed Waste Minimization Rule on November 30, 2022. The rule adds additional requirements for operators on federal and Indian leases and includes new air quality requirements along with waste prevention provisions. In addition, we may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to +31 +Table of Contents +Index to Financial Statements +set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the OCC issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane and incentivizing energy conservation or the use of alternative energy sources. Policy makers at both the U.S. federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions and encourage consumers to the alternative energy sources. The Inflation Reduction Act, which Congress passed and President Biden signed into law in August 2022, both imposes new climate related requirements on oil and gas operations and appropriates significant federal funding for renewable energy initiatives. Also, for the first time ever, the law imposes a fee on greenhouse gas (GHG) emissions from certain facilities. The emissions fee and funding provisions of the Inflation Reduction Act could increase our operating costs and accelerate the transition away from fossil fuels, which could in turn adversely affect our business, results of operations and financial position. +States in which we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level or other initiatives to incentivize the use of renewable energy could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +32 +Table of Contents +Index to Financial Statements +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable to improve our sustainability performance and to meet the specific requirements to perform services for certain customers. If we are unable to meet the ESG standard or investment, lending, ratings, or voting criteria and policies set by these parties, we may lose investors, investors may allocate a portion of their capital away from us, we may become a target for ESG-focused activism, our cost of capital may increase, the price of our securities may be negatively impacted, and our reputation may also be negatively affected. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Severe weather events, such as storms, hurricanes, droughts, or floods, could have an adverse effect on our operations and could increase our costs. Potential adverse effects could include damages to our facilities, the costs of less efficient or non-routine operating practices necessitated by weather events, or increased costs for insurance coverage. If climate changes result in more intense or frequent severe weather events, the physical and disruptive effects could have a material adverse impact on our operations and assets. +Air Emissions. The US Federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and natural gas operations. New facilities may be required to obtain permits before operations can commence, and existing facilities may be required to obtain additional permits, and incur capital costs, in order to remain in compliance. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations. In general, we believe that compliance with the Clean Air Act and similar state laws and regulations will not have a material impact on our operations or financial condition. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +In our Utica and SCOOP operations, we make an effort to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle or share 100% of all produced water, we do inject water into third-party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle once sharing +33 +Table of Contents +Index to Financial Statements +opportunities with other operators have been exhausted. In the state of Ohio, all water used during drilling operations is disposed of through injection into third-party salt water disposal wells regulated by applicable state agencies. +Increased attention to ESG matters may impact our business, financial results, or stock price. +In recent years, increasing attention has been given to corporate activities related to ESG matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, activist investors, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change, advocating for changes to companies’ boards of directors, and promoting the use of energy saving building materials. These activities may result in reduced demand for our oil, natural gas and NGL, reduced profits, increased investigations and litigation, each of which could have negative impacts on our access to capital markets. +In addition, we note that standards and expectations regarding carbon accounting and the processes for measuring and counting GHG emissions and GHG emission reductions are evolving, and it is possible that our approach to measuring both our emissions and our approaches to reducing emissions may be, either currently by some stakeholders or at some future point, considered inconsistent with common or best practices. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could cause reputational harm to our business, increase our risk of litigation, and could have a material adverse effect on our results of operations. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions. We may take certain actions to improve the ESG profile of our company and/or products, but we cannot guarantee that such actions will have the desired effect. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs as we collect and store personal data related to royalty owners. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act, as amended by the California Privacy Rights Act (CPRA), establishes certain transparency rules and create new data privacy rights for users, including limitations on our use of certain sensitive personal information and more ability for users to control the purposes for which their data is shared with third parties. The CPRA also provides for statutory fines for data security breaches or other CPRA violations. Meanwhile, many other states have considered privacy laws like the CPRA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our +34 +Table of Contents +Index to Financial Statements +business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +Risks Associated with an Investment in Us +The market price of our securities is subject to volatility. +Upon our emergence from bankruptcy, our old common stock was cancelled and we issued Common Stock. The market price of our Common Stock could be subject to wide fluctuations in response to, and the level of trading that develops with our Common Stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our new capital structure as a result of the transactions contemplated by the Plan, our limited trading history subsequent to our emergence from bankruptcy, our limited trading volume, the lack of comparable historical financial information due to our adoption of fresh start accounting, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this Part I, Item 1A of this Annual Report on Form 10-K. +Future sales or the availability for sale of substantial amounts of our Common Stock, or the perception that these sales may occur, could adversely affect the trading price of our Common Stock and could impair our ability to raise capital through future sales of equity securities. +A large percentage of our Common Stock is held by a relatively small number of investors. In connection with our emergence from bankruptcy protection, we entered into the Registration Rights Agreement pursuant to which we have agreed to file a registration statement with the SEC to facilitate potential future sales of our Common Stock by such investors. Sales of a substantial number of shares of our Common Stock in the public markets, or even the perception that these sales might occur (such as upon the filing of the aforementioned registration statement), could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. +We cannot predict the effect that future sales of our Common Stock will have on the price at which the Common Stock trades. Sales of substantial amounts of our Common Stock, or the perception that such sales could occur, may adversely affect the trading price of our Common Stock. +Certain of our stockholders own a significant portion of our outstanding debt and equity securities and their interests may not always coincide with the interests of other holders of the Common Stock. +A large percentage of our debt and equity are held by a relatively small number of investors. As a result, these investors could have significant influence over all matters presented to our stockholders and debt holders for approval, including election and removal of our directors, change in control transactions and the outcome of all actions requiring majority stockholder approval. +The interests of these investors may not always coincide with the interests of the other holders of the Common Stock and other debt holders, and the concentration of control in these investors may limit other stockholders' ability to influence corporate matters. The concentration of ownership and voting power of these investors may also delay, defer or even prevent an acquisition by a third party or other change of control transactions of our Company. This may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. In addition, the concentration of voting power may adversely affect the trading price and liquidity of the Common Stock. +35 +Table of Contents +Index to Financial Statements +There may be future dilution of our Common Stock, which could adversely affect the market price of our Common Stock. +We are not restricted from issuing additional shares of our Common Stock. In the future, we may issue shares of our Common Stock to raise cash for future capital expenditures, acquisitions or for general corporate purposes. We may also issue securities that are convertible into, exchangeable for or that represent the right to receive our Common Stock. Lastly, we currently issue restricted stock units and performance vesting restricted stock units to certain employees and directors as part of their compensation. Any of these events will dilute our shareholders' ownership interest in Gulfport and may reduce our earnings per share and have an adverse effect on the price of our Common Stock. +Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us, our stockholders, our creditors or other constituents; (iii) any action asserting a claim against us, any director or our officers arising pursuant to any provision of the DGCL, our certificate of incorporation or our by-laws; or (iv) any action asserting a claim against us, any director or our officers that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors or officers or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2. PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 20 of our consolidated financial statements. +ITEM 3. LEGAL PROCEEDINGS +The Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. +While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on us, cannot be predicted with certainty, we believe that none of these matters, if ultimately decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +The information with respect to this Item 3. Legal Proceedings is set forth in Note 19 of our consolidated financial statements. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +36 +Table of Contents +Index to Financial Statements +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +Shares of our Common Stock are listed on the NYSE under the symbol "GPOR". See Note 7 of our consolidated financial statements for further discussion of our Common Stock. +Shareholders +At the close of business on February 21, 2023, there were approximately 823 holders of record of our Common Stock. +Dividends +Subsequent to our emergence from bankruptcy, we did not pay dividends on our Common Stock in 2021 and 2022. The declaration and payment of any future Common Stock dividend will be at the full discretion of the Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Our Credit Facility also requires us to meet certain financial covenants at the time dividend payments are made. +During the Prior Successor Period, the Company paid dividends on our Preferred Stock, which included 3,071 shares of Preferred Stock paid in kind, approximately $55 thousand of cash-in-lieu of fractional shares, and $1.5 million of cash dividends to holders of our Preferred Stock. During the year ended December 31, 2022, the Company paid $5.4 million of cash dividends to holders of our Preferred Stock. +Issuer Purchases of Equity Securities +In November 2021, the Company's Board of Directors approved the Repurchase Program to acquire up to $100 million of Common Stock and subsequently increased the authorization from $100 million to $200 million in April 2022 and then from $200 million to $300 million in July 2022. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of Common Stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program is authorized to extend through June 30, 2023, and may be suspended from time to time, or modified, extended or discontinued by the Board of Directors at any time. As of December 31, 2022, the Company had repurchased 2.9 million shares for $250.8 million at a weighted average price of $86.47 per share. +The following table provides a summary of our Common Stock repurchase activity for the three months ended December 31, 2022: +Period +Total Number of Shares Purchased (1) +Average Price Paid per Share Total number of shares purchased as part of publicly announced plans or programs Approximate maximum dollar value of shares that may yet be purchased under the plans or programs +October 1 - October 31 64,355 $ 90.53 64,266 $ 66,603,000 +November 1 - November 30 78,370 $ 84.09 78,161 $ 60,013,000 +December 1 - December 31 150,510 $ 71.63 150,510 $ 49,231,000 +Total 293,235 $ 79.11 292,937 +_____________________ +(1) We repurchased and canceled 89 and 209 shares of our Common Stock at a weighted average price of $87.71 and $85.83 to satisfy tax withholding requirements incurred upon the vesting of restricted stock unit awards during October and November 2022, respectively. +Recent Sales of Unregistered Securities +None. +37 +Table of Contents +Index to Financial Statements +Stock Performance Graph +The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filings. +The performance graph below illustrates changes over the period of May 19, 2021 through December 31, 2022, in cumulative total stockholder return on the Successor Common Stock as measured against the cumulative total return of the S&P 500 Index and the S&P Oil & Gas Exploration and Production Index. The graph tracks the performance of a $100 investment in our Common Stock and in each index (with the reinvestment of all dividends for the index securities) from May 19, 2021 to December 31, 2022. +ITEM 6. [RESERVED] +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis represents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following information updates the discussion of Gulfport's financial condition provided in its 2021 Annual Report on Form 10-K filing and compares the results of operations for the year ended December 31, 2022 to the period from May 18, 2021 through December 31, 2021 ("Prior Successor Period") and the period from January 1, 2021 through May 17, 2021 ("Prior Predecessor Period"). Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in " Management's Discussion and Analysis of Financial Condition and Results of Operations " in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. +Overview +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +38 +Table of Contents +Index to Financial Statements +Recent Developments +Credit Facility +On May 2, 2022, the Company entered into the Borrowing Base Redetermination Agreement and First Amendment to the Credit Agreement (the "Amendment"), which amended the Company's Existing Credit Facility (as amended, the "Credit Facility"). The Amendment, among other things, increased the borrowing base under the Credit Facility from $850 million to $1.0 billion, with the elected commitments remaining at $700 million. On October 31, 2022, the Company completed its semi-annual borrowing base redetermination, during which the borrowing base was reconfirmed at $1.0 billion, with the elected commitments remaining at $700 million. See Note 5 of our consolidated financial statements for additional discussion of the Credit Facility. +Stock Repurchase Program +In November 2021 the Company's Board of Directors approved the Repurchase Program to acquire up to $100 million of Common Stock and subsequently increased the authorization from $100 million to $200 million in April 2022 and then from $200 million to $300 million in July 2022. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of Common Stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program is authorized to extend through June 30, 2023, and may be suspended from time to time, or modified, extended or discontinued by the Board of Directors at any time. As of December 31, 2022, the Company repurchased 2.9 million shares for $250.8 million at a weighted average price of $86.47 per share. +Inflation, Rising Interest Rates and Changes in Commodity Prices +The annual rate of inflation in the United States was measured at 6.5% in December 2022 by the Consumer Price Index, representing a significant increase to the historical inflation observed in recent years. Inflation and increased commodity prices have caused drilling and completion costs to increase from the prior year. In addition, the Federal Reserve has tightened monetary policy by approving a series of increases to the Federal Funds Rate. Furthermore, the Chairman of the Federal Reserve signaled that the Federal Reserve would continue to take necessary action to bring inflation down and to ensure price stability, including continued rate increases. The inflationary environment has impacted interest rates on our Credit Facility borrowings throughout 2022. Interest rates on our Credit Facility borrowings have increased from 3.19% at December 31, 2021, to 7.39% at December 31, 2022. Additional increases in interest rates may have a negative impact on the Company’s ability to continue to execute its business strategy. +Our revenues, the value of our assets, and our ability to obtain bank loans or additional capital on attractive terms have been and will continue to be affected by changes in natural gas, oil and NGL prices and the costs to produce our reserves. Natural gas, oil and NGL prices are subject to significant fluctuations that are beyond our ability to control or predict. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for 2023 to continue to be a function of supply and demand; however, we do not expect inflation to significantly impact cash flow in 2023. +Impact of the War in Ukraine +The invasion of Ukraine by Russia and the sanctions imposed in response to the crisis have increased volatility in the global financial markets and are expected to have further global economic consequences, including disruptions of global energy markets and the amplification of inflation and supply chain constraints. The ultimate impact of the war in Ukraine will depend on future developments and the timing and extent to which normal economic and operating conditions resume. +2022 Operational and Financial Highlights +During 2022, we had the following notable achievements: +• Reported total net production of 983.4 MMcfe per day. +• Generated $739.1 million of operating cash flows. +• Turned to sales 28 gross (23.6 net) wells; including the Extreme pad in the Utica, which was brought online at a combined gross peak production rate of approximately 140 MMcfe per day. +39 +Table of Contents +Index to Financial Statements +• Returned $250.8 million to shareholders through the repurchase of 2.9 million shares at a weighted average price of $86.47 per share. +• Increased the borrowing base under the Credit Facility from $850 million to $1.0 billion. +• Reduced total debt by $19 million. +• Reported year-end estimated net proved reserves of 4.0 Tcfe. +Business and Industry Outlook +The Company's primary focus going into 2023 is its continued attention on reducing cycle times and operating costs to improve margins and ultimately support our expected free cash flow generation. We are committed to an emphasis on sustainability and we will continue to prioritize safety, environmental stewardship, and maintaining strong relationships with the communities in which we operate. Throughout the year, we plan to maintain capital discipline, prioritizing free cash flow generation and preserving our strong financial position, while returning capital to shareholders and increasing our resource depth through incremental leasehold opportunities. +In 2022, natural gas prices improved significantly, but continue to be volatile as spot prices ranged from $3.46 to $9.85 per MMBtu. Henry Hub averaged $6.44 per MMBtu in 2022 vs $3.89 per MMBtu in 2021. As we look into 2023, we expect continued volatility in natural gas prices. To mitigate our exposure to commodity market volatility and to help provide a level of certainty around our financial strength, we have entered into a combination of natural gas swaps and collars, representing approximately 58% of our expected 2023 production, at an average floor price of $3.58 per Mcf. +Our 2023 capital expenditure program is expected to be in a range of $425 million to $475 million. Prior to 2022, general inflation was moderate; however, during 2022 our capital and operating costs were negatively impacted by the volatility in commodity prices, a significant rise in inflation and a lack of long-term contracts entering the year. With the recent weakening in commodity prices, we could begin to see deflationary pressures during 2023 as well as less frequent supply chain constraints. We will continue to monitor and manage inflationary and supply chain pressures caused by increased activities in the field and any future increases in commodity prices. +40 +Table of Contents +Index to Financial Statements +Results of Operations +Comparison of the Year Ended December 31, 2022, Prior Successor Period and Prior Predecessor Period +We reported net income of $494.7 million for the year ended December 31, 2022, compared to a net loss of $112.8 million for the Prior Successor Period and a net income of $251.0 million for the Prior Predecessor Period. The material changes that lead to the increase in net income are further discussed by category on the following pages. Some totals and changes throughout the below section may not sum or recalculate due to rounding. +Natural Gas, Oil and Condensate and NGL Sales (sales totals in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas (MMcf/day) +Utica production volumes 674 732 781 +SCOOP production volumes 209 183 126 +Total production volumes 883 915 907 +Total sales $ 1,998,452 $ 906,096 $ 344,390 +Average price without the impact of derivatives ($/Mcf) $ 6.20 $ 4.34 $ 2.77 +Impact from settled derivatives ($/Mcf) $ (3.11) $ (1.44) $ (0.03) +Average price, including settled derivatives ($/Mcf) $ 3.09 $ 2.90 $ 2.74 +Oil and condensate (MBbl/day) +Utica production volumes 1 1 1 +SCOOP production volumes 4 4 3 +Total production volumes 4 5 4 +Total sales $ 147,444 $ 81,347 $ 29,106 +Average price without the impact of derivatives ($/Bbl) $ 91.58 $ 69.71 $ 54.81 +Impact from settled derivatives ($/Bbl) $ (24.32) $ (8.33) $ — +Average price, including settled derivatives ($/Bbl) $ 67.26 $ 61.38 $ 54.81 +NGL (MBbl/day) +Utica production volumes 2 2 3 +SCOOP production volumes 10 9 6 +Total production volumes 12 11 9 +Total sales $ 184,963 $ 105,141 $ 36,780 +Average price without the impact of derivatives ($/Bbl) $ 41.26 $ 39.56 $ 30.37 +Impact from settled derivatives ($/Bbl) $ (2.80) $ (4.88) $ — +Average price, including settled derivatives ($/Bbl) $ 38.46 $ 34.68 $ 30.37 +Total (MMcfe/day) +Utica production volumes 693 753 805 +SCOOP production volumes 290 263 179 +Total production volumes 983 1,016 983 +Total sales $ 2,330,859 $ 1,092,584 $ 410,276 +Average price without the impact of derivatives ($/Mcfe) $ 6.49 $ 4.72 $ 3.05 +Impact from settled derivatives ($/Mcfe) $ (2.94) $ (1.39) $ (0.02) +Average price, including settled derivatives ($/Mcfe) $ 3.55 $ 3.33 $ 3.03 +41 +Table of Contents +Index to Financial Statements +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas sales $ 1,998,452 $ 906,096 $ 344,390 +Oil and condensate sales 147,444 81,347 29,106 +Natural gas liquid sales 184,963 105,141 36,780 +Total natural gas, oil and condensate, and NGL sales $ 2,330,859 $ 1,092,584 $ 410,276 +For the year ended December 31, 2022, our total unhedged natural gas, oil and condensate and NGL revenues increased approximately $1.2 billion, or 113%, compared to the Prior Successor Period. The increase was primarily driven by the timing of our emergence from bankruptcy. The Prior Successor Period only includes production from May 18, 2021, through December 31, 2021, compared to a full year of production in 2022. Additionally, as noted in the table above, significant increases in oil, natural gas and NGL indexes increased per unit realizations. Most notably, the Henry Hub index increased from $4.28 per MMBtu in the Prior Successor Period to $6.44 per MMBtu in 2022. +For the year ended December 31, 2022, our total unhedged natural gas, oil and condensate and NGL revenues increased approximately $1.9 billion, or 468%, compared to the Prior Predecessor Period. The increase was primarily driven by the timing of our emergence from bankruptcy. The Prior Predecessor Period only includes production from January 1, 2021, through May 17, 2021, compared to a full year of production in 2022. Additionally, there were significant increases in oil, natural gas and NGL indexes. Most notably, the Henry Hub index increased from $3.25 per MMBtu in the Prior Successor Period to $6.44 per MMBtu in 2022. +The total natural gas, oil and NGL volumes hedged for the year ended December 31, 2022, the Prior Successor Period and the Prior Predecessor Period represented approximately 86%, 88% and 86%, respectively, of our total sales volumes for the applicable year or period. +Natural Gas, Oil and NGL Derivatives (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas derivatives - fair value gains (losses) $ 32,797 $ (223,512) $ (123,080) +Natural gas derivatives - settlement losses (1,002,098) (300,172) (3,362) +Total losses on natural gas derivatives (969,301) (523,684) (126,442) +Oil and condensate derivatives - fair value gains (losses) 6,618 (5,128) (6,126) +Oil and condensate derivatives - settlement losses (39,163) (9,720) — +Total losses on oil and condensate derivatives (32,545) (14,848) (6,126) +NGL derivatives - fair value gains (losses) 14,648 (5,322) (4,671) +NGL derivatives - settlement losses (12,549) (12,965) — +Total gains (losses) on NGL derivatives 2,099 (18,287) (4,671) +Total losses on natural gas, oil and NGL derivatives $ (999,747) $ (556,819) $ (137,239) +Settlement gains (losses) in the table above represent realized cash gains or losses to the instruments described in Note 13 of our consolidated financial statements. Our hedging program incurred cash settlements of $1,053.8 million for the year ended December 31, 2022, compared to $322.9 million for the Prior Successor Period and $3.4 million for the Prior Predecessor Period. +42 +Table of Contents +Index to Financial Statements +Lease Operating Expenses (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Lease operating expenses +Utica $ 43,775 $ 21,841 $ 13,991 +SCOOP 21,015 10,247 5,449 +Other 1 84 84 +Total lease operating expenses $ 64,790 $ 32,172 $ 19,524 +Lease operating expenses per Mcfe +Utica $ 0.17 $ 0.13 $ 0.13 +SCOOP 0.20 0.17 0.22 +Other 0.15 0.81 2.15 +Total lease operating expenses per Mcfe $ 0.18 $ 0.14 $ 0.14 +The increase in total LOE when comparing the year ended December 31, 2022, to the Prior Successor Period, was primarily driven by the timing of our emergence from bankruptcy. The Prior Successor Period only includes production and LOE from May 18, 2021 through December 31, 2021, compared to a full year of production and LOE in 2022. The increase in LOE on a per unit basis in 2022 compared to the Prior Successor Period, was primarily due to additional water disposal costs, additional workover costs and an increase in contract labor. +The increase in total LOE when comparing the year ended December 31, 2022, to the Prior Predecessor Period, was primarily driven by the timing of our emergence from bankruptcy. The Prior Predecessor Period only includes production and LOE from January 1, 2021 through May 17, 2021, compared to a full year of production and LOE in 2022. The increase in LOE on a per unit basis in 2022 compared to the Prior Predecessor Period, was primarily due to additional water disposal costs, additional workover costs and an increase in contract labor. +Taxes Other Than Income (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Production taxes $ 48,145 $ 22,793 $ 8,459 +Property taxes 7,146 5,266 2,590 +Other 4,847 2,184 1,300 +Total taxes other than income $ 60,139 $ 30,243 $ 12,349 +Total taxes other than income per Mcfe $ 0.17 $ 0.13 $ 0.09 +The increase in taxes other than income when comparing the year ended December 31, 2022, to both the Prior Successor Period and Prior Predecessor Period, was primarily related to the timing of our emergence from bankruptcy. The Prior Successor Period only includes activity from May 18, 2021 through December 31, 2021, and Prior Predecessor Period only includes activity from January 1, 2021 through May 17, 2021, compared to a full year in 2022. +The increase in per unit taxes other than income when comparing the year ended December 31, 2022, to both the Prior Successor Period and Prior Predecessor Period, was primarily related to an increase in production taxes resulting from the significant increase in our natural gas, oil and condensate and NGL revenues excluding the impact of hedges discussed above. +43 +Table of Contents +Index to Financial Statements +Transportation, Gathering, Processing and Compression (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Transportation, gathering, processing and compression $ 357,246 $ 212,013 $ 161,086 +Transportation, gathering, processing and compression per Mcfe $ 1.00 $ 0.92 $ 1.20 +The increase in transportation, gathering, processing and compression when comparing the year ended December 31, 2022, to both the Prior Successor Period and Prior Predecessor Period, was primarily related to the timing of our emergence from bankruptcy. The Prior Successor Period only includes activity from May 18, 2021 through December 31, 2021, and Prior Predecessor Period only includes activity from January 1, 2021 through May 17, 2021, compared to a full year in 2022. +The increase on a per unit basis when comparing the year ended December 31, 2022, to the Prior Successor Period, was primarily due to an increase in minimum volume commitments, combined with an increase in rates on certain gathering and transportation systems. +The decrease on a per unit basis when comparing the year ended December 31, 2022, to the Prior Predecessor Period, was primarily related to savings associated with midstream contract rejections and renegotiations through the bankruptcy process. +Depreciation, Depletion and Amortization (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Depreciation, depletion and amortization of oil and gas properties $ 266,449 $ 159,518 $ 60,831 +Depreciation, depletion and amortization of other property and equipment 1,312 1,395 1,933 +Total depreciation, depletion and amortization $ 267,761 $ 160,913 $ 62,764 +Total depreciation, depletion and amortization per Mcfe $ 0.74 $ 0.69 $ 0.47 +The increase in depreciation, depletion and amortization of our oil and gas properties when comparing the year ended December 31, 2022, to both the Prior Successor Period and Prior Predecessor Period, was primarily driven by the timing of our emergence from bankruptcy. The Prior Successor Period only includes activity from May 18, 2021 through December 31, 2021, and Prior Predecessor Period only includes activity from January 1, 2021 through May 17, 2021, compared to a full year in 2022. +The increase in per unit depreciation, depletion, and amortization when comparing the year ended December 31, 2022, to the Prior Successor Period, was primarily due to due to additional drilling and development activities in 2022. +The increase in per unit depreciation, depletion, and amortization when comparing the year ended December 31, 2022, to the Prior Predecessor Period, was primarily the result of fresh start valuations on our oil and gas properties. See Note 3 of our consolidated financial statements for more information on fresh start adjustments. +Impairment of Oil and Gas Properties +As a result of the ceiling test performed at June 30, 2021, we incurred a $117.8 million impairment charge of oil and gas properties during the Prior Successor Period. Upon the application of fresh start accounting, the value of our oil and natural gas properties was determined using forward strip oil and natural gas prices as of the Emergence Date. These prices were higher than the 12-month weighted average prices used in the full cost ceiling limitation at June 30, 2021, which led to the Prior Successor Period impairment charge. +44 +Table of Contents +Index to Financial Statements +Impairment of Other Property and Equipment +We recognized a $14.6 million impairment charge on the Company's corporate headquarters during the Prior Predecessor Period as a result in a change in expected future use. +General and Administrative Expenses (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +General and administrative expenses, gross $ 68,495 $ 53,711 $ 32,152 +Reimbursed from third parties (13,035) (7,373) (4,957) +Capitalized general and administrative expenses (20,156) (11,873) (8,020) +General and administrative expenses, net $ 35,304 $ 34,465 $ 19,175 +General and administrative expenses, net per Mcfe $ 0.10 $ 0.15 $ 0.14 +The increase in total general and administrative expenses when comparing the year ended December 31, 2022, to both the Prior Successor Period and the Prior Predecessor Period, was primarily related to the timing of our emergence from bankruptcy. +The decrease in per unit general and administrative expense when comparing the year ended December 31, 2022, to both the Prior Successor Period and the Prior Predecessor Period, was primarily driven by a significant decrease in legal and professional fees associated with our restructuring. Prior to our emergence from bankruptcy, legal and professional fees associated with our Chapter 11 filing were presented as Reorganization Items, net. Subsequent to our Emergence Date, any legal and professional fees related to the administration of our Chapter 11 filing were presented as general and administrative expenses. +Restructuring and Liability Management +During the Prior Successor Period, we incurred $2.8 million in restructuring charges related to reductions in workforce as we continued to align our workforce and leadership structure to our current operating environment. +Accretion Expense +Accretion expense increased to $2.7 million for the year ended December 31, 2022, compared to $1.2 million in the Prior Successor Period. The increase is primarily related to the timing of our emergence from bankruptcy. Accretion expense increased from $1.2 million in the Prior Predecessor Period, primarily due to the timing of our emergence from bankruptcy and was partially offset by a decrease in our asset retirement obligation as a result of fresh start adjustments upon emergence from bankruptcy. See Note 3 of our consolidated financial statements for more information on fresh start adjustments. +45 +Table of Contents +Index to Financial Statements +Interest Expense (in thousands, except per unit) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Interest on 2026 Senior Notes $ 44,000 $ 27,476 $ — +Interest on Credit Facility 12,799 1,978 — +Amortization of loan costs 2,914 1,663 — +Interest on Exit Facility — 5,810 — +Interest on First-Out Term Loan — 3,564 — +Interest on DIP Credit Facility — — 3,104 +Interest expense on Pre-Petition Revolving Credit Facility — — 2,044 +Other 60 362 (989) +Total interest expense $ 59,773 $ 40,853 $ 4,159 +Interest expense per Mcfe $ 0.17 $ 0.18 $ 0.03 +The increase in interest expense during the year ended December 31, 2022, compared to both the Prior Successor Period and the Prior Predecessor Period, was primarily related to the timing of our emergence from bankruptcy. Interest expense per unit was comparable between the year ended December 31, 2022, and the Prior Successor Period, while there was a significant increase in interest expense when comparing the year ended December 31, 2022 with the Prior Predecessor Period, primarily due to the changes in our debt structure upon emergence from bankruptcy. +Loss (Gain) on Debt Extinguishment +During the Prior Successor Period, the Company recognized a loss of $3.0 million associated with the extinguishment of capitalized commitment fees related to the Exit Credit Facility as discussed in Note 5 of our consolidated financial statements. +Loss from Equity Investments, net (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Loss from equity method investments, net $ — $ — $ 342 +Through our wholly owned subsidiary Grizzly Holdings, we own an approximate 24.5% interest in Grizzly, a Canadian unlimited liability company. Effective as of the Emergence Date, we evaluated our investment in Grizzly and determined that we no longer have the ability to exercise significant influence over operating and financial policies of Grizzly Holdings. As such, we discontinued the equity method of accounting for our investment in Grizzly and we will use our previous carrying value of zero as our initial basis and will subsequently measure at fair value while recording any changes in fair value in earnings. +During the year ended December 31, 2020, our share of net loss from Mammoth Energy Services, Inc. was in excess of the carrying value of our investment, which reduced our investment to zero. Our carrying value remained at zero through the Prior Predecessor Period until the use of Mammoth Shares to settle Class 4A claims at the Emergence Date. See Note 15 of our consolidated financial statements for further discussion on our equity investments. +46 +Table of Contents +Index to Financial Statements +Reorganization Items, ne t +The following table summarizes the components in reorganization items, net included in our consolidated statements of operations for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Legal and professional advisory fees $ — $ — $ 81,565 +Adjustment for allowed claims — — — +Net gain on liabilities subject to compromise — — (575,182) +Fresh start adjustments, net — — 160,756 +Elimination of Predecessor accumulated other comprehensive income — — 40,430 +Debt issuance costs — — 3,150 +Other items, net — — 22,383 +Reorganization items, net $ — $ — $ (266,898) +Other, net (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Other, net $ (11,348) $ 13,049 $ 1,713 +The increase in other income when comparing the year ended December 31, 2022, to both the Prior Successor Period and the Prior Predecessor Period, was primarily the result of settlement payment receipts received in 2022 as discussed in Note 19 of our consolidated financial statements. +Income Taxes (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Income tax benefit $ — $ (39) $ (7,968) +For the year ended December 31, 2022 the Company's effective tax rate was 0%. For the Prior Predecessor Period, we had an effective tax rate of (3.3)% and an income tax benefit of $8.0 million. The tax benefit is entirely attributable to an Oklahoma refund claim associated with an examination relating to historical tax returns. The effective tax rate differs from the statutory tax rate due to the Company’s valuation allowance position and the permanent adjustments relating to the Chapter 11 Emergence. For the Prior Successor Period, we had an effective tax rate of 0.03% and tax benefit of $39 thousand. The tax expense is entirely attributable to the Oklahoma refund claim that was filed during the third quarter, resulting in an adjustment to the benefit recorded during the Prior Predecessor Period. We did not record any additional income tax expense for the Prior Successor Period as a result of maintaining a full valuation allowance against our net deferred tax asset. +Liquidity and Capital Resources +Overview . We strive to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility, fund our development projects, operations and capital expenditures and return capital to shareholders. We utilize derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company's cash flows. Historically, we have generally funded our operations, planned capital expenditures, acquisitions of additional oil and +47 +Table of Contents +Index to Financial Statements +natural gas properties and any debt or share repurchases with cash flow from our operating activities, cash on hand, borrowings under our revolving credit facility and issuances of equity and debt securities. +For the year ended December 31, 2022, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been share repurchases pursuant to the Repurchase Program, repayments under the Credit Facility, dividend payments on our Preferred Stock and the development of our oil and natural gas properties. +We believe our annual free cash flow generation, cash on hand, and borrowing capacity under the Credit Facility will provide sufficient liquidity to fund our operations, capital expenditures, interest expense, debt repayments and any return of capital to shareholders authorized by the Board, during the next 12 months and the foreseeable future. +To the extent actual operating results, realized commodity prices or uses of cash differ from our assumptions, our liquidity could be adversely affected. See Note 5 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +As of December 31, 2022, we had $7.3 million of cash and cash equivalents compared to $3.3 million as of December 31, 2021, and a net working capital deficit of $391.1 million as of December 31, 2022, compared to a net working capital deficit of $361.4 million as of December 31, 2021. As of December 31, 2022, our working capital deficit includes no debt due in the next 12 months. Our total principal amount of funded debt as of December 31, 2022, was $695.0 million compared to $714.0 million as of December 31, 2021. See Note 5 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +As of February 23, 2023, we had $25.6 million of cash and cash equivalents, $79.0 million borrowings under our Credit Facility, $113.4 million of letters of credit outstanding, and $550 million of outstanding 2026 Senior Notes. +As discussed in Note 5 of our consolidated financial statements, when we entered into the Existing Credit Facility on October 14, 2021, it provided for an aggregate maximum principal amount of up to $1.5 billion, an initial borrowing base of $850.0 million and an initial aggregate elected commitment amount of $700.0 million. The Existing Credit Facility also provides for a $175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. +On May 2, 2022, we entered into the Amendment to Borrowing Base Redetermination Agreement and First Amendment to our Credit Agreement (“Amendment”), which amended the Existing Credit Facility (as amended, the "Credit Facility"). The Amendment, among other things, (a) increased the borrowing base under the Credit Facility from $850 million to $1.0 billion, with the elected commitments remaining at $700 million, (b) amended certain covenants related to hedging to ease certain requirements and limitations, (c) amended the covenants governing restricted payments to (i) increased the Net Leverage Ratio allowing unlimited restricted payments from 1.00 to 1.00 to 1.25 to 1.00 and (ii) permitted additional restricted payments to redeem preferred equity until December 31, 2022, provided certain leverage, no event of default or borrowing base deficiency and availability tests were met and (d) provided for the transition from a LIBOR to a SOFR benchmark, with a 10 basis point credit spread adjustment for all tenors. +On October 31, 2022, the Company completed its semi-annual borrowing base redetermination during which the borrowing base under the Credit Facility was reconfirmed at $1.0 billion with the elected commitments remaining at $700 million. +Additionally, on the Emergence Date, pursuant to the terms of the Plan, we issued our 2026 Senior Notes. The 2026 Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Credit Facility. +We may continue to use a combination of cash, borrowings and issuances of our Common Stock or other securities to retire our outstanding debt and Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, tender offers or otherwise, but we are under no obligation to do so. +See Note 5 of our consolidated financial statements for additional discussion of our outstanding post-emergence debt. +Preferred Stock Dividends . As discussed in Note 6 of our consolidated financial statements, holders of Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the Liquidation Preference (as defined below) with respect to cash dividends and 15% per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of Preferred Stock (“PIK Dividends”). We currently have the option to pay either a cash or PIK dividend on a +48 +Table of Contents +Index to Financial Statements +quarterly basis. Each share of Preferred Stock has a liquidation preference of $1,000 (the "Liquidation Preference"). The Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted into Common Stock. +During the year ended December 31, 2022, and Prior Successor Period, the Company paid $5.4 million and $1.5 million, respectively, of cash dividends to holders of our Preferred Stock. +Supplemental Guarantor Financial Information . The 2026 Senior Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our Credit Facility or certain other debt (collectively the “Guarantors”). The 2026 Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC (the “Non-Guarantors”). The Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2026 Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under the Credit Facility) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2026 Senior Notes. +SEC Regulation S-X Rule 13-01 requires the presentation of "Summarized Financial Information" to replace the "Condensed Consolidating Financial Information" required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements. +Derivatives and Hedging Activities . Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. See Item 7A Quantitative and Qualitative Disclosures About Market Risk for further discussion on the impact of commodity price risk on our financial position. Additionally, see Note 13 of our consolidated financial statements for further discussion of derivatives and hedging activities. Subsequent to December 31, 2022 and as of February 23, 2023, we entered into the following natural gas, oil, and NGL derivative contracts: +Period Type of Derivative Instrument Index Daily Volume (MMbtu) Weighted +Average Price +2023 Basis Swaps TETCO M2 76,219 $(0.85) +2023 Basis Swaps Rex Zone 3 59,452 $(0.22) +2023 Basis Swaps NGPL TXOK 42,685 $(0.34) +2024 Swaps NYMEX Henry Hub 30,000 $3.90 +2024 Costless Collars NYMEX Henry Hub 60,000 +$3.17 / $3.96 +Additionally, subsequent to year end, the Company restructured a portion of its natural gas sold call position, by buying back a portion of its 2023 natural gas sold call position, and selling additional natural gas calls for 2023 and 2025. The following table summarizes these transactions: +Period Type of Derivative Instrument Index Daily Volume (MMBtu) Weighted +Average Price +2023 Purchased Gas Call Options NYMEX Henry Hub 134,137 $ 2.90 +2023 Sold Gas Call Options NYMEX Henry Hub 134,137 $ 3.70 +2025 Sold Gas Call Options NYMEX Henry Hub 160,000 $ 6.04 +49 +Table of Contents +Index to Financial Statements +Contractual and Commercial Obligations. The following table sets forth our contractual and commercial obligations at December 31, 2022 (in thousands): +Payment due by period +Contractual Obligations Total 2023 2024-2025 2026-2027 2028 and Thereafter +Long-term debt (1): +Principal $ 695,000 $ — $ 145,000 $ 550,000 $ — +Interest 148,500 44,000 88,000 16,500 — +Firm transportation and gathering contracts (2) +1,618,385 231,123 360,578 274,802 751,882 +Other operational commitments (3) +83,900 52,700 31,200 — — +Operating lease liabilities (4) +26,713 12,414 13,738 561 — +Total contractual cash obligations (5) +$ 2,572,498 $ 340,237 $ 638,516 $ 841,863 $ 751,882 +_____________________ +(1) The maturities of our debt obligations and associated interest reflect their original expiration dates and do not reflect any acceleration due to any events of default pertaining to these obligations. See Note 5 of our consolidated financial statements for a description of our long-term debt. +(2) Our commitments under our firm transportation and gathering contracts do not reflect contracts recently rejected or in the process of being rejected as discussed in the Litigation and Regulatory Proceedings section in Note 19 of our consolidated financial statements. See Note 18 of our consolidated financial statements for further discussion of our firm transportation and gathering commitments. +(3) See Note 18 of our consolidated financial statements for a description of our other operational commitments. +(4) See Note 10 of our consolidated financial statements for a description of our operating lease liabilities. +(5) This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 13 and 4 of our consolidated financial statements, respectively. +Off-balance Sheet Arrangements. We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2022, our material off-balance sheet arrangements and transactions include $113.4 million in letters of credit outstanding against our revolving credit facility and $33.5 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance, the majority of which are related to firm transportation agreements. The Company expects to enter into similar contractual arrangements in the future in order to support the Company's business plans. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. +Capital Expenditures. Our capital expenditures have historically been related to the execution of our drilling and completion activities in addition to certain lease acquisition activities. Our capital investment strategy is focused on developing projects we believe offer the highest rate of return and allow us to generate sustainable cash flow, considering current and forecasted commodity prices. For the year ended December 31, 2022, the Company's incurred capital expenditures totaled $449.2 million, of which $411.8 million related to drilling and completion activity and $37.4 million related to leasehold and land investment. +Our capital expenditures for 2023 are currently estimated to be in the range of $375 million to $400 million for drilling and completion expenditures. In addition, we currently expect to spend approximately $50 million to $75 million in 2023 for non-drilling and completion expenditures, which primarily includes leasehold acquisition, lease extension and lease maintenance payments. We expect this capital program to result in approximately 1,000 to 1,040 MMcfe per day of production in 2023. +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2022, WTI prices ranged from $71.05 to $123.64 per barrel and the Henry Hub spot market price of natural gas ranged from $3.46 to $9.85 per MMBtu. During 2021, WTI prices ranged from $47.47 to $85.64 per barrel and the Henry Hub spot market price of natural gas ranged from $2.43 to $23.86 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +50 +Table of Contents +Index to Financial Statements +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for further information regarding our open derivative instruments at December 31, 2022. +Sources and Uses of Cash +The following table presents the major changes in cash and cash equivalents for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Net cash provided by operating activities $ 739,077 $ 292,985 $ 172,155 +Additions to oil and natural gas properties (460,780) (207,113) (102,330) +Debt activity, net (19,000) (138,751) (147,660) +Repurchases of Common Stock (250,482) — — +Proceeds from issuance of Preferred Stock — — 50,000 +Preferred Stock dividends (5,444) (1,503) — +Other 628 (1,775) (2,609) +Net change in cash, cash equivalents and restricted cash $ 3,999 $ (56,157) $ (30,444) +Cash, cash equivalents and restricted cash at end of period $ 7,259 $ 3,260 $ 59,417 +Net cash provided by operating activities. Net cash provided by operating activities was $739.1 million for the year ended December 31, 2022, compared to $293.0 million for the Prior Successor Period and $172.2 million for the Prior Predecessor Period. These increases were primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to the significant increases in net natural gas, oil and NGL sales, excluding the impact of derivatives. +Additions to oil and natural gas properties. During the year ended December 31, 2022, we spud 19 gross (17.4 net) wells and commenced sales from 15 gross (13.4 net) wells in the Utica for a total cost of approximately $271.8 million and we spud 6 gross (4.3 net) and commenced sales from 13 gross (10.3 net) wells in the SCOOP for a total cost of approximately $126.9 million. In addition, 13 gross (0.07 net) wells were spud and 40 gross (2.65 net) wells were turned to sales by other operators on our SCOOP acreage during 2022 for a total cost to us of approximately $13.2 million. +Drilling and completion costs discussed above reflect incurred costs while drilling and completion costs presented in the table below reflect cash payments for drilling and completions. Incurred capital expenditures and cash capital expenditures may vary from period to period due to the cash payment cycle. Cash capital expenditures for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period were as follows (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Oil and Natural Gas Property Cash Expenditures: +Drilling and completion costs $ 410,281 $ 183,333 $ 94,128 +Leasehold acquisitions 32,708 13,022 2,752 +Other 17,791 10,758 5,450 +Total oil and natural gas property expenditures $ 460,780 $ 207,113 $ 102,330 +51 +Table of Contents +Index to Financial Statements +Debt Activity. During the year ended December 31, 2022, the Company's borrowing on its Credit Facility decreased $19 million. As of February 23, 2023, the Company had $79.0 million in borrowings outstanding on its Credit Facility. +Repurchases of Common Stock. As of December 31, 2022, the Company repurchased 2.9 million shares for $250.8 million at a weighted average price of $86.47 per share. As of February 23, 2023, we repurchased 3.1 million shares for approximately $264.4 million under the Repurchase Program at a weighted average price of $85.14 per share. +Issuance of Preferred Stock. During the Prior Predecessor Period, we received approximately $50.0 million in proceeds related to our Preferred Stock issuance. +Preferred Stock Dividends. During the year ended December 31, 2022, the Company paid $5.4 million of cash dividends to holders of our Preferred Stock compared to $1.5 million of cash dividends to holders of our Preferred Stock in the Prior Successor Period. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +Reorganization and Fresh Start Accounting. The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements included distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings were classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that were realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness were recorded as reorganization items, net in the consolidated statements of operations for the year ended December 31, 2020 and the Predecessor Period. +Upon emergence from the Chapter 11 Cases, ASC 852 required us to allocate our reorganization value to our individual assets based on their estimated fair values, resulting in a new entity for financial reporting purposes. After the Effective Date, the accounting and reporting requirements of ASC 852 are no longer applicable and have no impact on the Successor periods. Refer to Note 2 and Note 3 of our consolidated financial statements for more information on the events of the bankruptcy proceedings as well as the accounting and reporting impacts of the reorganization. +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2022. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. The Company did not record an impairment of its oil and natural gas properties for the year ended December 31, 2022. The Company recorded impairment of its oil and natural gas properties of $117.8 million for the Prior Successor Period. See Oil and Natural Gas Properties in Note 1 of our consolidated financial statements for further information on the full cost method of accounting. +52 +Table of Contents +Index to Financial Statements +Oil, Natural Gas and NGL Reserves. Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 20 of our consolidated financial statements for further information. +Income Taxes. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2022, a valuation allowance of $803.3 million had been established to fully offset our net deferred tax asset on our accompanying consolidated balance sheet. +Revenue Recognition. We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. Historically, our actual payments received have not significantly deviated from our accruals. +Derivative Instruments. We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments. Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the Board of Directors reviews our derivative program at its quarterly Board meetings. We believe we have sufficient internal controls to prevent unauthorized trading. +53 +Table of Contents +Index to Financial Statements +We use derivative instruments to achieve our risk management objectives, including swaps, options and costless collars. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls in the past to take advantage of premiums associated with market price volatility. +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions are typically reversed. The actual fixed price on our derivative instruments is derived from the reference from third-party indices such as NYMEX. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter into the original derivative position. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves, discount factors and option pricing models. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 16 of our consolidated financial statements for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2022, our natural gas, oil, and NGL derivative instruments consistent of the following types of instruments: +• Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +• Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• Costless Collars : Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +• Call Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we would pay the counterparty the excess on sold call options, and we would receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +Our hedge arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodity prices increase. At December 31, 2022, we had a net liability derivative position of $347.9 million, compared to a net liability derivative position of $402.0 million as of December 31, 2021. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have increased our liability by approximately $171.9 million, while a 10% decrease in underlying commodity prices would have decreased our liability by approximately $165.6 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. For more information regarding the Company's commodity derivative transactions, refer to Note 13 of our consolidated financial statements. +54 +Table of Contents +Index to Financial Statements +Counterparty Credit Risk. The Company routinely monitors and manages its exposure to counterparty risk related to derivative contracts by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties public credit ratings, and avoiding concentration of credit exposure by transacting with multiple counterparties. The Company's commodity derivative contract counterparties are typically financial institutions with investment-grade credit ratings. The Company enters into International Swap Dealers Association Master Agreements ("ISDA") with each of its derivative counterparties prior to executing derivative contracts. The terms of the ISDA provide, among other things, the Company and the counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or counterparty to a derivative contract. +Interest Rate Risk. Our Credit Facility is structured under floating rate terms, as advances under these facilities may be in the form of either base rate loans or term benchmark loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the term benchmark rates are elected, the term benchmark rates. At December 31, 2022, we had $145.0 million in borrowings outstanding under our Credit Facility which bore interest at the weighted average rate of 7.39%. A 1% increase in the average interest rate would increase interest expense by approximately $1.5 million based on outstanding borrowings under our Credit Facility at December 31, 2022. As of December 31, 2022, we did not have any interest rate swaps to hedge our interest risks. +55 +Table of Contents +Index to Financial Statements +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) +57 +Consolidated Balance Sheets +59 +Consolidated Statements of Operations +60 +Consolidated Statements of Comprehensive Income (Loss) +61 +Consolidated Statements of Stockholders' Equity (Deficit) +62 +Consolidated Statements of Cash Flows +64 +Notes to Consolidated Financial Statements +65 +1. Summary of Significant Accounting Policies +65 +2. Chapter 11 Emergence +71 +3. Fresh Start Accounting +72 +4. Property and Equipment +81 +5. Long-Term Debt +83 +6. Mezzanine Equity +86 +7. Equity +87 +8. Stock-Based Compensation +88 +9. Revenue From Contracts With Customers +90 +10. Leases +91 +11. Income Taxes +93 +12. Earnings Per Share +95 +13. Derivative Instruments +95 +14. Restructuring And Liability Management Expenses +99 +15. Investments +100 +16. Fair Value Measurements +101 +17. Related Party Transactions +103 +18. Commitments +103 +19. Contingencies +104 +20. Supplemental Information On Oil And Gas Exploration And Production Activities +106 +21. Subsequent Events +111 +56 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021 (Successor), the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the year ended December 31, 2022 (Successor), the period from May 18, 2021 through December 31, 2021 (Successor), the period from January 1, 2021 through May 17, 2021 (Predecessor) and the year ended December 31, 2020 (Predecessor) and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 (Successor), and the results of its operations and its cash flows for the year ended December 31, 2022 (Successor), the period from May 18, 2021 through December 31, 2021 (Successor), the period from January 1, 2021 through May 17, 2021 (Predecessor) and the year ended December 31, 2020 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2023 expressed an unqualified opinion. +Emergence from bankruptcy +As discussed in Note 1 to the financial statements, the United States Bankruptcy Court for the District of Delaware entered an order confirming the plan for reorganization on April 28, 2021, and the Company emerged from bankruptcy on May 17, 2021. Accordingly, the accompanying financial statements have been prepared in conformity with FASB Accounting Standards Codification 852, Reorganizations, for the Successor as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods, as described in Note 3. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Depletion, depreciation and amortization expense of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 to the financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization of oil and gas properties. To estimate the volume of +57 +Table of Contents +Index to Financial Statements +proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense. We identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense as a critical audit matter. +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others: +• We tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense. +• We evaluated the independence, objectivity, and professional qualifications of the Company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialist. +• We evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated future development costs, and ownership interest. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for pricing differentials, where applicable; +◦ Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ Tested the model used to determine the future development costs and compared estimated future development costs used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +March 1, 2023 +58 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +(In thousands) +Successor +December 31, 2022 December 31, 2021 +Assets +Current assets: +Cash and cash equivalents $ 7,259 $ 3,260 +Accounts receivable—oil, natural gas, and natural gas liquids sales 278,404 232,854 +Accounts receivable—joint interest and other 21,478 20,383 +Prepaid expenses and other current assets 7,621 12,359 +Short-term derivative instruments 87,508 4,695 +Total current assets 402,270 273,551 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 2,418,666 1,917,833 +Unproved properties 178,472 211,007 +Other property and equipment 6,363 5,329 +Total property and equipment 2,603,501 2,134,169 +Less: accumulated depletion, depreciation, amortization and impairment ( 545,771 ) ( 278,341 ) +Total property and equipment, net 2,057,730 1,855,828 +Other assets: +Long-term derivative instruments 26,525 18,664 +Operating lease assets 26,713 322 +Other assets 21,241 19,867 +Total other assets 74,479 38,853 +Total assets $ 2,534,479 $ 2,168,232 +Liabilities, Mezzanine Equity and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities $ 437,384 $ 394,011 +Short-term derivative instruments 343,522 240,735 +Current portion of operating lease liabilities 12,414 182 +Total current liabilities 793,320 634,928 +Non-current liabilities: +Long-term derivative instruments 118,404 184,580 +Asset retirement obligation 33,171 28,264 +Non-current operating lease liabilities 14,299 140 +Long-term debt, net of current maturities 694,155 712,946 +Total non-current liabilities 860,029 925,930 +Total liabilities $ 1,653,349 $ 1,560,858 +Commitments and contingencies (Notes 18 and 19) +Mezzanine Equity: +Preferred Stock - $ 0.0001 par value, 110.0 thousand shares authorized, 52.3 thousand issued and outstanding at December 31, 2022, and 57.9 thousand issued and outstanding at December 31, 2021 +52,295 57,896 +Stockholders’ equity: +Common Stock - $ 0.0001 par value, 42.0 million shares authorized, 19.1 million issued and outstanding at December 31, 2022, and 20.6 million issued and outstanding at December 31, 2021 +2 2 +Additional paid-in capital 449,243 692,521 +Common Stock held in reserve, 62 thousand shares at December 31, 2022, and 938 thousand shares at December 31, 2021 +( 1,996 ) ( 30,216 ) +Retained earnings (accumulated deficit) 381,872 ( 112,829 ) +Treasury stock, at cost - 3.9 thousand shares at December 31, 2022, and no shares at December 31, 2021 +( 286 ) — +Total stockholders’ equity $ 828,835 $ 549,478 +Total liabilities, mezzanine equity and stockholders’ equity $ 2,534,479 $ 2,168,232 +See accompanying notes to consolidated financial statements. +59 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(In thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +REVENUES: +Natural gas sales $ 1,998,452 $ 906,096 $ 344,390 $ 671,535 +Oil and condensate sales 147,444 81,347 29,106 62,902 +Natural gas liquid sales 184,963 105,141 36,780 66,814 +Net (loss) gain on natural gas, oil and NGL derivatives ( 999,747 ) ( 556,819 ) ( 137,239 ) 65,291 +Total revenues 1,331,112 535,765 273,037 866,542 +OPERATING EXPENSES: +Lease operating expenses 64,790 32,172 19,524 54,235 +Taxes other than income 60,139 30,243 12,349 28,509 +Transportation, gathering, processing and compression 357,246 212,013 161,086 456,318 +Depreciation, depletion and amortization 267,761 160,913 62,764 239,744 +Impairment of oil and natural gas properties — 117,813 — 1,357,099 +Impairment of other property and equipment — — 14,568 — +General and administrative expenses 35,304 34,465 19,175 59,329 +Restructuring and liability management expenses — 2,858 — 30,847 +Accretion expense 2,746 1,214 1,229 3,066 +Total operating expenses 787,986 591,691 290,695 2,229,147 +INCOME (LOSS) FROM OPERATIONS 543,126 ( 55,926 ) ( 17,658 ) ( 1,362,605 ) +OTHER EXPENSE (INCOME): +Interest expense 59,773 40,853 4,159 120,079 +Loss (Gain) on debt extinguishment — 3,040 — ( 49,579 ) +Loss from equity method investments, net — — 342 11,055 +Reorganization items, net — — ( 266,898 ) 152,359 +Other, net ( 11,348 ) 13,049 1,713 21,324 +Total other expense 48,425 56,942 ( 260,684 ) 255,238 +INCOME (LOSS) BEFORE INCOME TAXES 494,701 ( 112,868 ) 243,026 ( 1,617,843 ) +Income tax (benefit) expense — ( 39 ) ( 7,968 ) 7,290 +NET INCOME (LOSS) 494,701 ( 112,829 ) 250,994 ( 1,625,133 ) +Dividends on Preferred Stock ( 5,444 ) ( 4,573 ) — — +Participating securities - Preferred Stock ( 76,401 ) — — — +NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 412,856 $ ( 117,402 ) $ 250,994 $ ( 1,625,133 ) +NET INCOME (LOSS) PER COMMON SHARE: +Basic $ 20.45 $ ( 5.71 ) $ 1.56 $ ( 10.14 ) +Diluted $ 20.32 $ ( 5.71 ) $ 1.56 $ ( 10.14 ) +Weighted average common shares outstanding—Basic 20,185 20,545 160,834 160,231 +Weighted average common shares outstanding—Diluted 20,347 20,545 160,834 160,231 +See accompanying notes to consolidated financial statements. +60 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(In thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Net income (loss) $ 494,701 $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) +Foreign currency translation adjustment — — 2,570 3,833 +Other comprehensive loss — — 2,570 3,833 +Comprehensive income (loss) $ 494,701 $ ( 112,829 ) $ 253,564 $ ( 1,621,300 ) +See accompanying notes to consolidated financial statements. +61 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) +(In thousands) +Common Stock Common Stock Held in Reserve Treasury Stock Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Shares Amount Shares Amount +Balance at January 1, 2020 (Predecessor) 159,711 $ 1,597 — $ — $ — $ 4,207,554 $ ( 46,833 ) $ ( 2,847,726 ) $ 1,314,592 +Net loss — — — — — — — ( 1,625,133 ) ( 1,625,133 ) +Other comprehensive income — — — — — — 3,833 — 3,833 +Stock compensation — — — — — 6,444 — — 6,444 +Shares repurchased ( 243 ) ( 3 ) — — — ( 233 ) — — ( 236 ) +Issuance of restricted stock 1,294 13 — — — ( 13 ) — — — +Balance at December 31, 2020 (Predecessor) 160,762 $ 1,607 — $ — $ — $ 4,213,752 $ ( 43,000 ) $ ( 4,472,859 ) $ ( 300,500 ) +Net income — $ — — $ — $ — $ — $ — $ 250,994 $ 250,994 +Other comprehensive income — — — — — — 2,570 — 2,570 +Stock compensation — — — — — 6,514 — — 6,514 +Shares repurchased ( 96 ) ( 1 ) — — — ( 7 ) — — ( 8 ) +Issuance of restricted stock 228 3 — — — ( 2 ) — — 1 +Accumulated other comprehensive income extinguishment — — — — — — 40,430 — 40,430 +Cancellation of Predecessor equity ( 160,894 ) ( 1,609 ) — — — ( 4,220,256 ) — 4,221,865 — +Issuance of Common Stock 21,525 2 — — — 693,773 — — 693,775 +Shares of Common Stock held in reserve — — ( 1,679 ) ( 54,109 ) — — — — ( 54,109 ) +Balance at May 17, 2021 (Predecessor) 21,525 $ 2 ( 1,679 ) $ ( 54,109 ) $ — $ 693,774 $ — $ — $ 639,667 +Balance at May 18, 2021 (Successor) 21,525 $ 2 ( 1,679 ) $ ( 54,109 ) $ — $ 693,774 $ — $ — $ 639,667 +Net loss — — — — — — — ( 112,829 ) ( 112,829 ) +Release of Common Stock held in reserve — — 741 23,893 — — — — 23,893 +Conversion of Preferred Stock 12 — — — — 171 — — 171 +Dividends on Preferred Stock — — — — — ( 4,573 ) — — ( 4,573 ) +Stock compensation — — — — — 3,149 — — 3,149 +Balance at December 31, 2021 (Successor) 21,537 $ 2 ( 938 ) $ ( 30,216 ) $ — $ 692,521 $ — $ ( 112,829 ) $ 549,478 +62 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)–CONTINUED +(In thousands) +Common Stock Common Stock Held in Reserve Treasury Stock Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Shares Amount Shares Amount +Balance at January 1, 2022 (Successor) 21,537 $ 2 ( 938 ) $ ( 30,216 ) $ — $ 692,521 $ — $ ( 112,829 ) $ 549,478 +Net income — — — — — — — 494,701 494,701 +Conversion of Preferred Stock 407 — — — — 5,601 — — 5,601 +Stock compensation — — — — — 8,670 — — 8,670 +Repurchase of Common Stock under Repurchase Program ( 2,896 ) — — — ( 286 ) ( 250,482 ) — — ( 250,768 ) +Issuance of Common Stock held in reserve — — 876 28,220 — — — — 28,220 +Issuance of restricted stock, net of shares withheld for income taxes 49 — — — — ( 1,623 ) — — ( 1,623 ) +Dividends on Preferred Stock — — — — — ( 5,444 ) — — ( 5,444 ) +Balance at December 31, 2022 (Successor) 19,097 $ 2 ( 62 ) $ ( 1,996 ) $ ( 286 ) $ 449,243 $ — $ 381,872 $ 828,835 +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(In thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Cash flows from operating activities: +Net income (loss) $ 494,701 $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depletion, depreciation and amortization 267,761 160,913 62,764 239,744 +Impairment of oil and natural gas properties — 117,813 — 1,357,099 +Impairment of other property and equipment — — 14,568 — +Loss from equity investments — — 342 11,055 +Loss (Gain) on debt extinguishment — 3,040 — ( 49,579 ) +Net loss (gain) on derivative instruments 999,747 556,819 137,239 ( 65,291 ) +Net cash (payments) receipts on settled derivative instruments ( 1,053,810 ) ( 322,857 ) ( 3,361 ) 159,394 +Non-cash reorganization items, net — — ( 446,012 ) 21,956 +Deferred income tax expense — — — 7,290 +Other, net 11,251 3,130 1,727 31,984 +Changes in operating assets and liabilities, net 19,427 ( 113,044 ) 153,894 6,785 +Net cash provided by operating activities $ 739,077 $ 292,985 $ 172,155 $ 95,304 +Cash flows from investing activities: +Additions to oil and natural gas properties $ ( 460,780 ) $ ( 207,113 ) $ ( 102,330 ) $ ( 367,287 ) +Proceeds from sale of oil and natural gas properties 3,360 4,339 15 50,971 +Other, net ( 875 ) 2,669 4,484 1,729 +Net cash used in investing activities $ ( 458,295 ) $ ( 200,105 ) $ ( 97,831 ) $ ( 314,587 ) +Cash flows from financing activities: +Principal payments on Pre-Petition Revolving Credit Facility $ — $ — $ ( 318,961 ) $ ( 383,290 ) +Borrowings on Pre-Petition Revolving Credit Facility — — 26,050 713,701 +Borrowings on Exit Credit Facility — 406,277 302,751 — +Principal payments on Exit Credit Facility — ( 709,028 ) — — +Principal payments on DIP credit facility — — ( 157,500 ) ( 90,000 ) +Borrowings on DIP Credit facility — — — 90,000 +Principal payments on Credit Facility ( 2,082,000 ) ( 477,000 ) — — +Borrowings on Credit Facility 2,063,000 641,000 — — +Debt issuance costs and loan commitment fees ( 234 ) ( 8,783 ) ( 7,100 ) ( 2,988 ) +Dividends on Preferred Stock ( 5,444 ) ( 1,503 ) — — +Proceeds from issuance of Preferred Stock — — 50,000 — +Repurchase of Common Stock under Repurchase Program ( 250,482 ) — — — +Repurchase of senior notes — — — ( 22,827 ) +Other, net ( 1,623 ) — ( 8 ) ( 1,512 ) +Net cash (used in) provided by in financing activities $ ( 276,783 ) $ ( 149,037 ) $ ( 104,768 ) $ 303,084 +Net increase (decrease) in cash, cash equivalents and restricted cash $ 3,999 $ ( 56,157 ) $ ( 30,444 ) $ 83,801 +Cash, cash equivalents and restricted cash at beginning of period $ 3,260 $ 59,417 $ 89,861 $ 6,060 +Cash, cash equivalents and restricted cash at end of period $ 7,259 $ 3,260 $ 59,417 $ 89,861 +See accompanying notes to consolidated financial statements. +64 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Description of Company +Gulfport Energy Corporation is an independent natural gas-weighted exploration and production company focused on the production of natural gas, crude oil and NGL in the United States. The Company's principal properties are located in eastern Ohio targeting the Utica and in central Oklahoma targeting the SCOOP Woodford and SCOOP Springer formations. Gulfport filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on November 13, 2020, and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until its emergence on May 17, 2021. The Company refers to the post-emergence reorganized organization in the condensed financial statements and footnotes as the "Successor" for periods subsequent to May 17, 2021, and the pre-emergence organization as "Predecessor" for periods on or prior to May 17, 2021. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On the Petition Date, the Debtors filed voluntary petitions of relief under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). +The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021. The Debtors emerged from the Chapter 11 Cases on the Emergence Date. The Company's bankruptcy proceedings and related matters have been summarized below. +During the pendency of the Chapter 11 Cases, the Company continued to operate its business in the ordinary course as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief requested by the Company that was designed primarily to mitigate the impact of the Chapter 11 Cases on its operations, vendors, suppliers, customers and employees. As a result, the Company was able to conduct normal business activities and satisfy all associated obligations for the period following the Petition Date and was also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court. +Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Emergence Date. +The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements for the period ended May 17, 2021. ASC 852 specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings were classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded as reorganization items, net. Refer to Note 3 for more information regarding reorganization items. +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence Date. See Note 3 for more information regarding the application of fresh start accounting. +65 +Table of Contents +Index to Financial Statements +Risks and Uncertainties +The Company's revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil, gas and NGL, which are affected by many factors outside of Gulfport’s control, including changes in market supply and demand. The COVID-19 pandemic and related shut-down of various sectors of the global economy resulted in a significant reduction in global demand for natural gas and crude oil since 2020. Changes in market supply and demand are also impacted by OPEC+ production levels, weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials, export capacity, strength of the U.S. dollar and other factors. Field-level prices received for Gulfport’s production have historically been volatile and may be subject to significant fluctuations in the future. The Company's derivative contracts serve to mitigate in part the effect of this price volatility on the Company's cash flows, and the Company has derivative contracts in place for a portion of its expected future natural gas, crude oil and NGL production. See Note 13 for further discussion of the Company's commodity derivative contracts. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Gulfport Energy Operating Corporation, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC and Mule Sky LLC. All intercompany balances and transactions are eliminated in consolidation. +Segments +The Company's assets and operations consist of one reportable segment. The Company has a single management team that administers all properties as a whole rather than by geographic operating area. Further, the Company measures financial performance as a single enterprise and not on an area-by-area basis. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole . No material allowance was deemed necessary at December 31, 2022 and December 31, 2021. +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 to 18 months. +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for +66 +Table of Contents +Index to Financial Statements +accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash write-down is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company recognized a ceiling test impairment of $ 117.8 million in the second quarter of 2021. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 178.5 million and $ 211.0 million at December 31, 2022 and December 31, 2021, respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 15 years. +Foreign Currency +The U.S. dollar is the functional currency for Gulfport’s consolidated operations. However, the Company had an equity investment in a Canadian entity whose functional currency is the Canadian dollar. As of the Emergence Date, this investment is no longer accounted for under the equity method of accounting. Under the equity method of accounting, the assets and liabilities of the Canadian investment were translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses were translated at average rates for the periods presented and equity contributions are translated at the current exchange rate in effect at the date of the contribution. In addition, until the Emergence Date, the Company had an equity investment in a U.S. company that has a subsidiary that is a Canadian entity whose functional currency is the Canadian dollar. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity (deficit). +The following table presents the balances of the Company’s cumulative translation adjustments included in accumulated other comprehensive loss, exclusive of taxes (in thousands): +December 31, 2020 $ ( 41,651 ) +December 31, 2021 $ — +December 31, 2022 $ — +67 +Table of Contents +Index to Financial Statements +Net Income (Loss) per Common Share +Basic net income (loss) per common share is computed by dividing income attributable to Common Stock by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if options or other contracts to issue Common Stock were exercised or converted into Common Stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income (loss) per common share are illustrated in Note 12 . +Income Taxes +The amount of income taxes recorded by Gulfport requires interpretations of complex rules and regulations of various tax jurisdictions throughout the United States. Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2019. As of December 31, 2022, the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. See Note 11 for further discussion of the Company's income taxes. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression in the accompanying consolidated statements of operations. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of ASC 606, Revenue from Contracts with Customers and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 9 for additional discussion of revenue from contracts with customers. +68 +Table of Contents +Index to Financial Statements +Accounting for Stock-based Compensation +Share-based payments to employees, including grants of restricted stock units and performance vesting restricted stock units, are recognized as equity or liabilities at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares range between one to four years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. Although management believes these estimates are reasonable, actual results could differ from these estimates. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net income (loss) or total operating cash flows. +69 +Table of Contents +Index to Financial Statements +Supplemental cash flow and non-cash information (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Supplemental disclosure of cash flow information: +Cash paid for reorganization items, net $ — $ 85,706 $ 87,199 $ 24,553 +Interest payments 57,685 33,295 7,272 84,823 +Income tax receipts — ( 9,381 ) — — +Changes in operating assets and liabilities: +(Increase) decrease in accounts receivable - oil, natural gas, and natural gas liquids sales ( 45,550 ) ( 52,143 ) ( 60,832 ) 1,331 +(Increase) decrease in accounts receivable - joint interest and other ( 1,095 ) ( 5,178 ) ( 3,005 ) 36,055 +Increase (decrease) in accounts payable and accrued liabilities 59,879 ( 72,912 ) 79,193 126,434 +(Increase) decrease in prepaid expenses 4,863 13,559 135,471 ( 154,948 ) +(Increase) decrease in other assets 1,330 3,630 3,067 ( 2,087 ) +Total changes in operating assets and liabilities $ 19,427 $ ( 113,044 ) $ 153,894 $ 6,785 +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation $ 2,948 $ 1,101 $ 930 $ 2,860 +Asset retirement obligation capitalized 2,169 7,964 546 2,358 +Asset retirement obligation removed due to divestiture ( 7 ) — — ( 2,213 ) +Interest capitalized — 198 — 907 +Pre-petition revolver principal transfer to DIP credit facility — — — 157,500 +Fair value of contingent consideration asset on date of divestiture — — — 23,090 +Release of Common Stock held in reserve 28,220 23,893 — — +Foreign currency translation gain on equity method investments — — 2,570 3,833 +Accounts Payable and Accrued Liabilities +Accounts payable and accrued liabilities consisted of the following at December 31, 2022 and December 31, 2021 (in thousands): +Successor +December 31, 2022 December 31, 2021 +Accounts payable and other accrued liabilities $ 117,529 $ 98,821 +Revenue payable and suspense 222,721 180,857 +Accrued contract rejection damages and shares held in reserve 40,996 69,216 +Accrued transportation, gathering, processing, and compression 56,138 45,117 +Total accounts payable and accrued liabilities $ 437,384 $ 394,011 +Recent Adopted Accounting Pronouncements +In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This new standard simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments. It eliminates the treasury stock method for convertible instruments and requires application of the “if-converted” method for certain agreements. In addition, the standard eliminates the beneficial conversion +70 +Table of Contents +Index to Financial Statements +and cash conversion accounting models that require separate accounting for embedded conversion features and the recognition of a debt discount and related amortization to interest expense of those embedded features. +The Company elected to early adopt this standard effective on the Emergence Date. The Company adopted the new standard using the modified retrospective approach transition method. No cumulative-effect adjustment to retained earnings was required upon adoption of the new standard. The consolidated financial statements for the Successor Period are presented under the new standard, while the Predecessor periods and comparative periods are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. +2. CHAPTER 11 EMERGENCE +As described in Note 1 , on November 13, 2020, the Debtors filed the Chapter 11 Cases and the Plan, which was subsequently amended, and entered the confirmation order on April 28, 2021. The Debtors then emerged from bankruptcy upon effectiveness of the Plan on May 17, 2021. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan. +Plan of Reorganization +In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company's emergence from bankruptcy on May 17, 2021: +• Shares of the Predecessor's common stock outstanding immediately prior to the Emergence Date were cancelled, and on the Emergence Date, the Company issued 19,845,780 shares of Common Stock and 55,000 shares of Preferred Stock, which were the result of the transactions described below. The Company also entered into a registration rights agreement and amended its articles of incorporation and bylaws for the authorization of the Common Stock and Preferred Stock among other corporate governance actions. See Note 6 and 7 for further discussion of the Company's post-emergence equity; +• All outstanding obligations under the Predecessor Senior Notes were cancelled; +• The Predecessor effectuated certain restructuring transactions, including entering into a plan of Merger with Gulfport Merger Sub, Inc., a newly formed, wholly owned subsidiary of Gulfport ("Merger Sub"), pursuant to which Merger Sub was merged with and into Predecessor, resulting in the Predecessor becoming a wholly owned subsidiary of Gulfport; +• The Debtors entered into a Second Amended and Restated Credit Agreement (the "Exit Credit Agreement") with the Bank of Nova Scotia as administrative agent, various lender parties and acknowledged and agreed to by certain of Gulfport's subsidiaries, as guarantors, providing for (i) a new money senior secured reserve-based revolving credit facility in an aggregate maximum principal amount of up to $ 1.5 billion (the "Exit Facility"); (ii) a senior secured term loan in an aggregate maximum principal amount of up to $ 180 million (the "First-Out Term Loan") and together with the Exit Facility (the "Exit Credit Facility"), collectively with an initial borrowing base and elected commitment amount of up to $ 580 million (less the amount of any term loan deemed funded by any RBL Lender that is not a Consenting RBL Lender); +• The Company entered into an indenture to issue up to $ 550 million aggregate principal amount of its 8.000 % senior notes due 2026, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “1145 Indenture,” and such senior notes issued thereunder, the “1145 Notes”), under section 1145 of the Bankruptcy Code (“Section 1145”). Certain eligible holders have made an election (the “4(a)(2) Election”) entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “4(a)(2) Indenture,” and such senior notes issued thereunder, the “4(a)(2) Notes”), under Section 4(a)(2) of the Securities Act of 1933, as amended as opposed to its share of the up to $ 550 million aggregate principal amount of 1145 Notes. The 4(a)(2) Indenture's terms are substantially similar to the terms of the 1145 Indenture. The 1145 Indenture and the 4(a)(2) Indenture are referred to together as the "Indentures". The 1145 Notes and the 4(a)(2) Notes are collectively referred to as the "2026 Senior Notes"; +• The DIP Credit Facility indefeasibly converted into the Exit Facility, and all commitments under the DIP Credit Facility terminated. Each holder of an Allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility; +• Each holder of an Allowed Notes Claim received its pro rata share of 19,714,204 shares of Common Stock, 54,967 shares of Preferred Stock and New Unsecured Senior Notes; +71 +Table of Contents +Index to Financial Statements +• 1,678,755 shares of Common Stock were issued to the Disputed Claims reserve; +• Each holder of a Class 4A Claim greater than the Convenience Claim Threshold received its pro rata share of 119,679 shares of Common Stock (which were issued to the Unsecured Claims Distribution Trust), $ 10 million in cash, subject to adjustment by the Unsecured Claims Distribution Trustee, and 100 % of the Mammoth Shares; +• Each holder of a Class 4B claim greater than the Convenience Claim Threshold received its pro rata share of 11,897 shares of Common Stock, 33 shares of Preferred Stock, the Rights Offering Subscription Rights and the 2026 Senior Notes; +• Each holder of a Convenience Class Claim will share in a $ 3 million cash distribution pool, which the Unsecured Claims Distribution Trustee may increase by an additional $ 2 million by reducing the Gulfport Parent Cash Pool; +• Each intercompany claim was cancelled on the Emergence Date and holders of intercompany interests received no recovery or distribution; +• The Company conducted a Rights Offering and issued 50,000 shares of Preferred Stock at $ 1,000 per share to holders of claims against the Predecessor Subsidiaries, raising $ 50 million in proceeds. Additionally, 5,000 shares were issued to the Back Stop Commitment counterparties in lieu of cash consideration as per the Backstop Commitment Agreement; and +• The Company adopted the Gulfport Energy Corporation 2021 Stock Incentive Plan (the "Incentive Plan") effective on the Emergence Date and reserved 2,828,123 shares of Common Stock for issuance to Gulfport's employees and non-employee directors pursuant to equity incentive awards to be granted under the Incentive Plan. +Additionally, pursuant to the Plan confirmed by the Bankruptcy Court, the Company's post-emergence Board of Directors is comprised of five directors, including the Company's former Chief Executive Officer and current Executive Chairman, Timothy Cutt, and four non-employee directors, David Wolf, Guillermo Martinez, Jason Martinez and David Reganato. +Executory Contracts +Subject to certain exceptions, under the Bankruptcy Code the Debtors were entitled to assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. Generally, the rejection of an executory contract was treated as a pre-petition breach of such contract and, subject to certain exceptions, relieved the Debtors from performing future obligations under such contract but entitled the counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease required the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights thereto. Refer to Note 19 for more information on potential future rejection damages related to general unsecured claims. +3. FRESH START ACCOUNTING +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence Date. The Company qualified for fresh start accounting because (1) the holders of existing voting shares of the Company prior to the Emergence Date received less than 50% of the voting shares of the Successor's equity following its emergence from bankruptcy and (2) the reorganization value of the Company's assets immediately prior to confirmation of the Plan of approximately $ 2.3 billion was less than the post-petition liabilities and allowed claims of $ 3.1 billion. +In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations. Accordingly, the consolidated financial statements after May 17, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Emergence Date fair values of the Successor's assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor. +72 +Table of Contents +Index to Financial Statements +Reorganization Value +Reorganization value is derived from an estimate of enterprise value, or fair value of the Company's interest-bearing debt and stockholders' equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $ 1.3 billion and $ 1.9 billion. With the assistance of third-party valuation advisors, the Company determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. Deferred income taxes were determined in accordance with FASB ASC Topic 740 - Income Taxes. For GAAP purposes, the Company valued the Successor's individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $ 1.6 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process. +The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of May 17, 2021. As estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties, the resolution of contingencies is beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially. +The following table reconciles the enterprise value to the implied fair value of the Successor's equity as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Less: Fair value of debt ( 852,751 ) +Successor equity value (2) +$ 748,775 +_____________________ +(1) Restricted cash is not included in the above table. +(2) Inclusive of $ 55 million of mezzanine equity. +The following table reconciles the enterprise value to the reorganization value as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Plus: Current and other liabilities 686,489 +Plus: Asset retirement obligations 19,084 +Less: Common stock held in reserve for settlement of claims post Emergence Date ( 54,109 ) +Reorganization value of Successor assets $ 2,252,990 +_____________________ +(1) Restricted cash is not included in the above table. +The fair values of our oil and natural gas properties, other property and equipment, derivative instruments, equity investments and asset retirement obligations were estimated as of the Emergence Date. +Oil and natural gas properties . The Company's principal assets are its oil and natural gas properties, which are accounted for under the full cost method of accounting. The Company determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all developed wells and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future +73 +Table of Contents +Index to Financial Statements +commodity prices escalated by an inflationary rate after seven years, adjusted for differentials and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area. +Other property and equipmen t. The fair value of other property and equipment, such as land, buildings, vehicles, computer equipment and other equipment, was maintained at net book value as the carrying value reasonably approximated the fair value of the assets. +Asset retirement obligation s. In accordance with FASB ASC Topic 410 - Asset Retirement and Environmental Obligations , the asset retirement obligations associated with the Company's oil and gas assets was valued using the income approach. The fair value of the Company’s asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, updated estimates of timing of reclamation obligations, an appropriate long-term inflation adjustment, and the Company's revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of the Company's credit standing. +Derivative Instruments. The fair value of derivative instruments was adjusted based on the change in the Company’s credit rating reflecting the Company’s credit standing at the Emergence Date. +Equity Investments. The fair value of the Company's investment in Grizzly was reduced by $ 27 million. The reduction in valuation was based upon the assessment of the investment by the Company's new management and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls which will lead to further dilution of its equity ownership interest. +74 +Table of Contents +Index to Financial Statements +Consolidated Balance Sheet +The following consolidated balance sheet is as of May 17, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Emergence Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets and liabilities. +As of May 17, 2021 +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Assets +Current assets: +Cash and cash equivalents $ 146,545 $ ( 145,019 ) (a) $ — $ 1,526 +Restricted cash — 57,891 (b) — 57,891 +Accounts receivable—oil and natural gas sales 180,711 — — 180,711 +Accounts receivable—joint interest and other 15,431 — — 15,431 +Prepaid expenses and other current assets 86,189 ( 60,894 ) (c) — 25,295 +Short-term derivative instruments 3,324 — 141 (r) 3,465 +Total current assets 432,200 ( 148,022 ) 141 284,319 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 9,558,121 — ( 7,860,713 ) (s) 1,697,408 +Unproved properties 1,375,681 — ( 1,145,507 ) (s) 230,174 +Other property and equipment 38,026 — ( 31,133 ) (t) 6,893 +Total property and equipment 10,971,828 — ( 9,037,353 ) 1,934,475 +Accumulated depletion, depreciation and amortization ( 8,870,723 ) — 8,870,723 (u) — +Total property and equipment, net 2,101,105 — ( 166,630 ) 1,934,475 +Other assets: +Equity investments 27,044 — ( 27,044 ) (v) — +Long-term derivative instruments 7,468 — 715 (w) 8,183 +Operating lease assets 47 — — 47 +Other assets 18,866 7,100 (d) — 25,966 +Total other assets 53,425 7,100 ( 26,329 ) 34,196 +Total assets $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +75 +Table of Contents +Index to Financial Statements +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Liabilities and Stockholders’ Equity (Deficit) +Current liabilities: +Accounts payable and accrued liabilities $ 384,200 $ 122,599 (e) $ — $ 506,799 +Short-term derivative instruments 96,116 — 2,784 (x) 98,900 +Current portion of operating lease liabilities — 38 (f) — 38 +Current maturities of long-term debt 280,251 ( 220,251 ) (g) — 60,000 +Total current liabilities 760,567 ( 97,614 ) 2,784 665,737 +Non-current liabilities: +Long-term derivative instruments 69,331 — 11,411 (y) 80,742 +Asset retirement obligation — 65,341 (h) ( 46,257 ) (z) 19,084 +Non-current operating lease liabilities — 9 (i) — 9 +Long-term debt, net of current maturities — 792,751 (j) — 792,751 +Total non-current liabilities 69,331 858,101 ( 34,846 ) 892,586 +Liabilities subject to compromise 2,224,449 ( 2,224,449 ) (k) — — +Total liabilities $ 3,054,347 $ ( 1,463,962 ) $ ( 32,062 ) $ 1,558,323 +Commitments and contingencies +Mezzanine Equity: +Preferred Stock $ — $ 55,000 (l) $ — $ 55,000 +Stockholders’ equity (deficit): +Predecessor common stock 1,609 ( 1,609 ) (m) — — +Common Stock — 2 (n) — 2 +Additional paid-in capital 4,215,838 ( 3,522,064 ) (o) — 693,774 +Common Stock held in reserve — ( 54,109 ) (p) — ( 54,109 ) +Accumulated other comprehensive loss ( 40,430 ) 40,430 (q) — — +Retained earnings (accumulated deficit) ( 4,644,634 ) 4,805,390 (q) ( 160,756 ) (aa) — +Total stockholders’ equity (deficit) $ ( 467,617 ) $ 1,268,040 $ ( 160,756 ) $ 639,667 +Total liabilities, mezzanine equity and stockholders’ equity (deficit) $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +76 +Table of Contents +Index to Financial Statements +Reorganization Adjustments (in thousands) +(a) The table below reflects changes in cash and cash equivalents on the Emergence Date from implementation of the Plan: +Release of escrow funds by counterparties as a result of the Plan $ 63,068 +Preferred Stock rights offering proceeds 50,000 +Funds required to rollover the DIP Credit Facility and Pre-Petition Revolving Credit Facility into the Exit Facility ( 175,000 ) +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest ( 1,022 ) +Payment of issuance costs related to the Exit Credit Facility ( 10,250 ) +Funding of the Professional Fee Escrow ( 43,891 ) +Payment of professional fees at Emergence Date ( 7,964 ) +Transfer to restricted cash for the Unsecured Claims Distribution Trust ( 1,000 ) +Transfer to restricted cash for the Convenience Claims Cash Pool ( 3,000 ) +Transfer to restricted cash for the Parent Cash Pool ( 10,000 ) +Payment of severance costs at Emergence Date ( 5,960 ) +Net change in cash and cash equivalents $ ( 145,019 ) +(b) Changes in restricted cash reflect the net effect of transfers from cash and cash equivalents for the Professional Fee Escrow and various claims class cash pools. +(c) Changes in prepaid expenses and other current assets include the following: +Release of escrow funds as a result of the Plan $ ( 63,068 ) +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Prepaid compensation earned at Emergence ( 2,073 ) +Net change in prepaid expenses and other current assets $ ( 60,894 ) +(d) Changes in other assets were due to capitalization of debt issuance costs related to the Exit Credit Facility. +(e) Changes in accounts payable and accrued liabilities included the following: +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest $ ( 1,022 ) +Payment of professional fees at emergence ( 7,964 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust 1,000 +Accrued payable for claims to be settled via Convenience Claims Cash Pool 3,000 +Accrued payable for claims to be settled via Parent Cash Pool 10,000 +Professional fees payable at Emergence 18,047 +Accrued payable for General Unsecured Claims against Gulfport Parent to be settled via 4A Claims distribution from common shares held in reserve 23,894 +Accrued payable for General Unsecured Claims against Gulfport Subsidiary to be settled via 4B Claims distribution from common shares held in reserve 30,216 +Reinstatement of payables due to Plan effects 45,428 +Net change in accounts payable and accrued liabilities $ 122,599 +(f) Changes to current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +77 +Table of Contents +Index to Financial Statements +(g) Changes in the current maturities of long-term debt include the following: +Current portion of Term Notes issued under the Exit Facility $ 60,000 +Payment of DIP Facility to effectuate Exit Facility ( 157,500 ) +Transfer of post-petition RBL borrowings to Exit Facility ( 122,751 ) +Net changes to current maturities of long-term debt $ ( 220,251 ) +(h) Reflects the reclassification of asset retirement obligations from liabilities subject to compromise. +(i) Changes to non-current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +(j) Changes in long-term debt include the following: +Emergence Date draw on Exit Facility $ 122,751 +Noncurrent portion of First-Out Term Loan issued under the Exit Credit Facility 120,000 +Issuance of 2026 Senior Notes 550,000 +Net impact to long-term debt, net of current maturities $ 792,751 +(k) On the Emergence Date, liabilities subject to compromise were settled in accordance with the Plan as follows: +General Unsecured Claims settled via Class 4A, 4B, and 5B distributions $ 74,098 +Predecessor Senior Notes and associated interest 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Reinstatement of Predecessor Claims as Successor liabilities 45,475 +Reinstatement of Predecessor asset retirement obligations 65,341 +Total liabilities subject to compromise settled in accordance with the Plan $ 2,224,449 +The resulting gain on liabilities subject to compromise was determined as follows: +Pre-petition General Unsecured Claims Settled at Emergence $ 74,098 +Predecessor Senior Notes Claims settled at Emergence 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Rollover of Pre-Petition Revolving Credit Facility into Exit RBL Facility ( 197,500 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust ( 1,000 ) +Accrued payable for claims to be settled via Convenience Claims Cash Pool ( 3,000 ) +Accrued payable for claims to be settled via Parent Cash Pool ( 10,000 ) +Accrued payable for shares to be transferred to trust ( 54,109 ) +Issuance of Common Stock to settle Predecessor liabilities ( 639,666 ) +Issuance of 2026 Senior Notes in settlement of Class 4B and 5B claims ( 550,000 ) +Gain on settlement of liabilities subject to compromise $ 658,358 +(l) Changes to Preferred Stock reflect the fair value of preferred shares issued in the Rights Offering. +(m) Changes in Predecessor common stock reflect the extinguishment of Predecessor equity as per the Plan. +78 +Table of Contents +Index to Financial Statements +(n) Changes in Common Stock included the following: +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Parent (par value) $ — +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Subsidiaries (par value) 2 +Common stock reserved for settlement of claims post Emergence Date (par value) — +Net change to Common Stock $ 2 +(o) Changes to paid in capital included the following: +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Parent $ 27,751 +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Subsidiaries 666,022 +Extinguishment of Predecessor stock-based compensation 4,419 +Extinguishment of Predecessor paid in capital ( 4,220,256 ) +Net change to paid in capital $ ( 3,522,064 ) +(p) Common Stock held in reserve to settle Allowed General Unsecured Claims include: +Shares held in reserve to settle Allowed Claims against Gulfport Parent ( 23,894 ) +Shares held in reserve to settle Allowed Claims against Gulfport Subsidiary ( 30,215 ) +Total Common Stock held in reserve ( 54,109 ) +(q) Change to retained earnings (accumulated deficit) included the following: +Gain on settlement of liabilities subject to compromise $ 658,358 +Extinguishment of Predecessor common stock and paid in capital 4,221,864 +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Deferred compensation earned at Emergence ( 2,073 ) +Extinguishment of Predecessor accumulated other comprehensive income ( 40,430 ) +Write-off of debt issuance costs related to First-Out Term Loan ( 3,150 ) +Severance costs incurred as a result of the Plan ( 5,961 ) +Professional fees earned at Emergence ( 18,047 ) +Rights offering backstop commitment fee ( 5,000 ) +Extinguishment of Predecessor stock-based compensation ( 4,418 ) +Net change to retained earnings (accumulated deficit) $ 4,805,390 +Fresh Start Adjustments +(r) The change in fair value of short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(s) The change in oil and natural gas properties represents the fair value adjustment to the Company's properties due to the adoption of fresh start accounting. +(t) Predecessor accumulated depreciation and amortization for other property and equipment was net against the gross value of the assets with the adoption of fresh start accounting. +(u) Predecessor accumulated depreciation and amortization was eliminated with the adoption of fresh start accounting. +(v) The change in equity investments is due to the fair value adjustment to the Company's Grizzly investment. +79 +Table of Contents +Index to Financial Statements +(w) The change in fair value of long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(x) The change in fair value of liabilities related to short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(y) The change in fair value of liabilities related to long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(z) The fair value of asset retirement obligations was reduced due to the change in the Company's credit adjusted risk-free rate and expected economic life estimates. +(aa) Changes to retained earnings represent the total impact of fresh start adjustments to the post-reorganization balance sheet. +Reorganization Items, net +The Company has incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, the estimate of liabilities related to the rejection of certain midstream contracts reflects the best estimate of the most probable outcomes of ongoing litigation and settlement negotiations. The amount of these items, which were incurred in reorganization items, net within the accompanying condensed consolidated statements of operations, have significantly affected the Company's statements of operations. +The following table summarizes the components in reorganization items, net included in the Company's consolidated statements of operations (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Legal and professional advisory fees $ — $ — $ 81,565 +Net gain on liabilities subject to compromise — — ( 575,182 ) +Fresh start adjustments, net — — 160,756 +Elimination of Predecessor accumulated other comprehensive income — — 40,430 +Debt issuance costs — — 3,150 +Other items, net — — 22,383 +Total reorganization items, net $ — $ — $ ( 266,898 ) +80 +Table of Contents +Index to Financial Statements +4. PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated DD&A and impairment as of December 31, 2022 and 2021 are as follows (in thousands): +Successor +December 31, 2022 December 31, 2021 +Proved oil and natural gas properties $ 2,418,666 $ 1,917,833 +Unproved properties 178,472 211,007 +Other depreciable property and equipment 5,977 4,943 +Land 386 386 +Total property and equipment 2,603,501 2,134,169 +Accumulated DD&A and impairment ( 545,771 ) ( 278,341 ) +Property and equipment, net $ 2,057,730 $ 1,855,828 +Oil and Natural Gas Properties +Under the full cost method of accounting, capitalized costs of oil and natural gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1 . At December 31, 2022, the net book value of the Company's oil and gas properties was below the calculated ceiling for the period leading up to December 31, 2022. As a result, the Company did not record an impairment of its oil and natural gas properties for the year ended December 31, 2022. During the Prior Successor Period and the year ended December 31, 2020, the Company incurred $ 117.8 million and $ 1.4 billion of impairments, respectively, as a result of its oil and natural gas properties exceeding its calculated ceiling. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for natural gas, oil and NGL, which significantly reduced proved reserves values and proved reserves. The Company did not record an impairment of its oil and natural gas properties during the Prior Predecessor Period. +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 20.2 million, $ 11.9 million, $ 8.0 million and $ 25.0 million for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and the year ended December 31, 2020, respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 0.74 , $ 0.69 , $ 0.45 and $ 0.61 per Mcfe for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and the year ended December 31, 2020, respectively. +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2022 (in thousands): +Costs Incurred in +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 +Fresh Start Adjustments (May 17, 2021) (1) +Total +Acquisition costs $ 17,288 $ 8,687 $ 152,456 $ 178,431 +Exploration costs — — — — +Development costs 16 25 — 41 +Capitalized interest — — — — +Total oil and natural gas properties not subject to amortization $ 17,304 $ 8,712 $ 152,456 $ 178,472 +_____________________ +(1) Reflects carrying values of our unproved properties as a result of the application of fresh start accounting upon emergence from bankruptcy (see Note 3 for additional information) that remain in unproved properties as of December 31, 2022. +81 +Table of Contents +Index to Financial Statements +The following table summarizes the Company’s non-producing properties excluded from amortization by area as of December 31, 2022 and December 31, 2021 (in thousands): +Successor +December 31, 2022 December 31, 2021 +Utica $ 147,370 $ 175,028 +SCOOP 31,102 35,975 +Other — 4 +$ 178,472 $ 211,007 +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years . However, the majority of the Company's non-producing leases in the Utica have five-year extension terms, which could extend this time frame beyond five years . +Asset Retirement Obligation +A reconciliation of the Company's asset retirement obligation for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period is as follows (in thousands): +Asset retirement obligation at January 1, 2021 (Predecessor) $ 63,566 +Liabilities incurred 546 +Accretion expense 1,229 +Ending balance as of May 17, 2021 (Predecessor) $ 65,341 +Fresh start adjustments (1) +( 46,257 ) +Asset retirement obligation at May 18, 2021 (Successor) $ 19,084 +Liabilities incurred 204 +Accretion expense 1,214 +Revisions in estimated cash flows (2) +7,762 +Asset retirement obligation at December 31, 2021 (Successor) $ 28,264 +Liabilities incurred 96 +Liabilities removed due to divestitures ( 7 ) +Accretion expense 2,746 +Revisions in estimated cash flows (2) +2,072 +Asset retirement obligation at December 31, 2022 (Successor) $ 33,171 +_____________________ +(1) As discussed in Note 3 , the Company recorded its asset retirement obligation at fair value as of the Emergence Date. +(2) Revisions represent changes in the present value of liabilities resulting from changes in estimated costs. +82 +Table of Contents +Index to Financial Statements +5. LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31, 2022 and 2021 (in thousands): +Successor +December 31, 2022 December 31, 2021 +Credit Facility $ 145,000 $ 164,000 +8.000 % senior unsecured notes due 2026 +550,000 550,000 +Net unamortized debt issuance costs ( 845 ) ( 1,054 ) +Total Debt, net 694,155 712,946 +Less: current maturities of long term debt — — +Total Debt reflected as long term $ 694,155 $ 712,946 +Credit Facility +On October 14, 2021, the Company entered into the Existing Credit Facility with JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties. The Existing Credit Facility provided for an aggregate maximum principal amount of up to $ 1.5 billion, an initial borrowing base of $ 850 million and an initial aggregate elected commitment amount of $ 700 million. The Existing Credit Facility also provides for a $ 175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The Credit Facility matures October 14, 2025. +The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year. +On May 2, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Amendment to Borrowing Base Redetermination Agreement and First Amendment to our Credit Agreement ("Amendment"), which amended the Existing Credit Facility (as amended, the "Credit Facility"). The Amendment, among other things, (a) increased the borrowing base under the Credit Facility from $ 850 million to $ 1.0 billion with the elected commitments remaining at $ 700 million, (b) amended certain covenants related to hedging to ease certain requirements and limitations, (c) amended the covenants governing restricted payments to (i) increased the Net Leverage Ratio allowing unlimited restricted payments from 1.00 to 1.00 to 1.25 to 1.00 and (ii) permitted additional restricted payments to redeem preferred equity until December 31, 2022, provided certain leverage, no event of default or borrowing base deficiency and availability tests were met, and (d) provided for the transition from a LIBOR to a SOFR benchmark, with a 10 basis point credit spread adjustment for all tenors. +On October 31, 2022, the Company completed its semi-annual borrowing base redetermination during which the borrowing base under the Credit Facility was reconfirmed at $ 1.0 billion with the elected commitments remaining at $ 700 million. +The Credit Facility bears interest at a rate equal to, at the Company’s election, either (a) SOFR benchmark plus an applicable margin that varies from 2.75 % to 3.75 % per annum or (b) a base rate plus an applicable margin that varies from 1.75 % to 2.75 % per annum, based on borrowing base utilization. The Company is required to pay a commitment fee of 0.50 % per annum on the average daily unused portion of the current aggregate commitments under the Credit Facility. The Company is also required to pay customary letter of credit and fronting fees. +The Credit Facility requires the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.25 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00. +The obligations under the Credit Facility, certain swap obligations and certain cash management obligations, are guaranteed by the Company and the wholly-owned domestic material subsidiaries of the Borrower (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and secured by substantially all of the Loan Parties’ assets (subject to customary exceptions). +The Credit Facility also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements and borrowing base certificates, conduct of business, maintenance of property, maintenance of insurance, entry into certain derivatives contracts, restrictions on the incurrence of liens, indebtedness, asset dispositions, restricted payments, and other customary covenants. These covenants are subject to a number of limitations and exceptions. +83 +Table of Contents +Index to Financial Statements +As of December 31, 2022, the Company had $ 145.0 million outstanding borrowings under the Credit Facility, $ 113.4 million in letters of credit outstanding and was in compliance with all covenants under the credit agreement. +As of December 31, 2022, the Credit Facility bore interest at a weighted average rate of 7.39 %. +2026 Senior Notes +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company issued $ 550 million aggregate principal amount of its 8.000 % senior notes due 2026. The 2026 Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Credit Facility. Interest on the 2026 Senior Notes is payable semi-annually, on June 1 and December 1 of each year. The 2026 Senior Notes were issued under the Indentures, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the Guarantors and mature on May 17, 2026. +The covenants of the 1145 Indenture (other than the payment covenant) require that the Company comply with the covenants of the 4(a)(2) Indenture, as amended. The 4(a)(2) Indenture contains covenants limiting the Issuer’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) pay dividends or distributions in respect of certain equity interests or redeem, repurchase or retire certain equity interests or subordinated indebtedness, (iii) make certain investments, (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in certain lines of business, (viii) engage in consolidations, mergers and acquisitions, (ix) create unrestricted subsidiaries and (x) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the 2026 Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply. +Exit Credit Facility +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company entered into the Exit Credit Agreement, which provided for (i) the Exit Facility in an aggregate principal amount of up to $ 1.5 billion and (ii) the First-Out Term Loan in an aggregate maximum amount of up to $ 180.0 million. The Exit Facility had an initial borrowing base and elected commitment amount of up to $ 580.0 million. +Loans drawn under the Exit Facility were not subject to amortization, while loans drawn under the First-Out Term Loan amortized with $ 15.0 million quarterly installments, commencing on the closing date and occurring every three months after the closing date. The Exit Credit Facility was scheduled to mature on May 17, 2024. +The Exit Facility provided for a $ 150.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The Exit Facility also included a $ 40 million availability blocker that was to remain in place until Successful Midstream Resolution (as defined in the Exit Credit Agreement). The Credit Facility amended and refinanced the Exit Credit Facility. +Chapter 11 Proceedings - Predecessor Debt +Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stayed the creditors from taking any action as a result of the default. +The principal amounts from the Predecessor Senior Notes, Building Loan and Pre-Petition Revolving Credit Facility, other than letters of credit drawn on the Pre-Petition Revolving Credit Facility after the Petition Date, were classified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020. +Debtor-in-Possession Credit Agreement +Pursuant to the RSA, the Consenting RBL Lenders agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $ 262.5 million consisting of (a) $ 105 million of new money and (b) $ 157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The terms and conditions of the DIP Credit Facility are set forth in that certain form of credit agreement governing the DIP Credit Facility. The proceeds of the DIP Credit Facility were used for, among other things, post- +84 +Table of Contents +Index to Financial Statements +petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. On the Emergence Date, the DIP Facility was terminated and the lenders indefeasibly converted into the Exit Facility. Each holder of an allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Pre-Petition Revolving Credit Facility +Prior to the Emergence Date, the Company had entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The Pre-Petition Revolving Credit Facility had a borrowing base of $ 580 million. On the Emergence Date, the Pre-Petition Revolving Credit Facility was terminated and the lenders indefeasibly converted into the Exit Credit Facility. Each holder of an allowed claim under the Pre-Petition Revolving Credit Facility received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Predecessor Senior Notes +On the Emergence Date, all outstanding obligations under the Predecessor Senior Notes were cancelled in accordance with the Plan and each holder of an allowed unsecured notes claim received their pro-rata share of 19.7 million shares of Common Stock and $ 550 million of the 2026 Senior Notes. +Predecessor Building Loan +In June 2015, the Company entered into a loan for the construction of the Company's corporate headquarters in Oklahoma City, which was substantially completed in December 2016. On the Emergence Date, ownership of the Company's corporate headquarters reverted to the Building Loan lender and the Company entered into a short-term lease agreement for the headquarters with the lender. As a result, the Building Loan liability was discharged as of the Emergence Date. +Predecessor Debt Repurchases +In July of 2019, the Company's Board of Directors authorized $ 100 million of cash to be used to repurchase its Senior Notes in the open market at discounted values to par. In December 2019, the Company's Board of Directors increased the authorized size of its senior note repurchase program to $ 200 million in total. During the year ended December 31, 2020, the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $ 73.3 million aggregate principal amount of its outstanding Predecessor Senior Notes for $ 22.8 million in cash and recognized a $ 49.6 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. This gain is included in gain on debt extinguishment in the accompanying consolidated statements of operations. +Interest Expense +The following schedule shows the components of interest expense for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and the year ended December 31, 2020 (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Cash paid for interest $ 57,685 $ 33,295 $ 7,272 $ 84,823 +Change in accrued interest ( 826 ) 6,061 ( 1,503 ) 30,600 +Capitalized interest — ( 198 ) — ( 907 ) +Amortization of loan costs 2,914 1,663 — 5,563 +Other — 32 ( 1,610 ) — +Total interest expense $ 59,773 $ 40,853 $ 4,159 $ 120,079 +85 +Table of Contents +Index to Financial Statements +The Company did not capitalize interest expense for the year ended December 31, 2022 or Prior Predecessor Period. The Company capitalized approximately $ 0.2 million and $ 0.9 million in interest expense to undeveloped oil and natural gas properties during the Prior Successor Period and the year ended December 31, 2020, respectively. +Fair Value of Debt +At December 31, 2022, the carrying value of the outstanding debt represented by the 2026 Senior Notes was approximately $ 549.2 million. Based on the quoted market prices (Level 1), the fair value of the 2026 Senior Notes was determined to be approximately $ 542.7 million at December 31, 2022. +6. MEZZANINE EQUITY +As discussed in Note 2 , the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on the Emergence Date to provide for, among other things, (i) the authority to issue 42 million shares of Common Stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of Preferred Stock, with a par value of $ 0.0001 per share and a liquidation preference of $ 1,000 per share. +Mezzanine Equity +Preferred Stock +On the Emergence Date, the Successor issued 55,000 shares of Preferred Stock. +Holders of Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10 % per annum of the Liquidation Preference (with respect to cash dividends and 15 % per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of Preferred Stock (“PIK Dividends”). Gulfport currently has the option to pay either cash or PIK dividends on a quarterly basis. +Each holder of shares of Preferred Stock has the right (the “Conversion Right”), at its option and at any time, to convert all or a portion of the shares of Preferred Stock that it holds into a number of shares of Common Stock equal to the quotient obtained by dividing (x) the product obtained by multiplying (i) the Liquidation Preference times (ii) an amount equal to one (1) plus the Per Share Makewhole Amount (as defined in the Preferred Terms) on the date of conversion, by (y) $ 14.00 per share (as may be adjusted under the Preferred Terms) (the “Conversion Price”). The shares of Preferred Stock outstanding at December 31, 2022 would convert to 3.7 million shares of Common Stock if all holders of Preferred Stock exercised their Conversion Right. +Gulfport shall have the right, but not the obligation, to redeem all, but not less than all, of the outstanding shares of Preferred Stock by notice to the holders of Preferred Stock, at the greater of (i) the aggregate value of the Preferred Stock, calculated by the Current Market Price (as defined in the Preferred Terms) of the number of shares of Common Stock into which, subject to redemption, such Preferred Stock would have been converted if such shares were converted pursuant to the Conversion Right at the time of such redemption and (ii) (y) if the date of such redemption is on or prior to the three year anniversary of the Emergence Date, the sum of the Liquidation Preference plus the sum of all unpaid PIK Dividends through the three year anniversary of the Emergence Date, or (x) if the date of such redemption is after the three year anniversary of the Emergence Date, the Liquidation Preference (the “Redemption Price”). +Following the Emergence Date, if there is a Fundamental Change (as defined in the Preferred Terms), Gulfport is required to redeem all, but not less than all, of the outstanding shares of Preferred Stock by cash payment of the Redemption Price per share of Preferred Stock within three ( 3 ) business days of the occurrence of such Fundamental Change. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if Gulfport lacks sufficient cash to redeem all outstanding shares of Preferred Stock, the Company is required to redeem a pro rata portion of each holder’s shares of Preferred Stock. +The Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by Gulfport or converted into Common Stock. +The Preferred Stock has been classified as mezzanine equity in the accompanying consolidated balance sheets due to the redemption features noted above. +86 +Table of Contents +Index to Financial Statements +Dividends and Conversions +During the year ended December 31, 2022, the Company paid $ 5.4 million of cash dividends to holders of our Preferred Stock. During the Prior Successor Period, the Company paid dividends on our Preferred Stock, which included 3,071 shares of Preferred Stock paid in kind, approximately $ 55 thousand of cash-in-lieu of fractional shares, and $ 1.5 million of cash dividends to holders of our Preferred Stock. +The following table summarizes activity of the Company’s Preferred Stock for the year ended December 31, 2022 and Prior Successor Period: +Preferred Stock at May 18, 2021 (Successor) 55,000 +Issuance of Preferred Stock 3,071 +Conversion of Preferred Stock ( 175 ) +Preferred Stock at December 31, 2021 (Successor) 57,896 +Conversion of Preferred Stock ( 5,601 ) +Preferred Stock at December 31, 2022 (Successor) 52,295 +7. EQUITY +As discussed in Note 2 , the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on the Emergence Date to provide for, among other things, (i) the authority to issue 42 million shares of Common Stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of Preferred Stock, with a par value of $ 0.0001 per share and a liquidation preference of $ 1,000 per share. +Common Stock +On the Emergence Date, all existing shares of the Predecessor's common stock were cancelled. The Successor issued approximately 19.8 million shares of Common Stock and 1.7 million shares of Common Stock were issued to the Disputed Claims reserve. +In January 2022 approximately 876,000 shares in the Disputed Claims reserve at December 31, 2021 were issued to certain claimants. As of December 31, 2022, approximately 62,000 shares continue to be held in the Disputed Claims reserve and may be issued upon finalization of remaining claims. +87 +Table of Contents +Index to Financial Statements +Stock Repurchase Program +In November 2021 the Company's Board of Directors approved a stock repurchase program to acquire up to $ 100 million of its Common Stock and increased the authorization from $ 100 million to $ 200 million in April 2022 and from $ 200 million to $ 300 million in July 2022 ("Repurchase Program"). Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of Common Stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program is authorized to extend through June 30, 2023, and may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. The following table summarizes activity under the Repurchase Program for the year ended December 31, 2022 (number of shares and dollar value of shares purchased shown in thousands): +Total Number of Shares Purchased Dollar Value of Shares Purchased Average Price Paid Per Share +First quarter 2022 438 $ 35,512 $ 81.06 +Second quarter 2022 1,416 127,510 90.06 +Third quarter 2022 753 64,549 85.72 +Fourth quarter 2022 293 23,197 79.19 +Total 2,900 $ 250,768 $ 86.47 +8. STOCK-BASED COMPENSATION +As discussed in Note 2 , on the Emergence Date, the Company's Predecessor common stock was cancelled and the Company's Successor Common Stock was issued. Accordingly, the Company's then existing stock-based compensation awards were also cancelled, which resulted in the recognition of previously unamortized expense of $ 4.4 million related to the cancelled awards on the date of cancellation. The expense was included in reorganization items, net on the accompanying consolidated statements of operations. As a result, stock-based compensation for the Predecessor and Successor periods are not comparable. +Successor Stock-Based Compensation +As of the Emergence Date, the Board of Directors adopted the Incentive Plan with a share reserve equal to 2.8 million shares of Common Stock. The Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and performance awards or any combination of the foregoing. The Company has granted both restricted stock units and performance vesting restricted stock units to employees and directors pursuant to the Incentive Plan, as discussed below. During the year ended December 31, 2022 and Prior Successor Period, the Company's stock-based compensation expense was $ 8.7 million and $ 3.1 million, respectively, of which the Company capitalized $ 2.9 million and $ 1.1 million, respectively, relating to its exploration and development efforts. Stock compensation expense, net of the amounts capitalized, is included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2022, the Company has awarded an aggregate of approximately 265 thousand restricted stock units and approximately 191 thousand performance vesting restricted stock units, net of forfeited awards, under the Incentive Plan. +88 +Table of Contents +Index to Financial Statements +The following table summarizes restricted stock unit activity for the Prior Successor Period and year ended December 31, 2022: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of May 18, 2021 — $ — — $ — +Granted 200,484 66.05 153,138 48.54 +Vested — — — — +Forfeited/canceled ( 2,071 ) 66.89 — — +Unvested shares as of December 31, 2021 198,413 $ 66.04 153,138 $ 48.54 +Granted 78,192 $ 96.90 37,666 $ 66.82 +Vested ( 67,564 ) 65.91 — — +Forfeited/canceled ( 11,269 ) 80.11 — — +Unvested shares as of December 31, 2022 197,772 $ 77.49 190,804 $ 52.15 +Successor Restricted Stock Units +Restricted stock units awarded under the Incentive Plan generally vest over a period of 3 to 4 years in the case of employees and 4 years in the case of directors upon the recipient meeting applicable service requirements. Stock-based compensation expense is recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's Common Stock on the date of the grant. Unrecognized compensation expense as of December 31, 2022, was $ 12.3 million. The expense is expected to be recognized over a weighted average period of 2.13 years. +Successor Performance Vesting Restricted Stock Units +The Company has awarded performance vesting restricted stock units to certain of its executive officers under the Incentive Plan. The number of shares of Common Stock issued pursuant to the award will be based on a combination of (i) the Company's total shareholder return ("TSR") and (ii) the Company's relative total shareholder return ("RTSR") for the performance period. Participants will earn from 0 % to 200 % of the target award based on the Company's TSR and RTSR ranking compared to the TSR of the companies in the Company's designated peer group at the end of the performance period. Awards will be earned and vested over a three-year performance period, subject to earlier termination of the performance period in the event of a change in control. The grant date fair values were determined using the Monte Carlo simulation method and are being recorded ratably over the performance period. +The table below summarizes the assumptions used in the Monte Carlo simulation to determine the grant date fair value of awards granted during the year ended December 31, 2022: +Grant date April 29, 2022 +Forecast period (years) 3 +Risk-free interest rates 2.9 % +Implied equity volatility 88.4 % +Stock price on the date of grant $ 93.98 +For grants awarded in the Prior Successor Period, expected volatilities utilized in the Monte Carlo models were estimated using a historical period consistent with the remaining performance period of approximately 3 years. The risk-free interest rates were based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. The Company assumed a range of risk-free interest rates between 0.35 % and 0.67 % and a range of expected volatilities between 87.0 % and 87.1 % to estimate the fair value. +Unrecognized compensation expense as of December 31, 2022, related to performance vesting restricted shares was $ 5.6 million. The expense is expected to be recognized over a weighted average period of 1.71 years. +89 +Table of Contents +Index to Financial Statements +Predecessor Stock-Based Compensation +The Predecessor granted restricted stock units to employees and directors pursuant to the 2019 Amended and Restated Incentive Stock Plan (the "2019 Plan"). During the Prior Predecessor Period and the year ended December 31, 2020, the Company’s stock-based compensation cost was $ 4.4 million and $ 16.3 million, respectively, of which the Company capitalized $ 0.9 million and $ 2.9 million, respectively, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations. +The following table summarizes restricted stock unit activity for the Prior Predecessor Period and the year ended December 31, 2020: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of December 31, 2019 4,098,318 $ 4.73 1,783,660 $ 2.96 +Granted 3,069,521 0.85 — — +Vested ( 1,294,285 ) 5.73 — — +Forfeited ( 4,171,041 ) 1.68 ( 943,065 ) 1.98 +Unvested shares as of December 31, 2020 1,702,513 $ 4.74 840,595 $ 4.07 +Granted — — — — +Vested ( 227,132 ) 8.45 — — +Forfeited/canceled ( 1,475,381 ) 4.16 ( 840,595 ) 4.07 +Unvested shares as of May 17, 2021 — $ — — $ — +Predecessor Restricted Stock Units +Restricted stock units awarded under the 2019 Plan generally vested over a period of one year in the case of directors and three years in the case of employees and vesting was dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's Common Stock on the date of grant. All unrecognized compensation expense was recognized as of the Emergence Date. +Predecessor Performance Vesting Restricted Stock Units +The Company previously awarded performance vesting restricted stock units to certain of its executive officers under the 2019 Plan. The number of shares of Common Stock issued pursuant to the award was based on RTSR. RTSR is an incentive measure whereby participants will earn from 0 % to 200 % of the target award based on the Company’s TSR ranking compared to the TSR of the companies in the Company’s designated peer group at the end of the performance period. Awards were to be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. All unrecognized compensation expense was recognized as of the Emergence Date. +9. REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil, condensate and NGL. These sales are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable +90 +Table of Contents +Index to Financial Statements +market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression expense in the accompanying consolidated statements of operations. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 278.4 million and $ 232.9 million as of December 31, 2022 and December 31, 2021, respectively, and are reported in accounts receivable - oil and natural gas, and natural gas liquids sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For each of the periods presented, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +10. LEASES +Nature of Leases +The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one year , although at December 31, 2022, the Company had one active long-term drilling rig contract. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential v olatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are +91 +Table of Contents +Index to Financial Statements +capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells. +The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2026. These agreements are typically structured with non-cancelable terms of one to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. In July 2022, the Company moved its headquarters to a new location. The impact of the Company's new headquarters lease is reflected in the tables below. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Future amounts due under operating lease liabilities as of December 31, 2022, were as follows (in thousands): +2023 $ 13,752 +2024 13,439 +2025 836 +2026 561 +2027 10 +Total lease payments $ 28,598 +Less: imputed interest ( 1,885 ) +Total $ 26,713 +Lease costs incurred for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period consisted of the following (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Operating lease cost $ 535 $ 48 $ 41 +Variable lease cost — 3 — +Short-term lease cost 31,987 11,507 4,496 +Total lease cost (1) +$ 32,522 $ 11,558 $ 4,537 +_____________________ +(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations. +Supplemental cash flow information for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period related to leases was as follows (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Cash paid for amounts included in the measurement of lease liabilities +Operating cash flows from operating leases $ 601 $ 78 $ 48 +92 +Table of Contents +Index to Financial Statements +The weighted-average remaining lease term as of December 31, 2022, was 2.16 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2022, was 6.71 %. +11. INCOME TAXES +Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables. +The components of income tax benefits and expense were as follows (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Current: +State $ — $ ( 39 ) $ ( 7,968 ) $ — +Federal — — — ( 273 ) +Deferred: +State — — — 7,563 +Federal — — — — +Total income tax (benefit) expense provision $ — $ ( 39 ) $ ( 7,968 ) $ 7,290 +A reconciliation of the statutory federal income tax amount to the recorded expense follows (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Income (loss) before federal income taxes $ 494,701 $ ( 112,868 ) $ 243,026 $ ( 1,617,843 ) +Expected income tax at statutory rate 103,887 ( 23,702 ) 51,036 ( 339,747 ) +State income taxes 2,227 ( 3,177 ) ( 12,484 ) ( 14,696 ) +Bankruptcy adjustments — 44,748 ( 111,285 ) — +Remeasurement of state deferred tax asset 13,869 ( 7,966 ) — — +Return to provision ( 17,075 ) — — — +Other differences 1,117 2,841 445 10,800 +Change in valuation allowance due to current year activity ( 104,025 ) ( 12,783 ) 64,320 350,933 +Income tax (benefit) expense recorded $ — $ ( 39 ) $ ( 7,968 ) $ 7,290 +For the year ended December 31, 2022, the Company's effective tax rate was 0 %. For the Prior Predecessor Period, the Company had an effective tax rate of ( 3.3 )% and an income tax benefit of $ 8.0 million. For the Prior Successor Period, the Company had an effective tax rate of 0.03 % and tax benefit of $ 39 thousand. The higher effective income tax rate for the year ended December 31, 2022, is due the Company recording a benefit in 2021 related to an Oklahoma refund claim associated with an examination of historical returns. The effective tax rate differs from the statutory tax rate due the Company's valuation allowance position. +93 +Table of Contents +Index to Financial Statements +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2022, and 2021 are estimated as follows (in thousands): +Successor +December 31, 2022 December 31, 2021 +Deferred tax assets: +Net operating loss carryforward and tax credits $ 346,455 $ 298,127 +Oil and gas property basis difference 269,206 432,959 +Investment in pass through entities 66,502 58,751 +Stock-based compensation expense 1,484 — +Change in fair value of derivative instruments 73,198 86,296 +Other assets 52,107 31,298 +Total deferred tax assets 808,952 907,431 +Valuation allowance for deferred tax assets ( 803,332 ) ( 907,358 ) +Deferred tax assets, net of valuation allowance 5,620 73 +Deferred tax liabilities: +Right of use asset 5,615 — +Other 5 73 +Total deferred tax liabilities 5,620 73 +Net deferred tax asset $ — $ — +Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $ 803.3 million has been recorded. The amount of the Deferred Tax Asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. +As discussed in Note 2 , elements of the Plan provided that the Company’s indebtedness related to Predecessor Senior Notes and certain general unsecured claims were exchanged for Common Stock in settlement of those claims. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The IRC provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income, but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI and historical interest expense haircut is approximately $ 655 million, which will reduce the value of the Company’s net operating losses. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2022. The reduction of net operating losses is expected to be fully offset by a corresponding decrease in valuation allowance. As of December 31, 2021, the Company had an estimated federal net operating loss carryforward of approximately $ 1.4 billion after giving effect to the estimated reduction in tax attributes as discussed above. +Emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of IRC Section 382. The Company is applying rules under IRC Section 382(l)(5) that allows the Company to mitigate the limitations imposed under the regulations with respect to the Company’s remaining tax attributes. The Company’s deferred tax assets and liabilities, prior to the valuation allowance, have been computed on such basis. Additionally, under IRC Section 382(l)(5), an ownership change subsequent to the Company’s emergence could severely limit or effectively eliminate its ability to realize the value of its tax attributes. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.6 billion as of December 31, 2022. These federal net operating loss carryforwards of approximately $ 349 million generated in tax years prior to 2018 will begin to expire in 2036. As a result of the Tax Cuts and Jobs Act, the 2018 through 2022 federal NOL +94 +Table of Contents +Index to Financial Statements +carryforwards of $ 1.3 billion have no expiration. The Company also has state net operating loss carryovers of approximately $ 317 million that began to expire in 2022. +As of December 31, 2022, we had no liability for uncertain tax positions. +On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on the Company's current analysis of the provisions, the Company does not believe this legislation will have a material impact on its consolidated financial statements. +12. EARNINGS (LOSS) PER SHARE +Basic income or loss per share attributable to common stockholders is computed as (i) net income or loss less (ii) dividends paid to holders of Preferred Stock less (iii) net income or loss attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common stockholders is computed as (i) basic net income or loss attributable to common stockholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The "if-converted" method is used to determine the dilutive impact for the Company's convertible Preferred Stock and the treasury stock method is used to determine the dilutive impact of unvested restricted stock. +There were 0.2 million shares of restricted stock that were considered dilutive for the year ended December 31, 2022. There were no shares of restricted stock that were considered dilutive for the Prior Successor Period, Prior Predecessor Period or the year ended December 31, 2020. There were 3.7 million and 4.1 million shares of potential common shares issuable due to the Company's Preferred Stock for the year ended December 31, 2022 and Prior Successor Period, respectively. There were 0.1 million shares of restricted stock that were considered anti-dilutive during the Prior Successor Period. +Reconciliations of the components of basic and diluted net income (loss) per common share are presented in the tables below (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Net income (loss) $ 494,701 $ ( 112,829 ) $ 250,994 $ ( 1,625,133 ) +Dividends on Preferred Stock ( 5,444 ) ( 4,573 ) — — +Participating securities - Preferred Stock (1) +( 76,401 ) — — — +Net income (loss) attributable to common stockholders $ 412,856 $ ( 117,402 ) $ 250,994 $ ( 1,625,133 ) +Re-allocation of participating securities 512 — — — +Diluted net income (loss) attributable to common stockholders $ 413,368 $ ( 117,402 ) $ 250,994 $ ( 1,625,133 ) +Basic Shares 20,185 20,545 160,834 160,231 +Dilutive Shares 20,347 20,545 160,834 160,231 +Basic EPS $ 20.45 $ ( 5.71 ) $ 1.56 $ ( 10.14 ) +Dilutive EPS $ 20.32 $ ( 5.71 ) $ 1.56 $ ( 10.14 ) +_____________________ +(1) Preferred Stock represents participating securities because they participate in any dividends on shares of Common Stock on a pari passu , pro rata basis. However, Preferred Stock does not participate in undistributed net losses. +13. DERIVATIVE INSTRUMENTS +Natural Gas, Oil and NGL Derivative Instruments +The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars +95 +Table of Contents +Index to Financial Statements +and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods of favorable price movements. +The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its Credit Facility. The Company generally enters into commodity derivative contracts for approximately 50 % to 75 % of its forecasted current year annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 24 months. Gulfport does not enter into commodity derivative contracts for speculative purposes. +The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation. +Fixed price swaps require that the Company receive a fixed price and pay a floating market price to the counterparty for the hedged community. They are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. +The Company has entered into natural gas, crude oil and NGL fixed price swap contracts based off the NYMEX Henry Hub, NYMEX WTI and Mont Belvieu C3 indices. Below is a summary of the Company's open fixed price swap positions as of December 31, 2022. +Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2023 NYMEX Henry Hub 229,973 $ 4.28 +2024 NYMEX Henry Hub 174,973 $ 4.41 +Oil (Bbl/d) ($/Bbl) +2023 NYMEX WTI 3,000 $ 74.47 +NGL (Bbl/d) ($/Bbl) +2023 Mont Belvieu C3 3,000 $ 38.07 +96 +Table of Contents +Index to Financial Statements +Each two-way price costless collar has a set floor and ceiling price for the hedged production. They are settled monthly based on differences between the floor and ceiling prices specified in the contract and the referenced settlement price. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the collar contracts, the Company will cash-settle the difference with the hedge counterparty. When the referenced settlement price is less than the floor price in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the hedged contract volume. Similarly, when the referenced settlement price exceeds the ceiling price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the hedged contract volume. No payment is due from either party if the referenced settlement price is within the range set by the floor and ceiling prices. +The Company has entered into natural gas costless collar contracts based off the NYMEX Henry Hub natural gas index. Below is a summary of the Company's costless collar positions as of December 31, 2022. +Index Daily Volume Weighted Average Floor Price Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) ($/MMBtu) +2023 NYMEX Henry Hub 285,000 $ 2.93 $ 4.78 +2024 NYMEX Henry Hub 90,000 $ 3.67 $ 6.87 +From time to time the Company has sold natural gas call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps. Each sold call option has an established ceiling price. If at the time of settlement the referenced settlement price exceeds the ceiling price, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call options as of December 31, 2022. +Index Daily Volume Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) +2023 NYMEX Henry Hub 407,925 $ 2.90 +2024 NYMEX Henry Hub 202,000 $ 3.33 +2025 NYMEX Henry Hub 33,315 $ 4.65 +In addition, the Company entered into natural gas basis swap positions. These instruments are arrangements that guarantee a fixed price differential to NYMEX Henry Hub from a specified delivery point. The Company receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity. As of December 31, 2022, the Company had the following natural gas basis swap positions open: +Gulfport Pays Gulfport Receives Daily Volume Weighted Average Fixed Spread +Natural Gas (MMBtu/d) ($/MMBtu) +2023 Rex Zone 3 NYMEX Plus Fixed Spread 60,000 $ ( 0.22 ) +2023 NGPL TXOK NYMEX Plus Fixed Spread 20,000 $ ( 0.40 ) +2023 TETCO M2 NYMEX Plus Fixed Spread 40,082 $ ( 1.01 ) +2024 TETCO M2 NYMEX Plus Fixed Spread 9,973 $ ( 1.03 ) +97 +Table of Contents +Index to Financial Statements +Balance Sheet Presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2022 and 2021 (in thousands): +Successor +December 31, 2022 December 31, 2021 +Short-term derivative asset $ 87,508 $ 4,695 +Long-term derivative asset 26,525 18,664 +Short-term derivative liability ( 343,522 ) ( 240,735 ) +Long-term derivative liability ( 118,404 ) ( 184,580 ) +Total commodity derivative position $ ( 347,893 ) $ ( 401,956 ) +Gains and Losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and year ended December 31, 2020 (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Natural gas derivatives - fair value gains (losses) $ 32,797 $ ( 223,512 ) $ ( 123,080 ) $ ( 89,310 ) +Natural gas derivatives - settlement (losses) gains ( 1,002,098 ) ( 300,172 ) ( 3,362 ) 113,075 +Total (losses) gains on natural gas derivatives ( 969,301 ) ( 523,684 ) ( 126,442 ) 23,765 +Oil and condensate derivatives - fair value gains (losses) 6,618 ( 5,128 ) ( 6,126 ) ( 2,952 ) +Oil and condensate derivatives - settlement (losses) gains ( 39,163 ) ( 9,720 ) — 46,462 +Total (losses) gains on oil and condensate derivatives ( 32,545 ) ( 14,848 ) ( 6,126 ) 43,510 +NGL derivatives - fair value gains (losses) 14,648 ( 5,322 ) ( 4,671 ) ( 461 ) +NGL derivatives - settlement losses ( 12,549 ) ( 12,965 ) — ( 142 ) +Total gains (losses) on NGL derivatives 2,099 ( 18,287 ) ( 4,671 ) ( 603 ) +Contingent consideration arrangement - fair value losses — — — ( 1,381 ) +Total (losses) gains on natural gas, oil and NGL derivatives $ ( 999,747 ) $ ( 556,819 ) $ ( 137,239 ) $ 65,291 +98 +Table of Contents +Index to Financial Statements +Offsetting of Derivative Assets and Liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value (in thousands): +Successor +As of December 31, 2022 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 114,033 $ ( 80,345 ) $ 33,688 +Derivative liabilities $ ( 461,926 ) $ 80,345 $ ( 381,581 ) +Successor +As of December 31, 2021 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 23,359 $ ( 20,265 ) $ 3,094 +Derivative liabilities $ ( 425,315 ) $ 20,265 $ ( 405,050 ) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are spread between multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +14. RESTRUCTURING AND LIABILITY MANAGEMENT EXPENSES +In the third quarter of 2020, the Company announced and completed workforce reductions representing approximately 10 % of its headcount. Restructuring charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. Additionally, the Company incurred charges related to financial and legal advisors engaged to assist with the evaluation of a range of liability management alternatives during 2020 prior to the filing of the Chapter 11 Cases. +In the third quarter of 2021, the Company announced and completed a workforce reduction representing approximately 3 % of its headcount. Charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. +99 +Table of Contents +Index to Financial Statements +The following table summarizes the expenses related to the Company's reductions in workforce as well as expenses incurred related to liability management efforts in the accompanying consolidated statements of operations for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and the year ended December 31, 2020 (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Reduction in workforce $ — $ 2,858 $ — $ 1,460 +Liability management — — — 29,387 +Total restructuring and liability management expenses $ — $ 2,858 $ — $ 30,847 +15. INVESTMENTS +The Company had no investments accounted for by the equity method as of December 31, 2022 and 2021. The following table summarizes the Company's equity investments for the Predecessor Period and the year ended December 31, 2020 (in thousands): +Carrying Value Loss from Equity Method Investments +Predecessor Predecessor +December 31, 2020 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Investment in Grizzly Oil Sands ULC $ 24,816 $ 342 $ 377 +Investment in Mammoth Energy Services, Inc. — — 10,646 +Other equity investments — — 32 +Total equity investments $ 24,816 $ 342 $ 11,055 +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings, owns an approximate 24.5 % interest in Grizzly, a Canadian unlimited liability company. As of December 31, 2022, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company has no t paid any cash calls since its decision to cease funding further capital calls in 2019. Grizzly’s functional currency is the Canadian dollar. +Effective as of the Emergence Date, the Company evaluated its investment in Grizzly and determined that the Company no longer has the ability to exercise significant influence over operating and financial policies of Grizzly. As such, the equity method of accounting for its investment was no longer applicable. As a result, the Company will use its previous carrying value of zero (as discussed below) as its initial basis and will subsequently measure at fair value while recording any changes in fair value in earnings. +As discussed in Note 3 , the Company reduced the carrying value of its investment in Grizzly to zero upon the Emergence Date. The reduction in valuation was based upon the Company's new management's assessment of the investment and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls, which will lead to further dilution of its equity ownership interest. +Mammoth Energy Services, Inc. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims. The Company's investment carrying value was reduced to zero in the first quarter of 2020 due to the Company's share of cumulative net loss and impairments and the carrying value remained at zero through the Emergence Date. +100 +Table of Contents +Index to Financial Statements +16. FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +Financial assets and liabilities +The following tables summarize the Company’s financial and non-financial assets and liabilities by valuation level as of December 31, 2022 and 2021: +Successor +December 31, 2022 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments +$ — $ 114,033 $ — +Contingent consideration arrangement $ — $ — $ 4,900 +Total assets $ — $ 114,033 $ 4,900 +Liabilities: +Derivative Instruments +$ — $ 461,926 $ — +Successor +December 31, 2021 +Level 1 Level 2 Level 3 +(In thousands) +Assets: +Derivative Instruments $ — $ 23,359 $ — +Contingent consideration arrangement $ — $ — $ 5,800 +Total assets $ — $ 23,359 $ 5,800 +Liabilities: +Derivative Instruments $ — $ 425,315 $ — +The Company estimates the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the +101 +Table of Contents +Index to Financial Statements +marketplace throughout the full term of the instrument and can be supported by observable data. The Company adjusted the fair value of its derivative instruments as a fresh start adjustment at the Emergence Date as a result of changes in the Company's credit adjustment to reflect its new credit standing at emergence. +In January 2020, the Company closed on the sale of its SCOOP water infrastructure assets to a third-party water service provider. The sale included a contingent consideration arrangement, where the company has an opportunity to earn additional incentive payments over the next 13 years, subject to the Company's ability to meet certain thresholds which will be driven by, among other things, the Company's future development program and water production levels. As of December 31, 2022, the fair value of the contingent consideration was $ 4.9 million, of which $ 0.6 million is included in prepaid expenses and other assets and $ 4.3 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. The Company recognized a loss of $ 0.4 million, gain of $ 0.4 million and a nominal gain for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period, respectively, with respect to this contingent consideration arrangement. These fair value changes are included in other expense (income) in the accompanying consolidated statements of operations. +Non-financial assets and liabilities +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 4 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred were $ 0.1 million, $ 0.2 million and $ 0.5 million for the year ended December 31, 2022, Prior Successor Period and Prior Predecessor Period, respectively. +Fair value of other financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's Credit Facility is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +Chapter 11 Emergence and Fresh Start Accounting +On the Emergence Date, the Company adopted fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh start accounting, the Company’s assets and liabilities were recorded at their fair values as of May 17, 2021. The inputs utilized in the valuation of the Company’s most significant asset, its oil and natural gas properties and related assets, included mostly unobservable inputs which fall within Level 3 of the fair value hierarchy. Such inputs included estimates of future oil and gas production from the Company’s reserve reports, commodity prices based on forward strip price curves (adjusted for basis differentials) as of May 17, 2021, operating and development costs, expected future development plans for the properties and discount rates based on a weighted-average cost of capital computation. The Company also recorded its asset retirement obligations at fair value as a result of fresh start accounting. The inputs utilized in valuing the asset retirement obligations were mostly Level 3 unobservable inputs, including estimated economic lives of oil and natural gas wells as of the Emergence Date, anticipated future plugging and abandonment costs and an appropriate credit-adjusted risk free rate to discount such costs. Refer to Note 3 for a detailed discussion of the fair value approaches used by the Company. +102 +Table of Contents +Index to Financial Statements +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. As of December 31, 2022 and 2021, the Company held no shares of Mammoth Energy's outstanding common stock. As of December 31, 2020, the Company owned approximately 21.5 % of Mammoth Energy's outstanding common stock. There were no material amounts of services provided by Mammoth Energy that were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2022 and 2021 and $ 0.6 million for the year ended December 31, 2020. +18. COMMITMENTS +Firm Transportation and Gathering Agreements +The Company has contractual commitments with midstream and pipeline companies for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing the cost of these commitments. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, costs associated with utilized future firm transportation and gathering agreements are reflected in the Company's estimates of proved reserves. +A summary of these commitments at December 31, 2022, are set forth in the table below, excluding contracts in the process of being rejected as discussed in the Litigation and Regulatory Proceedings section in Note 19 (in thousands): +2023 $ 231,123 +2024 220,790 +2025 139,788 +2026 136,317 +2027 138,485 +Thereafter 751,882 +Total $ 1,618,385 +Other Operational Commitments +The Company has entered into various contractual commitments to purchase inventory and other material to be used in future activities during the year ended December 31, 2022. The Company's commitment to purchase these materials spans 2023 and 2024, with approximately $ 52.7 million in commitments in 2023 and $ 31.2 million for 2024. +Future Sales Commitments +The Company has entered into various firm sales contracts with third parties to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's proved reserves have generally been sufficient to satisfy its delivery commitments during the three most recent years, and it expects such reserves will continue to be the primary means of fulfilling its future commitments. However, where the Company's proved reserves are not sufficient to satisfy its delivery commitments, it can and may use spot market purchases of third-party production to satisfy these commitments. The Company's commitments as of December 31, 2022, were 20,000 MMBtu per day and extend through March 2024. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) plan under which eligible employees may contribute a portion of their total compensation up to the maximum pre-tax threshold through salary deferrals. The plan is considered a Safe Harbor 401(k) and provides a company +103 +Table of Contents +Index to Financial Statements +match on 100 % of salary deferrals that do not exceed 4 % of compensation in addition to a match of 50 % of salary deferrals that exceed 4 % but do not exceed 6 % of compensation. The Company may also make discretionary elective contributions to the plan. Effective January 1, 2023, the Company increased the match for all employees on 100 % of salary deferrals that do not exceed 6 % of compensation. The following table summarizes the contributions expenses related to this plan for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and the year ended December 31, 2020 (in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Contributions expense $ 1,386 $ 683 $ 721 $ 2,600 +19. CONTINGENCIES +The Company is involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. In accordance with ASC Topic 450, Contingencies , an accrual is recorded for a material loss contingency when its occurrence is probable and damages are reasonably estimable based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. +Litigation and Regulatory Proceedings +As part of its Chapter 11 Cases and restructuring efforts as discussed in Note 2 , the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation ("TC") and Rover Pipeline LLC ("Rover") (jointly, the “Pending Motions to Reject”). During the third quarter of 2021, Gulfport finalized a settlement agreement with TC that was approved by the Bankruptcy Court on September 21, 2021. Pursuant to the settlement agreement, Gulfport and TC agreed that the firm transportation contracts between Gulfport and TC would be rejected without any further payment or obligation by Gulfport or TC, and TC assigned its damages claims from such rejection to Gulfport. In exchange, Gulfport agreed to make a payment of $ 43.8 million in cash to TC. The $ 43.8 million was paid to TC on October 7, 2021. Gulfport expects to receive distributions for a significant portion of such amounts through future distributions with respect to the assigned claims pursuant to the terms of the Plan that became effective in May 2021. Any future distributions will be recognized once received by Gulfport. In February 2022, Gulfport received an initial distribution of $ 11.5 million from the above-mentioned claim, which is included in Other, net in the accompanying consolidated statements of operations. +Gulfport finalized a settlement agreement with Rover that was approved by the Bankruptcy Court on February 21, 2023. Pursuant to the settlement agreement, Gulfport and Rover agreed that the firm transportation contracts between Gulfport and Rover would be rejected. The Bankruptcy Court Order provided Rover will: (a) receive an allowed $ 85.9 million Class 4A General Unsecured Claim (the “Rover Unsecured Claim”), (b) receive an administrative claim of $ 1.0 million payable by Gulfport, and (c) draw the full amount of its credit assurance. Gulfport paid the $ 1.0 million administrative claim, and has no further obligations to Rover; the Rover Unsecured Claim will receive distributions under the Plan payable from the liquidating trust, not Gulfport. On February 24, 2023, Gulfport received a $ 17.8 million interim distribution for its TC claim. The timing and amount of any future distributions to Gulfport are not certain, and the total amount received will be impacted by the liquidating trust’s distributions and resolution of other remaining bankruptcy claims. +The Company has been named as a defendant in three separate complaints, two filed by Siltstone Resources, LLC, and the third filed by the Ohio Public Works Commission (OPWC) (together, the "Complaints"). The Complaints all arise from restrictive covenants in favor of OPWC generally prohibiting any transfer and any use inconsistent with a green park space. OPWC filed crossclaims against Gulfport in the Siltstone matters alleging that the transfer of the mineral rights and the development of oil and gas on the property violated these restrictive covenants. On June 19, 2018, October 25, 2019, and March 15, 2019, each trial court in the Complaints entered judgment in favor of the Company and other defendants, finding the restrictive covenants only applied to the surface estate. OPWC appealed each judgement to the respective Ohio Courts of Appeal where the trial court decisions were reversed in favor of OPWC. The Company and certain other parties to the Complaints appealed the appellate court decisions to the Ohio Supreme Court. On February 23, 2022, the Ohio Supreme Court affirmed the first appellate decision and remanded the case back to the trial court. On December 27, 2022, the Ohio Supreme +104 +Table of Contents +Index to Financial Statements +Court affirmed the other two complaints and remanded the matters back to the trial court. OPWC is seeking both injunctive relief to enforce the restrictive covenants and equitable relief. Liquidated damages were successfully discharged in the Company’s Chapter 11 proceedings through May 17, 2021. The scope and consequence of any injunctive relief that may be granted is not certain, but may have an adverse impact on the Company's operations associated with the leases subject to the Complaints. +The Company, along with other oil and gas companies, have been named as a defendant in J&R Passmore, LLC, individually and on behalf of all others similarly situated, in the United States District Court for the Southern District of Ohio on December 6, 2018. Plaintiffs assert their respective leases are limited to the Marcellus and Utica shale geological formations and allege that Defendants have willfully trespassed and illegally produced oil, natural gas, and other hydrocarbon products beyond these respective formations. Plaintiffs seek the full value of any production from below the Marcellus and Utica shale formations, unspecified damages from the diminution of value to their mineral estate, unspecified punitive damages, and the payment of reasonable attorney fees, legal expenses, and interest. On April 27, 2021, the Bankruptcy Court for the Southern District of Texas approved a settlement agreement in which the plaintiffs fully released the Company from all claims for amounts allegedly owed to the plaintiffs through the effective date of the Company’s Chapter 11 plan, which occurred on May 17, 2021. The plaintiffs are continuing to pursue alleged damages after May 17, 2021. +Business Operations +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. Gulfport and its subsidiaries have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. The Company conducts periodic reviews, on a company-wide basis, to assess changes in their environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, they may, among other things, exclude a property from the transaction, require the seller to remediate the property to their satisfaction in an acquisition or agree to assume liability for the remediation of the property. +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2022, Gulfport held no cash in excess of insured limits in these banks. +During the year ended December 31, 2022, two customers accounted for approximately 31 % of the Company's total sales. During the Prior Successor Period, two customers accounted for approximately 30 % of the Company's total sales. During the Prior Predecessor Period, three customers accounted for approximately 37 % of the Company's total sales. During the year ended December 31, 2020, one customer accounted for approximately 12 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +105 +Table of Contents +Index to Financial Statements +20. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company is making the following supplemental disclosures of oil and gas activities, in accordance with the full cost method of accounting for its oil and gas exploration and development activities. The Company owns a 24.5 % interest in Grizzly. However, Grizzly did not have any material activity or proved reserves in the years presented below. As such, amounts related to Grizzly have been omitted below. +The following table provides historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities (in thousands) +Successor +Year Ended December 31, 2022 Year Ended December 31, 2021 +Proved properties $ 2,418,666 $ 1,917,833 +Unproved properties 178,472 211,007 +Total oil and natural gas properties 2,597,138 2,128,840 +Accumulated depletion, amortization and impairment ( 543,780 ) ( 277,331 ) +Net capitalized costs $ 2,053,358 $ 1,851,509 +Costs Incurred in Oil and Gas Property Acquisition and Development Activities (in thousands) +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Acquisition $ 29,675 $ 13,411 $ 3,922 $ 15,260 +Development 441,458 191,193 112,986 276,622 +Exploratory — — — — +Total $ 471,133 $ 204,604 $ 116,908 $ 291,882 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company did not capitalize interest expense for the year ended December 31, 2022 or Prior Predecessor Period, and capitalized $ 0.2 million and $ 0.9 million during the Prior Successor Period and year ended December 31, 2020, respectively, based on the Company's weighted average cost of borrowings used to finance expenditures. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 20.2 million, $ 11.9 million, $ 8.0 million and $ 25.0 million during the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and year ended December 31, 2020, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +106 +Table of Contents +Index to Financial Statements +Results of Operations for Producing Activities (in thousands) +The following table sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Revenues $ 2,330,859 $ 1,092,584 $ 410,276 $ 801,251 +Production costs ( 482,175 ) ( 274,428 ) ( 192,959 ) ( 537,609 ) +Depletion ( 266,449 ) ( 159,518 ) ( 60,831 ) ( 229,702 ) +Impairment — ( 117,813 ) — ( 1,357,099 ) +Income tax benefit (expense) — 39 7,968 ( 7,290 ) +Results of operations from producing activities $ 1,582,235 $ 540,864 $ 164,454 $ ( 1,330,449 ) +Depletion per Mcf of gas equivalent (Mcfe) $ 0.74 $ 0.69 $ 0.45 $ 0.61 +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2022, 2021 and 2020 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2022, 2021 and 2020, in accordance with guidelines of the SEC applicable to reserves estimates. The prices used for the 2022 reserve report are $ 94.14 per barrel of oil, $ 6.36 per MMbtu and $ 47.86 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2021 and 2020 for reserve report purposes are $ 66.55 per barrel, $ 3.60 per MMbtu and $ 31.90 per barrel for NGL and $ 39.54 per barrel, $ 1.99 per MMbtu and $ 15.40 per barrel for NGL, respectively. +107 +Table of Contents +Index to Financial Statements +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +Oil (MMBbl) Natural Gas (Bcf) NGL (MMBbl) Natural Gas Equivalent (Bcfe) +Proved Reserves +December 31, 2019 (Predecessor) 18 4,048 62 4,528 +Purchases of reserves — — — — +Extensions and discoveries 1 216 3 240 +Sales of reserves — ( 74 ) — ( 75 ) +Revisions of prior reserve estimates ( 4 ) ( 1,564 ) ( 23 ) ( 1,725 ) +Current production ( 2 ) ( 345 ) ( 4 ) ( 380 ) +December 31, 2020 (Predecessor) 13 2,281 38 2,588 +Purchases of reserves — — — — +Extensions and discoveries 2 617 11 695 +Sales of reserves — — — — +Revisions of prior reserve estimates 2 913 9 982 +Current production ( 2 ) ( 333 ) ( 4 ) ( 366 ) +December 31, 2021 (Successor) 16 3,478 54 3,898 +Purchases of reserves — — — — +Extensions and discoveries 3 391 5 439 +Sales of reserves — — — — +Revisions of prior reserve estimates — 66 — 70 +Current production ( 2 ) ( 322 ) ( 4 ) ( 359 ) +December 31, 2022 (Successor) 18 3,612 54 4,048 +Proved developed reserves +December 31, 2019 (Predecessor) 8 1,757 30 1,984 +December 31, 2020 (Predecessor) 7 1,358 22 1,527 +December 31, 2021 (Successor) 8 1,928 31 2,165 +December 31, 2022 (Successor) 9 2,034 34 2,295 +Proved undeveloped reserves +December 31, 2019 (Predecessor) 10 2,291 32 2,544 +December 31, 2020 (Predecessor) 7 923 16 1,061 +December 31, 2021 (Successor) 8 1,550 22 1,733 +December 31, 2022 (Successor) 9 1,578 20 1,752 +Totals may not sum or recalculate due to rounding. +In 2022, the Company experienced extensions of 438.9 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreages. Of the total extensions, 295.9 Bcfe was attributable to the addition of 36 PUD locations in the Utica, 72.1 Bcfe was attributable to the addition of 8 PUD locations in the Marcellus and 65.4 Bcfe was attributable to the addition of 5 PUD locations in the SCOOP. The 8 Marcellus PUD locations added during 2022 have been grouped into the Utica for this report. The Company experienced total upward revisions of approximately 69.7 Bcfe in estimated proved reserves, of which 47.7 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 3.60 per MMBtu for 2021 to $ 6.36 per MMBtu for 2022, the 12-month average price for NGL increased from $ 31.90 per barrel for 2021 to $ 47.86 per barrel for 2022, and the 12-month average price for crude oil increased from $ 66.55 per barrel for 2021 to $ 94.14 per barrel for 2022. Upward revisions of 144.5 Bcfe were a result of an increase in working interest and net revenue interests as a result of our successful leasing efforts through 2022. Downward revisions of 95.6 Bcfe were experienced as a result of the SEC five-year development window, which removed 4 PUD locations in the Utica and 5 PUD locations in the SCOOP. The development plan changes reflect our commitment to optimizing the long-term development schedule to maximize cash flow and overall economic returns. A small downward revision of 26.9 Bcfe was primarily a result of performance changes to several wells and changes in PUD location forecasts. +108 +Table of Contents +Index to Financial Statements +In 2021, the Company experienced extensions of 694.6 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreage. Of the total extensions, 352.2 Bcfe was attributable to the addition of 29 PUD locations in the Utica, 342.2 Bcfe was attributable to the addition of 34 PUD locations in the SCOOP. The Company experienced total upward revisions of approximately 982.2 Bcfe in estimated proved reserves, of which 889.2 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 1.99 per MMBtu for 2020 to $ 3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $ 15.40 per barrel for 2020 to $ 31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $ 39.54 per barrel for 2020 to $ 66.55 per barrel for 2021. Upward revisions of 157.6 Bcfe were experienced from a combination of well performance, operating and development cost improvements and working interest changes. This was partially offset by a downward revision of 64.6 Bcfe, which was primarily a result of the exclusion of 4 PUD locations in the Utica when changes in the Company's schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Finally, during 2021, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +In 2020, the Company experienced extensions of 239.8 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreage. Of the total extensions, 150.6 Bcfe was attributable to the addition of 14 PUD locations in the Utica, 87.8 Bcfe was attributable to the addition of eight PUD locations in the SCOOP. The Company experienced total downward revisions of approximately 1.7 Tcfe in estimated proved reserves, of which 1,268.4 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2020 and the 12-month average price for natural gas decreased from $ 2.58 per MMBtu for 2019 to $ 1.99 per MMBtu for 2020, the 12-month average price for NGL decreased from $ 21.25 per barrel for 2019 to $ 15.40 per barrel for 2020, and the 12-month average price for crude oil decreased from $ 55.85 per barrel for 2019 to $ 39.54 per barrel for 2020. An additional 720.3 Bcfe in downward revisions was a result of the exclusion of 48 PUD locations in the Utica and 31 PUD locations in the SCOOP, which was a result of changes in the Company's schedule that moved development of these PUD locations beyond five years of initial booking. The development plan change reflected the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Positive revisions of 263.8 Bcfe were experienced from a combination of operating and development cost improvements, well performance and working interest changes. +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2022, 2021 and 2020 using an unweighted average first-of-the-month price for the period January through December 31, 2022, 2021 and 2020. The average gas prices used were $ 6.36 , $ 3.60 and $ 1.99 for the periods ended December 31, 2022, 2021 and 2020, respectively. The average oil prices used were $ 94.14 , $ 66.55 and $ 39.54 , for the periods ended December 31, 2022, 2021 and 2020, respectively. The average NGL prices used were $ 47.86 , $ 31.90 and $ 15.40 , for the periods ended December 31, 2022, 2021 and 2020, respectively. +Year ended operating expenses, development costs and appropriate statutory income tax rates, with consideration of future tax rates, were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties. The estimated future costs to develop proved developed non-producing and proved undeveloped reserves are approximately $ 396.7 million in 2023, $ 315.6 million in 2024 and $ 243.4 million in 2025. Estimated future development costs include capital spending on major development projects. Gulfport believes cash flow from its operating activities, cash on hand and borrowings under its Credit Facility will be sufficient to cover these estimated future development costs. +The assumptions used to derive the standardized measure of discounted future net cash flows are those required by accounting standards and do not necessarily reflect the Company's expectations. The information may be useful for certain comparative purposes but should not be solely relied upon in evaluating Gulfport or its performance. Furthermore, information contained in the following table may not represent realistic assessments of future cash flows, nor should the standardized measure of discounted future net cash flows be viewed as representative of the current value of the Company's reserves. Management believes that the following factors should be considered when reviewing the information below: +• Future commodity prices received for selling the Company's net production will likely differ from those required to be used in these calculations. +• Future operating and capital costs will likely differ from those required to be used in these calculations and do not reflect cost savings of Company owned midstream operations on future operating expenses. +109 +Table of Contents +Index to Financial Statements +• Future market conditions, government regulations, reservoir conditions and risks inherent in the production of oil and condensate and gas may cause production rates in future years to vary significantly from those rates used in the calculations. +• Future revenues may be subject to different production, severance and property taxation rates. +• The selection of a 10% discount rate is arbitrary and may not be a reasonable factor in adjusting for future economic conditions or in considering the risk that is part of realizing future net cash flows from the reserves. +The following table summarizes estimated future net cash flows from natural gas and crude oil reserves (in millions): +Successor Predecessor +Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 +Future cash flows $ 26,677 $ 14,938 $ 4,079 +Future development and abandonment costs ( 1,588 ) ( 1,141 ) ( 652 ) +Future production costs ( 5,872 ) ( 5,227 ) ( 2,325 ) +Future production taxes ( 553 ) ( 336 ) ( 137 ) +Future income taxes ( 2,609 ) ( 437 ) — +Future net cash flows 16,055 7,797 965 +10% discount to reflect timing of cash flows ( 7,776 ) ( 3,659 ) ( 425 ) +Standardized measure of discounted future net cash flows $ 8,279 $ 4,138 $ 540 +Future development and abandonment costs include not only development costs but also all future costs to settle asset retirement obligations. The following table summarizes the total of all future costs to settle asset retirement obligations that are included in future development and abandonment costs above (in millions): +Successor Predecessor +Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 +Future asset retirement obligations $ 222 $ 205 $ 120 +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The principal source of change in the standardized measure of discounted future net cash flows relating to proved reserves is presented in the table below (in millions): +Successor Predecessor +Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 +Sales and transfers of oil and gas produced, net of production costs $ ( 1,849 ) $ ( 1,035 ) $ ( 264 ) +Net changes in prices, production costs, and development costs 5,130 2,596 ( 954 ) +Extensions and discoveries 941 639 38 +Previously estimated development costs incurred during the period 204 149 215 +Revisions of previous quantity estimates, less related production costs 154 858 ( 255 ) +Sales of oil and gas reserves in place ( 1 ) ( 1 ) ( 6 ) +Accretion of discount 414 54 170 +Net changes in income taxes ( 1,067 ) ( 178 ) — +Change in production rates and other 215 516 ( 109 ) +Total change in standardized measure of discounted future net cash flows $ 4,141 $ 3,598 $ ( 1,165 ) +110 +Table of Contents +Index to Financial Statements +21. SUBSEQUENT EVENTS +Natural gas, Oil and NGL Derivative Instruments +Subsequent to December 31, 2022 and as of February 23, 2023, the Company entered into the following derivative contracts: +Period Type of Derivative Instrument Index Daily Volume (MMBtu) Weighted +Average Price +2023 Basis Swaps TETCO M2 76,219 $( 0.85 ) +2023 Basis Swaps Rex Zone 3 59,452 $( 0.22 ) +2023 Basis Swaps NGPL TXOK 42,685 $( 0.34 ) +2024 Swaps NYMEX Henry Hub 30,000 $ 3.90 +2024 Costless Collars NYMEX Henry Hub 60,000 +$ 3.17 / $ 3.96 +Additionally, subsequent to year end, the Company restructured a portion of its natural gas sold call position by buying back a portion of its 2023 natural gas sold call position, and selling additional natural gas calls for 2023 and 2025. The following table summarizes these transactions: +Period Type of Derivative Instrument Index Daily Volume (MMBtu) Weighted +Average Price +2023 Purchased Gas Call Options NYMEX Henry Hub 134,137 $ 2.90 +2023 Sold Gas Call Options NYMEX Henry Hub 134,137 $ 3.70 +2025 Sold Gas Call Options NYMEX Henry Hub 160,000 $ 6.04 +Expanded Common Stock Repurchase Program +On February 27, 2023, the Company's Board of Directors approved an increase to the authorized common stock repurchase amounts under its Repurchase Program from $ 300 million to $ 400 million. The additional $ 100 million authorization expires on March 31, 2024. +111 +Table of Contents +Index to Financial Statements +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2022, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended December 31, 2022, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2022. +112 +Table of Contents +Index to Financial Statements +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2022 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2022, as stated in their accompanying report. +/s/ John Reinhart /s/ William J. Buese +Name: John Reinhart Name: William J. Buese +Title: Chief Executive Officer Title: Chief Financial Officer +113 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated March 1, 2023 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 1, 2023 +114 +Table of Contents +Index to Financial Statements +ITEM 9B. OTHER INFORMATION +The disclosures set forth below are provided in this Part II, Item 9B in lieu of separate disclosure under Items 5.02(b)-(c) and (e) of Form 8-K. +Termination and Appointment of Senior Vice President – Operations +On March 1, 2023, the Board of Directors appointed Matthew Rucker as Senior Vice President – Operations of the Company, effective as of March 1, 2023 (the “Effective Date”). Mr. Rucker succeeds Robert J. Moses, who was terminated as Senior Vice President – Operations, effective as of the Effective Date. +Mr. Rucker previously served as VP – Production Operations of Javelin Energy Partners since August 2022 and Vice President of Business Development for Javelin from July 2022 to August 2022. Prior to joining Javelin, Mr. Rucker served as the Executive Vice President, Chief Operating Officer of Montage Resources Corporation from June 2020 to November 2020 and Executive Vice President of Montage from the consummation of its business combination transaction with Blue Ridge Mountain Resources (“Blue Ridge”) to June 2020. He previously served as Vice President, Resource Planning and Development of Blue Ridge since November 2016. Prior to joining Blue Ridge, Mr. Rucker served as a Production Superintendent for Chesapeake Energy Corporation from January 2014 to October 2016, overseeing Chesapeake’s Utica Shale production. As a member of Chesapeake’s Eastern Division leadership team, Mr. Rucker focused on the safe and efficient optimization of production in the Utica Shale and led an operating team of over 45 employees. During his service at Chesapeake, Mr. Rucker held several engineering positions in the Marcellus and Utica Shale Asset Teams within reservoir, primarily focused on strategic joint ventures, divestitures, acquisitions and resource development planning. Mr. Rucker graduated with a Bachelor of Science degree in Petroleum Engineering from Marietta College in 2007, where he continues to serve as Chair of the Marietta College Industry Advisory Council. He is a member of the Society of Petroleum Engineers. +There are no family relationships between Mr. Rucker and any director or executive officer of the Company that are required to be disclosed pursuant to Item 401(d) of Regulation S-K, there are no undertakings between Mr. Rucker and any other person pursuant to which he was selected to serve as an officer of the Company, and there are no transactions between the Company and Mr. Rucker that would require disclosure under Item 404(a) of Regulation S-K. +Rucker Employment Agreement and Equity Awards +In connection with Mr. Rucker’s appointment as Senior Vice President – Operations of the Company, he and the Company entered into an Employment Agreement (the “Rucker Employment Agreement”), effective as of the Effective Date. The Rucker Employment Agreement provides for, among other things, (i) an initial employment term ending on December 31, 2026, with one-year automatic renewals unless either party provides at least 90 days’ prior written notice of its intention to not extend the term; provided, that if a Change in Control (as defined in the Gulfport Energy Corporation 2021 Stock Incentive Plan, as may be amended from time to time (the “Plan”)) occurs, the employment term will be extended to the later of the original expiration date of the term and the expiration of the 24 month period following the effective date of such Change in Control, (ii) an annualized base salary of $390,000, (iii) eligibility to receive an annual performance-based cash bonus, with the target value for fiscal year 2023 equal to 75% of his base salary, and (iv) eligibility to receive annual grants of incentive equity awards pursuant to the Plan, as determined in the sole discretion of the Company’s Compensation Committee. +Under the Rucker Employment Agreement, if Mr. Rucker’s employment is terminated by the Company without Cause or if Mr. Rucker resigns for Good Reason (each as defined in the Rucker Employment Agreement), Mr. Rucker will receive, subject to his execution and non-revocation of a release of claims against the Company and its affiliates and his continued compliance with restrictive covenants, (i) a cash severance payment equal to one times the sum of his then-current base salary plus his target annual bonus for the fiscal year in which such termination occurs (which is increased to two times the sum of base salary and target annual bonus in the event such a termination occurs within 24 months following a Change in Control), (ii) payment of the pro rata portion of his target annual bonus for the fiscal year in which such termination occurs, and (iii) subject to Mr. Rucker’s timely election of continuation coverage under COBRA, a cash payment equal to his aggregate monthly COBRA premiums for the 12 month period following such termination date, to be used by Mr. Rucker to subsidize his COBRA premiums (which is increased to 18 months in the event such a termination occurs within 24 months following a Change in Control), in each case, payable in a lump sum on the 60th date following such termination date. +115 +Table of Contents +Index to Financial Statements +The Employment Agreement also provides for the following restrictive covenants: (i) non-solicitation of customers, employees and independent contractors during employment and for 12 months following termination, (ii) perpetual non-disclosure of confidential information and trade secrets, and (iii) assignment of intellectual property. +The foregoing description of the terms of the Rucker Employment Agreement is not complete and is qualified in its entirety by reference to the full text of the form Employment Agreement, a copy of which is attached hereto as Exhibit 10.19. +In addition, in connection with Mr. Rucker’s appointment as Senior Vice President – Operations of the Company, subject to approval by the Company’s Compensation Committee and contingent upon Mr. Rucker commencing employment with the Company on March 1, 2023, Mr. Rucker will be granted an initial equity award under the Plan, with a target value equal to approximately $1,350,000. Such award will be granted as follows: (i) 40% in the form of time-based restricted stock units, granted pursuant to the Form of Employee Restricted Stock Unit Award Agreement, which was filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2021, filed on August 9, 2021, and incorporated by reference herein (the “Form RSU Award Agreement”), and (ii) 60% in the form of performance-based restricted stock units, granted pursuant to the Form of Performance-Based Restricted Stock Unit Award Agreement, which was filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2021, filed on August 9, 2021, and incorporated by reference herein (the “Form PRSU Award Agreement”). +Moses Termination +Pursuant to the terms of his existing employment agreement and in connection with the termination of his employment, Mr. Moses will receive (i) a payment of one times his current base salary and annual bonus in an amount of $587,200, (ii) a payment of the pro rata portion of his annual bonus for 2023 in an amount of $36,198, (iii) pro rata vesting of all his unvested equity awards, (iv) immediate vesting of any Company matching or other contributions to the Company’s non-qualified deferred compensation plans, (v) lump sum payment of any PTO pay accrued but unused through the termination date and (vi) a lump sum payment equal to his monthly COBRA premium for a 12-month period, subject, in the case of items (i)-(iv) above to his execution of and compliance with a customary waiver and release agreement. +Amended & Restated Executive Employment Agreements and Equity Awards +On March 1, 2023, the Company entered into amended and restated employment agreements with each of Patrick K. Craine, the Company’s Chief Legal and Administrative Officer and Corporate Secretary, Michael J. Sluiter, the Company’s Senior Vice President of Reservoir Engineering, and Lester Zitkus, the Company’s Senior Vice President of Land (collectively, as amended and restated, the “Employment Agreements”). The terms of the Employment Agreements are substantially similar to the Form Employment Agreement, except that: +• Mr. Craine will (i) receive an annualized base salary of $485,000, (ii) be eligible to receive an annual performance-based cash bonus, with the target value for fiscal year 2023 equal to 90% of his base salary, and (iii) be eligible to receive annual grants of incentive equity awards pursuant to the Plan with a target value of approximately $1,500,000, as determined in the sole discretion of the Company’s Compensation Committee. +• Mr. Sluiter will (i) receive an annualized base salary of $390,000, (ii) be eligible to receive an annual performance-based cash bonus, with the target value for fiscal year 2023 equal to 75% of his base salary, and (iii) be eligible to receive annual grants of incentive equity awards pursuant to the Plan with a target value of approximately $1,250,000, as determined in the sole discretion of the Company’s Compensation Committee. +• Mr. Zitkus will (i) receive an annualized base salary of $360,000, (ii) be eligible to receive an annual performance-based cash bonus, with the target value for fiscal year 2023 equal to 60% of his base salary, and (iii) be eligible to receive annual grants of incentive equity awards pursuant to the Plan with a target value of approximately $600,000, as determined in the sole discretion of the Company’s Compensation Committee. +The awards granted to Mr. Craine, Mr. Sluiter and Mr. Zitkus will be granted as follows: (i) 40% in the form of time-based restricted stock units, granted pursuant to the Form RSU Award Agreement and (ii) 60% in the form of performance-based restricted stock units, granted pursuant to the Form PRSU Award Agreement. +The foregoing description of the Employment Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the form Employment Agreement, which is filed as Exhibit 10.19 to this Report. +116 +Table of Contents +Index to Financial Statements +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than 120 days after the close of our fiscal year ended December 31, 2022 (the 2023 Proxy Statement). +ITEM 11. EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2023 Proxy Statement. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2023 Proxy Statement. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2023 Proxy Statement. +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2023 Proxy Statement. +117 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. Financial Statement Schedules. No financial statement schedules are applicable or required. +3. Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith +2.1 +Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and its Debtor Subsidiaries. +8-K 001-19514 2.2 4/29/2021 +3.1 +Amended and Restated Certificate of Incorporation of Gulfport Energy Corporation. +8-K 001-19514 3.1 5/17/2021 +3.2 +Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K 001-19514 3.2 5/17/2021 +4.1 +1145 Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.1 5/17/2021 +4.2 +4(a)(2) Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.2 5/17/2021 +4.3 +Description of Securities Registered Pursuant to Section 12 of the Exchange Act. +X +10.1+ +Gulfport Energy Corporation 2021 Stock Incentive Plan. +8-K 001-19514 10.6 5/17/2021 +10.2+ +Form of Employee Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.7 8/9/2021 +10.3+ +Form of Director Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.8 8/9/2021 +10.4+ +Form of Performance-Based Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.9 8/9/2021 +10.5+ +Form of Indemnification Agreement. +S-4 333-199905 10.1 11/6/2014 +10.6+ +CEO Agreement Amendment by and among Timothy Cutt and Gulfport, effective as of September 2, 2021. +8-K 001-19514 10.1 9/7/2021 +10.7+ +Employment Agreement by and among William Buese and Gulfport, effective as of May 17, 2021. +8-K 001-19514 10.5 5/17/2021 +118 +Table of Contents +Index to Financial Statements +10.8+ +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Patrick K. Craine. +10-Q 000-19514 10.5 8/2/2019 +10.9+ +Employment Agreement dated November 13, 2020, by and between the Company and Michael Sluiter. +8-K 001-19514 10.4 11/16/2020 +10.10+ +Employment Agreement between Gulfport Energy Corporation and Timothy Cutt, effective April 29, 2022. +10-Q 001-19514 10.2 5/4/2022 +10.11+ +Employment Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023. +8-K 001-19514 10.1 1/24/2023 +10.12+ +Indemnification Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023 . +8-K 001-19514 10.2 1/24/2023 +10.13+ +Transition and Services Agreement, by and between Gulfport Energy Corporation and Timothy Cutt, effective February 1, 2023. +8-K 001-19514 10.3 1/24/2023 +10.14 +Cooperation Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and Silver Point Capital, L.P. +8-K 001-19514 10.3 5/17/2021 +10.15 +Registration Rights Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and the holders party thereto. +8-K 001-19514 10.2 5/17/2021 +10.16* +Third Amended and Restated Credit Agreement, dated as of October 14, 2021, by and among Gulfport Energy Corporation, as holdings, Gulfport Energy Operating Corporation, as the borrower, JPMorgan Chase Bank, N.A., the lenders party thereto, and the guarantors party thereto. +8-K 001-19514 10.1 10/14/2021 +10.17 +Borrowing Base Redetermination Agreement and First Amendment to Credit Agreement, dated as of May 2, 2022. +10-Q 001-19514 10.1 5/4/2022 +10.18 +Borrowing Base Reaffirmation Agreement and Second Amendment to Credit Agreement, dated as of October 31, 2022. +10-Q 001-19514 10.1 11/2/2022 +10.19+ +Form of Employment Agreement +X +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Netherland, Sewell & Associates, Inc. +X +23.2 +Consent of Grant Thornton LLP. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +119 +Table of Contents +Index to Financial Statements +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS Inline XBRL Instance Document. X +101.SCH Inline XBRL Taxonomy Extension Schema Document. X +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X +101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X +* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. ++ Management contract, compensatory plan or arrangement. +120 +Table of Contents +Index to Financial Statements +ITEM 16. FORM 10-K SUMMARY +None. +121 +Table of Contents +Index to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: March 1, 2023 +GULFPORT ENERGY CORPORATION +By: /s/ WILLIAM J. BUESE +William J. Buese +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: March 1, 2023 By: /s/ JOHN REINHART +John Reinhart +President and Chief Executive Officer +(Principal Executive Officer) +Date: March 1, 2023 By: /s/ WILLIAM J. BUESE +William J. Buese +Chief Financial Officer +(Principal Financial Officer and Principal Accounting Officer) +Date: March 1, 2023 By: /s/ TIMOTHY J. CUTT +Timothy J. Cutt +Executive Chairman of the Board +Date: March 1, 2023 By: /s/ DAVID WOLF +David Wolf +Lead Independent Director +Date: March 1, 2023 By: /s/ GUILLERMO MARTINEZ +Guillermo Martinez +Director +Date: March 1, 2023 By: /s/ JASON MARTINEZ +Jason Martinez +Director +Date: March 1, 2023 By: /s/ DAVID REGANATO +David Reganato +Director +122 \ No newline at end of file diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/filing_metadata.csv b/raw/filings/0000874499/2022/0001628280-23-005790/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..63248029ea9c5507f0b3655e3e74c2212929bdbd --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2023-03-01,2022-12-31,2023-03-01T19:57:00.000Z,0001628280-23-005790,gpor-20221231.htm,10-K,18603264,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828023005790/gpor-20221231.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828023005790/,2022,2022,1 diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/item1.txt b/raw/filings/0000874499/2022/0001628280-23-005790/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b022db244c9a389c7541ccae3d36b4cf40ac08de --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/item1.txt @@ -0,0 +1,393 @@ +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio, where we target development in what is commonly referred to as the Utica formation, and central Oklahoma where we target development in the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's Common Stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2022, we had 4.0 Tcfe of proved reserves with a Standardized Measure of $8.3 billion and a PV-10 of $9.5 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica and SCOOP operating areas. Our strategy is to develop our assets in a manner that generates sustainable cash flow, improves margins and operating efficiencies, while improving our ESG and safety performance. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2023 Outlook +Our 2023 capital expenditure program is expected to be in a range of $425 million to $475 million. In the Utica, we intend to spud 15 to 17 gross (13 to 15 net) operated horizontal wells, complete drilling on 15 to 17 gross (13 to 15 net) operated horizontal wells and commence sales on 18 to 20 gross (16 to 18 net) horizontal wells. In the Marcellus, we intend to spud, complete drilling and commence sales on two gross (1.9 net) operated horizontal wells. In the SCOOP, we intend to spud, complete drilling and commence sales on two gross (1.6 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,000 to 1,040 MMcfe per day of production in 2023. +4 +Table of Contents +Index to Financial Statements +Additionally, in 2023, we expect continuation of shareholder return actions through our common share repurchase program. During 2022, we repurchased 2.9 million shares for $250.8 million, leaving $49.2 million remaining on our Repurchase Program. +Operating Areas +Utica - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 188,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During 2022, we produced approximately 693 MMcfe per day net to our interests in this area and it accounts for approximately 70% of our total production. +The Marcellus covers hydrocarbon bearing rock formations that overlay the Utica. We have identified 15,000 net reservoir acres in Belmont County in eastern Ohio for Marcellus development and in 2022 we added 8 PUD Marcellus locations within our Utica operating area. Our Marcellus development area is 3,500 to 4,500 feet shallower than the Utica. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 32,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2022, we produced approximately 290 MMcfe per day net to our interests in this area and it accounts for approximately 30% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2022, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2022 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica +Proved developed 2 1,523 9 1,591 +Proved undeveloped (1) +7 1,256 6 1,335 +Total proved 9 2,779 15 2,926 +SCOOP +Proved developed 7 511 25 704 +Proved undeveloped 2 322 14 417 +Total proved 9 833 39 1,121 +Total +Proved developed 9 2,034 34 2,295 +Proved undeveloped 9 1,578 20 1,752 +Total proved 18 3,612 54 4,048 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 72 Bcfe of net reserves located in the Marcellus target formation. +December 31, 2022 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 10,712 $ 7,951 $ 18,663 +Present value of estimated future net revenue (PV-10) (1) +$ 5,803 $ 3,721 $ 9,524 +Standardized measure (1) +$ 8,279 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2022, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2022. The prices used in our PV-10 measure were $94.14 per barrel and $6.36 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2022. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $1.2 billion as of December 31, 2022. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Index to Financial Statements +Proved Reserves +Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2022 (in Bcfe): +Proved Reserves, December 31, 2021 (Successor) 3,898 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 439 +Revisions of prior reserve estimates 70 +Current production (359) +Proved Reserves, December 31, 2022 (Successor) 4,048 +Total may not sum due to rounding. +Sales of oil and natural gas reserves in place. These are reductions to proved reserves resulting from the divestiture of proved reserves during a period. During 2022, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 438.9 Bcfe of proved reserves were primarily attributable to the continued development of our Utica and SCOOP acreage. We added 44 PUD locations in the Utica which included 36 PUD locations in our Utica acreage for 295.9 Bcfe and 8 PUD locations in our Marcellus acreage for 72.1 Bcfe. In our SCOOP acreage we added 5 PUD locations for 65.4 Bcfe. New to 2022 was the addition of the 8 Marcellus PUD locations, which we have grouped into the Utica for this report. The five-year development plan focused on generating sustainable cash flow limited our ability to add significant well locations. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total upward revisions of 69.7 Bcfe in estimated proved reserves, of which 47.7 Bcfe was the result of commodity price changes. Commodity prices experienced volatility throughout 2022 and the 12-month average price for natural gas increased from $3.60 per MMBtu for 2021 to $6.36 per MMBtu for 2022, the 12-month average price for NGL increased from $31.90 per barrel for 2021 to $47.86 per barrel for 2022, and the 12-month average price for crude oil increased from $66.55 per barrel for 2021 to $94.14 per barrel for 2022. +Upward revisions of 144.5 Bcfe were a result of an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2022. Downward revisions of 95.6 Bcfe were experienced as a result of the exclusion of 4 PUD locations in the Utica and 5 PUD locations in the SCOOP when changes in our schedule moved the development of these PUD locations beyond five years of initial booking. The development plan change reflects our commitment to optimizing the long-term development schedule to maximize cash flow and overall economic returns. Finally, a small downward revision of 26.9 Bcfe was primarily a result of performance changes to several wells or PUD location forecasts. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2022, 2021 and 2020, and changes in proved reserves during the last three years are contained in the +7 +Table of Contents +Index to Financial Statements +Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +Proved Undeveloped Reserves +As of December 31, 2022, our PUDs totaled 1,578 Bcf of natural gas, 9 MMBbl of oil and 20 MMBbl of NGL, for a total of 1,752 Bcfe. Approximately 76% and 24% of our PUDs at year-end 2022 were located in Utica and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD drilling locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD drilling locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2022 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2021 (Successor) 1,733 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 433 +Conversion to proved developed reserves (474) +Revisions of prior reserve estimates 60 +Proved Undeveloped Reserves, December 31, 2022 (Successor) 1,752 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 433.4 Bcfe were primarily attributed to the addition of 49 PUD drilling locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 36 PUD drilling locations in our Utica acreage, 8 PUD drilling locations in our Marcellus acreage and 5 PUD drilling locations in the SCOOP. The Marcellus PUD drilling locations have been grouped into the Utica for this report. +Conversion to proved developed reserves. Our 2022 development activities resulted in the conversion of approximately 474.2 Bcfe into proved developed producing reserves, attributable to 15 PUD locations in the Utica and 31 PUD locations in the SCOOP. These 46 PUDs represent a conversion rate of 33% for 2022. +Revision of prior reserve estimates. We experienced total upward revisions of 59.7 Bcfe in estimated proved undeveloped reserves. This included 92.3 Bcfe of downward revisions as a result of the exclusion of 4 PUD locations in the Utica and 5 PUD locations in the SCOOP when changes in our schedule moved development of these PUD locations beyond five years of initial booking. These downward revisions were offset by upward revisions of 152.0 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest, well development design and well forecasts. +Costs incurred relating to the development of PUDs were approximately $271.6 million in 2022. +All PUD drilling locations included in our 2022 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2022, 0.60% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2022, 2021 and 2020, were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the +8 +Table of Contents +Index to Financial Statements +requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 25 years of reservoir and operations experience. In addition, our geoscience staff has approximately 46 years combined industry experience and our reservoir staff has approximately 55 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our Board of Directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2022, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2022 of $94.14 per barrel and $6.36 per MMBtu. Holding production and development costs constant, if SEC pricing were $103.55 per barrel and $6.99 per MMBtu, or a 10% increase, this would have resulted in an increase of 4.2 Bcfe of our total proved reserves and a $1.4 billion increase in PV-10 value at December 31, 2022. Holding production and development costs constant, if SEC pricing were $84.73 per barrel and $5.72 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 6.1 Bcfe of our total proved reserves and a $1.4 billion decrease in PV-10 value at December 31, 2022. For each of these scenarios, the 133 PUDs that were economic at SEC pricing were included. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2022: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica 135,817 109,797 83,166 78,185 +SCOOP 50,041 35,783 7,975 5,718 +Other — — 232 232 +Total 185,858 145,580 91,373 84,135 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2022: +Undeveloped Acres +Gross Acres Net Acres +Years Ending December 31, +2023 12,292 11,418 +2024 3,522 3,323 +2025 4,296 4,283 +After 2025 5,782 5,660 +Held by production 65,248 59,219 +Total (1) +91,140 83,903 +_____________________ +(1) Does not include acreage not subject to expiration. +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2022: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica 48.78/60.19 146 41.9 526 362.5 672 404.4 +SCOOP 20.71/27.76 106 16.1 556 167.7 662 183.8 +Total (1) +309 58.0 1,189 530.2 1,498 588.2 +_____________________ +(1) We also have override/royalty interests in 164 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2022 2021 2020 +Gross Net Gross Net Gross Net +Development: +Productive 25 21.7 29 26.6 26 24.4 +Dry — — — — — — +Total 25 21.7 29 26.6 26 24.4 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2022: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica (1) +19 17.4 15 13.4 — — — — +SCOOP (2) +6 4.3 13 10.3 13 0.1 40 2.7 +Total 25 21.7 28 23.7 13 0.1 40 2.7 +_____________________ +(1) Of the 19 gross wells drilled in 2022, five were completed as producing wells, eight were in various stages of drilling and six were waiting on completion as of December 31, 2022. +(2) All six gross wells that were drilled in 2022 had turned to sales as of December 31, 2022. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Natural gas sales +Natural gas production volumes (MMcf) 322,366 208,641 124,279 344,999 +Natural gas production volumes (MMcf/d) 883 915 907 943 +Total sales $ 1,998,452 $ 906,096 $ 344,390 $ 671,535 +Average price without the impact of derivatives ($/Mcf) $ 6.20 $ 4.34 $ 2.77 $ 1.95 +Impact from settled derivatives ($/Mcf) (1) +$ (3.11) $ (1.44) $ (0.03) $ 0.33 +Average price, including settled derivatives ($/Mcf) $ 3.09 $ 2.90 $ 2.74 $ 2.28 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,610 1,167 531 1,803 +Oil and condensate production volumes (MBbl/d) 4 5 4 5 +Total sales $ 147,444 $ 81,347 $ 29,106 $ 62,902 +Average price without the impact of derivatives ($/Bbl) $ 91.58 $ 69.71 $ 54.81 $ 34.88 +Impact from settled derivatives ($/Bbl) (2) +$ (24.32) $ (8.33) $ — $ 25.76 +Average price, including settled derivatives ($/Bbl) $ 67.26 $ 61.38 $ 54.81 $ 60.64 +NGL sales +NGL production volumes (MBbl) 4,483 2,658 1,211 3,964 +NGL production volumes (MBbl/d) 12 12 9 11 +Total sales $ 184,963 $ 105,141 $ 36,780 $ 66,814 +Average price without the impact of derivatives ($/Bbl) $ 41.26 $ 39.56 $ 30.37 $ 16.86 +Impact from settled derivatives ($/Bbl) $ (2.80) $ (4.88) $ — $ (0.04) +Average price, including settled derivatives ($/Bbl) $ 38.46 $ 34.68 $ 30.37 $ 16.82 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 358,924 231,594 134,735 379,600 +Natural gas equivalents (MMcfe/d) 983 1,016 983 1,037 +Total sales $ 2,330,859 $ 1,092,584 $ 410,276 $ 801,251 +Average price without the impact of derivatives ($/Mcfe) $ 6.49 $ 4.72 $ 3.05 $ 2.11 +Impact from settled derivatives ($/Mcfe) $ (2.94) $ (1.39) $ (0.02) $ 0.42 +Average price, including settled derivatives ($/Mcfe) $ 3.55 $ 3.33 $ 3.03 $ 2.53 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.14 $ 0.14 $ 0.14 +Average taxes other than income ($/Mcfe) $ 0.17 $ 0.13 $ 0.09 $ 0.08 +Average transportation, gathering, processing and compression ($/Mcfe) $ 1.00 $ 0.92 $ 1.20 $ 1.20 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.34 $ 1.19 $ 1.43 $ 1.42 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) In November 2020, the Company early terminated certain gas sold call options which resulted in a cash payment of $60.2 million. +(2) In April 2020, the Company early terminated certain oil fixed price swaps which resulted in a cash receipt of $40.5 million. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2022: +Successor Predecessor +Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 Year Ended December 31, 2020 +Utica +Net Production +Natural gas (MMcf) 246,123 166,906 106,968 291,133 +Oil (MBbl) 244 220 183 393 +NGL (MBbl) 885 562 361 1,077 +Total (MMcfe) 252,895 171,598 110,235 299,955 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 6.14 $ 4.33 $ 2.64 $ 1.97 +Oil ($/Bbl) $ 90.60 $ 66.94 $ 52.43 $ 33.41 +NGL ($/Bbl) $ 48.21 $ 47.16 $ 37.21 $ 18.55 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.17 $ 0.13 $ 0.13 $ 0.13 +Average taxes other than income ($/Mcfe) $ 0.06 $ 0.07 $ 0.06 $ 0.07 +Average transportation, gathering, processing and compression ($/Mcfe) $ 1.08 $ 0.98 $ 1.26 $ 1.29 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.31 $ 1.18 $ 1.45 $ 1.49 +SCOOP +Net Production +Natural gas (MMcf) 76,242 41,724 17,302 53,853 +Oil (MBbl) 1,366 933 344 1,392 +NGL (MBbl) 3,598 2,095 849 2,886 +Total (MMcfe) 106,024 59,893 24,461 79,519 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 6.38 $ 4.40 $ 3.59 $ 1.83 +Oil ($/Bbl) $ 91.71 $ 70.37 $ 56.05 $ 35.31 +NGL ($/Bbl) $ 39.56 $ 37.51 $ 27.46 $ 16.23 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.20 $ 0.17 $ 0.22 $ 0.18 +Average taxes other than income ($/Mcfe) $ 0.38 $ 0.29 $ 0.20 $ 0.10 +Average transportation, gathering, processing and compression ($/Mcfe) $ 0.78 $ 0.74 $ 0.90 $ 0.86 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.36 $ 1.20 $ 1.32 $ 1.14 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2022, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2016. Additionally, Grizzly had no proved reserves as of December 31, 2022. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. Upon emergence from bankruptcy, we determined that we no longer had the ability to exercise significant influence over operating and financial policies of Grizzly. As such, we discontinued the equity method of accounting for our investment in Grizzly. +13 +Table of Contents +Index to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the year ended December 31, 2022, Prior Successor Period, Prior Predecessor Period and year ended December 31, 2020 were as follows: +% of Sales +Year Ended December 31, 2022 (Successor) +ECO-Energy 20 % +Clearwater 11 % +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Year Ended December 31, 2020 (Predecessor) +ECO-Energy 12 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Index to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule. These executive orders in part led to the US again depositing an instrument of acceptance of the Paris Agreement, created in 2015 during the United Nations (“U.N.”) Climate Change Conference, which thereafter re-entered into force for the US on February 19, 2021. The Paris Agreement requires countries to review and “represent a progression” in their nationally determined contributions, which set emissions reduction goals, every five years beginning in 2020. The terms of the Paris Agreement and the executive orders are expected to result in additional regulations or changes to existing regulations, which could have a material adverse effect on our business. In +15 +Table of Contents +Index to Financial Statements +addition, incentives to conserve energy or use alternative energy sources could have a negative impact on our business. The executive orders and international accord may result in the development of additional regulations or changes to existing regulations. Failure to comply with laws and regulations can lead to the imposition of remedial liabilities, fines, or criminal penalties or to injunctions limiting our operations in affected areas. Moreover, multiple environmental laws provide for citizen suits which allow environmental organizations to act in the place of the government and sue operators for alleged violations of environmental law. We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. In addition, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a $25 million single well limit and up to a $37.5 million limit on multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million +16 +Table of Contents +Index to Financial Statements +comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2022 and 2021 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Enterprise Risk Management +Through our Enterprise Risk Management (ERM) program, internal risk committees comprised of senior management and subject matter experts across the Company review and assess the Company’s risks. Our Board of Directors plays a key role in risk management, providing oversight of the Company’s management team, strategic initiatives, and operations. The Board committees oversee corporate governance, risk management, regulatory compliance and ESG matters. +Cybersecurity remains a top identified enterprise-wide risk for our business and is overseen by our Chief Information Officer who is responsible for identifying and mitigating information security risks. The Audit Committee receives a detailed cybersecurity update annually from the Chief Information Officer and receives a cybersecurity update quarterly through the ERM program as a key risk. The Company provides an information security training program to all employees and regularly conducts external audits of its cybersecurity program. There have not been any material information security incidents over the last three years. +Human Capital Management +Employees +As of December 31, 2022, we had 223 employees, an increase of approximately 5% from the 212 employees at December 31, 2021. The increase in 2022 was driven by hiring across our business throughout the year. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2022, we continued making significant investments in our hiring and retention processes, including increasing funds allocated to our annual merit process and increasing our 401(k) match for all employees. We remain committed to providing development opportunities to existing employees as an additional retention tool, as their continued commitment to the Company is critical to our success. +We continue to respond quickly to situations that might be conducive to the spread of COVID-19 or other airborne pathogens. In 2022, our focus on healthy working conditions helped protect the safety of employees, minimize the risk of disease transmission at Gulfport locations and keep our operations online with minimal disruption. +17 +Table of Contents +Index to Financial Statements +Inclusion & Diversity +During 2022, we continued to build on our previously-announced diversity and inclusiveness initiatives, including by training all managers and supervisors to identify and eliminate bias in the workplace. We also partnered with a third-party recruiting website and utilized other tools to expand our reach to diverse candidates, which represented almost 33% of our new hires in 2022, an increase of approximately 10% over 2021. We are also pleased by growing numbers of diverse employees in key managerial, supervisory, and professional positions throughout the Company. +There were no changes to the composition of our Board of Directors in 2022 and it remains a group of highly qualified directors, 40% of whom are diverse candidates. We remain committed to evaluating our hiring and promotion practices to ensure that diversity and inclusion are considered and included throughout the Company. +Over the course of 2022, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual or refresher trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE Program and provided training to leaders on reinforcement strategies. Additionally, we launched the WORK GREEN Program in 2021, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize in-person training sessions developed by safety experts and supplement these sessions with computer-based modules to support a safety-first mindset in everything we do. We continue to provide training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President and Chief Executive Officer +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 54, as President and Chief Executive Officer, effective as of January 24, 2023. Mr. Reinhart joins the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating +18 +Table of Contents +Index to Financial Statements +Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Timothy J. Cutt, Executive Chairman of the Board +On January 24, 2023, Mr. Cutt resigned as Chief Executive Officer of the Company and was appointed as Executive Chairman of the Company. Mr. Cutt, 62, joined Gulfport as the Interim Chief Executive Officer in May 2021, and assumed the role of Chief Executive Officer in September 2021. Mr. Cutt is a Petroleum Engineer with 38 years of energy experience. He served as Chief Executive Officer and as a director of QEP Resources from January 2019 to March 2021. Prior to joining QEP, Mr. Cutt was the Chief Executive Officer and a director of Cobalt International Energy from 2016 to 2018. Previously, Mr. Cutt held several executive positions with BHP Billiton before serving as President of the Petroleum Division from 2013 to 2016. During this time, he was also a member of BHP Billiton’s Corporate Leadership Team. Mr. Cutt began his career with Mobil and worked for ExxonMobil for 24 years and served in various management roles including President of ExxonMobil de Venezuela, President ExxonMobil Canada Energy and President Hibernia Management & Development Company. Mr. Cutt served as a board member of the American Petroleum Institute (API) from 2013 to 2018. +William J. Buese, Chief Financial Officer +Mr. Buese, 51, joined Gulfport as the Chief Financial Officer in May 2021. Most recently, Mr. Buese served as Vice President, Chief Financial Officer and Treasurer of QEP Resources from January 2020 to March 2021. He joined QEP Resources in 2012 and held positions of increasing responsibility over a nine-year period, including Vice President of Finance and Treasurer and Director of Finance. Prior to joining QEP, Mr. Buese was Director of Finance at MarkWest Energy Partners, LP and served in various finance, treasury, accounting and investor relations roles from 2005 to 2012. Mr. Buese holds over 16 years of financial expertise in the energy industry and more than 25 years of financial experience overall. Mr. Buese received his Bachelor of Arts degree in Accounting from Michigan State University and Master of Science degree in Information Systems from the University of Colorado Denver. +Patrick K. Craine, Chief Legal and Administrative Officer +Mr. Craine, 50, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 20 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Michael J. Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 50, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to joining Noble in 2007, he spent over 20 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from +19 +Table of Contents +Index to Financial Statements +the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +20 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/item13.txt b/raw/filings/0000874499/2022/0001628280-23-005790/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9cc37fc1a91a900b6ea69d01a209873738a3e53 --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2023 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/item9a.txt b/raw/filings/0000874499/2022/0001628280-23-005790/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e0a3b1ede3f9bb73120184522c6497e59e9f8e65 --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/item9a.txt @@ -0,0 +1,38 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2022, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended December 31, 2022, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2022. +112 +Table of Contents +Index to Financial Statements +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2022 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2022, as stated in their accompanying report. +/s/ John Reinhart /s/ William J. Buese +Name: John Reinhart Name: William J. Buese +Title: Chief Executive Officer Title: Chief Financial Officer +113 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated March 1, 2023 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +March 1, 2023 +114 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/rp_note.txt b/raw/filings/0000874499/2022/0001628280-23-005790/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..aa3455627c80b269a4ef6054ac87ce475f0f3ec9 --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/rp_note.txt @@ -0,0 +1,3 @@ +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. As of December 31, 2022 and 2021, the Company held no shares of Mammoth Energy's outstanding common stock. As of December 31, 2020, the Company owned approximately 21.5 % of Mammoth Energy's outstanding common stock. There were no material amounts of services provided by Mammoth Energy that were included in lease operating expenses in the consolidated statements of operations for the years ended December 31, 2022 and 2021 and $ 0.6 million for the year ended December 31, 2020. \ No newline at end of file diff --git a/raw/filings/0000874499/2022/0001628280-23-005790/rpt_disclosure.txt b/raw/filings/0000874499/2022/0001628280-23-005790/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..17c0b59dd3f21f5d128303db2c920692283d67bf --- /dev/null +++ b/raw/filings/0000874499/2022/0001628280-23-005790/rpt_disclosure.txt @@ -0,0 +1,4 @@ +Approval of Related Party Transactions +The Audit Committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be substantively applied to each transaction reviewed by the Audit Committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether transactions are in the best interests of the Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party transactions. +The Company’s policy is that all its employees and directors, as well as their family members, must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the Board of Directors or a committee consisting solely of independent directors may grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give rise to a conflict of interest. +Further, under the Audit Committee charter, the Audit Committee is responsible for reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the Board of Directors. In addition, the Board of Directors and, pursuant to its written charter, the Audit Committee, reviews and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. 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EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2023 +OR +☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 001-19514 +Gulfport Energy Corp oration +(Exact name of registrant as specified in its charter) +Delaware 86-3684669 +(State or other jurisdiction of incorporation or organization) +(I.R.S. Employer Identification No.) +713 Market Drive +Oklahoma City, Oklahoma 73114 +(Address of principal executive offices) +(Zip Code) +( 405 ) 252-4600 +(Registrant telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, $0.0001 par value per share GPOR The New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large Accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Table of Contents +Inde x to Financial Statements +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ☒ No ☐ +The aggregate market value of our common stock held by non-affiliates on June 30, 2023 was approximately $ 1.2 billion. As of February 26, 2024, there were 18,191,650 shares of our $0.0001 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2024 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +SUMMARY RISK FACTORS +2 +PART I +4 +ITEM 1. +BUSINESS +4 +ITEM 1A. +RISK FACTORS +20 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +36 +ITEM 1C. +C YBERSECU RITY +36 +ITEM 2. +PROPERTIES +37 +ITEM 3. +LEGAL PROCEEDINGS +37 +ITEM 4. +MINE SAFETY DISCLOSURES +37 +PART II +38 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +38 +ITEM 6. +RESERVED +39 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +39 +RESULTS OF OPERATIONS +43 +LIQUIDITY AND CAPITAL RESOURCES +48 +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +53 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +55 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +57 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +111 +ITEM 9A. +CONTROLS AND PROCEDURES +111 +ITEM 9B. +OTHER INFORMATION +114 +ITEM 9C. +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +114 +PART III +114 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +114 +ITEM 11. +EXECUTIVE COMPENSATION +114 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +114 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +114 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +114 +PART IV +115 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +115 +ITEM 16. +FORM 10-K SUMMARY +118 +Signatures +119 +Table of Contents +Inde x to Financial Statements +DEFINITIONS +Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Gulfport,” the “Company” and “Registrant” refer to Gulfport Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in thousands of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K: +1145 Indenture . Agreement dated May 17, 2021 between the Company, UMB Bank, National Association, as trustee, and the guarantors party thereto, under section 1145 of the Bankruptcy Code for our 8.0% Senior Notes due 2026. +2019 Plan. 2019 Amended and Restated Stock Incentive Plan. +2023 Notes. 6.625% Senior Notes due 2023. +2024 Notes. 6.000% Senior Notes due 2024. +2025 Notes. 6.375% Senior Notes due 2025. +2026 Notes. 6.375% Senior Notes due 2026. +2026 Senior Notes . 8.0% Senior Notes due 2026. +4(a)(2) Indenture . Certain eligible holders have made an election entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among the Company, UMB Bank, National Association, as trustee, and the guarantors party thereto, under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) as opposed to its share of the up to $550 million aggregate principal amount of our Senior Notes due 2026. The 4(a)(2) Indenture’s terms are substantially similar to the terms of the 1145 Indenture. The primary differences between the terms of the 4(a)(2) Indenture and the terms of the 1145 Indenture are that (i) affiliates of the Issuer holding 4(a)(2) Notes are permitted to vote in determining whether the holders of the required principal amount of indenture securities have concurred in any direction or consent under the 4(a)(2) Indenture, while affiliates of the Issuer holding 1145 Notes will not be permitted to vote on such matters under the 1145 Indenture, (ii) the covenants of the 1145 Indenture (other than the payment covenant) require that the Issuer comply with the covenants of the 4(a)(2) Indenture, as amended, and (iii) the 1145 Indenture requires that the 1145 Securities be redeemed pro rata with the 4(a)(2) Securities and that the 1145 Indenture be satisfied and discharged if the 4(a)(2) Indenture is satisfied and discharged. +ASC. Accounting Standards Codification. +ASU. Accounting Standards Update. +Bankruptcy Code . Chapter 11 of Title 11 of the United States Code. +Bankruptcy Court. The United States Bankruptcy Court for the Southern District of Texas. +Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. +Bcf . One billion cubic feet of natural gas. +Bcfe. One billion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Board of Directors (Board) . The board of directors of Gulfport Energy Corporation. +Btu . British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels. +Chapter 11 Cases. Voluntary petitions filed on November 13, 2020 by Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +CODI . Cancellation of indebtedness income. +Common Stock . $0.0001 par value common stock issued by the Successor on the Emergence Date. +Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas, oil and NGL. +Credit Facility . The Existing Credit Facility, as amended by the Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement dated as of May 1, 2023 and reaffirmed as of October 31, 2023. +Table of Contents +Inde x to Financial Statements +DD&A. Depreciation, depletion and amortization. +Debtors. Collectively, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +Developed Acreage . The number of acres allocated or assignable to productive wells or wells capable of production. +DIP Credit Facility. Senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $262.5 million. +Disputed Claims Reserve. Reserve used to settle any pending claims of unsecured creditors that were in dispute as of the effective date of the Plan. +Emergence Date . May 17, 2021. +Existing Credit Facility. The Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. as administrative agent and various lender parties, providing for a senior secured reserve-based revolving credit facility effective as of October 14, 2021, as amended to date. +Exit Credit Agreement . The Second Amended and Restated Credit Agreement with The Bank of Nova Scotia as lead administrative agent and various lender parties providing for the Exit Facility and the First-Out Term Loan. +Exit Credit Facility . Collectively, the First-Out Term Loan and the Exit Facility, with an initial borrowing base and elected commitment amount of up to $580 million. +Exit Facility. Senior secured reserve-based revolving credit facility with The Bank of Nova Scotia as the lead arranger and administrative agent and various lender parties. +Exploratory Well . A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area. +FASB. Financial Accounting Standards Board. +First-Out Term Loan. Senior secured term loan in an aggregate maximum principal amount of $180 million. +GAAP . Accounting principles generally accepted in the United States of America. +Grizzly. Grizzly Oil Sands ULC. +Grizzly Holdings. Grizzly Holdings Inc. +Gross Acres or Gross Wells . Refers to the total acres or wells in which a working interest is owned. +Guarantors. All existing consolidated subsidiaries that guarantee the Company's Credit Facility or certain other debt. +Held By Production . Refers to an oil and gas lease continued into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith. +Horizontal Drilling . A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval. +Incentive Plan . Gulfport Energy Corporation 2021 Stock Incentive Plan, effective on the Emergence Date. +Indentures . Collectively, the 1145 Indenture and the 4(a)(2) Indenture governing the 2026 Senior Notes. +IRC . The Internal Revenue Code of 1986, as amended. +LIBOR. London Interbank Offered Rate. +LOE. Lease operating expenses. +Marcellus. Refers to the Marcellus Play that includes the hydrocarbon bearing rock formations commonly referred to as the Marcellus formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont County in eastern Ohio. +MBbl. One thousand barrels of crude oil, condensate or natural gas liquids. +Mcf . One thousand cubic feet of natural gas. +Mcfe. One thousand cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +MMBbl. One million barrels of crude oil, condensate or natural gas liquids. +Table of Contents +Inde x to Financial Statements +MMBtu. One million British thermal units. +MMcf. One million cubic feet of natural gas. +MMcfe. One million cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Natural Gas Liquids (NGL). Hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include ethane, propane, butane, isobutene, pentane, hexane and natural gasoline. +Net Acres or Net Wells . Refers to the sum of the fractional working interests owned in gross acres or gross wells. +Net Revenue Interest (NRI). An interest in an oil and natural gas property entitling the owner to a share of oil, natural gas or NGL production. +NYMEX. New York Mercantile Exchange. +OCC. Oklahoma Corporation Commission. +Parent. Gulfport Energy Corporation or its successor to the Credit Facility. +Petition Date . November 13, 2020. +Plan . The Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and Its Debtor Subsidiaries. +Predecessor. The pre-emergence from bankruptcy organization for periods on or prior to May 17, 2021. +Predecessor Building Loan. Loan agreement for our corporate headquarters scheduled to mature in June 2025. +Predecessor Senior Notes. Collectively, the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes. +Preferred Stock . $0.0001 par value preferred stock issued by the Successor on the Emergence Date. +Pre-Petition Revolving Credit Facility . Senior secured revolving credit facility, as amended, with The Bank of Nova Scotia as the lead arranger and administrative agent and certain lenders from time-to-time party thereto with a maximum facility amount of $580 million. +Prior Predecessor Period . Period from January 1, 2021 through May 17, 2021. +Prior Successor Period . Period from May 18, 2021 through December 31, 2021. +Productive Well . A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes. +Proved Developed Reserves (PDP) . Reserves expected to be recovered through existing wells with existing equipment and operating methods. +Proved Reserves . Quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +Proved Undeveloped Reserves (PUD). Proved reserves expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. +PV-10. Present net value of estimated future net revenues, discounted at 10%. +Repurchase Program . A stock repurchase program to acquire up to $650 million of Gulfport's outstanding Common Stock. It is authorized to extend through December 31, 2024, and may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. +Reservoir . A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. +Table of Contents +Inde x to Financial Statements +Royalty Interest . Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property. +RSA . Restructuring Support Agreement. +SCOOP . Refers to the South Central Oklahoma Oil Province, a term used to describe a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP Play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. Our acreage is primarily in Garvin, Grady and Stephens Counties. +SEC . The United States Securities and Exchange Commission. +Section 382. Internal Revenue Code Section 382. +SOFR . Secured Overnight Financing Rate. +Standardized Measure. Standardized measure of discounted future net cash flows. +Successor. The post-emergence from bankruptcy reorganized organization for periods subsequent to May 17, 2021. +Tcfe . One trillion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Undeveloped Acreage . Lease or mineral acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas. +Utica . Refers to the Utica Play that includes the hydrocarbon bearing rock formations commonly referred to as the Utica formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio. +Working Interest (WI). The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. +WTI. Refers to West Texas Intermediate. +Table of Contents +Inde x to Financial Statements +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including the expected impact of the war in Ukraine and the Israel-Hamas war on our business, our industry and the global economy, estimated future production and net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), share repurchases, business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Inde x to Financial Statements +SUMMARY RISK FACTORS +Financial, Liquidity and Commodity Price Risks +• Natural gas, oil and NGL prices fluctuate widely, and lower prices for extended time periods are likely to have a material adverse effect on our business. +• Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices and involve risk that our counterparties may be unable to satisfy their obligations to us. +• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +• Our debt and other financial commitments may limit our financial and operating flexibility. +• Our development, acquisition and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +• Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +• A change of control could limit our use of net operating losses to reduce future taxable income. +Industry, Business and Operational Risks +• The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +• The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +• Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +• Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +• Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +• Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +• Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +• We are not the operator of all our oil and natural gas properties and therefore are not positioned to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +• Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +• All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +• The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +• The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +• Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +• We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +• A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +• Terrorist activities could materially and adversely affect our business and results of operations. +2 +Table of Contents +Inde x to Financial Statements +• Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +• We may engage in acquisition and divestiture activities that involve substantial risks. +Environmental, Legal and Regulatory Risks +• We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +• Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +• Increased attention to Environmental, Social and Governance ("ESG") matters may impact our business, financial results, or stock price. +• Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +• Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +Risks Associated with an Investment in Us +• The market price of our securities is subject to volatility. +• Future sales or the availability for sale of substantial amounts of our Common Stock, or the perception that these sales may occur, could adversely affect the trading price of our Common Stock and could impair our ability to raise capital through future sales of equity securities. +• Certain of our stockholders own a significant portion of our outstanding debt and equity securities, and their interests may not always coincide with the interests of other holders of the Common Stock. +• There may be future dilution of our Common Stock, which could adversely affect the market price of our Common Stock. +• Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +3 +Table of Contents +Inde x to Financial Statements +PART I +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's Common Stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2023, we had 4.2 Tcfe of proved reserves with a Standardized Measure of $2.4 billion and a PV-10 of $2.4 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica/Marcellus and SCOOP operating areas. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2024 Outlook +Our 2024 capital expenditure program is expected to be in a range of $380 million to $420 million. In the Utica, we intend to complete drilling on approximately 17 gross (16.4 net) operated horizontal wells and commence sales on approximately 16 gross (15.5 net) operated horizontal wells. In the SCOOP, we intend to complete drilling on approximately five gross (4.1 net) operated horizontal wells and commence sales on three gross (2.4 net) operated horizontal wells. We do not currently have any new Marcellus directed activity budgeted in our 2024 capital expenditure program. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,045 to 1,080 MMcfe per day of production in 2024. +4 +Table of Contents +Inde x to Financial Statements +Additionally, in 2024, we expect continuation of shareholder return actions through our Repurchase Program. During 2023, we repurchased 1.5 million shares for $148.9 million at a weighted average price of $101.53 per share, leaving $250.4 million remaining on our Repurchase Program. +Operating Areas +Utica/Marcellus - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 193,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During 2023, we produced approximately 784 MMcfe per day net to our interests in this area and it accounts for approximately 74% of our total production. +The Marcellus covers hydrocarbon bearing rock formations that overlay the Utica. We have identified approximately 17,000 net reservoir acres of our existing leasehold for Marcellus development and have 15 PUD Marcellus locations within our Utica operating area. In 2023 we drilled, completed, and turned to sales two Marcellus wells. Our Marcellus development area is approximately 3,500 to 4,500 feet shallower than the Utica. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 32,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2023, we produced approximately 270 MMcfe per day net to our interests in this area and it accounts for approximately 26% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Inde x to Financial Statements +The tables below set forth information as of December 31, 2023, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2023 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica & Marcellus +Proved developed (1) +2 1,520 7 1,576 +Proved undeveloped (1) +10 1,421 17 1,585 +Total proved (1) +13 2,941 24 3,160 +SCOOP +Proved developed 4 459 24 627 +Proved undeveloped 2 325 15 426 +Total proved 6 785 39 1,053 +Total +Proved developed 6 1,980 31 2,203 +Proved undeveloped 12 1,746 32 2,011 +Total proved 19 3,725 63 4,214 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 17 Bcfe and 108 Bcfe of net developed and undeveloped reserves, respectively, located in the Marcellus target formation. +December 31, 2023 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 2,535 $ 2,235 $ 4,769 +Present value of estimated future net revenue (PV-10) (1) +$ 1,590 $ 819 $ 2,409 +Standardized measure (1) +$ 2,383 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2023, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2023. The prices used in our PV-10 measure were the average West Texas Intermediate Spot price of $78.21 per barrel and the average Henry Hub Spot price of $2.64 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2023. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $26 million as of December 31, 2023. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Inde x to Financial Statements +Proved Reserves +Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica/Marcellus and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2023 (in Bcfe): +Proved Reserves, December 31, 2022 (Successor) 4,048 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 996 +Revisions of prior reserve estimates (445) +Current production (385) +Proved Reserves, December 31, 2023 (Successor) 4,214 +Total may not sum due to rounding. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 995.7 Bcfe of proved reserves were primarily attributable to the continued development of our Utica/Marcellus and SCOOP acreage. We added 79 PUD locations in the Utica/Marcellus which included 67 Utica locations for 789.2 Bcfe and 12 Marcellus locations for 88.6 Bcfe. In the SCOOP, we added 14 PUD locations for 110.4 Bcfe. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 444.9 Bcfe in estimated proved reserves. These consisted of upward revisions of 24.9 Bcfe as a result of positive well performance and 293.9 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2023. These were offset by downward revisions of 554.9 Bcfe which were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset, maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Additionally, downward revisions of 159.7 Bcfe were associated with commodity price changes. Commodity prices experienced volatility throughout 2023 and the 12-month average price for natural gas decreased from $6.36 per MMBtu for 2022 to $2.64 per MMBtu for 2023, the 12-month average price for NGL decreased from $47.86 per barrel for 2022 to $31.42 per barrel for 2023, and the 12-month average price for crude oil decreased from $94.14 per barrel for 2022 to $78.21 per barrel for 2023. Finally, downward revisions of 49.1 Bcfe were a result of a combination of various economic assumption updates. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2023, 2022 and 2021, and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +7 +Table of Contents +Inde x to Financial Statements +Proved Undeveloped Reserves +As of December 31, 2023, our PUDs totaled 1,746 Bcf of natural gas, 12 MMBbl of oil and 32 MMBbl of NGL, for a total of 2,011 Bcfe. Approximately 79% and 21% of our PUD reserves at year-end 2023 were located in Utica/Marcellus and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD drilling locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD drilling locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2023 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2022 (Successor) 1,752 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 988 +Conversion to proved developed reserves (420) +Revisions of prior reserve estimates (310) +Proved Undeveloped Reserves, December 31, 2023 (Successor) 2,011 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 988.2 Bcfe were primarily attributed to the addition of 93 PUD drilling locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 79 PUD drilling locations in the Utica/Marcellus and 14 PUD drilling locations in the SCOOP. +Conversion to proved developed reserves. Our 2023 development activities resulted in the conversion of approximately 419.7 Bcfe into proved developed producing reserves, attributable to 20 PUD locations in the Utica, 2 PUD locations in our Marcellus acreage and 3 PUD locations in the SCOOP. These 25 PUDs represent a conversion rate of 19% for 2023. +Revision of prior reserve estimates. We experienced total downward revisions of 309.8 Bcfe in estimated proved undeveloped reserves. This included 501.8 Bcfe of downward revisions with changes in our development schedule. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing PUDs five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset, maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. These downward revisions were offset by upward revisions of 192.0 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest, well development design and well forecasts. +Costs incurred relating to the development of PUDs were approximately $362.9 million in 2023. +All PUD drilling locations included in our 2023 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2023, 0.34% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2023, 2022 and 2021, were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +8 +Table of Contents +Inde x to Financial Statements +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 27 years of reservoir and operations experience. In addition, our geoscience staff has approximately 48 years combined industry experience and our reservoir staff has approximately 58 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our Board of Directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2023, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2023 of $78.21 per barrel and $2.64 per MMBtu. Holding production and development costs constant, if SEC pricing were $86.03 per barrel and $2.90 per MMBtu, or a 10% increase, this would have resulted in an increase of 53 Bcfe of our total proved reserves and a $0.6 billion increase in PV-10 value at December 31, 2023. Holding production and development costs constant, if SEC pricing were $70.39 per barrel and $2.37 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 313 Bcfe of our total proved reserves and a $0.6 billion decrease in PV-10 value at December 31, 2023. For the low price scenario 132 PUDs were PV-10 economic. +9 +Table of Contents +Inde x to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2023: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica & Marcellus 148,747 121,387 75,547 72,058 +SCOOP 49,909 35,844 8,537 6,035 +Total 198,656 157,231 84,084 78,093 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2023: +Undeveloped Acres +Years Ending December 31, Gross Acres Net Acres +2024 3,029 2,704 +2025 5,070 5,061 +2026 4,507 4,430 +After 2026 12,054 11,984 +Held by production 59,424 53,914 +Total 84,084 78,093 +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2023: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica & Marcellus 49.16/60.23 3 1.4 708 426.8 711 428.2 +SCOOP 21.58/26.69 101 9.6 540 161.5 641 171.1 +Total (1) +117 11.0 1,416 588.3 1,533 599.3 +_____________________ +(1) We also have override/royalty interests in 181 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Inde x to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2023 2022 2021 +Gross Net Gross Net Gross Net +Development: +Productive 24 21.9 25 21.7 29 26.6 +Dry — — — — — — +Total 24 21.9 25 21.7 29 26.6 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2023: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica & Marcellus (1) +22.0 20.2 22.0 20.2 10.0 0.3 7.0 0.1 +SCOOP (2) +2.0 1.7 2.0 1.7 19.0 0.0 11.0 0.0 +Total 24.0 21.9 24.0 21.9 29.0 0.3 18.0 0.1 +_____________________ +(1) Of the 22 gross wells drilled in 2023, 16 were completed as producing wells and six were in various stages of drilling and completion as of December 31, 2023. +(2) The two gross wells that were drilled in 2023 were completed as producing wells as of December 31, 2023. +11 +Table of Contents +Inde x to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas sales +Natural gas production volumes (MMcf) 350,306 322,366 208,641 124,279 +Natural gas production volumes (MMcf) per day 960 883 915 907 +Total sales $ 831,812 $ 1,998,452 $ 906,096 $ 344,390 +Average price without the impact of derivatives ($/Mcf) $ 2.37 $ 6.20 $ 4.34 $ 2.77 +Impact from settled derivatives ($/Mcf) $ 0.42 $ (3.11) $ (1.44) $ (0.03) +Average price, including settled derivatives ($/Mcf) $ 2.79 $ 3.09 $ 2.90 $ 2.74 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,363 1,610 1,167 531 +Oil and condensate production volumes (MBbl) per day 4 4 5 4 +Total sales $ 99,854 $ 147,444 $ 81,347 $ 29,106 +Average price without the impact of derivatives ($/Bbl) $ 73.27 $ 91.58 $ 69.71 $ 54.81 +Impact from settled derivatives ($/Bbl) $ (2.53) $ (24.32) $ (8.33) $ — +Average price, including settled derivatives ($/Bbl) $ 70.74 $ 67.26 $ 61.38 $ 54.81 +NGL sales +NGL production volumes (MBbl) 4,386 4,483 2,658 1,211 +NGL production volumes (MBbl) per day 12 12 12 9 +Total sales $ 119,717 $ 184,963 $ 105,141 $ 36,780 +Average price without the impact of derivatives ($/Bbl) $ 27.29 $ 41.26 $ 39.56 $ 30.37 +Impact from settled derivatives ($/Bbl) $ 2.07 $ (2.80) $ (4.88) $ — +Average price, including settled derivatives ($/Bbl) $ 29.36 $ 38.46 $ 34.68 $ 30.37 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 384,802 358,924 231,594 134,735 +Natural gas equivalents (MMcfe) per day 1,054 983 1,016 983 +Total sales $ 1,051,383 $ 2,330,859 $ 1,092,584 $ 410,276 +Average price without the impact of derivatives ($/Mcfe) $ 2.73 $ 6.49 $ 4.72 $ 3.05 +Impact from settled derivatives ($/Mcfe) $ 0.40 $ (2.94) $ (1.39) $ (0.02) +Average price, including settled derivatives ($/Mcfe) $ 3.13 $ 3.55 $ 3.33 $ 3.03 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.14 $ 0.14 +Average taxes other than income ($/Mcfe) $ 0.09 $ 0.17 $ 0.13 $ 0.09 +Average transportation, gathering, processing and compression ($/Mcfe) $ 0.91 $ 1.00 $ 0.92 $ 1.20 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.17 $ 1.34 $ 1.19 $ 1.43 +Totals may not sum or recalculate due to rounding. +12 +Table of Contents +Inde x to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2023: +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Utica & Marcellus +Net Production +Natural gas (MMcf) 279,428 246,123 166,906 106,968 +Oil (MBbl) 255 244 220 183 +NGL (MBbl) 856 885 562 361 +Total (MMcfe) 286,095 252,895 171,598 110,235 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.34 $ 6.14 $ 4.33 $ 2.64 +Oil ($/Bbl) $ 70.18 $ 90.60 $ 66.94 $ 52.43 +NGL ($/Bbl) $ 33.63 $ 48.21 $ 47.16 $ 37.21 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.16 $ 0.17 $ 0.13 $ 0.13 +Average taxes other than income ($/Mcfe) 0.05 0.06 0.07 0.06 +Average transportation, gathering, processing and compression ($/Mcfe) 0.97 1.08 0.98 1.26 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.18 $ 1.31 $ 1.18 $ 1.45 +SCOOP +Net Production +Natural gas (MMcf) 70,878 76,242 41,724 17,302 +Oil (MBbl) 1,108 1,366 933 344 +NGL (MBbl) 3,530 3,598 2,095 849 +Total (MMcfe) 98,707 106,024 59,893 24,461 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.53 $ 6.38 $ 4.40 $ 3.59 +Oil ($/Bbl) $ 73.98 $ 91.71 $ 70.37 $ 56.05 +NGL ($/Bbl) $ 25.76 $ 39.56 $ 37.51 $ 27.46 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.25 $ 0.20 $ 0.17 $ 0.22 +Average taxes other than income ($/Mcfe) 0.17 0.38 0.29 0.20 +Average transportation, gathering, processing and compression ($/Mcfe) 0.73 0.78 0.74 0.90 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.15 $ 1.36 $ 1.20 $ 1.32 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2023, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2015. Additionally, Grizzly had no proved reserves as of December 31, 2023. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. +13 +Table of Contents +Inde x to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2023, December 31, 2022, Prior Successor Period, and Prior Predecessor Period were as follows: +% of Sales +Year Ended December 31, 2023 (Successor) +Vitol Inc. 12 % +Year Ended December 31, 2022 (Successor) +ECO-Energy 20 % +Clearwater 11 % +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Inde x to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases. We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. For example, in addition to regulations from the EPA and similar agencies, the SEC has issued proposed rules that would mandate extensive disclosure of climate-related risks and other information. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of +15 +Table of Contents +Inde x to Financial Statements +governmental regulation and ongoing regulatory changes, including with respect to environmental matters. The SEC has also indicated plans to propose various other disclosure regulations, including regarding human capital and other ESG matters. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. If future developments result in additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a minimum limit of $25 million for single well limits and $37.5 million limit for multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In +16 +Table of Contents +Inde x to Financial Statements +addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2023 and 2022 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2023, we had 226 employees, an increase of approximately 1% from the 223 employees as of December 31, 2022. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2023, we continued making significant investments in our talent management and retention processes, including increasing funds allocated to annual salary increases, short-term incentive payments, long-term incentive equity awards, and 401(k) matches for eligible employees. We remain committed to providing fair and competitive compensation programs and adequate development and advancement opportunities to our employees. We believe these practices serve as retention tools, as our employees' continued engagement and commitment to the Company is critical to our success. +Diversity, Equity and Inclusion +Diversity, equity and inclusion are paramount to our organization, our leadership team, and our culture. During 2023, we continued to build on our previously-announced diversity and inclusiveness initiatives through training, outreach, and new talent acquisition. We partnered with third-party recruiting websites and utilized other tools to expand our reach to diverse candidates, which represented almost 39% of our new hires in 2023, an increase of approximately 6% over 2022. While we always strive for continued improvement, we are pleased by the number of gender or ethnically diverse employees we have maintained in leadership positions throughout the Company. +Diversity and inclusion are also important at our Board level, where over 60% of our independent directors identify as gender or ethnically diverse. While our Board remains a group of highly qualified directors, our gender or ethnically diverse population among our Board has increased by 20% from 2022. We also remain committed to evaluating our hiring and promotion practices to ensure that diversity, equity and inclusion are considered and included throughout the Company. We encourage all employees to provide feedback and ideas on how Gulfport can continuously improve, and we ask all of our employees to sign a commitment indicating that they will speak up if they observe or become aware of any actions that are inconsistent with our core values, our Business Code of Conduct and Ethics, or other Company policies. We are also committed to supporting veterans through our recruiting and hiring efforts as well as supporting several causes that assist veterans and active-duty military. +Over the course of 2023, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +17 +Table of Contents +Inde x to Financial Statements +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE program and provided training to leaders on reinforcement strategies. Additionally, we continued the WORK GREEN program, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize training sessions with content developed by experts in the safety, legal, information security, and regulatory compliance fields, and we offer a blend of training sessions through both computer-based modules and live, instructor-led sessions. We believe our training efforts support a compliant safety-first mindset in everything we do. We continue to provide professional and workplace-related training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President and Chief Executive Officer +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 55, as President and Chief Executive Officer, effective as of January 24, 2023. Mr. Reinhart joined the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Michael Hodges, Executive Vice President and Chief Financial Officer +On April 3, 2023, the Board of Directors appointed Mr. Hodges, 45, as Executive Vice President and Chief Financial Officer. Most recently, Mr. Hodges served as Senior Vice President, Finance and Accounting at Leon Capital Group. Prior to joining Leon Capital, he was the Executive Vice President and Chief Financial Officer for Montage Resources Corporation until its merger with Southwestern Energy Company in November 2020. From 2012 until joining Montage Resources in 2018, Mr. Hodges served as the Chief Financial Officer for three upstream energy companies focused on near-term value creation through the acquisition and early-stage development of oil and natural gas resources. Mr. Hodges received his Bachelor of Business Administration in Finance from the University of Oklahoma and a Master of Science in Energy Management from Oklahoma City University and is a Certified Public Accountant in the State of Oklahoma. +Patrick Craine, Executive Vice President and Chief Legal and Administrative Officer +Mr. Craine, 51, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 25 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. +18 +Table of Contents +Inde x to Financial Statements +Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Matthew Rucker, Senior Vice President of Operations +Mr. Rucker, 38, joined Gulfport as the Senior Vice President of Operations in March 2023 from Javelin Energy Partners. He most recently served as Vice President of Production Operations since August 2022 and joined Javelin in July 2022 as the Vice President of Business Development. Prior to joining Javelin, Mr. Rucker served as the Executive Vice President, Chief Operating Officer for Montage Resources Corporation following Montage’s successful business combination transaction with Blue Ridge Mountain Resources in June 2020. Prior to Montage, Mr. Rucker served as Vice President, Resource Planning and Development of Blue Ridge from 2016 to 2020. Prior to joining Blue Ridge, Mr. Rucker served as a Production Superintendent for Chesapeake Energy Corporation from January 2014 to October 2016, overseeing Chesapeake’s Utica Shale production. As a member of Chesapeake’s Eastern Division leadership team, Mr. Rucker focused on the safe and efficient optimization of production in the Utica Shale and led an operating team of over 45 employees. During his service at Chesapeake, Mr. Rucker held several engineering positions in the Marcellus and Utica Shale asset teams within reservoir, primarily focused on strategic joint ventures, divestitures, acquisitions and resource development planning. Mr. Rucker received his Bachelor of Science degree in Petroleum Engineering from Marietta College and a Master of Business Administration in Energy from Texas Christian University. He serves on the Marietta College Industry Advisory Council and is a member of the Society of Petroleum Engineers. +Michael Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 51, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to joining Noble in 2007, he spent over 20 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus, 58, has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Inde x to Financial Statements +ITEM 1A. RISK FACTORS +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a summary of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Financial, Liquidity and Commodity Price Risks +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low natural gas, oil, and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2022, West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $71.05 to $123.64 per barrel and the Henry Hub spot market price of natural gas ranged from $3.46 to $9.85 per MMBtu. During 2023, WTI prices ranged from $66.61 to $93.67 per barrel and the Henry Hub spot market price of natural gas ranged from $1.74 to $3.78 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• the level of prices, and expectations about future prices, of oil and natural gas; +• changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the expected rates of declining current production; +• the price and availability of alternative fuels; +• technological advances affecting energy consumption; +• risks associated with operating drilling rigs; +• the effectiveness of worldwide conservation measures; +• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• the price and level of foreign imports and exports; +• the nature and extent of domestic and foreign governmental regulations and taxes; +• the ability of the members of the Organization of Petroleum Exporting Countries and others to agree to and maintain oil price and production controls; +• political or economic instability or armed conflict in oil and natural gas producing regions; +• weather conditions; +• acts of terrorism; and +• domestic and global economic conditions. +20 +Table of Contents +Inde x to Financial Statements +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2024 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2024 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We also may be unable to mitigate price volatility due to our exposure to long-dated call options and restrictions in our credit facility. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our Credit Facility, which is structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the SOFR benchmark. At December 31, 2023, amounts borrowed under our Credit Facility bore interest at the weighted average rate of 8.15%. A 1% increase in the average interest rate would increase our interest expense by approximately $1.2 million based on outstanding borrowings under our Credit Facility at December 31, 2023. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our Credit Facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2023, we did not hedge our interest rate risk. +Our debt and other financial commitments may limit our financial and operating flexibility. +Our total principal debt was approximately $668.0 million at December 31, 2023. We also had various commitments for leases, drilling contracts, derivative contracts, firm transportation, and purchase obligations for services, products and properties. Our financial commitments could have important consequences to our business, including, but not limited to, limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, to pay dividends, to repurchase shares of our common stock, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to make payments on our debt or to comply with restrictive terms of our debt. Higher levels of debt may make us more vulnerable to general adverse economic and industry conditions. Additionally, the agreement governing our credit facility and the indentures governing our senior notes contain a number of covenants that impose constraints on us, including requirements to comply with certain financial covenants and restrictions on our ability to dispose of assets, make certain investments, incur liens and additional debt, and engage in consolidations, mergers and acquisitions. If commodity prices decline and we reduce our level of capital spending and production declines or we incur additional impairment expense or the value of our proved reserves declines, we may not be able to incur additional indebtedness, may need to repay outstanding indebtedness and may not be in compliance +21 +Table of Contents +Inde x to Financial Statements +with the financial covenants in our debt instruments in the future. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K and Note 5 of our consolidated financial statements for more information regarding the financial covenants and our Credit Facility. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. +Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital through a variety of means. We cannot guarantee that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves. In addition, we may be unable to implement our development plan, complete acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting oil and NGL to one MCF of natural gas at the ratio of six Mcf of natural gas to one barrel of oil. +Under the full cost method of accounting for oil and gas properties, we are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash write-down is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. Future non-cash asset impairments could negatively affect our results of operations. +22 +Table of Contents +Inde x to Financial Statements +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2023, we had a net operating loss, or NOL, carryforward of approximately $1.8 billion for federal income tax purposes. If we were to experience an “ownership change,” as determined under IRC Section 382, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. +Industry, Business and Operational Risks +The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including, buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +23 +Table of Contents +Inde x to Financial Statements +As of December 31, 2023, approximately 48% of our total estimated proved reserves were PUDs and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. Estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2023 present value is based on a $2.64 per MMBtu of gas price and a $78.21 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire significant amounts of unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +24 +Table of Contents +Inde x to Financial Statements +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or cancelled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +25 +Table of Contents +Inde x to Financial Statements +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Although approximately 86% of our Utica/Marcellus acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 14% of our Utica/Marcellus acreage not held by production, approximately 10% will be subject to expiration in 2024, 5% in 2025, 10% in 2026 and approximately 75% thereafter, although a portion of our Utica/Marcellus leases generally grant us the right to extend these leases for an additional three or five-year period. Although 99% of our SCOOP acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 1% of our SCOOP acreage not held by production, approximately 80% will be subject to expiration in 2024, less than 1% in 2025, 19% in 2026 and none thereafter. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and gas properties can become damaged, our operations may be curtailed, delayed or cancelled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• loss of drilling fluid circulation; +• equipment failures or accidents; +• fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +• adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures, which may be exacerbated by climate change; +• issues with title or in receiving governmental permits or approvals; +• restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets; +• environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• shortages or delays in the availability of services or delivery of equipment; and +• unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +26 +Table of Contents +Inde x to Financial Statements +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, cybersecurity breaches, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +We utilize multi-well pad drilling where practical. For example, in the Utica/Marcellus we drill multiple wells from a single pad. Wells drilled on a pad are not turned to sales until all wells on the pad are drilled and cased and the drilling rig is moved from the location. In addition, existing wells that offset newly drilled wells may be temporarily shut-in during the drilling and completion process. As a result, multi-well pad drilling delays the completion of wells and the commencement of production from new wells, and may negatively affect the production from existing offset wells, all of which may cause volatility in our operating results from period to period. Finally, delays in completion of wells may impact planned conversion of PUD reserves to PDP reserves. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• the timing and amount of capital expenditures; +• the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• the operator's expertise and financial resources; +• approval of other participants in drilling wells; +• selection of technology; and +• the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids. +27 +Table of Contents +Inde x to Financial Statements +All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +Our largest fields by production are located in eastern Ohio and central Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2023, accounted for approximately 12% of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of and increased costs for drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines, trucks and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +With respect to our Utica/Marcellus acreage where we are focusing a portion of our exploration and development activity, operations may be delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica/Marcellus and the other areas in which we operate. As a result, we may experience delays or curtailments in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in or curtail our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +28 +Table of Contents +Inde x to Financial Statements +We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +We have contracts with some of our third-party service providers for gathering, processing and transportation services with minimum volume delivery commitments under which we are obligated to pay certain fees on minimum volumes regardless of actual volume throughput. As of December 31, 2023, our aggregate long-term contractual obligation under these agreements was approximately $1.4 billion. These fees could be significant and may have a material adverse effect on our results of operations. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyberattack involving our information systems and related infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +29 +Table of Contents +Inde x to Financial Statements +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems for protecting against cybersecurity risks may not be sufficient. As cyberattacks continue to evolve, including those leveraging artificial intelligence, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyberattacks. In addition, new laws and regulations governing data privacy, cybersecurity, and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +We may engage in acquisition and divestiture activities that involve substantial risks. +We may make acquisitions that complement or expand our current areas of operations. If we are unable to make attractive acquisitions, our future growth could be limited. Furthermore, even if we do make acquisitions, they may not result in an increase in our cash flow from operations or otherwise result in the benefits anticipated due to various risks, including, but not limited to: +• mistaken estimates or assumptions about reserves, potential drilling locations, revenues and costs, including synergies and the overall costs of equity or debt; +• difficulties in integrating the operations, technologies, products and personnel of the acquired assets or business; and +• unknown and unforeseen liabilities or other issues related to any acquisition for which contractual protections prove inadequate, including environmental liabilities and title defects. +In addition, from time to time, we may sell or otherwise dispose of certain of our properties or businesses as a result of an evaluation of our asset portfolio or to help enhance our liquidity. These transactions also have inherent risks, including possible delays in closing, the risk of lower-than-expected sales proceeds for the disposed assets or businesses and potential post-closing claims for indemnification. Moreover, volatility in commodity prices may result in fewer potential bidders, unsuccessful sales efforts and a higher risk that buyers may seek to terminate a transaction prior to closing. +Environmental, Legal and Regulatory Risks +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, in December 2023, the United States Environmental Protection Agency (USEPA), announced its final methane rules to reduce methane emissions from both new and existing oil and natural gas facilities and the Inflation Reduction Act of 2022 established the Methane Emissions Reduction Program, which imposes a charge on methane emissions from the same facilities. Further, the Bureau for Land Management (BLM) issued a proposed Methane Waste Prevention Rule on November 30, 2022. The rule adds additional requirements for operators on federal and Indian leases and includes new air quality requirements along with waste prevention provisions. Constrained supply chain for environmental control devices along with the significant estimated costs of compliance with these new and proposed rules could have a material impact on our operations. We may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. +30 +Table of Contents +Inde x to Financial Statements +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas.” Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the OCC issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane, and incentivizing energy conservation or the use of alternative energy sources. Policy makers at both the federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions and encourage consumers to the alternative energy sources. The Inflation Reduction Act of 2022, both imposes new climate related requirements on oil and gas operations and appropriates significant federal funding for renewable energy initiatives. Also, for the first time ever, the law imposes a fee on greenhouse gas (GHG) emissions from certain facilities. The emissions fee and funding provisions of the Inflation Reduction Act could increase our operating costs and accelerate the transition away from fossil fuels, which could in turn adversely affect our business, results of operations and financial position. On January 26, 2024, President Biden paused approvals for pending and future applications to export liquified natural gas (LNG) on non-FTA countries. The Department of Energy will conduct a review during the pause that will look at the economic and environmental impacts of projects seeking approval to export LNG to Europe and Asia. The impact on the pause and similar federal actions remain unclear. +31 +Table of Contents +Inde x to Financial Statements +States in which we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level or other initiatives to incentivize the use of renewable energy could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable to improve our sustainability performance and to meet the specific requirements to perform services for certain customers. If we are unable to meet the ESG standard or investment, lending, ratings, or voting criteria and policies set by these parties, we may lose investors, investors may allocate a portion of their capital away from us, we may become a target for ESG-focused activism, our cost of capital may increase, the price of our securities may be negatively impacted, and our reputation may also be negatively affected. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Severe weather events, such as storms, hurricanes, droughts, or floods, which may be exacerbated by climate change, could have an adverse effect on our operations and could increase our costs. Potential adverse effects could include damages to our facilities, the costs of less efficient or non-routine operating practices necessitated by weather events, or increased costs for insurance coverage. If climate changes result in more intense or frequent severe weather events, the physical and disruptive effects could have a material adverse impact on our operations and assets. +Air Emissions. The US Federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and natural gas operations. New facilities may be required to obtain permits before operations can commence, and existing facilities may be required to obtain additional permits, and incur capital costs, in order to remain in compliance. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations. In general, we believe that compliance with the Clean Air Act and similar state laws and regulations will not have a material impact on our operations or financial condition. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +32 +Table of Contents +Inde x to Financial Statements +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +In our Utica/Marcellus and SCOOP operations, we make an effort to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle or share 100% of all produced water, we do inject water into third-party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle once sharing opportunities with other operators have been exhausted. In the state of Ohio, all water used during drilling operations is disposed of through injection into third-party salt water disposal wells regulated by applicable state agencies. +Increased attention to ESG matters may impact our business, financial results, or stock price. +In recent years, increasing attention has been given to corporate activities related to ESG matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, activist investors, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change, advocating for changes to companies’ boards of directors, and promoting the use of energy saving building materials. In November 2023, the international community gathered in Dubai at COP28 and announced a new climate deal that calls on countries to reduce carbon pollution and transition away from fossil fuels in energy systems to achieve "net zero" by 2050. These activities and the global transition to a low carbon economy may result in reduced demand for our oil, natural gas and NGL, reduced profits, increased investigations and litigation, each of which could have negative impacts on our access to capital markets. +In addition, we note that standards and expectations regarding carbon accounting and the processes for measuring and counting GHG emissions and GHG emission reductions are evolving, and it is possible that our approach to measuring both our emissions and our approaches to reducing emissions may be, either currently by some stakeholders or at some future point, considered inconsistent with common or best practices. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could cause reputational harm to our business, increase our risk of litigation, and could have a material adverse effect on our results of operations. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions. We may take certain actions to improve the ESG profile of our company and/or products, but we cannot guarantee that such actions will have the desired effect. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. +33 +Table of Contents +Inde x to Financial Statements +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs as we collect, use, share, and store personal data related to royalty owners. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act (CCPA), as amended by the California Privacy Rights Act (CPRA), establishes certain transparency rules and creates new data privacy rights for individuals, including limitations on our use of certain sensitive personal information and more ability for individuals to control the purposes for which their data is shared with third parties. The CPRA also provides for statutory fines for data security breaches or other CPRA violations. Meanwhile, many other states enacted, and others have considered, privacy laws like the CPRA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +Risks Associated with an Investment in Us +The market price of our securities is subject to volatility. +Upon our emergence from bankruptcy, our old common stock was cancelled and we issued Common Stock. The market price of our Common Stock could be subject to wide fluctuations in response to, and the level of trading that develops with our Common Stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our new capital structure as a result of the transactions contemplated by the Plan, our limited trading history subsequent to our emergence from bankruptcy, our limited trading volume, the lack of comparable historical financial information due to our adoption of fresh start accounting, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this Part I, Item 1A of this Annual Report on Form 10-K. +34 +Table of Contents +Inde x to Financial Statements +Future sales or the availability for sale of substantial amounts of our Common Stock, or the perception that these sales may occur, could adversely affect the trading price of our Common Stock and could impair our ability to raise capital through future sales of equity securities. +A large percentage of our Common Stock is held by a relatively small number of investors. In connection with our emergence from bankruptcy protection, we entered into the Registration Rights Agreement pursuant to which we have agreed to file a registration statement with the SEC to facilitate potential future sales of our Common Stock by such investors. Sales of a substantial number of shares of our Common Stock in the public markets, or even the perception that these sales might occur (such as upon the filing of the aforementioned registration statement), could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. +We cannot predict the effect that future sales of our Common Stock will have on the price at which the Common Stock trades. Sales of substantial amounts of our Common Stock, or the perception that such sales could occur, may adversely affect the trading price of our Common Stock. +Certain of our stockholders own a significant portion of our outstanding debt and equity securities and their interests may not always coincide with the interests of other holders of the Common Stock. +A large percentage of our debt and equity are held by a relatively small number of investors. As a result, these investors could have significant influence over all matters presented to our stockholders and debt holders for approval, including election and removal of our directors, change in control transactions and the outcome of all actions requiring majority stockholder approval. +The interests of these investors may not always coincide with the interests of the other holders of the Common Stock and other debt holders, and the concentration of control in these investors may limit other stockholders' ability to influence corporate matters. The concentration of ownership and voting power of these investors may also delay, defer or even prevent an acquisition by a third party or other change of control transactions of our Company. This may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. In addition, the concentration of voting power may adversely affect the trading price and liquidity of the Common Stock. +There may be future dilution of our Common Stock, which could adversely affect the market price of our Common Stock. +We are not restricted from issuing additional shares of our Common Stock. In the future, we may issue shares of our Common Stock to raise cash for future capital expenditures, acquisitions or for general corporate purposes. We may also issue securities that are convertible into, exchangeable for or that represent the right to receive our Common Stock. Lastly, we currently issue restricted stock units and performance vesting restricted stock units to certain employees and directors as part of their compensation. Any of these events will dilute our shareholders' ownership interest in Gulfport and may reduce our earnings per share and have an adverse effect on the price of our Common Stock. +Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us, our stockholders, our creditors or other constituents; (iii) any action asserting a claim against us, any director or our officers arising pursuant to any provision of the DGCL, our certificate of incorporation or our by-laws; or (iv) any action asserting a claim against us, any director or our officers that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors or officers or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations. +35 +Table of Contents +Inde x to Financial Statements +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 1C. +CYBERSECURITY +Enterprise Risk Management +Gulfport increasingly relies on digital technology to optimize our business. As our reliance on technology expands, we are exposed to additional cyber-risks, which we focus on assessing, identifying, and managing. These risks include, but are not limited to: financial risks, operational risks, safety concerns, employee and owner personal information and violation of data privacy or security laws. +Managing Material Risks & Integrated Overall Risk Management +We take an integrated approach to assessing and identifying cybersecurity risks and threats. At the corporate level, cybersecurity is identified as a key risk within our Enterprise Risk Management (ERM) program. Our management of cyber risk is based on the National Institute of Standards and Technology’s (NIST) cybersecurity framework. While the NIST cybersecurity framework is our foundation, we combine that with the Center for Internet Security’s (CIS) control framework. +We utilize a defense-in-depth approach, layering security starting with cloud-based tools through our perimeter all the way to the client and server end points with End Point Detection and Response solutions. We continue to invest and align advances in technology to strengthen our security posture. This year, for example, we implemented additional protections against phishing attacks by utilizing artificial intelligence to further strengthen our defense. Cyber risks and incidents are categorized by severity, evaluated for materiality, responded to based on defined incident response playbooks and then remediated accordingly. We perform organized tabletop exercises to test these practices and identify areas where opportunities for improvement can occur. +We acknowledge that—even with advanced security tools—we are only as strong as the people that use our technology. That is why we design phishing simulations and require multiple security trainings for every employee annually. Our partnerships with law enforcement, the Oil and Natural Gas Information Sharing Center and our third party partners continually mature our cyber program as threats evolve. +Engaging Third Parties on Risk Management +Recognizing the complexity and evolving nature of cybersecurity risk, we leverage strategic external partnerships to assess and mitigate cybersecurity threats to us. For example, in addition to our security analysts, we partner with third parties that provide 24/7 security operations monitoring, enhancing our response time. We are also audited by third parties for compliance with information security standards and assess vulnerabilities annually, providing additional expertise that strengthens our security posture. +Managing Third Party Risk +We also recognize the risks associated with the use of vendors, service providers and other third parties that provide information system services to us, process information on our behalf, or have access to our information systems, and we have processes in place to oversee and manage these risks. We maintain ongoing monitoring to ensure compliance with our cybersecurity standards. +Risks from Cybersecurity Incidents +As of December 31, 2023, and for the past four years, we have identified no security incidents or breaches that are material, or likely to be material, to our business strategy, results or financial condition. +36 +Table of Contents +Inde x to Financial Statements +Cybersecurity Governance +We involve multiple levels of oversight as a part of our approach to cybersecurity risk management. +Risk Management Personnel +Cybersecurity remains a top identified enterprise-wide risk for our business and is overseen by our Chief Information Officer who is responsible for identifying and mitigating information security risks. Our current CIO has 20 years of industry experience and over 10 years of experience with the development, training and controls of effective global enterprise cybersecurity programs. The CIO’s responsibilities include but are not limited to: (i) reviewing our enterprise risk register and functional risk register; (ii) maintaining adequate processes to manage the identified risks under our cybersecurity program; (iii) analyzing logs of cybersecurity threats and vulnerabilities; (iv) overseeing prevention, detection, mitigation and remediation efforts; and (v) developing, maintaining, and ensuring team familiarity with the above‑mentioned incident response plan. Additionally, we maintain an experienced information technology team at the employee level that supports our Chief Information Officer in implementing our cybersecurity program and internal reporting, security and mitigation functions. +Board of Director Oversight +The Audit Committee receives a detailed cybersecurity update annually from the Chief Information Officer and receives a cybersecurity update quarterly through the ERM program as a key risk. +ITEM 2. PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 20 of our consolidated financial statements. +ITEM 3. LEGAL PROCEEDINGS +The Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. +While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on us, cannot be predicted with certainty, we believe that none of these matters, if ultimately decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +The information with respect to this Item 3. Legal Proceedings is set forth in Note 19 of our consolidated financial statements. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +37 +Table of Contents +Inde x to Financial Statements +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +Shares of our Common Stock are listed on the NYSE under the symbol "GPOR". See Note 7 of our consolidated financial statements for further discussion of our Common Stock. +Shareholders +At the close of business on February 14, 2024, there were approximately 8,635 holders of record of our Common Stock. +Dividends +Subsequent to our emergence from bankruptcy, we have not paid dividends on our Common Stock. The declaration and payment of any future Common Stock dividend will be at the full discretion of the Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Our Credit Facility also requires us to meet certain financial covenants at the time dividend payments are made. +During the years ended December 31, 2023 and December 31, 2022, the Company paid $4.8 million and $5.4 million, respectively, of cash dividends to holders of our Preferred Stock. During the Prior Successor Period, the Company paid dividends on our Preferred Stock, which included 3,071 shares of Preferred Stock paid in kind, approximately $55 thousand of cash-in-lieu of fractional shares, and $1.5 million of cash dividends to holders of our Preferred Stock. +Issuer Purchases of Equity Securities +In November 2021 the Company's Board of Directors approved the Repurchase Program to acquire up to $100 million of common stock, which has subsequently been increased up to $650 million and extended through December 31, 2024. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of common stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. As of December 31, 2023, the Company had repurchased 4.4 million shares for $399.6 million at a weighted average price of $91.53 per share. +The following table provides a summary of our Common Stock repurchase activity for the three months ended December 31, 2023: +Period +Total Number of Shares Purchased (1) +Average Price Paid per Share Total number of shares purchased as part of publicly announced plans or programs Approximate maximum dollar value of shares that may yet be purchased under the plans or programs +October 1 - October 31 8,446 $ 115.40 8,398 $ 315,350,000 +November 1 - November 30 94,240 $ 131.89 94,240 $ 302,921,000 +December 1 - December 31 387,116 $ 135.83 387,037 $ 250,351,000 +Total 489,802 $ 134.72 489,675 +_____________________ +(1) We repurchased and canceled 48 and 79 shares of our Common Stock at a weighted average price of $123.84 and $121.31 to satisfy tax withholding requirements incurred upon the vesting of restricted stock unit awards during October and December 2023, respectively. +Recent Sales of Unregistered Securities +None. +38 +Table of Contents +Inde x to Financial Statements +Stock Performance Graph +The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filings. +The performance graph below illustrates changes over the period of May 19, 2021 through December 31, 2023, in cumulative total stockholder return on the Successor Common Stock as measured against the cumulative total return of the S&P 500 Index and the S&P Oil & Gas Exploration and Production Index. The graph tracks the performance of a $100 investment in our Common Stock and in each index (with the reinvestment of all dividends for the index securities) from May 19, 2021 to December 31, 2023. +ITEM 6. [RESERVED] +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis represents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following information updates the discussion of Gulfport's financial condition provided in its 2022 Annual Report on Form 10-K filing and compares the results of operations for the year ended December 31, 2023 to the period ended December 31, 2022. Discussions of 2021 items and comparisons between 2022, Prior Successor Period and Prior Predecessor Period that are not included in this Form 10-K can be found in " Management's Discussion and Analysis of Financial Condition and Results of Operations " in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. +39 +Table of Contents +Inde x to Financial Statements +Overview +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +Recent Developments +Leadership Changes +In January 2023, ou r CEO Tim Cutt, resigned his position as CEO. Mr. Cutt, who served as CEO and Chairman since 2021, retained his position of Chairman of the Board of Directors. Subsequent to Mr. Cutt's resignation, Gulfport named John Reinhart President and CEO and Director, effective January 24, 2023. In addition, Matthew Rucker joined Gulfport's leadership team as Senior Vice President of Operations. +In April 2023, Gulfport named Michael Hodges Executive Vice President and Chief Financial Officer. William Buese resigned as Executive Vice President and Chief Financial Officer of the Company on April 1, 2023. Mr. Buese remained with the Company as an adviser until his termination on May 3, 2023. +Effective August 2, 2023, Matthew B. Willrath was promoted to Vice President and Chief Accounting Officer. Prior to the promotion, Mr. Willrath served as our Vice President and Controller and has been with Gulfport Energy since February 2020. +Credit Facility +On May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Existing Credit Facility (as amended, the “Credit Facility”). The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility from $700 million to $900 million, (b) increased the borrowing base under the Credit Facility from $1 billion to $1.1 billion, (c) increased the excess cash threshold under the Credit Facility from $45 million to $75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $100 million; provided that such notes have not be refinanced, redeemed or repaid in full on or prior to such 91st day. See Note 5 of our consolidated financial statements for additional discussion of the Credit Facility. +On October 27, 2023, Gulfport completed its semi-annual borrowing base redetermination during which the borrowing base was reaffirmed at $1.1 billion with elected commitments remaining at $900 million. +Common Stock Offering +On June 26, 2023, Gulfport completed an underwritten public offering of 1.5 million shares of its common stock by certain stockholders at a price to the public of $95.00 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +Concurrent with the closing of the offering, Gulfport purchased 263,158 shares of its common stock at $95.00 per share. The repurchase was part of the Company's existing Repurchase Program discussed below. +On December 14, 2023, Gulfport completed an underwritten public offering of 653,464 shares of its common stock by certain stockholders at a price to the public of $128.21 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +40 +Table of Contents +Inde x to Financial Statements +Stock Repurchase Program +On September 20, 2023, the Company's Board of Directors approved an increase to the authorized common stock Repurchase Program from $400 million to $650 million, extending the Repurchase Program through December 31, 2024. During the year ended December 31, 2023, the Company repurchased 1.5 million shares for $148.9 million at a weighted average price of $101.53 per share. As of December 31, 2023, the Company repurchased 4.4 million shares for $399.6 million at a weighted average price of $91.53 per share since the inception of the Repurchase Program. +Inflation, Rising Interest Rates and Changes in Commodity Prices +During 2023, the Federal Reserve has continued to tighten monetary policy by approving a series of increases to the Federal Funds Rate to combat the current inflationary environment. Furthermore, the Chairman of the Federal Reserve signaled that the Federal Reserve would continue to take necessary action to bring inflation down and to ensure price stability. The inflationary environment has impacted interest rates on our Credit Facility borrowings throughout 2023. Interest rates on our Credit Facility borrowings have increased from a weighted average of 5.19% for the year ended December 31, 2022, to 8.15% for the year ended December 31, 2023. Additional increases in interest rates may have a negative impact on the Company’s ability to continue to execute its business strategy. +Our revenues, the value of our assets, and our ability to obtain bank loans or additional capital on attractive terms have been and will continue to be affected by changes in natural gas, oil and NGL prices and the costs to produce our reserves. Natural gas, oil and NGL prices are subject to significant fluctuations that are beyond our ability to control or predict. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for 2024 to continue to be a function of supply and demand; however, we do not expect inflation to significantly impact cash flow in 2024 as a result of commitments that were entered into during 2023. +Impact of the War in Ukraine and the Israel-Hamas War +The invasion of Ukraine by Russia and the sanctions imposed in response to the crisis have increased volatility in the global financial markets and are expected to have further global economic consequences, including disruptions of the global energy markets and the amplification of inflation and supply chain constraints. Other armed conflicts, including the ongoing Israel-Hamas war, may result in further disruptions in the global economic environment. The ultimate impact of the war in Ukraine and the Israel-Hamas war will depend on future developments and the timing and extent to which normal economic and operating conditions resume. +2023 Operational and Financial Highlights +During 2023, we had the following notable achievements: +• Reported total net production of 1,054 MMcfe per day. +• Generated $723.2 million of operating cash flows. +• Turned to sales 24 gross (21.9 net) wells, which included our first two operated Marcellus wells. +• Total lease operating expenses, midstream costs and taxes other than income per Mcfe decreased 13%. +• Expanded common share repurchase program to $650 million and returned $148.9 million to shareholders through the repurchase of 1.5 million shares at a weighted average price of $101.53 per share. +• Reduced total debt by $27 million. +• Achieved MIQ certification for all Appalachian assets. +• Reported year-end estimated net proved reserves of 4.2 Tcfe. +Business and Industry Outlook +The Company's primary focus going into 2024 is its continued attention on reducing cycle times and operating costs to improve margins and ultimately support our expected free cash flow generation. We are committed to an emphasis on sustainability and we will continue to prioritize safety, environmental stewardship, and maintaining strong relationships with the communities in which we operate. Throughout the year, we plan to maintain capital discipline, prioritizing free cash flow generation and preserving our strong financial position, while returning capital to shareholders and increasing our resource depth through incremental leasehold opportunities. +41 +Table of Contents +Inde x to Financial Statements +In 2023, natural gas prices continued to be volatile as spot prices ranged from $1.74 to $3.78 per MMBtu. Henry Hub averaged $2.53 per MMBtu in 2023 vs $6.44 per MMBtu in 2022. As we look into 2024, we expect continued volatility in natural gas prices. To mitigate our exposure to commodity market volatility and to help provide a level of certainty around our financial strength, we have entered into a combination of natural gas swaps and collars, representing approximately 54% of our expected 2024 production, at an average floor price of $3.70 per Mcf. +Our 2024 capital expenditure program is expected to be in a range of $380 million to $420 million. With the weakening in commodity prices, we could begin to see additional deflationary pressures during 2024 as well as less frequent supply chain constraints. +42 +Table of Contents +Inde x to Financial Statements +Results of Operations +Comparison of the Year Ended December 31, 2023 and 2022 +We reported net income of $1.5 billion for the year ended December 31, 2023, compared to a net income of 494.7 million for the year ended December 31, 2022. The material changes that lead to the increase in net income are further discussed by category on the following pages. Some totals and changes throughout the below section may not sum or recalculate due to rounding. +Natural Gas, Oil and Condensate and NGL Production and Pricing (sales totals in thousands) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Natural gas (MMcf/day) +Utica & Marcellus production volumes 766 674 +SCOOP production volumes 194 209 +Total production volumes 960 883 +Total sales $ 831,812 $ 1,998,452 +Average price without the impact of derivatives ($/Mcf) $ 2.37 $ 6.20 +Impact from settled derivatives ($/Mcf) $ 0.42 $ (3.11) +Average price, including settled derivatives ($/Mcf) $ 2.79 $ 3.09 +Oil and condensate (MBbl/day) +Utica & Marcellus production volumes 1 1 +SCOOP production volumes 3 4 +Total production volumes 4 4 +Total sales $ 99,854 $ 147,444 +Average price without the impact of derivatives ($/Bbl) $ 73.27 $ 91.58 +Impact from settled derivatives ($/Bbl) $ (2.53) $ (24.32) +Average price, including settled derivatives ($/Bbl) $ 70.74 $ 67.26 +NGL (MBbl/day) +Utica & Marcellus production volumes 2 2 +SCOOP production volumes 10 10 +Total production volumes 12 12 +Total sales $ 119,717 $ 184,963 +Average price without the impact of derivatives ($/Bbl) $ 27.29 $ 41.26 +Impact from settled derivatives ($/Bbl) $ 2.07 $ (2.80) +Average price, including settled derivatives ($/Bbl) $ 29.36 $ 38.46 +Total (MMcfe/day) +Utica & Marcellus production volumes 784 693 +SCOOP production volumes 270 290 +Total production volumes 1,054 983 +Total sales $ 1,051,383 $ 2,330,859 +Average price without the impact of derivatives ($/Mcfe) $ 2.73 $ 6.49 +Impact from settled derivatives ($/Mcfe) $ 0.40 $ (2.94) +Average price, including settled derivatives ($/Mcfe) $ 3.13 $ 3.55 +43 +Table of Contents +Inde x to Financial Statements +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Natural gas $ 831,812 $ 1,998,452 (58) % +Oil and condensate 99,854 147,444 (32) % +NGL 119,717 184,963 (35) % +Total natural gas, oil and condensate and NGL sales $ 1,051,383 $ 2,330,859 (55) % +The decrease in natural gas sales without the impact of derivatives when comparing the year ended December 31, 2023, to the year ended December 31, 2022, was due to a 62% decrease in realized natural gas prices, partially offset by a 9% increase in sales volumes. The realized price change was primarily driven by the decrease in the average Henry Hub gas index from $6.64 per Mcf in the year ended December 31, 2022, to $2.74 per Mcf during the year ended December 31, 2023. The 9% increase in natural gas production was due to our 2022 and 2023 development programs in the Utica/Marcellus partially offset by natural declines and limited activity in the SCOOP. +The decrease in oil and condensate sales without the impact of derivatives when comparing the year ended December 31, 2023, to the year ended December 31, 2022, was due to a 20% decrease in realized oil prices and a 15% decrease in sales volumes. The realized price change was primarily driven by the decrease in the average WTI crude index from $94.23 per barrel in the year ended December 31, 2022, to $77.62 per barrel during the year ended December 31, 2023. The 15% decrease in oil and condensate production was due to natural declines and limited activity in the SCOOP. +The decrease in NGL sales without the impact of derivatives when comparing the year ended December 31, 2023, to the year ended December 31, 2022, was due to a 34% decrease in realized prices, partially offset by a 2% decrease in NGL sales volumes. The realized price change was primarily driven by the decrease in the average Mont Belvieu NGL index from $45.39 per barrel in the year ended December 31, 2022, to $30.07 per barrel during the year ended December 31, 2023. The NGL production remained consistent when comparing the year ended December 31, 2023 to the year ended December 31, 2022. +44 +Table of Contents +Inde x to Financial Statements +Natural Gas, Oil and NGL Derivatives (in thousands) +The total natural gas, oil and NGL volumes hedged for the year ended December 31, 2023 and 2022, represented approximately 95% and 86%, respectively, of our total sales volumes for the applicable year. +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Natural gas derivatives - fair value gains $ 584,563 $ 32,797 +Natural gas derivatives - settlement gains (losses) 146,381 (1,002,098) +Total gains (losses) on natural gas derivatives 730,944 (969,301) +Oil and condensate derivatives - fair value gains 5,971 6,618 +Oil and condensate derivatives - settlement losses (3,272) (39,163) +Total gains (losses) on oil and condensate derivatives 2,699 (32,545) +NGL derivatives - fair value (losses) gains (2,414) 14,648 +NGL derivatives - settlement gains (losses) 9,090 (12,549) +Total gains on NGL derivatives 6,676 2,099 +Total gains (losses) on natural gas, oil and NGL derivatives $ 740,319 $ (999,747) +We recognize fair value changes on our natural gas, oil and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. The significant change in the total gain (loss) for the year ended December 31, 2023 compared to the year ended December 31, 2022, was primarily the result of a significant decrease in futures pricing for oil, natural gas, and NGLs. The fair value gains of our hedging program totaled $588.1 million for the year ended December 31, 2023 compared to $54.1 million for the year ended December 31, 2022. Settlement gains (losses) in the table above represent realized cash gains or losses to the instruments described in Note 13 of our consolidated financial statements. Our hedging program generated cash receipts of $152.2 million for the year ended December 31, 2023, compared to cash settlements of $1,053.8 million for the year ended December 31, 2022. +Lease Operating Expenses (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Lease operating expenses +Utica & Marcellus $ 44,394 $ 43,775 1 % +SCOOP 24,254 21,015 15 % +Total lease operating expenses $ 68,648 $ 64,790 6 % +Lease operating expenses per Mcfe +Utica & Marcellus $ 0.16 $ 0.17 (6) % +SCOOP 0.25 0.20 25 % +Total lease operating expenses per Mcfe $ 0.18 $ 0.18 — % +The increase in total LOE for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily the result of a 7% increase in production. LOE per unit for the year ended December 31, 2023 was consistent with the year ended December 31, 2022. +45 +Table of Contents +Inde x to Financial Statements +Taxes Other Than Income (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Production taxes $ 25,564 $ 48,145 (47) % +Property taxes 6,160 7,146 (14) % +Other 1,993 4,847 (59) % +Total taxes other than income $ 33,717 $ 60,139 (44) % +Total taxes other than income per Mcfe $ 0.09 $ 0.17 (47) % +The decrease in total and per unit taxes other than income for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily related to a decrease in production taxes resulting from the decrease in our natural gas, oil and NGL revenues excluding the impact of hedges discussed above. +Transportation, Gathering, Processing and Compression (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Transportation, gathering, processing and compression $ 348,631 $ 357,246 (2) % +Transportation, gathering, processing and compression per Mcfe $ 0.91 $ 1.00 (9) % +Transportation, gathering, processing and compression for the year ended December 31, 2023, compared to the year ended December 31, 2022, decreased on a per unit basis primarily as a result of lower minimum volume commitments as a result of our 7% increase in production. +Depreciation, Depletion and Amortization (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Depreciation, depletion and amortization of oil and gas properties $ 318,473 $ 266,449 20 % +Depreciation, depletion and amortization of other property and equipment 1,242 1,312 (5) % +Total depreciation, depletion and amortization $ 319,715 $ 267,761 19 % +Total depreciation, depletion and amortization per Mcfe $ 0.83 $ 0.74 12 % +The increase in total and per unit depreciation, depletion and amortization of our oil and gas properties for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily the result of our drilling and development activities subsequent to 2022. +46 +Table of Contents +Inde x to Financial Statements +General and Administrative Expenses (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +General and administrative expenses, gross $ 75,180 $ 68,495 10 % +Reimbursed from third parties (13,770) (13,035) 6 % +Capitalized general and administrative expenses (22,810) (20,156) 13 % +General and administrative expenses, net $ 38,600 $ 35,304 9 % +General and administrative expenses, net per Mcfe $ 0.10 $ 0.10 — % +The increase in total general and administrative expenses for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily driven by increases in employee headcount and compensation as well as legal expenses related to the continued administration of our Chapter 11 filing and settlement of a firm transportation agreement as noted in Note 19 of our consolidated financial statements. +Restructuring Costs +During the year ended December 31, 2023, Gulfport recognized $4.8 million in personnel-related restructuring expenses associated with changes in the organizational structure and leadership team resulting from the appointment of Gulfport's new CEO in January 2023. Of these expenses, $1.3 million resulted from accelerated vesting of share-based grants, which are non-cash charges. The organizational changes were completed in the second quarter of 2023 and there are no remaining employee termination liabilities associated with these changes. +Interest Expense (in thousands, except per unit) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Interest on 2026 Senior Notes $ 44,000 $ 44,000 — % +Interest on Credit Facility 13,810 12,799 8 % +Amortization of loan costs 3,256 2,914 12 % +Capitalized interest (4,147) — 100 % +Other 150 60 150 % +Total interest expense $ 57,069 $ 59,773 (5) % +Interest expense per Mcfe $ 0.15 $ 0.17 (12) % +Interest expense on our Credit Facility increased 8% for the year ended December 31, 2023, compared to the year ended December 31, 2022, as a result of increased interest rates resulting from the current inflationary environment. The Company also capitalized $4.1 million in interest expense for the year ended December 31, 2023, and did not capitalize interest expense for the year ended December 31, 2022. +47 +Table of Contents +Inde x to Financial Statements +Other, net (in thousands) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 % Change +Other, net $ (27,982) $ (11,348) 147 % +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2023, included $17.8 million receipt of funds related to the interim TC claim distribution and a $1 million administrative payment to Rover as part of the executed settlement that occurred in the first quarter of 2023. Additionally, in the fourth quarter of 2023, Gulfport received an additional $8.3 million distribution related to its TC claim. Gulfport does not expect to receive additional distributions from the liquidating trust for its TC claim. The distributions and settlement is more fully described in Note 19 of our consolidated financial statements. Other, net included a $5.0 million recoupment of previously placed collateral for certain firm transportation commitments during our Chapter 11 filing. +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2022, included $11.5 million related to the initial TC claim distribution as discussed in Note 19 of our consolidated financial statements. Additionally, Other, net included a $5.1 million payment to settle certain gas imbalance positions and a $5.2 million receipt of funds from a litigation settlement. +Income Taxes (in thousands) +For the year ended December 31, 2023, we had an effective tax rate of (56)% and an income tax benefit of $525.2 million. The income tax benefit primarily related to the partial release of the valuation allowance maintained against our net deferred tax asset position. For the year ended December 31, 2022, the Company's effective tax rate was 0% and we did not record any income tax expense, as a result of maintaining a full valuation allowance against our net deferred tax asset. See Note 11 of our consolidated financial statements for further discussion of our income tax benefit. +Liquidity and Capital Resources +Overview . We strive to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility, fund our development projects, operations and capital expenditures and return capital to shareholders. We utilize derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company's cash flows. We generally fund our operations, planned capital expenditures and any share repurchases with cash flow from our operating activities, cash on hand, and borrowings under our Credit Facility. Additionally, we may access debt and equity markets and sell properties to enhance our liquidity. There is no guarantee that the debt or equity capital markets will be available to us on acceptable terms or at all. +For the year ended December 31, 2023, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been for development of our oil and natural gas properties, share repurchases and discretionary acreage acquisitions. +We believe our annual free cash flow generation, borrowing capacity under the Credit Facility and cash on hand will provide sufficient liquidity to fund our operations, capital expenditures, interest expense and share repurchases during the next 12 months and the foreseeable future. +To the extent actual operating results, realized commodity prices or uses of cash differ from our assumptions, our liquidity could be adversely affected. See Note 5 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our senior notes. +As of December 31, 2023, we had $1.9 million of cash and cash equivalents compared to $7.3 million as of December 31, 2022, and a net working capital of $52.4 million as of December 31, 2023, compared to a net working capital deficit of $391.1 million as of December 31, 2022. As of December 31, 2023, our net working capital includes no debt due in the next 12 months. Our total principal amount of funded debt as of December 31, 2023, was $668.0 million compared to $695.0 million as of December 31, 2022. See Note 5 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +48 +Table of Contents +Inde x to Financial Statements +As of February 26, 2024, we had $7.1 million of cash and cash equivalents, $51.0 million borrowings under our Credit Facility, $63.8 million of letters of credit outstanding, and $550 million of outstanding 2026 Senior Notes. +Debt. On October 14, 2021, we entered into the Third Amended and Restated Credit Agreement JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties. The Existing Credit Facility provides for an aggregate maximum principal amount of up to $1.5 billion. The credit agreement also provides for a $175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. +On May 2, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Amendment to Borrowing Base Redetermination Agreement and First Amendment to our Credit Agreement, which amended the Existing Credit Facility. The amendment, among other things, (a) increased the borrowing base under the Credit Facility from $850 million to $1.0 billion with elected commitments remaining at $700 million, (b) amended certain covenants related to hedging to ease certain requirements and limitations and (c) amended the covenants governing restricted payments to (i) increase the Net Leverage Ratio allowing unlimited restricted payments from 1.00 to 1.00 to 1.25 to 1.00 and (ii) permit additional restricted payments to redeem preferred equity until December 31, 2022 provided certain leverage, no event of default or borrowing base deficiency and availability tests are met and (d) provided for the transition from a LIBOR to a SOFR benchmark, with a 10 basis point credit spread adjustment for all tenors. +On October 31, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Borrowing Base Reaffirmation Agreement and Second Amendment to our Credit Agreement, which amended the Existing Credit Facility. The amendment, among other things, reconfirmed the borrowing base under the Credit Facility at $1.0 billion and the elected commitments at $700 million. +On May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Existing Credit Facility (as amended, the “Credit Facility”). The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility from $700 million to $900 million, (b) increased the borrowing base under the Credit Facility from $1 billion to $1.1 billion, (c) increased the excess cash threshold under the Credit Facility from $45 million to $75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $100 million; provided that such notes have not be refinanced, redeemed or repaid in full on or prior to such 91st day. +On October 27, 2023, Gulfport completed its semi-annual borrowing base redetermination during which the borrowing base was reaffirmed at $1.1 billion with elected commitments remaining at $900 million. +Additionally, on the Emergence Date, pursuant to the terms of the Plan, we issued our 2026 Senior Notes. The 2026 Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Credit Facility. +We may continue to use a combination of cash, borrowings and issuances of our Common Stock or other securities to retire our outstanding debt and Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, tender offers or otherwise, but we are under no obligation to do so. +See Note 5 of our consolidated financial statements for additional discussion of our outstanding debt. +Preferred Stock Dividends . As discussed in Note 6 of our consolidated financial statements, holders of Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the Liquidation Preference with respect to cash dividends and 15% per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of Preferred Stock (“PIK Dividends”). We currently have the option to pay either cash dividends or PIK dividends on a quarterly basis. +During the year ended December 31, 2023, and the year ended December 31, 2022, the Company paid $4.8 million and $5.4 million, respectively, of cash dividends to holders of our Preferred Stock. +49 +Table of Contents +Inde x to Financial Statements +Supplemental Guarantor Financial Information . The 2026 Senior Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our Credit Facility or certain other debt (the “Guarantors”). The 2026 Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC (the “Non-Guarantors”). The Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2026 Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2026 Senior Notes. +SEC Regulation S-X Rule 13-01 requires the presentation of "Summarized Financial Information" to replace the "Condensed Consolidating Financial Information" required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements. +Derivatives and Hedging Activities . Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. See Item 7A Quantitative and Qualitative Disclosures About Market Risk for further discussion on the impact of commodity price risk on our financial position. Additionally, see Note 13 of our consolidated financial statements for further discussion of derivatives and hedging activities. +Subsequent to December 31, 2023 and as of February 26, 2024, we entered into the following natural gas, oil, and NGL derivative contracts: +Period Type of Derivative Instrument Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2024 Swaps NYMEX Henry Hub 40,219 $2.66 +2024 Basis Swaps TETCO M2 18,306 $(0.90) +2025 Basis Swaps TETCO M2 100,000 $(0.99) +2025 Costless Collars NYMEX Henry Hub 30,000 $3.25 / $4.03 +NGL (Bbl/d) ($/Bbl) +2025 Swaps Mont Belvieu C3 1,000 $30.14 +50 +Table of Contents +Inde x to Financial Statements +Contractual and Commercial Obligations. The following table sets forth our contractual and commercial obligations at December 31, 2023 (in thousands): +Payment due by period +Contractual Obligations Total 2024 2025-2026 2027-2028 2029 and Thereafter +Long-term debt (1) : +Principal $ 668,000 $ — $ 550,000 $ 118,000 $ — +Interest 108,167 44,000 64,167 — — +Firm transportation and gathering contracts (2) +1,364,389 219,367 271,985 273,006 600,031 +Other operational commitments (3) +28,938 28,938 — — — +Operating lease liabilities (4) +14,298 12,958 1,330 10 — +Total contractual cash obligations (5) +$ 2,183,792 $ 305,263 $ 887,482 $ 391,016 $ 600,031 +_____________________ +(1) The maturities of our debt obligations and associated interest reflect their original expiration dates and do not reflect any acceleration due to any events of default pertaining to these obligations. See Note 5 of our consolidated financial statements for a description of our long-term debt. +(2) See Note 18 of our consolidated financial statements for further discussion of our firm transportation and gathering commitments. +(3) See Note 18 of our consolidated financial statements for a description of our other operational commitments. +(4) See Note 10 of our consolidated financial statements for a description of our operating lease liabilities. +(5) This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 13 and 4 of our consolidated financial statements, respectively. +Off-balance Sheet Arrangements. We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2023, our material off-balance sheet arrangements and transactions include $63.8 million in letters of credit outstanding against our Credit Facility and $43.3 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance, primarily for certain firm transportation agreements. Additionally, the Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials spans 2024, with approximately $28.9 million remaining. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. See Note 18 of our consolidated financial statements for further discussion of the various financial guarantees we have issued. +Capital Expenditures. Our capital expenditures have historically been related to the execution of our drilling and completion activities in addition to certain lease acquisition activities. Our capital investment strategy is focused on prudently developing our existing properties to generate sustainable cash flow considering current and forecasted commodity prices. For the year ended December 31, 2023, the Company's incurred capital expenditures totaled $491.5 million, of which $388.6 million related to drilling and completion activities, $54.8 million related to maintenance leasehold and land investment and $48.0 million related to discretionary acreage acquisitions. +Our drilling and completion capital expenditures for 2024 are currently estimated to be in the range of $330 million to $360 million. Also, we currently expect to spend approximately $50 million to $60 million in 2024 for maintenance leasehold and land investment, which is focused on near-term drilling programs and facilitating increases in our working interests and lateral footage in units we plan to drill in 2024 and 2025. We expect this capital program to result in approximately 1,045 to 1,080 MMcfe per day of production in 2024. +Additionally, we are pursuing accretive acreage opportunities that expand our resource depth and provide additional optionality to our near term development plans and intend to allocate approximately $40 million for discretionary acreage acquisitions. +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2023, WTI prices ranged from $66.61 to $93.67 per barrel and the Henry Hub spot market price of natural gas ranged from $1.74 to $3.78 per MMBtu. During 2022, WTI prices ranged from $71.05 to $123.64 per barrel and the Henry Hub spot market price of natural gas ranged from $3.46 to $9.85 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or +51 +Table of Contents +Inde x to Financial Statements +development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for further information regarding our open derivative instruments at December 31, 2023. +Sources and Uses of Cash +The following table presents the major changes in cash and cash equivalents for the year ended December 31, 2023 and December 31, 2022 (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Net cash provided by operating activities $ 723,181 $ 739,077 +Additions to oil and natural gas properties (537,360) (460,780) +Debt activity, net (27,000) (19,000) +Repurchases of Common Stock (149,165) (250,482) +Preferred Stock dividends (4,840) (5,444) +Other (10,146) 628 +Net change in cash and cash equivalents (5,330) 3,999 +Cash and cash equivalents at end of period $ 1,929 $ 7,259 +Net cash provided by operating activities. Net cash provided by operating activities was $723.2 million for the year ended December 31, 2023, compared to $739.1 million for the year ended December 31, 2022. The decrease was primarily the result of a decrease in revenue due to a decline in commodity prices partially offset by an increase of cash receipts from settled derivative instruments. +Additions to oil and natural gas properties. During the year ended December 31, 2023, we spud 20 gross (17.9 net) wells and commenced sales from 22 gross (20.2 net) wells in the Utica/Marcellus for a total cost of approximately $344.4 million and we spud 5 gross (3.2 net) and commenced sales from 2 gross (1.7 net) wells in the SCOOP for a total cost of approximately $37.3 million. Additionally, the Company incurred $54.8 million related to maintenance leasehold and land investment and $48.0 million related to discretionary acreage acquisitions. +52 +Table of Contents +Inde x to Financial Statements +Drilling and completion costs discussed above reflect incurred costs while drilling and completion costs presented in the table below reflect cash payments for drilling and completions. Incurred capital expenditures and cash capital expenditures may vary from period to period due to the cash payment cycle. Cash capital expenditures for the year ended December 31, 2023 and December 31, 2022, were as follows (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Oil and Natural Gas Property Cash Expenditures: +Drilling and completion costs $ 413,258 $ 410,281 +Leasehold acquisitions 101,191 32,708 +Other 22,911 17,791 +Total oil and natural gas property expenditures $ 537,360 $ 460,780 +Debt activity, net. During the year ended December 31, 2023, the Company had $971.0 million and $998.0 million in borrowings and repayments, respectively, on its Credit Facility. As of February 26, 2024, the Company had $51.0 million in borrowings outstanding on its Credit Facility. +Repurchases of Common Stock. During the year ended December 31, 2023, the Company repurchased 1.5 million shares for approximately $148.9 million under the Repurchase Program at a weighted average price of $101.53 per share. For the same period in 2022, the Company repurchased 2.9 million shares for $250.8 million at a weighted average price of $86.47 per share. As of February 26, 2024, we repurchased 4.5 million shares for approximately $413.6 million under the Repurchase Program at a weighted average price of $92.41 per share. +Preferred Stock Dividends. During the year ended December 31, 2023, the Company paid $4.8 million of cash dividends to holders of our Preferred Stock compared to $5.4 million in the year ended December 31, 2022. +Other. During the year ended December 31, 2023, the Company paid other expenses of $10.1 million, as compared to other expenses of $0.6 million paid during the year ended December 31, 2022. The increase was primarily related to a $6.8 million increase in debt issuance costs as a result of the Third Amendment to the Credit Facility which increased the commitment and redetermined its borrowing base, as discussed in Note 5 of our consolidated financial statements. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +Reorganization and Fresh Start Accounting. The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements included distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Accordingly, pre-petition liabilities that may be impacted by the Chapter 11 proceedings were classified as liabilities subject to compromise on the consolidated balance sheet as of December 31, 2020. Additionally, certain expenses, realized gains and losses and provisions for losses that were realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness were recorded as reorganization items, net in the consolidated statements of operations for the year ended December 31, 2020 and the Predecessor Period. +Upon emergence from the Chapter 11 Cases, ASC 852 required us to allocate our reorganization value to our individual assets based on their estimated fair values, resulting in a new entity for financial reporting purposes. After the Effective Date, the accounting and reporting requirements of ASC 852 are no longer applicable and have no impact on the Successor periods. Refer to Note 2 and Note 3 of our consolidated financial statements for more information on the events of the bankruptcy proceedings as well as the accounting and reporting impacts of the reorganization. +53 +Table of Contents +Inde x to Financial Statements +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2023. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. The Company did not record an impairment of its oil and natural gas properties for the year ended December 31, 2023 or December 31, 2022. See Oil and Natural Gas Properties in Note 1 of our consolidated financial statements for further information on the full cost method of accounting. +Oil, Natural Gas and NGL Reserves. Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 20 of our consolidated financial statements for further information. +Income Taxes. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company currently believes that it is more likely than not that a portion of the Company's federal and state deferred tax assets will be utilized. +Revenue Recognition. We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. Historically, our actual payments received have not significantly deviated from our accruals. +Derivative Instruments. We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models +54 +Table of Contents +Inde x to Financial Statements +that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments. Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the Board of Directors reviews our derivative program at its quarterly board meetings. +We use derivative instruments to achieve our risk management objectives, including swaps, options and costless collars. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls in the past to take advantage of premiums associated with market price volatility. +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of estimated production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions are typically reversed. The actual fixed prices on our derivative instruments is derived from the reference prices from third-party indices such as NYMEX. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter the original derivative position. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves, discount factors and option pricing models. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 16 of our consolidated financial statements for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2023, our natural gas, oil, and NGL derivative instruments consisted of the following types of instruments: +• Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +55 +Table of Contents +Inde x to Financial Statements +• Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• Costless Collars : Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +• Call Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options, and we would receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +Our hedge arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodity prices increase. At December 31, 2023, we had a net asset derivative position of $240.2 million, compared to a net liability derivative position of $347.9 million as of December 31, 2022. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have decreased our asset by approximately $88.3 million, while a 10% decrease in underlying commodity prices would have increased our asset by approximately $86.5 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. For more information regarding the Company's commodity derivative transactions, refer to Note 13 of our consolidated financial statements. +Counterparty Credit Risk. The Company routinely monitors and manages its exposure to counterparty risk related to derivative contracts by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties public credit ratings, and avoiding concentration of credit exposure by transacting with multiple counterparties. The Company's commodity derivative contract counterparties are typically financial institutions with investment-grade credit ratings. The Company enters into International Swap Dealers Association Master Agreements ("ISDA") with each of its derivative counterparties prior to executing derivative contracts. The terms of the ISDA provide, among other things, the Company and the counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or counterparty to a derivative contract. +Interest Rate Risk. Our Credit Facility is structured under floating rate terms, as advances under these facilities may be in the form of either base rate loans or term benchmark loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the term benchmark rates are elected, the term benchmark rates. At December 31, 2023, we had $118.0 million in borrowings outstanding under our Credit Facility which bore interest at the weighted average rate of 8.15% for the year ended December 31, 2023. A 1% increase in the average interest rate would increase interest expense by approximately $1.2 million based on outstanding borrowings under our Credit Facility at December 31, 2023. As of December 31, 2023, we did not have any interest rate swaps to hedge our interest risks. +56 +Table of Contents +Inde x to Financial Statements +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) +58 +Consolidated Balance Sheets +61 +Consolidated Statements of Operations +62 +Consolidated Statements of Comprehensive Income (Loss) +63 +Consolidated Statements of Stockholders' Equity (Deficit) +64 +Consolidated Statements of Cash Flows +66 +Notes to Consolidated Financial Statements +67 +1. Summary of Significant Accounting Policies +67 +2. Chapter 11 Emergence +73 +3. Fresh Start Accounting +74 +4. Property and Equipment +82 +5. Long-Term Debt +84 +6. Mezzanine Equity +87 +7. Equity +88 +8. Stock-Based Compensation +89 +9. Revenue From Contracts With Customers +92 +10. Leases +93 +11. Income Taxes +94 +12. Earnings Per Share +96 +13. Derivative Instruments +97 +14. Restructuring Costs +100 +15. Investments +100 +16. Fair Value Measurements +101 +17. Related Party Transactions +102 +18. Commitments +103 +19. Contingencies +103 +20. Supplemental Information On Oil And Gas Exploration And Production Activities +105 +21. Subsequent Events +110 +57 +Table of Contents +Inde x to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022 (Successor), the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the years ended December 31, 2023 and 2022 (Successor), the period from May 18, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through May 17, 2021(Predecessor), and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022 (Successor), and the results of its operations and its cash flows for the years ended December 31, 2023 and 2022 (Successor), the period from May 18, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through May 17, 2021(Predecessor), in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2024 expressed an unqualified opinion. +Emergence from bankruptcy +As discussed in Note 1 to the financial statements, the United States Bankruptcy Court for the District of Delaware entered an order confirming the plan for reorganization on April 28, 2021, and the Company emerged from bankruptcy on May 17, 2021. Accordingly, the accompanying financial statements have been prepared in conformity with FASB Accounting Standards Codification 852, Reorganizations, for the Successor as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods, as described in Note 3. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Depletion, depreciation and amortization expense and impairment of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 and Note 4 to the financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil +58 +Table of Contents +Inde x to Financial Statements +and gas properties (the full cost ceiling test). To estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and assessment of potential impairment. We identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense and the assessment of potential impairment as a critical audit matter. +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and the assessment of potential impairment. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others: +• Tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessment of potential impairment for the Company’s oil and gas properties. +• Evaluated the independence, objectivity, and professional qualifications of the Company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialist. +• Evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated future development costs, and ownership interest. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year; +◦ Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ Tested the model used to determine the future development costs and compared estimated future development costs used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +Evaluation of the realizability of deferred tax assets +As described further in Note 11 to the financial statements, the Company recorded a reduction in the valuation allowance associated with federal and state deferred tax assets of $699.7 million and $23.4 million, based on a change in judgment about the realizability of the Company’s deferred tax assets in future years. Management’s assessment of all available evidence, both positive and negative, supporting the realizability of the Company’s deferred tax assets, as required by applicable accounting standards, resulted in the recognition of a tax benefit for the portion of the Company’s deferred tax assets considered more likely than not to be realized. We identified the evaluation of the realizability of the deferred tax assets as a critical audit matter. +The principal consideration for our determination that the realizability of the deferred tax assets is a critical audit matter is that changes in certain inputs and assumptions, which require a high degree of subjectivity, necessary to estimate the future taxable +59 +Table of Contents +Inde x to Financial Statements +income could have a significant impact on the measurement of the realizability of the deferred tax asset. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the realizability of deferred tax assets included the following, among others. +• Tested the design and operating effectiveness of key controls relating to the income tax provision which includes the periodic evaluation of the realizability of the deferred tax assets. Specifically, these controls related to the preparation and review of the tax provision, including the estimation of future taxable income required as part of the evaluation and measurement of the release of the valuation allowance. +• Evaluated management's assessment of and weighing of the positive and negative evidence utilized to conclude that a portion of the deferred tax assets were realizable. +• Evaluated the Company’s forecasts of future production volumes by comparing the forecast utilized to the SEC reserve report and evaluating any differences. +• Compared the estimated realized pricing used in the future taxable income forecast to quoted future market pricing for observable periods. +• Compared the net revenue interests used in the forecast of producing reserves and related future taxable income to the Company’s interim and year-end reserve reports. +• Evaluated the lease operating expense, taxes other than income, transportation, gathering, processing and compression expense, and general and administrative expense included in the estimates of future taxable income forecast by comparing to historical actuals. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +February 28, 2024 +60 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +(In thousands) +Successor +December 31, 2023 December 31, 2022 +Assets +Current assets: +Cash and cash equivalents $ 1,929 $ 7,259 +Accounts receivable—oil, natural gas, and natural gas liquids sales 122,479 278,404 +Accounts receivable—joint interest and other 22,221 21,478 +Prepaid expenses and other current assets 16,951 7,621 +Short-term derivative instruments 233,226 87,508 +Total current assets 396,806 402,270 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 2,904,519 2,418,666 +Unproved properties 204,233 178,472 +Other property and equipment 9,165 6,363 +Total property and equipment 3,117,917 2,603,501 +Less: accumulated depletion, depreciation and amortization ( 865,618 ) ( 545,771 ) +Total property and equipment, net 2,252,299 2,057,730 +Other assets: +Long-term derivative instruments 47,566 26,525 +Deferred tax asset 525,156 — +Operating lease assets 14,299 26,713 +Other assets 31,487 21,241 +Total other assets 618,508 74,479 +Total assets $ 3,267,613 $ 2,534,479 +Liabilities, Mezzanine Equity and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities $ 309,532 $ 437,384 +Short-term derivative instruments 21,963 343,522 +Current portion of operating lease liabilities 12,959 12,414 +Total current liabilities 344,454 793,320 +Non-current liabilities: +Long-term derivative instruments 18,602 118,404 +Asset retirement obligation 29,941 33,171 +Non-current operating lease liabilities 1,340 14,299 +Long-term debt 667,382 694,155 +Total non-current liabilities 717,265 860,029 +Total liabilities 1,061,719 1,653,349 +Commitments and contingencies (Notes 18 and 19) +Mezzanine equity: +Preferred Stock - $ 0.0001 par value, 110.0 thousand shares authorized, 44.2 thousand issued and outstanding at December 31, 2023, and 52.3 thousand issued and outstanding at December 31, 2022 +44,214 52,295 +Stockholders’ equity: +Common Stock - $ 0.0001 par value, 42.0 million shares authorized, 18.3 million issued and outstanding at December 31, 2023, and 19.1 million issued and outstanding at December 31, 2022 +2 2 +Additional paid-in capital 315,726 449,243 +Common Stock held in reserve, 62.0 thousand shares at December 31, 2023, and 62.0 thousand shares at December 31, 2022 +( 1,996 ) ( 1,996 ) +Retained earnings 1,847,948 381,872 +Treasury stock, at cost - 0.0 thousand shares at December 31, 2023, and 3.9 thousand shares at December 31, 2022 +— ( 286 ) +Total stockholders’ equity 2,161,680 828,835 +Total liabilities, mezzanine equity and stockholders’ equity $ 3,267,613 $ 2,534,479 +See accompanying notes to consolidated financial statements. +61 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(In thousands) +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +REVENUES: +Natural gas sales $ 831,812 $ 1,998,452 $ 906,096 $ 344,390 +Oil and condensate sales 99,854 147,444 81,347 29,106 +Natural gas liquid sales 119,717 184,963 105,141 36,780 +Net gain (loss) on natural gas, oil and NGL derivatives 740,319 ( 999,747 ) ( 556,819 ) ( 137,239 ) +Total revenues 1,791,702 1,331,112 535,765 273,037 +OPERATING EXPENSES: +Lease operating expenses 68,648 64,790 32,172 19,524 +Taxes other than income 33,717 60,139 30,243 12,349 +Transportation, gathering, processing and compression 348,631 357,246 212,013 161,086 +Depreciation, depletion and amortization 319,715 267,761 160,913 62,764 +Impairment of oil and natural gas properties — — 117,813 — +Impairment of other property and equipment — — — 14,568 +General and administrative expenses 38,600 35,304 34,465 19,175 +Restructuring costs 4,762 — 2,858 — +Accretion expense 2,782 2,746 1,214 1,229 +Total operating expenses 816,855 787,986 591,691 290,695 +INCOME (LOSS) FROM OPERATIONS 974,847 543,126 ( 55,926 ) ( 17,658 ) +OTHER EXPENSE (INCOME): +Interest expense 57,069 59,773 40,853 4,159 +Loss on debt extinguishment — — 3,040 — +Loss from equity method investments, net — — — 342 +Reorganization items, net — — — ( 266,898 ) +Other, net ( 27,982 ) ( 11,348 ) 13,049 1,713 +Total other expense 29,087 48,425 56,942 ( 260,684 ) +INCOME (LOSS) BEFORE INCOME TAXES 945,760 494,701 ( 112,868 ) 243,026 +INCOME TAX BENEFIT: +Current — — ( 39 ) ( 7,968 ) +Deferred ( 525,156 ) — — — +Total income tax benefit ( 525,156 ) — ( 39 ) ( 7,968 ) +NET INCOME (LOSS) 1,470,916 494,701 ( 112,829 ) 250,994 +Dividends on Preferred Stock ( 4,840 ) ( 5,444 ) ( 4,573 ) — +Participating securities - Preferred Stock ( 212,360 ) ( 76,401 ) — — +NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 1,253,716 $ 412,856 $ ( 117,402 ) $ 250,994 +NET INCOME (LOSS) PER COMMON SHARE: +Basic $ 67.24 $ 20.45 $ ( 5.71 ) $ 1.56 +Diluted $ 66.46 $ 20.32 $ ( 5.71 ) $ 1.56 +Weighted average common shares outstanding—Basic 18,645 20,185 20,545 160,834 +Weighted average common shares outstanding—Diluted 18,902 20,347 20,545 160,834 +See accompanying notes to consolidated financial statements. +62 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(In thousands) +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Net income (loss) $ 1,470,916 $ 494,701 $ ( 112,829 ) $ 250,994 +Foreign currency translation adjustment — — — 2,570 +Other comprehensive loss — — — 2,570 +Comprehensive income (loss) $ 1,470,916 $ 494,701 $ ( 112,829 ) $ 253,564 +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) +(In thousands) +Common Stock Common Stock Held in Reserve Treasury Stock Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Shares Amount Shares Amount +Balance at January 1, 2021 (Predecessor) 160,762 $ 1,607 — $ — $ — $ 4,213,752 $ ( 43,000 ) $ ( 4,472,859 ) $ ( 300,500 ) +Net income — — — — — — — 250,994 250,994 +Other comprehensive income — — — — — — 2,570 — 2,570 +Stock compensation — — — — — 6,514 — — 6,514 +Shares repurchased ( 96 ) ( 1 ) — — — ( 7 ) — — ( 8 ) +Issuance of restricted stock 228 3 — — — ( 2 ) — — 1 +Accumulated other comprehensive income extinguishment — — — — — — 40,430 — 40,430 +Cancellation of Predecessor equity ( 160,894 ) ( 1,609 ) — — — ( 4,220,256 ) — 4,221,865 — +Issuance of Common Stock 21,525 2 — — — 693,773 — — 693,775 +Shares of Common Stock held in reserve — — ( 1,679 ) ( 54,109 ) — — — — ( 54,109 ) +Balance at May 17, 2021 (Predecessor) 21,525 $ 2 ( 1,679 ) $ ( 54,109 ) $ — $ 693,774 $ — $ — $ 639,667 +Balance at May 18, 2021 (Successor) 21,525 2 ( 1,679 ) ( 54,109 ) — 693,774 — — 639,667 +Net loss — — — — — — — ( 112,829 ) ( 112,829 ) +Release of Common Stock held in reserve — — 741 23,893 — — — — 23,893 +Conversion of Preferred Stock 12 — — — — 171 — — 171 +Dividends on Preferred Stock — — — — — ( 4,573 ) — — ( 4,573 ) +Stock compensation — — — — — 3,149 — — 3,149 +Balance at December 31, 2021 (Successor) 21,537 $ 2 ( 938 ) $ ( 30,216 ) $ — $ 692,521 $ — $ ( 112,829 ) $ 549,478 +Net income — — — — — — — 494,701 494,701 +Conversion of Preferred Stock 407 — — — — 5,601 — — 5,601 +Stock compensation — — — — — 8,670 — — 8,670 +Repurchase of Common Stock under Repurchase Program ( 2,896 ) — — — ( 286 ) ( 250,482 ) — — ( 250,768 ) +Issuance of Common Stock held in reserve — — 876 28,220 — — — — 28,220 +Issuance of restricted stock, net of shares withheld for income taxes 49 — — — — ( 1,623 ) — — ( 1,623 ) +Dividends on Preferred Stock — — — — — ( 5,444 ) — — ( 5,444 ) +Balance at December 31, 2022 (Successor) 19,097 $ 2 ( 62 ) $ ( 1,996 ) $ ( 286 ) $ 449,243 $ — $ 381,872 $ 828,835 +64 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)–CONTINUED +(In thousands) +Common Stock Common Stock Held in Reserve Treasury Stock Paid-in +Capital Accumulated Other +Comprehensive (Loss) Income Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity (Deficit) +Shares Amount Shares Amount +Balance at January 1, 2023 (Successor) 19,097 $ 2 ( 62 ) $ ( 1,996 ) $ ( 286 ) $ 449,243 $ — $ 381,872 $ 828,835 +Net income — — — — — — — 1,470,916 1,470,916 +Conversion of Preferred Stock 593 — — — — 8,081 — — 8,081 +Stock compensation — — — — — 13,525 — — 13,525 +Repurchase of Common Stock under Repurchase Program ( 1,470 ) — — — 286 ( 151,912 ) — — ( 151,626 ) +Issuance of Common Stock held in reserve 68 — — — — — — — — +Issuance of restricted stock, net of shares withheld for income taxes — — — — — ( 3,207 ) — — ( 3,207 ) +Dividends on Preferred Stock — — — — — ( 4 ) — ( 4,840 ) ( 4,844 ) +Balance at December 31, 2023 (Successor) 18,288 $ 2 ( 62 ) $ ( 1,996 ) $ — $ 315,726 $ — $ 1,847,948 $ 2,161,680 +See accompanying notes to consolidated financial statements. +65 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(In thousands) +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Cash flows from operating activities: +Net income (loss) $ 1,470,916 $ 494,701 $ ( 112,829 ) $ 250,994 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depletion, depreciation and amortization 319,715 267,761 160,913 62,764 +Impairment of oil and natural gas properties — — 117,813 — +Impairment of other property and equipment — — — 14,568 +Loss from equity investments — — — 342 +Loss on debt extinguishment — — 3,040 — +Net (gain) loss on derivative instruments ( 740,319 ) 999,747 556,819 137,239 +Net cash receipts (payments) on settled derivative instruments 152,199 ( 1,053,810 ) ( 322,857 ) ( 3,361 ) +Non-cash reorganization items, net — — — ( 446,012 ) +Deferred income tax benefit ( 525,156 ) — — — +Stock-based compensation expense 9,480 5,723 2,045 1,165 +Other, net 7,645 5,528 1,085 562 +Changes in operating assets and liabilities, net 28,701 19,427 ( 113,044 ) 153,894 +Net cash provided by operating activities 723,181 739,077 292,985 172,155 +Cash flows from investing activities: +Additions to oil and natural gas properties ( 537,360 ) ( 460,780 ) ( 207,113 ) ( 102,330 ) +Proceeds from sale of oil and natural gas properties 2,659 3,360 4,339 15 +Other, net ( 2,526 ) ( 875 ) 2,669 4,484 +Net cash used in investing activities ( 537,227 ) ( 458,295 ) ( 200,105 ) ( 97,831 ) +Cash flows from financing activities: +Principal payments on Credit Facility ( 998,000 ) ( 2,082,000 ) ( 477,000 ) — +Borrowings on Credit Facility 971,000 2,063,000 641,000 — +Debt issuance costs and loan commitment fees ( 7,068 ) ( 234 ) ( 8,783 ) ( 7,100 ) +Borrowings on Exit Credit Facility — — 406,277 302,751 +Principal payments on Exit Credit Facility — — ( 709,028 ) — +Principal payments on DIP Credit Facility — — — ( 157,500 ) +Principal payments on Pre-Petition Revolving Credit Facility — — — ( 318,961 ) +Borrowings on Pre-Petition Revolving Credit Facility — — — 26,050 +Dividends on Preferred Stock ( 4,840 ) ( 5,444 ) ( 1,503 ) — +Proceeds from issuance of Preferred Stock — — — 50,000 +Repurchase of Common Stock under Repurchase Program ( 108,735 ) ( 250,482 ) — — +Repurchase of Common Stock under Repurchase Program - related party ( 40,430 ) — — — +Other, net ( 3,211 ) ( 1,623 ) — ( 8 ) +Net cash used in financing activities ( 191,284 ) ( 276,783 ) ( 149,037 ) ( 104,768 ) +Net (decrease) increase in cash and cash equivalents ( 5,330 ) 3,999 ( 56,157 ) ( 30,444 ) +Cash and cash equivalents at beginning of period 7,259 3,260 59,417 89,861 +Cash and cash equivalents at end of period $ 1,929 $ 7,259 $ 3,260 $ 59,417 +See accompanying notes to consolidated financial statements. +66 +Table of Contents +Inde x to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Description of Company +Gulfport Energy Corporation is an independent natural gas-weighted exploration and production company focused on the exploration, acquisition and production of natural gas, crude oil and NGL in the United States with primary focus in the Appalachia and Anadarko basins. The Company's principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Gulfport filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on November 13, 2020, and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until its emergence on May 17, 2021. The Company refers to the post-emergence reorganized organization in the condensed financial statements and footnotes as the "Successor" for periods subsequent to May 17, 2021, and the pre-emergence organization as "Predecessor" for periods on or prior to May 17, 2021. +Basis of Presentation +The consolidated financial statements included in this Annual Report are prepared in accordance with GAAP. +Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On the Petition Date, the Debtors filed voluntary petitions of relief under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). +The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021. The Debtors emerged from the Chapter 11 Cases on the Emergence Date. The Company's bankruptcy proceedings and related matters have been summarized below. +During the pendency of the Chapter 11 Cases, the Company continued to operate its business in the ordinary course as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief requested by the Company that was designed primarily to mitigate the impact of the Chapter 11 Cases on its operations, vendors, suppliers, customers and employees. As a result, the Company was able to conduct normal business activities and satisfy all associated obligations for the period following the Petition Date and was also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court. +Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Emergence Date. +The Company applied FASB ASC Topic 852 - Reorganizations ("ASC 852") in preparing the consolidated financial statements for the period ended May 17, 2021. ASC 852 specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Additionally, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded as reorganization items, net. Refer to Note 3 for more information regarding reorganization items. +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence Date. See Note 3 for more information regarding the application of fresh start accounting. +67 +Table of Contents +Inde x to Financial Statements +Risks and Uncertainties +The Company's revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil, gas and NGL, which are affected by many factors outside of Gulfport’s control, including changes in market supply and demand. Field-level prices received for Gulfport’s production have historically been volatile and may be subject to significant fluctuations in the future. The Company's derivative contracts serve to mitigate in part the effect of this price volatility on the Company's cash flows, and the Company has derivative contracts in place for a portion of its expected future natural gas, crude oil and NGL production. See Note 13 for further discussion of the Company's commodity derivative contracts. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Gulfport Energy Operating Corporation, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC and Mule Sky LLC. All intercompany balances and transactions are eliminated in consolidation. +Segments +The Company's assets and operations consist of one reportable segment. The Company has a single management team that administers all properties as a whole rather than by geographic operating area. Further, the Company measures financial performance as a single enterprise and not on an area-by-area basis. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. No material allowance was deemed necessary at December 31, 2023 and December 31, 2022. +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 to 18 months. +68 +Table of Contents +Inde x to Financial Statements +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash write-down is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company recognized a ceiling test impairment of $ 117.8 million in the second quarter of 2021. There were no impairments recognized in 2022 or 2023. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 204.2 million and $ 178.5 million at December 31, 2023 and December 31, 2022, respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Other property and equipment is recorded at cost. The Company expenses maintenance and repairs in the period incurred. Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Net Income (Loss) per Common Share +Basic net income (loss) per common share is computed by dividing income attributable to Common Stock by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if options or other contracts to issue Common Stock were exercised or converted into Common Stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income (loss) per common share are illustrated in Note 12 . +69 +Table of Contents +Inde x to Financial Statements +Income Taxes +The amount of income taxes recorded by Gulfport requires interpretations of complex rules and regulations of various tax jurisdictions throughout the United States. Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2020. As of December 31, 2023, the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. See Note 11 for further discussion of the Company's income taxes. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression in the accompanying consolidated statements of operations. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of ASC 606, Revenue from Contracts with Customers and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 9 for additional discussion of revenue from contracts with customers. +Accounting for Stock-based Compensation +Share-based payments to employees and members of its Board of Directors, including grants of restricted stock units and performance vesting restricted stock units, are recognized as equity at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares generally range between one to four years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +70 +Table of Contents +Inde x to Financial Statements +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. Although management believes these estimates are reasonable, actual results could differ from these estimates. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net income (loss) or total operating cash flows. +Supplemental cash flow and non-cash information (in thousands) +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Supplemental disclosure of cash flow information: +Cash paid for reorganization items, net $ — $ — $ 85,706 $ 87,199 +Interest payments, net of amounts capitalized 57,967 57,685 33,295 7,272 +Income tax receipts — — ( 9,381 ) — +Changes in operating assets and liabilities, net: +Accounts receivable - oil, natural gas, and natural gas liquids sales 155,925 ( 45,550 ) ( 52,143 ) ( 60,832 ) +Accounts receivable - joint interest and other ( 743 ) ( 1,095 ) ( 5,178 ) ( 3,005 ) +Accounts payable and accrued liabilities ( 126,329 ) 59,879 ( 72,912 ) 79,193 +Prepaid expenses ( 215 ) 4,863 13,559 135,471 +Other assets 63 1,330 3,630 3,067 +Total changes in operating assets and liabilities, net $ 28,701 $ 19,427 $ ( 113,044 ) $ 153,894 +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation $ 4,046 $ 2,948 $ 1,101 $ 930 +Asset retirement obligation capitalized 588 2,169 7,964 546 +Asset retirement obligation removed due to divestiture and settlements ( 1,267 ) ( 7 ) — — +Asset retirement obligation revisions ( 5,077 ) 2,072 7,762 — +Release of Common Stock held in reserve — 28,220 23,893 — +Foreign currency translation gain on equity method investments — — — 2,570 +71 +Table of Contents +Inde x to Financial Statements +Accounts Payable and Accrued Liabilities +Accounts payable and accrued liabilities consisted of the following (in thousands): +Successor +December 31, 2023 December 31, 2022 +Revenue payable and suspense $ 148,598 $ 222,991 +Accounts payable 43,517 37,807 +Accrued capital expenditures 38,322 36,464 +Accrued transportation, gathering, processing, and compression 32,849 56,138 +Accrued contract rejection damages and shares held in reserve 1,996 40,996 +Other accrued liabilities 44,250 42,988 +Total accounts payable and accrued liabilities $ 309,532 $ 437,384 +Other, net +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2023, included a $ 17.8 million receipt of funds related to the interim TC claim distribution and a $ 1 million administrative payment to Rover as part of the executed settlement that occurred in the first quarter of 2023. Additionally, in the fourth quarter of 2023, Gulfport received an additional $ 8.3 million distribution related to its TC claim. Gulfport does not expect to receive additional distributions from the liquidating trust for its TC claim. The distributions and settlement is more fully described in Note 19 . Other, net also included a $ 5.0 million recoupment of previously placed collateral for certain firm transportation commitments during its Chapter 11 filing. +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2022, included $ 11.5 million related to the initial TC claim distribution as discussed in Note 19 . Additionally, Other, net included a $ 5.1 million payment to settle certain gas imbalance positions and a $ 5.2 million receipt of funds from a litigation settlement. +Recent Accounting Pronouncements +In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (Topic 280). The amendments require disclosure for each reportable segment, the significant expense categories and amounts that are regularly provided to the chief operating decision-maker (CODM) and included in each reported measure of a segment’s profit or loss. Additionally, this ASU enhances interim disclosure requirements and provides new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective retrospectively for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this standard on our disclosures. +In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures (Topic 740). The amendment requires annual disclosure of additional categories of information about federal, state, and foreign income taxes in the rate reconciliation table and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. Additionally, the amendment requires disclosure of annual income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and to disaggregate the information by jurisdiction based on a quantitative threshold. ASU 2023-09 is effective for the Company’s annual reporting periods beginning after December 15, 2024, with early adoption permitted, and should be applied on a prospective basis, with a retrospective option. We are currently evaluating the effect that adoption of ASU 2023-09 will have on our disclosures. +72 +Table of Contents +Inde x to Financial Statements +2. CHAPTER 11 EMERGENCE +As described in Note 1 , on November 13, 2020, the Debtors filed the Chapter 11 Cases and the Plan, which was subsequently amended, and entered the confirmation order on April 28, 2021. The Debtors then emerged from bankruptcy upon effectiveness of the Plan on May 17, 2021. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan. +Plan of Reorganization +In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company's emergence from bankruptcy on May 17, 2021: +• Shares of the Predecessor's common stock outstanding immediately prior to the Emergence Date were cancelled, and on the Emergence Date, the Company issued 19,845,780 shares of Common Stock and 55,000 shares of Preferred Stock, which were the result of the transactions described below. The Company also entered into a registration rights agreement and amended its articles of incorporation and bylaws for the authorization of the Common Stock and Preferred Stock among other corporate governance actions. See Note 6 and 7 for further discussion of the Company's post-emergence equity; +• All outstanding obligations under the Predecessor Senior Notes were cancelled; +• The Predecessor effectuated certain restructuring transactions, including entering into a plan of Merger with Gulfport Merger Sub, Inc., a newly formed, wholly owned subsidiary of Gulfport ("Merger Sub"), pursuant to which Merger Sub was merged with and into Predecessor, resulting in the Predecessor becoming a wholly owned subsidiary of Gulfport; +• The Debtors entered into a Second Amended and Restated Credit Agreement (the "Exit Credit Agreement") with the Bank of Nova Scotia as administrative agent, various lender parties and acknowledged and agreed to by certain of Gulfport's subsidiaries, as guarantors, providing for (i) a new money senior secured reserve-based revolving credit facility in an aggregate maximum principal amount of up to $ 1.5 billion (the "Exit Facility"); (ii) a senior secured term loan in an aggregate maximum principal amount of up to $ 180 million (the "First-Out Term Loan") and together with the Exit Facility (the "Exit Credit Facility"), collectively with an initial borrowing base and elected commitment amount of up to $ 580 million (less the amount of any term loan deemed funded by any RBL Lender that is not a Consenting RBL Lender); +• The Company entered into an indenture to issue up to $ 550 million aggregate principal amount of its 8.000 % senior notes due 2026, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “1145 Indenture,” and such senior notes issued thereunder, the “1145 Notes”), under section 1145 of the Bankruptcy Code (“Section 1145”). Certain eligible holders have made an election (the “4(a)(2) Election”) entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the guarantors party thereto (such indenture, the “4(a)(2) Indenture,” and such senior notes issued thereunder, the “4(a)(2) Notes”), under Section 4(a)(2) of the Securities Act of 1933, as amended as opposed to its share of the up to $ 550 million aggregate principal amount of 1145 Notes. The 4(a)(2) Indenture's terms are substantially similar to the terms of the 1145 Indenture. The 1145 Indenture and the 4(a)(2) Indenture are referred to together as the "Indentures". The 1145 Notes and the 4(a)(2) Notes are collectively referred to as the "2026 Senior Notes"; +• The DIP Credit Facility indefeasibly converted into the Exit Facility, and all commitments under the DIP Credit Facility terminated. Each holder of an Allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility; +• Each holder of an Allowed Notes Claim received its pro rata share of 19,714,204 shares of Common Stock, 54,967 shares of Preferred Stock and New Unsecured Senior Notes; +• 1,678,755 shares of Common Stock were issued to the Disputed Claims Reserve; +• Each holder of a Class 4A Claim greater than the Convenience Claim Threshold received its pro rata share of 119,679 shares of Common Stock (which were issued to the Unsecured Claims Distribution Trust), $ 10 million in cash, subject to adjustment by the Unsecured Claims Distribution Trustee, and 100 % of the Mammoth Shares; +• Each holder of a Class 4B claim greater than the Convenience Claim Threshold received its pro rata share of 11,897 shares of Common Stock, 33 shares of Preferred Stock, the Rights Offering Subscription Rights and the 2026 Senior Notes; +• Each holder of a Convenience Class Claim will share in a $ 3 million cash distribution pool, which the Unsecured Claims Distribution Trustee may increase by an additional $ 2 million by reducing the Gulfport Parent Cash Pool; +73 +Table of Contents +Inde x to Financial Statements +• Each intercompany claim was cancelled on the Emergence Date and holders of intercompany interests received no recovery or distribution; +• The Company conducted a Rights Offering and issued 50,000 shares of Preferred Stock at $ 1,000 per share to holders of claims against the Predecessor Subsidiaries, raising $ 50 million in proceeds. Additionally, 5,000 shares were issued to the Back Stop Commitment counterparties in lieu of cash consideration as per the Backstop Commitment Agreement; and +• The Company adopted the Gulfport Energy Corporation 2021 Stock Incentive Plan (the "Incentive Plan") effective on the Emergence Date and reserved 2,828,123 shares of Common Stock for issuance to Gulfport's employees and non-employee directors pursuant to equity incentive awards to be granted under the Incentive Plan. +Executory Contracts +Subject to certain exceptions, under the Bankruptcy Code the Debtors were entitled to assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. Generally, the rejection of an executory contract was treated as a pre-petition breach of such contract and, subject to certain exceptions, relieved the Debtors from performing future obligations under such contract but entitled the counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease required the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights thereto. Refer to Note 19 for more information on potential future rejection damages related to general unsecured claims. +3. FRESH START ACCOUNTING +In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and applied fresh start accounting on the Emergence Date. The Company qualified for fresh start accounting because (1) the holders of existing voting shares of the Company prior to the Emergence Date received less than 50% of the voting shares of the Successor's equity following its emergence from bankruptcy and (2) the reorganization value of the Company's assets immediately prior to confirmation of the Plan of approximately $ 2.3 billion was less than the post-petition liabilities and allowed claims of $ 3.1 billion. +In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations. Accordingly, the consolidated financial statements after May 17, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Emergence Date fair values of the Successor's assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor. +Reorganization Value +Reorganization value is derived from an estimate of enterprise value, or fair value of the Company's interest-bearing debt and stockholders' equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $ 1.3 billion and $ 1.9 billion. With the assistance of third-party valuation advisors, the Company determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. Deferred income taxes were determined in accordance with FASB ASC Topic 740 - Income Taxes. For GAAP purposes, the Company valued the Successor's individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $ 1.6 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process. +74 +Table of Contents +Inde x to Financial Statements +The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of May 17, 2021. As estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties, the resolution of contingencies is beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially. +The following table reconciles the enterprise value to the implied fair value of the Successor's equity as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Less: Fair value of debt ( 852,751 ) +Successor equity value (2) +$ 748,775 +_____________________ +(1) Restricted cash is not included in the above table. +(2) Inclusive of $ 55 million of mezzanine equity. +The following table reconciles the enterprise value to the reorganization value as of the Emergence Date (in thousands): +Enterprise Value $ 1,600,000 +Plus: Cash and cash equivalents (1) +1,526 +Plus: Current and other liabilities 686,489 +Plus: Asset retirement obligations 19,084 +Less: Common stock held in reserve for settlement of claims post Emergence Date ( 54,109 ) +Reorganization value of Successor assets $ 2,252,990 +_____________________ +(1) Restricted cash is not included in the above table. +The fair values of our oil and natural gas properties, other property and equipment, derivative instruments, equity investments and asset retirement obligations were estimated as of the Emergence Date. +Oil and natural gas properties . The Company's principal assets are its oil and natural gas properties, which are accounted for under the full cost method of accounting. The Company determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all developed wells and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after seven years, adjusted for differentials and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area. +Other property and equipmen t. The fair value of other property and equipment, such as land, buildings, vehicles, computer equipment and other equipment, was maintained at net book value as the carrying value reasonably approximated the fair value of the assets. +Asset retirement obligation s. In accordance with FASB ASC Topic 410 - Asset Retirement and Environmental Obligations , the asset retirement obligations associated with the Company's oil and gas assets was valued using the income approach. The fair value of the Company’s asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, updated estimates of timing of reclamation obligations, an appropriate long-term inflation adjustment, and the Company's revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of the Company's credit standing. +75 +Table of Contents +Inde x to Financial Statements +Derivative Instruments. The fair value of derivative instruments was adjusted based on the change in the Company’s credit rating reflecting the Company’s credit standing at the Emergence Date. +Equity Investments. The fair value of the Company's investment in Grizzly was reduced by $ 27 million. The reduction in valuation was based upon the assessment of the investment by the Company's new management and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls which will lead to further dilution of its equity ownership interest. +Consolidated Balance Sheet +The following consolidated balance sheet is as of May 17, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Emergence Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets and liabilities. +As of May 17, 2021 +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Assets +Current assets: +Cash and cash equivalents $ 146,545 $ ( 145,019 ) (a) $ — $ 1,526 +Restricted cash — 57,891 (b) — 57,891 +Accounts receivable—oil and natural gas sales 180,711 — — 180,711 +Accounts receivable—joint interest and other 15,431 — — 15,431 +Prepaid expenses and other current assets 86,189 ( 60,894 ) (c) — 25,295 +Short-term derivative instruments 3,324 — 141 (r) 3,465 +Total current assets 432,200 ( 148,022 ) 141 284,319 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 9,558,121 — ( 7,860,713 ) (s) 1,697,408 +Unproved properties 1,375,681 — ( 1,145,507 ) (s) 230,174 +Other property and equipment 38,026 — ( 31,133 ) (t) 6,893 +Total property and equipment 10,971,828 — ( 9,037,353 ) 1,934,475 +Accumulated depletion, depreciation and amortization ( 8,870,723 ) — 8,870,723 (u) — +Total property and equipment, net 2,101,105 — ( 166,630 ) 1,934,475 +Other assets: +Equity investments 27,044 — ( 27,044 ) (v) — +Long-term derivative instruments 7,468 — 715 (w) 8,183 +Operating lease assets 47 — — 47 +Other assets 18,866 7,100 (d) — 25,966 +Total other assets 53,425 7,100 ( 26,329 ) 34,196 +Total assets $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +76 +Table of Contents +Inde x to Financial Statements +Predecessor Reorganization Adjustments Fresh Start Adjustments Successor +(In thousands) +Liabilities and Stockholders’ Equity (Deficit) +Current liabilities: +Accounts payable and accrued liabilities $ 384,200 $ 122,599 (e) $ — $ 506,799 +Short-term derivative instruments 96,116 — 2,784 (x) 98,900 +Current portion of operating lease liabilities — 38 (f) — 38 +Current maturities of long-term debt 280,251 ( 220,251 ) (g) — 60,000 +Total current liabilities 760,567 ( 97,614 ) 2,784 665,737 +Non-current liabilities: +Long-term derivative instruments 69,331 — 11,411 (y) 80,742 +Asset retirement obligation — 65,341 (h) ( 46,257 ) (z) 19,084 +Non-current operating lease liabilities — 9 (i) — 9 +Long-term debt, net of current maturities — 792,751 (j) — 792,751 +Total non-current liabilities 69,331 858,101 ( 34,846 ) 892,586 +Liabilities subject to compromise 2,224,449 ( 2,224,449 ) (k) — — +Total liabilities $ 3,054,347 $ ( 1,463,962 ) $ ( 32,062 ) $ 1,558,323 +Commitments and contingencies +Mezzanine Equity: +Preferred Stock $ — $ 55,000 (l) $ — $ 55,000 +Stockholders’ equity (deficit): +Predecessor common stock 1,609 ( 1,609 ) (m) — — +Common Stock — 2 (n) — 2 +Additional paid-in capital 4,215,838 ( 3,522,064 ) (o) — 693,774 +Common Stock held in reserve — ( 54,109 ) (p) — ( 54,109 ) +Accumulated other comprehensive loss ( 40,430 ) 40,430 (q) — — +Retained earnings (accumulated deficit) ( 4,644,634 ) 4,805,390 (q) ( 160,756 ) (aa) — +Total stockholders’ equity (deficit) $ ( 467,617 ) $ 1,268,040 $ ( 160,756 ) $ 639,667 +Total liabilities, mezzanine equity and stockholders’ equity (deficit) $ 2,586,730 $ ( 140,922 ) $ ( 192,818 ) $ 2,252,990 +77 +Table of Contents +Inde x to Financial Statements +Reorganization Adjustments (in thousands) +(a) The table below reflects changes in cash and cash equivalents on the Emergence Date from implementation of the Plan: +Release of escrow funds by counterparties as a result of the Plan $ 63,068 +Preferred Stock rights offering proceeds 50,000 +Funds required to rollover the DIP Credit Facility and Pre-Petition Revolving Credit Facility into the Exit Facility ( 175,000 ) +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest ( 1,022 ) +Payment of issuance costs related to the Exit Credit Facility ( 10,250 ) +Funding of the Professional Fee Escrow ( 43,891 ) +Payment of professional fees at Emergence Date ( 7,964 ) +Transfer to restricted cash for the Unsecured Claims Distribution Trust ( 1,000 ) +Transfer to restricted cash for the Convenience Claims Cash Pool ( 3,000 ) +Transfer to restricted cash for the Parent Cash Pool ( 10,000 ) +Payment of severance costs at Emergence Date ( 5,960 ) +Net change in cash and cash equivalents $ ( 145,019 ) +(b) Changes in restricted cash reflect the net effect of transfers from cash and cash equivalents for the Professional Fee Escrow and various claims class cash pools. +(c) Changes in prepaid expenses and other current assets include the following: +Release of escrow funds as a result of the Plan $ ( 63,068 ) +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Prepaid compensation earned at Emergence ( 2,073 ) +Net change in prepaid expenses and other current assets $ ( 60,894 ) +(d) Changes in other assets were due to capitalization of debt issuance costs related to the Exit Credit Facility. +(e) Changes in accounts payable and accrued liabilities included the following: +Payment of accrued Pre-Petition Revolving Credit Facility and DIP Credit Facility interest $ ( 1,022 ) +Payment of professional fees at emergence ( 7,964 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust 1,000 +Accrued payable for claims to be settled via Convenience Claims Cash Pool 3,000 +Accrued payable for claims to be settled via Parent Cash Pool 10,000 +Professional fees payable at Emergence 18,047 +Accrued payable for General Unsecured Claims against Gulfport Parent to be settled via 4A Claims distribution from common shares held in reserve 23,894 +Accrued payable for General Unsecured Claims against Gulfport Subsidiary to be settled via 4B Claims distribution from common shares held in reserve 30,216 +Reinstatement of payables due to Plan effects 45,428 +Net change in accounts payable and accrued liabilities $ 122,599 +(f) Changes to current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +78 +Table of Contents +Inde x to Financial Statements +(g) Changes in the current maturities of long-term debt include the following: +Current portion of Term Notes issued under the Exit Facility $ 60,000 +Payment of DIP Facility to effectuate Exit Facility ( 157,500 ) +Transfer of post-petition RBL borrowings to Exit Facility ( 122,751 ) +Net changes to current maturities of long-term debt $ ( 220,251 ) +(h) Reflects the reclassification of asset retirement obligations from liabilities subject to compromise. +(i) Changes to non-current operating lease liabilities reflect the reinstatement of lease liabilities due to contract assumptions. +(j) Changes in long-term debt include the following: +Emergence Date draw on Exit Facility $ 122,751 +Noncurrent portion of First-Out Term Loan issued under the Exit Credit Facility 120,000 +Issuance of 2026 Senior Notes 550,000 +Net impact to long-term debt, net of current maturities $ 792,751 +(k) On the Emergence Date, liabilities subject to compromise were settled in accordance with the Plan as follows: +General Unsecured Claims settled via Class 4A, 4B, and 5B distributions $ 74,098 +Predecessor Senior Notes and associated interest 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Reinstatement of Predecessor Claims as Successor liabilities 45,475 +Reinstatement of Predecessor asset retirement obligations 65,341 +Total liabilities subject to compromise settled in accordance with the Plan $ 2,224,449 +The resulting gain on liabilities subject to compromise was determined as follows: +Pre-petition General Unsecured Claims Settled at Emergence $ 74,098 +Predecessor Senior Notes Claims settled at Emergence 1,842,035 +Pre-Petition Revolving Credit Facility 197,500 +Rollover of Pre-Petition Revolving Credit Facility into Exit RBL Facility ( 197,500 ) +Accrued payable for claims to be settled via Unsecured Claims Distribution Trust ( 1,000 ) +Accrued payable for claims to be settled via Convenience Claims Cash Pool ( 3,000 ) +Accrued payable for claims to be settled via Parent Cash Pool ( 10,000 ) +Accrued payable for shares to be transferred to trust ( 54,109 ) +Issuance of Common Stock to settle Predecessor liabilities ( 639,666 ) +Issuance of 2026 Senior Notes in settlement of Class 4B and 5B claims ( 550,000 ) +Gain on settlement of liabilities subject to compromise $ 658,358 +(l) Changes to Preferred Stock reflect the fair value of preferred shares issued in the Rights Offering. +(m) Changes in Predecessor common stock reflect the extinguishment of Predecessor equity as per the Plan. +79 +Table of Contents +Inde x to Financial Statements +(n) Changes in Common Stock included the following: +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Parent (par value) $ — +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Subsidiaries (par value) 2 +Common stock reserved for settlement of claims post Emergence Date (par value) — +Net change to Common Stock $ 2 +(o) Changes to paid in capital included the following: +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Parent $ 27,751 +Issuance of Common Stock to settle General Unsecured Claims against Gulfport Subsidiaries 666,022 +Extinguishment of Predecessor stock-based compensation 4,419 +Extinguishment of Predecessor paid in capital ( 4,220,256 ) +Net change to paid in capital $ ( 3,522,064 ) +(p) Common Stock held in reserve to settle Allowed General Unsecured Claims include: +Shares held in reserve to settle Allowed Claims against Gulfport Parent ( 23,894 ) +Shares held in reserve to settle Allowed Claims against Gulfport Subsidiary ( 30,215 ) +Total Common Stock held in reserve ( 54,109 ) +(q) Change to retained earnings (accumulated deficit) included the following: +Gain on settlement of liabilities subject to compromise $ 658,358 +Extinguishment of Predecessor common stock and paid in capital 4,221,864 +Recognition of counterparty credits due to settlements effectuated at Emergence 4,247 +Deferred compensation earned at Emergence ( 2,073 ) +Extinguishment of Predecessor accumulated other comprehensive income ( 40,430 ) +Write-off of debt issuance costs related to First-Out Term Loan ( 3,150 ) +Severance costs incurred as a result of the Plan ( 5,961 ) +Professional fees earned at Emergence ( 18,047 ) +Rights offering backstop commitment fee ( 5,000 ) +Extinguishment of Predecessor stock-based compensation ( 4,418 ) +Net change to retained earnings (accumulated deficit) $ 4,805,390 +Fresh Start Adjustments +(r) The change in fair value of short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(s) The change in oil and natural gas properties represents the fair value adjustment to the Company's properties due to the adoption of fresh start accounting. +(t) Predecessor accumulated depreciation and amortization for other property and equipment was net against the gross value of the assets with the adoption of fresh start accounting. +(u) Predecessor accumulated depreciation and amortization was eliminated with the adoption of fresh start accounting. +(v) The change in equity investments is due to the fair value adjustment to the Company's Grizzly investment. +80 +Table of Contents +Inde x to Financial Statements +(w) The change in fair value of long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(x) The change in fair value of liabilities related to short-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(y) The change in fair value of liabilities related to long-term derivative instruments is due to the change in the Company's post-emergence credit rating. +(z) The fair value of asset retirement obligations was reduced due to the change in the Company's credit adjusted risk-free rate and expected economic life estimates. +(aa) Changes to retained earnings represent the total impact of fresh start adjustments to the post-reorganization balance sheet. +Reorganization Items, net +The Company has incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, the estimate of liabilities related to the rejection of certain midstream contracts reflects the best estimate of the most probable outcomes of ongoing litigation and settlement negotiations. The amount of these items, which were incurred in reorganization items, net within the accompanying condensed consolidated statements of operations, have significantly affected the Company's statements of operations. +The following table summarizes the components in reorganization items, net included in the Company's consolidated statements of operations (in thousands): +Predecessor +Period from January 1, 2021 through May 17, 2021 +Legal and professional advisory fees $ 81,565 +Net gain on liabilities subject to compromise ( 575,182 ) +Fresh start adjustments, net 160,756 +Elimination of Predecessor accumulated other comprehensive income 40,430 +Debt issuance costs 3,150 +Other items, net 22,383 +Total reorganization items, net $ ( 266,898 ) +81 +Table of Contents +Inde x to Financial Statements +4. PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated DD&A are as follows (in thousands): +Successor +December 31, 2023 December 31, 2022 +Proved oil and natural gas properties $ 2,904,519 $ 2,418,666 +Unproved properties 204,233 178,472 +Other depreciable property and equipment 8,779 5,977 +Land 386 386 +Total property and equipment 3,117,917 2,603,501 +Accumulated DD&A ( 865,618 ) ( 545,771 ) +Property and equipment, net $ 2,252,299 $ 2,057,730 +Oil and Natural Gas Properties +Under the full cost method of accounting, capitalized costs of oil and natural gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1 . During 2023, the net book value of the Company's oil and gas properties was below the calculated ceiling for each quarter of 2023. As a result, the Company did not record an impairment of its oil and natural gas properties during 2023. Lower natural gas, oil and NGL prices can reduce the value of the Company’s assets. In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine its actual ceiling test calculation and impairment analysis in future periods. Given the decline of commodity prices in 2023 and early 2024, non-cash impairments in future periods could occur if the trailing 12-month commodity prices decrease as compared to the average used in prior periods. +Additionally, the company did not record an impairment of its oil and natural gas properties during 2022 or the Prior Predecessor Period. During the Prior Successor Period, the Company incurred $ 117.8 million of impairments as a result of its oil and natural gas properties exceeding its calculated ceiling. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for natural gas, oil and NGL, which significantly reduced proved reserves values and proved reserves. +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 22.8 million, $ 20.2 million, $ 11.9 million and $ 8.0 million for the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period, respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 0.83 , $ 0.74 , $ 0.69 and $ 0.45 per Mcfe for the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period, respectively. +82 +Table of Contents +Inde x to Financial Statements +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2023 (in thousands): +Costs Incurred in +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 +Fresh Start Adjustments (May 17, 2021) (1) +Total +Acquisition costs $ 58,002 $ 17,288 $ 8,687 $ 117,270 $ 201,247 +Exploration costs — — — — — +Development costs 535 6 15 — 556 +Capitalized interest 2,430 — — — 2,430 +Total oil and natural gas properties not subject to amortization $ 60,967 $ 17,294 $ 8,702 $ 117,270 $ 204,233 +_____________________ +(1) Reflects carrying values of our unproved properties as a result of the application of fresh start accounting upon emergence from bankruptcy (see Note 3 for additional information) that remain in unproved properties as of December 31, 2023. +The following table summarizes the Company’s non-producing properties excluded from amortization by area (in thousands): +Successor +December 31, 2023 December 31, 2022 +Utica & Marcellus $ 177,888 $ 147,370 +SCOOP 26,345 31,102 +Total unproved properties $ 204,233 $ 178,472 +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years . However, the majority of the Company's non-producing leases in the Utica/Marcellus have five-year extension terms, which could extend this time frame beyond five years . +Asset Retirement Obligation +The following table provides a reconciliation of the Company's asset retirement obligation for the years ended December 31, 2023 and December 31, 2022 (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Asset retirement obligation, beginning of period $ 33,171 $ 28,264 +Liabilities incurred 588 96 +Liabilities settled ( 604 ) — +Liabilities removed due to divestitures ( 919 ) ( 7 ) +Accretion expense 2,782 2,746 +Revisions in estimated cash flows (1) +( 5,077 ) 2,072 +Asset retirement obligation, end of period $ 29,941 $ 33,171 +_____________________ +(1) Revisions represent changes in the present value of liabilities resulting from changes in estimated costs. +83 +Table of Contents +Inde x to Financial Statements +5. LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31, 2023 and December 31, 2022 (in thousands): +Successor +December 31, 2023 December 31, 2022 +8.0 % senior unsecured notes due 2026 +$ 550,000 $ 550,000 +Credit Facility due 2027 118,000 145,000 +Net unamortized debt issuance costs ( 618 ) ( 845 ) +Total debt, net 667,382 694,155 +Less: current maturities of long-term debt — — +Total long-term debt, net $ 667,382 $ 694,155 +Credit Facility +On October 14, 2021, the Company entered into the Existing Credit Facility with JPMorgan Chase Bank, N.A., as administrative agent, and various lender parties. The Existing Credit Facility provided for an aggregate maximum principal amount of up to $ 1.5 billion, an initial borrowing base of $ 850 million and an initial aggregate elected commitment amount of $ 700 million. The Existing Credit Facility also provides for a $ 175.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. +The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year. +On May 2, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Amendment to Borrowing Base Redetermination Agreement and First Amendment to our Credit Agreement ("Amendment"), which amended the Existing Credit Facility (as amended, the "Credit Facility"). The Amendment, among other things, (a) increased the borrowing base under the Credit Facility from $ 850 million to $ 1.0 billion with the elected commitments remaining at $ 700 million, (b) amended certain covenants related to hedging to ease certain requirements and limitations, (c) amended the covenants governing restricted payments to (i) increased the Net Leverage Ratio allowing unlimited restricted payments from 1.00 to 1.00 to 1.25 to 1.00 and (ii) permitted additional restricted payments to redeem preferred equity until December 31, 2022, provided certain leverage, no event of default or borrowing base deficiency and availability tests were met, and (d) provided for the transition from a LIBOR to a SOFR benchmark, with a 10 basis point credit spread adjustment for all tenors. +On October 31, 2022, the Company completed its semi-annual borrowing base redetermination and entered into the Borrowing Base Reaffirmation Agreement and Second Amendment to our Credit Agreement, which amended the Existing Credit Facility. The amendment, among other things, reconfirmed the borrowing base under the Credit Facility at $ 1.0 billion and the elected commitments at $ 700 million. +On May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Existing Credit Facility (as amended, the “Credit Facility”). The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility from $ 700 million to $ 900 million, (b) increased the borrowing base under the Credit Facility from $ 1 billion to $ 1.1 billion, (c) increased the excess cash threshold under the Credit Facility from $ 45 million to $ 75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $ 100 million; provided that such notes have not be refinanced, redeemed or repaid in full on or prior to such 91st day. +On October 27, 2023, Gulfport completed its semi-annual borrowing base redetermination during which the borrowing base was reaffirmed at $ 1.1 billion with elected commitments remaining at $ 900 million. +84 +Table of Contents +Inde x to Financial Statements +The Credit Facility bears interest at a rate equal to, at the Company’s election, either (a) SOFR benchmark plus an applicable margin that varies from 2.75 % to 3.75 % per annum or (b) a base rate plus an applicable margin that varies from 1.75 % to 2.75 % per annum, based on borrowing base utilization. The Company is required to pay a commitment fee of 0.50 % per annum on the average daily unused portion of the current aggregate commitments under the Credit Facility. The Company is also required to pay customary letter of credit and fronting fees. +The Credit Facility requires the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.25 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00. +The obligations under the Credit Facility, certain swap obligations and certain cash management obligations, are guaranteed by the Company and the wholly-owned domestic material subsidiaries of the Borrower (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and secured by substantially all of the Loan Parties’ assets (subject to customary exceptions). +The Credit Facility also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements and borrowing base certificates, conduct of business, maintenance of property, maintenance of insurance, entry into certain derivatives contracts, restrictions on the incurrence of liens, indebtedness, asset dispositions, restricted payments, and other customary covenants. These covenants are subject to a number of limitations and exceptions. +As of December 31, 2023, the Company had $ 118.0 million outstanding borrowings under the Credit Facility, $ 63.8 million in letters of credit outstanding and was in compliance with all covenants under the credit agreement. +For the years ended December 31, 2023 and December 31, 2022, the Credit Facility bore interest at a weighted average rate of 8.15 % and 5.19 %, respectively. +2026 Senior Notes +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company issued $ 550 million aggregate principal amount of its 8.0 % senior notes due 2026. The notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Credit Facility. Interest on the 2026 Senior Notes is payable semi-annually, on June 1 and December 1 of each year. The 2026 Senior Notes were issued under the Indentures, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the Guarantors and mature on May 17, 2026. +The covenants of the 1145 Indenture (other than the payment covenant) require that the Company comply with the covenants of the 4(a)(2) Indenture, as amended. The 4(a)(2) Indenture contains covenants limiting the Issuer’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) pay dividends or distributions in respect of certain equity interests or redeem, repurchase or retire certain equity interests or subordinated indebtedness, (iii) make certain investments, (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in certain lines of business, (viii) engage in consolidations, mergers and acquisitions, (ix) create unrestricted subsidiaries and (x) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the 2026 Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply. +Exit Credit Facility +As discussed in Note 2 , on the Emergence Date, pursuant to the terms of the Plan, the Company entered into the Exit Credit Agreement, which provided for (i) the Exit Facility in an aggregate principal amount of up to $ 1.5 billion and (ii) the First-Out Term Loan in an aggregate maximum amount of up to $ 180.0 million. The Exit Facility had an initial borrowing base and elected commitment amount of up to $ 580.0 million. +Loans drawn under the Exit Facility were not subject to amortization, while loans drawn under the First-Out Term Loan amortized with $ 15.0 million quarterly installments, commencing on the closing date and occurring every three months after the closing date. The Exit Credit Facility was scheduled to mature on May 17, 2024. +85 +Table of Contents +Inde x to Financial Statements +The Exit Facility provided for a $ 150.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. The Exit Facility also included a $ 40 million availability blocker that was to remain in place until Successful Midstream Resolution (as defined in the Exit Credit Agreement). The Credit Facility amended and refinanced the Exit Credit Facility. +Chapter 11 Proceedings - Predecessor Debt +Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stayed the creditors from taking any action as a result of the default. +The principal amounts from the Predecessor Senior Notes, Predecessor Building Loan and Pre-Petition Revolving Credit Facility, other than letters of credit drawn on the Pre-Petition Revolving Credit Facility after the Petition Date, were classified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020. +Debtor-in-Possession Credit Agreement +Pursuant to the RSA, the Consenting RBL Lenders agreed to provide the Company with a senior secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of $ 262.5 million consisting of (a) $ 105 million of new money and (b) $ 157.5 million to roll up a portion of the existing outstanding obligations under the Pre-Petition Revolving Credit Facility. The terms and conditions of the DIP Credit Facility are set forth in that certain form of credit agreement governing the DIP Credit Facility. The proceeds of the DIP Credit Facility were used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases and payment of court approved adequate protection obligations. On the Emergence Date, the DIP Facility was terminated and the lenders indefeasibly converted into the Exit Facility. Each holder of an allowed DIP Claim received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Pre-Petition Revolving Credit Facility +Prior to the Emergence Date, the Company had entered into a senior secured revolving credit facility agreement, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The Pre-Petition Revolving Credit Facility had a borrowing base of $ 580 million. On the Emergence Date, the Pre-Petition Revolving Credit Facility was terminated and the lenders indefeasibly converted into the Exit Credit Facility. Each holder of an allowed claim under the Pre-Petition Revolving Credit Facility received, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed DIP Claim its Pro Rata share of participation in the Exit Credit Facility. +Predecessor Senior Notes +On the Emergence Date, all outstanding obligations under the Predecessor Senior Notes were cancelled in accordance with the Plan and each holder of an allowed unsecured notes claim received their pro-rata share of 19.7 million shares of Common Stock and $ 550 million of the 2026 Senior Notes. +Predecessor Building Loan +In June 2015, the Company entered into a loan for the construction of the Company's corporate headquarters in Oklahoma City, which was substantially completed in December 2016. On the Emergence Date, ownership of the Company's corporate headquarters reverted to the Predecessor Building Loan lender and the Company entered into a short-term lease agreement for the headquarters with the lender. As a result, the Predecessor Building Loan liability was discharged as of the Emergence Date. +86 +Table of Contents +Inde x to Financial Statements +Interest Expense +The following schedule shows the components of interest expense for the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Cash paid for interest $ 57,967 $ 57,685 $ 33,295 $ 7,272 +Change in accrued interest ( 7 ) ( 826 ) 6,061 ( 1,503 ) +Capitalized interest ( 4,147 ) — ( 198 ) — +Amortization of loan costs 3,256 2,914 1,663 — +Other — — 32 ( 1,610 ) +Total interest expense $ 57,069 $ 59,773 $ 40,853 $ 4,159 +The Company capitalized $ 4.1 million in interest expense for year ended December 31, 2023, and $ 0.2 million during the Prior Successor Period to undeveloped oil and natural gas properties. The Company did not capitalize interest expense for the year ended December 31, 2022 or Prior Predecessor Period. +Fair Value of Debt +At December 31, 2023, the carrying value of the outstanding debt represented by the 2026 Senior Notes was approximately $ 549.4 million. Based on the quoted market prices (Level 1), the fair value of the 2026 Senior Notes was determined to be approximately $ 557.0 million at December 31, 2023. +6. MEZZANINE EQUITY +As discussed in Note 2 , the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on the Emergence Date to provide for, among other things, (i) the authority to issue 42 million shares of Common Stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of Preferred Stock, with a par value of $ 0.0001 per share and a liquidation preference of $ 1,000 per share (the "Liquidation Preference"). +Preferred Stock +On the Emergence Date, the Successor issued 55,000 shares of Preferred Stock. +Holders of Preferred Stock are entitled to receive cumulative quarterly dividends at a rate of 10 % per annum of the Liquidation Preference with respect to cash dividends and 15 % per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of Preferred Stock (“PIK Dividends”). Gulfport currently has the option to pay either cash dividends or PIK dividends on a quarterly basis. +Each holder of shares of Preferred Stock has the right (the “Conversion Right”), at its option and at any time, to convert all or a portion of the shares of Preferred Stock that it holds into a number of shares of Common Stock equal to the quotient obtained by dividing (x) the product obtained by multiplying (i) the Liquidation Preference times (ii) an amount equal to one (1) plus the Per Share Makewhole Amount (as defined in the Preferred Terms) on the date of conversion, by (y) $ 14.00 per share (as may be adjusted under the Preferred Terms). The shares of Preferred Stock outstanding at December 31, 2023 would convert to 3.2 million shares of Common Stock if all holders of Preferred Stock exercised their Conversion Right. +87 +Table of Contents +Inde x to Financial Statements +Gulfport shall have the right, but not the obligation, to redeem all, but not less than all, of the outstanding shares of Preferred Stock by notice to the holders of Preferred Stock, at the greater of (i) the aggregate value of the Preferred Stock, calculated by the Current Market Price (as defined in the Preferred Terms) of the number of shares of Common Stock into which, subject to redemption, such Preferred Stock would have been converted if such shares were converted pursuant to the Conversion Right at the time of such redemption and (ii) (y) if the date of such redemption is on or prior to the three year anniversary of the Emergence Date, the sum of the Liquidation Preference plus the sum of all unpaid PIK Dividends through the three year anniversary of the Emergence Date, or (x) if the date of such redemption is after the three year anniversary of the Emergence Date, the Liquidation Preference (the “Redemption Price”). +Following the Emergence Date, if there is a Fundamental Change (as defined in the Preferred Terms), Gulfport is required to redeem all, but not less than all, of the outstanding shares of Preferred Stock by cash payment of the Redemption Price per share of Preferred Stock within three ( 3 ) business days of the occurrence of such Fundamental Change. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if Gulfport lacks sufficient cash to redeem all outstanding shares of Preferred Stock, the Company is required to redeem a pro rata portion of each holder’s shares of Preferred Stock. +The Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by Gulfport or converted into Common Stock. +The Preferred Stock has been classified as mezzanine equity in the accompanying consolidated balance sheets due to the redemption features noted above. +Dividends and Conversions +During the years ended December 31, 2023 and December 31, 2022, the Company paid $ 4.8 million and $ 5.4 million, respectively, of cash dividends to holders of our Preferred Stock. During the Prior Successor Period, the Company paid dividends on our Preferred Stock, which included 3,071 shares of Preferred Stock paid in kind, approximately $ 55 thousand of cash-in-lieu of fractional shares, and $ 1.5 million of cash dividends to holders of our Preferred Stock. +The following table summarizes activity of the Company’s Preferred Stock for the years ended December 31, 2023, December 31, 2022 and Prior Successor Period: +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 +Preferred Stock, beginning of period 52,295 57,896 55,000 +Issuance of Preferred Stock — — 3,071 +Conversion of Preferred Stock ( 8,081 ) ( 5,601 ) ( 175 ) +Preferred Stock, end of period 44,214 52,295 57,896 +7. EQUITY +As discussed in Note 2 , the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on the Emergence Date to provide for, among other things, (i) the authority to issue 42 million shares of Common Stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of Preferred Stock, with a par value of $ 0.0001 per share and a Liquidation Preference of $ 1,000 per share. +Common Stock +On the Emergence Date, all existing shares of the Predecessor's common stock were cancelled. The Successor issued approximately 19.8 million shares of Common Stock and 1.7 million shares of Common Stock were issued to the Disputed Claims Reserve. +In January 2022 approximately 876,000 shares in the Disputed Claims Reserve at December 31, 2021 were issued to certain claimants. As of December 31, 2023, approximately 62,000 shares continue to be held in the Disputed Claims Reserve. The 62,000 remaining shares were issued in January 2024. +88 +Table of Contents +Inde x to Financial Statements +Common Stock Offering +On June 26, 2023, Gulfport completed an underwritten public offering of 1.5 million shares of its common stock by certain stockholders at a price to the public of $ 95.00 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +Concurrent with the closing of the offering, Gulfport purchased 263,158 shares of its common stock at $ 95.00 per share. The repurchase was part of the Company's existing Repurchase Program discussed below. +On December 14, 2023, Gulfport completed an underwritten public offering of 653,464 shares of its common stock by certain stockholders at a price to the public of $ 128.21 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +Stock Repurchase Program +In November 2021 the Company's Board of Directors approved the Repurchase Program to acquire up to $ 100 million of common stock, which has subsequently been increased up to $ 650 million and extended through December 31, 2024. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of common stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. +The following table summarizes activity under the Repurchase Program for the year ended December 31, 2023 (number of shares and dollar value of shares purchased shown in thousands): +Total Number of Shares Purchased Dollar Value of Shares Purchased Average Price Paid Per Share +First quarter 2023 459 $ 32,873 $ 71.61 +Second quarter 2023 442 41,358 93.67 +Third quarter 2023 76 8,681 113.97 +Fourth quarter 2023 490 65,968 134.72 +Total 1,467 $ 148,880 $ 101.53 +As of December 31, 2023, the Company has repurchased 4.4 million shares for $ 399.6 million at a weighted average price of $ 91.53 per share since the inception of the Repurchase Program. +8. STOCK-BASED COMPENSATION +As discussed in Note 2 , on the Emergence Date, the Company's Predecessor common stock was cancelled and the Company's Successor Common Stock was issued. Accordingly, the Company's then existing stock-based compensation awards were also cancelled, which resulted in the recognition of previously unamortized expense of $ 4.4 million related to the cancelled awards on the date of cancellation. The expense was included in reorganization items, net on the accompanying consolidated statements of operations. As a result, stock-based compensation for the Predecessor and Successor periods are not comparable. +Successor Stock-Based Compensation +As of the Emergence Date, the Board of Directors adopted the Incentive Plan with a share reserve of 2.8 million shares of Common Stock. The Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and performance awards or any combination of the foregoing. The Company has granted both restricted stock units and performance vesting restricted stock units to employees and directors pursuant to the Incentive Plan, as discussed below. +89 +Table of Contents +Inde x to Financial Statements +During the years ended December 31, 2023 and December 31, 2022, the Company's stock-based compensation expense was $ 12.3 million and $ 8.7 million of which the Company capitalized $ 4.0 million and $ 2.9 million, respectively, relating to its exploration and development efforts. Stock compensation expense, net of the amounts capitalized, is included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2023, the Company has awarded an aggregate of approximately 369,017 restricted stock units and approximately 274,624 performance vesting restricted stock units under the Incentive Plan. +The following table summarizes restricted stock unit activity for the Prior Successor Period and years ended December 31, 2022 and December 31, 2023: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of May 18, 2021 — $ — — $ — +Granted 200,484 66.05 153,138 48.54 +Vested — — — — +Forfeited/canceled ( 2,071 ) 66.89 — — +Unvested shares as of December 31, 2021 198,413 $ 66.04 153,138 $ 48.54 +Granted 78,192 96.90 37,666 66.82 +Vested ( 67,564 ) 65.91 — — +Forfeited/canceled ( 11,269 ) 80.11 — — +Unvested shares as of December 31, 2022 197,772 $ 77.49 190,804 $ 52.15 +Granted 104,901 88.59 83,820 58.39 +Vested ( 101,804 ) 75.75 — — +Forfeited/canceled ( 7,267 ) 91.61 ( 19,046 ) 49.37 +Unvested shares as of December 31, 2023 193,602 $ 83.89 255,578 $ 54.40 +The aggregate fair value of restricted stock units that vested during the years ended December 31, 2023 and December 31, 2022, was approximately $ 9.9 million and $ 5.9 million, respectively, based on the stock price at the time of vesting. There were no restricted stock units that vested in the Prior Successor Period. +Successor Restricted Stock Units +Restricted stock units awarded under the Incentive Plan generally vest over a period of 3 to 4 years in the case of employees and 1 or 4 years in the case of directors upon the recipient meeting applicable service requirements. Stock-based compensation expense is recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's Common Stock on the date of the grant. Unrecognized compensation expense as of December 31, 2023, was $ 11.7 million. The expense is expected to be recognized over a weighted average period of 1.83 years. +Successor Performance Vesting Restricted Stock Units +The Company has awarded performance vesting restricted stock units to certain of its executive officers under the Incentive Plan. The number of shares of common stock issued pursuant to the award will be based on a combination of (i) the Company's total shareholder return ("TSR") and (ii) the Company's relative total shareholder return ("RTSR") for the performance period. Participants will earn from 0 % to 200 % of the target award based on the Company's TSR and RTSR ranking compared to the TSR of the companies in the Company's designated peer group at the end of the performance period. Awards will be earned and vested at the end of a three-year performance period, subject to earlier termination of the performance period in the event of a change in control. The grant date fair values were determined using the Monte Carlo simulation method and are being recorded ratably over the performance period. +90 +Table of Contents +Inde x to Financial Statements +The table below summarizes the assumptions used in the Monte Carlo simulation to determine the grant date fair value of awards granted during the years ended December 31, 2022 and December 31, 2023: +Grant date April 29, 2022 January 24, 2023 March 3, 2023 April 3, 2023 +Forecast period (years) 3 3 3 3 +Risk-free interest rates 2.87 % 3.88 % 4.64 % 3.79 % +Implied equity volatility 88.4 % 87.2 % 86.4 % 70.8 % +Stock price on the date of grant $ 93.98 $ 72.99 $ 82.20 $ 79.50 +For grants awarded in the Prior Successor Period, expected volatilities utilized in the Monte Carlo models were estimated using a historical period consistent with the remaining performance period of approximately 3 years. The risk-free interest rates were based on the U.S. Treasury rate for a term commensurate with the expected life of the grant. The Company assumed a range of risk-free interest rates between 0.35 % and 0.67 % and a range of expected volatilities between 87.0 % and 87.1 % to estimate the fair value. +Unrecognized compensation expense as of December 31, 2023, related to performance vesting restricted shares was $ 5.2 million. The expense is expected to be recognized over a weighted average period of 1.64 years. +Predecessor Stock-Based Compensation +The Predecessor granted restricted stock units to employees and directors pursuant to the 2019 Amended and Restated Incentive Stock Plan (the "2019 Plan"). During the Prior Predecessor Period, the Company’s stock-based compensation cost was $ 4.4 million, of which the Company capitalized $ 0.9 million, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations. +The following table summarizes restricted stock unit activity for the Prior Predecessor Period: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of January 1, 2021 1,702,513 $ 4.74 840,595 $ 4.07 +Granted — — — — +Vested ( 227,132 ) 8.45 — — +Forfeited/canceled ( 1,475,381 ) 4.16 ( 840,595 ) 4.07 +Unvested shares as of May 17, 2021 — $ — — $ — +Predecessor Restricted Stock Units +Restricted stock units awarded under the 2019 Plan generally vested over a period of one year in the case of directors and three years in the case of employees and vesting was dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's Common Stock on the date of grant. All unrecognized compensation expense was recognized as of the Emergence Date. +91 +Table of Contents +Inde x to Financial Statements +Predecessor Performance Vesting Restricted Stock Units +The Company previously awarded performance vesting restricted stock units to certain of its executive officers under the 2019 Plan. The number of shares of Common Stock issued pursuant to the award was based on RTSR. RTSR is an incentive measure whereby participants will earn from 0 % to 200 % of the target award based on the Company’s TSR ranking compared to the TSR of the companies in the Company’s designated peer group at the end of the performance period. Awards were to be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. All unrecognized compensation expense was recognized as of the Emergence Date. +9. REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil condensate and NGL. These sales are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression expense in the accompanying consolidated statements of operations. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 122.5 million and $ 278.4 million as of December 31, 2023 and December 31, 2022, respectively, and are reported in accounts receivable - oil, natural gas, and natural gas liquids sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +92 +Table of Contents +Inde x to Financial Statements +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For each of the periods presented, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +10. LEASES +Nature of Leases +The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one year . At December 31, 2023, the Company had one active long-term drilling rig contract. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential v olatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells. +The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2027. These agreements are typically structured with non-cancelable terms of one year to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Future amounts due under operating lease liabilities as of December 31, 2023, were as follows (in thousands): +2024 $ 13,439 +2025 836 +2026 561 +2027 10 +2028 — +Total lease payments $ 14,846 +Less: imputed interest ( 547 ) +Total $ 14,299 +93 +Table of Contents +Inde x to Financial Statements +Lease costs incurred for the years ended December 31, 2023 and December 31, 2022 consisted of the following (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Operating lease cost $ 13,752 $ 535 +Variable lease cost — — +Short-term lease cost 28,691 31,987 +Total lease cost (1) +$ 42,443 $ 32,522 +_____________________ +(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations. +Supplemental cash flow information related to leases was as follows (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Cash paid for amounts included in the measurement of lease liabilities +Operating cash flows from operating leases $ 6,390 $ 601 +The weighted-average remaining lease term as of December 31, 2023, was 1.23 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2023, was 6.70 %. +11. INCOME TAXES +Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables. +The components of income tax benefits were as follows (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Current: +State $ — $ — $ ( 39 ) $ ( 7,968 ) +Federal — — — — +Deferred: +State ( 26,704 ) — — — +Federal ( 498,452 ) — — — +Total income tax benefit provision $ ( 525,156 ) $ — $ ( 39 ) $ ( 7,968 ) +94 +Table of Contents +Inde x to Financial Statements +A reconciliation of the statutory federal income tax amount to the recorded benefit follows (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Income (loss) before federal income taxes $ 945,760 $ 494,701 $ ( 112,868 ) $ 243,026 +Expected income tax at statutory rate 198,610 103,887 ( 23,702 ) 51,036 +State income taxes ( 2,581 ) 2,227 ( 3,177 ) ( 12,484 ) +Bankruptcy adjustments — — 44,748 ( 111,285 ) +Remeasurement of state deferred tax asset — 13,869 ( 7,966 ) — +Return to provision ( 5,592 ) ( 17,075 ) — — +Other differences 1,982 1,117 2,841 445 +Change in valuation allowance due to current year activity ( 717,575 ) ( 104,025 ) ( 12,783 ) 64,320 +Income tax benefit recorded $ ( 525,156 ) $ — $ ( 39 ) $ ( 7,968 ) +For the year ended December 31, 2023, the Company's effective tax rate was ( 56 )% and an income tax benefit of $ 525.2 million. For the year ended December 31, 2022, the Company's effective tax rate was 0 %. For the Prior Successor Period, the Company had an effective tax rate of 0.03 % and an income tax benefit of $ 39 thousand. For the Prior Predecessor Period, the Company had an effective tax rate of ( 3.3 )% and an income tax benefit of $ 8.0 million. The lower effective income tax rate for the year ended December 31, 2023, is driven by the release of the valuation allowance on the Company's deferred tax assets, which is also the driver behind the effective tax rate and the Company's statutory tax rate. +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2023 and December 31, 2022 are estimated as follows (in thousands): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Deferred tax assets: +Net operating loss carryforward and tax credits $ 399,017 $ 346,455 +Oil and gas property basis difference 143,769 269,206 +Investment in pass through entities 68,114 66,502 +Stock-based compensation expense 1,262 1,484 +Change in fair value of derivative instruments — 73,198 +Other assets 52,730 52,107 +Total deferred tax assets 664,892 808,952 +Valuation allowance for deferred tax assets ( 85,757 ) ( 803,332 ) +Deferred tax assets, net of valuation allowance 579,135 5,620 +Deferred tax liabilities: +Change in fair value of derivative instruments 50,448 — +Right of use asset 3,003 5,615 +Other 528 5 +Total deferred tax liabilities 53,979 5,620 +Net deferred tax asset $ 525,156 $ — +95 +Table of Contents +Inde x to Financial Statements +As discussed in Note 2 , elements of the Plan provided that the Company’s indebtedness related to Predecessor Senior Notes and certain general unsecured claims were exchanged for Common Stock in settlement of those claims. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The IRC provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income, but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI and historical interest expense haircut is approximately $ 655 million, which will reduce the value of the Company’s net operating losses. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2022. +At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess the likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company believes it is more-likely-than-not that a portion of the Company's federal and state deferred tax assets will be utilized. The Company recorded a reduction in the related valuation allowance associated with federal and state deferred tax assets of $ 699.7 million and $ 23.4 million respectively. +The Company will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to the deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of the deferred tax assets that could have a material impact on the consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.8 billion as of December 31, 2023. These federal net operating loss carryforwards of approximately $ 349 million generated in tax years prior to 2018 will begin to expire in 2036. As a result of the Tax Cuts and Jobs Act, the 2018 through 2023 federal NOL carryforwards of $ 1.4 billion have no expiration. The Company also has state net operating loss carryovers of approximately $ 702 million that will begin to expire in 2024. +As of December 31, 2023, we had no liability for uncertain tax positions. +12. EARNINGS (LOSS) PER SHARE +Basic income or loss per share attributable to common stockholders is computed as (i) net income or loss less (ii) dividends paid to holders of preferred stock less (iii) net income or loss attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common stockholders is computed as (i) basic net income or loss attributable to common stockholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The "if-converted" method is used to determine the dilutive impact for the Company's convertible preferred stock and the treasury stock method is used to determine the dilutive impact of unvested restricted stock. +There were 0.3 million and 0.2 million shares of restricted stock that were considered dilutive for the years ended December 31, 2023 and December 31, 2022, respectively. There were no shares of restricted stock that were considered dilutive for the Prior Successor Period or Prior Predecessor Period. There were 3.2 million, 3.7 million and 4.1 million potential shares of common stock issuable due to the Company's convertible Preferred Stock for the years ended December 31, 2023, December 31, 2022 and Prior Successor Period, respectively. There were 0.1 million shares of restricted stock that were considered anti-dilutive during the Prior Successor Period. +96 +Table of Contents +Inde x to Financial Statements +Reconciliations of the components of basic and diluted net income (loss) per common share are presented in the table below (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Net income (loss) $ 1,470,916 $ 494,701 $ ( 112,829 ) $ 250,994 +Dividends on Preferred Stock ( 4,840 ) ( 5,444 ) ( 4,573 ) — +Participating securities - Preferred Stock (1) +( 212,360 ) ( 76,401 ) — — +Net income (loss) attributable to common stockholders $ 1,253,716 $ 412,856 $ ( 117,402 ) $ 250,994 +Re-allocation of participating securities 2,475 512 — — +Diluted net income (loss) attributable to common stockholders $ 1,256,191 $ 413,368 $ ( 117,402 ) $ 250,994 +Basic Shares 18,645 20,185 20,545 160,834 +Dilutive Shares 18,902 20,347 20,545 160,834 +Basic EPS $ 67.24 $ 20.45 $ ( 5.71 ) $ 1.56 +Dilutive EPS $ 66.46 $ 20.32 $ ( 5.71 ) $ 1.56 +_____________________ +(1) Preferred Stock represents participating securities because they participate in any dividends on shares of Common Stock on a pari passu , pro rata basis. However, Preferred Stock does not participate in undistributed net losses. +13. DERIVATIVE INSTRUMENTS +Natural Gas, Oil and NGL Derivative Instruments +The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in a floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods of favorable price movements. +The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its Credit Facility. The Company generally enters into commodity derivative contracts for approximately 30 % to 70 % of its forecasted current year annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 36 months. Gulfport does not enter into commodity derivative contracts for speculative purposes. +The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation. As of December 31, 2023, our commodity derivative contracts were spread among 12 counterparties. +Fixed price swaps require that the Company receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. They are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. +97 +Table of Contents +Inde x to Financial Statements +The Company has entered into natural gas, crude oil and NGL fixed price swap contracts based off the NYMEX Henry Hub, NYMEX WTI and Mont Belvieu C3 indices. Below is a summary of the Company's open fixed price swap positions as of December 31, 2023. +Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2024 NYMEX Henry Hub 324,973 $ 4.05 +2025 NYMEX Henry Hub 180,000 $ 4.00 +2026 NYMEX Henry Hub 30,000 $ 3.62 +Oil (Bbl/d) ($/Bbl) +2024 NYMEX WTI 500 $ 77.50 +NGL (Bbl/d) ($/Bbl) +2024 Mont Belvieu C3 2,500 $ 30.25 +2025 Mont Belvieu C3 1,000 $ 30.03 +Each two-way price costless collar has a set floor and ceiling price for the hedged production. They are settled monthly based on differences between the floor and ceiling prices specified in the contract and the referenced settlement price. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the collar contracts, the Company will cash-settle the difference with the hedge counterparty. When the referenced settlement price is less than the floor price in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the hedged contract volume. Similarly, when the referenced settlement price exceeds the ceiling price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the hedged contract volume. No payment is due from either party if the referenced settlement price is within the range set by the floor and ceiling prices. +The Company has entered into natural gas and crude oil costless collars based off the NYMEX Henry Hub and NYMEX WTI indices. Below is a summary of the Company's costless collar positions as of December 31, 2023. +Index Daily Volume Weighted Average Floor Price Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) ($/MMBtu) +2024 NYMEX Henry Hub 225,000 $ 3.36 $ 5.14 +2025 NYMEX Henry Hub 100,000 $ 3.62 $ 4.54 +Oil (Bbl/d) ($/Bbl) ($/Bbl) +2024 NYMEX WTI 1,000 $ 62.00 $ 80.00 +From time to time the Company has sold natural gas call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps. Each sold call option has an established ceiling price. If at the time of settlement the referenced settlement price exceeds the ceiling price, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call option positions as of December 31, 2023. +Index Daily Volume Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) +2024 NYMEX Henry Hub 202,000 $ 3.33 +2025 NYMEX Henry Hub 193,315 $ 5.80 +98 +Table of Contents +Inde x to Financial Statements +In addition, the Company has entered into natural gas basis swap positions. These instruments are arrangements that guarantee a fixed price differential to NYMEX Henry Hub from a specified delivery point. The Company receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity. As of December 31, 2023, the Company had the following natural gas basis swap positions open: +Gulfport Pays Gulfport Receives Daily Volume Weighted Average Fixed Spread +Natural Gas (MMBtu/d) ($/MMBtu) +2024 Rex Zone 3 NYMEX Plus Fixed Spread 150,000 $ ( 0.15 ) +2024 NGPL TXOK NYMEX Plus Fixed Spread 70,000 $ ( 0.31 ) +2024 TETCO M2 NYMEX Plus Fixed Spread 179,945 $ ( 0.93 ) +Balance Sheet Presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2023 and December 31, 2022 (in thousands): +Successor +December 31, 2023 December 31, 2022 +Short-term derivative asset $ 233,226 $ 87,508 +Long-term derivative asset 47,566 26,525 +Short-term derivative liability ( 21,963 ) ( 343,522 ) +Long-term derivative liability ( 18,602 ) ( 118,404 ) +Total commodity derivative position $ 240,227 $ ( 347,893 ) +Gains and Losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas derivatives - fair value gains (losses) $ 584,563 $ 32,797 $ ( 223,512 ) $ ( 123,080 ) +Natural gas derivatives - settlement gains (losses) 146,381 ( 1,002,098 ) ( 300,172 ) ( 3,362 ) +Total gains (losses) on natural gas derivatives 730,944 ( 969,301 ) ( 523,684 ) ( 126,442 ) +Oil and condensate derivatives - fair value gains (losses) 5,971 6,618 ( 5,128 ) ( 6,126 ) +Oil and condensate derivatives - settlement losses ( 3,272 ) ( 39,163 ) ( 9,720 ) — +Total gains (losses) on oil and condensate derivatives 2,699 ( 32,545 ) ( 14,848 ) ( 6,126 ) +NGL derivatives - fair value (losses) gains +( 2,414 ) 14,648 ( 5,322 ) ( 4,671 ) +NGL derivatives - settlement gains (losses) 9,090 ( 12,549 ) ( 12,965 ) — +Total gains (losses) on NGL derivatives 6,676 2,099 ( 18,287 ) ( 4,671 ) +Total gains (losses) on natural gas, oil and NGL derivatives $ 740,319 $ ( 999,747 ) $ ( 556,819 ) $ ( 137,239 ) +99 +Table of Contents +Inde x to Financial Statements +Offsetting of Derivative Assets and Liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value (in thousands): +Successor +As of December 31, 2023 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 280,792 $ ( 30,866 ) $ 249,926 +Derivative liabilities $ ( 40,565 ) $ 30,866 $ ( 9,699 ) +Successor +As of December 31, 2022 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 114,033 $ ( 80,345 ) $ 33,688 +Derivative liabilities $ ( 461,926 ) $ 80,345 $ ( 381,581 ) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are spread between multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +14. RESTRUCTURING COSTS +During the year ended December 31, 2023, Gulfport recognized $ 4.8 million in personnel-related restructuring expenses associated with changes in the organizational structure and leadership team resulting from the appointment of Gulfport's new CEO in January 2023. Of these expenses, $ 1.3 million resulted from accelerated vesting of certain share-based grants, which are non-cash charges. The organizational changes were completed in the second quarter of 2023 and there are no remaining employee termination liabilities associated with these changes. +During the Prior Successor Period, the Company recognized $ 2.9 million in a workforce reduction representing approximately 3 % of its headcount. Charges related to the reduction in workforce primarily consisted of one-time employee-related termination benefits. +15. INVESTMENTS +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings, owns an approximate 24.5 % interest in Grizzly, a Canadian unlimited liability company. As of December 31, 2023, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company has no t paid any cash calls since its decision to cease funding further capital calls in 2019. Grizzly’s functional currency is the Canadian dollar. +100 +Table of Contents +Inde x to Financial Statements +As discussed in Note 3 , the Company reduced the carrying value of its investment in Grizzly to zero upon the Emergence Date. The reduction in valuation was based upon the Company's new management's assessment of the investment and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls, which will lead to further dilution of its equity ownership interest. +16. FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +Financial assets and liabilities +The following tables summarize the Company’s financial and non-financial assets and liabilities by valuation level as of December 31, 2023 and December 31, 2022 (in thousands): +Successor +December 31, 2023 +Level 1 Level 2 Level 3 +Assets: +Derivative instruments $ — $ 280,792 $ — +Contingent consideration arrangement $ — $ — $ 2,900 +Total assets $ — $ 280,792 $ 2,900 +Liabilities: +Derivative instruments $ — $ 40,565 $ — +Successor +December 31, 2022 +Level 1 Level 2 Level 3 +Assets: +Derivative instruments $ — $ 114,033 $ — +Contingent consideration arrangement $ — $ — $ 4,900 +Total assets $ — $ 114,033 $ 4,900 +Liabilities: +Derivative instruments $ — $ 461,926 $ — +101 +Table of Contents +Inde x to Financial Statements +The Company estimates the fair value of all derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The Company's SCOOP water infrastructure sale, which closed in the first quarter of 2020, included a contingent consideration arrangement. As of December 31, 2023, the fair value of the contingent consideration was $ 2.9 million, of which $ 0.2 million is included in prepaid expenses and other assets and $ 2.7 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. The Company recognized losses of $ 1.4 million and $ 0.4 million for the years ended December 31, 2023 and December 31, 2022, respectively, with respect to this contingent consideration arrangement. These fair value changes are included in other expense (income) in the accompanying consolidated statements of operations. +Non-financial assets and liabilities +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 4 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred were $ 0.6 million and $ 0.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. +Fair value of other financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's Credit Facility is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. Subsequent to Gulfport's emergence, the Company held no shares of Mammoth Energy's outstanding common stock. There were no material amounts of services provided by Mammoth Energy that were provided during the Prior Predecessor Period. +Share Repurchase Program +Concurrent with the closing of the June offering transaction discussed in Note 7 , the Company purchased 215,060 shares of its common stock from Silver Point Capital, L.P. for approximately $ 20.4 million. The repurchase is part of the Company's existing share Repurchase Program. Upon closing of the transaction on June 26, 2023, the repurchased common stock was cancelled. +The Company purchased 146,455 shares of its common stock from Silver Point Capital, L.P. for approximately $ 20.0 million. The repurchase is part of the Company's existing share Repurchase Program. Upon closing of the transaction on December 11, 2023, the repurchased common stock was cancelled. +102 +Table of Contents +Inde x to Financial Statements +18. COMMITMENTS +Firm Transportation and Gathering Agreements +The Company has contractual commitments with midstream and pipeline companies for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing the cost of these commitments. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, costs associated with utilized future firm transportation and gathering agreements are reflected in the Company's estimates of proved reserves. +A summary of these commitments at December 31, 2023, are set forth in the table below (in thousands): +2024 $ 219,367 +2025 137,728 +2026 134,257 +2027 136,425 +2028 136,581 +Thereafter 600,031 +Total $ 1,364,389 +Other Operational Commitments +The Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials spans 2024, with approximately $ 28.9 million remaining. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) plan under which eligible employees may contribute a portion of their total compensation up to the maximum pre-tax threshold through salary deferrals. The plan is considered a Safe Harbor 401(k) and provides a company match on 100 % of salary deferrals that do not exceed 6 % of compensation. The Company may also make discretionary elective contributions to the plan. The following table summarizes the contributions expenses related to this plan for the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period (in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Contributions expense $ 1,549 $ 1,386 $ 683 $ 721 +19. CONTINGENCIES +The Company is involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. In accordance with ASC Topic 450, Contingencies , an accrual is recorded for a material loss contingency when its occurrence is probable and damages are reasonably estimable based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. +103 +Table of Contents +Inde x to Financial Statements +Litigation and Regulatory Proceedings +As part of its Chapter 11 Cases and restructuring efforts, the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation ("TC") and Rover Pipeline LLC ("Rover"). During the third quarter of 2021, Gulfport finalized a settlement agreement with TC that was approved by the Bankruptcy Court on September 21, 2021. Pursuant to the settlement agreement, Gulfport and TC agreed that the firm transportation contracts between them would be rejected without any further payment or obligation by either party, and TC assigned its damages claims from such rejection to Gulfport. In exchange, Gulfport agreed to make a payment of $ 43.8 million in cash to TC. The $ 43.8 million was paid on October 7, 2021. Gulfport expects to receive distributions for a significant portion of such amounts through future distributions with respect to the assigned claims pursuant to the terms of the Plan that became effective in May 2021. Any future distributions will be recognized once received by Gulfport. In February 2022, Gulfport received an initial distribution of $ 11.5 million from the above-mentioned claim, which is included in Other, net in the accompanying consolidated statements of operations. +During the first quarter of 2023, Gulfport finalized a settlement agreement with Rover that was approved by the Bankruptcy Court on February 21, 2023. Pursuant to the settlement agreement, Gulfport and Rover agreed that the firm transportation contracts between them would be rejected. The Bankruptcy Court Order provided Rover will: (a) receive an allowed $ 85.9 million Class 4A General Unsecured Claim (the “Rover Unsecured Claim”), (b) receive an administrative claim of $ 1.0 million payable by Gulfport, and (c) draw the full amount of its credit assurance. Gulfport paid the $ 1.0 million administrative claim during the first quarter, and has no further obligations to Rover. The Rover Unsecured Claim will receive distributions under the Plan payable from the liquidating trust, not Gulfport. On February 24, 2023, Gulfport received an additional $ 17.8 million interim distribution for its TC claim. On December 22, 2023, Gulfport received its final $ 8.3 million distribution for its TC claim. These payments are included in Other, net in the accompanying consolidated statements of operations. +The Company, along with other oil and gas companies, have been named as a defendant in a number of lawsuits where Plaintiffs assert their respective leases are limited to the Marcellus and Utica shale geological formations and allege that Defendants have willfully trespassed and illegally produced oil, natural gas, and other hydrocarbon products beyond these respective formations. They also allege that Defendants engaged in conversion and were unjustly enriched. Plaintiffs seek the full value of any production from below the Marcellus and Utica shale formations, unspecified damages from the diminution of value to their mineral estate, unspecified punitive damages, and the payment of reasonable attorney fees, legal expenses, and interest. On April 27, 2021, the Bankruptcy Court for the Southern District of Texas approved a settlement agreement in which the plaintiffs fully released the Company from all claims that accrued and any damages related to the period before the effective date of the Company’s Chapter 11 plan, which occurred on May 17, 2021. The plaintiffs are continuing to pursue alleged damages after May 17, 2021. +Business Operations +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. Gulfport and its subsidiaries have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. The Company conducts periodic reviews, on a company-wide basis, to assess changes in its environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, it may, among other things, exclude a property from the transaction, require the seller to remediate the property to its satisfaction in an acquisition or agree to assume liability for the remediation of the property. +104 +Table of Contents +Inde x to Financial Statements +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2023, Gulfport held no cash in excess of insured limits in these banks. +During the year ended December 31, 2023, one customer accounted for approximately 12 % of the Company's total sales. During the year ended December 31, 2022, two customers accounted for approximately 31 % of the Company's total sales. During the Prior Successor Period, two customers accounted for approximately 30 % of the Company's total sales. During the Prior Predecessor Period, three customers accounted for approximately 37 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +20. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company is making the following supplemental disclosures of oil and gas activities, in accordance with the full cost method of accounting for its oil and gas exploration and development activities. The Company owns a 24.5 % interest in Grizzly. However, Grizzly did not have any material activity or proved reserves in the years presented below. As such, amounts related to Grizzly have been omitted below. +The following table provides historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities (in thousands) +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 +Proved properties $ 2,904,519 $ 2,418,666 +Unproved properties 204,233 178,472 +Total oil and natural gas properties 3,108,752 2,597,138 +Accumulated depletion and amortization ( 862,253 ) ( 543,780 ) +Net capitalized costs $ 2,246,499 $ 2,053,358 +105 +Table of Contents +Inde x to Financial Statements +Costs Incurred in Oil and Gas Property Acquisition and Development Activities (in thousands) +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Acquisition $ 93,905 $ 29,675 $ 13,411 $ 3,922 +Development 419,431 441,458 191,193 112,986 +Exploratory — — — — +Total $ 513,336 $ 471,133 $ 204,604 $ 116,908 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company did not capitalize interest expense for the year ended December 31, 2022, or Prior Predecessor Period. The Company capitalized $ 4.1 million for the year ended December 31, 2023, and $ 0.2 million during the Prior Successor Period based on the Company's weighted average cost of borrowings used to finance expenditures. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 22.8 million, $ 20.2 million, $ 11.9 million and $ 8.0 million during the years ended December 31, 2023, December 31, 2022, Prior Successor Period and Prior Predecessor Period, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +Results of Operations for Producing Activities (in thousands) +The following table sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Revenues $ 1,051,383 $ 2,330,859 $ 1,092,584 $ 410,276 +Production costs ( 450,996 ) ( 482,175 ) ( 274,428 ) ( 192,959 ) +Depletion ( 318,473 ) ( 266,449 ) ( 159,518 ) ( 60,831 ) +Impairment — — ( 117,813 ) — +Income tax benefit 525,156 — 39 7,968 +Results of operations from producing activities $ 807,070 $ 1,582,235 $ 540,864 $ 164,454 +Depletion per Mcf of gas equivalent (Mcfe) $ 0.83 $ 0.74 $ 0.69 $ 0.45 +106 +Table of Contents +Inde x to Financial Statements +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2023, 2022 and 2021 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2023, 2022 and 2021, in accordance with guidelines of the SEC applicable to reserves estimates. The prices used for the 2023 reserve report are $ 78.21 per barrel of oil, $ 2.64 per MMbtu and $ 31.42 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2022 and 2021 for reserve report purposes are $ 94.14 per barrel, $ 6.36 per MMbtu and $ 47.86 per barrel for NGL and $ 66.55 per barrel, $ 3.60 per MMbtu and $ 31.90 per barrel for NGL, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +Oil (MMBbl) Natural Gas (Bcf) NGL (MMBbl) Natural Gas Equivalent (Bcfe) +Proved Reserves +December 31, 2020 (Predecessor) 13 2,281 38 2,588 +Purchases of reserves — — — — +Extensions and discoveries 2 617 11 695 +Sales of reserves — — — — +Revisions of prior reserve estimates 2 913 9 982 +Current production ( 2 ) ( 333 ) ( 4 ) ( 366 ) +December 31, 2021 (Successor) 16 3,478 54 3,898 +Purchases of reserves — — — — +Extensions and discoveries 3 391 5 439 +Sales of reserves — — — — +Revisions of prior reserve estimates — 66 — 70 +Current production ( 2 ) ( 322 ) ( 4 ) ( 359 ) +December 31, 2022 (Successor) 18 3,612 54 4,048 +Purchases of reserves — — — — +Extensions and discoveries 6 875 14 996 +Sales of reserves — — — — +Revisions of prior reserve estimates ( 4 ) ( 411 ) ( 1 ) ( 445 ) +Current production ( 1 ) ( 350 ) ( 4 ) ( 385 ) +December 31, 2023 (Successor) 19 3,725 63 4,214 +Proved developed reserves +December 31, 2020 (Predecessor) 7 1,358 22 1,527 +December 31, 2021 (Successor) 8 1,928 31 2,165 +December 31, 2022 (Successor) 9 2,034 34 2,295 +December 31, 2023 (Successor) 6 1,980 31 2,203 +Proved undeveloped reserves +December 31, 2020 (Predecessor) 7 923 16 1,061 +December 31, 2021 (Successor) 8 1,550 22 1,733 +December 31, 2022 (Successor) 9 1,578 20 1,752 +December 31, 2023 (Successor) 12 1,746 32 2,011 +Totals may not sum or recalculate due to rounding. +107 +Table of Contents +Inde x to Financial Statements +In 2023, the Company experienced extensions of 995.7 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica/Marcellus and SCOOP acreages. Of the total extensions, 789.2 Bcfe was attributable to the addition of 67 Utica PUD locations, 88.6 Bcfe was attributable to the addition of 12 Marcellus PUD locations, and 110.4 Bcfe was attributable to the addition of 14 SCOOP PUD locations. The Company experienced total downward revisions of 444.9 Bcfe in estimated proved reserves. These consisted of upward revisions of 24.9 Bcfe as a result of positive well performance and 293.9 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2023. These were offset by downward revisions of 554.9 Bcfe which were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset, maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Additionally, downward revisions of 159.7 Bcfe due to commodity price changes. Commodity prices experienced volatility throughout 2023 and the 12-month average price for natural gas decreased from $ 6.36 per MMBtu for 2022 to $ 2.64 per MMBtu for 2023, the 12-month average price for NGL increased from $ 47.86 per barrel for 2022 to $ 31.42 per barrel for 2023, and the 12-month average price for crude oil decreased from $ 94.14 per barrel for 2022 to $ 78.21 per barrel for 2023. Finally, downward revisions of 49.1 Bcfe were a result of a combination of various economic assumption updates. +In 2022, the Company experienced extensions of 438.9 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica/Marcellus and SCOOP acreages. Of the total extensions, 295.9 Bcfe was attributable to the addition of 36 PUD locations in the Utica, 72.1 Bcfe was attributable to the addition of 8 PUD locations in the Marcellus and 65.4 Bcfe was attributable to the addition of 5 PUD locations in the SCOOP. The Company experienced total upward revisions of approximately 69.7 Bcfe in estimated proved reserves, of which 47.7 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 3.60 per MMBtu for 2021 to $ 6.36 per MMBtu for 2022, the 12-month average price for NGL increased from $ 31.90 per barrel for 2021 to $ 47.86 per barrel for 2022, and the 12-month average price for crude oil increased from $ 66.55 per barrel for 2021 to $ 94.14 per barrel for 2022. Upward revisions of 144.5 Bcfe were a result of an increase in working interest and net revenue interests as a result of our successful leasing efforts through 2022. Downward revisions of 95.6 Bcfe were experienced as a result of the SEC five-year development window, which removed 4 PUD locations in the Utica and 5 PUD locations in the SCOOP. The development plan changes reflect our commitment to optimizing the long-term development schedule to maximize cash flow and overall economic returns. A small downward revision of 26.9 Bcfe was primarily a result of performance changes to several wells and changes in PUD location forecasts. +In 2021, the Company experienced extensions of 694.6 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica and SCOOP acreage. Of the total extensions, 352.2 Bcfe was attributable to the addition of 29 PUD locations in the Utica, 342.2 Bcfe was attributable to the addition of 34 PUD locations in the SCOOP. The Company experienced total upward revisions of approximately 982.2 Bcfe in estimated proved reserves, of which 889.2 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 1.99 per MMBtu for 2020 to $ 3.60 per MMBtu for 2021, the 12-month average price for NGL increased from $ 15.40 per barrel for 2020 to $ 31.90 per barrel for 2021, and the 12-month average price for crude oil increased from $ 39.54 per barrel for 2020 to $ 66.55 per barrel for 2021. Upward revisions of 157.6 Bcfe were experienced from a combination of well performance, operating and development cost improvements and working interest changes. This was partially offset by a downward revision of 64.6 Bcfe, which was primarily a result of the exclusion of 4 PUD locations in the Utica when changes in the Company's schedule moved development of these PUD locations beyond five years of initial booking. The development plan change reflects the Company's commitment to capital discipline, funding future activities within cash flow and ongoing optimization of our development plan. Finally, during 2021, we sold approximately 0.2 Bcfe of proved oil and natural gas reserves through various sales of our non-operated interests in our other non-core assets. +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2023, 2022 and 2021 using an unweighted average first-of-the-month price for the period January through December 31, 2023, 2022 and 2021. The average gas prices used were $ 2.64 , $ 6.36 and $ 3.60 for the periods ended December 31, 2023, 2022 and 2021, respectively. The average oil prices used were $ 78.21 , $ 94.14 and $ 66.55 , for the periods ended December 31, 2023, 2022 and 2021, respectively. The average NGL prices used were $ 31.42 , $ 47.86 and $ 31.90 , for the periods ended December 31, 2023, 2022 and 2021, respectively. +108 +Table of Contents +Inde x to Financial Statements +Year ended operating expenses, development costs and appropriate statutory income tax rates, with consideration of future tax rates, were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties. The estimated future costs to develop proved developed non-producing and proved undeveloped reserves are approximately $ 246.3 million in 2024, $ 328.7 million in 2025 and $ 282.6 million in 2026. Estimated future development costs include capital spending on major development projects. Gulfport believes cash flow from its operating activities, cash on hand and borrowings under its Credit Facility will be sufficient to cover these estimated future development costs. +The assumptions used to derive the standardized measure of discounted future net cash flows are those required by accounting standards and do not necessarily reflect the Company's expectations. The information may be useful for certain comparative purposes but should not be solely relied upon in evaluating Gulfport or its performance. Furthermore, information contained in the following table may not represent realistic assessments of future cash flows, nor should the standardized measure of discounted future net cash flows be viewed as representative of the current value of the Company's reserves. Management believes that the following factors should be considered when reviewing the information below: +• Future commodity prices received for selling the Company's net production will likely differ from those required to be used in these calculations. +• Future operating and capital costs will likely differ from those required to be used in these calculations and do not reflect cost savings of Company owned midstream operations on future operating expenses. +• Future market conditions, government regulations, reservoir conditions and risks inherent in the production of oil and condensate and gas may cause production rates in future years to vary significantly from those rates used in the calculations. +• Future revenues may be subject to different production, severance and property taxation rates. +• The selection of a 10% discount rate is arbitrary and may not be a reasonable factor in adjusting for future economic conditions or in considering the risk that is part of realizing future net cash flows from the reserves. +The following table summarizes estimated future net cash flows from natural gas and crude oil reserves (in millions): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 +Future cash flows $ 12,338 $ 26,677 $ 14,938 +Future development and abandonment costs ( 1,625 ) ( 1,588 ) ( 1,141 ) +Future production costs ( 5,641 ) ( 5,872 ) ( 5,227 ) +Future production taxes ( 303 ) ( 553 ) ( 336 ) +Future income taxes ( 63 ) ( 2,609 ) ( 437 ) +Future net cash flows 4,706 16,055 7,797 +10% discount to reflect timing of cash flows ( 2,323 ) ( 7,776 ) ( 3,659 ) +Standardized measure of discounted future net cash flows $ 2,383 $ 8,279 $ 4,138 +Totals may not sum or recalculate due to rounding. +Future development and abandonment costs include not only development costs but also all future costs to settle asset retirement obligations. The following table summarizes the total of all future costs to settle asset retirement obligations that are included in future development and abandonment costs above (in millions): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 +Future asset retirement obligations $ 229 $ 222 $ 205 +109 +Table of Contents +Inde x to Financial Statements +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The principal source of change in the standardized measure of discounted future net cash flows relating to proved reserves is presented in the table below (in millions): +Successor +Year Ended December 31, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 +Sales and transfers of oil and gas produced, net of production costs $ ( 600 ) $ ( 1,849 ) $ ( 1,035 ) +Net changes in prices, production costs, and development costs ( 7,181 ) 5,130 2,596 +Acquisition of oil and gas reserves in place — — — +Extensions and discoveries 581 941 639 +Previously estimated development costs incurred during the period 263 204 149 +Revisions of previous quantity estimates, less related production costs ( 278 ) 154 858 +Sales of oil and gas reserves in place — ( 1 ) ( 1 ) +Accretion of discount 828 414 54 +Net changes in income taxes 1,219 ( 1,067 ) ( 178 ) +Change in production rates and other ( 728 ) 215 516 +Total change in standardized measure of discounted future net cash flows $ ( 5,896 ) $ 4,141 $ 3,598 +21. SUBSEQUENT EVENTS +Natural gas, Oil and NGL Derivative Instruments +Subsequent to December 31, 2023 and as of February 26, 2024, the Company entered into the following derivative contracts: +Period Type of Derivative Instrument Index +Daily Volume +Weighted +Average Price +Natural Gas +(MMBtu/d) ($/MMBtu) +2024 +Swaps +NYMEX Henry Hub +40,219 $ 2.66 +2024 +Basis Swaps +TETCO M2 +18,306 $( 0.90 ) +2025 +Basis Swaps +TETCO M2 +100,000 $( 0.99 ) +2025 +Costless Collars +NYMEX Henry Hub +30,000 +$ 3.25 / $ 4.03 +NGL +(Bbl/d) ($/Bbl) +2025 +Swaps +Mont Belvieu C3 +1,000 $ 30.14 +110 +Table of Contents +Inde x to Financial Statements +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2023, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended December 31, 2023, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2023. +111 +Table of Contents +Inde x to Financial Statements +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2023 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2023, as stated in their accompanying report. +/s/ John Reinhart /s/ Michael Hodges +Name: John Reinhart Name: Michael Hodges +Title: Chief Executive Officer Title: Chief Financial Officer +112 +Table of Contents +Inde x to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated February 28, 2024 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 28, 2024 +113 +Table of Contents +Inde x to Financial Statements +ITEM 9B. OTHER INFORMATION +The disclosures set forth below are provided in this Part II, Item 9B in lieu of separate disclosure under Items 5.02(b)-(c) and (e) of Form 8-K. +Trading Arrangements +During the year ended December 31, 2023, none of our officers (as defined in Rule 16a-1(f) of the Exchange Act) or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement"(as defined in Item 408 of Regulation S-K). +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than 120 days after the close of our fiscal year ended December 31, 2023 (the 2024 Proxy Statement). +ITEM 11. EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2024 Proxy Statement. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2024 Proxy Statement. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2024 Proxy Statement. +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2024 Proxy Statement. +114 +Table of Contents +Inde x to Financial Statements +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. Financial Statement Schedules. No financial statement schedules are applicable or required. +3. Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith +2.1 +Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and its Debtor Subsidiaries. +8-K 001-19514 2.2 4/29/2021 +3.1 +Amended and Restated Certificate of Incorporation of Gulfport Energy Corporation. +8-K 001-19514 3.1 5/17/2021 +3.2 +Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K 001-19514 3.2 5/17/2021 +4.1 +1145 Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.1 5/17/2021 +4.2 +4(a)(2) Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.2 5/17/2021 +4.3 +Description of Securities Registered Pursuant to Section 12 of the Exchange Act. +10-K +001-19514 +4.3 +3/1/2023 +10.1+ +Gulfport Energy Corporation 2021 Stock Incentive Plan. +8-K 001-19514 10.6 5/17/2021 +10.2+ +Form of Employee Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.7 8/9/2021 +10.3+ +Form of Director Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.8 8/9/2021 +10.4+ +Form of Performance-Based Restricted Stock Unit Award Agreement . +10-Q 001-19514 10.9 8/9/2021 +10.5+ +Form of Indemnification Agreement. +S-4 333-199905 10.1 11/6/2014 +10.6+ +CEO Agreement Amendment by and among Timothy Cutt and Gulfport, effective as of September 2, 2021. +8-K 001-19514 10.1 9/7/2021 +10.7+ +Employment Agreement by and among William Buese and Gulfport, effective as of May 17, 2021. +8-K 001-19514 10.5 5/17/2021 +115 +Table of Contents +Inde x to Financial Statements +10.8+ +Employment Agreement, entered into and effective as of August 1, 2019, by and between Gulfport Energy Corporation and Patrick K. Craine. +10-Q 000-19514 10.5 8/2/2019 +10.9+ +Employment Agreement dated November 13, 2020, by and between the Company and Michael Sluiter. +8-K 001-19514 10.4 11/16/2020 +10.10+ +Employment Agreement between Gulfport Energy Corporation and Timothy Cutt, effective April 29, 2022. +10-Q 001-19514 10.2 5/4/2022 +10.11+ +Employment Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023. +8-K 001-19514 10.1 1/24/2023 +10.12+ +Indemnification Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023. +8-K 001-19514 10.2 1/24/2023 +10.13+ +Transition and Services Agreement, by and between Gulfport Energy Corporation and Timothy Cutt, effective February 1, 2023. +8-K 001-19514 10.3 1/24/2023 +10.14 +Cooperation Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and Silver Point Capital, L.P. +8-K 001-19514 10.3 5/17/2021 +10.15 +Registration Rights Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and the holders party thereto. +8-K 001-19514 10.2 5/17/2021 +10.16* +Third Amended and Restated Credit Agreement, dated as of October 14, 2021, by and among Gulfport Energy Corporation, as holdings, Gulfport Energy Operating Corporation, as the borrower, JPMorgan Chase Bank, N.A., the lenders party thereto, and the guarantors party thereto. +8-K 001-19514 10.1 10/14/2021 +10.17 +Borrowing Base Redetermination Agreement and First Amendment to Credit Agreement, dated as of May 2, 2022. +10-Q 001-19514 10.1 5/4/2022 +10.18 +Borrowing Base Reaffirmation Agreement and Second Amendment to Credit Agreement, dated as of October 31, 2022. +10-Q 001-19514 10.1 11/2/2022 +10.19+ +Form of Employment Agreement. +10-K +001-19514 10.19 3/1/2023 +10.20 +Borrowing Base Reaffirmation Agreement and Third Amendment to Credit Agreement, dated as of May 1, 2023. +10-Q 001-19514 10.3 5/3/2023 +10.21+ +Change in Control Severance Agreement. +10-Q 001-19514 10.2 8/2/2023 +10.22+ +Employment Agreement between Gulfport Energy Corporation and Michael Hodges, effective April 3, 2023. +8-K 001-19514 10.1 4/3/2023 +10.23+ +Indemnification Agreement, by and between Gulfport Energy Corporation and Michael Hodges, effective April 3, 2023. +8-K 001-19514 10.2 4/3/2023 +10.24+ +Form of Performance-Based Restricted Stock Unit Award Agreement, dated as of February 27, 2024 . +X +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Netherland, Sewell & Associates, Inc. +X +116 +Table of Contents +Inde x to Financial Statements +23.2 +Consent of Grant Thornton LLP. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +97.1 +Clawback Policy. +X +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS Inline XBRL Instance Document. X +101.SCH Inline XBRL Taxonomy Extension Schema Document. X +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X +101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X +104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +X +* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. ++ Management contract, compensatory plan or arrangement. +117 +Table of Contents +Inde x to Financial Statements +ITEM 16. FORM 10-K SUMMARY +None. +118 +Table of Contents +Inde x to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 28, 2024 +GULFPORT ENERGY CORPORATION +By: /s/ MICHAEL HODGES +Michael Hodges +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: February 28, 2024 By: /s/ JOHN REINHART +John Reinhart +President and Chief Executive Officer +(Principal Executive Officer) +Date: February 28, 2024 By: /s/ MICHAEL HODGES +Michael Hodges +Chief Financial Officer +(Principal Financial Officer and Principal Accounting Officer) +Date: February 28, 2024 By: /s/ TIMOTHY J. CUTT +Timothy J. Cutt +Chairman of the Board +Date: February 28, 2024 By: /s/ DAVID WOLF +David Wolf +Lead Independent Director +Date: February 28, 2024 By: /s/ JASON MARTINEZ +Jason Martinez +Director +Date: February 28, 2024 By: /s/ JEANNIE POWERS +Jeannie Powers +Director +Date: February 28, 2024 By: /s/ DAVID REGANATO +David Reganato +Director +Date: February 28, 2024 By: /s/ MARY SHAFER-MALICKI +Mary Shafer-Malicki +Director +119 \ No newline at end of file diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/filing_metadata.csv b/raw/filings/0000874499/2023/0001628280-24-007527/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d1bd5ef1e664b658d9ea393971510920ede83bcb --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2024-02-28,2023-12-31,2024-02-28T20:00:11.000Z,0001628280-24-007527,gpor-20231231.htm,10-K,16876880,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828024007527/gpor-20231231.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828024007527/,2023,2023,1 diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/item1.txt b/raw/filings/0000874499/2023/0001628280-24-007527/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b82add56d2e09d0f7c0c0655edbdd1cec9f28324 --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/item1.txt @@ -0,0 +1,373 @@ +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's Common Stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "GPOR". Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2023, we had 4.2 Tcfe of proved reserves with a Standardized Measure of $2.4 billion and a PV-10 of $2.4 billion. See " Definitions " above for our definition of PV-10 (a non-GAAP financial measure) and " Oil, Natural Gas and NGL Reserves " below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol "GPOR". +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica/Marcellus and SCOOP operating areas. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2024 Outlook +Our 2024 capital expenditure program is expected to be in a range of $380 million to $420 million. In the Utica, we intend to complete drilling on approximately 17 gross (16.4 net) operated horizontal wells and commence sales on approximately 16 gross (15.5 net) operated horizontal wells. In the SCOOP, we intend to complete drilling on approximately five gross (4.1 net) operated horizontal wells and commence sales on three gross (2.4 net) operated horizontal wells. We do not currently have any new Marcellus directed activity budgeted in our 2024 capital expenditure program. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,045 to 1,080 MMcfe per day of production in 2024. +4 +Table of Contents +Inde x to Financial Statements +Additionally, in 2024, we expect continuation of shareholder return actions through our Repurchase Program. During 2023, we repurchased 1.5 million shares for $148.9 million at a weighted average price of $101.53 per share, leaving $250.4 million remaining on our Repurchase Program. +Operating Areas +Utica/Marcellus - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 193,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. During 2023, we produced approximately 784 MMcfe per day net to our interests in this area and it accounts for approximately 74% of our total production. +The Marcellus covers hydrocarbon bearing rock formations that overlay the Utica. We have identified approximately 17,000 net reservoir acres of our existing leasehold for Marcellus development and have 15 PUD Marcellus locations within our Utica operating area. In 2023 we drilled, completed, and turned to sales two Marcellus wells. Our Marcellus development area is approximately 3,500 to 4,500 feet shallower than the Utica. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 41,000 in the Woodford formation and approximately 32,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2023, we produced approximately 270 MMcfe per day net to our interests in this area and it accounts for approximately 26% of our total production. +Oil, Natural Gas and NGL Reserves +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +5 +Table of Contents +Inde x to Financial Statements +The tables below set forth information as of December 31, 2023, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2023 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica & Marcellus +Proved developed (1) +2 1,520 7 1,576 +Proved undeveloped (1) +10 1,421 17 1,585 +Total proved (1) +13 2,941 24 3,160 +SCOOP +Proved developed 4 459 24 627 +Proved undeveloped 2 325 15 426 +Total proved 6 785 39 1,053 +Total +Proved developed 6 1,980 31 2,203 +Proved undeveloped 12 1,746 32 2,011 +Total proved 19 3,725 63 4,214 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 17 Bcfe and 108 Bcfe of net developed and undeveloped reserves, respectively, located in the Marcellus target formation. +December 31, 2023 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 2,535 $ 2,235 $ 4,769 +Present value of estimated future net revenue (PV-10) (1) +$ 1,590 $ 819 $ 2,409 +Standardized measure (1) +$ 2,383 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2023, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2023. The prices used in our PV-10 measure were the average West Texas Intermediate Spot price of $78.21 per barrel and the average Henry Hub Spot price of $2.64 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2023. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $26 million as of December 31, 2023. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +6 +Table of Contents +Inde x to Financial Statements +Proved Reserves +Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica/Marcellus and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +The following table summarizes the changes in our estimated proved reserves during 2023 (in Bcfe): +Proved Reserves, December 31, 2022 (Successor) 4,048 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 996 +Revisions of prior reserve estimates (445) +Current production (385) +Proved Reserves, December 31, 2023 (Successor) 4,214 +Total may not sum due to rounding. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 995.7 Bcfe of proved reserves were primarily attributable to the continued development of our Utica/Marcellus and SCOOP acreage. We added 79 PUD locations in the Utica/Marcellus which included 67 Utica locations for 789.2 Bcfe and 12 Marcellus locations for 88.6 Bcfe. In the SCOOP, we added 14 PUD locations for 110.4 Bcfe. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 444.9 Bcfe in estimated proved reserves. These consisted of upward revisions of 24.9 Bcfe as a result of positive well performance and 293.9 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2023. These were offset by downward revisions of 554.9 Bcfe which were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset, maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Additionally, downward revisions of 159.7 Bcfe were associated with commodity price changes. Commodity prices experienced volatility throughout 2023 and the 12-month average price for natural gas decreased from $6.36 per MMBtu for 2022 to $2.64 per MMBtu for 2023, the 12-month average price for NGL decreased from $47.86 per barrel for 2022 to $31.42 per barrel for 2023, and the 12-month average price for crude oil decreased from $94.14 per barrel for 2022 to $78.21 per barrel for 2023. Finally, downward revisions of 49.1 Bcfe were a result of a combination of various economic assumption updates. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2023, 2022 and 2021, and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +7 +Table of Contents +Inde x to Financial Statements +Proved Undeveloped Reserves +As of December 31, 2023, our PUDs totaled 1,746 Bcf of natural gas, 12 MMBbl of oil and 32 MMBbl of NGL, for a total of 2,011 Bcfe. Approximately 79% and 21% of our PUD reserves at year-end 2023 were located in Utica/Marcellus and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD drilling locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD drilling locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +The following table summarizes the changes in our estimated proved undeveloped reserves during 2023 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2022 (Successor) 1,752 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 988 +Conversion to proved developed reserves (420) +Revisions of prior reserve estimates (310) +Proved Undeveloped Reserves, December 31, 2023 (Successor) 2,011 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 988.2 Bcfe were primarily attributed to the addition of 93 PUD drilling locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 79 PUD drilling locations in the Utica/Marcellus and 14 PUD drilling locations in the SCOOP. +Conversion to proved developed reserves. Our 2023 development activities resulted in the conversion of approximately 419.7 Bcfe into proved developed producing reserves, attributable to 20 PUD locations in the Utica, 2 PUD locations in our Marcellus acreage and 3 PUD locations in the SCOOP. These 25 PUDs represent a conversion rate of 19% for 2023. +Revision of prior reserve estimates. We experienced total downward revisions of 309.8 Bcfe in estimated proved undeveloped reserves. This included 501.8 Bcfe of downward revisions with changes in our development schedule. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing PUDs five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset, maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. These downward revisions were offset by upward revisions of 192.0 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest, well development design and well forecasts. +Costs incurred relating to the development of PUDs were approximately $362.9 million in 2023. +All PUD drilling locations included in our 2023 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2023, 0.34% of our total proved reserves were classified as proved developed non-producing. +Reserves Estimation +Reserve estimates for the years ended December 31, 2023, 2022 and 2021, were prepared by Netherland, Sewell & Associates, Inc. ("NSAI") for all of our operating areas. +8 +Table of Contents +Inde x to Financial Statements +NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis. +We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 27 years of reservoir and operations experience. In addition, our geoscience staff has approximately 48 years combined industry experience and our reservoir staff has approximately 58 years combined experience. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• preparation of year-end reserve estimates by NSAI in coordination with our experienced reservoir engineers; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans; +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and +• annual review by our Board of Directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2023, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2023 of $78.21 per barrel and $2.64 per MMBtu. Holding production and development costs constant, if SEC pricing were $86.03 per barrel and $2.90 per MMBtu, or a 10% increase, this would have resulted in an increase of 53 Bcfe of our total proved reserves and a $0.6 billion increase in PV-10 value at December 31, 2023. Holding production and development costs constant, if SEC pricing were $70.39 per barrel and $2.37 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 313 Bcfe of our total proved reserves and a $0.6 billion decrease in PV-10 value at December 31, 2023. For the low price scenario 132 PUDs were PV-10 economic. +9 +Table of Contents +Inde x to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2023: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica & Marcellus 148,747 121,387 75,547 72,058 +SCOOP 49,909 35,844 8,537 6,035 +Total 198,656 157,231 84,084 78,093 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2023: +Undeveloped Acres +Years Ending December 31, Gross Acres Net Acres +2024 3,029 2,704 +2025 5,070 5,061 +2026 4,507 4,430 +After 2026 12,054 11,984 +Held by production 59,424 53,914 +Total 84,084 78,093 +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2023: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica & Marcellus 49.16/60.23 3 1.4 708 426.8 711 428.2 +SCOOP 21.58/26.69 101 9.6 540 161.5 641 171.1 +Total (1) +117 11.0 1,416 588.3 1,533 599.3 +_____________________ +(1) We also have override/royalty interests in 181 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Inde x to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2023 2022 2021 +Gross Net Gross Net Gross Net +Development: +Productive 24 21.9 25 21.7 29 26.6 +Dry — — — — — — +Total 24 21.9 25 21.7 29 26.6 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2023: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica & Marcellus (1) +22.0 20.2 22.0 20.2 10.0 0.3 7.0 0.1 +SCOOP (2) +2.0 1.7 2.0 1.7 19.0 0.0 11.0 0.0 +Total 24.0 21.9 24.0 21.9 29.0 0.3 18.0 0.1 +_____________________ +(1) Of the 22 gross wells drilled in 2023, 16 were completed as producing wells and six were in various stages of drilling and completion as of December 31, 2023. +(2) The two gross wells that were drilled in 2023 were completed as producing wells as of December 31, 2023. +11 +Table of Contents +Inde x to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Natural gas sales +Natural gas production volumes (MMcf) 350,306 322,366 208,641 124,279 +Natural gas production volumes (MMcf) per day 960 883 915 907 +Total sales $ 831,812 $ 1,998,452 $ 906,096 $ 344,390 +Average price without the impact of derivatives ($/Mcf) $ 2.37 $ 6.20 $ 4.34 $ 2.77 +Impact from settled derivatives ($/Mcf) $ 0.42 $ (3.11) $ (1.44) $ (0.03) +Average price, including settled derivatives ($/Mcf) $ 2.79 $ 3.09 $ 2.90 $ 2.74 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,363 1,610 1,167 531 +Oil and condensate production volumes (MBbl) per day 4 4 5 4 +Total sales $ 99,854 $ 147,444 $ 81,347 $ 29,106 +Average price without the impact of derivatives ($/Bbl) $ 73.27 $ 91.58 $ 69.71 $ 54.81 +Impact from settled derivatives ($/Bbl) $ (2.53) $ (24.32) $ (8.33) $ — +Average price, including settled derivatives ($/Bbl) $ 70.74 $ 67.26 $ 61.38 $ 54.81 +NGL sales +NGL production volumes (MBbl) 4,386 4,483 2,658 1,211 +NGL production volumes (MBbl) per day 12 12 12 9 +Total sales $ 119,717 $ 184,963 $ 105,141 $ 36,780 +Average price without the impact of derivatives ($/Bbl) $ 27.29 $ 41.26 $ 39.56 $ 30.37 +Impact from settled derivatives ($/Bbl) $ 2.07 $ (2.80) $ (4.88) $ — +Average price, including settled derivatives ($/Bbl) $ 29.36 $ 38.46 $ 34.68 $ 30.37 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 384,802 358,924 231,594 134,735 +Natural gas equivalents (MMcfe) per day 1,054 983 1,016 983 +Total sales $ 1,051,383 $ 2,330,859 $ 1,092,584 $ 410,276 +Average price without the impact of derivatives ($/Mcfe) $ 2.73 $ 6.49 $ 4.72 $ 3.05 +Impact from settled derivatives ($/Mcfe) $ 0.40 $ (2.94) $ (1.39) $ (0.02) +Average price, including settled derivatives ($/Mcfe) $ 3.13 $ 3.55 $ 3.33 $ 3.03 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.14 $ 0.14 +Average taxes other than income ($/Mcfe) $ 0.09 $ 0.17 $ 0.13 $ 0.09 +Average transportation, gathering, processing and compression ($/Mcfe) $ 0.91 $ 1.00 $ 0.92 $ 1.20 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.17 $ 1.34 $ 1.19 $ 1.43 +Totals may not sum or recalculate due to rounding. +12 +Table of Contents +Inde x to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2023: +Successor Predecessor +Year Ended December 31, 2023 Year Ended December 31, 2022 Period from May 18, 2021 through December 31, 2021 Period from January 1, 2021 through May 17, 2021 +Utica & Marcellus +Net Production +Natural gas (MMcf) 279,428 246,123 166,906 106,968 +Oil (MBbl) 255 244 220 183 +NGL (MBbl) 856 885 562 361 +Total (MMcfe) 286,095 252,895 171,598 110,235 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.34 $ 6.14 $ 4.33 $ 2.64 +Oil ($/Bbl) $ 70.18 $ 90.60 $ 66.94 $ 52.43 +NGL ($/Bbl) $ 33.63 $ 48.21 $ 47.16 $ 37.21 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.16 $ 0.17 $ 0.13 $ 0.13 +Average taxes other than income ($/Mcfe) 0.05 0.06 0.07 0.06 +Average transportation, gathering, processing and compression ($/Mcfe) 0.97 1.08 0.98 1.26 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.18 $ 1.31 $ 1.18 $ 1.45 +SCOOP +Net Production +Natural gas (MMcf) 70,878 76,242 41,724 17,302 +Oil (MBbl) 1,108 1,366 933 344 +NGL (MBbl) 3,530 3,598 2,095 849 +Total (MMcfe) 98,707 106,024 59,893 24,461 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.53 $ 6.38 $ 4.40 $ 3.59 +Oil ($/Bbl) $ 73.98 $ 91.71 $ 70.37 $ 56.05 +NGL ($/Bbl) $ 25.76 $ 39.56 $ 37.51 $ 27.46 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.25 $ 0.20 $ 0.17 $ 0.22 +Average taxes other than income ($/Mcfe) 0.17 0.38 0.29 0.20 +Average transportation, gathering, processing and compression ($/Mcfe) 0.73 0.78 0.74 0.90 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.15 $ 1.36 $ 1.20 $ 1.32 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2023, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2015. Additionally, Grizzly had no proved reserves as of December 31, 2023. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. +13 +Table of Contents +Inde x to Financial Statements +Mammoth Energy. As discussed in Note 15 of our consolidated financial statements, the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims during 2021. The Company no longer owns any common stock of Mammoth Energy. +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 18 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2023, December 31, 2022, Prior Successor Period, and Prior Predecessor Period were as follows: +% of Sales +Year Ended December 31, 2023 (Successor) +Vitol Inc. 12 % +Year Ended December 31, 2022 (Successor) +ECO-Energy 20 % +Clearwater 11 % +Period from May 18, 2021 through December 31, 2021 (Successor) +ECO-Energy 20 % +Macquarie 10 % +Period from January 1, 2021 through May 17, 2021 (Predecessor) +ECO-Energy 14 % +Macquarie 12 % +Citadel 11 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +14 +Table of Contents +Inde x to Financial Statements +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases. We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. For example, in addition to regulations from the EPA and similar agencies, the SEC has issued proposed rules that would mandate extensive disclosure of climate-related risks and other information. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of +15 +Table of Contents +Inde x to Financial Statements +governmental regulation and ongoing regulatory changes, including with respect to environmental matters. The SEC has also indicated plans to propose various other disclosure regulations, including regarding human capital and other ESG matters. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. If future developments result in additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a minimum limit of $25 million for single well limits and $37.5 million limit for multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In +16 +Table of Contents +Inde x to Financial Statements +addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2023 and 2022 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2023, we had 226 employees, an increase of approximately 1% from the 223 employees as of December 31, 2022. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2023, we continued making significant investments in our talent management and retention processes, including increasing funds allocated to annual salary increases, short-term incentive payments, long-term incentive equity awards, and 401(k) matches for eligible employees. We remain committed to providing fair and competitive compensation programs and adequate development and advancement opportunities to our employees. We believe these practices serve as retention tools, as our employees' continued engagement and commitment to the Company is critical to our success. +Diversity, Equity and Inclusion +Diversity, equity and inclusion are paramount to our organization, our leadership team, and our culture. During 2023, we continued to build on our previously-announced diversity and inclusiveness initiatives through training, outreach, and new talent acquisition. We partnered with third-party recruiting websites and utilized other tools to expand our reach to diverse candidates, which represented almost 39% of our new hires in 2023, an increase of approximately 6% over 2022. While we always strive for continued improvement, we are pleased by the number of gender or ethnically diverse employees we have maintained in leadership positions throughout the Company. +Diversity and inclusion are also important at our Board level, where over 60% of our independent directors identify as gender or ethnically diverse. While our Board remains a group of highly qualified directors, our gender or ethnically diverse population among our Board has increased by 20% from 2022. We also remain committed to evaluating our hiring and promotion practices to ensure that diversity, equity and inclusion are considered and included throughout the Company. We encourage all employees to provide feedback and ideas on how Gulfport can continuously improve, and we ask all of our employees to sign a commitment indicating that they will speak up if they observe or become aware of any actions that are inconsistent with our core values, our Business Code of Conduct and Ethics, or other Company policies. We are also committed to supporting veterans through our recruiting and hiring efforts as well as supporting several causes that assist veterans and active-duty military. +Over the course of 2023, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +17 +Table of Contents +Inde x to Financial Statements +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public, and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE program and provided training to leaders on reinforcement strategies. Additionally, we continued the WORK GREEN program, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize training sessions with content developed by experts in the safety, legal, information security, and regulatory compliance fields, and we offer a blend of training sessions through both computer-based modules and live, instructor-led sessions. We believe our training efforts support a compliant safety-first mindset in everything we do. We continue to provide professional and workplace-related training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President and Chief Executive Officer +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 55, as President and Chief Executive Officer, effective as of January 24, 2023. Mr. Reinhart joined the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Michael Hodges, Executive Vice President and Chief Financial Officer +On April 3, 2023, the Board of Directors appointed Mr. Hodges, 45, as Executive Vice President and Chief Financial Officer. Most recently, Mr. Hodges served as Senior Vice President, Finance and Accounting at Leon Capital Group. Prior to joining Leon Capital, he was the Executive Vice President and Chief Financial Officer for Montage Resources Corporation until its merger with Southwestern Energy Company in November 2020. From 2012 until joining Montage Resources in 2018, Mr. Hodges served as the Chief Financial Officer for three upstream energy companies focused on near-term value creation through the acquisition and early-stage development of oil and natural gas resources. Mr. Hodges received his Bachelor of Business Administration in Finance from the University of Oklahoma and a Master of Science in Energy Management from Oklahoma City University and is a Certified Public Accountant in the State of Oklahoma. +Patrick Craine, Executive Vice President and Chief Legal and Administrative Officer +Mr. Craine, 51, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 25 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. +18 +Table of Contents +Inde x to Financial Statements +Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +Matthew Rucker, Senior Vice President of Operations +Mr. Rucker, 38, joined Gulfport as the Senior Vice President of Operations in March 2023 from Javelin Energy Partners. He most recently served as Vice President of Production Operations since August 2022 and joined Javelin in July 2022 as the Vice President of Business Development. Prior to joining Javelin, Mr. Rucker served as the Executive Vice President, Chief Operating Officer for Montage Resources Corporation following Montage’s successful business combination transaction with Blue Ridge Mountain Resources in June 2020. Prior to Montage, Mr. Rucker served as Vice President, Resource Planning and Development of Blue Ridge from 2016 to 2020. Prior to joining Blue Ridge, Mr. Rucker served as a Production Superintendent for Chesapeake Energy Corporation from January 2014 to October 2016, overseeing Chesapeake’s Utica Shale production. As a member of Chesapeake’s Eastern Division leadership team, Mr. Rucker focused on the safe and efficient optimization of production in the Utica Shale and led an operating team of over 45 employees. During his service at Chesapeake, Mr. Rucker held several engineering positions in the Marcellus and Utica Shale asset teams within reservoir, primarily focused on strategic joint ventures, divestitures, acquisitions and resource development planning. Mr. Rucker received his Bachelor of Science degree in Petroleum Engineering from Marietta College and a Master of Business Administration in Energy from Texas Christian University. He serves on the Marietta College Industry Advisory Council and is a member of the Society of Petroleum Engineers. +Michael Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 51, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to joining Noble in 2007, he spent over 20 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus, 58, has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Inde x to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/item13.txt b/raw/filings/0000874499/2023/0001628280-24-007527/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..89b3f492cbdee23067ea2a623ed99d0ce687dd66 --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2024 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/item9a.txt b/raw/filings/0000874499/2023/0001628280-24-007527/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..3534c48732b468c13832cd703ca936f21bc7a186 --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/item9a.txt @@ -0,0 +1,38 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2023, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended December 31, 2023, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that out internal control over financial reporting was effective as of December 31, 2023. +111 +Table of Contents +Inde x to Financial Statements +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2023 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2023, as stated in their accompanying report. +/s/ John Reinhart /s/ Michael Hodges +Name: John Reinhart Name: Michael Hodges +Title: Chief Executive Officer Title: Chief Financial Officer +112 +Table of Contents +Inde x to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated February 28, 2024 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 28, 2024 +113 +Table of Contents +Inde x to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/rp_note.txt b/raw/filings/0000874499/2023/0001628280-24-007527/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..50ed007fe6da5b26f8bfe54c75afc29a30af12f7 --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/rp_note.txt @@ -0,0 +1,9 @@ +17. RELATED PARTY TRANSACTIONS +In the ordinary course of business, the Company has conducted business activities with certain related parties. +As discussed in Note 2 , the Company's previously owned shares of the outstanding common stock of Mammoth Energy were used to settle Class 4A claims in 2021. Subsequent to Gulfport's emergence, the Company held no shares of Mammoth Energy's outstanding common stock. There were no material amounts of services provided by Mammoth Energy that were provided during the Prior Predecessor Period. +Share Repurchase Program +Concurrent with the closing of the June offering transaction discussed in Note 7 , the Company purchased 215,060 shares of its common stock from Silver Point Capital, L.P. for approximately $ 20.4 million. The repurchase is part of the Company's existing share Repurchase Program. Upon closing of the transaction on June 26, 2023, the repurchased common stock was cancelled. +The Company purchased 146,455 shares of its common stock from Silver Point Capital, L.P. for approximately $ 20.0 million. The repurchase is part of the Company's existing share Repurchase Program. Upon closing of the transaction on December 11, 2023, the repurchased common stock was cancelled. +102 +Table of Contents +Inde x to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2023/0001628280-24-007527/rpt_disclosure.txt b/raw/filings/0000874499/2023/0001628280-24-007527/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..317b6d8c7215fca443df2fbd967ac1289e97bb01 --- /dev/null +++ b/raw/filings/0000874499/2023/0001628280-24-007527/rpt_disclosure.txt @@ -0,0 +1,6 @@ +Approval of Related Party Transactions +The Audit Committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be substantively applied to each transaction reviewed by the Audit Committee. Instead of a formalized policy, related party transactions are reviewed and judgment is applied to determine whether transactions are in the best interests of the Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party transactions. +The Company’s policy is that all its employees and directors, as well as their family members, must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the Board of Directors or a committee consisting solely of independent directors may grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give rise to a conflict of interest. +Further, under the Audit Committee charter, the Audit Committee is responsible for reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the Board of Directors. In addition, the Board of Directors and, pursuant to its written charter, the Audit Committee, reviews and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. The Board of Directors and the Audit Committee approve only those transactions that, considering known circumstances, are consistent, or are not inconsistent with, the Company’s best interests, as they determine in the good faith exercise of their discretion. +During 2024, Gulfport employed Sara Disser who is the daughter of the Company’s Chief Executive Officer. 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2022-12-31 0000874499 gpor:LowerCommodityPricesMember 2022-01-01 2022-12-31 0000874499 srt:NaturalGasPerThousandCubicFeetMember 2021-01-01 2021-12-31 0000874499 srt:NaturalGasLiquidsReservesMember 2021-01-01 2021-12-31 0000874499 srt:NaturalGasReservesMember 2021-01-01 2021-12-31 0000874499 gpor:DeclineinPerformanceMember gpor:UticaFieldMember 2022-01-01 2022-12-31 0000874499 gpor:ExclusionOfPUDLocationsMember gpor:UticaFieldMember 2022-01-01 2022-12-31 0000874499 gpor:ExclusionOfPUDLocationsMember gpor:SCOOPPropertiesMember 2022-01-01 2022-12-31 0000874499 gpor:DeclineinPerformanceMember 2022-01-01 2022-12-31 +Table of Contents +Index to Financial Statements +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2024 +OR +☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number 001-19514 +Gulfport Energy Corp oration +(Exact name of registrant as specified in its charter) +Delaware 86-3684669 +(State or other jurisdiction of incorporation or organization) +(I.R.S. Employer Identification No.) +713 Market Drive +Oklahoma City, Oklahoma 73114 +(Address of principal executive offices) +(Zip Code) +( 405 ) 252-4600 +(Registrant telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, $0.0001 par value per share GPOR The New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). +Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large Accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Table of Contents +Index to Financial Statements +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ☒ No ☐ +The aggregate market value of our common stock held by non-affiliates on June 30, 2024 was approximately $ 2.0 billion. As of February 20, 2025, there were 17,894,932 shares of our $0.0001 par value common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of Gulfport Energy Corporation’s Proxy Statement for the 2025 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +TABLE OF CONTENTS +Page +FORWARD-LOOKING STATEMENTS +1 +SUMMARY RISK FACTORS +2 +PART I +4 +ITEM 1. +BUSINESS +4 +ITEM 1A. +RISK FACTORS +20 +ITEM 1B. +UNRESOLVED STAFF COMMENTS +36 +ITEM 1C. +CYBERSECURITY +36 +ITEM 2. +PROPERTIES +38 +ITEM 3. +LEGAL PROCEEDINGS +38 +ITEM 4. +MINE SAFETY DISCLOSURES +38 +PART II +39 +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +39 +ITEM 6. +RESERVED +40 +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +40 +RESULTS OF OPERATIONS +43 +LIQUIDITY AND CAPITAL RESOURCES +48 +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +53 +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +54 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +57 +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +97 +ITEM 9A. +CONTROLS AND PROCEDURES +97 +ITEM 9B. +OTHER INFORMATION +99 +ITEM 9C. +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +99 +PART III +99 +ITEM 10. +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +99 +ITEM 11. +EXECUTIVE COMPENSATION +99 +ITEM 12. +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +99 +ITEM 13. +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +99 +ITEM 14. +PRINCIPAL ACCOUNTING FEES AND SERVICES +99 +PART IV +100 +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +100 +ITEM 16. +FORM 10-K SUMMARY +104 +Signatures +105 +Table of Contents +Index to Financial Statements +DEFINITIONS +Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Gulfport,” the “Company” and “Registrant” refer to Gulfport Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in thousands of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Annual Report on Form 10-K: +1145 Indenture . Indenture dated May 17, 2021 between Gulfport Operating, UMB Bank, National Association, as trustee, and the guarantors party thereto, under section 1145 of the Bankruptcy Code for our 8.0% Senior Notes due 2026. +2026 Senior Notes . 8.0% Senior Notes due May 17, 2026. +2026 Senior Notes Indentures . Collectively, the 1145 Indenture and the 4(a)(2) Indenture governing the 2026 Senior Notes. +2029 Senior Notes . 6.750% Senior Notes due September 1, 2029. +2029 Senior Notes Indenture. Indenture dated September 13, 2024 between Gulfport Operating, UMB Bank, National Association, as trustee, and the guarantors party thereto. +4(a)(2) Indenture . Certain eligible holders made an election entitling such holders to receive senior notes issued pursuant to an indenture, dated as of May 17, 2021, by and among Gulfport Operating, UMB Bank, National Association, as trustee, and the guarantors party thereto, under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) as opposed to its share of the up to $550 million aggregate principal amount of our Senior Notes due 2026. The 4(a)(2) Indenture’s terms are substantially similar to the terms of the 1145 Indenture. The primary differences between the terms of the 4(a)(2) Indenture and the terms of the 1145 Indenture are that (i) affiliates of the Issuer holding 4(a)(2) Notes are permitted to vote in determining whether the holders of the required principal amount of indenture securities have concurred in any direction or consent under the 4(a)(2) Indenture, while affiliates of the Issuer holding 1145 Notes will not be permitted to vote on such matters under the 1145 Indenture, (ii) the covenants of the 1145 Indenture (other than the payment covenant) require that the Issuer comply with the covenants of the 4(a)(2) Indenture, as amended, and (iii) the 1145 Indenture requires that the 1145 Securities be redeemed pro rata with the 4(a)(2) Securities and that the 1145 Indenture be satisfied and discharged if the 4(a)(2) Indenture is satisfied and discharged. +ASC. Accounting Standards Codification. +ASU. Accounting Standards Update. +Bankruptcy Code. Chapter 11 of Title 11 of the United States Code. +Bankruptcy Court. The United States Bankruptcy Court for the Southern District of Texas. +Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. +Bcf . One billion cubic feet of natural gas. +Bcfe. One billion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Board of Directors (Board) . The board of directors of Gulfport Energy Corporation. +Bps. Basis points. +Btu . British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels. +Chapter 11 Cases. Voluntary petitions filed on November 13, 2020 by Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +CODM. Chief Operating Decision Maker. +Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas, oil and NGL. +Credit Facility . The Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. as administrative agent and various lender parties, providing for a senior secured reserve-based revolving credit facility effective as of October 14, 2021, as amended by the Commitment Increase, Borrowing Base Reaffirmation Agreement, and Fourth Amendment to Credit Agreement dated as of September 12, 2024. +DD&A. Depreciation, depletion and amortization. +Table of Contents +Index to Financial Statements +Debtors. Collectively, Gulfport Energy Corporation, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Grizzly Holdings, Inc., Gulfport Appalachia, LLC, Gulfport Midcon, LLC, Gulfport Midstream Holdings, LLC, Jaguar Resources LLC, Mule Sky LLC, Puma Resources, Inc. and Westhawk Minerals LLC. +Developed Acreage . The number of acres allocated or assignable to productive wells or wells capable of production. +Development Well . A well drilled within the proved area of a natural gas or crude oil reservoir to the depth of a stratigraphic horizon known to be productive. +Disputed Claims Reserve. Reserve used to settle any pending claims of unsecured creditors that were in dispute as of the effective date of the Plan. +Emergence Date . Gulfport filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on November 13, 2020, and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until its emergence on May 17, 2021. +Exploratory Well . A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area. +FASB. Financial Accounting Standards Board. +GAAP . Accounting principles generally accepted in the United States of America. +Grizzly. Grizzly Oil Sands ULC. +Grizzly Holdings. Grizzly Holdings Inc. +Gross Acres or Gross Wells . Refers to the total acres or wells in which a working interest is owned. +Guarantors. All existing consolidated subsidiaries that guarantee the Company's Credit Facility or certain other debt. +Gulfport Operating. Gulfport Energy Operating Corporation. +Held By Production . Refers to an oil and gas lease continued into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith. +Horizontal Drilling . A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval. +Incentive Plan . Gulfport Energy Corporation 2021 Stock Incentive Plan, effective on the Emergence Date. +IRC . The Internal Revenue Code of 1986, as amended. +LIBOR. London Interbank Offered Rate. +LOE. Lease operating expenses. +Marcellus. Refers to the Marcellus Play that includes the hydrocarbon bearing rock formations commonly referred to as the Marcellus formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont County in eastern Ohio. +MBbl. One thousand barrels of crude oil, condensate or natural gas liquids. +Mcf . One thousand cubic feet of natural gas. +Mcfe. One thousand cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +MMBbl. One million barrels of crude oil, condensate or natural gas liquids. +MMBtu. One million British thermal units. +MMcf. One million cubic feet of natural gas. +MMcfe. One million cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +Natural Gas Liquids (NGL). Hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include ethane, propane, butane, isobutene, pentane, hexane and natural gasoline. +Net Acres or Net Wells . Refers to the sum of the fractional working interests owned in gross acres or gross wells. +Table of Contents +Index to Financial Statements +Net Revenue Interest (NRI). An interest in an oil and natural gas property entitling the owner to a share of oil, natural gas or NGL production. +NYMEX. New York Mercantile Exchange. +OCC. Oklahoma Corporation Commission. +Parent. Gulfport Energy Corporation. +Plan . The Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and Its Debtor Subsidiaries. +Predecessor. The pre-emergence from bankruptcy organization for periods on or prior to May 17, 2021. +Productive Well . A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes. +Proved Developed Reserves (PDP) . Reserves expected to be recovered through existing wells with existing equipment and operating methods. +Proved Reserves . Quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. +Proved Undeveloped Reserves (PUD). Proved reserves expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. +PV-10. Present net value of estimated future net revenues, discounted at 10%. +Repurchase Program . A stock repurchase program to acquire up to $1 billion of Gulfport's outstanding common stock. It is authorized to extend through December 31, 2025, and may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. +Reservoir . A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. +Royalty Interest . Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property. +RTSR. Relative total shareholder return. +SCOOP . Refers to the South Central Oklahoma Oil Province, a term used to describe a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko basin. The SCOOP Play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. Our acreage is primarily in Garvin, Grady and Stephens Counties. +SEC . The United States Securities and Exchange Commission. +Section 382. Internal Revenue Code Section 382. +SOFR . Secured Overnight Financing Rate. +Standardized Measure. Standardized measure of discounted future net cash flows. +Successor. The post-emergence from bankruptcy reorganized organization for periods subsequent to May 17, 2021. +Tcfe . One trillion cubic feet of natural gas equivalent, with one barrel of NGL and crude oil being equivalent to 6,000 cubic feet of natural gas. +TSR. Total shareholder return. +Undeveloped Acreage . Lease or mineral acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas. +USEPA. United States Environmental Protection Agency. +Table of Contents +Index to Financial Statements +Utica . Refers to the Utica Play that includes the hydrocarbon bearing rock formations commonly referred to as the Utica formation located in the Appalachian Basin of the United States and Canada. Our acreage is located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio. +Working Interest (WI). The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. +WTI. Refers to West Texas Intermediate. +Table of Contents +Index to Financial Statements +FORWARD-LOOKING STATEMENTS +This Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will or may occur in the future, including the expected impact of the war in Ukraine and the conflict in the Middle East on our business, our industry and the global economy, estimated future production and net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof and the information under the heading “2025 Outlook”), share repurchases, business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters and other such matters are forward-looking statements. +These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. +Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in Item 1A. “ Risk Factors ” and Item 7. “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. +All forward-looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. +Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report. +We may use the Investors section of our website (www.gulfportenergy.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on our website is not part of this Annual Report on Form 10-K. +1 +Table of Contents +Index to Financial Statements +SUMMARY RISK FACTORS +Financial, Liquidity and Commodity Price Risks +• Natural gas, oil and NGL prices fluctuate widely, and lower prices for extended time periods are likely to have a material adverse effect on our business. +• Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices and involve risk that our counterparties may be unable to satisfy their obligations to us. +• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +• Our debt and other financial commitments may limit our financial and operating flexibility. +• Our development, acquisition and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +• Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +• A change of control could limit our use of net operating losses to reduce future taxable income. +Industry, Business and Operational Risks +• The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +• The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +• Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +• Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +• Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +• Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +• Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +• We are not the operator of all our oil and natural gas properties and therefore are not positioned to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +• Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +• All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +• The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +• The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +• Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +• We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +• A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +• Terrorist activities could materially and adversely affect our business and results of operations. +2 +Table of Contents +Index to Financial Statements +• Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +• We may engage in acquisition and divestiture activities that involve substantial risks. +Environmental, Legal and Regulatory Risks +• We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +• Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +• Increased attention to Environmental, Social and Governance (“ESG”) matters may impact our business, financial results, or stock price. +• Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +• Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +Risks Associated with an Investment in Us +• The market price of our securities is subject to volatility. +• Future sales or the availability for sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and could impair our ability to raise capital through future sales of equity securities. +• Certain of our stockholders own a significant portion of our outstanding equity securities, and their interests may not always coincide with the interests of other holders of the common stock. +• There may be future dilution of our common stock, which could adversely affect the market price of our common stock. +• Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +3 +Table of Contents +Index to Financial Statements +PART I +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol “GPOR”. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2024, we had 4.0 Tcfe of proved reserves with a Standardized Measure of $1.75 billion and a PV-10 of $1.76 billion. See “ Definitions ” above for our definition of PV-10 (a non-GAAP financial measure) and “ Oil, Natural Gas and NGL Reserves and Estimation ” below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol “ GPOR ” . +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica/Marcellus and SCOOP operating areas. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we generally allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2025 Outlook +Our 2025 capital expenditure program is expected to be in a range of $370 million to $395 million. In the Utica, we intend to complete drilling on approximately 17 gross (17.0 net) operated horizontal wells and commence sales on approximately 22 gross (21.9 net) operated horizontal wells. In the Marcellus, we intend to complete drilling on approximately 8 gross (8.0 net) operated horizontal wells and commence sales on approximately 4 gross (4.0 net) operated horizontal wells. In the SCOOP, we intend to complete drilling on approximately two gross (1.8 net) operated horizontal wells and commence sales on two gross (1.8 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,040 to 1,065 MMcfe per day of production in 2025. +4 +Table of Contents +Index to Financial Statements +Additionally, in 2025, we expect a continuation of shareholder return actions through our Repurchase Program. During 2024, we repurchased 1.2 million shares for $184.5 million at a weighted average price of $153.35 per share, leaving $415.9 million remaining on our Repurchase Program, which expires on December 31, 2025. +Operating Areas +Utica/Marcellus - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 208,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. +The Marcellus covers hydrocarbon-bearing rock formations that overlay the Utica. We have identified approximately 20,500 net reservoir acres of our existing leasehold for Marcellus development and have 22 PUD Marcellus locations within our Utica operating area. In 2023 we drilled, completed, and turned to sales two Marcellus wells and have plans to drill eight Marcellus wells and complete and turn to sales four Marcellus wells in 2025. Our Marcellus development area is approximately 3,500 to 4,500 feet shallower than the Utica. During 2024, we produced approximately 842 MMcfe per day net to our interests in Utica/Marcellus and it accounted for approximately 80% of our total production. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 43,000 in the Woodford formation and approximately 30,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2024, we produced approximately 212 MMcfe per day net to our interests in the SCOOP and it accounted for approximately 20% of our total production. +Oil, Natural Gas and NGL Reserves and Estimation +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +As discussed above, the process of estimating oil, natural gas and NGL reserves is complex and requires significant judgment. As a result, we have developed internal policies and controls for estimating and recording reserves. Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica/Marcellus and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 28 years of reservoir and operations experience. In addition, our geoscience staff has approximately 51 years combined industry experience and our reservoir staff has approximately 61 years combined experience. +5 +Table of Contents +Index to Financial Statements +During 2024, our total net natural gas, NGLs and oil proved reserves estimates attributable to the Company's interests were prepared by our engineers and Netherland, Sewell & Associates, Inc. (“NSAI”) conducted an audit of the proved reserves as of December 31, 2024. NSAI is an independent petroleum engineering firm and were selected for their historical experience and geographic expertise in engineering similar resources. In the course of its audit, NSAI conducted a detailed review of properties making up approximately 85% of the total proved reserves and accounting for approximately 95% of the present worth of those reserves. The estimates prepared by the Company and audited by NSAI were within the recommended 10% tolerance threshold set forth in the Standards Pertaining to the Estimation and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers A copy of the summary reserve report is included as Exhibit 99.1 to this Annual Report on Form 10-K. Our internal staff of petroleum engineers and geoscience professionals work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. As needed, we provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Reserve estimates for the years ended 2023 and 2022, were prepared by NSAI for 100% of our operating areas. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• audit of year-end reserve estimates by NSAI; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments, including the substitution, removal or deferral of PUD locations; and +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan. +6 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2024, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2024 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica & Marcellus +Proved developed (1) +4 1,427 8 1,498 +Proved undeveloped (1) +13 1,189 36 1,480 +Total proved (1) +17 2,616 44 2,978 +SCOOP +Proved developed 4 451 23 611 +Proved undeveloped 2 289 13 380 +Total proved 5 740 36 991 +Total +Proved developed 7 1,879 31 2,109 +Proved undeveloped 15 1,478 49 1,861 +Total proved 22 3,356 80 3,969 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 12 Bcfe and 174 Bcfe of net developed and undeveloped reserves, respectively, located in the Marcellus target formation. +December 31, 2024 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 1,620 $ 1,876 $ 3,496 +Present value of estimated future net revenue (PV-10) (1) +$ 1,059 $ 699 $ 1,757 +Standardized measure (1) +$ 1,747 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2024, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2024. The prices used in our PV-10 measure were the average WTI Spot price of $76.32 per barrel and the average Henry Hub Spot price of $2.13 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2024. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $10 million as of December 31, 2024. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +7 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved reserves during 2024 (in Bcfe): +Proved Reserves, December 31, 2023 4,214 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 547 +Revisions of prior reserve estimates (406) +Current production (386) +Proved Reserves, December 31, 2024 3,969 +Total may not sum due to rounding. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 547 Bcfe of proved reserves were primarily attributable to the continued development of our Utica/Marcellus and SCOOP acreage. We added 46 PUD locations in the Utica/Marcellus which included 33 Utica locations for 341 Bcfe and 13 Marcellus locations for 92 Bcfe. In the SCOOP, we added 16 PUD locations for 114 Bcfe. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 406 Bcfe in estimated proved reserves. These consisted of upward revisions of 16 Bcfe as a result of positive well performance and 171 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2024. These were offset by downward revisions of 488 Bcfe which were associated with commodity price changes. Commodity prices experienced volatility throughout 2024 and the 12-month average price for natural gas decreased from $2.64 per MMBtu for 2023 to $2.13 per MMBtu for 2024, the 12-month average price for NGL decreased from $31.42 per barrel for 2023 to $31.30 per barrel for 2024, and the 12-month average price for crude oil decreased from $78.21 per barrel for 2023 to $76.32 per barrel for 2024. Additionally, downward revisions of 172 Bcfe were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 11 Utica/Marcellus PUD locations and 6 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Finally, upward revisions of 67 Bcfe were a result of a combination of various economic assumption updates. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2024, 2023 and 2022, and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +Proved Undeveloped Reserves +As of December 31, 2024, our PUDs totaled 1,478 Bcf of natural gas, 15 MMBbl of oil and 49 MMBbl of NGL, for a total of 1,861 Bcfe. Approximately 80% and 20% of our PUD reserves at year-end 2024 were located in Utica/Marcellus and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +8 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved undeveloped reserves during 2024 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2023 2,011 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 547 +Conversion to proved developed reserves (341) +Revisions of prior reserve estimates (357) +Proved Undeveloped Reserves, December 31, 2024 1,861 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 547 Bcfe were primarily attributed to the addition of 62 PUD locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 46 PUD locations in the Utica/Marcellus and 16 PUD locations in the SCOOP. +Conversion to proved developed reserves. Our 2024 development activities resulted in the conversion of approximately 341 Bcfe into proved developed producing reserves, attributable to 16 PUD locations in the Utica and 5 PUD locations in the SCOOP. These 21 PUDs represent a conversion rate of 13% for 2024. +Revision of prior reserve estimates. We experienced total downward revisions of 357 Bcfe in estimated proved undeveloped reserves. This included 300 Bcfe of downward revisions associated with commodity price changes. Commodity prices experienced volatility throughout 2024 and the 12-month average price for natural gas decreased from $2.64 per MMBtu for 2023 to $2.13 per MMBtu for 2024, the 12-month average price for NGL decreased from $31.42 per barrel for 2023 to $31.30 per barrel for 2024, and the 12-month average price for crude oil decreased from $78.21 per barrel for 2023 to $76.32 per barrel for 2024. Additionally, downward revisions of 172 Bcfe were associated with changes in our development schedule. The schedule changes moved the development of 11 Utica/Marcellus PUD locations and 6 SCOOP PUD locations beyond the SEC requirement of developing PUDs five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. These downward revisions were offset by upward revisions of 116 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest and well forecasts. +Costs incurred relating to the development of PUDs were approximately $326.4 million in 2024. +All PUD locations included in our 2024 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2024, 1.20% of our total proved reserves were classified as proved developed non-producing. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2024, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2024 of $76.32 per barrel and $2.13 per MMBtu. Holding production and development costs constant, if SEC pricing were $83.95 per barrel and $2.34 per MMBtu, or a 10% increase, this would have resulted in an increase of 87 Bcfe of our total proved reserves and a $0.54 billion increase in PV-10 value at December 31, 2024. Holding production and development costs constant, if SEC pricing were $68.69 per barrel and $1.92 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 494 Bcfe of our total proved reserves and a $0.51 billion decrease in PV-10 value at December 31, 2024. For the low price scenario 128 PUDs were PV-10 economic. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2024: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica & Marcellus 161,391 133,638 77,387 74,359 +SCOOP 49,922 35,896 9,829 7,134 +Total 211,313 169,534 87,216 81,493 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2024: +Undeveloped Acres +Years Ending December 31, Gross Acres Net Acres +2025 2,203 2,195 +2026 3,682 3,661 +2027 2,812 2,775 +After 2027 18,673 18,667 +Held by production 59,846 54,195 +Total 87,216 81,493 +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2024: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica & Marcellus 49.66/60.84 15 5.15 712 437.2 727 442.4 +SCOOP 21.41/26.49 119 12.23 531 159.92 650 172.1 +Total (1) +143 17.4 1,411 597.1 1,554 614.5 +_____________________ +(1) We also have override/royalty interests in 177 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2024 2023 2022 +Gross Net Gross Net Gross Net +Development: +Productive 21 19.8 24 21.9 25 21.7 +Dry — — — — — — +Total 21 19.8 24 21.9 25 21.7 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2024: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica & Marcellus (1) +18.0 17.4 16.0 15.4 16.0 0.1 8.0 0.1 +SCOOP (2) +3.0 2.4 3.0 2.4 18.0 0.2 16.0 0.1 +Total 21.0 19.8 19.0 17.8 34.0 0.3 24.0 0.2 +_____________________ +(1) Of the 18 gross wells drilled in 2024, 10 were completed as producing wells and eight were in various stages of drilling and completion as of December 31, 2024. +(2) The three gross wells that were drilled in 2024 were completed as producing wells as of December 31, 2024. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Natural gas sales +Natural gas production volumes (MMcf) 354,154 350,306 322,366 +Natural gas production volumes (MMcf) per day 968 960 883 +Total sales $ 714,160 $ 831,812 $ 1,998,452 +Average price without the impact of derivatives ($/Mcf) $ 2.02 $ 2.37 $ 6.20 +Impact from settled derivatives ($/Mcf) $ 0.80 $ 0.42 $ (3.11) +Average price, including settled derivatives ($/Mcf) $ 2.82 $ 2.79 $ 3.09 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,459 1,363 1,610 +Oil and condensate production volumes (MBbl) per day 4 4 4 +Total sales $ 101,589 $ 99,854 $ 147,444 +Average price without the impact of derivatives ($/Bbl) $ 69.64 $ 73.27 $ 91.58 +Impact from settled derivatives ($/Bbl) $ 0.11 $ (2.53) $ (24.32) +Average price, including settled derivatives ($/Bbl) $ 69.75 $ 70.74 $ 67.26 +NGL sales +NGL production volumes (MBbl) 3,818 4,386 4,483 +NGL production volumes (MBbl) per day 10 12 12 +Total sales $ 112,855 $ 119,717 $ 184,963 +Average price without the impact of derivatives ($/Bbl) $ 29.56 $ 27.29 $ 41.26 +Impact from settled derivatives ($/Bbl) $ (0.56) $ 2.07 $ (2.80) +Average price, including settled derivatives ($/Bbl) $ 29.00 $ 29.36 $ 38.46 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 385,814 384,802 358,924 +Natural gas equivalents (MMcfe) per day 1,054 1,054 983 +Total sales $ 928,604 $ 1,051,383 $ 2,330,859 +Average price without the impact of derivatives ($/Mcfe) $ 2.41 $ 2.73 $ 6.49 +Impact from settled derivatives ($/Mcfe) $ 0.73 $ 0.40 $ (2.94) +Average price, including settled derivatives ($/Mcfe) $ 3.14 $ 3.13 $ 3.55 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.18 +Average taxes other than income ($/Mcfe) 0.08 0.09 0.17 +Average transportation, gathering, processing and compression ($/Mcfe) 0.91 0.91 1.00 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.17 $ 1.17 $ 1.34 +Totals may not sum or recalculate due to rounding. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2024: +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Utica & Marcellus +Net Production +Natural gas (MMcf) 296,548 279,428 246,123 +Oil (MBbl) 847 255 244 +NGL (MBbl) 1,072 856 885 +Total (MMcfe) 308,060 286,095 252,895 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 1.99 $ 2.34 $ 6.14 +Oil ($/Bbl) $ 66.84 $ 70.18 $ 90.60 +NGL ($/Bbl) $ 37.01 $ 33.63 $ 48.21 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.16 $ 0.16 $ 0.17 +Average taxes other than income ($/Mcfe) 0.06 0.05 0.06 +Average transportation, gathering, processing and compression ($/Mcfe) 0.93 0.97 1.08 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.15 $ 1.18 $ 1.31 +SCOOP +Net Production +Natural gas (MMcf) 57,605 70,878 76,242 +Oil (MBbl) 612 1,108 1,366 +NGL (MBbl) 2,746 3,530 3,598 +Total (MMcfe) 77,753 98,707 106,024 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.13 $ 2.53 $ 6.38 +Oil ($/Bbl) $ 73.51 $ 73.98 $ 91.71 +NGL ($/Bbl) $ 26.65 $ 25.76 $ 39.56 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.28 $ 0.25 $ 0.20 +Average taxes other than income ($/Mcfe) 0.13 0.17 0.38 +Average transportation, gathering, processing and compression ($/Mcfe) 0.83 0.73 0.78 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.24 $ 1.15 $ 1.36 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2024, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2015. Additionally, Grizzly had no proved reserves as of December 31, 2024. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. +13 +Table of Contents +Index to Financial Statements +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 17 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2024, 2023 and 2022 were as follows: +% of Sales +Year Ended December 31, 2024 +Vitol Inc. 15 % +Year Ended December 31, 2023 +Vitol Inc. 12 % +Year Ended December 31, 2022 +ECO-Energy 20 % +Clearwater 11 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +14 +Table of Contents +Index to Financial Statements +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases (“GHG”). We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. +15 +Table of Contents +Index to Financial Statements +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. If future developments result in additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a minimum limit of $25 million for single well limits and $37.5 million limit for multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +16 +Table of Contents +Index to Financial Statements +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2024, 2023 and 2022 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2024, we had 235 employees, an increase of approximately 4% from the 226 employees as of December 31, 2023. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2024, we continued making significant investments in our talent management and retention processes, including increasing funds allocated to annual salary increases, short-term incentive payments, long-term incentive equity awards, 401(k) matches for eligible employees, and other enhancements to our benefits offerings. We remain committed to providing fair and competitive compensation programs and adequate development and advancement opportunities to our employees. We believe these practices serve as talent acquisition and retention tools, as our employees' continued engagement and commitment to the Company is critical to our success. +Over the course of 2024, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE program and provided training to leaders on reinforcement strategies. Additionally, we continued the WORK GREEN program, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +17 +Table of Contents +Index to Financial Statements +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize training sessions with content developed by experts in the safety, legal, information security, and regulatory compliance fields, and we offer a blend of training sessions through both computer-based modules and live, instructor-led sessions. We believe our training efforts support a compliant safety-first mindset in everything we do. We continue to provide professional and workplace-related training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President, Chief Executive Officer and Director +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 56, as President, Chief Executive Officer and Director, effective as of January 24, 2023. Mr. Reinhart joined the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Michael Hodges, Executive Vice President and Chief Financial Officer +On April 3, 2023, the Board of Directors appointed Mr. Hodges, 46, as Executive Vice President and Chief Financial Officer. Most recently, Mr. Hodges served as Senior Vice President, Finance and Accounting at Leon Capital Group. Prior to joining Leon Capital, he was the Executive Vice President and Chief Financial Officer for Montage Resources Corporation until its merger with Southwestern Energy Company in November 2020. From 2012 until joining Montage Resources in 2018, Mr. Hodges served as the Chief Financial Officer for three upstream energy companies focused on near-term value creation through the acquisition and early-stage development of oil and natural gas resources. Mr. Hodges received his Bachelor of Business Administration in Finance from the University of Oklahoma and a Master of Science in Energy Management from Oklahoma City University and is a Certified Public Accountant in the State of Oklahoma. +Patrick Craine, Executive Vice President and Chief Legal and Administrative Officer +Mr. Craine, 52, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 25 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +18 +Table of Contents +Index to Financial Statements +Matthew Rucker, Executive Vice President and Chief Operating Officer +Mr. Rucker, 39, joined Gulfport as the Senior Vice President of Operations in March 2023. On February 24, 2025, Matthew Rucker was promoted to Executive Vice President and Chief Operating Officer. He joined Gulfport from Javelin Energy Partners where he previously served as Vice President of Production Operations starting in August 2022. Mr. Rucker joined Javelin in July 2022 as the Vice President of Business Development. Prior to joining Javelin, Mr. Rucker served as the Executive Vice President, Chief Operating Officer for Montage Resources Corporation following Montage’s successful business combination transaction with Blue Ridge Mountain Resources in June 2020. Prior to Montage, Mr. Rucker served as Vice President, Resource Planning and Development of Blue Ridge from 2016 to 2020. Prior to joining Blue Ridge, Mr. Rucker served as a Production Superintendent for Chesapeake Energy Corporation from January 2014 to October 2016, overseeing Chesapeake’s Utica Shale production. As a member of Chesapeake’s Eastern Division leadership team, Mr. Rucker focused on the safe and efficient optimization of production in the Utica Shale and led an operating team of over 45 employees. During his service at Chesapeake, Mr. Rucker held several engineering positions in the Marcellus and Utica Shale asset teams within reservoir, primarily focused on strategic joint ventures, divestitures, acquisitions and resource development planning. Mr. Rucker received his Bachelor of Science degree in Petroleum Engineering from Marietta College and a Master of Business Administration in Energy from Texas Christian University. He serves on the Marietta College Industry Advisory Council and is a member of the Society of Petroleum Engineers. +Michael Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 52, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to that role, he spent over 17 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus, 59, has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Index to Financial Statements +ITEM 1A. RISK FACTORS +There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a summary of significant factors that might cause our future results to differ materially from those currently expected. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial position, operating results, cash flows, reserves or our ability to pay our debts and other liabilities could suffer, the trading price and liquidity of our securities could decline and you may lose all or part of your investment in our securities. +Financial, Liquidity and Commodity Price Risks +Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse effect on our business. +Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil and NGL. We incur substantial expenditures to replace reserves, sustain production and fund our business plans. Low natural gas, oil and NGL prices can negatively affect the amount of cash available for capital expenditures, debt service and debt repayment and our ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on our financial condition, results of operations, cash flows and reserves. In addition, periods of low natural gas, oil and NGL prices may result in ceiling test write-downs of our oil and natural gas properties. +Historically, the markets for natural gas, oil and NGL have been volatile, and they are likely to continue to be volatile. For example, during 2023, WTI prices ranged from $66.61 to $93.67 per barrel and the Henry Hub spot market price of natural gas ranged from $1.74 to $3.78 per MMBtu. During 2024, WTI prices ranged from $66.73 to $87.69 per barrel and the Henry Hub spot market price of natural gas ranged from $1.21 to $13.20 per MMBtu. +Wide fluctuations in natural gas, oil and NGL prices may result from factors that are beyond our control, including: +• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural gas reserves; +• the level of prices, and expectations about future prices, of oil and natural gas; +• changes in the level of consumer and industrial demand, including impacts from global or national health epidemics and concerns, such as the recent coronavirus; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the expected rates of declining current production; +• the price and availability of alternative fuels; +• technological advances and changing consumer attitudes affecting energy consumption; +• risks associated with operating drilling rigs; +• the effectiveness of worldwide conservation measures; +• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities; +• the level and effect of trading in commodity futures markets, including by commodity price speculators and others; +• U.S. exports of oil, natural gas, liquefied natural gas and NGL; +• the price and level of foreign imports and exports, including as a result of U.S. trade policy; +• the nature and extent of domestic and foreign governmental regulations and taxes; +• the ability of the members of the Organization of Petroleum Exporting Countries and others to agree to and maintain oil price and production controls; +• political or economic instability or armed conflict in oil and natural gas producing regions; +• weather conditions; +• acts of terrorism; and +• domestic and global economic conditions. +20 +Table of Contents +Index to Financial Statements +These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Even with natural gas, oil and NGL derivatives currently in place to mitigate price risks associated with a portion of our 2025 cash flows, we have substantial exposure to natural gas prices, and to a lesser extent, oil and NGL prices, in 2025 and beyond. In addition, a prolonged extension of lower prices could reduce the quantities of reserves that we may economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. +Our commodity price risk management activities may limit the benefit we would receive from increases in commodity prices, may require us to provide collateral for derivative liabilities and involve risk that our counterparties may be unable to satisfy their obligations to us. +To manage our exposure to price volatility, we enter into natural gas, oil and NGL price derivative contracts. Our natural gas, oil and NGL derivative arrangements may limit the benefit we would receive from increases in commodity prices. The fair value of our natural gas, oil and NGL derivative instruments can fluctuate significantly between periods. Our decision to mitigate cash flow volatility through derivative arrangements, if any, is based in part on our view of current and future market conditions and our desire to stabilize cash flows necessary for the development of our proved reserves. We may choose not to enter into derivatives if the pricing environment for certain time periods is not deemed to be favorable. Additionally, we may choose to liquidate existing derivative positions prior to the expiration of their contractual maturities to monetize gain positions for the purpose of funding our capital program. +Natural gas, oil and NGL derivative transactions expose us to the risk that our counterparties, which are generally financial institutions, may be unable to satisfy their obligations to us. During periods of declining commodity prices, the value of our commodity derivative asset positions increase, which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund our planned activities and could result in a larger percentage of our future cash flows being exposed to commodity price changes. +Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. +Our earnings are exposed to interest rate risk associated with borrowings under our Credit Facility, which is structured under floating rate terms. As such, our interest expense is sensitive to fluctuations in the SOFR benchmark. For the year ended December 31, 2024, amounts borrowed under our Credit Facility bore interest at the weighted average rate of 8.23%. A 1% increase in the average interest rate would increase our interest expense by approximately $0.4 million based on outstanding borrowings under our Credit Facility at December 31, 2024. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our Credit Facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2024, we did not hedge our interest rate risk. +21 +Table of Contents +Index to Financial Statements +Our debt and other financial commitments may limit our financial and operating flexibility. +Our total principal debt was approximately $713.7 million at December 31, 2024. We also had various commitments for leases, drilling contracts, derivative contracts, firm transportation, and purchase obligations for services, products and properties. Our financial commitments could have important consequences to our business, including, but not limited to, limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, to pay dividends, to repurchase shares of our common stock, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to make payments on our debt or to comply with restrictive terms of our debt. Higher levels of debt may make us more vulnerable to general adverse economic and industry conditions. Additionally, the agreement governing our credit facility and the indentures governing our senior notes contain a number of covenants that impose constraints on us, including requirements to comply with certain financial covenants and restrictions on our ability to dispose of assets, make certain investments, incur liens and additional debt, and engage in consolidations, mergers and acquisitions. If commodity prices decline and we reduce our level of capital spending and production declines or we incur additional impairment expense or the value of our proved reserves declines, we may not be able to incur additional indebtedness, may need to repay outstanding indebtedness and may not be in compliance with the financial covenants in our debt instruments in the future. Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K and Note 4 of our consolidated financial statements for more information regarding the financial covenants and our Credit Facility. +Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves. +Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. +Historically, we have financed capital expenditures primarily with cash flow from operations and borrowings under our revolving credit facility. Our cash flow from operations and access to capital are subject to a number of variables, including: +• our proved reserves; +• the volume of oil and natural gas we are able to produce from existing wells; +• the prices at which oil and natural gas are sold; +• our ability to acquire, locate and produce economically new reserves; and +• our ability to borrow under our credit facility. +We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital through a variety of means. We cannot guarantee that we will be able to obtain debt or equity financing on terms favorable to us, or at all. +If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves. In addition, we may be unable to implement our development plan, complete acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. +22 +Table of Contents +Index to Financial Statements +Under our method of accounting for oil and natural gas properties, declines in commodity prices may result in impairment of asset value. +We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting oil and NGL to one Mcf of natural gas at the ratio of six Mcf of natural gas to one barrel of oil. +Under the full cost method of accounting for oil and gas properties, we are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or non-cash write-down is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. Future non-cash asset impairments could negatively affect our results of operations. +A change of control could limit our use of net operating losses to reduce future taxable income. +As of December 31, 2024, we had a net operating loss, or NOL, carryforward of approximately $1.6 billion for federal income tax purposes. If we were to experience an “ownership change,” as determined under IRC Section 382, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate for the month in which such ownership change occurs. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more “5% shareholders” (as defined in the Code) at any time during a rolling three-year period. +Industry, Business and Operational Risks +The oil and gas development, exploration and production industry is very competitive, and some of our competitors have greater financial and other resources than we do. +We face competition in every aspect of our business, including buying and selling reserves and leases, obtaining goods and services needed to operate our business and marketing natural gas, oil or NGL. Competitors include multinational oil companies, independent production companies and individual producers and operators. Some of our competitors have greater financial and other resources than we do and may have greater access to the capital and credit markets. Many of these companies not only explore for and produce oil and natural gas but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. As a result, these competitors may be able to address these competitive factors more effectively or weather industry downturns more easily than we can. We also face indirect competition from alternative energy sources, including wind, solar and electric power. +Our performance depends largely on the talents and efforts of highly skilled individuals and on our ability to attract new employees and to retain and motivate our existing employees. Competition in our industry for qualified employees is intense. If we are unsuccessful in attracting and retaining skilled employees and managerial talent, our ability to compete effectively may be diminished. We also compete for the equipment required to explore, develop and operate properties. Typically, during times of rising commodity prices, drilling and operating costs will also increase. During these periods, there is often a shortage of drilling rigs and other oilfield equipment and services, which could adversely affect our ability to execute our development plans on a timely basis and within budget. +23 +Table of Contents +Index to Financial Statements +The actual quantities of and future net revenues from our proved reserves may be less than our estimates. +The estimates of our proved reserves and the estimated future net revenues from our proved reserves included in this report are based upon various assumptions, including assumptions required by the SEC relating to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these estimates are subject to future revisions. +Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and natural gas prices and other factors, many of which are beyond our control. +As of December 31, 2024, approximately 47% of our total estimated proved reserves were PUDs and may not be ultimately developed or produced. Recovery of PUDs requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. Estimated development costs may not equal our actual costs, development may not occur as scheduled and results may not be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. If we choose not to develop our PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove them from our reported proved reserves. In addition, under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed within this five-year time frame. +You should not assume that the present values included in this report represent the current market value of our estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic average of prices on the first day of each month within the 12-month period. The December 31, 2024 present value is based on a $2.13 per MMBtu of gas price and a $76.32 per Bbl of oil price, before considering basis differential adjustments. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate. +Actual future net revenues from our oil and natural gas properties will also be affected by factors such as: +• actual prices we receive for oil and natural gas; +• the amount and timing of actual production; +• supply of and demand for oil and natural gas; and +• changes in governmental regulations or taxation. +The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of future net cash flows from our proved reserves and their present value. In addition, the 10% discount factor that is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the most appropriate discount factor. Interest rates in effect from time to time and the risks associated with our business or the oil and gas industry in general will affect the appropriateness of the 10% discount factor. +24 +Table of Contents +Index to Financial Statements +Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns. +We have a substantial inventory of undeveloped properties. Development and exploratory drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the course of our due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems, such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities created prior to our purchase of the property. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. +We acquire unproven properties that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such undeveloped properties or wells. +Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling and completion operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, title problems, equipment failures or accidents, shortages of midstream transportation, equipment or personnel, environmental issues, state or local bans or moratoriums on hydraulic fracturing and produced water disposal, and a decline in commodity prices, among others. The profitability of wells, particularly in certain of the areas in which we operate, will be reduced or eliminated if commodity prices decline. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and future market prices for natural gas, oil and NGL, costs associated with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations. All costs of development and exploratory drilling activities are capitalized under the full cost method, even if the activities do not result in commercially productive discoveries, which may result in a future impairment of our oil and natural gas properties if commodity prices decrease. +We rely to a significant extent on seismic data and other technologies in evaluating undeveloped properties and in conducting our exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to acquisition of undeveloped properties, or drilling a well, whether oil or natural gas is present or may be produced economically. If we incur significant expense in acquiring or developing properties that do not produce as expected or at profitable levels, it could have a material adverse effect on our results of operations and financial condition. +25 +Table of Contents +Index to Financial Statements +Part of our strategy involves using the latest available horizontal drilling and completion techniques; therefore, the results of our planned drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production. +Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the development activities we employ, such as offset drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of offset drilling, adjacent wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. +Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future. +Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities. +Leases on oil and natural gas properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Although approximately 86% of our Utica/Marcellus acreage is held by existing production, the remaining acreage is subject to expiration. Of the remaining 14% of our Utica/Marcellus acreage not held by production, approximately 7% will be subject to expiration in 2025, 12% in 2026, 9% in 2027 and approximately 72% thereafter, although a portion of our Utica/Marcellus leases generally grant us the right to extend these leases for an additional three or five-year period. Approximately 99% of our SCOOP acreage is held by existing production; the remaining acreage is subject to expiration. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. Low commodity prices may cause us to delay our drilling plans and, as a result, lose our right to develop the related properties. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. +Oil and natural gas operations are uncertain and involve substantial costs and risks. Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits. +Our oil and gas properties can become damaged, our operations may be curtailed, delayed or canceled and the costs of such operations may increase as a result of a variety of factors, including, but not limited to: +• unexpected drilling conditions, pressure conditions or irregularities in reservoir formations; +• loss of drilling fluid circulation; +• equipment failures or accidents; +• fires, explosions, blowouts, cratering or loss of well control, as well as the mishandling or underground migration of fluids and chemicals; +• risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives; +26 +Table of Contents +Index to Financial Statements +• adverse weather conditions and natural disasters, such as tornadoes, earthquakes, hurricanes and extreme temperatures, which may be exacerbated by climate change; +• issues with title or in receiving governmental permits or approvals; +• restricted takeaway capacity for our production, including due to inadequate midstream infrastructure or constrained downstream markets; +• environmental hazards or liabilities, including liabilities for environmental damage caused by previous owners of properties purchased by us; +• restrictions in access to, or disposal of, water used or produced in drilling and completion operations; +• shortages or delays in the availability of services or delivery of equipment; and +• unexpected or unforeseen changes in regulatory policy, and political or public opinions. +The occurrence of one or more of these factors could result in a partial or total loss of our investment in a particular property, as well as significant liabilities. +While we may maintain insurance against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. For certain risks, such as political risk, business interruption, cybersecurity breaches, war, terrorism and piracy, we have limited or no insurance coverage. Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +Multi-well pad drilling may result in volatility in our operating results and delay the conversion of our PUD reserves. +We utilize multi-well pad drilling where practical. For example, in the Utica/Marcellus we drill multiple wells from a single pad. Wells drilled on a pad are not turned to sales until all wells on the pad are drilled and cased and the drilling rig is moved from the location. In addition, existing wells that offset newly drilled wells may be temporarily shut in during the drilling and completion process. As a result, multi-well pad drilling delays the completion of wells and the commencement of production from new wells and may negatively affect the production from existing offset wells, all of which may cause volatility in our operating results from period to period. Finally, delays in completion of wells may impact planned conversion of PUD reserves to PDP reserves. +We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties. +We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including: +• the timing and amount of capital expenditures; +• the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel; +• the operator's expertise and financial resources; +• approval of other participants in drilling wells; +• selection of technology; and +• the rate of production of the reserves. +In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited. +27 +Table of Contents +Index to Financial Statements +Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Our ability to produce natural gas, oil and NGL economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our operations or are unable to dispose of or recycle the water we use economically and in an environmentally safe manner. +Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations. For water sourcing, we first seek to use non-potable water supplies for our operational needs. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must then be obtained from other sources and transported to the drilling site. An inability to secure sufficient amounts of water or to dispose of or recycle the water used in our operations could adversely impact our operations in certain areas. The imposition of new environmental regulations could further restrict our ability to conduct operations such as hydraulic fracturing by restricting the disposal of things such as produced water and drilling fluids. +All of our producing properties are located in eastern Ohio and central Oklahoma, making us vulnerable to risks associated with operating in only these regions. +Our largest fields by production are located in eastern Ohio and central Oklahoma. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes, tornados or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available. +The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows. +The largest purchaser of our oil and natural gas during the year ended December 31, 2024, accounted for approximately 15% of our total natural gas, oil and NGL revenues. If this purchaser or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows. +The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations. +The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of and increased costs for drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations. +Our operations may be adversely affected by pipeline, trucking and gathering system capacity constraints and may be subject to interruptions that could adversely affect our cash flow. +The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines, trucks and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. In certain resource plays, the capacity of gathering and transportation systems is insufficient to accommodate potential production from existing and new wells. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. +28 +Table of Contents +Index to Financial Statements +With respect to our Utica/Marcellus acreage where we are focusing a portion of our exploration and development activity, operations may be delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider. Capital constraints could limit the construction of new pipelines and gathering systems and the providing or expansion of trucking services by third parties in the Utica/Marcellus and the other areas in which we operate. As a result, we may experience delays or curtailments in producing and selling our natural gas, oil and NGL. In such event, we might have to shut in or curtail our wells awaiting a pipeline connection or capacity or sell natural gas, oil or NGL production at significantly lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations. +A portion of our natural gas, oil and NGL production in any region may be interrupted, or shut in, from time to time for numerous reasons, including weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could materially adversely affect our cash flow. +We are required to pay fees to some of our midstream service providers based on minimum volumes regardless of actual volume throughput. +We have contracts with some of our third-party service providers for gathering, processing and transportation services with minimum volume delivery commitments under which we are obligated to pay certain fees on minimum volumes regardless of actual volume throughput. As of December 31, 2024, our aggregate long-term contractual obligation under these agreements was approximately $1.1 billion. These fees could be significant and may have a material adverse effect on our results of operations. +A deterioration in general economic, business or industry conditions would have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, tariffs, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. Historically, concerns about global economic growth have had a significant impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and materially adversely impact our results of operations, liquidity and financial condition. +Terrorist activities could materially and adversely affect our business and results of operations. +Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign attacks, as well as military or other actions taken in response to these acts, could cause instability in the global financial and energy markets. Continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy in unpredictable ways, including the disruption of energy supplies and markets, increased volatility in commodity prices, or the possibility that the infrastructure on which we rely could be a direct target or an indirect casualty of an act of terrorism, and, in turn, could materially and adversely affect our business and results of operations. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. +29 +Table of Contents +Index to Financial Statements +Cyber-attacks targeting systems and infrastructure used by the oil and gas industry and related regulations may adversely impact our operations and, if we are unable to obtain and maintain adequate protection for our data, our business may be harmed. +Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil, natural gas and NGL reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our customers, employees and third-party partners. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of our vendors, suppliers and other business partners, have been and may become the target of cyberattacks or information security breaches that could result in the unauthorized access to our seismic data, reserves information, customer or employee data or other proprietary or commercially sensitive information could lead to data corruption, communication interruption, or other disruptions in our exploration or production operations or planned business transactions, any of which could have a material adverse impact on our results of operations. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations, which may include drilling, completion, production and corporate functions. A cyberattack involving our information systems and related infrastructure, or that of our business associates, could result in supply chain disruptions that delay or prevent the transportation and marketing of our production, non-compliance leading to regulatory fines or penalties, loss or disclosure of, or damage to, our or any of our customer’s, supplier’s or royalty owners’ data or confidential information that could harm our business by damaging our reputation, subjecting us to potential financial or legal liability, and requiring us to incur significant costs, including costs to repair or restore our systems and data or to take other remedial steps. +In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems for protecting against cybersecurity risks may not be sufficient. As cyberattacks continue to evolve, including those leveraging artificial intelligence, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyberattacks. In addition, new laws and regulations governing data privacy, cybersecurity, and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties and legal liability. +We may engage in acquisition and divestiture activities that involve substantial risks. +We may make acquisitions that complement or expand our current areas of operations. If we are unable to make attractive acquisitions, our future growth could be limited. Furthermore, even if we do make acquisitions, they may not result in an increase in our cash flow from operations or otherwise result in the benefits anticipated due to various risks, including, but not limited to: +• mistaken estimates or assumptions about reserves, potential drilling locations, revenues and costs, including synergies and the overall costs of equity or debt; +• difficulties in integrating the operations, technologies, products and personnel of the acquired assets or business; and +• unknown and unforeseen liabilities or other issues related to any acquisition for which contractual protections prove inadequate, including environmental liabilities and title defects. +In addition, from time to time, we may sell or otherwise dispose of certain of our properties or businesses as a result of an evaluation of our asset portfolio or to help enhance our liquidity. These transactions also have inherent risks, including possible delays in closing, the risk of lower-than-expected sales proceeds for the disposed assets or businesses and potential post-closing claims for indemnification. Moreover, volatility in commodity prices may result in fewer potential bidders, unsuccessful sales efforts and a higher risk that buyers may seek to terminate a transaction prior to closing. +30 +Table of Contents +Index to Financial Statements +Environmental, Legal and Regulatory Risks +We are subject to extensive governmental regulation and ongoing regulatory changes, which could adversely impact our business. +Our operations are subject to extensive federal, state, tribal, local and other laws, rules and regulations, including with respect to environmental matters, worker health and safety, wildlife conservation, the gathering and transportation of oil, gas and NGL, conservation policies, reporting obligations, royalty payments, unclaimed property and the imposition of taxes. Such regulations include requirements for permits to drill and to conduct other operations and for provision of financial assurances (such as bonds) covering drilling, completion and well operations. If permits are not issued, or if unfavorable restrictions or conditions are imposed on our drilling or completion activities, we may not be able to conduct our operations as planned. For example, in March 2024, the United States Environmental Protection Agency (USEPA), issued its final methane rules to reduce methane emissions from both new and existing oil and natural gas facilities and the Inflation Reduction Act of 2022 (“IRA 2022”) established the Methane Emissions Reduction Program, which imposes a charge on methane emissions from the same facilities, the rule for which was finalized in November 2024. Further, the Bureau for Land Management (BLM) issued a final Methane Waste Prevention Rule on April 10, 2024. The rule adds additional requirements for operators on federal and Indian leases and includes new air quality requirements along with waste prevention provisions. Constrained supply chain for environmental control devices along with the significant estimated costs of compliance with these new and proposed rules could have a material impact on our operations. We may be required to make large, sometimes unexpected, expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. +In addition, changes in public policy have affected, and in the future could further affect, our operations. Regulatory changes could, among other things, restrict production levels, impose price controls, alter environmental protection requirements and increase taxes, royalties and other amounts payable to the government. Our operating and compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. We do not expect that any of these laws and regulations will affect our operations materially differently than they would affect other companies with similar operations, size and financial strength. Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our profitability, financial condition and liquidity. As is discussed below this is particularly true of changes related to pipeline safety, seismic activity, hydraulic fracturing, climate change and endangered species designations. As of January 2025, however, the Trump Administration issued a series of executive orders that signal a shift in the United States' energy polices, including directing federal agencies to identify and exercise emergency authorities to facilitate conventional energy production, transportation, and refining, and call for the use of emergency regulations to expedite energy infrastructure projects, promote energy exploration and production on federal lands and waters, and mandate a review of existing regulations that may burden domestic energy development. +Pipeline Safety. The pipeline assets owned by our midstream service providers are subject to stringent and complex regulations related to pipeline safety and integrity management. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has established a series of rules that require pipeline operators to develop and implement integrity management programs for gas, NGL and condensate transmission pipelines as well as certain low stress pipelines and gathering lines transporting hazardous liquids, such as oil, that, in the event of a failure, could affect “high consequence areas”. Recent PHMSA rules have also extended certain requirements for integrity assessments and leak detections beyond high consequence areas. Further, legislation funding PHMSA through 2023 requires the agency to engage in additional rulemaking to amend the integrity management program, emergency response plan, operation and maintenance manual, and pressure control recordkeeping requirements for gas distribution operators; to create new leak detection and repair program obligations; and to set new minimum federal safety standards for onshore gas gathering lines. At this time, we cannot predict the cost of these requirements or other potential new or amended regulations, but they could be significant, and any such costs incurred by our midstream service providers could result in increased midstream gathering and processing expenses for us. Moreover, violations of pipeline safety regulations by our midstream service providers could result in the imposition of significant penalties which may impact the cost or availability of pipeline capacity necessary for our operations. +Seismic Activity. Earthquakes in some of our operating areas and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. For example, the OCC issued guidance to operators in the SCOOP and STACK areas for management of certain seismic activity that may be related to hydraulic fracturing or water disposal activities. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation or other requirements that could lead to operational delays, increase our operating and compliance costs or otherwise adversely affect our operations. In addition, we could be subject to third-party lawsuits seeking damages or other remedies as a result of alleged induced seismic activity in our areas of operation. +31 +Table of Contents +Index to Financial Statements +Hydraulic Fracturing. Several states have adopted or are considering adopting regulations that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing operations. Three states (New York, Maryland and Vermont) have banned the use of high-volume hydraulic fracturing. In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. There have also been certain governmental reviews that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Governments may continue to study hydraulic fracturing. We cannot predict the outcome of future studies, but based on the results of these studies to date, federal and state legislatures and agencies may seek to further regulate or even ban hydraulic fracturing activities. In addition, if existing laws and regulations with regard to hydraulic fracturing are revised or reinterpreted or if new laws and regulations become applicable to our operations through judicial or administrative actions, our business, financial condition, results of operations and cash flows could be adversely affected. +We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and potential bans. Additional regulation could also lead to greater opposition to hydraulic fracturing, including litigation. +Climate Change. Continuing political and social attention to the issue of climate change has resulted in legislative, regulatory and other initiatives to reduce greenhouse gas emissions, such as carbon dioxide and methane, and incentivizing energy conservation or the use of alternative energy sources. Policy makers at both the federal and state levels have introduced legislation and proposed new regulations designed to quantify and limit the emission of greenhouse gases through inventories, limitations or taxes on greenhouse gas emissions and encourage consumers to the alternative energy sources. The IRA 2022, both imposes new climate related requirements on oil and gas operations and appropriates significant federal funding for renewable energy initiatives. Also, for the first time ever, the law imposes a fee on GHG emissions from certain facilities. The emissions fee and funding provisions of the IRA 2022 could increase our operating costs and accelerate the transition away from fossil fuels, which could in turn adversely affect our business, results of operations and financial position. On January 26, 2024, the Biden Administration paused approvals for pending and future applications to export liquified natural gas (LNG) on non-FTA countries. On January 20, 2025, President Trump issued an executive order reversing the pause implemented by the Biden Administration, resuming the processing of export permit applications for new LNG projects. Additionally, in January 2025 President Trump signed executive orders that, among other things, direct federal executive departments and agencies to initiate a regulatory freeze for certain rules that have not taken effect, pending review by the newly appointed agency head, and call upon the USEPA to submit a report on the continuing applicability of its endangerment finding for GHGs under the Clean Air Act and issue guidance on the “social cost of carbon” to consider whether such metric should be eliminated, and pause the disbursement of funds appropriated through the IRA 2022. The impact on these federal actions remain unclear. +States in which we operate have imposed venting and flaring limitations designed to reduce methane emissions from oil and gas exploration and production activities. Legislative and state initiatives to date have generally focused on the development of cap and trade or carbon tax programs. Renewable energy standards (also referred to as renewable portfolio standards) require electric utilities to provide a specified minimum percentage of electricity from eligible renewable resources, with potential increases to the required percentage over time. The development of a federal renewable energy standard, or the development of additional or more stringent renewable energy standards at the state level or other initiatives to incentivize the use of renewable energy could reduce the demand for oil and gas, thereby adversely impacting our earnings, cash flows and financial position. Cap and trade programs offer greenhouse gas emission allowances that are gradually reduced over time. A cap and trade program or expanded use of cap and trade programs at the state level could impose direct costs on us through the purchase of allowances and could impose indirect costs by incentivizing consumers to shift away from fossil fuels. In addition, federal or state carbon taxes could directly increase our costs of operation and similarly incentivize consumers to shift away from fossil fuels. +32 +Table of Contents +Index to Financial Statements +In addition, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Members of the investment community have also begun to screen companies such as ours for sustainability performance, including practices related to greenhouse gases and climate change, before investing in our common units. Any efforts to improve our sustainability practices in response to these pressures may increase our costs, and we may be forced to implement technologies that are not economically viable to improve our sustainability performance and to meet the specific requirements to perform services for certain customers. If we are unable to meet the ESG standard or investment, lending, ratings, or voting criteria and policies set by these parties, we may lose investors, investors may allocate a portion of their capital away from us, we may become a target for ESG-focused activism, our cost of capital may increase, the price of our securities may be negatively impacted, and our reputation may also be negatively affected. +These various legislative, regulatory and other activities addressing greenhouse gas emissions could adversely affect our business, including by imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations, which could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Limitations on greenhouse gas emissions could also adversely affect demand for oil and gas, which could lower the value of our reserves and have a material adverse effect on our profitability, financial condition and liquidity. Furthermore, increasing attention to climate change risks has resulted in increased likelihood of governmental investigations and private litigation, which could increase our costs or otherwise adversely affect our business. +Severe weather events, such as storms, hurricanes, droughts, or floods, which may be exacerbated by climate change, could have an adverse effect on our operations and could increase our costs. Potential adverse effects could include damages to our facilities, the costs of less efficient or non-routine operating practices necessitated by weather events, or increased costs for insurance coverage. If climate changes result in more intense or frequent severe weather events, the physical and disruptive effects could have a material adverse impact on our operations and assets. +Air Emissions. The US Federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and natural gas operations. New facilities may be required to obtain permits before operations can commence, and existing facilities may be required to obtain additional permits, and incur capital costs, in order to remain in compliance. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations. In general, we believe that compliance with the Clean Air Act and similar state laws and regulations will not have a material impact on our operations or financial condition. +Endangered Species. The Endangered Species Act (ESA) prohibits the taking of endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in material compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity or the imposition of seasonal restrictions on our construction or operational activities could materially limit or delay our plans. +Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business. +State and federal regulatory agencies have focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells. +33 +Table of Contents +Index to Financial Statements +In our Utica/Marcellus and SCOOP operations, we make an effort to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle or share 100% of all produced water, we do inject water into third-party commercially operated disposal wells in line with all state and federal mandated practices and cease produced water recycle whenever fracture stimulation operations are idle once sharing opportunities with other operators have been exhausted. In the state of Ohio, all water used during drilling operations is disposed of through injection into third-party salt water disposal wells regulated by applicable state agencies. +Increased attention to ESG matters may impact our business, financial results, or stock price. +In recent years, increasing attention has been given to corporate activities related to ESG matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, activist investors, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change, advocating for changes to companies’ boards of directors, and promoting the use of energy saving building materials. On January 20, 2025, however, President Trump signed an executive order to withdraw the United States from the Paris Agreement, marking a significant shift in U.S. federal climate policy. Pursuant to the terms of the Paris Agreement, the withdrawal will take effect on January 27, 2026. State and local GHG initiatives may continue despite the U.S. withdrawal from the Paris Agreement. A potential global transition to a low carbon economy may result in reduced demand for our oil, natural gas and NGL, reduced profits, increased investigations and litigation, each of which could have negative impacts on our access to capital markets. +In addition, we note that standards and expectations regarding carbon accounting and the processes for measuring and counting GHG emissions and GHG emission reductions are evolving, and it is possible that our approach to measuring both our emissions and our approaches to reducing emissions may be, either currently by some stakeholders or at some future point, considered inconsistent with common or best practices. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could cause reputational harm to our business, increase our risk of litigation, and could have a material adverse effect on our results of operations. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions. We may take certain actions to improve the ESG profile of our company and/or products, but we cannot guarantee that such actions will have the desired effect. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. +Future U.S. and state tax legislation may adversely affect our business, results of operations, financial condition and cash flow. +From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislative proposals have been introduced in the U.S. Congress in the past that, if enacted, would (i) eliminate the immediate deduction for intangible drilling and development costs, (ii) repeal the percentage depletion allowance for oil and natural gas properties, and (iii) extend the amortization period for certain geological and geophysical expenditures. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. In addition, at the state level, legislative changes imposing increased taxes on oil and gas production have periodically been considered in Ohio and Oklahoma. These proposed changes in the U.S. federal and state tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows. +34 +Table of Contents +Index to Financial Statements +Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. +The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs as we collect, use, share, and store personal data related to royalty owners. Any failure to comply with these laws and regulations could result in significant penalties and legal liability. For example, the California Consumer Privacy Act (CCPA), as amended by the California Privacy Rights Act (CPRA), establishes certain transparency rules and creates new data privacy rights for individuals, including limitations on our use of certain sensitive personal information and more ability for individuals to control the purposes for which their data is shared with third parties. The CPRA also provides for statutory fines for data security breaches or other CPRA violations. Meanwhile, many other states enacted, and others have considered, privacy laws like the CPRA. We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, require us to change our business practices, allow private class-action litigation and carry significant potential liability for our business should we fail to comply with any such applicable laws. +Any failure, or perceived failure, by us to comply with applicable data protection laws could result in heightened risk of litigation, including private rights of action, and proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result. +Risks Associated with an Investment in Us +The market price of our securities is subject to volatility. +The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading that develops with our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, future sales of additional stock and changes in our capital structure, compliance with governmental regulations and taxation laws, actual or anticipated variations in our operating results and cash flow, allocation of free cash flow including any determination by our board of directors regarding repurchasing stock, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this Part I, Item 1A. of this Annual Report on Form 10-K. +Future sales or the availability for sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and could impair our ability to raise capital through future sales of equity securities. +A significant percentage of our common stock is held by a single investor. In connection with our emergence from bankruptcy protection in 2021, we entered into the Registration Rights Agreement pursuant to which we have agreed to file a registration statement with the SEC to facilitate potential future sales of our common stock by such investors. Sales of a substantial number of shares of our common stock in the public markets, or even the perception that these sales might occur (such as upon the filing of the aforementioned registration statement), could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. +We cannot predict the effect that future sales of our common stock will have on the price at which the common stock trades. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect the trading price of our common stock. +35 +Table of Contents +Index to Financial Statements +Certain of our stockholders own a significant portion of our outstanding equity securities and their interests may not always coincide with the interests of other holders of the common stock. +A large percentage of our equity is held by a relatively small number of investors. As a result, these investors could have significant influence over all matters presented to our stockholders for approval, including election and removal of our directors, change in control transactions and the outcome of all actions requiring majority stockholder approval. +The interests of these investors may not always coincide with the interests of the other holders of the common stock, and the concentration of control in these investors may limit other stockholders' ability to influence corporate matters. The concentration of ownership and voting power of these investors may also delay, defer or even prevent an acquisition by a third party or other change of control transactions of our Company. This may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. In addition, the concentration of voting power may adversely affect the trading price and liquidity of the common stock. +There may be future dilution of our common stock, which could adversely affect the market price of our common stock. +We are not restricted from issuing additional shares of our common stock. In the future, we may issue shares of our common stock to raise cash for future capital expenditures, acquisitions or for general corporate purposes. We may also issue securities that are convertible into, exchangeable for or that represent the right to receive our common stock. Lastly, we currently issue restricted stock units and performance vesting restricted stock units to certain employees and directors as part of their compensation. Any of these events will dilute our shareholders' ownership interest in Gulfport and may reduce our earnings per share and have an adverse effect on the price of our common stock. +Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders. +Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us, our stockholders, our creditors or other constituents; (iii) any action asserting a claim against us, any director or our officers arising pursuant to any provision of the DGCL, our certificate of incorporation or our by-laws; or (iv) any action asserting a claim against us, any director or our officers that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors or officers or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 1C. +CYBERSECURITY +Enterprise Risk Management +Gulfport increasingly relies on digital technology to optimize our business. As our reliance on technology expands, we are exposed to additional cyber-risks, which we focus on assessing, identifying, and managing. These risks include, but are not limited to: financial risks, operational risks, safety concerns, employee and owner personal information and violation of data privacy or security laws. +36 +Table of Contents +Index to Financial Statements +Managing Material Risks & Integrated Overall Risk Management +We take an integrated approach to assessing and identifying cybersecurity risks and threats. At the corporate level, cybersecurity is identified as a key risk within our Enterprise Risk Management (ERM) program. Our management of cyber risk is based on the National Institute of Standards and Technology’s (NIST) cybersecurity framework. While the NIST cybersecurity framework is our foundation, we combine that with the Center for Internet Security’s (CIS) control framework. +We utilize a defense-in-depth approach, layering security starting with cloud-based tools through our perimeter all the way to the client and server end points with End Point Detection and Response solutions. We continue to invest and align advances in technology to strengthen our security posture. This year we implemented tools that provide additional visibility into lateral movement, enhancements for multifactor authentication, and patching of servers. Cyber risks and incidents are categorized by severity, evaluated for materiality, responded to based on defined incident response playbooks and then remediated accordingly. We perform organized tabletop exercises to test these practices and identify areas where opportunities for improvement can occur. +We acknowledge that—even with advanced security tools—we are only as strong as the people that use our technology. That is why we design phishing simulations and require multiple security trainings for every employee annually. Our partnerships with law enforcement, the Oil and Natural Gas Information Sharing Center and our third party partners continually mature our cyber program as threats evolve. +Engaging Third Parties on Risk Management +Recognizing the complexity and evolving nature of cybersecurity risk, we leverage strategic external partnerships to assess and mitigate cybersecurity threats to us. For example, in addition to our security analysts, we partner with third parties that provide 24/7 security operations monitoring, enhancing our response time. We are also audited by third parties for compliance with information security standards and assess vulnerabilities annually, providing additional expertise that strengthens our security posture. +Managing Third Party Risk +We also recognize the risks associated with the use of vendors, service providers and other third parties that provide information system services to us, process information on our behalf, or have access to our information systems, and we have processes in place to oversee and manage these risks. We maintain ongoing monitoring to ensure compliance with our cybersecurity standards. +Risks from Cybersecurity Incidents +As of December 31, 2024, and for the past five years, we have identified no security incidents or breaches that are material, or likely to be material, to our business strategy, results or financial condition. +Cybersecurity Governance +We involve multiple levels of oversight as a part of our approach to cybersecurity risk management. +Risk Management Personnel +Cybersecurity remains a top identified enterprise-wide risk for our business and is overseen by our Chief Information Officer who is responsible for identifying and mitigating information security risks. Our current CIO has 20 years of industry experience and over 10 years of experience with the development, training and controls of effective global enterprise cybersecurity programs. The CIO’s responsibilities include but are not limited to: (i) reviewing our enterprise risk register and functional risk register; (ii) maintaining adequate processes to manage the identified risks under our cybersecurity program; (iii) analyzing logs of cybersecurity threats and vulnerabilities; (iv) overseeing prevention, detection, mitigation and remediation efforts; and (v) developing, maintaining, and ensuring team familiarity with the above‑mentioned incident response plan. Additionally, we maintain an experienced information technology team at the employee level that supports our Chief Information Officer in implementing our cybersecurity program and internal reporting, security and mitigation functions. +37 +Table of Contents +Index to Financial Statements +Board of Director Oversight +The Audit Committee receives a detailed cybersecurity update annually from the Chief Information Officer and receives a cybersecurity update quarterly through the ERM program as a key risk. +ITEM 2. PROPERTIES +Information regarding our properties is included in Item 1 and in the Supplemental Information on Oil and Gas Exploration and Production Activities in Note 20 of our consolidated financial statements. +ITEM 3. LEGAL PROCEEDINGS +The Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. +While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on us, cannot be predicted with certainty, we believe that none of these matters, if ultimately decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. +The information with respect to this Item 3. Legal Proceedings is set forth in Note 18 of our consolidated financial statements. +ITEM 4. MINE SAFETY DISCLOSURES +Not applicable. +38 +Table of Contents +Index to Financial Statements +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Common Stock +Shares of our common stock are listed on the NYSE under the symbol “GPOR”. See Note 6 of our consolidated financial statements for further discussion of our common stock. +Shareholders +At the close of business on February 12, 2025, there were approximately 20,947 holders of record of our common stock. +Dividends +During the years ended December 31, 2024, 2023 and 2022, the Company has not paid dividends on our common stock. The declaration and payment of any future common stock dividend will be at the full discretion of the Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Our Credit Facility also requires us to meet certain financial covenants at the time dividend payments are made. +During the years ended December 31, 2024, 2023 and 2022, the Company paid $4.2 million, $4.8 million and $5.4 million, respectively, of cash dividends to holders of our preferred stock. +Issuer Purchases of Equity Securities +In November 2021, the Company's Board of Directors approved the Repurchase Program to acquire up to $100 million of common stock, which has subsequently been increased up to $1.0 billion and extended through December 31, 2025. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of common stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. As of December 31, 2024, the Company had repurchased 5.6 million shares for $584.1 million at a weighted average price of $104.88 per share. +The following table provides a summary of our common stock repurchase activity for the three months ended December 31, 2024: +Period +Total Number of Shares Purchased (1) +Average Price Paid per Share Total number of shares purchased as part of publicly announced plans or programs Approximate maximum dollar value of shares that may yet be purchased under the plans or programs +October 1 - October 31 115,448 $ 146.66 115,403 $ 129,071,000 +November 1 - November 30 221,208 $ 169.14 221,208 $ 441,657,000 +December 1 - December 31 154,569 $ 166.82 154,557 $ 415,874,000 +Total 491,225 $ 163.13 491,168 +_____________________ +(1) We repurchased and canceled 45 and 12 shares of our common stock at a weighted average price of $143.69 and $174.48 to satisfy tax withholding requirements incurred upon the vesting of restricted stock unit awards during October and December 2024, respectively. +Recent Sales of Unregistered Securities +None. +39 +Table of Contents +Index to Financial Statements +Stock Performance Graph +The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filings. +The performance graph below illustrates changes over the period of May 19, 2021, through December 31, 2024, in cumulative total stockholder return on the common stock as measured against the cumulative total return of the S&P 500 Index and the S&P Oil & Gas Exploration and Production Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends for the index securities) from May 19, 2021, to December 31, 2024. +ITEM 6. [RESERVED] +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion and analysis represents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this report. The following information updates the discussion of Gulfport's financial condition provided in its 2023 Annual Report on Form 10-K filing and compares the results of operations for the year ended December 31, 2024 to the year ended December 31, 2023. Discussions of our results from 2022 to 2023 that are not included in this Form 10-K can be found in “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. +40 +Table of Contents +Index to Financial Statements +Overview +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we generally allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. +Recent Developments +Long-Term Debt and Credit Facility +In September 2024, Gulfport Operating purchased approximately 95%, or $524.3 million of the 2026 Senior Notes in a tender offer using the net proceeds received from the issuance of $650 million of its 2029 Senior Notes. The net impact of these transactions resulted in the Company extending the maturity of substantially all of the senior notes from 2026 to 2029. +Additionally, on September 12, 2024, the Company entered into the Commitment Increase, Borrowing Base Reaffirmation Agreement, and Fourth Amendment to Credit Agreement (the “Fourth Amendment”), which amended the Company’s Third Amended and Restated Credit Agreement. The Fourth Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $1.0 billion, (b) reaffirmed the borrowing base under the Credit Facility at $1.1 billion, (c) extended the maturity date under the Credit Facility to September 12, 2028, and (d) reduced the pricing grid 50 bps. +Stock Repurchase Program +On November 4, 2024, the Company's Board of Directors approved an increase to the authorized Repurchase Program from $650.0 million to $1.0 billion and extended the authorization through December 31, 2025. During the year ended December 31, 2024, the Company repurchased 1.2 million shares for $184.5 million at a weighted average price of $153.35 per share. As of December 31, 2024, the Company repurchased 5.6 million shares for $584.1 million at a weighted average price of $104.88 per share since the inception of the Repurchase Program. +41 +Table of Contents +Index to Financial Statements +2024 Operational and Financial Highlights +During 2024, we had the following notable achievements: +• Reported total net production of 1,054 MMcfe per day. +• Generated $650.0 million of operating cash flows. +• Turned to sales 19 gross operated (17.8 net) wells. +• Expanded common share repurchase program to $1.0 billion and returned $184.5 million to shareholders through the repurchase of 1.2 million shares at a weighted average price of $153.35 per share. +• Extended the maturity of substantially all long-term senior notes from 2026 to 2029. +• Extended the maturity of the Credit Facility to 2028 and increased the available commitments under the Credit Facility by $100 million. +• Exited the year with total liquidity of $899.7 million. +• Achieved MIQ certification for all Appalachian assets for the second consecutive year. +• Reported year-end estimated net proved reserves of 4.0 Tcfe. +Business and Industry Outlook +The Company's primary focus going into 2025 is its continued attention on reducing cycle times and operating costs to improve margins and ultimately support our expected free cash flow generation. We are committed to an emphasis on sustainability and we will continue to prioritize safety, environmental stewardship, and maintaining strong relationships with the communities in which we operate. Throughout the year, we plan to maintain capital discipline, prioritizing free cash flow generation and preserving our strong financial position, while returning capital to shareholders and increasing our resource depth through incremental leasehold opportunities. +In 2024, natural gas prices continued to be volatile as spot prices ranged from $1.21 to $13.20 per MMBtu. Henry Hub averaged $2.19 per MMBtu in 2024 vs $2.53 per MMBtu in 2023. As we look into 2025, we expect continued volatility in natural gas prices. To mitigate our exposure to commodity market volatility and to help provide a level of certainty around our financial strength, we have entered into a combination of natural gas swaps and collars, representing approximately 46% of our expected 2025 production, at an average floor price of $3.59 per Mcf. +Our 2025 capital expenditure program is expected to be in a range of $370 million to $395 million. +42 +Table of Contents +Index to Financial Statements +Results of Operations +Comparison of the Year Ended December 31, 2024 and 2023 +We reported net loss of $261.4 million for the year ended December 31, 2024, compared to a net income of $1.5 billion for the year ended December 31, 2023. The material changes that led to the decrease in net loss are further discussed by category on the following pages. Some totals and changes throughout the below section may not sum or recalculate due to rounding. +Natural Gas, Oil and Condensate and NGL Production and Pricing (sales totals in thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 +Natural gas (MMcf/day) +Utica & Marcellus production volumes 810 766 +SCOOP production volumes 157 194 +Total production volumes 968 960 +Total sales $ 714,160 $ 831,812 +Average price without the impact of derivatives ($/Mcf) $ 2.02 $ 2.37 +Impact from settled derivatives ($/Mcf) $ 0.80 $ 0.42 +Average price, including settled derivatives ($/Mcf) $ 2.82 $ 2.79 +Oil and condensate (MBbl/day) +Utica & Marcellus production volumes 2 1 +SCOOP production volumes 2 3 +Total production volumes 4 4 +Total sales $ 101,589 $ 99,854 +Average price without the impact of derivatives ($/Bbl) $ 69.64 $ 73.27 +Impact from settled derivatives ($/Bbl) $ 0.11 $ (2.53) +Average price, including settled derivatives ($/Bbl) $ 69.75 $ 70.74 +NGL (MBbl/day) +Utica & Marcellus production volumes 3 2 +SCOOP production volumes 8 10 +Total production volumes 10 12 +Total sales $ 112,855 $ 119,717 +Average price without the impact of derivatives ($/Bbl) $ 29.56 $ 27.29 +Impact from settled derivatives ($/Bbl) $ (0.56) $ 2.07 +Average price, including settled derivatives ($/Bbl) $ 29.00 $ 29.36 +Total (MMcfe/day) +Utica & Marcellus production volumes 842 784 +SCOOP production volumes 212 270 +Total production volumes 1,054 1,054 +Total sales $ 928,604 $ 1,051,383 +Average price without the impact of derivatives ($/Mcfe) $ 2.41 $ 2.73 +Impact from settled derivatives ($/Mcfe) $ 0.73 $ 0.40 +Average price, including settled derivatives ($/Mcfe) $ 3.14 $ 3.13 +43 +Table of Contents +Index to Financial Statements +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Natural gas $ 714,160 $ 831,812 (14) % +Oil and condensate 101,589 99,854 2 % +NGL 112,855 119,717 (6) % +Total natural gas, oil and condensate and NGL sales $ 928,604 $ 1,051,383 (12) % +The decrease in natural gas sales without the impact of derivatives when comparing the year ended December 31, 2024, to the year ended December 31, 2023, was primarily due to a 15% decrease in realized natural gas prices, partially offset by a 1% increase in sales volumes. The realized price change was primarily driven by the decrease in the average Henry Hub gas index from $2.74 per Mcf in the year ended December 31, 2023, to $2.27 per Mcf during the year ended December 31, 2024. The 1% increase in natural gas production was primarily due to our 2023 and 2024 development programs in the Utica/Marcellus partially offset by natural declines and limited activity in the SCOOP. +The increase in oil and condensate sales without the impact of derivatives when comparing the year ended December 31, 2024, to the year ended December 31, 2023, was due to a 7% increase in sales volumes, partially offset by a 5% decrease in realized oil prices. The 7% increase in oil and condensate production was primarily due to commencement of sales on new wells targeting the Utica liquids window. The realized price change was primarily driven by the decrease in the average WTI crude index from $77.62 per barrel in the year ended December 31, 2023, to $75.72 per barrel during the year ended December 31, 2024. +The decrease in NGL sales without the impact of derivatives when comparing the year ended December 31, 2024, to the year ended December 31, 2023, was due to a 13% decrease in NGL sales volumes, partially offset by an 8% increase in realized prices. The 13% decrease in NGL production was primarily due to natural declines and limited 2023 development in the SCOOP. The realized price change was primarily driven by the increase in the average Mont Belvieu NGL index from $30.07 per barrel in the year ended December 31, 2023, to $32.73 per barrel during the year ended December 31, 2024. +44 +Table of Contents +Index to Financial Statements +Natural Gas, Oil and NGL Derivatives (in thousands) +The total natural gas, oil and NGL volumes hedged for the year ended December 31, 2024 and 2023, represented approximately 80% and 95%, respectively, of our total sales volumes for the applicable year. +Year Ended December 31, 2024 Year Ended December 31, 2023 +Natural gas derivatives - fair value (losses) gains $ (251,019) $ 584,563 +Natural gas derivatives - settlement gains 284,626 146,381 +Total gains on natural gas derivatives 33,607 730,944 +Oil and condensate derivatives - fair value gains 2,351 5,971 +Oil and condensate derivatives - settlement gains (losses) 166 (3,272) +Total gains on oil and condensate derivatives 2,517 2,699 +NGL derivatives - fair value losses (4,442) (2,414) +NGL derivatives - settlement (losses) gains (2,155) 9,090 +Total (losses) gains on NGL derivatives (6,597) 6,676 +Total gains on natural gas, oil and NGL derivatives $ 29,527 $ 740,319 +We recognize fair value changes on our natural gas, oil and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. The significant change in the total gain for the year ended December 31, 2024 compared to the year ended December 31, 2023, was primarily the result of changes in futures pricing for oil, natural gas, and NGLs during each period. The fair value losses of our hedging program totaled $253.1 million for the year ended December 31, 2024 compared to gains of $588.1 million for the year ended December 31, 2023. Settlement gains (losses) in the table above represent realized cash gains or losses to the instruments described in Note 12 of our consolidated financial statements. Our hedging program generated cash receipts of $282.6 million for the year ended December 31, 2024, compared to cash receipts of $152.2 million for the year ended December 31, 2023. +Lease Operating Expenses (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Lease operating expenses +Utica & Marcellus $ 48,321 $ 44,394 9 % +SCOOP 21,791 24,254 (10) % +Total lease operating expenses $ 70,112 $ 68,648 2 % +Lease operating expenses per Mcfe +Utica & Marcellus $ 0.16 $ 0.16 — % +SCOOP 0.28 0.25 12 % +Total lease operating expenses per Mcfe $ 0.18 $ 0.18 — % +The increase in total LOE for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily the result of increased production in Utica/Marcellus as described above. +45 +Table of Contents +Index to Financial Statements +Taxes Other Than Income (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Production taxes $ 19,385 $ 25,564 (24) % +Property taxes 8,174 6,160 33 % +Other 2,178 1,993 9 % +Total taxes other than income $ 29,737 $ 33,717 (12) % +Total taxes other than income per Mcfe $ 0.08 $ 0.09 (11) % +The decrease in total and per unit taxes other than income for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily related to a decrease in production taxes resulting from the decrease in our natural gas, oil and NGL revenues excluding the impact of hedges discussed above. +Transportation, Gathering, Processing and Compression (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Transportation, gathering, processing and compression $ 351,237 $ 348,631 1 % +Transportation, gathering, processing and compression per Mcfe $ 0.91 $ 0.91 — % +Transportation, gathering, processing and compression for the year ended December 31, 2024, compared to the year ended December 31, 2023, increased in total primarily as a result of our small increase in production. +Depreciation, Depletion and Amortization (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Depreciation, depletion and amortization of oil and gas properties $ 324,078 $ 318,473 2 % +Depreciation, depletion and amortization of other property and equipment 1,645 1,242 32 % +Total depreciation, depletion and amortization $ 325,723 $ 319,715 2 % +Total depreciation, depletion and amortization per Mcfe $ 0.84 $ 0.83 1 % +Depreciation, depletion and amortization of our oil and gas properties for the year ended December 31, 2024, compared to the year ended December 31, 2023, increased 2% primarily the result of our drilling and development activities during 2023 and 2024. +Impairment of Oil and Natural Gas Properties +At September 30, 2024, the net book value of our oil and gas properties exceeded the calculated ceiling. As a result, we recorded a non-cash ceiling test impairment of $30.5 million in the third quarter of 2024. The impairment resulted from declines in the full cost ceiling, which primarily resulted from the significant decrease in the 12-month average trailing price for natural gas. The 12-month average trailing price for natural gas in the third quarter of 2024 was $2.21 per MMBtu. +At December 31, 2024, the net book value of our oil and gas properties exceeded the calculated ceiling. As a result, we recorded a non-cash ceiling test impairment of $342.7 million in the fourth quarter of 2024. The impairment resulted from declines in the full cost ceiling, which primarily resulted from the significant decrease in the 12-month average trailing price for natural gas. The 12-month average trailing price for natural gas in the fourth quarter of 2024 was $2.13 per MMBtu. +46 +Table of Contents +Index to Financial Statements +Lower natural gas, oil and NGL prices can reduce the value of our assets. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine the actual ceiling test calculation and impairment analysis in future periods. Given the decline of natural gas prices through December 2024, we may have additional ceiling test impairments of our oil and natural gas properties in subsequent quarters if the 12-month average trailing price does not improve from the $2.13 per MMBtu utilized in the fourth quarter 2024 ceiling test. Any such ceiling test impairment could be material to our net earnings; however, given the inter-relationship of the various judgements made to estimate proved reserves, it is impractical to estimate the potential changes in these estimates and their impact on the impairment. +We did not record an impairment during any quarter in 2023. +General and Administrative Expenses (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +General and administrative expenses, gross $ 82,478 $ 75,180 10 % +Reimbursed from third parties (14,582) (13,770) 6 % +Capitalized general and administrative expenses (25,338) (22,810) 11 % +General and administrative expenses, net $ 42,558 $ 38,600 10 % +General and administrative expenses, net per Mcfe $ 0.11 $ 0.10 10 % +The increase in total and per unit general and administrative expenses for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily driven by increases in employee compensation and headcount. +Restructuring Costs +During the year ended December 31, 2023, Gulfport recognized $4.8 million in personnel-related restructuring expenses associated with changes in the organizational structure and leadership team resulting from the appointment of Gulfport's new CEO in January 2023. Of these expenses, $1.3 million resulted from accelerated vesting of share-based grants, which are non-cash charges. The organizational changes were completed in the second quarter of 2023 and there are no remaining employee termination liabilities associated with these changes. +Interest Expense (in thousands, except per unit) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Interest on 2026 Senior Notes $ 31,417 $ 44,000 (29) % +Interest on 2029 Senior Notes 13,163 — 100 % +Interest on Credit Facility 14,143 13,810 2 % +Amortization of loan costs 4,208 3,256 29 % +Capitalized interest (4,771) (4,147) 15 % +Other 1,822 150 1115 % +Total interest expense $ 59,982 $ 57,069 5 % +Interest expense per Mcfe $ 0.16 $ 0.15 7 % +Due to the tender offer for the 2026 Senior Notes in the third quarter of 2024 described below, interest paid on the 2026 Senior Notes decreased 29% for the year ended December 31, 2024, compared to the year ended December 31, 2023. The Company also paid $13.2 million of interest on the 2029 Senior Notes for the year ended December 31, 2024. Interest expense on our Credit Facility increased 2% for the year ended December 31, 2024, compared to the year ended December 31, 2023, as a result of a higher average balance outstanding. Amortization of loan costs increased 29% for the year ended December 31, 2024, compared to the year ended December 31, 2023, as a result of the Third Amendment to the Credit Facility which increased the elected commitments and borrowing base and the Fourth Amendment to the Credit Facility which increased the elected commitments. The Company also capitalized $4.8 million and $4.1 million in interest expense for the years ended December 31, 2024 and 2023, respectively. +47 +Table of Contents +Index to Financial Statements +Loss on Debt Extinguishment +In September 2024, Gulfport Operating purchased and retired $524.3 million of the 2026 Senior Notes in a tender offer using net proceeds from the 2029 Senior Notes offering. The 2026 Senior Notes were tendered at an average price equal to 102.3% of the principal amount. The retirement of the 2026 Senior Notes resulted in a loss on debt extinguishment of $13.4 million, which included cash costs of $12.9 million. +Other, net (in thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 % Change +Other, net $ 7,336 $ (27,982) (126) % +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2024, included approximately $4.9 million related to changes in the Company's legal reserves for certain litigation and regulatory proceedings. Additionally, Other, net included approximately $1.9 million write-down of certain of its pipe inventory that the Company does not expect to utilize in its drilling and completion activities. +As part of its Chapter 11 Cases and restructuring efforts, the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation (“TC”) and Rover Pipeline LLC (“Rover”). During the first quarter of 2023, Gulfport finalized a settlement agreement with Rover that was approved by the Bankruptcy Court on February 21, 2023. Pursuant to the settlement agreement, Gulfport and Rover agreed that the firm transportation contracts between them would be rejected. As part of the settlement, Gulfport paid a $1.0 million administrative claim, which is included in Other, net. On February 24, 2023, Gulfport received an additional $17.8 million interim distribution for its TC claim, which is also included in Other, net. Other, net in the second quarter of 2023 included a $5.0 million recoupment of previously placed collateral for certain firm transportation commitments during the Company's Chapter 11 Cases. Additionally, in the fourth quarter of 2023, Gulfport received an additional $8.3 million distribution related to its TC claim. +Income Taxes (in thousands) +For the year ended December 31, 2024, we had an effective tax rate of 18% and an income tax benefit of $56.1 million. For the year ended December 31, 2023, the Company's effective tax rate was (56)% and an income tax benefit of $525.2 million. The higher effective tax rate for the year ended December 31, 2024 is primarily related to the valuation allowance the Company released during the third quarter of 2023. See Note 10 of our consolidated financial statements for further discussion of our income tax benefit. +Liquidity and Capital Resources +Overview . We strive to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility, fund our development projects, operations and capital expenditures and return capital to shareholders. We utilize derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company’s cash flows. We generally fund our operations, planned capital expenditures and any share repurchases with cash flow from our operating activities, cash on hand, and borrowings under our Credit Facility. Additionally, we may access debt and equity markets and sell properties to enhance our liquidity. There is no guarantee that the debt or equity capital markets will be available to us on acceptable terms or at all. +For the year ended December 31, 2024, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations and access to the debt markets, and our primary uses of cash have been for development of our oil and natural gas properties, share repurchases, dividend payments on our preferred stock and discretionary acreage acquisitions. +We believe our annual free cash flow generation, borrowing capacity under the Credit Facility and cash on hand will provide sufficient liquidity to fund our operations, capital expenditures, interest expense and share repurchases during the next 12 months and the foreseeable future. +48 +Table of Contents +Index to Financial Statements +To the extent actual operating results, realized commodity prices or uses of cash differ from our assumptions, our liquidity could be adversely affected. See Note 4 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our senior notes. +As of December 31, 2024, we had $1.5 million of cash and cash equivalents compared to $1.9 million as of December 31, 2023, and a net working capital deficit of $114.2 million as of December 31, 2024, compared to net working capital of $52.4 million as of December 31, 2023. As of December 31, 2024, our net working capital deficit includes no debt due in the next 12 months. Our total principal amount of funded debt as of December 31, 2024, was $713.7 million compared to $668.0 million as of December 31, 2023. See Note 4 of our consolidated financial statements for further discussion of our debt obligations, including principal and carrying amounts of our notes. +As of February 20, 2025, we had $3.1 million of cash and cash equivalents, $10.0 million borrowings under our Credit Facility, $63.9 million of letters of credit outstanding, $25.7 million of outstanding 2026 Senior Notes and $650.0 million of outstanding 2029 Senior Notes. +Debt. In May 2021, we issued our 2026 Senior Notes. The 2026 Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that guarantee the Credit Facility. In September 2024, Gulfport Operating purchased approximately 95%, or $524.3 million, of the 2026 Senior Notes in a tender offer using net proceeds received from the private placement of the 2029 Senior Notes. This resulted in extending the maturity of substantially all of our senior notes from 2026 to 2029. +Additionally, on May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Credit Facility. The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $900 million, (b) increased the borrowing base under the Credit Facility to $1.1 billion, (c) increased the excess cash threshold under the Credit Facility to $75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $100 million; provided that such notes have not been refinanced, redeemed or repaid in full on or prior to such 91st day. On April 18, 2024, Gulfport completed its semi-annual borrowing base redetermination under its Credit Facility during which the borrowing base was reaffirmed at $1.1 billion with elected commitments remaining at $900 million. +On September 12, 2024, the Company entered into the Commitment Increase, Borrowing Base Reaffirmation Agreement, and Fourth Amendment to Credit Agreement (the “Fourth Amendment”), which amended the Company’s Third Amended and Restated Credit Agreement. The Fourth Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $1.0 billion, (b) reaffirmed the borrowing base under the Credit Facility at $1.1 billion, (c) extended the maturity date under the Credit Facility to September 12, 2028, and (d) reduced the pricing grid 50 bps. +We may continue to use a combination of cash, borrowings and issuances of our common stock or other securities to retire our outstanding debt and preferred stock through privately negotiated transactions, open market repurchases, redemptions, tender offers or otherwise, but we are under no obligation to do so. +See Note 4 of our consolidated financial statements for additional discussion of our outstanding debt. +Dividends on Preferred Stock . As discussed in Note 5 of our consolidated financial statements, holders of preferred stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the Liquidation Preference with respect to cash dividends and 15% per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of preferred stock (“PIK Dividends”). We currently have the option to pay either cash dividends or PIK Dividends on a quarterly basis. +During the years ended December 31, 2024 and 2023, the Company paid $4.2 million and $4.8 million, respectively, of cash dividends to holders of our preferred stock. +49 +Table of Contents +Index to Financial Statements +Supplemental Guarantor Financial Information . The 2026 Senior Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our Credit Facility or certain other debt (the “2026 Senior Notes Guarantors”). The 2026 Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC. The 2026 Senior Notes Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the 2026 Senior Notes Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2026 Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2026 Senior Notes. +The 2029 Senior Notes are guaranteed on a senior unsecured basis by Gulfport and certain of Gulfport’s wholly owned subsidiaries (collectively, the “2029 Senior Notes Guarantors” and, together with the 2026 Senior Notes Guarantors, the “Guarantors”) and certain future subsidiaries of Gulfport that become borrowers or guarantors under any credit agreement with an aggregate principal amount outstanding or commitment amount in excess of $15 million. The 2029 Senior Notes Guarantors are 100% owned by the Parent, and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the 2029 Senior Notes Guarantors to obtain funds from each other in the form of a dividend or loan. The guarantees rank (i) senior in right of payment to any future subordinated indebtedness of Gulfport Operating or the 2029 Senior Notes Guarantors, (ii) pari passu in right of payment with all existing and future unsecured senior indebtedness of Gulfport Operating or the 2029 Senior Notes Guarantors, (iii) effectively junior to any secured indebtedness of Gulfport Operating or the 2029 Senior Notes Guarantors, including indebtedness under the credit agreement, to the extent of the value of the collateral securing such indebtedness, and (iv) structurally subordinated in right of payment to all indebtedness and other liabilities of Gulfport Operating’s subsidiaries that are not 2029 Senior Notes Guarantors. +SEC Regulation S-X Rule 13-01 requires the presentation of “Summarized Financial Information” to replace the “Condensed Consolidating Financial Information” required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements. +Derivatives and Hedging Activities . Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. See Item 7A . “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on the impact of commodity price risk on our financial position. Additionally, see Note 12 of our consolidated financial statements for further discussion of derivatives and hedging activities. +Subsequent to December 31, 2024 and as of February 20, 2025, we entered into the following natural gas, oil, and NGL derivative contracts: +Period Type of Derivative Instrument Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2025 Swaps NYMEX Henry Hub 18,301 $3.85 +2026 Basis Swaps Rex Zone 3 40,000 $(0.17) +Oil (Bbl/d) ($/Bbl) +2025 Swaps NYMEX WTI 1,000 $70.87 +50 +Table of Contents +Index to Financial Statements +Contractual and Commercial Obligations. The following table sets forth our contractual and commercial obligations at December 31, 2024 (in thousands): +Payment due by period +Contractual Obligations Total 2025 2026-2027 2028-2029 2030 and Thereafter +Long-term debt (1) : +Principal $ 713,702 $ — $ 25,702 $ 688,000 $ — +Interest 220,923 44,481 88,692 87,750 — +Firm transportation and gathering contracts (2) +1,147,946 140,434 270,729 273,366 463,417 +Other operational commitments (3) +13,791 13,791 — — — +Operating lease liabilities (4) +6,228 5,657 571 — — +Total contractual cash obligations (5) +$ 2,102,590 $ 204,363 $ 385,694 $ 1,049,116 $ 463,417 +_____________________ +(1) The maturities of our debt obligations and associated interest reflect their original expiration dates and do not reflect any acceleration due to any events of default pertaining to these obligations. See Note 4 of our consolidated financial statements for a description of our long-term debt. +(2) See Note 17 of our consolidated financial statements for further discussion of our firm transportation and gathering commitments. +(3) See Note 17 of our consolidated financial statements for a description of our other operational commitments. +(4) See Note 9 of our consolidated financial statements for a description of our operating lease liabilities. +(5) This table does not include derivative liabilities or the estimated discounted cost for future abandonment of oil and natural gas properties. See Notes 12 and 3 of our consolidated financial statements, respectively. +Off-balance Sheet Arrangements. We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of December 31, 2024, our material off-balance sheet arrangements and transactions include $63.8 million in letters of credit outstanding against our Credit Facility and $44.9 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance, primarily for certain firm transportation agreements. Additionally, the Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials exists through 2025, with approximately $13.8 million remaining. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. See Note 17 of our consolidated financial statements for further discussion of the various financial guarantees we have issued. +Capital Expenditures. Our capital expenditures have historically been related to the execution of our drilling and completion activities in addition to certain lease acquisition activities. Our capital investment strategy is focused on prudently developing our existing properties to generate sustainable cash flow considering current and forecasted commodity prices. For the year ended December 31, 2024, the Company's incurred capital expenditures totaled $430.1 million, of which $327.4 million related to drilling and completion activities, $57.9 million related to maintenance leasehold and land investment and $44.8 million related to discretionary acreage acquisitions. +Our drilling and completion capital expenditures for 2025 are currently estimated to be in the range of $335 million to $355 million. Also, we currently expect to spend approximately $35 million to $40 million in 2025 for maintenance leasehold and land investment, which is focused on near-term drilling programs and facilitating increases in our working interests and lateral footage in units we plan to drill in 2025, 2026 and 2027. We expect this capital program to result in approximately 1,040 to 1,065 MMcfe per day of production in 2025. +Commodity Price Risk. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2024, WTI prices ranged from $66.73 to $87.69 per barrel and the Henry Hub spot market price of natural gas ranged from $1.21 to $13.20 per MMBtu. During 2023, WTI prices ranged from $66.61 to $93.67 per barrel and the Henry Hub spot market price of natural gas ranged from $1.74 to $3.78 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in commodity prices and/or our reserves could also negatively impact the borrowing base under our revolving credit facility, which could limit our liquidity and ability to fund development activities. +51 +Table of Contents +Index to Financial Statements +See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” for further information regarding our open derivative instruments at December 31, 2024. +Sources and Uses of Cash +The following table presents the major changes in cash and cash equivalents for the year ended December 31, 2024 and 2023 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 +Net cash provided by operating activities $ 650,033 $ 723,181 +Additions to oil and natural gas properties (454,098) (537,360) +Debt activity, net 32,761 (27,000) +Debt issuance and loan commitment fees (14,933) (7,068) +Repurchases of common stock (184,477) (149,165) +Dividends on preferred stock (4,230) (4,840) +Shares exchanged for tax withholdings (23,614) (3,207) +Other (1,898) 129 +Net change in cash and cash equivalents $ (456) $ (5,330) +Cash and cash equivalents at end of period $ 1,473 $ 1,929 +Net cash provided by operating activities. Net cash provided by operating activities was $650.0 million for the year ended December 31, 2024, compared to $723.2 million for the year ended December 31, 2023. The decrease was primarily the result of a decrease in our natural gas revenues. +Additions to oil and natural gas properties. During the year ended December 31, 2024, we spud 20 gross (19.7 net) operated wells and commenced sales from 16 gross (15.4 net) operated wells targeting the Utica formation for a total cost incurred of approximately $259.8 million. During the year ended December 31, 2024, we spud 2 gross (1.8 net) operated wells and commenced sales from 3 gross (2.4 net) operated wells in the SCOOP for a total incurred cost of approximately $63.8 million. Additionally, the Company incurred $57.9 million related to maintenance leasehold and land investment and $44.8 million related to discretionary acreage acquisitions. +Drilling and completion costs discussed above reflect incurred costs while drilling and completion costs presented in the table below reflect cash payments for drilling and completions. Incurred capital expenditures and cash capital expenditures may vary from period to period due to the cash payment cycle. Cash capital expenditures for the year ended December 31, 2024 and 2023, were as follows (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 +Oil and Natural Gas Property Cash Expenditures: +Drilling and completion costs $ 325,129 $ 413,258 +Leasehold acquisitions 102,630 101,191 +Other 26,339 22,911 +Total oil and natural gas property expenditures $ 454,098 $ 537,360 +Debt activity, net. During the year ended December 31, 2024, the Company had $956.0 million and $1.0 billion in borrowings and repayments, respectively, on its Credit Facility. In September 2024, the Company purchased $524.3 million of the 2026 Senior Notes in a tender offer. The retirement of the 2026 Senior Notes resulted in a loss on debt extinguishment of $13.4 million, which included cash costs of $12.9 million. The Company also issued $650.0 million aggregate principal amount of its 6.750% senior notes due 2029. As of February 20, 2025, the Company had $10.0 million in borrowings outstanding on its Credit Facility. +52 +Table of Contents +Index to Financial Statements +Debt issuance and loan commitment fees. During the year ended December 31, 2024, the Company incurred debt issuance and loan commitment fees of $14.9 million, as compared to $7.1 million during the year ended December 31, 2023. The increase was primarily related to the issuance of the 2029 Senior Notes and the Fourth Amendment to the Credit Facility. See Note 4 of our consolidated financial statements for further discussion of the long-term debt activity. +Repurchases of common stock. During the year ended December 31, 2024, the Company repurchased 1.2 million shares for approximately $184.5 million under the Repurchase Program at a weighted average price of $153.35 per share. For the same period in 2023, the Company repurchased 1.5 million shares for $148.9 million at a weighted average price of $101.53 per share. As of February 20, 2025, we repurchased 5.6 million shares for approximately $593.2 million under the Repurchase Program at a weighted average price of $105.57 per share. +Dividends on preferred stock. During the year ended December 31, 2024, the Company paid $4.2 million of cash dividends to holders of our preferred stock compared to $4.8 million in the year ended December 31, 2023. +Shares exchanged for tax withholdings. During the year ended December 31, 2024, the Company paid $23.6 million of shares exchanged for tax withholdings compared to $3.2 million in the year ended December 31, 2023. The increase in shares traded for taxes was primarily due to the vesting of certain PSU awards as discussed in Note 7 of our consolidated financial statements. +Other. During the year ended December 31, 2024, the Company incurred other expenses of $1.9 million, as compared to other income of $0.1 million paid during the year ended December 31, 2023. The change was primarily related to proceeds from sales of oil and gas properties of $2.6 million during the year ended December 31, 2023. +Critical Accounting Policies and Estimates +The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions we consider to be most significant to our financial statements are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors. +Oil and Natural Gas Properties . We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. +Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation, depletion and amortization expense may be significantly different if our estimate of remaining reserves or future development costs changes significantly. +We review the carrying value of our oil and natural gas properties under the full cost method of accounting prescribed by the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. +Two primary factors impacting this test are reserve estimates and the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2024. Downward revisions to estimates of oil and natural gas reserves and/or unfavorable prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. During 2024, the Company recognized ceiling test impairments of $373.2 million and did not record an impairment of its oil and natural gas properties for the year ended December 31, 2023. See Oil and Natural Gas Properties in Note 1 of our consolidated financial statements for further information on the full cost method of accounting. +53 +Table of Contents +Index to Financial Statements +Oil, Natural Gas and NGL Reserves. Estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Note 20 of our consolidated financial statements for further information. +Income Taxes. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company currently believes that it is more likely than not that a portion of the Company's federal and state deferred tax assets will be utilized. +Revenue Recognition. We derive almost all of our revenue from the sale of natural gas, crude oil and NGL produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. Historically, our actual payments received have not significantly deviated from our accruals. +Derivative Instruments. We seek to reduce our exposure to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. +The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Natural Gas, Oil and Natural Gas Liquids Derivative Instruments. Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. +54 +Table of Contents +Index to Financial Statements +Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas, oil and NGL futures markets when prices reach levels that management believes provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in all risk management activities and the Board of Directors reviews our derivative program at its quarterly board meetings. +We use derivative instruments to achieve our risk management objectives, including swaps, options and costless collars. All of these are described in more detail below. We typically use swaps for a large portion of the oil and natural gas price risk we hedge. We have also sold calls in the past to take advantage of premiums associated with market price volatility. +We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of estimated production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions are typically reversed. The actual fixed prices on our derivative instruments is derived from the reference prices from third-party indices such as NYMEX. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty. +We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter the original derivative position. +We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves, discount factors and option pricing models. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 15 of our consolidated financial statements for further discussion of the fair value measurements associated with our derivatives. +As of December 31, 2024, our natural gas, oil, and NGL derivative instruments consisted of the following types of instruments: +• Swaps : We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options. +• Basis Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. +• Costless Collars : Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty. +• Call Options : We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options, and we would receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party. +55 +Table of Contents +Index to Financial Statements +Our hedge arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or commodity prices increase. At December 31, 2024, we had a net liability derivative position of $12.9 million, compared to a net asset derivative position of $240.2 million as of December 31, 2023. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have increased our liability by approximately $82.3 million, while a 10% decrease in underlying commodity prices would have decreased our liability by approximately $81.8 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument. For more information regarding the Company's commodity derivative transactions, refer to Note 12 of our consolidated financial statements. +Counterparty Credit Risk. The Company routinely monitors and manages its exposure to counterparty risk related to derivative contracts by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties public credit ratings, and avoiding concentration of credit exposure by transacting with multiple counterparties. The Company's commodity derivative contract counterparties are typically financial institutions with investment-grade credit ratings. The Company enters into International Swap Dealers Association Master Agreements (“ISDA”) with each of its derivative counterparties prior to executing derivative contracts. The terms of the ISDA provide, among other things, the Company and the counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or counterparty to a derivative contract. +Interest Rate Risk. Our Credit Facility is structured under floating rate terms, as advances under these facilities may be in the form of either base rate loans or term benchmark loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the United States or, if the term benchmark rates are elected, the term benchmark rates. At December 31, 2024, we had $38.0 million in borrowings outstanding under our Credit Facility which bore interest at the weighted average rate of 8.23% for the year ended December 31, 2024. A 1% increase in the average interest rate would increase interest expense by approximately $0.4 million based on outstanding borrowings under our Credit Facility at December 31, 2024. As of December 31, 2024, we did not have any interest rate swaps to hedge our interest risks. +56 +Table of Contents +Index to Financial Statements +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +INDEX TO FINANCIAL STATEMENTS +Page +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) +58 +Consolidated Balance Sheets +60 +Consolidated Statements of Operations +61 +Consolidated Statements of Stockholders' Equity +62 +Consolidated Statements of Cash Flows +63 +Notes to Consolidated Financial Statements +64 +1. Summary of Significant Accounting Policies +64 +2. Segment Information +69 +3. Property and Equipment +70 +4. Long-Term Debt +71 +5. Mezzanine Equity +74 +6. Equity +75 +7. Stock-Based Compensation +76 +8. Revenue From Contracts With Customers +78 +9. Leases +79 +10. Income Taxes +80 +11. Earnings Per Share +82 +12. Derivative Instruments +82 +13. Restructuring Costs +86 +14. Investments +86 +15. Fair Value Measurements +86 +16. Related Party Transactions +88 +17. Commitments +88 +18. Contingencies +89 +19. Subsequent Events +91 +20. Supplemental Information On Oil And Gas Exploration And Production Activities (Unaudited) +91 +57 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2025 expressed an unqualified opinion. +Basis for opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Depletion, depreciation and amortization expense and impairment of oil and gas properties impacted by the Company’s estimation of proved reserves +As described further in Note 1 and Note 3 to the consolidated financial statements, the Company uses the full cost method of accounting for oil and gas operations. This accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil and gas properties (the full cost ceiling test). To estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and assessment of potential impairment. We identified the estimation of proved reserves as it relates to the +58 +Table of Contents +Index to Financial Statements +recognition of depletion, depreciation and amortization expense and the assessment of potential impairment as a critical audit matter. +The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and the assessment of potential impairment. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment. +Our audit procedures related to the estimation of proved reserves included the following, among others: +• Tested the design and operating effectiveness of internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessment of potential impairment for the Company’s oil and gas properties. +• Evaluated the independence, objectivity, and professional qualifications of the Company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the Company’s proved reserve volumes and read the report prepared by the Company’s reserve specialist. +• Evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated future development costs, and ownership interest. We tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows: +◦ Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year; +◦ Tested the model used to estimate the operating costs at year end and compared to historical operating costs; +◦ Tested the model used to determine the future development costs and compared estimated future development costs used in the reserve report to amounts expended for recently drilled and completed wells, where applicable; +◦ Tested the working and net revenue interests used in the reserve report by inspecting land and division order records; +◦ Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and +◦ Applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year’s reserve report. +/s/ GRANT THORNTON LLP +We have served as the Company's auditor since 2005. +Oklahoma City, Oklahoma +February 26, 2025 +59 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED BALANCE SHEETS +(In thousands) +December 31, 2024 December 31, 2023 +Assets +Current assets: +Cash and cash equivalents $ 1,473 $ 1,929 +Accounts receivable—oil, natural gas, and natural gas liquids sales 155,942 122,479 +Accounts receivable—joint interest and other 8,727 22,221 +Prepaid expenses and other current assets 7,086 16,951 +Short-term derivative instruments 58,085 233,226 +Total current assets 231,313 396,806 +Property and equipment: +Oil and natural gas properties, full-cost method +Proved oil and natural gas properties 3,349,805 2,904,519 +Unproved properties 221,650 204,233 +Other property and equipment 11,291 9,165 +Total property and equipment 3,582,746 3,117,917 +Less: accumulated depletion, depreciation, amortization and impairment ( 1,564,475 ) ( 865,618 ) +Total property and equipment, net 2,018,271 2,252,299 +Other assets: +Long-term derivative instruments 6,003 47,566 +Deferred tax asset 581,233 525,156 +Operating lease assets 6,099 14,299 +Other assets 22,778 31,487 +Total other assets 616,113 618,508 +Total assets $ 2,865,697 $ 3,267,613 +Liabilities, Mezzanine Equity and Stockholders’ Equity +Current liabilities: +Accounts payable and accrued liabilities $ 298,081 $ 309,532 +Short-term derivative instruments 41,889 21,963 +Current portion of operating lease liabilities 5,538 12,959 +Total current liabilities 345,508 344,454 +Non-current liabilities: +Long-term derivative instruments 35,081 18,602 +Asset retirement obligation 32,949 29,941 +Non-current operating lease liabilities 561 1,340 +Long-term debt 702,857 667,382 +Total non-current liabilities 771,448 717,265 +Total liabilities 1,116,956 1,061,719 +Commitments and contingencies (Notes 17 and 18) +Mezzanine equity: +Preferred stock - $ 0.0001 par value, 110.0 thousand shares authorized, 37.3 thousand issued and outstanding at December 31, 2024, and 44.2 thousand issued and outstanding at December 31, 2023 +37,348 44,214 +Stockholders’ equity: +Common stock - $ 0.0001 par value, 42.0 million shares authorized, 17.8 million issued and outstanding at December 31, 2024, and 18.3 million issued and outstanding at December 31, 2023 +2 2 +Additional paid-in capital 129,059 315,726 +Common stock held in reserve, 0 shares at December 31, 2024, and 62.0 thousand shares at December 31, 2023 +— ( 1,996 ) +Retained earnings 1,582,332 1,847,948 +Total stockholders’ equity 1,711,393 2,161,680 +Total liabilities, mezzanine equity and stockholders’ equity $ 2,865,697 $ 3,267,613 +See accompanying notes to consolidated financial statements. +60 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF OPERATIONS +(In thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +REVENUES: +Natural gas sales $ 714,160 $ 831,812 $ 1,998,452 +Oil and condensate sales 101,589 99,854 147,444 +Natural gas liquid sales 112,855 119,717 184,963 +Net gain (loss) on natural gas, oil and NGL derivatives 29,527 740,319 ( 999,747 ) +Total revenues 958,131 1,791,702 1,331,112 +OPERATING EXPENSES: +Lease operating expenses 70,112 68,648 64,790 +Taxes other than income 29,737 33,717 60,139 +Transportation, gathering, processing and compression 351,237 348,631 357,246 +Depreciation, depletion and amortization 325,723 319,715 267,761 +Impairment of oil and natural gas properties 373,214 — — +General and administrative expenses 42,558 38,600 35,304 +Restructuring costs — 4,762 — +Accretion expense 2,307 2,782 2,746 +Total operating expenses 1,194,888 816,855 787,986 +(LOSS) INCOME FROM OPERATIONS ( 236,757 ) 974,847 543,126 +OTHER EXPENSE (INCOME): +Interest expense 59,982 57,069 59,773 +Loss on debt extinguishment 13,388 — — +Other, net 7,336 ( 27,982 ) ( 11,348 ) +Total other expense 80,706 29,087 48,425 +(LOSS) INCOME BEFORE INCOME TAXES ( 317,463 ) 945,760 494,701 +INCOME TAX BENEFIT: +Current — — — +Deferred ( 56,077 ) ( 525,156 ) — +Total income tax benefit ( 56,077 ) ( 525,156 ) — +NET (LOSS) INCOME ( 261,386 ) 1,470,916 494,701 +Dividends on preferred stock ( 4,230 ) ( 4,840 ) ( 5,444 ) +Participating securities - preferred stock — ( 212,360 ) ( 76,401 ) +NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ ( 265,616 ) $ 1,253,716 $ 412,856 +NET (LOSS) INCOME PER COMMON SHARE: +Basic $ ( 14.72 ) $ 67.24 $ 20.45 +Diluted $ ( 14.72 ) $ 66.46 $ 20.32 +Weighted average common shares outstanding—Basic 18,050 18,645 20,185 +Weighted average common shares outstanding—Diluted 18,050 18,902 20,347 +See accompanying notes to consolidated financial statements. +61 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(In thousands) +Common Stock Common Stock Held in Reserve Treasury Stock Paid-in +Capital Retained Earnings (Accumulated +Deficit) Total Stockholders’ +Equity +Shares Amount Shares Amount +Balance at January 1, 2022 21,537 $ 2 ( 938 ) $ ( 30,216 ) $ — $ 692,521 $ ( 112,829 ) 549,478 +Net income — — — — — — 494,701 494,701 +Conversion of preferred stock 407 — — — — 5,601 — 5,601 +Stock compensation — — — — — 8,670 — 8,670 +Repurchase of common stock under Repurchase Program ( 2,896 ) — — — ( 286 ) ( 250,482 ) — ( 250,768 ) +Issuance of common stock held in reserve — — 876 28,220 — — — 28,220 +Issuance of common stock upon vesting of share-based awards 68 — — — — — — — +Common stock withheld for income taxes on share-based awards ( 19 ) — — — — ( 1,623 ) — ( 1,623 ) +Dividends on preferred stock — — — — — ( 5,444 ) — ( 5,444 ) +Balance at December 31, 2022 19,097 $ 2 ( 62 ) $ ( 1,996 ) $ ( 286 ) $ 449,243 $ 381,872 $ 828,835 +Net income — — — — — — 1,470,916 1,470,916 +Conversion of preferred stock 593 — — — — 8,081 — 8,081 +Stock compensation — — — — — 13,525 — 13,525 +Repurchase of common stock under Repurchase Program ( 1,470 ) — — — 286 ( 151,912 ) — ( 151,626 ) +Issuance of common stock upon vesting of share-based awards 102 — — — — — — — +Common stock withheld for income taxes on share-based awards ( 34 ) — — — — ( 3,207 ) — ( 3,207 ) +Dividends on preferred stock — — — — — ( 4 ) ( 4,840 ) ( 4,844 ) +Balance at December 31, 2023 18,288 $ 2 ( 62 ) $ ( 1,996 ) $ — $ 315,726 $ 1,847,948 $ 2,161,680 +Net loss — — — — — — ( 261,386 ) ( 261,386 ) +Conversion of preferred stock 500 — — — — 6,866 — 6,866 +Stock compensation — — — — — 16,355 — 16,355 +Repurchase of common stock under Repurchase Program ( 1,203 ) — — — — ( 186,271 ) — ( 186,271 ) +Issuance of common stock held in reserve — — 62 1,996 — — — 1,996 +Issuance of common stock upon vesting of share-based awards 363 — — — — — — — +Common stock withheld for income taxes on share-based awards ( 150 ) — — — — ( 23,614 ) — ( 23,614 ) +Dividends on preferred stock — — — — — ( 3 ) ( 4,230 ) ( 4,233 ) +Balance at December 31, 2024 17,798 $ 2 — $ — $ — $ 129,059 $ 1,582,332 $ 1,711,393 +See accompanying notes to consolidated financial statements. +62 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +CONSOLIDATED STATEMENTS OF CASH FLOWS +(In thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Cash flows from operating activities: +Net (loss) income $ ( 261,386 ) $ 1,470,916 $ 494,701 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depletion, depreciation and amortization 325,723 319,715 267,761 +Impairment of oil and natural gas properties 373,214 — — +Loss on debt extinguishment 13,388 — — +Net (gain) loss on derivative instruments ( 29,527 ) ( 740,319 ) 999,747 +Net cash receipts (payments) on settled derivative instruments 282,637 152,199 ( 1,053,810 ) +Deferred income tax benefit ( 56,077 ) ( 525,156 ) — +Stock-based compensation expense 10,958 9,480 5,723 +Other, net 6,315 7,645 5,528 +Changes in operating assets and liabilities, net ( 15,212 ) 28,701 19,427 +Net cash provided by operating activities 650,033 723,181 739,077 +Cash flows from investing activities: +Additions to oil and natural gas properties ( 454,098 ) ( 537,360 ) ( 460,780 ) +Proceeds from sale of oil and natural gas properties 225 2,659 3,360 +Other, net ( 2,120 ) ( 2,526 ) ( 875 ) +Net cash used in investing activities ( 455,993 ) ( 537,227 ) ( 458,295 ) +Cash flows from financing activities: +Principal payments on Credit Facility ( 1,036,000 ) ( 998,000 ) ( 2,082,000 ) +Borrowings on Credit Facility 956,000 971,000 2,063,000 +Issuance of 2029 Senior Notes 650,000 — — +Early retirement of 2026 Senior Notes ( 524,298 ) — — +Premium paid on 2026 Senior Notes ( 12,941 ) — — +Debt issuance costs and loan commitment fees ( 14,933 ) ( 7,068 ) ( 234 ) +Dividends on preferred stock ( 4,230 ) ( 4,840 ) ( 5,444 ) +Repurchase of common stock under Repurchase Program ( 105,344 ) ( 108,735 ) ( 250,482 ) +Repurchase of common stock under Repurchase Program - related party ( 79,133 ) ( 40,430 ) — +Shares exchanged for tax withholdings ( 23,614 ) ( 3,207 ) ( 1,623 ) +Other, net ( 3 ) ( 4 ) — +Net cash used in financing activities ( 194,496 ) ( 191,284 ) ( 276,783 ) +Net change in cash and cash equivalents ( 456 ) ( 5,330 ) 3,999 +Cash and cash equivalents at beginning of period 1,929 7,259 3,260 +Cash and cash equivalents at end of period $ 1,473 $ 1,929 $ 7,259 +See accompanying notes to consolidated financial statements. +63 +Table of Contents +Index to Financial Statements +GULFPORT ENERGY CORPORATION +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Description of Company +Gulfport Energy Corporation is an independent natural gas-weighted exploration and production company focused on the exploration, acquisition and production of natural gas, crude oil and NGL in the United States with primary focus in the Appalachia and Anadarko basins. The Company's principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. +Basis of Presentation +The consolidated financial statements included in this Annual Report are prepared in accordance with GAAP and the rules and regulations of the SEC. +Risks and Uncertainties +The Company's revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil, gas and NGL, which are affected by many factors outside of Gulfport’s control, including changes in market supply and demand. Field-level prices received for Gulfport’s production have historically been volatile and may be subject to significant fluctuations in the future. The Company's derivative contracts serve to mitigate in part the effect of this price volatility on the Company's cash flows, and the Company has derivative contracts in place for a portion of its expected future natural gas, crude oil and NGL production. See Note 12 for further discussion of the Company's commodity derivative contracts. +Principles of Consolidation +The consolidated financial statements include the Company and its wholly-owned subsidiaries, Gulfport Energy Operating Corporation, Grizzly Holdings Inc., Jaguar Resources LLC, Gator Marine, Inc., Gator Marine Ivanhoe, Inc., Westhawk Minerals LLC, Puma Resources, Inc., Gulfport Appalachia LLC, Gulfport Midstream Holdings, LLC, Gulfport MidCon, LLC and Mule Sky LLC. All intercompany balances and transactions are eliminated in consolidation. +Segments +The Company's assets and operations consist of one reportable segment. The Company has a single management team that administers all properties as a whole rather than by geographic operating area. See Not e 2 , Segment Information, for further detail. +Cash and Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of the consolidated financial statements. +Accounts Receivable +The Company sells oil and natural gas to various purchasers and participates in drilling, completion and operation of oil and natural gas wells with joint interest owners on properties the Company operates. The related receivables are classified as accounts receivable—oil and natural gas sales and accounts receivable—joint interest and other, respectively. Credit is extended based on evaluation of a customer’s payment history and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy and the industry as a whole. No material allowance was deemed necessary at December 31, 2024 and December 31, 2023. +64 +Table of Contents +Index to Financial Statements +Oil and Gas Properties +The Company uses the full cost method of accounting for oil and gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and gas properties, are capitalized. Additionally, interest is capitalized on the cost of unproved oil and natural gas properties that are excluded from amortization for which exploration and development activities are in process or expected within the next 12 to 18 months. +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue (only to the extent that the derivative instruments are treated as cash flow hedges for accounting purposes), and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of unproved properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or non-cash write-down is required. Ceiling test impairment can result in a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. The Company recognized ceiling test impairments of $ 373.2 million during the year ended December 31, 2024. There were no impairments recognized in 2023 or 2022. +Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties, are depleted by an equivalent units-of-production method, converting barrels to gas at the ratio of one barrel of oil to six Mcf of gas. No gain or loss is recognized upon the disposal of oil and gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and gas reserves. Oil and gas properties not subject to amortization consist of the cost of unproved leaseholds and totaled approximately $ 221.7 million and $ 204.2 million at December 31, 2024 and December 31, 2023, respectively. These costs are reviewed quarterly by management for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by Gulfport and other operators, the terms of oil and gas leases not held by production, and available funds for exploration and development. +The Company accounts for its abandonment and restoration liabilities by recording a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, the Company increases the carrying amount of oil and natural gas properties by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is included in capitalized costs and depreciated consistent with depletion of reserves. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements. +Other Property and Equipment +Other property and equipment is recorded at cost. The Company expenses maintenance and repairs in the period incurred. Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 30 years. +Net Income (Loss) per Common Share +Basic net income (loss) per common share is computed by dividing income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares are not included if their effect would be anti-dilutive. Calculations of basic and diluted net income (loss) per common share are illustrated in Note 11 . +65 +Table of Contents +Index to Financial Statements +Income Taxes +The amount of income taxes recorded by Gulfport requires interpretations of complex rules and regulations of various tax jurisdictions throughout the United States. Gulfport uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized as income in the year in which realization becomes determinable. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized. +The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2021. As of December 31, 2024, the Company has no unrecognized tax benefits that would have a material impact on the effective rate. The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. See Note 10 for further discussion of the Company's income taxes. +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression in the accompanying consolidated statements of operations. +Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +The recognition of gains or losses on derivative instruments is outside the scope of ASC 606, Revenue from Contracts with Customers and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. +The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes. +See Note 8 for additional discussion of revenue from contracts with customers. +Accounting for Stock-based Compensation +Share-based payments to employees and members of its Board of Directors, including grants of restricted stock units and performance vesting restricted stock units, are recognized as equity at the fair value on the date of grant and to be expensed over the applicable vesting period. The vesting periods for restricted shares generally range between one year to three years with annual vesting installments. The Company does not recognize expense based on an estimate of forfeitures, but rather recognizes the impact of forfeitures only as they occur. +66 +Table of Contents +Index to Financial Statements +Derivative Instruments +The Company utilizes commodity derivatives to manage the price risk associated with forecasted sale of its natural gas, crude oil and NGL production. All derivative instruments are recognized as assets or liabilities in the consolidated balance sheets, measured at fair value. The Company does not apply hedge accounting to derivative instruments. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. +Use of Estimates +The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve quantities and the related present value of estimated future net cash flows there from, the amount and timing of asset retirement obligations, the realization of deferred tax assets, the fair value determination of acquired assets and liabilities and the realization of future net operating loss carryforwards available as reductions of income tax expense. The estimate of the Company’s oil and gas reserves is used to compute depletion, depreciation, amortization and impairment of oil and gas properties. Although management believes these estimates are reasonable, actual results could differ from these estimates. +Reclassification +Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net income (loss) or total operating cash flows. +Supplemental Cash Flow and Non-Cash Information (in thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Supplemental disclosure of cash flow information: +Interest payments, net of amounts capitalized $ 46,406 $ 53,820 $ 57,685 +Changes in operating assets and liabilities, net: +Accounts receivable - oil, natural gas, and natural gas liquids sales ( 33,463 ) 155,925 ( 45,550 ) +Accounts receivable - joint interest and other 13,494 ( 743 ) ( 1,095 ) +Accounts payable and accrued liabilities 4,067 ( 126,329 ) 59,879 +Prepaid expenses 667 ( 215 ) 4,863 +Other assets 23 63 1,330 +Total changes in operating assets and liabilities, net $ ( 15,212 ) $ 28,701 $ 19,427 +Supplemental disclosure of non-cash transactions: +Capitalized stock-based compensation $ 5,397 $ 4,046 $ 2,948 +Asset retirement obligation capitalized 682 588 2,169 +Asset retirement obligation removed due to divestiture and settlements — ( 1,267 ) ( 7 ) +Asset retirement obligation revisions 19 ( 5,077 ) 2,072 +Release of common stock held in reserve 1,996 — 28,220 +Unamortized 2026 Senior Notes debt issuance costs 447 — — +67 +Table of Contents +Index to Financial Statements +Accounts Payable and Accrued Liabilities +Accounts payable and accrued liabilities consisted of the following (in thousands): +December 31, 2024 December 31, 2023 +Revenue payable and suspense $ 139,703 $ 148,598 +Accounts payable 34,668 43,517 +Accrued capital expenditures 20,229 38,322 +Accrued transportation, gathering, processing, and compression 36,170 32,849 +Accrued contract rejection damages and shares held in reserve — 1,996 +Other accrued liabilities 67,311 44,250 +Total accounts payable and accrued liabilities $ 298,081 $ 309,532 +Other, net +Other, net in the Company's consolidated statements of operations for the year ended December 31, 2024, included approximately $ 4.9 million related to changes in the Company's legal reserves for certain litigation and regulatory proceedings. Additionally, Other, net included approximately $ 1.9 million as a result of a write-down of certain of its pipe inventory that the Company does not expect to utilize in its drilling and completion activities. +As part of its Chapter 11 Cases and restructuring efforts, the Company filed motions to reject certain firm transportation agreements between the Company and affiliates of TC Energy Corporation (“TC”) and Rover Pipeline LLC (“Rover”). During the first quarter of 2023, Gulfport finalized a settlement agreement with Rover that was approved by the Bankruptcy Court on February 21, 2023. Pursuant to the settlement agreement, Gulfport and Rover agreed that the firm transportation contracts between them would be rejected. As part of the settlement, Gulfport paid a $ 1.0 million administrative claim, which is included in Other, net. On February 24, 2023, Gulfport received an additional $ 17.8 million interim distribution for its TC claim, which is also included in Other, net. Other, net in the second quarter of 2023 included a $ 5.0 million recoupment of previously placed collateral for certain firm transportation commitments during the Company's Chapter 11 Cases. Additionally, in the fourth quarter of 2023, Gulfport received an additional $ 8.3 million distribution related to its TC claim. +Recent Accounting Pronouncements +In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (Topic 280). The amendments require disclosure for each reportable segment, the significant expense categories and amounts that are regularly provided to the CODM and included in each reported measure of a segment’s profit or loss. Additionally, this ASU enhances interim disclosure requirements and provides new segment disclosure requirements for entities with a single reportable segment. The Company adopted ASU 2023-07 during the year ended December 31, 2024. See Note 2 , Segment Information, for further detail. +In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures (Topic 740). The amendment requires annual disclosure of additional categories of information about federal, state, and foreign income taxes in the rate reconciliation table and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. Additionally, the amendment requires disclosure of annual income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and to disaggregate the information by jurisdiction based on a quantitative threshold. ASU 2023-09 is effective for the Company’s annual reporting periods beginning after December 15, 2024, with early adoption permitted, and should be applied on a prospective basis, with a retrospective option. The Company is currently evaluating the effect the adoption of ASU 2023-09 will have on its disclosures and does not expect it to have a material impact on its consolidated financial statements. +In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, which requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. The requirements will be applied prospectively with the option for retrospective application. The Company is currently evaluating the impact that the adoption of this accounting standard will have on its financial disclosures. +68 +Table of Contents +Index to Financial Statements +2. SEGMENT INFORMATION +The Company's assets and operations consist of one reportable segment with all revenues, operating expenses and assets attributable to this segment reflected in the consolidated financial statements. The Company derives its revenue from the sale of natural gas, oil and condensate and NGL produced from its oil and natural gas properties located in the United States. +The CODM of the Company is its Chief Executive Officer. The CODM assesses entity-wide operating results and performance and decides how to allocate resources based on net (loss) income, which is reported on the consolidated statement of operations. +The measure of segment assets is reported on the consolidated balance sheets as “ total assets ”. +The following table presents selected financial information with respect to the Company's one operating segment for the years ended December 31, 2024, 2023 and 2022 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Total revenues $ 958,131 $ 1,791,702 $ 1,331,112 +Significant segment expenses +Lease operating expenses 70,112 68,648 64,790 +Taxes other than income 29,737 33,717 60,139 +Transportation, gathering, processing and compression 351,237 348,631 357,246 +Depreciation, depletion, and amortization 325,723 319,715 267,761 +Impairment of oil and gas properties 373,214 — — +General and administrative 42,558 38,600 35,304 +Interest expense 59,982 57,069 59,773 +Other segment expenses (1) +23,031 ( 20,438 ) ( 8,602 ) +Income tax benefit ( 56,077 ) ( 525,156 ) — +Total significant segment expenses 1,219,517 320,786 836,411 +Net (loss) income $ ( 261,386 ) $ 1,470,916 $ 494,701 +Capital expenditures (2) +$ 464,492 $ 521,187 $ 470,396 +_____________________ +(1) Other segment expenses include “Restructuring costs”, “Accretion expense”, “Loss on debt extinguishment”, and “Other, net” from the consolidated statements of operations. +(2) Capital expenditures include capitalized general and administrative costs and capitalized interest expense. +69 +Table of Contents +Index to Financial Statements +3. PROPERTY AND EQUIPMENT +The major categories of property and equipment and related accumulated DD&A are as follows (in thousands): +December 31, 2024 December 31, 2023 +Proved oil and natural gas properties $ 3,349,805 $ 2,904,519 +Unproved properties 221,650 204,233 +Other depreciable property and equipment 10,905 8,779 +Land 386 386 +Total property and equipment 3,582,746 3,117,917 +Accumulated DD&A and impairment ( 1,564,475 ) ( 865,618 ) +Property and equipment, net $ 2,018,271 $ 2,252,299 +Oil and Natural Gas Properties +Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the Company's oil and natural gas properties. During the year ended December 31, 2024, the net book value of the Company's oil and gas properties exceeded the calculated ceiling. As a result, the Company recorded a non-cash ceiling test impairment of its oil and natural gas properties of $ 30.5 million in the third quarter of 2024 and $ 342.7 million in the fourth quarter of 2024. The impairments resulted from declines in the full cost ceiling, which primarily resulted from the significant decrease in the 12-month average trailing price for natural gas. The Company did not record an impairment of its oil and natural gas properties during 2023 or 2022. +Lower natural gas, oil and NGL prices can reduce the value of the Company’s assets. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine the actual ceiling test calculation and impairment analysis in future periods. Given the decline of natural gas prices through December 2024, we may have additional ceiling test impairments of our oil and natural gas properties in subsequent quarters if the 12-month average trailing price does not improve from the $ 2.13 per MMBtu utilized in the fourth quarter 2024 ceiling test. Any such ceiling test impairment could be material to our net earnings; however, given the inter-relationship of the various judgements made to estimate proved reserves, it is impractical to estimate the potential changes in these estimates and their impact on the impairment. +General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $ 25.3 million, $ 22.8 million and $ 20.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 0.84 , $ 0.83 and $ 0.74 per Mcfe for the years ended December 31, 2024, 2023 and 2022, respectively. +The following table summarizes the Company’s non-producing properties excluded from amortization by area (in thousands): +December 31, 2024 December 31, 2023 +Utica & Marcellus $ 197,513 $ 177,888 +SCOOP 24,137 26,345 +Total unproved properties $ 221,650 $ 204,233 +70 +Table of Contents +Index to Financial Statements +The following is a summary of Gulfport’s oil and natural gas properties not subject to amortization as of December 31, 2024 (in thousands): +Costs Incurred in +2024 2023 2022 Prior to 2022 Total +Acquisition costs $ 58,742 $ 58,002 $ 17,288 $ 82,695 $ 216,727 +Exploration costs — — — — — +Development costs 1,472 556 — — 2,028 +Capitalized interest 2,895 — — — 2,895 +Total oil and natural gas properties not subject to amortization $ 63,109 $ 58,558 $ 17,288 $ 82,695 $ 221,650 +The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three years to five years . However, the majority of the Company's non-producing leases in the Utica/Marcellus have five-year extension terms, which could extend this time frame beyond five years . +Asset Retirement Obligation +The following table provides a reconciliation of the Company's asset retirement obligation for the years ended December 31, 2024 and 2023 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 +Asset retirement obligation, beginning of period $ 29,941 $ 33,171 +Liabilities incurred 682 588 +Liabilities settled — ( 604 ) +Liabilities removed due to divestitures — ( 919 ) +Accretion expense 2,307 2,782 +Revisions in estimated cash flows (1) +19 ( 5,077 ) +Asset retirement obligation, end of period $ 32,949 $ 29,941 +_____________________ +(1) Revisions represent changes in the present value of liabilities resulting from changes in estimated costs. +4. LONG-TERM DEBT +Long-term debt consisted of the following items as of December 31, 2024 and 2023 (in thousands): +December 31, 2024 December 31, 2023 +6.750 % senior unsecured notes due 2029 +$ 650,000 $ — +8.0 % senior unsecured notes due 2026 +25,702 550,000 +Credit Facility due 2028 38,000 — +Credit Facility due 2027 — 118,000 +Net unamortized debt issuance costs ( 10,845 ) ( 618 ) +Total debt, net 702,857 667,382 +Less: current maturities of long-term debt — — +Total long-term debt, net $ 702,857 $ 667,382 +71 +Table of Contents +Index to Financial Statements +2029 Senior Notes +In September 2024, Gulfport Operating completed a private offering of $ 650.0 million aggregate principal amount of 6.750 % senior notes due September 1, 2029. The 2029 Senior Notes are guaranteed on a senior unsecured basis by the Company and each of the Company's subsidiaries that guarantee the Credit Facility. Interest on the 2029 Senior Notes is payable semi-annually, on March 1 and September 1 of each year, beginning on March 1, 2025. +The net proceeds from the offering, together with cash on hand were used to purchase $ 524.3 million of the 2026 Senior Notes in a tender offer and repay a portion of its outstanding borrowings under the Credit Facility. The 2029 Senior Notes were issued under the 2029 Senior Notes Indenture, dated as of September 13, 2024, by and among Gulfport Operating, UMB Bank, National Association, as trustee, and the Guarantors. The 2029 Senior Notes will mature on September 1, 2029. +The 2029 Senior Notes Indenture contains covenants limiting Gulfport Operating’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) make certain restricted payments, (iii) make certain investments (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in consolidations, mergers and acquisitions, (viii) create unrestricted subsidiaries (ix) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the 2029 Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply. +2026 Senior Notes +In May 2021, Gulfport Operating issued $ 550 million aggregate principal amount of its 8.0 % senior notes due 2026. The notes are guaranteed on a senior unsecured basis by the Company and each of the Company's subsidiaries that guarantee the Credit Facility. Interest on the 2026 Senior Notes is payable semi-annually, on June 1 and December 1 of each year. The 2026 Senior Notes were issued under the 2026 Senior Notes Indentures, dated as of May 17, 2021, by and among the Issuer, UMB Bank, National Association, as trustee, and the Guarantors and mature on May 17, 2026. +The covenants of the 1145 Indenture (other than the payment covenant) require that the Company comply with the covenants of the 4(a)(2) Indenture, as amended. The 4(a)(2) Indenture contains covenants limiting the Issuer’s and its restricted subsidiaries’ ability to (i) incur additional debt, (ii) pay dividends or distributions in respect of certain equity interests or redeem, repurchase or retire certain equity interests or subordinated indebtedness, (iii) make certain investments, (iv) create restrictions on distributions from restricted subsidiaries, (v) engage in specified sales of assets, (vi) enter into certain transactions among affiliates, (vii) engage in certain lines of business, (viii) engage in consolidations, mergers and acquisitions, (ix) create unrestricted subsidiaries and (x) incur or create liens. These covenants contain important exceptions, limitations and qualifications. At any time that the 2026 Senior Notes are rated investment grade, certain covenants will be terminated and cease to apply. +As noted above, in September 2024, Gulfport Operating purchased and retired $ 524.3 million of its 2026 Senior Notes in a tender offer using net proceeds from the 2029 Senior Notes offering. The 2026 Senior Notes were tendered at an average price equal to 102.3 % of the principal amount. The retirement of the 2026 Senior Notes resulted in a loss on debt extinguishment of $ 13.4 million, which included cash costs of $ 12.9 million. +Credit Facility +On May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Credit Facility. The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility from $ 700 million to $ 900 million, (b) increased the borrowing base under the Credit Facility from $ 1 billion to $ 1.1 billion, (c) increased the excess cash threshold under the Credit Facility from $ 45 million to $ 75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $ 100 million; provided that such notes have not been refinanced, redeemed or repaid in full on or prior to such 91st day. +On April 18, 2024, Gulfport completed its semi-annual borrowing base redetermination during which the borrowing base was reaffirmed at $ 1.1 billion with elected commitments remaining at $ 900 million. +72 +Table of Contents +Index to Financial Statements +Prior to the Fourth Amendment (as defined below), the Credit Facility bore interest at a rate equal to, at the Company’s election, either (a) SOFR benchmark plus an applicable margin that varies from 2.75 % to 3.75 % per annum or (b) a base rate plus an applicable margin that varies from 1.75 % to 2.75 % per annum, based on borrowing base utilization. Prior to the Fourth Amendment, the Company was required to pay a commitment fee of 0.50 % per annum on the average daily unused portion of the current aggregate commitments under the Credit Facility. The Company was also required to pay customary letter of credit and fronting fees. +Prior to the Fourth Amendment, the Credit Facility required the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.25 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00. +On September 12, 2024, the Company entered into the Commitment Increase, Borrowing Base Reaffirmation Agreement, and Fourth Amendment to Credit Agreement (the “Fourth Amendment”), which amended the Company’s Third Amended and Restated Credit Agreement. The Fourth Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $ 1.0 billion, (b) reaffirmed the borrowing base under the Credit Facility at $ 1.1 billion, (c) extended the maturity date under the Credit Facility to September 12, 2028, and (d) reduced the pricing grid 50 bps. +The Credit Facility bears interest at a rate equal to, at the Company’s election, either (a) SOFR benchmark plus an applicable margin that varies from 2.25 % to 3.25 % per annum or (b) a base rate plus an applicable margin that varies from 1.25 % to 2.25 % per annum, based on borrowing base utilization. The Company is required to pay a commitment fee that varies from 0.375 % to 0.50 % per annum on the average daily unused portion of the current aggregate commitments under the Credit Facility. The Company is also required to pay customary letter of credit and fronting fees. +The Credit Facility requires the Company to maintain as of the last day of each fiscal quarter (i) a net funded leverage ratio of less than or equal to 3.50 to 1.00, and (ii) a current ratio of greater than or equal to 1.00 to 1.00. +The obligations under the Credit Facility, certain swap obligations and certain cash management obligations, are guaranteed by the Company and the wholly-owned domestic material subsidiaries of the Borrower (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and secured by substantially all of the Loan Parties’ assets (subject to customary exceptions). +The Credit Facility also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements and borrowing base certificates, conduct of business, maintenance of property, maintenance of insurance, entry into certain derivatives contracts, restrictions on the incurrence of liens, indebtedness, asset dispositions, restricted payments, and other customary covenants. These covenants are subject to a number of limitations and exceptions. +As of December 31, 2024, the Company had $ 38.0 million outstanding borrowings under the Credit Facility, $ 63.8 million in letters of credit outstanding and was in compliance with all covenants under the credit agreement. +For the years ended December 31, 2024 and 2023, the Credit Facility bore interest at a weighted average rate of 8.23 % and 8.15 %, respectively. +Interest Expense +The following schedule shows the components of interest expense for the years ended December 31, 2024, 2023 and 2022 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Cash paid for interest $ 51,177 $ 57,967 $ 57,685 +Change in accrued interest 9,368 ( 7 ) ( 826 ) +Capitalized interest ( 4,771 ) ( 4,147 ) — +Amortization of loan costs 4,208 3,256 2,914 +Other — — — +Total interest expense $ 59,982 $ 57,069 $ 59,773 +73 +Table of Contents +Index to Financial Statements +The Company capitalized $ 4.8 million and $ 4.1 million in interest expense for the years ended December 31, 2024 and 2023, respectively, to undeveloped oil and natural gas properties. The Company did not capitalize interest expense for the year ended December 31, 2022. +Fair Value of Debt +At December 31, 2024, the carrying value of the outstanding debt represented by the 2026 Senior Notes and 2029 Senior Notes were approximately $ 25.7 million and $ 639.2 million, respectively. Based on the quoted market prices (Level 1), the fair value of the 2026 Senior Notes and 2029 Senior Notes was determined to be approximately $ 26.0 million and $ 655.0 million, respectively, at December 31, 2024. +5. MEZZANINE EQUITY +The Company's amended and restated certificate of incorporation provides for, among other things, (i) the authority to issue 42 million shares of common stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of preferred stock, with a par value of $ 0.0001 per share and a liquidation preference of $ 1,000 per share (the “Liquidation Preference”). +Preferred Stock +In May 2021, the Company issued 55,000 shares of preferred stock. +Holders of preferred stock are entitled to receive cumulative quarterly dividends at a rate of 10 % per annum of the Liquidation Preference with respect to cash dividends and 15 % per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of preferred stock (“PIK Dividends”). Gulfport currently has the option to pay either cash dividends or PIK Dividends on a quarterly basis. +Each holder of shares of preferred stock has the right (the “Conversion Right”), at its option and at any time, to convert all or a portion of the shares of preferred stock that it holds into a number of shares of common stock equal to the quotient obtained by dividing (x) the product obtained by multiplying (i) the Liquidation Preference times (ii) an amount equal to one (1) plus the Per Share Makewhole Amount (as defined in the Preferred Terms) on the date of conversion, by (y) $ 14.00 per share (as may be adjusted under the Preferred Terms). The shares of preferred stock outstanding at December 31, 2024 would convert to 2.7 million shares of common stock if all holders of preferred stock exercised their Conversion Right. +Gulfport may redeem all, but not less than all, of the outstanding shares of preferred stock by notice to the holders of preferred stock, at the greater of (i) the aggregate value of the preferred stock, calculated by the Current Market Price (as defined in the Preferred Terms) of the number of shares of common stock into which, subject to redemption, such preferred stock would have been converted if such shares were converted pursuant to the Conversion Right at the time of such redemption and (ii) the Liquidation Preference (the “Redemption Price”). +Following the Emergence Date, if there is a Fundamental Change (as defined in the Preferred Terms), Gulfport is required to redeem all, but not less than all, of the outstanding shares of preferred stock by cash payment of the Redemption Price per share of preferred stock within three ( 3 ) business days of the occurrence of such Fundamental Change. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if Gulfport lacks sufficient cash to redeem all outstanding shares of preferred stock, the Company is required to redeem a pro rata portion of each holder’s shares of preferred stock. +The preferred stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by Gulfport or converted into common stock. +The preferred stock has been classified as mezzanine equity in the accompanying consolidated balance sheets due to the redemption features noted above. +Dividends and Conversions +During the years ended December 31, 2024, 2023 and 2022 the Company paid $ 4.2 million, $ 4.8 million and $ 5.4 million, respectively, of cash dividends to holders of our preferred stock. +74 +Table of Contents +Index to Financial Statements +The following table summarizes activity of the Company’s preferred stock for the years ended December 31, 2024 and 2023: +Year Ended December 31, 2024 Year Ended December 31, 2023 +Preferred stock, beginning of period 44,214 52,295 +Issuance of preferred stock — — +Conversion of preferred stock ( 6,866 ) ( 8,081 ) +Preferred stock, end of period 37,348 44,214 +6. EQUITY +In May 2021, the Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the authority to issue 42 million shares of common stock with a par value of $ 0.0001 per share and (ii) the designation of 110,000 shares of preferred stock, with a par value of $ 0.0001 per share and a Liquidation Preference of $ 1,000 per share. +Common Stock +In May 2021, Gulfport issued approximately 19.8 million shares of common stock and 1.7 million shares of common stock were issued to the Disputed Claims Reserve. +In January 2024, the remaining 62,000 shares in the Disputed Claims Reserve were issued to certain claimants. There are no remaining shares in the Disputed Claims Reserve subsequent to the January 2024 issuance. +Common Stock Offering +On June 26, 2023, Gulfport completed an underwritten public offering of 1.5 million shares of its common stock by certain stockholders at a price to the public of $ 95.00 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +Concurrent with the closing of the offering, Gulfport purchased 263,158 shares of its common stock at $ 95.00 per share. The repurchase was part of the Company's existing Repurchase Program discussed below. +On December 14, 2023, Gulfport completed an underwritten public offering of 653,464 shares of its common stock by certain stockholders at a price to the public of $ 128.21 per share. Gulfport did not sell any of its common stock as part of this offering and did not receive any proceeds from the sale of the shares sold by the selling stockholders. +Stock Repurchase Program +In November 2021 the Company's Board of Directors approved the Repurchase Program to acquire up to $ 100 million of common stock, which has subsequently been increased up to $ 1 billion and extended through December 31, 2025. Purchases under the Repurchase Program may be made from time to time in open market or privately negotiated transactions, and will be subject to available liquidity, market conditions, credit agreement restrictions, applicable legal requirements, contractual obligations and other factors. The Repurchase Program does not require the Company to acquire any specific number of shares of common stock. The Company intends to purchase shares under the Repurchase Program with available funds while maintaining sufficient liquidity to fund its capital development program. The Repurchase Program may be suspended from time to time, modified, extended or discontinued by the Board of Directors at any time. +75 +Table of Contents +Index to Financial Statements +The following table summarizes activity under the Repurchase Program for the year ended December 31, 2024 (number of shares and dollar value of shares purchased shown in thousands): +Total Number of Shares Purchased Dollar Value of Shares Purchased Average Price Paid Per Share +First quarter 2024 210 $ 29,492 $ 140.39 +Second quarter 2024 161 25,000 155.65 +Third quarter 2024 341 49,862 146.17 +Fourth quarter 2024 491 80,123 163.13 +Total 1,203 $ 184,477 $ 153.35 +As of December 31, 2024, the Company has repurchased 5.6 million shares for $ 584.1 million at a weighted average price of $ 104.88 per share since the inception of the Repurchase Program. +7. STOCK-BASED COMPENSATION +In May 2021, the Board of Directors adopted the Incentive Plan with a share reserve of 2.8 million shares of common stock. The Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and performance awards or any combination of the foregoing. +The Company has granted both restricted stock units and performance vesting restricted stock units to employees and directors pursuant to the Incentive Plan, as discussed below. During the years ended December 31, 2024 and 2023, the Company's stock-based compensation expense was $ 16.4 million and $ 12.3 million of which the Company capitalized $ 5.4 million and $ 4.0 million, respectively, relating to its exploration and development efforts. Stock compensation expense, net of the amounts capitalized, is included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2024, the Company has awarded an aggregate of approximately 444,493 restricted stock units and approximately 462,982 performance vesting restricted stock units under the Incentive Plan. +The vesting for certain share-based awards was accelerated in the first three months of 2023 in conjunction with the restructuring activities described in Note 13 and is included in restructuring costs in the accompanying consolidated statement of operations. +76 +Table of Contents +Index to Financial Statements +The following table summarizes activity for the years ended December 31, 2022, 2023 and 2024: +Number of +Unvested +Restricted Stock Units Weighted +Average +Grant Date +Fair Value Number of +Unvested +Performance Vesting Restricted Stock Units Weighted +Average +Grant Date +Fair Value +Unvested shares as of December 31, 2021 198,413 $ 66.04 153,138 $ 48.54 +Granted 78,192 96.90 37,666 66.82 +Vested ( 67,564 ) 65.91 — — +Forfeited/canceled ( 11,269 ) 80.11 — — +Unvested shares as of December 31, 2022 197,772 $ 77.49 190,804 $ 52.15 +Granted 104,901 88.59 83,820 58.39 +Vested ( 101,804 ) 75.75 — — +Forfeited/canceled ( 7,267 ) 91.61 ( 19,046 ) 49.37 +Unvested shares as of December 31, 2023 193,602 $ 83.89 255,578 $ 54.40 +Granted (1) +75,476 152.79 188,358 81.90 +Vested ( 96,942 ) 81.14 ( 265,797 ) 48.65 +Forfeited/canceled ( 5,122 ) 114.91 — — +Unvested shares as of December 31, 2024 167,014 $ 115.67 178,139 $ 92.06 +_____________________ +(1) The table includes the impacts of performance share units granted in a prior year that vested higher than 100% of target due to the Company's TSR performance compared to peers. +The aggregate fair value of share-based awards that vested during the years ended December 31, 2024, 2023 and 2022, was approximately $ 56.8 million, $ 9.9 million and $ 5.9 million, respectively, based on the stock price at the time of vesting. +Restricted Stock Units +Restricted stock units awarded under the Incentive Plan generally vest over a period of 3 years in the case of employees and 1 or 4 years in the case of directors upon the recipient meeting applicable service requirements. Stock-based compensation expense is recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of the grant. Unrecognized compensation expense as of December 31, 2024, was $ 12.1 million. The expense is expected to be recognized over a weighted average period of 1.72 years. +Performance Vesting Restricted Stock Units +The Company has awarded performance vesting restricted stock units to certain of its executive officers under the Incentive Plan. The number of shares of common stock issued pursuant to the award will be based on a combination of (i) the Company's TSR and (ii) the Company's RTSR for the performance period. Participants will earn from 0 % to 200 % of the target award based on the Company's TSR and RTSR ranking compared to the TSR of the companies in the Company's designated peer group at the end of the performance period. Awards will be earned and vested at the end of a three-year performance period, subject to earlier termination of the performance period in the event of a change in control. The grant date fair values were determined using the Monte Carlo simulation method and are being recorded ratably over the performance period. +The table below summarizes the assumptions used in the Monte Carlo simulation to determine the grant date fair value of awards granted during the years ended December 31, 2022, 2023 and 2024: +Grant date April 29, 2022 January 24, 2023 March 3, 2023 April 3, 2023 March 1, 2024 +Forecast period (years) 3 3 3 3 3 +Risk-free interest rates 2.87 % 3.88 % 4.64 % 3.79 % 4.36 % +Implied equity volatility 88.4 % 87.2 % 86.4 % 70.8 % 46.7 % +Stock price on the date of grant $ 93.98 $ 72.99 $ 82.20 $ 79.50 $ 142.00 +77 +Table of Contents +Index to Financial Statements +Unrecognized compensation expense as of December 31, 2024, related to performance vesting restricted shares was $ 8.0 million. The expense is expected to be recognized over a weighted average period of 1.73 years. +8. REVENUE FROM CONTRACTS WITH CUSTOMERS +Revenue Recognition +The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. These sales are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered. +Gathering, processing and compression fees attributable to gas processing, as well as any transportation fees, including firm transportation fees, incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression expense in the accompanying consolidated statements of operations. +Transaction Price Allocated to Remaining Performance Obligations +A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. +For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration. +Contract Balances +Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $ 155.9 million and $ 122.5 million as of December 31, 2024 and December 31, 2023, respectively, and are reported in accounts receivable - oil, natural gas, and natural gas liquids sales in the accompanying consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments. +Prior-Period Performance Obligations +The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For each of the periods presented, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. +78 +Table of Contents +Index to Financial Statements +9. LEASES +Nature of Leases +The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. +The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less than one year . At December 31, 2024, the Company had one active long-term drilling rig contract. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential v olatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells. +The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2027. These agreements are typically structured with non-cancelable terms of one year to five years . The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms. +Discount Rate +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. +Future amounts due under operating lease liabilities as of December 31, 2024, were as follows (in thousands): +2025 $ 5,657 +2026 561 +2027 10 +2028 — +2029 — +Total lease payments $ 6,228 +Less: imputed interest ( 129 ) +Total $ 6,099 +79 +Table of Contents +Index to Financial Statements +Lease costs incurred for the years ended December 31, 2024 and 2023 consisted of the following (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 +Operating lease cost $ 12,828 $ 13,752 +Variable lease cost — — +Short-term lease cost 26,817 28,691 +Total lease cost (1) +$ 39,645 $ 42,443 +_____________________ +(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations. +The weighted-average remaining lease term as of December 31, 2024, was 0.76 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2024, was 6.25 %. +10. INCOME TAXES +Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables. +The components of income tax benefits were as follows (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Current: +State $ — $ — $ — +Federal — — — +Deferred: +State 11,747 ( 26,704 ) — +Federal ( 67,824 ) ( 498,452 ) — +Total income tax benefit provision $ ( 56,077 ) $ ( 525,156 ) $ — +A reconciliation of the statutory federal income tax amount to the recorded benefit follows (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Income (loss) before federal income taxes $ ( 317,463 ) $ 945,760 $ 494,701 +Expected income tax at statutory rate ( 66,668 ) 198,610 103,887 +State income taxes 4,765 ( 2,581 ) 2,227 +Remeasurement of state deferred tax asset 54 — 13,869 +Return to provision 5,800 ( 5,592 ) ( 17,075 ) +Other differences 1,857 1,982 1,117 +Change in valuation allowance due to current year activity ( 1,885 ) ( 717,575 ) ( 104,025 ) +Income tax benefit recorded $ ( 56,077 ) $ ( 525,156 ) $ — +For the year ended December 31, 2024, the Company's effective tax rate was 18 % and an income tax benefit of $ 56.1 million. For the year ended December 31, 2023, the Company's effective tax rate was ( 56 )% and an income tax benefit of $ 525.2 million. For the year ended December 31, 2022, the Company's effective tax rate was 0 %. The higher effective income tax rate for the year ended December 31, 2024, is primarily related to the valuation allowance the Company released during the year ended December 31, 2023. +80 +Table of Contents +Index to Financial Statements +The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2024 and December 31, 2023 are estimated as follows (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 +Deferred tax assets: +Net operating loss carryforward and tax credits $ 345,770 $ 399,017 +Oil and gas property basis difference 194,412 143,769 +Investment in pass through entities 65,210 68,114 +Stock-based compensation expense 1,821 1,262 +Change in fair value of derivative instruments 6,106 — +Other assets 56,849 52,730 +Total deferred tax assets 670,168 664,892 +Valuation allowance for deferred tax assets ( 83,695 ) ( 85,757 ) +Deferred tax assets, net of valuation allowance 586,473 579,135 +Deferred tax liabilities: +Change in fair value of derivative instruments 3,401 50,448 +Right of use asset 1,281 3,003 +Other 558 528 +Total deferred tax liabilities 5,240 53,979 +Net deferred tax asset $ 581,233 $ 525,156 +At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess the likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company currently believes it is more-likely-than-not that a portion of the Company's federal and state deferred tax assets will be utilized. The Company has maintained a $ 83.7 million valuation allowance associated with its federal and state deferred tax assets. +The Company will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to the deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of the deferred tax assets that could have a material impact on the consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. +The Company has an available federal tax net operating loss carryforward estimated at approximately $ 1.6 billion as of December 31, 2024. These federal net operating loss carryforwards of approximately $ 264.5 million generated in tax years prior to 2018 will begin to expire in 2036. As a result of the Tax Cuts and Jobs Act, the 2018 through 2024 federal NOL carryforwards of $ 1.3 billion have no expiration. The Company also has state net operating loss carryovers of approximately $ 394.5 million that will begin to expire in 2025. +As of December 31, 2024, we had no liability for uncertain tax positions. +81 +Table of Contents +Index to Financial Statements +11. EARNINGS (LOSS) PER SHARE +Basic income or loss per share attributable to common stockholders is computed as (i) net income or loss less (ii) dividends paid to holders of preferred stock less (iii) net income or loss attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common stockholders is computed as (i) basic net income or loss attributable to common stockholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The “if-converted” method is used to determine the dilutive impact for the Company's convertible preferred stock and the treasury stock method is used to determine the dilutive impact of unvested restricted stock. +There were 0.3 million shares of restricted stock that were considered anti-dilutive for the year ended December 31, 2024. There were 0.3 million and 0.2 million shares of restricted stock that were considered dilutive for the years ended December 31, 2023 and 2022, respectively. There were 2.7 million, 3.2 million and 3.7 million potential shares of common stock issuable due to the Company's convertible preferred stock for the years ended December 31, 2024, 2023 and 2022, respectively. +Reconciliations of the components of basic and diluted net (loss) income per common share are presented in the table below (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Net (loss) income $ ( 261,386 ) $ 1,470,916 $ 494,701 +Dividends on preferred stock ( 4,230 ) ( 4,840 ) ( 5,444 ) +Participating securities - preferred stock (1) +— ( 212,360 ) ( 76,401 ) +Net (loss) income attributable to common stockholders $ ( 265,616 ) $ 1,253,716 $ 412,856 +Re-allocation of participating securities — 2,475 512 +Diluted net (loss) income attributable to common stockholders $ ( 265,616 ) $ 1,256,191 $ 413,368 +Basic Shares 18,050 18,645 20,185 +Dilutive Shares 18,050 18,902 20,347 +Basic EPS $ ( 14.72 ) $ 67.24 $ 20.45 +Dilutive EPS $ ( 14.72 ) $ 66.46 $ 20.32 +_____________________ +(1) Preferred stock represents participating securities because it participates in any dividends on shares of common stock on a pari passu , pro rata basis. However, preferred stock does not participate in undistributed net losses. +12. DERIVATIVE INSTRUMENTS +Natural Gas, Oil and NGL Derivative Instruments +The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in a floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods of favorable price movements. +The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its Credit Facility. The Company generally enters into commodity derivative contracts for approximately 30 % to 70 % of its forecasted current year annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 36 months. Gulfport does not enter into commodity derivative contracts for speculative purposes. +82 +Table of Contents +Index to Financial Statements +The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation. As of December 31, 2024, our commodity derivative contracts were spread among 12 counterparties. +Fixed price swaps require that the Company receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. They are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. +The Company has entered into natural gas, crude oil and NGL fixed price swap contracts based off the NYMEX Henry Hub, NYMEX WTI and Mont Belvieu C3 indices. Below is a summary of the Company's open fixed price swap positions as of December 31, 2024: +Index Daily Volume Weighted +Average Price +Natural Gas (MMBtu/d) ($/MMBtu) +2025 NYMEX Henry Hub 250,000 $ 3.82 +2026 NYMEX Henry Hub 200,000 $ 3.64 +Oil (Bbl/d) ($/Bbl) +2025 NYMEX WTI 2,000 $ 74.50 +NGL (Bbl/d) ($/Bbl) +2025 Mont Belvieu C3 2,504 $ 29.97 +2026 Mont Belvieu C3 496 $ 29.51 +Each two-way costless collar has a set floor and ceiling price for the hedged production. They are settled monthly based on differences between the floor and ceiling prices specified in the contract and the referenced settlement price. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the collar contracts, the Company will cash-settle the difference with the hedge counterparty. When the referenced settlement price is less than the floor price in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the hedged contract volume. Similarly, when the referenced settlement price exceeds the ceiling price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the hedged contract volume. No payment is due from either party if the referenced settlement price is within the range set by the floor and ceiling prices. +The Company has entered into natural gas costless collars based off the NYMEX Henry Hub index. Below is a summary of the Company's costless collar positions as of December 31, 2024: +Index Daily Volume Weighted Average Floor Price Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) ($/MMBtu) +2025 NYMEX Henry Hub 220,000 $ 3.37 $ 4.23 +2026 NYMEX Henry Hub 90,000 $ 3.35 $ 4.10 +83 +Table of Contents +Index to Financial Statements +From time to time the Company has sold natural gas call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps. Each sold call option has an established ceiling price. If at the time of settlement the referenced settlement price exceeds the ceiling price, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call option positions as of December 31, 2024: +Index Daily Volume Weighted Average Ceiling Price +Natural Gas (MMBtu/d) ($/MMBtu) +2025 NYMEX Henry Hub 193,315 $ 5.80 +In addition, the Company has entered into natural gas basis swap positions. These instruments are arrangements that guarantee a fixed price differential to NYMEX Henry Hub from a specified delivery point. The Company receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity. As of December 31, 2024, the Company had the following natural gas basis swap positions open: +Gulfport Pays Gulfport Receives Daily Volume Weighted Average Fixed Spread +Natural Gas (MMBtu/d) ($/MMBtu) +2025 Rex Zone 3 NYMEX Plus Fixed Spread 110,000 $ ( 0.20 ) +2025 NGPL TXOK NYMEX Plus Fixed Spread 40,000 $ ( 0.29 ) +2025 TETCO M2 NYMEX Plus Fixed Spread 230,000 $ ( 0.96 ) +2025 Transco Station 85 NYMEX Plus Fixed Spread 5,000 $ 0.38 +2025 TGP 500 NYMEX Plus Fixed Spread 10,000 $ 0.31 +2026 Rex Zone 3 NYMEX Plus Fixed Spread 40,000 $ ( 0.19 ) +2026 NGPL TXOK NYMEX Plus Fixed Spread 30,000 $ ( 0.30 ) +2026 TETCO M2 NYMEX Plus Fixed Spread 130,000 $ ( 0.98 ) +2026 Transco Station 85 NYMEX Plus Fixed Spread 5,000 $ 0.52 +2026 TGP 500 NYMEX Plus Fixed Spread 10,000 $ 0.54 +Balance Sheet Presentation +The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2024 and December 31, 2023 (in thousands): +December 31, 2024 December 31, 2023 +Short-term derivative asset $ 58,085 $ 233,226 +Long-term derivative asset 6,003 47,566 +Short-term derivative liability ( 41,889 ) ( 21,963 ) +Long-term derivative liability ( 35,081 ) ( 18,602 ) +Total commodity derivative position $ ( 12,882 ) $ 240,227 +84 +Table of Contents +Index to Financial Statements +Gains and Losses +The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2024, 2023 and 2022 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Natural gas derivatives - fair value (losses) gains +$ ( 251,019 ) $ 584,563 $ 32,797 +Natural gas derivatives - settlement gains (losses) +284,626 146,381 ( 1,002,098 ) +Total gains (losses) on natural gas derivatives +33,607 730,944 ( 969,301 ) +Oil and condensate derivatives - fair value gains +2,351 5,971 6,618 +Oil and condensate derivatives - settlement gains (losses) 166 ( 3,272 ) ( 39,163 ) +Total gains (losses) on oil and condensate derivatives +2,517 2,699 ( 32,545 ) +NGL derivatives - fair value (losses) gains +( 4,442 ) ( 2,414 ) 14,648 +NGL derivatives - settlement (losses) gains ( 2,155 ) 9,090 ( 12,549 ) +Total (losses) gains on NGL derivatives +( 6,597 ) 6,676 2,099 +Total gains (losses) on natural gas, oil and NGL derivatives +$ 29,527 $ 740,319 $ ( 999,747 ) +Offsetting of Derivative Assets and Liabilities +As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value (in thousands): +As of December 31, 2024 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 64,088 $ ( 49,343 ) $ 14,745 +Derivative liabilities $ ( 76,970 ) $ 49,343 $ ( 27,627 ) +As of December 31, 2023 +Gross Assets (Liabilities) Presented in the Consolidated Balance Sheets Gross Amounts Subject to Master Netting Agreements Net Amount +Derivative assets $ 280,792 $ ( 30,866 ) $ 249,926 +Derivative liabilities $ ( 40,565 ) $ 30,866 $ ( 9,699 ) +Concentration of Credit Risk +By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are spread between multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company. +85 +Table of Contents +Index to Financial Statements +13. RESTRUCTURING COSTS +During the year ended December 31, 2023, Gulfport recognized $ 4.8 million in personnel-related restructuring expenses associated with changes in the organizational structure and leadership team resulting from the appointment of Gulfport's new CEO in January 2023. Of these expenses, $ 1.3 million resulted from accelerated vesting of certain share-based grants, which are non-cash charges. The organizational changes were completed in the second quarter of 2023 and there are no remaining employee termination liabilities associated with these changes. +14. INVESTMENTS +Grizzly Oil Sands ULC +The Company, through its wholly owned subsidiary Grizzly Holdings, owns an approximate 24.5 % interest in Grizzly, a Canadian unlimited liability company. As of December 31, 2024, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company has no t paid any cash calls since its decision to cease funding further capital calls in 2019. Grizzly’s functional currency is the Canadian dollar. +The Company reduced the carrying value of its investment in Grizzly to zero upon the Emergence Date. The reduction in valuation was based upon the Company's new management's assessment of the investment and its priority for future funding in its portfolio. In particular, Grizzly’s operations remained suspended, even with improvements in the pricing environment since its initial suspension in 2015. Additionally, the Company does not anticipate funding future capital calls, which will lead to further dilution of its equity ownership interest. +15. FAIR VALUE MEASUREMENTS +The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are classified and disclosed in one of the following categories: +Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. +Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. +Level 3 – Significant inputs to the valuation model are unobservable. +Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +86 +Table of Contents +Index to Financial Statements +Financial assets and liabilities +The following tables summarize the Company’s financial and non-financial assets and liabilities by valuation level as of December 31, 2024 and December 31, 2023 (in thousands): +December 31, 2024 +Level 1 Level 2 Level 3 +Assets: +Derivative instruments $ — $ 64,088 $ — +Contingent consideration arrangement $ — $ — $ 2,700 +Total assets $ — $ 64,088 $ 2,700 +Liabilities: +Derivative instruments $ — $ 76,970 $ — +December 31, 2023 +Level 1 Level 2 Level 3 +Assets: +Derivative instruments $ — $ 280,792 $ — +Contingent consideration arrangement $ — $ — $ 2,900 +Total assets $ — $ 280,792 $ 2,900 +Liabilities: +Derivative instruments $ — $ 40,565 $ — +The Company estimates the fair value of all derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data. +The Company's SCOOP water infrastructure sale, which closed in the first quarter of 2020, included a contingent consideration arrangement. As of December 31, 2024, the fair value of the contingent consideration was $ 2.7 million, of which $ 0.5 million is included in prepaid expenses and other current assets and $ 2.2 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and is based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, records changes in fair value in earnings. The Company recognized an immaterial gain for the year ended December 31, 2024 and a loss of $ 1.4 million for the year ended December 31, 2023, with respect to this contingent consideration arrangement. These fair value changes are included in Other, net in the accompanying consolidated statements of operations. +Non-financial assets and liabilities +The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 3 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred were $ 0.7 million and $ 0.6 million for the years ended December 31, 2024 and 2023, respectively. +Fair value of other financial instruments +The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Company's Credit Facility is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities. +87 +Table of Contents +Index to Financial Statements +16. RELATED PARTY TRANSACTIONS +Stock Repurchase Program +The following table summarizes the Company's purchases of its common stock from Silver Point Capital, L.P. for the years ended December 31, 2023 and 2024 (dollar value of shares purchased shown in thousands): +Date of Transaction Shares Repurchased Repurchase Amount Closing Date +June 22, 2023 (1) +215,060 $ 20,430 June 26, 2023 +December 07, 2023 146,455 $ 20,000 December 11, 2023 +March 19, 2024 97,219 $ 15,002 March 19, 2024 +September 19, 2024 170,000 $ 24,863 September 25, 2024 +November 21, 2024 150,000 $ 26,340 December 03, 2024 +December 19, 2024 79,410 $ 12,929 December 26, 2024 +_____________________ +(1) Concurrent with the closing of the June 2023 offering transaction discussed in Note 6 . +The repurchases are part of the Company's existing Repurchase Program. Upon closing of the transactions, the repurchased common stock was canceled. +17. COMMITMENTS +Firm Transportation and Gathering Agreements +The Company has contractual commitments with midstream and pipeline companies for future gathering and transportation of natural gas from the Company's producing wells to downstream markets. Under certain of these agreements, the Company has minimum daily volume commitments. The Company is also obligated under certain of these arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it often can release it to other counterparties, thus reducing the cost of these commitments. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to future firm transportation and gathering agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, costs associated with utilized future firm transportation and gathering agreements are reflected in the Company's estimates of proved reserves. +A summary of these commitments at December 31, 2024, are set forth in the table below (in thousands): +2025 $ 140,434 +2026 134,281 +2027 136,448 +2028 136,604 +2029 136,762 +Thereafter 463,417 +Total $ 1,147,946 +Future Firm Sales Commitments +The Company has entered into various firm sales contracts to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's operated production has generally been sufficient to satisfy its delivery commitments during the periods presented, and it expects its operated production will continue to be the primary means of fulfilling its future commitments. However, where the Company's operated production is not sufficient to satisfy its delivery commitments, it can and may use spot market purchases to satisfy the commitments. +88 +Table of Contents +Index to Financial Statements +A summary of these volume commitments at December 31, 2024, are set forth in the table below (MMBtu per day): +2025 68,000 +2026 75,000 +2027 12,000 +2028 — +Thereafter — +Total 155,000 +Other Operational Commitments +The Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials exists through 2025, with approximately $ 13.8 million remaining. +Contributions to 401(k) Plan +Gulfport sponsors a 401(k) plan under which eligible employees may contribute a portion of their total compensation up to the maximum threshold through salary deferrals. The plan is considered a Safe Harbor 401(k) and provides a company match on 100 % of salary deferrals that do not exceed 6 % of compensation. The Company may also make discretionary elective contributions to the plan. The following table summarizes the contributions expenses related to this plan for the years ended December 31, 2024, 2023 and 2022 (in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Contributions expense $ 1,749 $ 1,549 $ 1,386 +18. CONTINGENCIES +The Company is involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different. In accordance with ASC Topic 450, Contingencies , an accrual is recorded for a material loss contingency when its occurrence is probable and damages are reasonably estimable based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. +Litigation and Regulatory Proceedings +The Company, along with other oil and gas companies, have been named as a defendant in a number of lawsuits where Plaintiffs assert their respective leases are limited to the Utica/Marcellus shale geological formations and allege that Defendants have willfully trespassed and illegally produced oil, natural gas, and other hydrocarbon products beyond these respective formations. They also allege that Defendants engaged in conversion and were unjustly enriched. Plaintiffs seek the full value of any production from below the Utica/Marcellus shale formations, unspecified damages from the diminution of value to their mineral estate, unspecified punitive damages, and the payment of reasonable attorney fees, legal expenses, and interest. On April 27, 2021, the Bankruptcy Court for the Southern District of Texas approved a settlement agreement in which the plaintiffs fully released the Company from all claims that accrued and any damages related to the period before the effective date of the Company’s Chapter 11 plan, which occurred on May 17, 2021. The plaintiffs are continuing to pursue alleged damages after May 17, 2021. +89 +Table of Contents +Index to Financial Statements +The Company received Notice and Finding of Violations (“NOV/FOVs”) from the USEPA alleging violations of the Clean Air Act at 17 locations in Ohio between 2013 and 2019. On January 22, 2020, the Company entered a Consent Decree with the Department of Justice and USEPA addressing Gulfport's failure to capture and control air emissions from storage vessels and to comply with associated inspection, recordkeeping, and reporting requirements. During the process of terminating the Consent Decree, the Company was informed that there were untimely repairs on a number of locations subject to the Company's Consent Decree that failed to comply with Subpart OOOO or Permit to Install and Operate Applications. On July 31, 2024, the Company received a NOV/FOV from USEPA related to the alleged untimely repairs. While these repairs have been completed, resolution of the matter may result in monetary sanctions exceeding $ 300,000 . The Company also received a Demand for Stipulated Penalties for Certain Instances of Alleged Non-Compliance with Consent Decree Requirements from the United States Department of Justice (“USDOJ”) on September 5, 2024. The Company paid a $ 97,500 penalty to resolve the USDOJ demand for stipulated penalties. +In November 2020, Robert T. Stephenson and Sandra J. Bass, as the Successor Co-Trustees of the Robert L. Stephenson Living Trust, dated January 28, 2004, and express trust; and Norma E. Stephenson, Trustee of the Norma E. Stephenson Living Trust, dated July 29, 1991, and express trust filed an action against the Company in the District Court of Grady County in the State of Oklahoma. In June 2021 the case was removed to the United States District Court for the Western District of Oklahoma. The parties have engaged in discovery and a trial has been set for Summer 2025. The complaint alleges that the Company has failed to comply with a Letter Agreement from April 1979 granting an overriding royalty interest covering 16 sections (approximately 10,240 acres). The plaintiffs seek quiet title, declaratory judgment, breach of contract, specific performance, and damages under the Oklahoma Production Revenue Standards Act. Given the nature of this matter, the Company is unable to reasonably estimate the total possible loss or ranges of loss. The Company believes it has strong defenses to these claims and intends to vigorously defend this matter; however, an adverse decision could have a material effect on the Company, its financial condition, results of operations, and cash flows. +In January 2025, Grace E. Moore Great Grandchildren Trust of 2006, Joseph Gorsha, Damon Faldowski, Damon Faldowski II, and Mark Faldowski, individually and on behalf of all others similarly situated, filed a class action against Gulfport and another natural gas producer in the United States District Court, Southern District of Ohio, Eastern Division. The lawsuit alleges, among other things, that defendants underpaid royalties to the plaintiffs in connection with the production and sale of natural gas and NGL. The lawsuit seeks compensatory damages, injunctive relief regarding royalty payment practices, restitution, disgorgement of profits, prejudgment interest, post-judgment interest, attorney’s fees, and costs. Given the preliminary nature of this action, we are currently unable to estimate what, if any, liability may result from this matter. +Business Operations +The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. +Environmental Contingencies +The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. Gulfport and its subsidiaries have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. The Company conducts periodic reviews, on a company-wide basis, to assess changes in its environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, it may, among other things, exclude a property from the transaction, require the seller to remediate the property to its satisfaction in an acquisition or agree to assume liability for the remediation of the property. +Other Matters +Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates. +90 +Table of Contents +Index to Financial Statements +Concentration of Credit Risk +Gulfport operates in the oil and natural gas industry principally in the states of Ohio and Oklahoma with sales to refineries, re-sellers such as marketers, and other end users. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the oil and gas industry, Gulfport believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company’s results of operations in the long term. +The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2024, Gulfport held no cash in excess of insured limits in these banks. +During the years ended December 31, 2024 and 2023, one customer accounted for approximately 15 % and 12 %, respectively, of the Company's total sales. During the year ended December 31, 2022, two customers accounted for approximately 31 % of the Company's total sales. The Company does not believe that the loss of any of these customers would have a material adverse effect on its natural gas, oil and condensate and NGL sales as alternative customers are readily available. +19. SUBSEQUENT EVENTS +Natural gas, Oil and NGL Derivative Instruments +Subsequent to December 31, 2024 and as of February 20, 2025, the Company entered into the following derivative contracts: +Period Type of Derivative Instrument Index +Daily Volume +Weighted +Average Price +Natural Gas +(MMBtu/d) ($/MMBtu) +2025 +Swaps +NYMEX Henry Hub +18,301 $ 3.85 +2026 +Basis Swaps +Rex Zone 3 +40,000 $( 0.17 ) +Oil +(Bbl/d) ($/Bbl) +2025 +Swaps +NYMEX WTI +1,000 $ 70.87 +20. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) +The Company is making the following supplemental disclosures of oil and gas activities, in accordance with the full cost method of accounting for its oil and gas exploration and development activities. The Company owns a 24.5 % interest in Grizzly. However, Grizzly did not have any material activity or proved reserves in the years presented below. As such, amounts related to Grizzly have been omitted below. +The following table provides historical revenue and cost information relating to the Company’s oil and gas operations located entirely in the United States: +Capitalized Costs Related to Oil and Gas Producing Activities (in thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 +Proved properties $ 3,349,805 $ 2,904,519 +Unproved properties 221,650 204,233 +Total oil and natural gas properties 3,571,455 3,108,752 +Accumulated depletion and amortization ( 1,559,546 ) ( 862,253 ) +Net capitalized costs $ 2,011,909 $ 2,246,499 +91 +Table of Contents +Index to Financial Statements +Costs Incurred in Oil and Gas Property Acquisition, Development and Exploratory Activities (in thousands) +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Acquisition $ 89,646 $ 93,905 $ 29,675 +Development 373,284 419,431 441,458 +Exploratory — — — +Total $ 462,930 $ 513,336 $ 471,133 +Capitalized interest is included as part of the cost of oil and natural gas properties. The Company capitalized $ 4.8 million and $ 4.1 million for the years ended December 31, 2024 and 2023, respectively, based on the Company's weighted average cost of borrowings used to finance expenditures. The Company did not capitalize interest expense for the year ended December 31, 2022. +In addition to capitalized interest, the Company capitalized internal costs totaling $ 25.3 million, $ 22.8 million and $ 20.2 million during the years ended December 31, 2024, 2023, and 2022, respectively, which were directly related to the acquisition, exploration and development of the Company's oil and natural gas properties. +Results of Operations for Producing Activities (in thousands) +The following table sets forth the revenues and expenses related to the production and sale of oil and natural gas. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to the permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production. +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Revenues $ 928,604 $ 1,051,383 $ 2,330,859 +Production costs ( 451,086 ) ( 450,996 ) ( 482,175 ) +Depletion ( 324,078 ) ( 318,473 ) ( 266,449 ) +Impairment ( 373,214 ) — — +Income tax benefit 56,077 525,156 — +Results of operations from producing activities $ ( 163,697 ) $ 807,070 $ 1,582,235 +Depletion per Mcf of gas equivalent (Mcfe) $ 0.84 $ 0.83 $ 0.74 +92 +Table of Contents +Index to Financial Statements +Oil and Natural Gas Reserves +The following table presents estimated volumes of proved developed and undeveloped oil and gas reserves as of December 31, 2024, 2023 and 2022 and changes in proved reserves during the last three years. The reserve reports use an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2024, 2023 and 2022, in accordance with guidelines of the SEC applicable to reserves estimates. The prices used for the 2024 reserve report are $ 76.32 per barrel of oil, $ 2.13 per MMbtu and $ 31.30 per barrel for NGL, adjusted by lease for transportation fees and regional price differentials, and for oil and gas reserves, respectively. The prices used at December 31, 2023 and 2022 for reserve report purposes are $ 78.21 per barrel, $ 2.64 per MMbtu and $ 31.42 per barrel for NGL and $ 94.14 per barrel, $ 6.36 per MMbtu and $ 47.86 per barrel for NGL, respectively. +Gulfport emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data. +Oil (MMBbl) Natural Gas (Bcf) NGL (MMBbl) Natural Gas Equivalent (Bcfe) +Proved Reserves +December 31, 2021 16 3,478 54 3,898 +Purchases of reserves — — — — +Extensions and discoveries 3 391 5 439 +Sales of reserves — — — — +Revisions of prior reserve estimates — 66 — 70 +Current production ( 2 ) ( 322 ) ( 4 ) ( 359 ) +December 31, 2022 18 3,612 54 4,048 +Purchases of reserves — — — — +Extensions and discoveries 6 875 14 996 +Sales of reserves — — — — +Revisions of prior reserve estimates ( 4 ) ( 411 ) ( 1 ) ( 445 ) +Current production ( 1 ) ( 350 ) ( 4 ) ( 385 ) +December 31, 2023 19 3,725 63 4,214 +Purchases of reserves — — — — +Extensions and discoveries 5 398 20 547 +Sales of reserves — — — — +Revisions of prior reserve estimates — ( 413 ) 1 ( 406 ) +Current production ( 1 ) ( 354 ) ( 4 ) ( 386 ) +December 31, 2024 22 3,356 80 3,969 +Proved developed reserves +December 31, 2021 8 1,928 31 2,165 +December 31, 2022 9 2,034 34 2,295 +December 31, 2023 6 1,980 31 2,203 +December 31, 2024 7 1,879 31 2,109 +Proved undeveloped reserves +December 31, 2021 8 1,550 22 1,733 +December 31, 2022 9 1,578 20 1,752 +December 31, 2023 12 1,746 32 2,011 +December 31, 2024 15 1,478 49 1,861 +Totals may not sum or recalculate due to rounding. +93 +Table of Contents +Index to Financial Statements +In 2024, the Company experienced extensions of 547.5 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica/Marcellus and SCOOP acreages. Of the total extensions, 340.7 Bcfe was attributable to the addition of 33 Utica PUD locations, 92.4 Bcfe was attributable to the addition of 13 Marcellus PUD locations, and 114.4 Bcfe was attributable to the addition of 16 SCOOP PUD locations. The Company experienced total downward revisions of 406.0 Bcfe in estimated proved reserves. These consisted of upward revisions of 16.2 Bcfe as a result of positive well performance and 171.2 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2024. These were offset by downward revisions of 487.9 Bcfe which were due to commodity price changes. Commodity prices experienced volatility throughout 2024 and the 12-month average price for natural gas decreased from $ 2.64 per MMBtu for 2023 to $ 2.13 per MMBtu for 2024, the 12-month average price for NGL decreased from $ 31.42 per barrel for 2023 to $ 31.30 per barrel for 2024, and the 12-month average price for crude oil decreased from $ 78.21 per barrel for 2023 to $ 76.32 per barrel for 2024. Additionally, downward revisions of 172.4 Bcfe were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 11 Utica/Marcellus PUD locations and 6 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Finally, upward revisions of 66.9 Bcfe were a result of a combination of various economic assumption updates. +In 2023, the Company experienced extensions of 995.7 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica/Marcellus and SCOOP acreages. Of the total extensions, 789.2 Bcfe was attributable to the addition of 67 Utica PUD locations, 88.6 Bcfe was attributable to the addition of 12 Marcellus PUD locations, and 110.4 Bcfe was attributable to the addition of 14 SCOOP PUD locations. The Company experienced total downward revisions of 444.9 Bcfe in estimated proved reserves. These consisted of upward revisions of 24.9 Bcfe as a result of positive well performance and 293.9 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2023. These were offset by downward revisions of 554.9 Bcfe which were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 36 Utica/Marcellus PUD locations and 8 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Additionally, downward revisions of 159.7 Bcfe due to commodity price changes. Commodity prices experienced volatility throughout 2023 and the 12-month average price for natural gas decreased from $ 6.36 per MMBtu for 2022 to $ 2.64 per MMBtu for 2023, the 12-month average price for NGL increased from $ 47.86 per barrel for 2022 to $ 31.42 per barrel for 2023, and the 12-month average price for crude oil decreased from $ 94.14 per barrel for 2022 to $ 78.21 per barrel for 2023. Finally, downward revisions of 49.1 Bcfe were a result of a combination of various economic assumption updates. +In 2022, the Company experienced extensions of 438.9 Bcfe of estimated proved reserves, which were primarily attributable to the Company's continued development of its Utica/Marcellus and SCOOP acreages. Of the total extensions, 295.9 Bcfe was attributable to the addition of 36 PUD locations in the Utica, 72.1 Bcfe was attributable to the addition of 8 PUD locations in the Marcellus and 65.4 Bcfe was attributable to the addition of 5 PUD locations in the SCOOP. The Company experienced total upward revisions of approximately 69.7 Bcfe in estimated proved reserves, of which 47.7 Bcfe was the result of improved commodity prices. The 12-month average price for natural gas increased from $ 3.60 per MMBtu for 2021 to $ 6.36 per MMBtu for 2022, the 12-month average price for NGL increased from $ 31.90 per barrel for 2021 to $ 47.86 per barrel for 2022, and the 12-month average price for crude oil increased from $ 66.55 per barrel for 2021 to $ 94.14 per barrel for 2022. Upward revisions of 144.5 Bcfe were a result of an increase in working interest and net revenue interests as a result of our successful leasing efforts through 2022. Downward revisions of 95.6 Bcfe were experienced as a result of the SEC five-year development window, which removed 4 PUD locations in the Utica and 5 PUD locations in the SCOOP. The development plan changes reflect our commitment to optimizing the long-term development schedule to maximize cash flow and overall economic returns. A small downward revision of 26.9 Bcfe was primarily a result of performance changes to several wells and changes in PUD location forecasts. +94 +Table of Contents +Index to Financial Statements +Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The following tables present the estimated future cash flows, and changes therein, from Gulfport’s proven oil and gas reserves as of December 31, 2024, 2023 and 2022 using an unweighted average first-of-the-month price for the year January through December 31, 2024, 2023 and 2022. The average gas prices used were $ 2.13 , $ 2.64 and $ 6.36 per MMbtu, for the years ended December 31, 2024, 2023 and 2022, respectively. The average oil prices used were $ 76.32 , $ 78.21 and $ 94.14 per Bbl, for the years ended December 31, 2024, 2023 and 2022, respectively. The average NGL prices used were $ 31.30 , $ 31.42 and $ 47.86 per Bbl, for the years ended December 31, 2024, 2023 and 2022, respectively. +Year ended operating expenses, development costs and appropriate statutory income tax rates, with consideration of future tax rates, were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties. The estimated future costs to develop proved developed non-producing and proved undeveloped reserves are approximately $ 280.2 million in 2025, $ 318.8 million in 2026 and $ 259.2 million in 2027. Estimated future development costs include capital spending on major development projects. Gulfport believes cash flow from its operating activities, cash on hand and borrowings under its Credit Facility will be sufficient to cover these estimated future development costs. +The assumptions used to derive the standardized measure of discounted future net cash flows are those required by accounting standards and do not necessarily reflect the Company's expectations. The information may be useful for certain comparative purposes but should not be solely relied upon in evaluating Gulfport or its performance. Furthermore, information contained in the following table may not represent realistic assessments of future cash flows, nor should the standardized measure of discounted future net cash flows be viewed as representative of the current value of the Company's reserves. Management believes that the following factors should be considered when reviewing the information below: +• Future commodity prices received for selling the Company's net production will likely differ from those required to be used in these calculations. +• Future operating and capital costs will likely differ from those required to be used in these calculations and do not reflect cost savings of Company owned midstream operations on future operating expenses. +• Future market conditions, government regulations, reservoir conditions and risks inherent in the production of oil and condensate and gas may cause production rates in future years to vary significantly from those rates used in the calculations. +• Future revenues may be subject to different production, severance and property taxation rates. +• The selection of a 10% discount rate is arbitrary and may not be a reasonable factor in adjusting for future economic conditions or in considering the risk that is part of realizing future net cash flows from the reserves. +The following table summarizes estimated future net cash flows from natural gas and crude oil reserves (in millions): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Future cash flows $ 10,474 $ 12,338 $ 26,677 +Future development and abandonment costs ( 1,498 ) ( 1,625 ) ( 1,588 ) +Future production costs ( 5,268 ) ( 5,641 ) ( 5,872 ) +Future production taxes ( 212 ) ( 303 ) ( 553 ) +Future income taxes ( 23 ) ( 63 ) ( 2,609 ) +Future net cash flows 3,473 4,706 16,055 +10% discount to reflect timing of cash flows ( 1,726 ) ( 2,323 ) ( 7,776 ) +Standardized measure of discounted future net cash flows $ 1,747 $ 2,383 $ 8,279 +Totals may not sum or recalculate due to rounding. +95 +Table of Contents +Index to Financial Statements +Future development and abandonment costs include not only development costs but also all future costs to settle asset retirement obligations. The following table summarizes the total of all future costs to settle asset retirement obligations that are included in future development and abandonment costs above (in millions): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Future asset retirement obligations $ 240 $ 229 $ 222 +Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves +The principal source of change in the standardized measure of discounted future net cash flows relating to proved reserves is presented in the table below (in millions): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Sales and transfers of oil and gas produced, net of production costs $ ( 478 ) $ ( 600 ) $ ( 1,849 ) +Net changes in prices, production costs, and development costs ( 910 ) ( 7,181 ) 5,130 +Acquisition of oil and gas reserves in place — — — +Extensions and discoveries 368 581 941 +Previously estimated development costs incurred during the period 211 263 204 +Revisions of previous quantity estimates, less related production costs ( 21 ) ( 278 ) 154 +Sales of oil and gas reserves in place — — ( 1 ) +Accretion of discount 238 828 414 +Net changes in income taxes 16 1,219 ( 1,067 ) +Change in production rates and other ( 60 ) ( 728 ) 215 +Total change in standardized measure of discounted future net cash flows $ ( 636 ) $ ( 5,896 ) $ 4,141 +96 +Table of Contents +Index to Financial Statements +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2024, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2024, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the quarter ended December 31, 2024, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2024. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2024 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2024, as stated in their accompanying report. +97 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2024, and our report dated February 26, 2025 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 26, 2025 +98 +Table of Contents +Index to Financial Statements +ITEM 9B. OTHER INFORMATION +The disclosures set forth below are provided in this Part II, Item 9B in lieu of separate disclosure under Items 5.02(b)-(c) and (e) of Form 8-K. +Trading Arrangements +During the year ended December 31, 2024, none of our officers (as defined in Rule 16a-1(f) of the Exchange Act) or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K). +Appointment of Chief Operating Officer +On February 24, 2025, Matthew Rucker was promoted to Executive Vice President, Chief Operating Officer, with a $500,000 base salary, 100% short-term incentive bonus target, and 400% long-term incentive award. +ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +Not applicable. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The names of executive officers and certain other senior officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Item 1 of Part I of this report. The other information called for by this Item 10 is incorporated herein by reference to the definitive proxy statement to be filed by Gulfport pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 not later than 120 days after the close of our fiscal year ended December 31, 2024 (the 2025 Proxy Statement). +ITEM 11. EXECUTIVE COMPENSATION +The information called for by this Item 11 is incorporated herein by reference to the 2025 Proxy Statement. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information called for by this Item 12 is incorporated herein by reference to the 2025 Proxy Statement. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2025 Proxy Statement. +ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES +The information called for by this Item 14 is incorporated herein by reference to the 2025 Proxy Statement. +99 +Table of Contents +Index to Financial Statements +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) The following financial statements, financial statement schedules and exhibits are filed as part of this report: +1. Financial Statements. Gulfport's consolidated financial statements are included in Item 8 of Part II of this report. Reference is made to the accompanying Index to Financial Statements. +2. Financial Statement Schedules. No financial statement schedules are applicable or required. +3. Exhibits. The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. +INDEX OF EXHIBITS +Incorporated by Reference +Exhibit Number Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith +2.1 +Amended Joint Chapter 11 Plan of Reorganization of Gulfport Energy Corporation and its Debtor Subsidiaries. +8-K 001-19514 2.2 4/29/2021 +3.1 +Amended and Restated Certificate of Incorporation of Gulfport Energy Corporation. +8-K 001-19514 3.1 5/17/2021 +3.2 +Amended and Restated Bylaws of Gulfport Energy Corporation. +8-K 001-19514 3.2 5/17/2021 +4.1 +1145 Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.1 5/17/2021 +4.2 +4(a)(2) Indenture, dated as of May 17, 2021, by and among Gulfport Energy Corporation, UMB Bank, National Association, as trustee, and the guarantors party thereto (including the form of note attached thereto). +8-K 001-19514 4.2 5/17/2021 +4.3 +I ndenture, dated September 13, 2024, among Gulfport Energy Operating Co rporation , Gulfport Energy Co rpor ation, the su bsidiary guarantors party thereto and UMB Bank, National Association, as trustee. +8-K 001-19514 4.1 9/16/2024 +4.4 +Description of Securities Registered Pursuant to Section 12 of the Exchange Act. +10-K 001-19514 4.3 3/1/2023 +10.1+ +Gulfport Energy Corporation 2021 Stock Incentive Plan. +8-K 001-19514 10.6 5/17/2021 +10.2+ +Form of Employee Restricted Stock Unit Award Agreement, dated as of July 21, 2021. +10-Q 001-19514 10.7 8/9/2021 +10.3+ +Form of Director Restricted Stock Unit Award Agreement, dated as of July 21, 2021. +10-Q 001-19514 10.8 8/9/2021 +10.4+ +Form of Performance-Based Restricted Stock Unit Award Agreement, dated as of July 21, 2021. +10-Q 001-19514 10.9 8/9/2021 +10.5+ +Form of Indemnification Agreement. +S-4 333-199905 10.1 11/6/2014 +100 +Table of Contents +Index to Financial Statements +10.6+ +CEO Agreement Amendment by and among Timothy Cutt and Gulfport, effective as of September 2, 2021. +8-K 001-19514 10.1 9/7/2021 +10.7+ +Employment Agreement by and among William Buese and Gulfport, effective as of May 17, 2021. +8-K 001-19514 10.5 5/17/2021 +10.8+ +Employment Agreement between Gulfport Energy Corporation and Timothy Cutt, effective April 29, 2022. +10-Q 001-19514 10.2 5/4/2022 +10.9+ +Employment Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023. +8-K 001-19514 10.1 1/24/2023 +10.10+ +Indemnification Agreement, by and between Gulfport Energy Corporation and John Reinhart, effective January 24, 2023. +8-K 001-19514 10.2 1/24/2023 +10.11+ +Transition and Services Agreement, by and between Gulfport Energy Corporation and Timothy Cutt, effective February 1, 2023. +8-K 001-19514 10.3 1/24/2023 +10.12 +Cooperation Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and Silver Point Capital, L.P. +8-K 001-19514 10.3 5/17/2021 +10.13 +Registration Rights Agreement, dated as of May 17, 2021, by and among Gulfport Energy Corporation and the holders party thereto. +8-K 001-19514 10.2 5/17/2021 +10.14* +Third Amended and Restated Credit Agreement, dated as of October 14, 2021, by and among Gulfport Energy Corporation, as holdings, Gulfport Energy Operating Corporation, as the borrower, JPMorgan Chase Bank, N.A., the lenders party thereto, and the guarantors party thereto. +8-K 001-19514 10.1 10/14/2021 +10.15 +Borrowing Base Redetermination Agreement and First Amendment to Credit Agreement, dated as of May 2, 2022. +10-Q 001-19514 10.1 5/4/2022 +10.16 +Borrowing Base Reaffirmation Agreement and Second Amendment to Credit Agreement, dated as of October 31, 2022. +10-Q 001-19514 10.1 11/2/2022 +10.17+ +Form of Employment Agreement. +10-K 001-19514 10.19 3/1/2023 +10.18 +Borrowing Base Reaffirmation Agreement and Third Amendment to Credit Agreement, dated as of May 1, 2023. +10-Q 001-19514 10.3 5/3/2023 +10.19+ +Change in Control Severance Agreement. +10-Q 001-19514 10.2 8/2/2023 +10.20+ +Employment Agreement between Gulfport Energy Corporation and Michael Hodges, effective April 3, 2023. +8-K 001-19514 10.1 4/3/2023 +10.21+ +Indemnification Agreement, by and between Gulfport Energy Corporation and Michael Hodges, effective April 3, 2023. +8-K 001-19514 10.2 4/3/2023 +10.22 +C ommitment Increase, Borrowing Base Reaffirmation Agreement and Fourth Amendment to Credit Agreement dated Sep tem ber 12, 20 24. +8-K 001-19514 10.1 9/16/2024 +10.23+ +E mploy ment Agreement between Gulfport Energy Corporation and Patrick Craine, effective March 1, 2023. +X +101 +Table of Contents +Index to Financial Statements +10.24+ +Employment Agreement between Gulfport Energy Corporation and Matthew Rucker , effective March 1, 2023. +X +10.25+ +Employment Agreement between Gulfport Energy Corporation and Michael Sluiter, effective March 1, 2023. +X +10.26+ +Form of Performance-Based Restricted Stock Unit Award Agreement, dated as of April 29, 2022. +X +10.27+ +Form of Performance-Based Restricted Stock Unit Award Agreement, dated as of January 1, 2023. +X +10.28+ +Form of Non-Executive Restricted Stock Unit Award Agreement, dated as of May 24, 2023. +X +10.29+ +Form of Director Restricted Stock Unit Award Agreement, dated as of May 24, 2023. +X +10.30+ +F orm of Performance -Based Restricted Stock Unit Award Agreement, dated as of January 1, 2024 . +X +10.31+ +Form of Executive Restricted Stock Unit Award Agreement, dated as of February 29, 2024. +X +10.32+ +Form of Non-Executive Restricted Stock Unit Award Agreement, dated as of February 29, 2024. +X +10.33+ +Form of Director Restricted Stock Unit Award Agreement, dated as of May 23, 2024. +X +10.34+ +Form of Performance-Based Restricted Stock Unit Award Agreement, dated as of January 1, 2025. +X +10.35+ +Form of Executive Restricted Stock Unit Award Agreement, dated as of February 2 4 , 202 5 . +X +10.36+ +Form of Non-Executive Restricted Stock Unit Award Agreement, dated as of February 2 4 , 202 5 . +X +19 +I nsider Trading Policy. +X +21 +Subsidiaries of the Registrant. +X +23.1 +Consent of Netherland, Sewell & Associates, Inc. +X +23.2 +Consent of Grant Thornton LLP. +X +31.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +31.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. +X +102 +Table of Contents +Index to Financial Statements +32.1 +Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +32.2 +Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. +X +97.1 +Clawback Policy. +10-K 001-19514 97.1 2/28/2024 +99.1 +Report of Netherland, Sewell & Associates, Inc . +X +101.INS Inline XBRL Instance Document. X +101.SCH Inline XBRL Taxonomy Extension Schema Document. X +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X +101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X +104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) X +* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. ++ Management contract, compensatory plan or arrangement. +103 +Table of Contents +Index to Financial Statements +ITEM 16. FORM 10-K SUMMARY +None. +104 +Table of Contents +Index to Financial Statements +SIGNATURES +In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +Date: February 26, 2025 +GULFPORT ENERGY CORPORATION +By: /s/ MICHAEL HODGES +Michael Hodges +Chief Financial Officer +In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Date: February 26, 2025 By: /s/ JOHN REINHART +John Reinhart +President, Chief Executive Officer and Director +(Principal Executive Officer) +Date: February 26, 2025 By: /s/ MICHAEL HODGES +Michael Hodges +Chief Financial Officer +(Principal Financial Officer and Principal Accounting Officer) +Date: February 26, 2025 By: /s/ TIMOTHY J. CUTT +Timothy J. Cutt +Chairman of the Board +Date: February 26, 2025 By: /s/ DAVID WOLF +David Wolf +Lead Independent Director +Date: February 26, 2025 By: /s/ JASON MARTINEZ +Jason Martinez +Director +Date: February 26, 2025 By: /s/ JEANNIE POWERS +Jeannie Powers +Director +Date: February 26, 2025 By: /s/ DAVID REGANATO +David Reganato +Director +Date: February 26, 2025 By: /s/ MARY SHAFER-MALICKI +Mary Shafer-Malicki +Director +105 \ No newline at end of file diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/filing_metadata.csv b/raw/filings/0000874499/2024/0001628280-25-008043/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..183cc032939588359e0f8de0181adc4f6c01d99a --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000874499,GPOR,GULFPORT ENERGY CORP,10-K,2025-02-26,2024-12-31,2025-02-26T18:24:42.000Z,0001628280-25-008043,gpor-20241231.htm,10-K,14304176,1,1,https://www.sec.gov/Archives/edgar/data/874499/000162828025008043/gpor-20241231.htm,https://www.sec.gov/Archives/edgar/data/874499/000162828025008043/,2024,2024,1 diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/item1.txt b/raw/filings/0000874499/2024/0001628280-25-008043/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c703783c22b1d93f992a8976636ecdb9304b93b1 --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/item1.txt @@ -0,0 +1,355 @@ +ITEM 1. BUSINESS +Our Business +Gulfport is an independent natural gas-weighted exploration and production company with assets primarily located in the Appalachia and Anadarko basins. Our principal properties are located in eastern Ohio targeting the Utica and Marcellus and in central Oklahoma targeting the SCOOP Woodford and Springer formations. Gulfport's Predecessor was incorporated in the State of Delaware in July 1997. Our corporate headquarters are located in Oklahoma City, Oklahoma and shares of Gulfport's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol “GPOR”. Our corporate strategy is focused on the economic development of our asset base in an effort to generate sustainable free cash flow. +As of December 31, 2024, we had 4.0 Tcfe of proved reserves with a Standardized Measure of $1.75 billion and a PV-10 of $1.76 billion. See “ Definitions ” above for our definition of PV-10 (a non-GAAP financial measure) and “ Oil, Natural Gas and NGL Reserves and Estimation ” below for a reconciliation of our standardized measure of discounted future net cash flows (the most directly comparable GAAP measure) to PV-10. +Information About Us +Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of our recent news releases. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. +Emergence From Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code +On November 13, 2020, we, and certain of our subsidiaries, filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas. The Chapter 11 Cases were administered jointly under the caption In re Gulfport Energy Corporation, et al., Case No. 20-35562 (DRJ). The Bankruptcy Court confirmed the Plan and entered the confirmation order on April 28, 2021, and the Debtors emerged from the Chapter 11 Cases on the Emergence Date. On May 18, 2021, we began trading on the NYSE under the symbol “ GPOR ” . +Business Strategy +Gulfport aims to create sustainable value through the economic development of our significant resource plays in the Utica/Marcellus and SCOOP operating areas. Our strategy is to develop our assets in a safe, environmentally responsible manner, while generating sustainable cash flow, improving margins and operating efficiencies and returning capital to shareholders. To accomplish these goals, we generally allocate capital to projects we believe offer the highest rate of return and we deploy leading drilling and completion techniques and technologies in our development efforts. We believe our plan to generate free cash flow on an annual basis will allow us to further strengthen our balance sheet, return capital to shareholders and increase our resource depth through incremental leasehold opportunities that provide optionality to our future development plans. +2025 Outlook +Our 2025 capital expenditure program is expected to be in a range of $370 million to $395 million. In the Utica, we intend to complete drilling on approximately 17 gross (17.0 net) operated horizontal wells and commence sales on approximately 22 gross (21.9 net) operated horizontal wells. In the Marcellus, we intend to complete drilling on approximately 8 gross (8.0 net) operated horizontal wells and commence sales on approximately 4 gross (4.0 net) operated horizontal wells. In the SCOOP, we intend to complete drilling on approximately two gross (1.8 net) operated horizontal wells and commence sales on two gross (1.8 net) operated horizontal wells. We expect to fund these expenditures with our operating cash flow and borrowings under our Credit Facility. +We expect this drilling program to result in approximately 1,040 to 1,065 MMcfe per day of production in 2025. +4 +Table of Contents +Index to Financial Statements +Additionally, in 2025, we expect a continuation of shareholder return actions through our Repurchase Program. During 2024, we repurchased 1.2 million shares for $184.5 million at a weighted average price of $153.35 per share, leaving $415.9 million remaining on our Repurchase Program, which expires on December 31, 2025. +Operating Areas +Utica/Marcellus - The Utica covers hydrocarbon-bearing rock formations located in the Appalachian Basin of the United States and Canada. We have approximately 208,000 net reservoir acres located primarily in Belmont, Harrison, Jefferson and Monroe Counties in eastern Ohio where the Utica ranges in thickness from 600 to over 750 feet. +The Marcellus covers hydrocarbon-bearing rock formations that overlay the Utica. We have identified approximately 20,500 net reservoir acres of our existing leasehold for Marcellus development and have 22 PUD Marcellus locations within our Utica operating area. In 2023 we drilled, completed, and turned to sales two Marcellus wells and have plans to drill eight Marcellus wells and complete and turn to sales four Marcellus wells in 2025. Our Marcellus development area is approximately 3,500 to 4,500 feet shallower than the Utica. During 2024, we produced approximately 842 MMcfe per day net to our interests in Utica/Marcellus and it accounted for approximately 80% of our total production. +SCOOP - The SCOOP is a defined area that encompasses many of the top hydrocarbon producing counties in Oklahoma within the Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford, Sycamore and Springer formations. We have approximately 73,000 net reservoir acres (comprised of approximately 43,000 in the Woodford formation and approximately 30,000 in the Springer formation) located primarily in Garvin, Grady and Stephens Counties. The Woodford Shale across our position ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation consists of hydrocarbon-bearing interbedded shales and siliceous limestones ranging in thickness from 150 to over 450 feet and is overlain by the Caney Shale. The Springer formation across our position is comprised of a series of lenticular sand and shale units. The primary targets are a series of porous, low clay and organic-rich packages within the Goddard Shale member ranging in thickness from 50 to over 250 feet. During 2024, we produced approximately 212 MMcfe per day net to our interests in the SCOOP and it accounted for approximately 20% of our total production. +Oil, Natural Gas and NGL Reserves and Estimation +Reserve engineering is a subjective process of estimating volumes of economically recoverable oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the reserve estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “ Risk Factors ” contained elsewhere in this Form 10-K. +As discussed above, the process of estimating oil, natural gas and NGL reserves is complex and requires significant judgment. As a result, we have developed internal policies and controls for estimating and recording reserves. Estimates of proved developed and undeveloped reserves and related information are presented in accordance with the requirements of the SEC's rules for the Modernization of Oil and Gas Reporting. These rules permit the use of reliable technologies to estimate and categorize reserves and require the use of the unweighted average of the first-of-the-month commodity prices, adjusted for location and quality differentials, for the prior 12 months (unless contractual arrangements designate the price) to calculate economic producibility of reserves and the discounted cash flows reported as the Standardized Measure of Future Net Cash Flows Relating to Proved Reserves. Reliable technologies were used to support the undeveloped locations in the Utica/Marcellus and SCOOP operating areas. The Company used public and proprietary geologic and engineering data to establish continuity of the formation and its producing properties. This data included performance data, seismic data, open hole log information, petro-physical analysis of log data, mud logs, log cross-sections, gas sample analysis, statistical analysis and measurements of total organic content and thermal maturity. In our development area, these data demonstrated consistent and continuous reservoir characteristics. Refer to Note 20 of our consolidated financial statements for more information pertaining to our proved reserves and the preparation of such estimates. +Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 28 years of reservoir and operations experience. In addition, our geoscience staff has approximately 51 years combined industry experience and our reservoir staff has approximately 61 years combined experience. +5 +Table of Contents +Index to Financial Statements +During 2024, our total net natural gas, NGLs and oil proved reserves estimates attributable to the Company's interests were prepared by our engineers and Netherland, Sewell & Associates, Inc. (“NSAI”) conducted an audit of the proved reserves as of December 31, 2024. NSAI is an independent petroleum engineering firm and were selected for their historical experience and geographic expertise in engineering similar resources. In the course of its audit, NSAI conducted a detailed review of properties making up approximately 85% of the total proved reserves and accounting for approximately 95% of the present worth of those reserves. The estimates prepared by the Company and audited by NSAI were within the recommended 10% tolerance threshold set forth in the Standards Pertaining to the Estimation and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers A copy of the summary reserve report is included as Exhibit 99.1 to this Annual Report on Form 10-K. Our internal staff of petroleum engineers and geoscience professionals work closely with NSAI to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. As needed, we provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure and status of permits. Reserve estimates for the years ended 2023 and 2022, were prepared by NSAI for 100% of our operating areas. +Internal Controls Over Proved Reserve Estimates +Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following: +• review and verification of historical production, operating, marketing and capital data, which data is based on actual production as reported by us; +• verification of property ownership by our land department; +• audit of year-end reserve estimates by NSAI; +• direct reporting responsibilities by our reservoir engineering department to our Chief Executive Officer; +• review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions; +• provision of quarterly updates to our Board of Directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves; +• annual review by our Board of Directors of our year-end reserve report and year-over-year changes in our proved reserves; +• annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments, including the substitution, removal or deferral of PUD locations; and +• annual review and approval by our senior management and our Board of Directors of a multi-year development plan. +6 +Table of Contents +Index to Financial Statements +The tables below set forth information as of December 31, 2024, with respect to our estimated proved developed and undeveloped oil, natural gas and NGL reserves, the associated estimated future net revenue, the PV-10 and the standardized measure. None of the estimated future net revenue, PV-10 nor the standardized measure are intended to represent the current market value of the estimated oil, natural gas and NGL reserves we own. All of our estimated reserves are located within the United States. +December 31, 2024 +Oil +(MMBbl) Natural Gas +(Bcf) NGL +(MMBbl) Total +(Bcfe) +Utica & Marcellus +Proved developed (1) +4 1,427 8 1,498 +Proved undeveloped (1) +13 1,189 36 1,480 +Total proved (1) +17 2,616 44 2,978 +SCOOP +Proved developed 4 451 23 611 +Proved undeveloped 2 289 13 380 +Total proved 5 740 36 991 +Total +Proved developed 7 1,879 31 2,109 +Proved undeveloped 15 1,478 49 1,861 +Total proved 22 3,356 80 3,969 +Totals may not sum or recalculate due to rounding. +_____________________ +(1) Includes approximately 12 Bcfe and 174 Bcfe of net developed and undeveloped reserves, respectively, located in the Marcellus target formation. +December 31, 2024 +Proved Developed Proved Undeveloped Total Proved +($ in millions) +Estimated future net revenue (1) +$ 1,620 $ 1,876 $ 3,496 +Present value of estimated future net revenue (PV-10) (1) +$ 1,059 $ 699 $ 1,757 +Standardized measure (1) +$ 1,747 +Totals may not sum due to rounding. +_____________________ +(1) Estimated future net revenue represents the estimated future revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions as of December 31, 2024, and assuming commodity prices as set forth below. For the purpose of determining prices used in our reserve reports, we used the unweighted arithmetic average of the prices on the first day of each month within the 12-month period ended December 31, 2024. The prices used in our PV-10 measure were the average WTI Spot price of $76.32 per barrel and the average Henry Hub Spot price of $2.13 per MMBtu, before basis differential adjustments. These prices should not be interpreted as a prediction of future prices, nor do they reflect the value of our commodity derivative instruments in place as of December 31, 2024. The amounts shown do not give effect to non-property-related expenses, such as corporate general and administrative expenses and debt service, or to depreciation, depletion and amortization. The present value of estimated future net revenue typically differs from the standardized measure because the former does not include the effects of estimated future income tax expense of $10 million as of December 31, 2024. +Management uses PV-10, which is calculated without deducting estimated future income tax expenses, as a measure of the value of the Company's current proved reserves and to compare relative values among peer companies. We also understand that securities analysts and rating agencies use this measure in similar ways. While estimated future net revenue and the present value thereof are based on prices, costs and discount factors which may be consistent from company to company, the standardized measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows or any other measure of a company's financial or operating performance presented in accordance with GAAP. +A reconciliation of the standardized measure of discounted future net cash flows to PV-10 is presented above. Neither PV-10 nor the standardized measure of discounted future net cash flows purport to represent the fair value of our proved oil and gas reserves. +7 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved reserves during 2024 (in Bcfe): +Proved Reserves, December 31, 2023 4,214 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 547 +Revisions of prior reserve estimates (406) +Current production (386) +Proved Reserves, December 31, 2024 3,969 +Total may not sum due to rounding. +Extensions and discoveries. These are additions to our proved reserves that result from extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery. Extensions of approximately 547 Bcfe of proved reserves were primarily attributable to the continued development of our Utica/Marcellus and SCOOP acreage. We added 46 PUD locations in the Utica/Marcellus which included 33 Utica locations for 341 Bcfe and 13 Marcellus locations for 92 Bcfe. In the SCOOP, we added 16 PUD locations for 114 Bcfe. +Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs. +We experienced total downward revisions of 406 Bcfe in estimated proved reserves. These consisted of upward revisions of 16 Bcfe as a result of positive well performance and 171 Bcfe due to an increase in working interest and net revenue interest as a result of our successful leasing efforts through 2024. These were offset by downward revisions of 488 Bcfe which were associated with commodity price changes. Commodity prices experienced volatility throughout 2024 and the 12-month average price for natural gas decreased from $2.64 per MMBtu for 2023 to $2.13 per MMBtu for 2024, the 12-month average price for NGL decreased from $31.42 per barrel for 2023 to $31.30 per barrel for 2024, and the 12-month average price for crude oil decreased from $78.21 per barrel for 2023 to $76.32 per barrel for 2024. Additionally, downward revisions of 172 Bcfe were primarily a result of development schedule changes with some PUD well design changes. The schedule changes moved the development of 11 Utica/Marcellus PUD locations and 6 SCOOP PUD locations beyond the SEC requirement of developing these wells five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. Finally, upward revisions of 67 Bcfe were a result of a combination of various economic assumption updates. +Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2024, 2023 and 2022, and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information , in Note 20 of our consolidated financial statements. +Proved Undeveloped Reserves +As of December 31, 2024, our PUDs totaled 1,478 Bcf of natural gas, 15 MMBbl of oil and 49 MMBbl of NGL, for a total of 1,861 Bcfe. Approximately 80% and 20% of our PUD reserves at year-end 2024 were located in Utica/Marcellus and SCOOP, respectively. Our PUDs will be converted from undeveloped to developed as the applicable wells commence production or when there are no material incremental completion capital expenditures associated with such proved developed reserves. +We record PUD locations only after a development plan has been approved by our senior management and Board of Directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells. +8 +Table of Contents +Index to Financial Statements +The following table summarizes the changes in our estimated proved undeveloped reserves during 2024 (in Bcfe): +Proved Undeveloped Reserves, December 31, 2023 2,011 +Sales of oil and natural gas reserves in place — +Extensions and discoveries 547 +Conversion to proved developed reserves (341) +Revisions of prior reserve estimates (357) +Proved Undeveloped Reserves, December 31, 2024 1,861 +Total may not sum due to rounding. +Extensions and discoveries. Our extensions of approximately 547 Bcfe were primarily attributed to the addition of 62 PUD locations as a result of our current five-year development plan that is focused on generating sustainable cash flow. These additions included 46 PUD locations in the Utica/Marcellus and 16 PUD locations in the SCOOP. +Conversion to proved developed reserves. Our 2024 development activities resulted in the conversion of approximately 341 Bcfe into proved developed producing reserves, attributable to 16 PUD locations in the Utica and 5 PUD locations in the SCOOP. These 21 PUDs represent a conversion rate of 13% for 2024. +Revision of prior reserve estimates. We experienced total downward revisions of 357 Bcfe in estimated proved undeveloped reserves. This included 300 Bcfe of downward revisions associated with commodity price changes. Commodity prices experienced volatility throughout 2024 and the 12-month average price for natural gas decreased from $2.64 per MMBtu for 2023 to $2.13 per MMBtu for 2024, the 12-month average price for NGL decreased from $31.42 per barrel for 2023 to $31.30 per barrel for 2024, and the 12-month average price for crude oil decreased from $78.21 per barrel for 2023 to $76.32 per barrel for 2024. Additionally, downward revisions of 172 Bcfe were associated with changes in our development schedule. The schedule changes moved the development of 11 Utica/Marcellus PUD locations and 6 SCOOP PUD locations beyond the SEC requirement of developing PUDs five years from initial booking. The development schedule changes reflect our ongoing commitment to optimizing the long-term plan to best develop our asset and maximize cash flow, and overall economic returns. These locations excluded from our SEC reserves report remain in Gulfport's development plan. These downward revisions were offset by upward revisions of 116 Bcfe in estimated proved reserves from a combination of changes including working interest and net revenue interest and well forecasts. +Costs incurred relating to the development of PUDs were approximately $326.4 million in 2024. +All PUD locations included in our 2024 reserve report are scheduled to be drilled within five years of initial booking. +As of December 31, 2024, 1.20% of our total proved reserves were classified as proved developed non-producing. +PV-10 Sensitivities +As noted above, our proved reserves at December 31, 2024, were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for 2024 of $76.32 per barrel and $2.13 per MMBtu. Holding production and development costs constant, if SEC pricing were $83.95 per barrel and $2.34 per MMBtu, or a 10% increase, this would have resulted in an increase of 87 Bcfe of our total proved reserves and a $0.54 billion increase in PV-10 value at December 31, 2024. Holding production and development costs constant, if SEC pricing were $68.69 per barrel and $1.92 per MMBtu, or a 10% decrease, this would have resulted in a decrease of 494 Bcfe of our total proved reserves and a $0.51 billion decrease in PV-10 value at December 31, 2024. For the low price scenario 128 PUDs were PV-10 economic. +9 +Table of Contents +Index to Financial Statements +Acreage +The following table presents our total gross and net developed and undeveloped acres as of December 31, 2024: +Developed +Acreage Undeveloped +Acreage +Field Gross Net Gross Net +Utica & Marcellus 161,391 133,638 77,387 74,359 +SCOOP 49,922 35,896 9,829 7,134 +Total 211,313 169,534 87,216 81,493 +Of our leases that are not held by production, most have a five-year primary term, many of which include options to extend the primary term. We manage lease expirations to ensure that we do not experience unintended material expirations. Our leasehold management efforts include scheduling our operations to establish production in paying quantities in order to hold leases prior to the expiration dates, paying the prescribed lease extension payments, planning non-core divestitures or strategic acreage trades with other operators to high-grade our lease inventory and letting some leases expire that are no longer part of our development plans. The following table sets forth the potential expiration periods of gross and net undeveloped leasehold acres as of December 31, 2024: +Undeveloped Acres +Years Ending December 31, Gross Acres Net Acres +2025 2,203 2,195 +2026 3,682 3,661 +2027 2,812 2,775 +After 2027 18,673 18,667 +Held by production 59,846 54,195 +Total 87,216 81,493 +Productive Wells +The following table presents our total gross and net productive wells, expressed separately for oil and gas, as of December 31, 2024: +NRI/WI Productive +Oil Wells Productive +Gas Wells Total Wells +Field Percentages Gross Net Gross Net Gross Net +Utica & Marcellus 49.66/60.84 15 5.15 712 437.2 727 442.4 +SCOOP 21.41/26.49 119 12.23 531 159.92 650 172.1 +Total (1) +143 17.4 1,411 597.1 1,554 614.5 +_____________________ +(1) We also have override/royalty interests in 177 wells with an average NRI of 0.6%, which are not material to our operations. Totals may not sum due to rounding. +10 +Table of Contents +Index to Financial Statements +Drilling Activity +The following table sets forth information with respect to operated wells drilled during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, regardless of whether they produce a reasonable rate of return. +Year Ended December 31, +2024 2023 2022 +Gross Net Gross Net Gross Net +Development: +Productive 21 19.8 24 21.9 25 21.7 +Dry — — — — — — +Total 21 19.8 24 21.9 25 21.7 +Exploratory: +Productive — — — — — — +Dry — — — — — — +Total — — — — — — +The following table presents activity by operating area for the year ended December 31, 2024: +Operated Non-Operated +Field Drilled Turned to Sales Drilled Turned to Sales +Gross Net Gross Net Gross Net Gross Net +Utica & Marcellus (1) +18.0 17.4 16.0 15.4 16.0 0.1 8.0 0.1 +SCOOP (2) +3.0 2.4 3.0 2.4 18.0 0.2 16.0 0.1 +Total 21.0 19.8 19.0 17.8 34.0 0.3 24.0 0.2 +_____________________ +(1) Of the 18 gross wells drilled in 2024, 10 were completed as producing wells and eight were in various stages of drilling and completion as of December 31, 2024. +(2) The three gross wells that were drilled in 2024 were completed as producing wells as of December 31, 2024. +11 +Table of Contents +Index to Financial Statements +Production, Prices and Production Costs +The following table presents our production volumes, average prices received and average production costs during the periods indicated (sales totals in thousands): +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Natural gas sales +Natural gas production volumes (MMcf) 354,154 350,306 322,366 +Natural gas production volumes (MMcf) per day 968 960 883 +Total sales $ 714,160 $ 831,812 $ 1,998,452 +Average price without the impact of derivatives ($/Mcf) $ 2.02 $ 2.37 $ 6.20 +Impact from settled derivatives ($/Mcf) $ 0.80 $ 0.42 $ (3.11) +Average price, including settled derivatives ($/Mcf) $ 2.82 $ 2.79 $ 3.09 +Oil and condensate sales +Oil and condensate production volumes (MBbl) 1,459 1,363 1,610 +Oil and condensate production volumes (MBbl) per day 4 4 4 +Total sales $ 101,589 $ 99,854 $ 147,444 +Average price without the impact of derivatives ($/Bbl) $ 69.64 $ 73.27 $ 91.58 +Impact from settled derivatives ($/Bbl) $ 0.11 $ (2.53) $ (24.32) +Average price, including settled derivatives ($/Bbl) $ 69.75 $ 70.74 $ 67.26 +NGL sales +NGL production volumes (MBbl) 3,818 4,386 4,483 +NGL production volumes (MBbl) per day 10 12 12 +Total sales $ 112,855 $ 119,717 $ 184,963 +Average price without the impact of derivatives ($/Bbl) $ 29.56 $ 27.29 $ 41.26 +Impact from settled derivatives ($/Bbl) $ (0.56) $ 2.07 $ (2.80) +Average price, including settled derivatives ($/Bbl) $ 29.00 $ 29.36 $ 38.46 +Natural gas, oil and condensate and NGL sales +Natural gas equivalents (MMcfe) 385,814 384,802 358,924 +Natural gas equivalents (MMcfe) per day 1,054 1,054 983 +Total sales $ 928,604 $ 1,051,383 $ 2,330,859 +Average price without the impact of derivatives ($/Mcfe) $ 2.41 $ 2.73 $ 6.49 +Impact from settled derivatives ($/Mcfe) $ 0.73 $ 0.40 $ (2.94) +Average price, including settled derivatives ($/Mcfe) $ 3.14 $ 3.13 $ 3.55 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.18 $ 0.18 $ 0.18 +Average taxes other than income ($/Mcfe) 0.08 0.09 0.17 +Average transportation, gathering, processing and compression ($/Mcfe) 0.91 0.91 1.00 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.17 $ 1.17 $ 1.34 +Totals may not sum or recalculate due to rounding. +12 +Table of Contents +Index to Financial Statements +The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2024: +Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022 +Utica & Marcellus +Net Production +Natural gas (MMcf) 296,548 279,428 246,123 +Oil (MBbl) 847 255 244 +NGL (MBbl) 1,072 856 885 +Total (MMcfe) 308,060 286,095 252,895 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 1.99 $ 2.34 $ 6.14 +Oil ($/Bbl) $ 66.84 $ 70.18 $ 90.60 +NGL ($/Bbl) $ 37.01 $ 33.63 $ 48.21 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.16 $ 0.16 $ 0.17 +Average taxes other than income ($/Mcfe) 0.06 0.05 0.06 +Average transportation, gathering, processing and compression ($/Mcfe) 0.93 0.97 1.08 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.15 $ 1.18 $ 1.31 +SCOOP +Net Production +Natural gas (MMcf) 57,605 70,878 76,242 +Oil (MBbl) 612 1,108 1,366 +NGL (MBbl) 2,746 3,530 3,598 +Total (MMcfe) 77,753 98,707 106,024 +Average price without the impact of derivatives: +Natural gas ($/Mcf) $ 2.13 $ 2.53 $ 6.38 +Oil ($/Bbl) $ 73.51 $ 73.98 $ 91.71 +NGL ($/Bbl) $ 26.65 $ 25.76 $ 39.56 +Production Costs: +Average lease operating expenses ($/Mcfe) $ 0.28 $ 0.25 $ 0.20 +Average taxes other than income ($/Mcfe) 0.13 0.17 0.38 +Average transportation, gathering, processing and compression ($/Mcfe) 0.83 0.73 0.78 +Total lease operating expenses, midstream costs and taxes other than income ($/Mcfe) $ 1.24 $ 1.15 $ 1.36 +Our Investments +Grizzly Oil Sands . We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.5% interest in Grizzly. As of December 31, 2024, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly's operations have been suspended since 2015. Additionally, Grizzly had no proved reserves as of December 31, 2024. We elected to cease funding capital calls in 2019, and we have no obligation to fund any future projects Grizzly may consider pursuing. Failure to fund capital calls will lead to continued dilution of our equity ownership interest in Grizzly. +13 +Table of Contents +Index to Financial Statements +Marketing +The principal function of our marketing operations is to provide natural gas, oil and NGL marketing services, including securing and negotiating commodity transactions, gathering, hauling, processing and transportation services, contract administration and nomination services for production from Gulfport-marketed wells. Generally, natural gas and NGL production is sold to purchasers under both spot and term transactions. Oil production is sold under both spot and term transactions with the majority of our sales contracts being shorter term in nature. +We have entered into long-term gathering, processing and transportation contracts with various parties that reserve capacity for fixed, determinable quantities of production over specified periods of time. Some contracts require us to make payments for any shortfalls in delivering or transporting minimum volumes under these commitments. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including risk mitigation and satisfaction of our firm transportation delivery commitments. These marketing activities often enhance the value of our production by aggregating volumes and allowing improved flexibility in relation to deal structure, size and counterparty exposure whether through intermediary markets or direct end markets. See Note 17 of our consolidated financial statements for further discussion of our commitments. +Major Customers +Our total natural gas, oil and NGL sales, before the effects of hedging, to major customers (purchasers in excess of 10% of total natural gas, oil and NGL sales) for the years ended December 31, 2024, 2023 and 2022 were as follows: +% of Sales +Year Ended December 31, 2024 +Vitol Inc. 15 % +Year Ended December 31, 2023 +Vitol Inc. 12 % +Year Ended December 31, 2022 +ECO-Energy 20 % +Clearwater 11 % +Competition +The oil and natural gas industry is intensely competitive, and we compete with many other companies that have greater resources than we have. Competition can negatively impact our ability to successfully source quality vendors, service providers, employees and contractors to secure optimal pipeline access and end markets in which to sell our production, to acquire new properties, and our search for, and the development of, reserves. Many of our competitors not only explore for and produce oil and natural gas, but also have midstream and further downstream operations and market a variety of hydrocarbon products on a regional, national or worldwide basis. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include renewable sources such as wind or solar energy in addition to coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas. +Seasonality +Gulfport drills and completes wells throughout the year, but adverse weather conditions can impact drilling, completion, and field operations, as well as third-party midstream and downstream pipeline operations, which can impact overall production volumes. Seasonal anomalies can minimize or exaggerate the impact on these operations, while extreme weather events can materially constrain our operations for short periods of time. +14 +Table of Contents +Index to Financial Statements +Title to Oil and Natural Gas Properties +It is customary in the oil and natural gas industry to make only a preliminary review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations at the time we are preparing to develop the undeveloped leases and when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to certain imperfections in title, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations. +Regulation - Environment, Health and Safety +Exploration and Production, Environmental, Health and Safety, and Occupational Laws and Regulations +Our operations are subject to federal, tribal, state, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to, the following: +• reporting of workplace injuries and illnesses; +• industrial hygiene monitoring; +• worker protection and workplace safety; +• approval or permits to drill and to conduct operations; +• provision of financial assurances (such as bonds) covering drilling and well operations; +• calculation and disbursement of royalty payments and production taxes; +• seismic operations and data; +• location, drilling, cementing and casing of wells; +• well design and construction of pad and equipment; +• construction and operations activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species, their habitats, or sites of cultural significance; +• method of completing wells; +• hydraulic fracturing; +• water withdrawal; +• well production and operations, including processing and gathering systems; +• emergency response, contingency plans and spill prevention plans; +• air emissions and fluid discharges; +• climate change; +• use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations; +• surface usage, maintenance, monitoring and the restoration of properties associated with well pads, pipelines, impoundments and access roads; +• plugging and abandoning of wells; and +• transportation of production. +In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases (“GHG”). We consider the costs of environmental, safety and health protection and compliance to be necessary, manageable parts of our business. We have been able to plan for and comply with environmental, safety and health laws and regulations without materially altering our operating strategy or incurring significant unreimbursed expenditures. However, based on policy and regulatory trends and increasingly stringent laws, our capital expenditures and operating expenses related to compliance with the protection of the environment, safety and health have increased over the years and may continue to increase. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. See the Risk Factors described in Item 1A. of this report for further discussion of governmental regulation and ongoing regulatory changes, including with respect to environmental matters. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters. +15 +Table of Contents +Index to Financial Statements +Our operations are also subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, the rate of production allowable from oil and gas wells, and the unitization or pooling of oil and gas properties. In the United States, some states allow the compulsory pooling or integration of tracts to facilitate exploration and development. Other states rely on voluntary pooling of lands and leases which may make it more difficult to develop oil and gas properties. In addition, federal and state conservation laws generally limit the venting or flaring of natural gas, and state conservation laws impose certain requirements regarding the ratable purchase of production. These regulations often impose additional operational costs to us and can also limit the amounts of oil and gas we can produce from our wells and the number of wells or the locations at which we can drill. +Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the potential impacts of hydraulic fracturing, which could spur further action toward federal, state and/or local legislation and regulation. Further restrictions of hydraulic fracturing could reduce the amount of natural gas, oil and NGL that we are ultimately able to produce in commercial quantities from our properties. +Certain of our U.S. natural gas and oil leases are granted or approved by the federal government and administered by the Bureau of Land Management (BLM) or Bureau of Indian Affairs (BIA) of the Department of the Interior. Such leases require compliance with detailed federal regulations and orders that regulate, among other matters, drilling and operations on lands covered by these leases and calculation and disbursement of royalty payments to the federal government, tribes or tribal members. The federal government has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding, venting and flaring, oil and gas measurement and royalty payment obligations for production from federal lands. If future developments result in additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations. Permitting activities on federal lands are also subject to frequent delays. +Delays in obtaining permits or an inability to obtain new permits or permit renewals could inhibit our ability to execute our drilling and production plans. Failure to comply with applicable regulations or permit requirements could result in revocation of our permits, inability to obtain new permits and the imposition of fines and penalties. +Operating Hazards and Insurance +The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, we could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Our horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. +We maintain a control of well insurance policy with a minimum limit of $25 million for single well limits and $37.5 million limit for multi-well pads. This policy insures against certain sudden and accidental risks associated with drilling, completing and operating our wells. This insurance may not be adequate to cover all losses or exposure to liability. We also carry a $51 million comprehensive general liability umbrella insurance program. In addition, we maintain a $10 million pollution liability insurance policy providing coverage for gradual pollution related risks and in excess of the general liability policy for sudden and accidental pollution risks. We provide workers' compensation insurance coverage to employees in all states in which we operate, as well as auto liability for our company vehicles. While we believe these policies are customary in the industry, they do not provide complete coverage against all operating risks, and policy limits scale to our working interest percentage in certain situations. In addition, our insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. Our insurance coverage may not be sufficient to cover every claim made against us or may not be commercially available for purchase in the future. +16 +Table of Contents +Index to Financial Statements +We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans go through a technical review every five years and are updated as necessary. As required by applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean-up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean-up services during each of 2024, 2023 and 2022 were immaterial. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. +Human Capital Management +Employees +As of December 31, 2024, we had 235 employees, an increase of approximately 4% from the 226 employees as of December 31, 2023. All of our employees are non-bargaining. +The attraction and retention of qualified employees continues to be one of our highest priorities. We focus on making substantive improvements to key areas that impact our employees. During 2024, we continued making significant investments in our talent management and retention processes, including increasing funds allocated to annual salary increases, short-term incentive payments, long-term incentive equity awards, 401(k) matches for eligible employees, and other enhancements to our benefits offerings. We remain committed to providing fair and competitive compensation programs and adequate development and advancement opportunities to our employees. We believe these practices serve as talent acquisition and retention tools, as our employees' continued engagement and commitment to the Company is critical to our success. +Over the course of 2024, Gulfport continued to develop and revise Company policies, including those intended to implement our Business Code of Conduct and Ethics, which provides a framework for how we interact with our employees, vendors and other stakeholders when conducting our operations. To that end, we provided all of our employees with annual trainings focused on the guidelines, rules, and principles that must be followed when acting on the Company's behalf. We remain committed to maintaining the highest standards of business ethics. +Health, Safety & Environment +Safety is at the forefront of everything we do. We have a robust annual training program, including environmental, health, and safety topics. Our safety program, WORK SAFE, is comprised of twelve key topics including critical tasks and cultural conditions. We hold regular safety briefings to discuss daily operations and routinely have safety stand-down meetings highlighting potential risks. Every employee is empowered to use their stop-work authority to cease operating if work is being performed in an unsafe manner. We monitor employee safety by establishing annual company-wide key safety metrics tied to leading indicators (i.e., incident reporting and investigations, hazard observations, safety and health meetings) and lagging indicators (i.e., injury rates and preventable motor vehicle accidents). +As part of our focus on continuous improvement, we monitor and communicate key environmental and safety metrics both internally and externally. Trend analysis guides us to make operational changes and policy updates as necessary to protect our employees, the public and the environment. We establish and carefully track key environmental and safety metrics that are a component of every employee’s incentive compensation opportunity annually. +We have established several programs to ensure that our employees and external partners are appropriately trained to perform the critical work we do safely and effectively. We continued to reinforce our WORK SAFE program and provided training to leaders on reinforcement strategies. Additionally, we continued the WORK GREEN program, which focuses on protecting the air, land and water where we operate and includes community-based volunteer events targeting environmental clean-up and habitat improvement initiatives. An environmental training on the elements of WORK GREEN was created and delivered to all employees. +17 +Table of Contents +Index to Financial Statements +Training & Development +Gulfport invests in our employees' professional growth to build strong teams and develop leaders for today and the future. We build our dynamic team of industry-leading professionals by engaging them in interesting and rewarding work and providing training and development opportunities. We utilize training sessions with content developed by experts in the safety, legal, information security, and regulatory compliance fields, and we offer a blend of training sessions through both computer-based modules and live, instructor-led sessions. We believe our training efforts support a compliant safety-first mindset in everything we do. We continue to provide professional and workplace-related training resources to employees through universities, electronic content services and specialized courses related to our industry through our tuition reimbursement program or third-party providers. +Executive Officers +John Reinhart, President, Chief Executive Officer and Director +On January 18, 2023, the Board of Directors appointed Mr. Reinhart, 56, as President, Chief Executive Officer and Director, effective as of January 24, 2023. Mr. Reinhart joined the Company with over two decades of oil and gas industry leadership experience. Most recently, he served as President, Chief Executive Officer and member of the board of directors of Montage Resources Corporation where he led actions that positioned Montage as an attractive strategic partner with sufficient scale, low debt profile and achievement of top-quartile operational and financial metrics. Mr. Reinhart previously served as President, Chief Executive Officer and member of the board of directors of Blue Ridge Mountain Resources and as Chief Operating Officer at Ascent Resources. He started his oil and gas career at Schlumberger before joining Chesapeake Energy Corporation, where he held operations roles with increasing responsibility. Mr. Reinhart began his career in the United States Army, serving tours in Panama and Iraq. Mr. Reinhart graduated from West Virginia University with a Bachelor of Science degree in Mechanical Engineering. +Michael Hodges, Executive Vice President and Chief Financial Officer +On April 3, 2023, the Board of Directors appointed Mr. Hodges, 46, as Executive Vice President and Chief Financial Officer. Most recently, Mr. Hodges served as Senior Vice President, Finance and Accounting at Leon Capital Group. Prior to joining Leon Capital, he was the Executive Vice President and Chief Financial Officer for Montage Resources Corporation until its merger with Southwestern Energy Company in November 2020. From 2012 until joining Montage Resources in 2018, Mr. Hodges served as the Chief Financial Officer for three upstream energy companies focused on near-term value creation through the acquisition and early-stage development of oil and natural gas resources. Mr. Hodges received his Bachelor of Business Administration in Finance from the University of Oklahoma and a Master of Science in Energy Management from Oklahoma City University and is a Certified Public Accountant in the State of Oklahoma. +Patrick Craine, Executive Vice President and Chief Legal and Administrative Officer +Mr. Craine, 52, has served as Chief Legal and Administrative Officer since June 2021 and joined Gulfport as Executive Vice President, General Counsel and Corporate Secretary in May 2019. Prior to joining the Company, Mr. Craine served as Deputy General Counsel – Chief Risk and Compliance Officer at Chesapeake Energy Corporation. Prior to joining Chesapeake in 2013, Mr. Craine was a partner with Bracewell LLP, a global law firm, where his practice focused on securities and corporate regulatory matters and investigations. Before Mr. Craine entered private practice, he served as a lawyer with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority where he held leadership positions in their Oil and Gas Task Forces. Mr. Craine has over 25 years of extensive senior-level experience handling a broad range of securities, corporate, regulatory, governance, compliance and litigation matters, with particular expertise in the energy industry. Mr. Craine received his Bachelor of Arts degree, summa cum laude, Phi Beta Kappa, from Wabash College, and his Juris Doctorate, cum laude, from the Southern Methodist University Dedman School of Law. +18 +Table of Contents +Index to Financial Statements +Matthew Rucker, Executive Vice President and Chief Operating Officer +Mr. Rucker, 39, joined Gulfport as the Senior Vice President of Operations in March 2023. On February 24, 2025, Matthew Rucker was promoted to Executive Vice President and Chief Operating Officer. He joined Gulfport from Javelin Energy Partners where he previously served as Vice President of Production Operations starting in August 2022. Mr. Rucker joined Javelin in July 2022 as the Vice President of Business Development. Prior to joining Javelin, Mr. Rucker served as the Executive Vice President, Chief Operating Officer for Montage Resources Corporation following Montage’s successful business combination transaction with Blue Ridge Mountain Resources in June 2020. Prior to Montage, Mr. Rucker served as Vice President, Resource Planning and Development of Blue Ridge from 2016 to 2020. Prior to joining Blue Ridge, Mr. Rucker served as a Production Superintendent for Chesapeake Energy Corporation from January 2014 to October 2016, overseeing Chesapeake’s Utica Shale production. As a member of Chesapeake’s Eastern Division leadership team, Mr. Rucker focused on the safe and efficient optimization of production in the Utica Shale and led an operating team of over 45 employees. During his service at Chesapeake, Mr. Rucker held several engineering positions in the Marcellus and Utica Shale asset teams within reservoir, primarily focused on strategic joint ventures, divestitures, acquisitions and resource development planning. Mr. Rucker received his Bachelor of Science degree in Petroleum Engineering from Marietta College and a Master of Business Administration in Energy from Texas Christian University. He serves on the Marietta College Industry Advisory Council and is a member of the Society of Petroleum Engineers. +Michael Sluiter, Senior Vice President of Reservoir Engineering +Mr. Sluiter, 52, joined Gulfport as the Senior Vice President of Reservoir Engineering in December 2018 from Noble Energy, Inc., where he most recently served as the Permian Basin Business Unit Manager. Prior to that role, he spent over 17 years developing his skills and expertise in unconventional resource development, reservoir engineering, subsurface development, business development/M&A, and leadership at Noble Energy, Santos Australia and Santos USA. Mr. Sluiter began his career as a wireline field services engineer for Schlumberger in Thailand. Mr. Sluiter is a graduate of the University of Sydney, Australia, with a Bachelor of Science degree in Chemical Engineering. +Lester Zitkus, Senior Vice President of Land +Mr. Zitkus, 59, has served as Senior Vice President of Land since January 2017 and joined the Company as Vice President of Land in March 2014. Prior to joining the Company, Mr. Zitkus served as an independent consultant from October 2013 to March 2014 and as Vice President of Land for Chesapeake Energy Corporation from May 2007 to October 2013. During his 20-year tenure with Equitable Resources Inc. (now EQT Corp.), he held various positions, including Vice President of Operations and Senior Vice President of Land, between 1987 and 2007. He holds a degree in Mineral Land Management from the University of Evansville. Mr. Zitkus is a member of the American Association of Professional Landmen and Past Regional Director of the Independent Petroleum Association of America. +There is no family relationship between any of our officers or between any of them and the Company's Board of Directors. The executive officers serve at the pleasure of the Company's Board of Directors. +19 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/item13.txt b/raw/filings/0000874499/2024/0001628280-25-008043/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..7e9c09797d8158b3d29d370ab7c60e0d42b206ef --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information called for by this Item 13 is incorporated herein by reference to the 2025 Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/item9a.txt b/raw/filings/0000874499/2024/0001628280-25-008043/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..5449472f0446c66204767e44f4fee66f9c7db457 --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/item9a.txt @@ -0,0 +1,32 @@ +ITEM 9A. CONTROLS AND PROCEDURES +Evaluation of Disclosure Control and Procedures +Under the direction of our Chief Executive Officer and our Chief Financial Officer, and with participation of management, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. +As of December 31, 2024, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2024, our disclosure controls and procedures are effective. +In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their goals under all potential future conditions. +Changes in Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting during the quarter ended December 31, 2024, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. +Management's Report on Internal Control Over Financial Reporting +Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. +Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2 013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2024. +Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2024 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2024, as stated in their accompanying report. +97 +Table of Contents +Index to Financial Statements +Report of Independent Registered Public Accounting Firm +Board of Directors and Stockholders +Gulfport Energy Corporation +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2024, and our report dated February 26, 2025 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Oklahoma City, Oklahoma +February 26, 2025 +98 +Table of Contents +Index to Financial Statements \ No newline at end of file diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/rp_note.txt b/raw/filings/0000874499/2024/0001628280-25-008043/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..3152e6b8413186085af60915fc3775c4ca512fb5 --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/rp_note.txt @@ -0,0 +1,14 @@ +16. RELATED PARTY TRANSACTIONS +Stock Repurchase Program +The following table summarizes the Company's purchases of its common stock from Silver Point Capital, L.P. for the years ended December 31, 2023 and 2024 (dollar value of shares purchased shown in thousands): +Date of Transaction Shares Repurchased Repurchase Amount Closing Date +June 22, 2023 (1) +215,060 $ 20,430 June 26, 2023 +December 07, 2023 146,455 $ 20,000 December 11, 2023 +March 19, 2024 97,219 $ 15,002 March 19, 2024 +September 19, 2024 170,000 $ 24,863 September 25, 2024 +November 21, 2024 150,000 $ 26,340 December 03, 2024 +December 19, 2024 79,410 $ 12,929 December 26, 2024 +_____________________ +(1) Concurrent with the closing of the June 2023 offering transaction discussed in Note 6 . +The repurchases are part of the Company's existing Repurchase Program. Upon closing of the transactions, the repurchased common stock was canceled. \ No newline at end of file diff --git a/raw/filings/0000874499/2024/0001628280-25-008043/rpt_disclosure.txt b/raw/filings/0000874499/2024/0001628280-25-008043/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..24c9b540ac49d1b944c9ed28f784e772eca5e09e --- /dev/null +++ b/raw/filings/0000874499/2024/0001628280-25-008043/rpt_disclosure.txt @@ -0,0 +1,7 @@ +Approval of Related Party Transactions +The Audit Committee, as provided in its charter, reviews and approves related party transactions. The Company does not have a formal set of standards to be substantively applied to each transaction reviewed by the Audit Committee. Instead of a formalized policy, related party transactions are reviewed, and judgment is applied to determine whether transactions are in the best interests of the Company. Further, the Company’s Code of Business Conduct and Ethics governs various compliance areas, including conflicts of interest and fair dealings, which are considered in the process of the review and approval of related party transactions. +The Company’s policy is that all its employees and directors, as well as their family members, must avoid any activity that is or has the appearance of conflicting with the Company’s business interest. This policy is included in the Company’s Code of Business Conduct and Ethics posted on its website. Each director and executive officer is instructed to always inform the designated compliance officer when confronted with any situation that may be perceived as a conflict of interest. Only the Board of Directors or a committee consisting solely of independent directors may grant waivers of the provisions of the Code of Business Conduct and Ethics for the Company’s executive officers and directors. In addition, at least annually, each director and executive officer completes a detailed questionnaire specifying any business relationship that may give rise to a conflict of interest. +Further, under the Audit Committee charter, the Audit Committee is responsible for reviewing and monitoring compliance with our Code of Business Conduct and Ethics and recommending any warranted changes to the Board of Directors. In addition, the Board of Directors and, pursuant to its written charter, the Audit Committee, reviews and approves all relationships and transactions in which the Company and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. The Board of Directors and the Audit Committee approve only those transactions that, considering known circumstances, are consistent, or are not inconsistent with, the Company’s best interests, as they determine in good faith exercise of their discretion. +During 2025, Gulfport employed Sara Disser who is the daughter of the Company’s former Chief Executive Officer. She received total compensation of approximately $193,677. +During 2025, Gulfport employed Matthew Holland who is the son -in-law of the Company’s former Chief Executive Officer. He received total compensation of approximately $275,370. +As part of Gulfport’s existing $1.5 billion share repurchase program, Gulfport purchased approximately $25.0 million in common stock from affiliates of Silver Point Capital, L.P. in 2025. \ No newline at end of file diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/filing.txt b/raw/filings/0000910521/2014/0000910521-15-000018/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e86a5958cc70e48d42706c551d3ab07ef906a6fa --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/filing.txt @@ -0,0 +1,6000 @@ +10-K +1 +deckfy2015331201510-k.htm +10-K +DECK FY 2015 3.31.2015 10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended March 31, 2015 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +250 Coromar Drive, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock, par value $0.01 per share +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes o No ý +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý +As of September 30, 2014 , the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $3,280,043,169 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on The New York Stock Exchange (NYSE) on that date, which was $97.18 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +The number of shares of the registrant's Common Stock outstanding at May 15, 2015 was 33,296,968 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2015 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended March 31, 2015 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +8 +Item 1B. +Unresolved Staff Comments +19 +Item 2. +Properties +19 +Item 3. +Legal Proceedings +20 +Item 4. +Mine Safety Disclosures +20 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +21 +Item 6. +Selected Financial Data +23 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +38 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +49 +Item 8. +Financial Statements and Supplementary Data +50 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +50 +Item 9A. +Controls and Procedures +50 +Item 9B. +Other Information +51 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +52 +Item 11. +Executive Compensation +52 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +52 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +52 +Item 14. +Principal Accounting Fees and Services +52 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +53 +Signatures +56 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will," or "would," and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K and the information and documents incorporated by reference in this Annual Report on Form 10-K contains forward-looking statements relating to, among other things: +• +our global business, growth, operating, investing, and financing strategies; +• +our product offerings, distribution channels and geographic mix; +• +the success of our new products, brands, and growth initiatives; +• +the impact of seasonality on our operations; +• +expectations regarding our net sales and earnings growth and other financial metrics; +• +our development of worldwide distribution channels; +• +trends affecting our financial condition, results of operations, or cash flows; +• +our expectations for expansion of our retail and E-Commerce capabilities; +• +information security and privacy of customer, employee or company information; +• +overall global economic trends; +• +reliability of overseas factory production and storage; and +• +the availability and cost of raw materials. +Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in the section entitled "Risk Factors" Part I, Item 1A of this Annual Report on Form 10-K, as well as in our other filings with the Securities and Exchange Commission (SEC). Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. You should read this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. +Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. +Except as required by applicable law or the listing rules of the NYSE we expressly disclaim any intent or obligation to update any forward-looking statements, or to update the reasons actual results could differ materially from those expressed or implied by these forward-looking statements, whether to conform such statements to actual results or changes in our expectations, or as a result of the availability of new information. +2 +Table of Contents +We qualify all of our forward-looking statements by these cautionary statements. +PART I +References in this Annual Report on Form 10-K (Annual Report) to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Ahnu®, Deckers®, Hoka One One® (Hoka), MOZO®, Sanuk®, Teva®, TSUBO®, UGG® and UGGpure TM are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for employees, share quantity, per share data and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2015, 2013 and 2012 fiscal years ended March 31, 2015 , December 31, 2013 and December 31, 2012 , respectively. The transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +Products +We market our products primarily under three proprietary brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility. +We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga Mat TM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. +We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brands unique attitude. We also continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +3 +Table of Contents +In addition to our primary brands, our other brands include Ahnu, a line of outdoor performance and lifestyle footwear; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; MOZO, a line of footwear crafted for culinary professionals that redefines the industry's dress code; and TSUBO, a line of mid and high-end dress and dress casual footwear that incorporates style, function, and maximum comfort. +With respect to MOZO and TSUBO, we are seeking strategic alternatives for these businesses. +In April 2015, the Company acquired inventory and certain intangible assets, including the trade name related to the Koolaburra® brand, a sheepskin and wool based footwear brand. The purchase price of the acquisition was not material to the Company’s consolidated financial statements. +Sales and Distribution +At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market maximizes our selling efforts. +We distribute products sold in the US through our distribution centers in Camarillo, Moreno Valley and Ventura, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. +Internationally, we distribute our products through independent distributors and retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites and our retail stores. For our wholesale and Direct-to-Consumer businesses, we operate distribution centers with third-party logistics (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +Our five largest customers accounted for approximately 22.2% of worldwide net sales for the year ended March 31, 2015 compared to 23.0% for the year ended December 31, 2013 . No single customer accounted for greater than 10% of our consolidated net sales in the years ended March 31, 2015 and December 31, 2013 , respectively. +UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Journeys, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +Other brands. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +4 +Table of Contents +E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com, Teva.com, Sanuk.com, Ahnu.com, Hokaoneone.com, Mozo.com, and Tsubo.com websites. Our websites also drive wholesale and distributor sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +We have expanded our international capabilities by developing websites to service certain international markets. These websites are translated into the local language, may provide product through local distribution centers and price the products in the consumers' local currency. In 2012, we launched mobile websites for several of our brands in Europe, Japan and the US, in addition to websites in the US for our Sanuk brand. Our E-Commerce business sells products directly to consumers throughout the world, including the US, the United Kingdom (UK), Japan and China. In March 2015, we launched our first multi-brand E-Commerce website in the Asia-Pacific region, which is live in Singapore, Australia and Hong Kong and is expected to debut in Malaysia and South Korea during fiscal year 2016. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in California, the UK, the Netherlands, China and Japan. Products sold through our E-Commerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction. +Through our integrated OmniChannel strategy, we believe that consumers try on product in our retail stores, perform further online research and order products online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are mutually dependent in a way that will allow us to view them on a combined basis. Further, a number of our stores allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores. +Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013, we expanded our fleet and opened our first Sanuk (two concept, one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. +In fiscal year 2015 , we opened new stores in the US and internationally. A large majority of the new stores were in the US and China, with the remaining new stores in Japan, Canada and Hong Kong. As of March 31, 2015 , we had a total of 142 stores worldwide. As of December 31, 2013 , we had 113 stores worldwide. During fiscal year 2016 , we plan to open additional retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates new innovative footwear products that combine our standards of high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our research and development costs for the last three years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and +5 +Table of Contents +environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances policy as a condition of doing business with our company. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, a wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report). We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers. +Patents and Trademarks +We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, identifying the Company, and distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Ahnu, Hoka One One, MOZO, TSUBO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. As of March 31, 2015 , we hold approximately 180 utility and design patent registrations in the US and abroad and have filed more than 20 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent or group of patents expiring in the same year is critical to our business. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Hoka brand beginning September 27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors". For further discussion on our working capital and inventory management, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources". +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including +6 +Table of Contents +seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading. +At March 31, 2015 , our backlog of orders from our wholesale customers and distributors was approximately $609,000 compared to approximately $614,000 at March 31, 2014 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2016 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail stores during the year. Backlog is also affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete depends on our ability to: +• +shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +• +anticipate and respond to changing consumer demands in a timely manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +price our products suitably; +• +provide strong and effective marketing support; and +• +ensure product availability. +We believe we are well positioned to compete in the footwear industry. We continually look to acquire or develop more footwear brands to complement our existing portfolio and grow our existing consumer base. +Employees +At March 31, 2015 , we employed approximately 3,400 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,900 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,200 employees at December 31, 2013, including approximately 2,000 employees in our retail stores. The decrease in retail employees was largely due to employing fewer seasonal workers at March 31, 2015 compared to December 31, 2013. The overall increase in employees during fiscal year 2015 was primarily related to increased expansion efforts. As we open new retail stores and expand our operations, we expect that our employee count will increase accordingly. We believe that we have good relationships with our employees. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for further discussion of our business segments. Refer to Part I, Item 1A "Risk Factors" for a discussion of the risks related to our foreign operations. +7 +Table of Contents +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy. We have included the Chief Executive Officer (CEO) and Chief Financial Officer certifications regarding the Company’s public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1and Exhibit 31.2, respectively, to this report on Form 10-K. Additionally, we filed with the New York Stock Exchange (NYSE) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (Listing Standards) pursuant to Section 303A.12(a) of the Listing Standards, which indicated that the CEO was not aware of any violations of the Listing Standards by the Company. +Item 1A. Risk Factors. +Our short and long-term success is subject to many factors beyond our control. Investing in our common stock involves substantial risk. Before investing in our stock, stockholders and potential stockholders should carefully consider the following risk factors related to our company as well as general investor risks, in addition to the other information contained in this report and the information incorporated by reference in this report. If any of the following risks occur, our business, financial condition or results of operations could be adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report. +Many of our products are seasonal, and our sales are sensitive to weather conditions . +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. For example, extended periods of unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. Furthermore, variations in weather conditions across the globe may impact sales of our products in ways that we cannot predict. If management is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns or unanticipated levels of order cancellations because of seasonal circumstances, our profitability may be materially affected. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly and annual results, with a resulting effect on our common stock price. +If raw materials do not meet our specifications, consumer expectations or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product return rates, a loss of sales, or a reduction in our gross margins . +We depend on a limited number of key sources for certain raw materials. For sheepskin, the raw material used in many of our UGG products, we rely on two tanneries. Both the top grade twin-face and other grades of sheepskin used in UGG products are in high demand and limited supply. Furthermore, our unique sheepskin needs require certain types of sheepskin that may only be found in certain geographic locations and tanneries with sufficient expertise and capacity to deliver sheepskin which meets our specifications. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Sheepskin is also a by-product of the food industry and is therefore dependent upon the demand by the food industry, which has generally been decreasing, thus leading to an overall reduction in the number of sheep available. The potential inability to obtain sheepskin, UGGpure and other raw materials could impair our ability to meet our production requirements and could lead to inventory shortages, which can result in lost sales, delays in shipments to customers, strain on our relationships with customers, and diminished brand loyalty. There +8 +Table of Contents +have also been significant fluctuations in the prices of sheepskin as the demand from competitors for this material and the supply of sheep have changed. We experienced an increase in sheepskin costs in 2012 and a decrease in 2013, with the majority of the decrease being realized in the fourth quarter of 2013. In fiscal year 2015, average sheepskin prices decreased compared to 2013. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. +We began using a new raw material, UGGpure, a wool woven into a durable backing, in some of our UGG products in 2013. If these raw materials and the end product do not conform to our specification or fail to meet consumer expectations, we could experience a higher rate of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. In addition, our sheepskin and UGGpure suppliers warehouse their inventory at a limited number of facilities in China, the loss of any of which due to natural disasters and other adverse events would likely result in shortages of sheepskin or UGGpure leading to delays in the production of our products and could result in a loss of sales and earnings. +Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are able to commensurately increase our selling prices and implement other cost-saving measures. Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design specifications and, in some cases, additional technical requirements for performance footwear. +Our new and existing retail stores may not realize returns on our investments. +Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to expand this segment in the future. We have entered into significant long-term leases for many of our retail locations. Global store openings involve substantial investments, including constructing leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or the closure of a store could result in significant write-downs of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of our working capital, which could adversely impact our financial position, results of operations, or cash flows. +In addition, from time to time we license the right to operate retail stores for our brands to third parties. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards, which could harm their sales and as a result harm our results of operations, result in loss of our capital or other contributions, or cause our brand image to suffer. +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders . +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and projected volumes many months before consumer tastes become apparent. The footwear and fashion industry is subject to rapid changes in consumer preferences, making it difficult to accurately forecast demand for our products and our future results of operations. Many factors may significantly affect demand for our products, which include: consumer acceptance of our products, the lifecycle of our products and consumer replenishment and buying behavior, changes in consumer demand for products of our competitors, effects of weather conditions, our reliance on manual processes and judgment for certain supply and demand planning functions that are subject to human error, unanticipated changes in general market conditions, and weak economic conditions or consumer confidence that reduces demand for discretionary items, such as our products. +A large number of models, colors, and sizes in our product lines can increase these risks. As a result, we may fail to accurately forecast styles, colors, and features that will be in demand. If we overestimate demand for any products or styles, we may be forced to incur higher markdowns or sell excess inventories at reduced prices resulting in lower, or negative, gross margins. On the other hand, if we underestimate demand for our products or if our independent factories are unable to supply products when we need them, we may experience inventory shortages that may prevent us from fulfilling customer orders or delaying shipments to customers. This could negatively affect our relationship with customers and diminish our brand loyalty, which may have a material adverse effect on our financial condition and results of operations. +Failure to adequately protect our trademarks, patents, and other intellectual property rights or deter counterfeiting could diminish the value of our brands and reduce sales. +We believe that our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights are of value and are integral to our success and our competitive position. Specifically, the success of the UGG brand has led to trademark counterfeiting, product imitation and other infringements of our intellectual property rights. We devote significant resources to the registration and protection of our trademarks and to anti-counterfeiting efforts worldwide. In spite of our efforts, counterfeiting still occurs and if we are unsuccessful in challenging a third-party’s use related to trademark, trade dress or other +9 +Table of Contents +intellectual property rights, this could adversely affect our future sales, financial condition, and results of operation. If our brands are associated with infringers’ or competitors’ inferior products, this could also adversely affect the integrity of our brands. +Although we are aggressive in pursuing entities involved in the trafficking and sale of counterfeit merchandise through legal action or other appropriate means, we cannot guarantee that the action we have taken will be adequate to protect our brands and prevent counterfeiting in the future, especially because some countries' laws do not protect intellectual property rights to the same extent as do US laws. Our business could be significantly harmed if we are not able to protect our intellectual property, adequately secure intellectual property rights related to our brands in specific territories, or if a court found that we are infringing on other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in the US or internationally in which we are involved, either as a plaintiff or as a defendant, could cost a significant amount of time and money and distract management’s attention from operating our business. If we do not prevail on any intellectual property claims, then we may have to change our manufacturing processes, products, trade names, or enter into costly license agreements, any of which could have a material adverse effect on our results of operations and financial condition. Additionally, unplanned increases in legal fees and other costs associated with the defense of our intellectual property or rebranding could result in higher operating expenses and lower earnings. +For example, from time to time, we may need to defend against claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but such claims have been rejected by courts in the US, China, Turkey and in the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. Any decision or settlement in any of these matters that prevents trademark protection of the "UGG" brand in our major markets, or that allows a third-party to continue to use our brand trademarks in connection with the sale of products similar to our products, or to continue to manufacture or distribute counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of operations and financial condition. +Our success depends on our ability to retain the value of our brands and to anticipate and promptly respond to changing fashion and retail trends. +Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand, and react to the rapidly changing fashion tastes of footwear, apparel, and accessory consumers and to provide appealing merchandise in a timely and cost effective manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We are also dependent on consumer receptivity to our products and marketing strategy. There can be no assurance that consumers will continue to prefer our brands or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or (3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. For example, UGG products include fashion items that could go out of style at any time and competition for the sale of products by the UGG brand is intense and has increased over time. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our UGG brand image to be outdated or associate our UGG brand with styles that are no longer popular. UGG products represent a majority of our business, and if UGG product sales were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely affected. +We believe that the ongoing economic uncertainty in many countries where we sell our products and the corresponding impact on consumer confidence and discretionary income may increase the uncertainty of consumer preferences. Achieving market acceptance for new products will also likely require us to exert substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with our existing products would erode our competitive position, which would reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business. +Furthermore, the value of our brands is partially based on consumer perceptions on a variety of qualities; any misstep in product quality or design, customer service, marketing, unfavorable publicity or excessive discounting could negatively affect the image of our brand with our consumers. Negative claims or publicity regarding our company, our products or our brands, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. Hence, even if our products do anticipate and promptly respond to changing consumer preferences and/or stay ahead of changing fashion trends, our brand image could become tarnished or undesirable in the minds of consumers or target markets, which could have a material adverse effect on our business, results of operations, and financial condition. +We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed . +The footwear industry is highly competitive, and many new competitors have entered into the marketplace. We believe that some of these competitors have entered the market place in response to the success of our brands and that such competitors have targeted or intend to target our products with their product offerings. Additionally, we have experienced increased competition +10 +Table of Contents +from established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and accessory markets. Our competitors include fashion, athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production, and develop new products more quickly. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. +Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can expect to receive for the sale of our competing products and may cause our consumers to shift their purchases away from our products. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, financial condition, and common stock price. +We may not succeed in implementing our growth strategies . +As part of our growth strategies, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets, partner with or acquire compatible and strategic companies or brands, expand geographically, increase our retail presence, and improve our operational performance. We continue to expand the nature and scope of our operations considerably, including significantly increasing the number of our employees worldwide. We anticipate that substantial further expansion will be required to realize our growth potential and new market opportunities. +We are growing globally through our retail, E-Commerce, wholesale, and distributor channels. In addition, as part of our international growth strategy, we may continue to transition from third-party distribution to direct distribution through wholly-owned subsidiaries. Implementing our growth strategies, or failure to effectively execute them, could affect near term revenues from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a negative effect on the value of our common stock. In addition, our growth initiatives could: +• +increase our working capital needs beyond our capacity; +• +increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings; +• +result in impairment charges related to acquired businesses; +• +create remote-site management issues, which would adversely affect our internal control environment; +• +have significant domestic or international legal or compliance implications; +• +make it difficult to attract, retain, and manage adequate human resources in remote locations; +• +cause additional inventory manufacturing, distribution, and management costs; +• +cause us to experience difficulty in filling customer orders; +• +result in distribution termination transaction costs; or +• +create other production, distribution, and operating difficulties. +We face risks associated with pursuing strategic acquisitions. +We have extended our brands into complementary product categories and markets in part through strategic acquisitions, and we may continue to do so in the future, depending on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, including risks inherent in entering new markets in which we may not have prior experience, potential loss of significant customers or key personnel of the acquired business, managing geographically-remote operations, and potential diversion of management’s attention from other aspects of our business operations. Acquisitions may also cause us to incur debt or result in dilutive issuances of our equity securities, write-offs of goodwill and substantial amortization expenses associated with other intangible assets. We may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have terms that restrict our operations. Additionally, we cannot provide assurance that we will be able to successfully integrate the operations of any acquired businesses into our operations and achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have a material adverse effect on our results of operations and financial position. We will face cannibalization of existing product sales by our newly acquired products, unless we adequately +11 +Table of Contents +integrate new brands and products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. Although we may not consummate a potential acquisition for a variety of reasons, we may nonetheless incur material costs in the preliminary stages of such an acquisition that we may not be able to recover. +Our goodwill and other intangible assets may incur impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets for fiscal year 2015 , 2013 , and 2012 . In addition, we conducted interim impairment evaluations when impairment indicators arose. During the year ended March 31, 2015 , the quarter ended March 31, 2014 and the years ended December 31, 2013 and 2012 , we did not recognize any material impairment charges on our goodwill and other intangible assets. +If any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to write down the related intangible assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value of our trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of intangible assets is subject to a high degree of judgment and complexity. We may also decide to discontinue a brand which would result in the write down of all related intangible assets. The balances of goodwill and nonamortizable intangibles by brand are as follows: +As of March 31, 2015 +UGG +Teva +Sanuk +Other +Total +Trademarks +$ +154 +$ +15,301 +$ +— +$ +— +$ +15,455 +Goodwill +6,101 +— +113,944 +7,889 +127,934 +Total nonamortizable intangibles +$ +6,255 +$ +15,301 +$ +113,944 +$ +7,889 +$ +143,389 +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality standards . +Most of our production is performed by a limited number of independent manufacturers. We depend on these manufacturers' ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods in a safe and sound location pending shipment. We do not possess direct control over either the independent manufacturers or their materials suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have long standing relationships with most of our factories, we currently do not have long-term contracts with these independent manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of acceptable quality and competitively priced products from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to provide products or services of a comparable quality at an acceptable price or on a timely basis. If a change in our independent manufacturers becomes necessary, we would likely experience increased costs as well as substantial disruption of our business, which could result in a loss of sales and earnings. +Interruptions in the supply chain can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside the US, where we are subject to the risks of international commerce . +Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products, including the potential threat of anti-dumping duties and quotas; +• +increasing transportation costs and a limited supply of international shipping capacity; +• +increasing labor costs; +12 +Table of Contents +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds; +• +changing economic conditions; +• +violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in China, Vietnam, the US, and elsewhere; +• +refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; +• +customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +labor disruptions; +• +delays during shipping, at the port of entry or at the port of departure; +• +decreased scrutiny by custom officials for counterfeit products; +• +political instability, which can interrupt commerce, including acts of war and other external factors over which we have no control; +• +heightened terrorism security concerns, which could subject imported or exported products to additional, more frequent or more lengthy inspections; +• +imposition or the repeal of laws that affect intellectual property rights; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +expropriation and nationalization; +• +disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• +disruptions at manufacturing or distribution facilities caused by natural or other disasters; and +• +adverse changes in consumer perception of goods, trade, or political relations with China and Vietnam. +These factors, or others of which we are currently unaware or which we do not currently view as material, could severely interfere with the manufacture or shipment of our products. This could make it difficult to obtain adequate supplies of quality products when we need them, thus materially affecting our sales and results of operations. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, and we could suffer an interruption in our product supply chain. In addition, the manufacturers' or designated suppliers' violations of such standards and laws could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products. +We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks . +The state of the global economy continues to influence the level of consumer spending for discretionary items. This affects our business as it is highly dependent on consumer demand for our products. The current political and economic environments in certain countries in Europe have resulted in significant macroeconomic risks, including high rates of unemployment, high fuel prices, and continued global economic uncertainty largely precipitated by the European debt crisis. +We operate on a global basis, with approximately 35.9% of our net sales for the year ended March 31, 2015 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations and global credit markets. A significant portion of our international operating +13 +Table of Contents +expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impact the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future changes in foreign currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material fluctuations in foreign currency translation amounts or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected. We currently utilize forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign currency hedging activities, transactions, remeasurements or translations could materially impact our consolidated financial statements. +While our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in other currencies. As a result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly. +Labor disruptions could adversely affect our financial position, results of operations, or cash flows. +Our business depends on its ability to source and distribute products in a timely manner. Labor disputes at or that affect our independent manufacturers, shipping ports, including the recent labor dispute at west coast US ports, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions. Any such disruption may have a material adverse effect on our business by potentially resulting in cancelled orders by customers and unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions, which could increase our costs and adversely impact our operating results . +Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These include: +• +changes in currency exchange rates, which impact the price to international consumers; +• +ability to move currency out of international markets; +• +the burdens of complying with a variety of foreign laws and regulations, the interpretation and application of which are uncertain; +• +legal costs and penalties related to defending allegations of non-compliance; +• +unexpected changes in legal and regulatory requirements; +• +inability to successfully import into a country; +• +changes in tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting products in unfamiliar cultures; +• +political instability; +• +changes in diplomatic and trade relationships; and +• +general economic fluctuations in specific countries or markets. +14 +Table of Contents +International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays . +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of the products and our forecasted gross margins. +We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +Additionally, the increased threat of terrorist activity and law enforcement responses to this threat have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +We could be adversely affected by the loss of our warehouses. +The warehousing of our inventory is located at a limited number of self-managed domestic facilities and self-managed and third-party managed international facilities, the loss of any of which due to natural disasters and other adverse events, could materially adversely impact our sales, business performance, and operating results. In addition, we could face a significant disruption in our domestic distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period, or if our plans for a new distribution facility are disrupted or delayed. +Key business processes and supporting information systems could be interrupted and adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• +critical business systems become inoperable or require significant costs to restore; +• +key personnel are unable to perform their duties, communicate, or access information systems; +• +significant quantities of merchandise are damaged or destroyed; +• +we are required to make unanticipated investment in state-of-the-art technologies and security measures; +• +key wholesale and distributor customers cannot place or receive orders; +• +E-Commerce customer orders may not be received or fulfilled; +• +confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; +• +we are exposed to unanticipated liabilities; or +• +carriers cannot ship or unload shipments. +These interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +Furthermore, we rely on certain information technology management and enterprise resource planning systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand +15 +Table of Contents +into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected. +The loss, theft or misuse of sensitive customer or company information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business . +Our business involves the storage and transmission of sensitive information including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and proprietary company financial and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information. +As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relations with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience. +Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our operations, and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse effect on our business, results of operations, and financial condition. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, other parties or employees, be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition. We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +Our business could be adversely affected by the loss of key members of our management team or other key personnel. +Our future success and growth depend largely upon the continued services of our executive officers and other key employees. From time to time, there may be changes in our executive officers or other key employees resulting from the hiring or departure of these personnel, which may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees and the often extensive process of identifying and hiring other personnel, who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business. +We depend on highly skilled personnel and, if we are unable to retain or hire additional qualified personnel, we may not be able to achieve our strategic objectives. +To execute our growth plan and achieve our strategic objectives, we must continue to attract and retain highly qualified and motivated personnel across our company. In particular, in order to continue to develop new products and successfully operate +16 +Table of Contents +and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessories designers and information technology specialists. Competition for these highly skilled professionals is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, our headquarters are located in Santa Barbara, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining suitably skilled personnel with the qualifications and motivation to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives and our operating results may suffer. +In addition, prospective and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our equity awards decline, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed. +Our revolving credit facility provides our lenders with a first-priority lien against substantially all of our assets and contains financial covenants and other restrictions on our actions. +From time to time, we have financed our liquidity needs in part from borrowing made under a revolving credit facility. Our credit facility provides for a committed revolving credit line of up to $400 million. Our obligations under the agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries, other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries, and are secured by a first priority security interest in substantially all of our assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries. The agreement for our credit facility also contains a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under the credit agreement could result in a default. A default under the credit agreement could cause the lenders to accelerate the timing of payments and exercise their lien on essentially all of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because borrowings under the revolving credit facility bear interest at variable interest rates, which we do not anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. There were no outstanding borrowings under our committed revolving credit facility as of March 31, 2015 . In addition, we have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY 60 million, or approximately $10 million. At March 31, 2015 , we had approximately $4.9 million of outstanding borrowings under the China Credit Facility. +The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of their audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports at a material cost. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, including those in and involving the US, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. It is possible that tax proposals could result in changes to the existing US tax laws that affect us. We are unable to predict whether any proposals will ultimately be enacted. Any such changes could increase our income tax liability and adversely affect our net income and long term effective tax rates. +The disruption, expense, and potential liability associated with existing and future litigation. +17 +Table of Contents +We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +New regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. +On August 22, 2012, the SEC adopted a new rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform due diligence, disclose and annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We are currently investigating the use of conflict materials, if any, within our supply chain. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the NYSE. While our average daily trading volume for the 52-week period ended May 15, 2015 was approximately 740,000 shares, we have experienced more limited volume in the past and may do so in the future. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $66.05 to $99.38 for the 52-week period ended May 15, 2015 . The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future performance, whether realized or perceived; +• +changes in estimates by securities analysts or failure to meet such estimates; +• +published research and opinions by securities analysts and other market forecasters; +• +changes in our credit ratings; +• +the financial results and liquidity of our customers; +• +shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into agreements with related parties; +• +claims brought against us by a regulatory agency or our stockholders; +• +quarterly fluctuations in our sales, expenses, and financial results; +• +general equity market conditions and investor sentiment; +• +economic conditions and consumer confidence; +• +broad market fluctuations in volume and price; +• +increasing short sales of our stock; +• +announcements to repurchase our stock; +• +the declaration of stock or cash dividends; and +18 +Table of Contents +• +a variety of risk factors, including the ones described elsewhere in this Annual Report and in our other periodic reports. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect consumer spending generally and the buying habits and preferences of our customers and end-user consumers in particular. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by a continuation or worsening of recent economic conditions, increases in consumer debt levels, uncertainties regarding future economic prospects, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products and those who do shop may limit the amounts of their purchases. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses in response to lower than anticipated levels of demand for our products. In either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and could have a material adverse effect on our financial condition and results of operations. +We sell our products through higher-end specialty and department store retailers. These retailer customers may be impacted by continuing economic uncertainty, reduced customer demand for luxury products, and a significant decrease in available credit. If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial difficulties or insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of operations, and cash flows. Our business, access to credit, and trading price of common stock could be materially and adversely affected if the current economic conditions do not improve or worsen. +Our financial success is influenced by the success of our customers . +Much of our financial success is directly related to the success of our retailers and distributor partners to market and sell our brands through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss of sales. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five-years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or brands, then these customers could postpone, reduce, or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or extended credit terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our common stock price. +Our five largest customers accounted for approximately 22.2% of worldwide net sales in fiscal year 2015 and 23.0% of worldwide net sales in fiscal year 2013 . Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations, and financial condition. +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties. +19 +Table of Contents +Our corporate headquarters are located in Goleta, California. We have three US distribution centers, all in California. Our international distribution centers, located in the Netherlands, the UK, Germany, China, Hong Kong and Japan, are managed by 3PLs. We recently began operating our new distribution center in Moreno Valley, California. Our E-Commerce operations are in Arizona, the UK, many Eurozone countries, China, Japan, Singapore, Australia and Hong Kong. We also have offices in Hong Kong, China and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK, the Netherlands and Germany to oversee European operations and administration. As of March 31, 2015 , we had 51 retail stores in the US ranging from approximately 1,000 to 8,000 square feet. Internationally, we had 91 retail stores in China, Japan, the UK, Canada, France, Hong Kong, Belgium and the Netherlands. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers. The construction of our new fourteen acre corporate headquarters in Goleta, California was substantially completed in January 2014. Other than our new corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our E-Commerce and retail store facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table reflects the location, use, segment, and approximate size of our significant physical properties as of March 31, 2015 : +Facility Location +Description +Business Segment +Facility Size (Square Footage) +Moreno Valley, California +Warehouse Facility +Unallocated +794,000 +Camarillo, California +Warehouse Facility +Unallocated +723,000 +Goleta, California +Corporate Offices +Unallocated +196,000 +Item 3. Legal Proceedings. +On July 17, 2012 and July 26, 2012, two purported shareholder derivative lawsuits were filed in the California Superior Court for the County of Santa Barbara against our Board of Directors and several of our officers. The Company is named as nominal defendant. Plaintiffs in the state derivative actions allege, among other things, that the Board allowed certain officers to make allegedly false and misleading statements. The complaints include claims for breach of fiduciary duties, insider trading, unjust enrichment, and violations of the California Corporations Code. The complaints seek compensatory damages, disgorgement, and other relief. The actions were consolidated on September 13, 2012, and the Plaintiffs filed a consolidated complaint on November 20, 2012. On March 21, 2013, the Company’s demurrer to the consolidated complaint was sustained with leave to amend. The Plaintiffs did not timely amend the consolidated complaint and a final judgment and order of dismissal with prejudice was entered on May 6, 2013. Plaintiffs filed an appeal on May 22, 2013. The court of appeal affirmed the judgment of dismissal on October 2, 2014. Plaintiffs filed a petition for review in the California Supreme Court on December 5, 2014, which was denied on February 25, 2015 resulting in dismissal of the suits. +As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual properties, including our trademark registration for UGG. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva, UGG, and Sanuk products. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements. +Item 4. Mine Safety Disclosures. +Not applicable. +20 +Table of Contents +PART II +Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Our common stock is traded on the NYSE under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK". +The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated. +Common Stock +Price Per Share +Low +High +Year ended March 31, 2015 +March Quarter +$ +66.05 +$ +94.10 +December Quarter +$ +81.56 +$ +98.57 +September Quarter +$ +81.53 +$ +99.38 +June Quarter +$ +76.11 +$ +86.33 +Transition Period ended March 31, 2014 +March Quarter +$ +72.86 +$ +88.56 +Year ended December 31, 2013 +December Quarter +$ +57.84 +$ +86.09 +September Quarter +$ +51.07 +$ +66.09 +June Quarter +$ +47.35 +$ +59.69 +March Quarter +$ +36.12 +$ +55.69 +As of May 15, 2015 , we had approximately 57 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2015 that were not registered under the Securities Act of 1933, as amended. +STOCK PERFORMANCE GRAPH +Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the NASDAQ Market Index, the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year and one quarter period commencing December 31, 2009 and ending March 31, 2015 . The data represented below assumes one hundred dollars invested in each of the Company's common stock, the NYSE Composite Index, the NASDAQ Market Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2010. +Beginning in fiscal year 2015, we are using the NYSE Composite Index rather than the NASDAQ Market Index that we used in prior years due to the May 5, 2014 change in listing of our stock to the NYSE. For this Annual Report, we have included both the NYSE Composite Index and the NASDAQ Market Index. +The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under either of such Acts. Total return assumes reinvestment of dividends; we have not declared or paid any cash dividends on our common stock since our inception. +21 +Table of Contents +ASSUMES $100 INVESTED ON JAN. 01, 2010 +ASSUMES DIVIDEND REINVESTED +12/31/2009 +12/31/2010 +12/31/2011 +12/31/2012 +12/31/2013 +3/31/2015 +Deckers Outdoor Corporation +$ +100.0 +$ +235.2 +$ +222.9 +$ +118.8 +$ +249.1 +$ +214.9 +NASDAQ Market Index# +100.0 +118.0 +117.0 +137.5 +192.6 +229.4 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +141.2 +175.6 +180.1 +225.0 +214.9 +NYSE Composite Index* +100.0 +113.8 +109.7 +127.5 +161.2 +176.9 +# +The NASDAQ Market Index is the same NASDAQ Index used in our 2013 Form 10-K. +* +The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE. +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00. +STOCK REPURCHASE PROGRAM +22 +Table of Contents +In June 2012, the Company approved a stock repurchase program to repurchase up to $200 million of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program may have been suspended at any time at the Company's discretion. As of February 28, 2015, the Company had repurchased approximately 3,823,000 shares under this program, for approximately $200 million, or an average price of $52.31 per share. As of February 28, 2015, the Company had repurchased the full amount authorized under this program. +In January 2015, the Company approved a new stock repurchase program to repurchase up to $200 million of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of March 31, 2015 , the Company has repurchased approximately 377,000 shares under this program for approximately $27.9 million, or an average price of $74.09 per share, leaving the remaining approved amount at approximately $172.1 million. +Total number +of shares +purchased* +(in thousands) +Average price +paid per share +Approximate dollar +value of shares +added/(purchased) +(in thousands) +Approximate dollar +value of shares that +may yet be purchased +(in thousands) +December 31, 2012 +$ +79,300 +January 1, 2013 — September 30, 2014 +— +$ +— +$ +— +$ +79,300 +October 1, 2014 — October 31, 2014 +157 +$ +84.66 +$ +(13,300 +) +$ +66,000 +November 1, 2014 — December 31, 2014 +— +$ +— +$ +— +$ +66,000 +January 1, 2015 — January 31, 2015 +— +$ +— +$ +200,000 +$ +266,000 +February 1, 2015 — February 28, 2015 +1,089 +$ +73.41 +$ +(79,900 +) +$ +186,100 +March 1, 2015 — March 31, 2015 +190 +$ +73.73 +$ +(14,000 +) +$ +172,100 +Total +1,436 +$ +74.68 +* All shares purchased were purchased as part of a publicly announced program in open-market transactions. +Item 6. Selected Financial Data. +We derived the following selected consolidated financial data from our consolidated financial statements. +The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report: +• Consolidated statements of operations for the years ended December 31, 2010 and 2011 +• Consolidated balance sheets as of December 31, 2010 , 2011 and 2012 +The financial data are further derived from, and qualified by reference to, the following accompanying consolidated financial statements in Part IV of this Annual Report: +• +Consolidated statements of operations for the years ended December 31, 2012 and 2013 , March 31, 2015 , and the transition quarter ended March 31, 2014 +• Consolidated balance sheets as of December 31, 2013 , March 31, 2014 and March 31, 2015 +Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our accompanying consolidated financial statements in Part IV of this Annual Report and the related notes and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". +23 +Table of Contents +Year ended +Quarter ended (transition period) +Years ended December 31, +3/31/2015 +3/31/2014 +2013 +2012 +2011 +2010 +(In thousands, except per share data) +Statements of Operations Data +Net sales: +UGG wholesale +$ +903,926 +$ +83,271 +$ +818,377 +$ +819,256 +$ +915,203 +$ +663,854 +Teva wholesale +116,931 +45,283 +109,334 +108,591 +118,742 +96,207 +Sanuk wholesale +102,690 +28,793 +94,420 +89,804 +26,039 +— +Other brands wholesale +76,152 +18,662 +38,276 +20,194 +21,801 +23,476 +E-Commerce +233,070 +38,584 +169,534 +130,592 +106,498 +91,808 +Retail stores +384,288 +80,123 +326,677 +245,961 +189,000 +125,644 +1,817,057 +294,716 +1,556,618 +1,414,398 +1,377,283 +1,000,989 +Cost of sales +938,949 +150,456 +820,135 +782,244 +698,288 +498,051 +Gross profit +878,108 +144,260 +736,483 +632,154 +678,995 +502,938 +Selling, general and administrative (SG&A) expenses +653,689 +144,668 +528,586 +445,206 +394,157 +253,850 +Income (loss) from operations +224,419 +(408 +) +207,897 +186,948 +284,838 +249,088 +Other expense (income), net +3,280 +334 +2,340 +2,830 +(424 +) +(1,021 +) +Income (loss) before income taxes +221,139 +(742 +) +205,557 +184,118 +285,262 +250,109 +Income taxes +59,359 +1,943 +59,868 +55,104 +83,404 +89,732 +Net income (loss) +161,780 +(2,685 +) +145,689 +129,014 +201,858 +160,377 +Net income attributable to noncontrolling interest +— +— +— +(148 +) +(2,806 +) +(2,142 +) +Net income (loss) attributable to Deckers Outdoor Corporation +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +128,866 +$ +199,052 +$ +158,235 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.70 +$ +(0.08 +) +$ +4.23 +$ +3.49 +$ +5.16 +$ +4.10 +Diluted +$ +4.66 +$ +(0.08 +) +$ +4.18 +$ +3.45 +$ +5.07 +$ +4.03 +Weighted-average common shares outstanding: +Basic +34,433 +34,621 +34,473 +36,879 +38,605 +38,615 +Diluted +34,733 +34,621 +34,829 +37,334 +39,265 +39,292 +As of +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +12/31/2011 +12/31/2010 +(In thousands) +Balance Sheet Data +Cash and cash equivalents +$ +225,143 +$ +245,088 +$ +237,125 +$ +110,247 +$ +263,606 +$ +445,226 +Working capital +$ +519,051 +$ +501,647 +$ +508,786 +$ +424,569 +$ +585,823 +$ +570,869 +Total assets +$ +1,169,933 +$ +1,064,204 +$ +1,259,729 +$ +1,068,064 +$ +1,146,196 +$ +808,994 +Long-term liabilities +$ +65,379 +$ +53,140 +$ +51,092 +$ +62,246 +$ +72,687 +$ +8,456 +Total Deckers Outdoor Corporation stockholders' equity +$ +937,012 +$ +888,849 +$ +888,119 +$ +738,801 +$ +835,936 +$ +652,987 +24 +Table of Contents +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. +References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should be read together with our accompanying consolidated financial statements in Part IV of this Annual Report and the accompanying notes to those statements included in Part IV of this Annual Report. +Overview +We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under three proprietary brands: +• +UGG®: Premier brand in luxurious comfort footwear, handbags, apparel, home and cold weather accessories; +• +Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and +• +Sanuk®: Innovative action sport footwear brand rooted in the surf community. +Our financial condition and results of operations include the operations of Hoka One One® (Hoka) beginning September 27, 2012, the acquisition date. In addition to our primary brands, our other brands include Ahnu®, a line of outdoor performance and lifestyle footwear; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; MOZO®, a line of footwear crafted for culinary professionals that redefines the industry's dress code; and TSUBO®, a line of mid and high-end dress and dress casual comfort footwear that incorporates style and function with maximum comfort. +We sell our brands through quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce business and retail stores. Independent third parties manufacture all of our products. +Our business has been and we expect that it will continue to be impacted by what we believe are several important trends: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant. +• +Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. +• +The sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant fluctuations in the price of sheepskin over the years as the demand from competitors for this material has changed. +• +Our use of UGGpure®, real wool woven into a durable backing used as an alternative to table grade sheepskin, in select products, primarily in linings and foot beds, continues to grow. +• +The markets for casual, outdoor, and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles, and a growing emphasis on comfort. +• +Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort, and high performance attributes they have come to expect from traditional athletic footwear. +• +Consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders. +• +Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable. +25 +Table of Contents +• +There is an emerging sustainable lifestyle movement happening all around the world, and consumers are demanding that brands and companies become more environmentally responsible. +• +Consumers are following a recent trend of buy now, wear now. This trend entails the consumer waiting to purchase shoes until they will actually wear them, contrasted with a tendency in the past to purchase shoes they did not plan to wear until later. +By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs. +We have experienced significant cost fluctuations over the past several years, notably with respect to sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production. Also, refer to Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for further discussion of our commodity price risk. +Below is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business. +UGG Brand Overview +The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including mobile, digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand. +We believe the increased global media focus and demand for UGG products has been driven by the following: +• +High consumer brand loyalty, due to over 35 years of delivering quality and luxuriously comfortable UGG footwear; +• +Continued innovation of new product categories and styles, including those beyond footwear such as loungewear, handbags, cold-weather accessories and a new home offering; +• +A more robust footwear offering, including transitional products that bridge the seasons between spring and fall; +• +Expanded slipper category showing incremental growth with added styles for both women, men and children; +• +Growing Direct-to-Consumer platform and enhanced OmniChannel capabilities that enable us to increasingly engage existing and prospective consumers in a more connected environment to introduce our evolving product lines; +• +Product customization with our UGG by You program allows for deeper connection with brand and products; +• +Focus on mobile consumers with responsive website design providing shoppers access to the brand from their mobile devices; +• +Year-round holistic paid advertising approach for women, men and children in targeted digital, high-end print, OOH and across multiple social media platforms; +• +Holiday and winter focused advertising campaign to drive important seasonal sales; +• +Continued creation of targeted UGG for Men campaigns; +26 +Table of Contents +• +Targeted E-Commerce based marketing to existing and prospective consumers through integrated outreach including email blasts, interactive website design and search engine optimization based content; +• +Continued partnerships with high-end retailers such as Nordstrom, Dillard's and Bloomingdales; +• +Expanded product assortments from existing accounts; +• +Adoption by high-profile celebrities as a favored footwear brand; +• +Continued media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to; +• +Increased exposure to the brand driven by our concept stores that showcase all of our product offerings; and +• +Continued expansion of worldwide retail through new UGG stores. +We believe the luxurious comfort of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our key strategies include presenting UGG as a year-round global, premium lifestyle brand with a broad product line suitable for wear in a variety of climates and occasions and limiting retail distribution. As part of this strategic approach, we have increased our product offerings, including a growing transitional collections and spring line, an expanded men’s line, a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as home, handbags, cold weather accessories, and apparel products. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth. +Teva Brand Overview +For 30 years Teva has fueled the expression of freedom through the adventure lifestyle around the globe. Teva pioneered the sport sandal category in 1984. We believe that Teva’s Originals Collection is a key platform in driving market penetration for the brand. The Originals Collection honors the heritage of Teva by revamping the styles the brand was founded on by blending their original simplicity with modern sophistication. In the US, our focus will be to bolster our leadership position in sandals and grow our market share through casual category extensions. Globally, we seek to establish the Originals Collection as a catalyst for the Teva brand's success across warm-weather climates. +Within the US, we expect that Teva will grow its position as a market leader within the sport sandal category. Growth opportunities within our current core channels of distribution - outdoor specialty, sporting goods and family footwear retail chains - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However, we cannot assure investors that these efforts will be successful. +Sanuk Brand Overview +The Sanuk brand was founded 17 years ago, and from its origins in the Southern California surf culture, has grown into a global brand with an expanding fan base and growing presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and funky branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat TM sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities, especially within the casual sneaker markets, supporting our strategic initiatives spanning new product launches, and OmniChannel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful. +Other Brands Overview +Our other brands consist of Ahnu, Hoka, MOZO and TSUBO. Our other brands are sold through most of our distribution channels, primarily through wholesale channels. +Ahnu is an authentic performance footwear brand that makes footwear for fashion-minded people who prefer trails, yoga mats, and hybrid fitness workouts. Ahnu's products feature après-yoga styling, innovative trail and city hikers, and everyday casual shoes and sandals. Ahnu’s go-anywhere approach blurs the lines between performance and fashion through modern color and material stories infused with Numentum ® performance technology. +27 +Table of Contents +The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. We believe runners from around the world are experiencing the benefits of Hoka brand products. These shoes are used by marathon runners, and even ultra-marathon runners as well as every day runners to enjoy running. +With respect to Ahnu and Hoka, we expect to leverage our design, marketing, and distribution capabilities. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful. +With respect to MOZO and TSUBO, we are seeking strategic alternatives for these businesses. +E-Commerce Overview +Our E-Commerce business, which sells all of our brands, allows us to build our relationship with the consumer and is a key component of our integrated OmniChannel strategy. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +Managing our E-Commerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our E-Commerce business through improved website features and performance, increased marketing, expansion into more international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our E-Commerce business will continue to grow. +Retail Stores Overview +Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013, we expanded our fleet and opened our first Sanuk (two concept, one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. Through our integrated OmniChannel strategy, we believe that consumers try on products in our retail stores, perform further online research and order products online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are mutually dependent in a way that will allow us to view them on a combined basis. Further, a number of our stores allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores. +As of March 31, 2015 , we had a total of 142 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During fiscal year 2016, we plan to open additional company-owned retail stores worldwide. +During the year ended March 31, 2015 , we converted seven of our retail stores in China to partner retail stores, whereby, upon conversion, the stores became wholly-owned and operated by local, third-party companies within China. These conversions included the assignment of the lease and the sale of both our on-hand inventory and store leasehold improvements to the operator. As of the date of conversion, partner retail stores sales are included in our UGG brand wholesale segment and not included in our retail stores segment. During fiscal year 2016, we plan to convert additional retail stores in China to partner retail stores. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31, and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our other brands are not significantly impacted by the season. +In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our business. The fiscal 2015 and 2013 years ended on March 31, 2015 and December 31, 2013 , respectively. The 2014 transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +The following table summarizes our quarterly net sales and income (loss) from operations: +28 +Table of Contents +FY 2015 +Quarter ended +6/30/2014 +Quarter ended +9/30/2014 +Quarter ended +12/31/2014 +Quarter ended +3/31/2015 +Net sales +$ +211,469 +$ +480,273 +$ +784,678 +$ +340,637 +Income (loss) from operations +$ +(50,482 +) +$ +59,583 +$ +214,581 +$ +737 +FY 2013 +2014 +Quarter ended +6/30/2013 +Quarter ended +9/30/2013 +Quarter ended +12/31/2013 +Quarter ended +3/31/2014 +Net sales +$ +170,085 +$ +386,725 +$ +736,048 +$ +294,716 +Income (loss) from operations +$ +(42,751 +) +$ +46,497 +$ +201,499 +$ +(408 +) +With the large growth in the UGG brand over the past several years, net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors" for a further discussion of our risk factors. +Results of Operations +Year Ended March 31, 2015 Compared to Year Ended December 31, 2013 +The following table summarizes our results of operations: +Years ended +3/31/2015 +12/31/2013 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,817,057 +100.0 +% +$ +1,556,618 +100.0 +% +$ +260,439 +16.7 +% +Cost of sales +938,949 +51.7 +820,135 +52.7 +118,814 +14.5 +Gross profit +878,108 +48.3 +736,483 +47.3 +141,625 +19.2 +Selling, general and administrative (SG&A) expenses +653,689 +36.0 +528,586 +33.9 +125,103 +23.7 +Income from operations +224,419 +12.3 +207,897 +13.4 +16,522 +7.9 +Other expense, net +3,280 +0.2 +2,340 +0.2 +940 +40.2 +Income before income taxes +221,139 +12.1 +205,557 +13.2 +15,582 +7.6 +Income taxes +59,359 +3.2 +59,868 +3.8 +(509 +) +(0.9 +) +Net income +$ +161,780 +8.9 +% +$ +145,689 +9.4 +% +$ +16,091 +11.0 +% +Overview. Overall net sales increased for all distribution channels of all segments. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses. +29 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years ended +Change +3/31/2015 +12/31/2013 +Amount +% +Net sales by location: +US +$ +1,165,350 +$ +1,042,274 +$ +123,076 +11.8 +% +International +651,707 +514,344 +137,363 +26.7 +Total +$ +1,817,057 +$ +1,556,618 +$ +260,439 +16.7 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +903,926 +$ +818,377 +$ +85,549 +10.5 +% +E-Commerce +209,722 +155,635 +54,087 +34.8 +Retail stores +379,545 +324,868 +54,677 +16.8 +Total +1,493,193 +1,298,880 +194,313 +15.0 +Teva: +Wholesale +116,931 +109,334 +7,597 +6.9 +E-Commerce +9,179 +6,627 +2,552 +38.5 +Retail stores +633 +426 +207 +48.6 +Total +126,743 +116,387 +10,356 +8.9 +Sanuk: +Wholesale +102,690 +94,420 +8,270 +8.8 +E-Commerce +8,214 +6,077 +2,137 +35.2 +Retail stores +3,807 +1,183 +2,624 +221.8 +Total +114,711 +101,680 +13,031 +12.8 +Other brands: +Wholesale +76,152 +38,276 +37,876 +99.0 +E-Commerce +5,955 +1,195 +4,760 +398.3 +Retail stores +303 +200 +103 +51.5 +Total +82,410 +39,671 +42,739 +107.7 +Total +$ +1,817,057 +$ +1,556,618 +$ +260,439 +16.7 +% +Total E-Commerce +$ +233,070 +$ +169,534 +$ +63,536 +37.5 +% +Total Retail stores +$ +384,288 +$ +326,677 +$ +57,611 +17.6 +% +In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations, throughout this Annual Report we provide certain financial information on a "constant currency basis", which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US generally accepted accounting principles. +We experienced an increase in net sales in all brands and distribution channels with the largest impact due to increased UGG brand sales through our wholesale channel, retail stores and E-Commerce websites, as well as increased other brands sales through our wholesale channel. On a constant currency basis, net sales increased by 18.0% to approximately $1,837,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 17.6% overall increase in the volume of footwear sold for all brands and channels to approximately 30.7 million pairs for the year ended March 31, 2015 compared to approximately 26.1 million pairs for the year ended December 31, 2013 . Our weighted-average wholesale selling price per pair decreased to $46.53 for the year ended March 31, 2015 from $46.87 for the year ended December 31, 2013 . The decreased average selling price was primarily due to our Teva and Sanuk wholesale segments, partially offset by an increase in the average selling price in our other brands wholesale segment. +30 +Table of Contents +Wholesale net sales of our UGG brand increased primarily due to an increase in the volume of pairs sold, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, wholesale sales of our UGG brand increased by 11.1% to approximately $909,000. For UGG wholesale net sales, the increase in volume had an impact of approximately $89,000, including approximately $5,000 related to the negative impact of foreign currency exchange rate fluctuations. +Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to a shift in product mix and an increased impact from closeout sales. For Teva wholesale net sales, the increase in volume had an impact of approximately $15,000 and the decrease in average selling price had an impact of approximately $7,000. +Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to a shift in product mix. For Sanuk wholesale net sales, the increase in volume had an impact of approximately $14,000 and the decrease in average selling price had an impact of approximately $5,000. +Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold as well as an increase in the weighted-average wholesale selling price per pair. The increase in average selling price was primarily due to a shift in brand mix. The increase in volume of pairs sold had an impact of approximately $36,000 and the increase in average selling price had an impact of approximately $2,000. +Net sales of our E-Commerce business increased due to an increase in the number of pairs sold, partially offset by a decrease in the weighted-average selling price per pair. The decrease in the average selling price was primarily due to a shift in product mix and increased sales discounts. For E-Commerce net sales, the increase in volume had an impact of approximately $63,000 and the decrease in average selling price had an impact of approximately $2,000. +Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of new stores opened since December 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 20.7% to approximately $394,000. A large majority of the new stores were in the US and China, with the remaining new stores in Japan, Canada and Hong Kong. Same store sales for the 52 weeks ending March 29, 2015 decreased 8.4% compared to the 52 weeks ended December 29, 2013. The decrease in same store sales is primarily due to a shift in sales of our Classic styles to online from in-store, as well as a shift in product mix whereby we sold more casual styles, which generally carry lower price points. For retail same store sales, we experienced a decrease in weighted-average selling price of approximately $19,000. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate. +International sales, which are included in the segment sales above, for all of our products combined increased by 26.7% for the year ended March 31, 2015 as compared to the year ended December 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 30.5% to approximately $671,000. International sales represented 35.9% and 33.0% of worldwide net sales for the years ended March 31, 2015 and December 31, 2013 , respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand internationally across all channels of approximately $122,000. +Foreign income before income taxes was $95,850 and $60,851, and worldwide income before income taxes was $221,139 and $205,557 for the years ended March 31, 2015 and December 31, 2013 , respectively. Foreign income before income taxes represented 43.3% and 29.6% of worldwide income before income taxes for the years ended March 31, 2015 and December 31, 2013 , respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of a strategic supply chain reorganization completed during the year ended March 31, 2015. +We expect that our foreign income before income taxes will fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years. +Gross Profit. Overall gross margin increased 100 basis points, primarily due to an increase in the mix of retail and E-Commerce sales, which generally carry higher margins than our wholesale segments. The increased mix of retail and E-Commerce sales contributed approximately 70 basis points to the overall increase in gross margin. An increase in the UGG brand wholesale gross margin, primarily related to the July 2014 acquisition of our UGG brand distributor in Germany, contributed approximately +31 +Table of Contents +20 basis points to the overall increase in gross margin. The factors discussed above include the negative impact of foreign currency exchange rate fluctuations. Our gross margins fluctuate based on several factors including the factors discussed above. +Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to: +• +increased retail costs of approximately $44,000 largely related to new retail stores that were not open as of December 31, 2013 and related corporate infrastructure; +• +increased expenses of approximately $20,000 for marketing and promotions related to our wholesale business, primarily for the Hoka and UGG brands; +• +increased E-Commerce expenses of approximately $18,000 largely related to increased marketing and advertising and the expansion of our E-Commerce business; +• +increased expenses of approximately $16,000 for corporate infrastructure to support our international wholesale expansion and OmniChannel transformation; +• +increased information technology costs of approximately $8,000, in part due to accelerating the amortization expense for certain software projects that will not be used; +• +increased sales and commission expenses of approximately $8,000 largely driven by the increase in wholesale sales; +• +increased US distribution center costs of approximately $7,000, largely driven by the increase in sales and our new Moreno Valley distribution center; and +• +increased expenses of approximately $7,000 related to the negative impact of foreign currency exchange rate fluctuations. +These increases were partially offset by decreased recognition of performance-based cash compensation of approximately $8,000. +Performance-Based Compensation +As noted above, the recognition of performance-based cash compensation decreased by approximately $8,000 over the prior fiscal year period. As of March 31, 2015 , the target level of the performance objectives relating to our fiscal year 2015 performance-based cash awards was only partially achieved, and we have recognized the expense accordingly. In contrast, as of December 31, 2013 , we achieved above the target level of the performance objectives relating to our 2013 performance-based cash awards and we recognized expense for those 2013 awards accordingly at that time. +At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for the next fiscal year and for subsequent fiscal years. The Committee then establishes specific annual Company financial goals and specific strategic goals for each executive. Performance-based cash compensation awards for the fiscal year ended December 31, 2013 were earned above target levels, and performance-based cash compensation awards for the fiscal year ended March 31, 2015 were only partially earned, based on our achievement of certain targets for annual earnings before interest, taxes, depreciation and amortization (EBITDA), as well as achievement of pre-determined individual financial and non-financial performance goals that are tailored to individual employees based on their role and responsibilities at the Company. The performance objectives and goals, as well as the targets, differ each year and are based upon many factors, including the Company’s current business stage and strategies, recent Company financial and operating performance, expected growth rates over prior year's performance, business and general economic conditions and market and peer group analysis. For example, in evaluating targets for the 2013 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2012 , which was approximately $229.7 million, and, in evaluating targets for the 2015 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2013 , which was approximately $251.8 million. Performance objectives for the 2015 fiscal year were based, in part, upon the expected achievement of growth in the Company’s EBITDA for the fiscal year ended March 31, 2015 as compared to the Company’s EBITDA for the fiscal year ended December 31, 2013 . The Company’s higher EBITDA for the fiscal year ended December 31, 2013 as compared to the fiscal year ended December 31, 2012 resulted in fiscal year 2015 EBITDA targets that were higher than the 2013 EBITDA targets. +32 +Table of Contents +In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the compensation expense we recognize may also fluctuate from period to period. +Income (Loss) from Operations. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment: +Years ended +Change +3/31/2015 +12/31/2013 +Amount +% +UGG wholesale +$ +269,489 +$ +224,738 +$ +44,751 +19.9 +% +Teva wholesale +13,320 +9,166 +4,154 +45.3 +Sanuk wholesale +21,914 +20,591 +1,323 +6.4 +Other brands wholesale +(9,838 +) +(9,807 +) +(31 +) +(0.3 +) +E-Commerce +92,392 +66,849 +25,543 +38.2 +Retail stores +57,928 +65,683 +(7,755 +) +(11.8 +) +Unallocated overhead costs +(220,786 +) +(169,323 +) +(51,463 +) +(30.4 +) +Total +$ +224,419 +$ +207,897 +$ +16,522 +7.9 +% +Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.5% to approximately $236,000. +The increase in income from operations of UGG brand wholesale was primarily the result of the increase in net sales as well as a 3.1 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $16,000 including the negative impact of foreign currency exchange rate fluctuations. The increase in gross margin was primarily due to an increase in higher-margin wholesale sales, largely related to the acquisition of our UGG brand distributor in Germany. The increase in operating expenses was primarily due to marketing and promotions, amortization and sales and commissions. +The increase in income from operations of Teva brand wholesale was primarily the result of a decrease in operating expenses of approximately $5,000 as well as the increase in net sales, partially offset by a 3.1 percentage point decrease in gross margin. The decrease in operating expenses was primarily due to decreased design and sales and commission expenses. The decrease in gross margin was primarily due to an increased impact from closeout sales. +The increase in income from operations of Sanuk brand wholesale was primarily the result of the increase in net sales as well as a decrease in operating expenses of approximately $2,000, partially offset by a 4.8 percentage point decrease in gross margin. The decrease in gross margin was primarily due to a shift in sales mix as well as an increased impact from closeout sales. +Loss from operations of our other brands wholesale was comparable to the prior period. +The increase in income from operations of our E-Commerce business was primarily due to the increase in net sales. This increase was partially offset by an overall increase in operating expenses of approximately $9,000 as well as a 3.0 percentage point decrease in gross margin. The overall increase in operating expenses was primarily due to increased marketing and advertising and the expansion of our E-Commerce business of approximately $18,000, partially offset by the positive impact of foreign currency exchange rate fluctuations in the current year of approximately $7,000 compared to the negative impact of foreign currency exchange rate fluctuations of approximately $2,000 in the prior period. The decrease in gross margin was primarily due to increased sales discounts. +The decrease in income from operations of our retail store business, which primarily relates to the UGG brand, was primarily due to increased operating expenses of approximately $43,000, largely offset by the increase in net sales, and includes the negative impact of foreign currency exchange rate fluctuations. The increase in operating expenses largely related to our new store openings +33 +Table of Contents +and related corporate infrastructure. On a constant currency basis income from operations of our retail store business decreased 2.6% to approximately $64,000. +The increase in unallocated overhead costs was primarily due to (1) expense related to increased corporate infrastructure of approximately $16,000 to support our OmniChannel transformation and international wholesale expansion, (2) the negative impact of foreign currency exchange rate fluctuations of approximately $16,000, (3) increased information technology costs of approximately $8,000, (4) increased US distribution center costs of approximately $7,000 and (5) increased depreciation expenses of approximately $4,000 related to our corporate headquarters buildings, partially offset by a reduction in performance-based compensation of approximately $5,000. +Other Expense, Net. The increase in other expense, net was primarily due to an increase in interest expense. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years ended +3/31/2015 +12/31/2013 +Income tax expense +$ +59,359 +$ +59,868 +Effective income tax rate +26.8 +% +29.1 +% +The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. This decrease was partially offset by overall discrete tax liabilities of approximately $1,600 recognized during the year ended March 31, 2015 compared to overall discrete tax benefits of approximately $900 recognized during the year ended December 31, 2013 . The discrete tax liabilities relate to provisions recorded for unrecognized tax benefits as well as prior year US federal and state tax adjustments. The discrete tax benefits relate to a combination of prior year US federal, state and foreign tax adjustments. For the fiscal year 2015, we generated approximately 25.0% of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2015 , we had approximately $132,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We have no plans to repatriate any of our foreign cash. +Net Income. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding was the result of our share repurchases during the year ended March 31, 2015 . The weighted-average impact of the share repurchases was a reduction of approximately 200,000 shares. +Transition Period Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 (Unaudited) +The following table summarizes the Company’s results of operations: +Three Months Ended March 31, +2014 +2013 (unaudited) +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +294,716 +100.0 +% +$ +263,760 +100.0 +% +$ +30,956 +11.7 +% +Cost of sales +150,456 +51.1 +140,201 +53.2 +10,255 +7.3 +Gross profit +144,260 +48.9 +123,559 +46.8 +20,701 +16.8 +Selling, general and administrative (SG&A) expenses +144,668 +49.1 +120,907 +45.8 +23,761 +19.7 +(Loss) income from operations +(408 +) +(0.2 +) +2,652 +1.0 +(3,060 +) +(115.4 +) +Other expense, net +334 +0.1 +142 +0.1 +192 +135.2 +(Loss) income before income taxes +(742 +) +(0.3 +) +2,510 +0.9 +(3,252 +) +(129.6 +) +Income tax expense +1,943 +0.6 +1,503 +0.5 +440 +29.3 +Net (loss) income +$ +(2,685 +) +(0.9 +)% +$ +1,007 +0.4 +% +$ +(3,692 +) +(366.6 +)% +34 +Table of Contents +Overview. The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce sites as well as an increase in our other brands wholesale sales, partially offset by a decrease in Teva wholesale sales. We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations for the three months ended March 31, 2013 . The change resulted from higher SG&A expenses, partially offset by an increase in gross profit. +Net Sales. The following tables summarize net sales by location, brand, and distribution channel: +Three Months Ended March 31, +Change +2014 +2013 (unaudited) +Amount +% +Net sales by location: +US +$ +198,293 +$ +182,693 +$ +15,600 +8.5 +% +International +96,423 +81,067 +15,356 +18.9 +Total +$ +294,716 +$ +263,760 +$ +30,956 +11.7 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +83,271 +$ +82,706 +$ +565 +0.7 +% +E-Commerce +35,362 +24,409 +10,953 +44.9 +Retail stores +78,947 +63,466 +15,481 +24.4 +Total +197,580 +170,581 +26,999 +15.8 +Teva: +Wholesale +45,283 +50,504 +(5,221 +) +(10.3 +) +E-Commerce +1,314 +1,057 +257 +24.3 +Retail stores +250 +46 +204 +443.5 +Total +46,847 +51,607 +(4,760 +) +(9.2 +) +Sanuk: +Wholesale +28,793 +30,011 +(1,218 +) +(4.1 +) +E-Commerce +1,034 +918 +116 +12.6 +Retail stores +875 +17 +858 +5,047.1 +Total +30,702 +30,946 +(244 +) +(0.8 +) +Other: +Wholesale +18,662 +10,369 +8,293 +80.0 +E-Commerce +874 +230 +644 +280.0 +Retail stores +51 +27 +24 +88.9 +Total +19,587 +10,626 +8,961 +84.3 +Total +$ +294,716 +$ +263,760 +$ +30,956 +11.7 +% +Total E-Commerce +$ +38,584 +$ +26,614 +$ +11,970 +45.0 +% +Total Retail stores +$ +80,123 +$ +63,556 +$ +16,567 +26.1 +% +The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands sales through the wholesale channel, increased Sanuk brand sales through our retail stores, increased other brands sales through our E-commerce sites, and increased UGG brand wholesale sales. These increases were partially offset by decreased wholesale sales of our Teva brand and our Sanuk brand. On a constant currency basis, net sales increased by 12.4% to approximately $296,000. We experienced an increase in the number of pairs sold in the retail, other brands wholesale and E-Commerce segments, partially offset by a decrease in the number of pairs sold in the Teva brand, Sanuk brand and UGG brand wholesale segments. This resulted in an increase in the overall volume of footwear sold for all brands of 3.3% to approximately 6.2 million pairs sold for the three months ended March 31, 2014 from approximately 6.0 million pairs for the three months ended March 31, 2013 . +35 +Table of Contents +Wholesale net sales of our UGG brand increased primarily due to an increase in the weighted-average wholesale selling price, partially offset by a decrease in the volume of pairs sold. The increase in average selling price was primarily due to a shift in product mix of cold weather shoe products that generally carry higher price points and higher average closeout prices. For UGG wholesale net sales, the increase in average selling price had an impact of approximately $1,000 and the decrease in volume had an impact of approximately $500. +Wholesale net sales of our Teva brand decreased due to a decrease in the weighted-average wholesale selling price per pair as well as a decrease in volume of pairs sold. The decrease in average selling price was primarily due to a shift in product mix. For Teva wholesale net sales, the decrease in average selling price had an impact of approximately $3,000 and the decrease in volume had an impact of approximately $2,000. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold outside the US as well as a decrease in the weighted-average wholesale selling price per pair, partially offset by an increase in the volume of pairs sold in the US. The decrease in average selling price was primarily due to increased closeout sales. For Sanuk wholesale net sales, the decrease in volume of pairs sold outside the US had an impact of approximately $3,000, the decrease in average selling price had an impact of approximately $2,000 and the increase in volume of pairs sold in the US had an impact of approximately $4,000. +Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold of approximately $8,500. The increase in volume was primarily due to the continued growth of the Hoka brand. The change in average selling price had no material impact on sales. +Net sales of our E-Commerce business increased due to an increase in the number of pairs sold as well as an increase in the weighted-average selling price per pair. For E-Commerce net sales, the increase in volume had an impact of approximately $8,000 and the increase in average selling price had an impact of approximately $2,000. +Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 42 new stores opened since March 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 28.3% to approximately $82,000. Over half of these new stores were in Asia, primarily in China and Japan, with the remaining new stores in the US and Europe. Same store sales for the thirteen weeks ended March 30, 2014 increased by 4.0% compared to the same period in 2013 . For retail same store sales, we experienced an increase in volume of approximately $4,000 partially offset by a decrease in weighted-average selling price of approximately $2,000. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate. +International sales, which are included in the segment sales above, for all of our products combined increased by 18.9% for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 21.0% to approximately $98,000. International sales represented 32.7% and 30.7% of worldwide net sales for the three months ended March 31, 2014 and 2013 , respectively. The increase in international sales as a percentage of worldwide net sales was primarily due to the continued growth in our UGG brand's international retail and E-Commerce business of approximately $16,000. +Foreign loss before income taxes and worldwide loss before income taxes was $3,631 and $742, respectively, during the three months ended March 31, 2014 , as compared to foreign income before income taxes and worldwide income before income taxes of $335 and $2,510, respectively, during the three months ended March 31, 2013 . The change from foreign income before income taxes to a foreign loss before income taxes was primarily due to an increase in foreign operating expenses of approximately $14,000, which is primarily related to the expansion of our international retail and E-Commerce operations. The increase in foreign operating expenses was partially offset by an increase in foreign gross margin of 2.2 percentage points, which was primarily related to the increase in international retail and E-Commerce sales which generally carry higher margins than wholesale sales. +We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in improved foreign operating results in future years. +Gross Profit. As a percentage of net sales, gross margin increased compared to the same period in 2013 due to reduced sheepskin costs and increased use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix of retail and E-Commerce sales, which generally carry higher +36 +Table of Contents +margins than our wholesale segments. The change in sales between our wholesale customers and distributors was immaterial to gross margin. +Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to: +• +increased retail costs of approximately $14,000, largely related to 42 new retail stores that were not open as of March 31, 2013 and related corporate infrastructure; +• +increased E-Commerce costs of approximately $5,000, largely related to marketing and advertising, the negative impact of foreign currency exchange rate fluctuations, and increased expenses related to the international expansion of our E-Commerce business; and +• +increased expenses of approximately $3,000 for marketing and promotions, largely related to the UGG and Hoka brands. +Income (Loss) from Operations. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment: +Three Months Ended March 31, +Change +2014 +2013 (unaudited) +Amount +% +UGG wholesale +$ +13,595 +$ +14,081 +$ +(486 +) +(3.5 +)% +Teva wholesale +6,425 +9,640 +(3,215 +) +(33.4 +) +Sanuk wholesale +7,530 +9,360 +(1,830 +) +(19.6 +) +Other wholesale +(758 +) +(2,580 +) +1,822 +70.6 +E-Commerce +13,272 +8,969 +4,303 +48.0 +Retail stores +7,646 +10,433 +(2,787 +) +(26.7 +) +Unallocated overhead costs +(48,118 +) +(47,251 +) +(867 +) +(1.8 +) +Total +$ +(408 +) +$ +2,652 +$ +(3,060 +) +(115.4 +)% +We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations during the three months ended March 31, 2013 due to increased SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by increased gross profit. On a constant currency basis, income from operations decreased by 59.2% to approximately $1,000. +The slight decrease in income from operations of UGG brand wholesale was primarily the result of an increase in operating expenses of approximately $2,000 as well as the negative impact of foreign currency rate fluctuations of approximately $300, partially offset by a 2.0 percentage point increase in gross margin, primarily due to decreased sheepskin costs. +The decrease in income from operations of Teva brand wholesale was primarily the result of a 5.8 percentage point decrease in gross margin as well as the decrease in net sales, partially offset by a decrease in operating expenses of approximately $1,000. The decrease in gross margin was primarily due to a shift in sales mix as well as increased freight expense. +The decrease in income from operations of Sanuk brand wholesale was primarily the result of the decrease in net sales, as well as increased operating expenses of approximately $1,000. +The decrease in loss from operations of our other brands wholesale was primarily the result of the increase in net sales as well as a 7.8 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $2,000. The increase in sales and gross margin is largely due to the continued growth of the Hoka brand which generally carries higher margins than the other brands included in this segment. +The increase in income from operations of our E-Commerce business was primarily due to the increase in net sales as well as a 5.7 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000. The increase in gross margin was largely due to the reduced sheepskin costs related to our UGG brand products. The increase in operating expenses was primarily due to increased expenses related to marketing and advertising, the negative impact of foreign currency exchange rate fluctuations and increased expenses related to the international expansion of our E-commerce business. +37 +Table of Contents +Income from operations of our retail store business, which primarily relates to the UGG brand, decreased primarily due to increased operating expenses of approximately $14,000 largely related to our new store openings and related corporate infrastructure, as well as the negative impact of foreign currency exchange rate fluctuations of approximately $1,000. These results were partially offset by increased gross profit of approximately $12,000. +Unallocated overhead costs were comparable to the same period in 2013. +Other Expense, Net. The increase in other expense, net was primarily due to expenses related to our credit facilities. +Income Taxes. Income taxes for the three months ended March 31, 2014 are computed using the actual tax rate for the transition period (see Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for an explanation of our change in fiscal year). Income taxes for the three months ended March 31, 2013 were computed using the effective tax rate estimated to be applicable for the full fiscal year ended December 31, 2013. Income tax expense and effective income tax rates were as follows: +Three Months Ended March 31, +2014 +2013 (unaudited) +Income tax expense +$ +1,943 +$ +1,503 +Effective income tax rate +(261.9 +)% +59.9 +% +We recognized income tax expense of $1,943 on a pre-tax loss of $742 for the three months ended March 31, 2014 compared to income tax expense of $1,503 on pre-tax earnings of $2,510 for the three months ended March 31, 2013. The income tax expense of $1,943 primarily relates to taxable income in the US and certain foreign jurisdictions during the three months ended March 31, 2014 . The pre-tax loss of $742 includes the loss of a foreign subsidiary in a jurisdiction with no corporate income tax, therefore providing no tax benefit from the loss that was recognized. +Net (Loss) Income. We experienced a net loss for the three months ended March 31, 2014 compared to net income for the three months ended March 31, 2013 as a result of the items discussed above. As a result of the net loss for the three months ended March 31, 2014 , we recognized a loss per share compared to diluted earnings per share during the three months ended March 31, 2013 . +Year ended December 31, 2013 Compared to Year ended December 31, 2012 +The following table summarizes our results of operations: +Years ended December 31, +2013 +2012 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,556,618 +100.0 +% +$ +1,414,398 +100.0 +% +$ +142,220 +10.1 +% +Cost of sales +820,135 +52.7 +782,244 +55.3 +37,891 +4.8 +Gross profit +736,483 +47.3 +632,154 +44.7 +104,329 +16.5 +Selling, general and administrative (SG&A) expenses +528,586 +33.9 +445,206 +31.5 +83,380 +18.7 +Income from operations +207,897 +13.4 +186,948 +13.2 +20,949 +11.2 +Other expense, net +2,340 +0.2 +2,830 +0.2 +(490 +) +(17.3 +) +Income before income taxes +205,557 +13.2 +184,118 +13.0 +21,439 +11.6 +Income taxes +59,868 +3.8 +55,104 +3.9 +4,764 +8.6 +Net income +145,689 +9.4 +129,014 +9.1 +16,675 +12.9 +Net income attributable to the noncontrolling interest +— +— +(148 +) +— +148 +* +Net income attributable to Deckers Outdoor Corporation +$ +145,689 +9.4 +% +$ +128,866 +9.1 +% +$ +16,823 +13.1 +% +38 +Table of Contents +* Calculation of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel, and increased Sanuk brand sales through our E-Commerce sites and retail stores. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses. +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years ended December 31, +Change +2013 +2012 +Amount +% +Net sales by location: +US +$ +1,042,274 +$ +972,987 +$ +69,287 +7.1 +% +International +514,344 +441,411 +72,933 +16.5 +Total +$ +1,556,618 +$ +1,414,398 +$ +142,220 +10.1 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +818,377 +$ +819,256 +$ +(879 +) +(0.1 +)% +E-Commerce +155,635 +118,886 +36,749 +30.9 +Retail stores +324,868 +245,397 +79,471 +32.4 +Total +1,298,880 +1,183,539 +115,341 +9.7 +Teva: +Wholesale +109,334 +108,591 +743 +0.7 +E-Commerce +6,627 +6,578 +49 +0.7 +Retail stores +426 +347 +79 +22.8 +Total +116,387 +115,516 +871 +0.8 +Sanuk: +Wholesale +94,420 +89,804 +4,616 +5.1 +E-Commerce +6,077 +4,172 +1,905 +45.7 +Retail stores +1,183 +20 +1,163 +5,815.0 +Total +101,680 +93,996 +7,684 +8.2 +Other brands: +Wholesale +38,276 +20,194 +18,082 +89.5 +E-Commerce +1,195 +956 +239 +25.0 +Retail stores +200 +197 +3 +1.5 +Total +39,671 +21,347 +18,324 +85.8 +Total +$ +1,556,618 +$ +1,414,398 +$ +142,220 +10.1 +% +Total E-Commerce +$ +169,534 +$ +130,592 +$ +38,942 +29.8 +% +Total Retail stores +$ +326,677 +$ +245,961 +$ +80,716 +32.8 +% +The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel and increased Sanuk brand sales through our E-Commerce sites and retail stores. On a constant currency basis, net sales increased by 11.1% to approximately $1,571,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 10.1% overall increase in the volume of footwear sold for all brands and channels to approximately 26.1 million pairs for the year ended December 31, 2013 compared to approximately 23.7 million pairs for 2012. Our weighted-average wholesale selling price per pair decreased to $46.87 for the year ended December 31, 2013 from $49.17 for 2012. The decreased average selling price was primarily due to our UGG, Teva and Sanuk wholesale segments, partially offset by an increase in the average selling price in our other brands wholesale segment. Our overall weighted-average selling price per pair across all channels decreased to $59.63 +39 +Table of Contents +for the year ended December 31, 2013 from $60.12 for 2012. The decrease in overall average selling price per pair was primarily due to the decreased weightedaverage wholesale selling price per pair, partially offset by the increased mix of Direct-to-Consumer sales which carry higher price points. +Wholesale net sales of our UGG brand decreased primarily due to a decrease in the weighted-average wholesale selling price per pair as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by an increase in the volume of pairs sold. On a constant currency basis, wholesale sales of our UGG brand increased by 0.6% to approximately $824,000. The decrease in average selling price was primarily due to increased closeout sales at a lower price, as well as the negative impact of foreign currency exchange rate fluctuations. For UGG wholesale net sales, the decrease in average selling price had an estimated impact of approximately $28,000, including approximately $6,000 related to the negative impact of foreign currency exchange rate fluctuations, partially offset by an increase in volume of approximately $27,000. +Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was largely due to a higher proportion of the sales coming from sandals which carry lower average selling prices. For Teva wholesale net sales, the increase in volume had an estimated impact of approximately $4,000 and the decrease in average selling price had an estimated impact of approximately $3,000. +Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to an increased impact of closeout sales. For Sanuk wholesale net sales, the increase in volume had an estimated impact of approximately $10,000 and the decrease in average selling price had an estimated impact of approximately $5,000. +Wholesale net sales of our other brands increased due to an increase in the weighted-average wholesale selling price per pair, as well as an increase in the volume of pairs sold. The increase in average selling price was primarily due to the addition of the Hoka brand, which carries higher average selling prices than the other brands included in this segment. The increase in volume of pairs sold was primarily due to the addition of the Hoka brand. Hoka sales are included from our acquisition date of September 27, 2012 and, therefore, comparable sales amounts are not included in the sales for the year ended December 31, 2012 . Excluding the Hoka brand, our other brands’ wholesale net sales increased by approximately $4,000 due to an increase in sales of approximately $5,000 from an increase in the volume of pairs sold, partially offset by a decrease in sales of approximately $1,000 due to a decrease in the average selling price. The decrease in average selling price was primarily due to the increased impact of closeout sales. +Net sales of our E-Commerce business increased due to an increase in the volume of pairs sold primarily attributable to the UGG brand. For E-Commerce net sales, the increase in volume had an impact of approximately $39,000. The change in average selling price had no material impact on net sales. +Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 40 new stores opened since December 31, 2012 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 36.4% to approximately $335,000. Over half of the new stores were in Asia, primarily in China and Japan, with the remaining new stores in the US and Europe. Same store sales for the 52 weeks ending December 29, 2013 increased 2.8% compared to the same period in 2012 . For retail same store sales, we experienced an increase in volume of approximately $4,500 partially offset by a decrease in weighted-average selling price of approximately $500. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate. +International sales, which are included in the segment sales above, for all of our products combined increased by 16.5% for the year ended December 31, 2013 as compared to the year ended December 31, 2012 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 19.9% to approximately $529,000. International sales represented 33.0% and 31.2% of worldwide net sales for the year ended December 31, 2013 and 2012, respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand's international retail and E-Commerce business of approximately $65,000, as well as increased sales to our distributors throughout Asia and Latin America of approximately $8,000 and wholesale customers in France of approximately $7,000, partially offset by decreased sales to our distributors in Canada and Europe of approximately $11,000. +Foreign income before income taxes was $60,851 and $51,409, and worldwide income before income taxes was $205,557 and $184,118 for the year ended December 31, 2013 and 2012 , respectively. Foreign income before income taxes represented 29.6% and 27.9% of worldwide income before income taxes for the year ended December 31, 2013 and 2012 , respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to a 16.5% international sales growth rate compared to a 7.1% US sales growth rate, as well as an increase in gross margin earned +40 +Table of Contents +on foreign sales. These increases were primarily related to the increase in international retail and E-Commerce sales which generally carry higher margins than wholesale sales. +We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand and our continuing strategy of enhancing product diversification will contribute to growth in our international retail and E-Commerce business in future years. +Gross Profit. As a percentage of net sales, gross margin increased in the year ended December 31, 2013 compared to the same period in 2012 . Gross profit increased by approximately 1.5 percentage points due to reduced sheepskin costs and increased use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix of retail and E-Commerce sales, which generally carry higher margins than our wholesale segments, of approximately 1.2 percentage points. These increases were partially offset by the negative impact of foreign currency exchange rate fluctuations of approximately 30 basis points. The change in sales between our wholesale customers and distributors is immaterial to gross margin. Our gross margins fluctuate based on several factors, and we expect our gross margin to increase for the full year 2014 compared to 2013, primarily due to realizing a full year of reduced sheepskin prices, the increased use of UGGpure and an increase in the proportion of Direct-to-Consumer sales which generally carry higher margins. +Selling, General and Administrative Expenses. SG&A expenses increased primarily from: +• +increased retail costs of approximately $53,000 largely related to 40 new retail stores that were not open as of December 31, 2012 and related corporate infrastructure; +• +increased recognition of performance-based compensation of approximately $17,000; +• +increased E-Commerce expenses of approximately $13,000 largely related to increased marketing and advertising; and +• +increased expenses of approximately $9,000 for the Hoka brand which we acquired on September 27, 2012. +These increases were partially offset by decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately $8,000 primarily due to changes made during 2012 to the brand's forecast of sales and gross profit through 2015, which increased the expense in 2012 without a comparable increase in 2013. +Performance-Based Compensation +As noted above, the recognition of performance-based compensation increased by approximately $17,000 for the year ended December 31, 2013 over the prior year period. As of December 31, 2013 , the target level of the performance objectives relating to our 2013 performance-based cash awards was achieved, and we have recognized the expense accordingly. In contrast, as of December 31, 2012 , we did not achieve the same level of the performance objectives relating to our 2012 performance-based cash awards and we recognized expense for those 2012 awards accordingly at that time. +At the beginning of each year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for the next fiscal year and for subsequent years. The Committee then establishes specific annual Company financial goals and specific strategic goals for each executive. Performance-based cash compensation awards for the fiscal year ended December 31, 2012 were only partially earned, and performance-based cash compensation awards for the fiscal year ended December 31, 2013 were earned at higher levels, based on our achievement of certain targets for annual EBITDA, as well as achievement of pre-determined individual financial and non-financial performance goals that are tailored to individual employees based on their role and responsibilities at the Company. The performance objectives and goals, as well as the targets, differ each year and are based upon many factors, including the Company’s current business stage and strategies, recent Company financial and operating performance, expected growth rates over prior year’s performance, business and general economic conditions and market and peer group analysis. For example, in evaluating targets for the 2012 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2011 , which was approximately $314.6 million, and, in evaluating targets for the 2013 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2012 , which was approximately $229.7 million. Performance objectives for the 2013 fiscal year were based, in part, upon the expected achievement of growth in the Company’s EBITDA for the fiscal year ended December 31, 2013 as compared to the Company’s EBITDA for the fiscal year ended December 31, 2012 . While expected growth rates over prior year performance were not reduced, the Company’s lower EBITDA for the fiscal year ended December 31, 2012 as compared to the fiscal year ended December 31, 2011 resulted in 2013 EBITDA targets that were lower than the 2012 EBITDA targets. +41 +Table of Contents +In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the compensation expense we recognize may also fluctuate from period to period. +Income (Loss) from Operations. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment: +Years ended December 31, +Change +2013 +2012 +Amount +% +UGG wholesale +$ +224,738 +$ +206,039 +$ +18,699 +9.1 +% +Teva wholesale +9,166 +9,228 +(62 +) +(0.7 +) +Sanuk wholesale +20,591 +14,398 +6,193 +43.0 +Other brands wholesale +(9,807 +) +(4,523 +) +(5,284 +) +(116.8 +) +E-Commerce +66,849 +56,190 +10,659 +19.0 +Retail stores +65,683 +63,306 +2,377 +3.8 +Unallocated overhead costs +(169,323 +) +(157,690 +) +(11,633 +) +(7.4 +) +Total +$ +207,897 +$ +186,948 +$ +20,949 +11.2 +% +Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.7% to approximately $213,000. +The increase in income from operations of UGG brand wholesale was primarily the result of a 2.1 percentage point increase in gross margin primarily related to decreased sheepskin costs of approximately $18,000, as well as reduced operating expenses of approximately $2,000, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations of UGG brand wholesale increased 11.0% to approximately $229,000. +Income from operations of Teva brand wholesale was comparable to the same period in 2012 . +The increase in income from operations of Sanuk brand wholesale was primarily the result of decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately $8,000, which was primarily due to changes made during 2012 to the brand's forecast of sales and gross profit through 2015, which increased the expense in 2012 without a comparable increase in 2013. In addition, income from operations increased due to the increase in net sales, partially offset by a 1.4 percentage point decrease in gross margin due to increased closeout sales as well as an increase in sales expenses of approximately $2,000. +The increase in loss from operations of our other brands wholesale was primarily the result of the activity of our Hoka brand, which we purchased on September 27, 2012, and includes initial costs to expand the brand. +The increase in income from operations of our E-Commerce business was primarily the result of the increase in net sales and resulting gross profit, partially offset by increased operating expenses of approximately $15,000. The increased operating expenses were largely due to increased marketing and advertising costs. +Income from operations of our retail store business, which primarily involves the UGG brand, increased due to the increase in net sales, largely offset by increased operating expenses of approximately $53,000 primarily attributable to 40 new stores opened during the year as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations of our retail store business increased 7.9% to approximately $68,000. +The increase in unallocated overhead costs resulted most significantly from an increase of approximately $8,000 in the recognition of performance-based compensation that was not allocated to any of our reportable segments. +42 +Table of Contents +Other Expense, Net. Other expense, net decreased primarily due to a decrease in interest expense related to our short-term borrowings. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years ended December 31, +2013 +2012 +Income tax expense +$ +59,868 +$ +55,104 +Effective income tax rate +29.1 +% +29.9 +% +The decrease in the effective tax rate was primarily due to the increase in our annual foreign income before income tax as a percentage of worldwide income before income tax, as income generated in the foreign jurisdictions is taxed at significantly lower rates than the US. For the full year 2013, we generated approximately 11.0% of our earnings before income tax from a country which does not impose a corporate income tax. +Net Income Attributable to the Noncontrolling Interest. Prior to April 2, 2012, we owned 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of our major manufacturers in China. On April 2, 2012, we purchased the 49% noncontrolling interest owned by Stella International for a total purchase price of $20,000. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and continues to be consolidated with our operations. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding was the result of our share repurchases which commenced during the year ended December 31, 2012 . The weighted-average impact of the share repurchases was a reduction of approximately 2,600,000 shares. +Off-Balance Sheet Arrangements +We do not have off-balance sheet arrangements. +Liquidity and Capital Resources +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing credit. These factors may impact our working capital reserves and have a material adverse effect on our business. +Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30 and September 30 to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30 and December 31; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31 and March 31 in anticipation of the spring selling season that occurs in the quarters ending March 31 and June 30. Given the seasonality of our UGG, Teva, and Sanuk brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has been provided using our internal cash flows and short-term borrowings. We borrow funds under our credit agreement as needed. +The following table summarizes our cash flows: +Years ended +3/31/2015 +12/31/2013 +12/31/2012 +Net cash provided by operating activities +$ +169,654 +$ +262,125 +$ +163,906 +Net cash used in investing activities +$ +(100,636 +) +$ +(85,197 +) +$ +(75,362 +) +Net cash used in financing activities +$ +(78,260 +) +$ +(50,513 +) +$ +(242,621 +) +43 +Table of Contents +Cash from Operating Activities. Net cash provided by operating activities for the year ended March 31, 2015 resulted primarily from net income and an increase in trade accounts payable, long-term liabilities and accrued expenses. The increase in long-term liabilities was primarily due to an increase in deferred rent. The increase in trade accounts payable and accrued expenses was primarily due to the timing of inventory purchases and payments. The increase in long-term liabilities was primarily related to non-current tax liabilities. These increases in cash provided by operating activities were partially offset by increases in trade accounts receivable, inventories, income tax receivable and prepaid expenses and other assets. The increase in trade accounts receivable was primarily related to increased wholesale sales in the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. The increase in inventory was primarily related to efforts to manage inventory levels relative to expected future sales and the timing of our inventory purchases and payments. The increase in income tax receivable was primarily related to estimated tax payments made in prior periods. The increase in prepaid expenses and other assets was primarily due to deposits for future leather purchases. Net working capital increased as of March 31, 2015 from December 31, 2013 , primarily as a result of lower trade accounts payable and lower income taxes payable, partially offset by lower other current assets, lower trade accounts receivable and lower inventories. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Net cash provided by operating activities for the year ended December 31, 2013 resulted primarily from net income, a decrease in inventories, and increases in accrued expenses, income taxes payable and trade accounts payable. The decrease in inventories was primarily related to efforts to manage inventory levels relative to expected future sales and the timing of our inventory purchases and payments. The increase in accrued expenses was primarily due to larger payroll accruals, including performance-based compensation for the year ended December 31, 2013 versus 2012 , as well as increased value added tax (VAT) accruals. The increase in income taxes payable was due to the increase in earnings. The increase in trade accounts payable was primarily due to the timing of inventory purchases and payments. These increases in cash provided by operating activities were partially offset by an increase in prepaid expenses and other current assets. The increase in prepaid and other current assets was primarily due to deposits paid in accordance with our contracts to purchase sheepskin. Net working capital increased as of December 31, 2013 from December 31, 2012 , primarily as a result of higher cash and cash equivalents balances and higher prepaid and other current assets, partially offset by higher other current liabilities, lower inventories and higher accounts payable. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Net cash provided by operating activities for the year ended December 31, 2012 resulted primarily from net income, a decrease in prepaid and other current assets and an increase in trade accounts payable. The decrease in prepaid expenses and other current assets was primarily due to refunds of deposits received in accordance with our contracts to purchase sheepskin. The increase in trade accounts payable was primarily due to the timing of inventory purchases and payments. These increases in cash provided by operating activities were partially offset by an increase in inventories. The increase in inventories was primarily related to expected future sales and the timing of our inventory purchases and payments. Net working capital decreased as of December 31, 2012 from December 31, 2011 , primarily as a result of lower cash and prepaid and other current assets, and increased short-term borrowings and accounts payable, partially offset by higher inventories. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Wholesale accounts receivable turnover and inventory turnover both improved in the twelve months ended March 31, 2015 compared to the twelve months ended December 31, 2013 , and did not have a material impact on our liquidity. +Wholesale accounts receivable turnover and inventory turnover both improved in the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 , and did not have a material impact on our liquidity. +Cash from Investing Activities. Net cash used in investing activities for the year ended March 31, 2015 resulted primarily from the purchases of property and equipment and purchase of intangibles. The capital expenditures were primarily related to infrastructure improvements to support our OmniChannel transformation and international expansion, the build out of our distribution center and retail stores, and purchases of computer hardware and software. The purchase of intangible and other assets, net was related to the acquisition of our UGG brand distributor that sold to retailers in Germany. +Net cash used in investing activities for the year ended December 31, 2013 resulted primarily from the purchases of property and equipment. The capital expenditures included the build out of our new corporate facilities and retail stores, and purchases of computer hardware and software. The new corporate facilities replaced several leased spaces. +For the year ended December 31, 2012 , net cash used in investing activities resulted primarily from the purchases of property and equipment, as well as our acquisitions of the Hoka brand and an intangible asset for lease rights for a retail store location in France. Capital expenditures in fiscal year 2012 included the build out of new retail stores and our corporate facilities. +As of March 31, 2015 , we had approximately $8,000 of material commitments for future capital expenditures primarily related to equipment costs of our new distribution center. We estimate that the capital expenditures for fiscal year 2016 including +44 +Table of Contents +the aforementioned commitments will range from approximately $65,000 to $70,000. We anticipate these expenditures will primarily include information technology and related infrastructure improvements to support our OmniChannel transformation and international expansion, the build out of our retail stores and equipment costs of our new distribution center. The actual amount of capital expenditures for the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures. +Cash from Financing Activities. For the year ended March 31, 2015 , net cash used in financing activities resulted primarily from repayments of short-term borrowings and cash paid for repurchases of common stock. This was partially offset by short-term borrowings provided by our lines of credit and funding received from the mortgage obtained on our corporate headquarters property. +For the year ended December 31, 2013 , net cash used in financing activities was comprised primarily of repayments of short-term borrowings, as well as contingent consideration paid related to our Sanuk acquisition. The cash used was partially offset by cash from our short-term borrowings. +For the year ended December 31, 2012 , net cash used in financing activities was comprised primarily of repayments of short-term borrowings and repurchases of our common stock, as well as contingent consideration paid related to our Sanuk acquisition, and the purchase of the remaining 49% noncontrolling interest in our joint venture with Stella International. The cash used was partially offset by cash from our short-term borrowings . +In June 2012, the Company approved a stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program may have been suspended at any time at the Company's discretion. As of February 28, 2015, the Company had repurchased approximately 3,823,000 shares under this program, for approximately $200,000, or an average price of $52.31 per share. As of February 28, 2015, the Company had repurchased the full amount authorized under this program. +In January 2015, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of March 31, 2015, the Company has repurchased approximately 377,000 shares under this program for approximately $27,900, or an average price of $74.09 per share, leaving the remaining approved amount at $172,100. +In August 2011 we entered into a Credit Agreement (Credit Agreement) with JPMorgan Chase Bank, National Association (JPMorgan) as the administrative agent, Comerica Bank (Comerica) and HSBC Bank USA, National Association (HSBC), as co-syndication agents, and the lenders party thereto. In August 2012, we amended and restated the Credit Agreement in its entirety(Amended and Restated Credit Agreement). In June 2013, we amended the Amended and Restated Credit Agreement to permit additional borrowings in China of $12,500 and revised certain financial covenants including an increase in the maximum amount permitted to be spent on the headquarters building from $75,000 to $80,000. In August 2013, one of our subsidiaries entered into a new credit agreement in China (China Credit Facility). In November 2014, we entered into a second Amended and Restated Credit Agreement with JPMorgan as the administrative Agent, Comerica and HSBC as co-syndication agents, and the lenders party thereto. The Second Amended and Restated Credit Agreement amends and restates, in its entirety, the Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit facility. Refer to Note 5 to our accompanying consolidated financial statements in Part IV of this Annual Report for further information on our Second Amended and Restated Credit Agreement and China Credit Facility. At March 31, 2015 , we had no outstanding borrowings under the Second Amended and Restated Credit Agreement and outstanding letters of credit of approximately $100, leaving an unused balance of approximately $399,900 under the Second Amended and Restated Credit Agreement. At March 31, 2015 , we had approximately $4,900 of outstanding borrowings under the China Credit Facility. As of March 31, 2015 , we were in compliance with all covenants and we remain in compliance as of June 1, 2015 . +In July 2014, we obtained a mortgage on our corporate headquarters property for approximately $33,900. At March 31, 2015 the outstanding balance under the mortgage is $33,600. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that will amortize the principal balance over a 30-year period. Minimum principal payments over the next 5 years are approximately $2,700. The loan will mature and have a balloon payment due in 15 years of approximately $23,400. The loan will be used for working capital and other general corporate purposes. In December 2014 the mortgage financial covenants were amended to be consistent with the financial covenants of the Second Amended and Restated Credit Agreement. +Contractual Obligations. The following table summarizes our contractual obligations at March 31, 2015 and the effects such obligations are expected to have on liquidity and cash flow in future periods. +45 +Table of Contents +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +348,899 +$ +53,664 +$ +104,682 +$ +72,102 +$ +118,451 +Purchase obligations (2) +664,659 +664,429 +230 +— +— +Mortgage obligation (3) +54,687 +2,168 +4,336 +4,336 +43,847 +Contingent consideration obligations (4) +25,732 +25,732 +— +— +— +Unrecognized tax benefits (5) +3,566 +281 +1,992 +1,293 +— +Total +$ +1,097,543 +$ +746,274 +$ +111,240 +$ +77,731 +$ +162,298 +(1) +Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. +(2) +Our purchase obligations consist mostly of open purchase orders. They also include capital expenditures, service contracts and promotional expenses. Outstanding purchase orders are primarily with our third-party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and service contracts are due periodically through fiscal years 2016 and 2017. +We have also entered into minimum purchase commitments with certain suppliers (see Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report). Certain of the agreements require that we advance specified minimum payment amounts. We have included the total remaining cash commitments under these agreements, net of deposits, as of March 31, 2015 in this table. We expect our sheepskin purchases will eventually exceed the minimum commitment levels; therefore we believe the deposits will become fully refundable, and thus, we believe this will not materially affect our results of operations, as it is in the normal course of our business. +(3) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period, however the loan will mature and have a balloon payment due in 15 years of approximately $23,400. For a further discussion, see Note 5 to our consolidated financial statements in Part IV of this Annual Report. +(4) +Our contingent consideration obligations consist of estimated contingent consideration payments for the acquisitions of the Sanuk and Hoka brands. For additional information, see the "Commitments and Contingencies" section below and Notes 1 and 6 to our accompanying consolidated financial statements in Part IV of this Annual Report. +(5) +The unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate, if recognized. See Note 4 to our accompanying consolidated financial statements in Part IV of this Annual Report. +Commitments and Contingencies. The following reflect the additional commitments and contingent liabilities that may have a material impact on liquidity and cash flow in future periods. +In July 2011, the Company acquired the Sanuk brand, and the total purchase price included contingent consideration payments. As of March 31, 2015 , the remaining contingent consideration payment, which has no maximum, is 40.0% of the Sanuk brand gross profit in calendar year 2015 and is to be paid within 60 days following the end of the performance period. Estimated contingent consideration payments of approximately $24,200 are included within other accrued expenses in the consolidated balance sheet as of March 31, 2015 , and are not included in the table above. See Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report. +The purchase price for the Hoka brand, acquired in September 2012, also includes contingent consideration through 2017, with a maximum of $2,000, of which approximately $500 has been paid. Estimated future contingent consideration payments of approximately $1,500 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of March 31, 2015 , and are not included in the table above. See Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report. +46 +Table of Contents +We believe that cash generated from operations, the available borrowings under our existing Second Amended and Restated Credit Agreement, and our cash and cash equivalents will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months and the foreseeable future. However, risks and uncertainties that could impact our ability to maintain or grow our cash position include our earnings growth rate, the continued strength of our brands, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories, our ability to generate returns on our acquisitions of businesses, and market volatility, among others. See Part I, Item 1A, "Risk Factors" for a discussion of additional factors that may affect our cash position and liquidity. Furthermore, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a new credit agreement or draw on our existing Second Amended and Restated Credit Agreement. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal years have not had a significant impact on our net sales or profitability. +Critical Accounting Policies and Estimates +Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our significant accounting policies. Those policies and estimates that we believe are most critical to the understanding of our accompanying consolidated financial statements in Part IV of this Annual Report are revenue recognition; use of estimates, which includes the below reserves and allowances; inventories; accounting for long-lived assets; goodwill and other intangible assets; fair value of contingent consideration; and stock compensation. +Use of Estimates. The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period. Management reasonably could use different estimates and assumptions, and changes in estimates and assumptions could occur from period to period, with the result in each case being a potential material change in the financial statement presentation of our financial condition or results of operations. We have historically been materially accurate in our estimates used for the reserves and allowances below. +The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +March 31, 2015 +March 31, 2014 +December 31, 2013 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +161,323 +$ +121,768 +$ +209,081 +Allowance for doubtful accounts +$ +2,297 +1.4% +$ +1,798 +1.5% +$ +2,039 +1.0% +Allowance for sales discounts +$ +2,348 +1.5% +$ +2,121 +1.7% +$ +3,540 +1.7% +Allowance for estimated chargebacks +$ +4,041 +2.5% +$ +3,064 +2.5% +$ +4,935 +2.4% +Amount +% of Net Sales +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +340,637 +$ +294,716 +$ +736,048 +Allowance for estimated returns +$ +9,532 +2.8% +$ +8,586 +2.9% +$ +14,554 +2.0% +Estimated returns liability +$ +1,741 +0.5% +$ +2,400 +0.8% +$ +10,144 +1.4% +Allowance for Doubtful Accounts. We provide a reserve against trade accounts receivable for estimated losses that may result from customers' inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, +47 +Table of Contents +aged trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this reserve. The reserve includes specific reserves for accounts, which all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses of this nature. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for the accounts we consider to have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at March 31, 2015 by approximately $1,000. +Allowance for Sales Discounts. A significant portion of our wholesale sales and resulting trade accounts receivable reflects a discount that our customers may take, generally based upon meeting certain order, shipment and payment timelines. We use the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Estimated Chargebacks. When our wholesale customers pay their invoices, they often take deductions for chargebacks against their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks taken against invoices. +Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated future returns of goods shipped prior to period end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products. We also have a policy whereby we accept returns from our retail and E-Commerce customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. The allowance for estimated returns as a percentage of net sales was comparable to the same period in the prior year. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the allowance and liability reserves for returns in total at March 31, 2015 by approximately $2,000. Our historical estimates for returns have been reasonably accurate. +Inventory Write-Downs. We review the various items in inventory on a regular basis for excess, obsolete, and impaired inventory. In doing so, we write the inventory down to the lower of cost or expected future net selling prices. Inventories were stated at $238,911, $211,519 and $260,791 net of inventory write-downs of $3,601, $4,843 and $6,142 at March 31, 2015 , March 31, 2014 and December 31, 2013 , respectively. The decrease in inventory write-downs at March 31, 2015 compared to March 31, 2014 and December 31, 2013 was primarily due to lower write-downs of certain UGG and other brand styles that are not being continued. The amount of inventory write-downs as a percentage of inventory were 1.5%, 2.2% and 2.4% as of March 31, 2015 , March 31, 2014 and December 31, 2013 , respectively. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve at March 31, 2015 by approximately $1,000. +Valuation of Goodwill, Intangible and Other Long-Lived Assets. We assess the impairment of goodwill, intangible, and other long-lived assets on a separate asset basis based on assumptions and judgments regarding the carrying amount of these assets individually. +We performed our annual impairment tests for goodwill and nonamortizable intangible assets. We evaluated our UGG, Sanuk and other brands' goodwill and our Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk and other brands' goodwill, trademarks, and net assets, the brands' fiscal year 2015 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, we concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill, as well as the Teva trademarks, were not impaired. Our Teva trademarks were evaluated under Accounting Standards Update, Testing Indefinite-Lived Intangible Assets for Impairment , and we concluded, based on an evaluation of all relevant qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity-specific events, and legal, regulatory, contractual, political, business, or other factors, that it is not more likely than not that the fair value of the Teva trademarks is less than its carrying amount, and accordingly we did not perform a quantitative impairment test for the Teva trademarks. Our goodwill balance at March 31, 2015 represents goodwill in the UGG, Sanuk and other brands' reporting units. We believe that it is not more likely than not that the fair value of the UGG reporting unit's fair value and the other brands' reporting units' fair value are less than their respective carrying values. The UGG and other brands' goodwill was evaluated based on qualitative analyses. +We performed a qualitative analysis of the Sanuk reporting unit's fair value as of October 31, 2014, and concluded that it is not more likely than not that the fair value of the reporting unit's fair value was less than the carrying value, and, therefore, no additional sensitivity analysis was performed. +48 +Table of Contents +We also evaluated amortizable long-lived assets, including intangible assets as of December 31, 2014 and December 31, 2013 . During the fiscal year ended March 31, 2015 , we recorded immaterial impairment losses for four of our retail stores for which the fair values did not exceed their carrying values. As of December 31, 2013 , we recorded immaterial impairment losses for three of our retail stores for which the fair values did not exceed their carrying values. Our other valuation methodologies used as of March 31, 2015 did not change from the prior years. +Fair Value of Contingent Consideration. We have entered into contingent consideration arrangements when we have acquired brands. The fair value of our Sanuk brand contingent consideration is material and highly subjective. It is based on estimated future sales, gross profits, and discount rates, among other variables and estimates (see Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report). These are evaluated each reporting period and the contingent consideration is adjusted accordingly. Our estimated revenue forecasts include a compound annual growth rate of 14.6% from calendar year 2014 through calendar year 2015, the final year of the contingent consideration arrangement. Our use of different estimates and assumptions could produce different financial results. For example, a 5.0% change in the estimated compound annual growth rate would change the total liability balance at March 31, 2015 by approximately $2,000. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. There have been significant fluctuations in the price of sheepskin in recent years as the demand from our competitors, as well as the demand from our customers, for this commodity has changed. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, global economic conditions, and other factors which are not considered predictable or within our control. We began using a new raw material, UGGpure, a wool woven into a durable backing, in some of our UGG products in 2013 and which we currently purchase from one supplier. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to reduce the impact of price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to mitigate the impact on our margins. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Other than an increasing amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. As of June 1, 2015 , we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +We utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect to purchase and sell in foreign currencies. As of March 31, 2015 , our designated derivative contracts had notional amounts totaling approximately $46,000. These contracts were held by four counterparties and were expected to mature over the next 12 months. Based upon sensitivity analysis as of March 31, 2015 , a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $5,000. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes. Subsequent to March 31, 2015 , we entered into non-designated derivative contracts with notional amounts totaling approximately $42,000 and designated derivative contracts with notional amounts totaling approximately $31,000. All derivative contracts were held by six counterparties. +Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our European and Asian operations. Approximately $519,000, or 28.6%, of our total net sales for the year ended March 31, 2015 were denominated in foreign currencies. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of remeasuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US dollar functional and also from remeasuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. We remeasure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries' local currency is their designated functional currency, and we translate those subsidiaries' assets and liabilities into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income (loss). Changes in foreign exchange rates affect +49 +Table of Contents +our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, and retailers, which may have a negative impact on our net sales and gross margins. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the US and changes in the London Interbank Offered Rate (LIBOR). Our Second Amended and Restated Credit Agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. Our China Credit Facility provides for interest on outstanding borrowings at rates based on the People’s Bank of China rate, which was 5.35% at March 31, 2015 (see Note 5 to our accompanying consolidated financial statements in Part IV of this Annual Report). +Item 8. Financial Statements and Supplementary Data. +Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm are filed with this Annual Report in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report. +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +50 +Table of Contents +As of March 31, 2015 , our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of March 31, 2015 , our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our accompanying consolidated financial statements in Part IV of this Annual Report has issued an attestation report on the Company's internal control over financial reporting. Please see the section entitled “Report of Independent Registered Public Accounting Firm” on page F-2 of this Annual Report. +(c) Changes in Internal Control over Financial Reporting. +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +51 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +The information required by this item and not disclosed in the paragraph immediately below will be disclosed in the proxy statement for our 2015 annual meeting of stockholders, or the Proxy Statement, and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2015 pursuant to Regulation 14A under the Exchange Act. +We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions, which we refer to as the Accounting and Finance Code of Ethics. The Accounting and Finance Code of Ethics is designed to meet the requirements of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. We have also adopted a code of ethics that applies to all of our directors, officers and employees, which we refer to as the Code of Ethics. The Code of Ethics is designed to meet the requirements of the NYSE listing rules. The Accounting and Finance Code of Ethics and the Code of Ethics are available on our website at www.deckers.com under the “Investor Information” section of the website. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only. We will promptly disclose on our website the nature of any waiver to the Accounting and Finance Code of Ethics or the Code of Ethics that applies to any of our executive officers or directors. We will also promptly disclose on our website any amendment to the Accounting and Finance Code of Ethics or the Code of Ethics. +Item 11. Executive Compensation. +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +52 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules. +See the “Index to Consolidated Financial Statements and Financial Statement Schedules” on page F-1 herein. +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 8, 2011 and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation (Exhibit 3.2 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.1 +Lease Agreement dated November 1, 2003 between Ampersand Aviation, LLC and Deckers Outdoor Corporation for office building at 495-A South Fairview Avenue, Goleta, California, 93117 (Exhibit 10.34 to the Registrant's Form 10-K filed on March 26, 2004 and incorporated by reference herein) +10.2 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.6 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd.,Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.7 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.8 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Equity Incentive Plan, adopted by the Board of Directors on December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filed on March 1, 2011 and incorporated by reference herein) +#10.10 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective August 1, 2013 (Exhibit 10.10 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.11 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.12 +Form of Restricted Stock Unit Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.13 +Form of Restricted Stock Unit Award Agreement (Level III) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and incorporated by reference herein) +#10.14 +Form of Stock Appreciation Rights Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.15 +Form of Restricted Stock Unit Award Agreement (2012 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on May 31, 2012 and incorporated by reference herein) +53 +Table of Contents +Exhibit +Number +Description of Exhibit +#10.16 +Form of Restricted Stock Unit Award Agreement (2013 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on December 19, 2013 and incorporated by reference herein) +#10.17 +Form of Restricted Stock Unit Award Agreement (2014 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on September 24, 2014 and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.19 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.20 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Angel Martinez and Deckers Outdoor Corporation (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.21 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Thomas George and Deckers Outdoor Corporation (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.22 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Constance Rishwain and Deckers Outdoor Corporation (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.23 +Consulting Agreement and General Release, dated January 16, 2015, by and between Zohar Ziv and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on January 21, 2015 and incorporated by reference herein) +#10.24 +Consulting Agreement and General Release, dated May 6, 2015, by and between Constance Rishwain and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 12, 2015 and incorporated by reference herein) +#10.25 +Employment Agreement, dated February 28, 2011, by and between Stephen Murray and Deckers Europe Limited (Exhibit 10.23 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.26 +Asset Purchase Agreement, dated May 19, 2011, by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on May 19, 2011 and incorporated by reference herein) +10.27 +Amendment No. 1 to Asset Purchase Agreement, dated July 1, 2011, by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on July 6, 2011 and incorporated by reference herein) +10.28 +Second Amended and Restated Credit Agreement, dated November 13, 2014, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 19, 2014 and incorporated by reference herein) +10.29 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.30 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.31 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +*31.2 +Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +**32 +Certification Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +54 +Table of Contents +Exhibit +Number +Description of Exhibit +*101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2015, March 31, 2014 and December 31, 2013; (ii) Consolidated Statements of Comprehensive Income (Loss) for the year ended March 31, 2015, quarter transition period ended March 31, 2014, and years ended December 31, 2013 and December 31, 2012; (iii) Consolidated Statements of Cash Flows for the years ended March 31, 2015, quarter transition period ended March 31, 2014, and years ended December 31, 2013 and December 31, 2012, and (iv) Notes to Consolidated Financial Statements. +* Filed herewith. +** Furnished herewith +# Management contract or compensatory plan or arrangement. +55 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: June 1, 2015 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ ANGEL R. MARTINEZ +Chairman of the Board, +Chief Executive +Officer (Principal Executive Officer) +June 1, 2015 +Angel R. Martinez +/s/ THOMAS A. GEORGE +Chief Financial Officer +(Principal Financial and Accounting Officer) +June 1, 2015 +Thomas A. George +/s/ MICHAEL F. DEVINE, III +Director +June 1, 2015 +Michael F. Devine, III +/s/ KARYN O. BARSA +Director +June 1, 2015 +Karyn O. Barsa +/s/ JOHN M. GIBBONS +Director +June 1, 2015 +John M. Gibbons +/s/ JOHN G. PERENCHIO +Director +June 1, 2015 +John G. Perenchio +/s/ LAURI SHANAHAN +Director +June 1, 2015 +Lauri Shanahan +/s/ JAMES QUINN +Director +June 1, 2015 +James Quinn +/s/ BONITA C. STEWART +Director +June 1, 2015 +Bonita C. Stewart +/s/ NELSON C. CHAN +Director +June 1, 2015 +Nelson C. Chan +56 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of March 31, 2015, March 31, 2014, and December 31, 2013 +F-4 +Consolidated Statements of Comprehensive Income (Loss) for the year ended March 31, 2015, quarter ended (transition period) March 31, 2014, and years ended December 31, 2013 and 2012 +F-5 +Consolidated Statements of Stockholders' Equity for the year ended March 31, 2015, quarter ended (transition period) March 31, 2014, and years ended December 31, 2013 and 2012 +F-6 +Consolidated Statements of Cash Flows for the year ended March 31, 2015, quarter ended (transition period) March 31, 2014, and years ended December 31, 2013 and 2012 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for the year ended March 31, 2015, quarter ended (transition period) March 31, 2014, and years ended December 31, 2013 and 2012 +F-36 +All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deckers Outdoor Corporation and subsidiaries as of March 31, 2015 , March 31, 2014 and December 31, 2013 , and the results of their operations and their cash flows for the year ended March 31, 2015 , the quarter ended (transition period) March 31, 2014 , and the years ended December 31, 2013 and December 31, 2012 in conformity with US generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the internal control over financial reporting of Deckers Outdoor Corporation as of March 31, 2015 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 1, 2015 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of Deckers Outdoor Corporation. +/s/ KPMG LLP +Los Angeles, California +June 1, 2015 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the internal control over financial reporting of Deckers Outdoor Corporation as of March 31, 2015 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A(b). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015 , based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of March 31, 2015 , March 31, 2014 and December 31, 2013 , and the results of their operations and their cash flows for the year ended March 31, 2015 , the quarter ended (transition period) March 31, 2014 , and the years ended December 31, 2013 and December 31, 2012 and our report dated June 1, 2015 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Los Angeles, California +June 1, 2015 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +3/31/2015 +3/31/2014 +12/31/2013 +ASSETS +Current assets: +Cash and cash equivalents +$ +225,143 +$ +245,088 +$ +237,125 +Trade accounts receivable, net of allowances ($18,218 at March 31, 2015, $15,569 at March 31, 2014 and $25,068 at December 31, 2013) +143,105 +106,199 +184,013 +Inventories +238,911 +211,519 +260,791 +Prepaid expenses +15,141 +12,067 +14,980 +Other current assets +35,057 +27,118 +112,514 +Deferred tax assets +14,066 +21,871 +19,881 +Income tax receivable +15,170 +— +— +Total current assets +686,593 +623,862 +829,304 +Property and equipment, net of accumulated depreciation ($129,002 at March 31, 2015, $103,090 at March 31, 2014 and $99,473 at December 31, 2013) +232,317 +184,570 +174,066 +Goodwill +127,934 +127,934 +128,725 +Other intangible assets, net of accumulated amortization ($37,316 at March 31, 2015, $26,026 at March 31, 2014 and $24,140 at December 31, 2013) +87,743 +91,411 +93,278 +Deferred tax assets +15,017 +17,062 +15,751 +Other assets +20,329 +19,365 +18,605 +Total assets +$ +1,169,933 +$ +1,064,204 +$ +1,259,729 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Short-term borrowings +$ +5,383 +$ +6,702 +$ +9,728 +Trade accounts payable +85,714 +76,139 +151,037 +Accrued payroll +27,300 +22,927 +35,725 +Other accrued expenses +41,066 +11,624 +45,301 +Income taxes payable +6,858 +2,908 +49,453 +Value added tax (VAT) payable +1,221 +1,915 +29,274 +Total current liabilities +167,542 +122,215 +320,518 +Long-term liabilities: +Mortgage payable +33,154 +— +— +Income tax liability +5,087 +— +— +Deferred rent obligations +15,663 +14,319 +12,206 +Other long-term liabilities +11,475 +38,821 +38,886 +Total long-term liabilities +65,379 +53,140 +51,092 +Commitments and contingencies (Note 6) +Stockholders' equity: +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 33,292 at March 31, 2015, 34,624 at March 31, 2014 and 34,618 shares at December 31, 2013) +333 +346 +346 +Additional paid-in capital +158,777 +146,731 +143,916 +Retained earnings +798,370 +743,815 +746,500 +Accumulated other comprehensive loss +(20,468 +) +(2,043 +) +(2,643 +) +Total stockholders' equity +937,012 +888,849 +888,119 +Total liabilities and stockholders' equity +$ +1,169,933 +$ +1,064,204 +$ +1,259,729 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(amounts in thousands, except per share data) +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Net sales +$ +1,817,057 +$ +294,716 +$ +1,556,618 +$ +1,414,398 +Cost of sales +938,949 +150,456 +820,135 +782,244 +Gross profit +878,108 +144,260 +736,483 +632,154 +Selling, general and administrative (SG&A) expenses +653,689 +144,668 +528,586 +445,206 +Income (loss) from operations +224,419 +(408 +) +207,897 +186,948 +Other expense (income), net: +Interest income +(207 +) +(65 +) +(60 +) +(217 +) +Interest expense +4,220 +516 +3,079 +3,840 +Other, net +(733 +) +(117 +) +(679 +) +(793 +) +Total other expense, net +3,280 +334 +2,340 +2,830 +Income (loss) before income taxes +221,139 +(742 +) +205,557 +184,118 +Income taxes +59,359 +1,943 +59,868 +55,104 +Net income (loss) +161,780 +(2,685 +) +145,689 +129,014 +Other comprehensive income (loss), net of tax: +Unrealized gain (loss) on foreign currency hedging +450 +(273 +) +(486 +) +(633 +) +Foreign currency translation adjustment +(18,875 +) +873 +(757 +) +963 +Total other comprehensive (loss) income +(18,425 +) +600 +(1,243 +) +330 +Comprehensive income (loss) +$ +143,355 +$ +(2,085 +) +$ +144,446 +$ +129,344 +Net income (loss) attributable to: +Deckers Outdoor Corporation +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +128,866 +Noncontrolling interest +— +— +— +148 +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +129,014 +Comprehensive income (loss) attributable to: +Deckers Outdoor Corporation +$ +143,355 +$ +(2,085 +) +$ +144,446 +$ +129,196 +Noncontrolling interest +— +— +— +148 +$ +143,355 +$ +(2,085 +) +$ +144,446 +$ +129,344 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.70 +$ +(0.08 +) +$ +4.23 +$ +3.49 +Diluted +$ +4.66 +$ +(0.08 +) +$ +4.18 +$ +3.45 +Weighted-average common shares outstanding: +Basic +34,433 +34,621 +34,473 +36,879 +Diluted +34,733 +34,621 +34,829 +37,334 +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Income (Loss) +Total Deckers +Outdoor Corp. +Stockholders' +Equity +Non-controlling Interest +Total Stockholders' +Equity +Shares +Amount +Balance, December 31, 2011 +38,692 +$ +387 +$ +144,684 +$ +692,595 +$ +(1,730 +) +$ +835,936 +$ +5,494 +$ +841,430 +Stock compensation expense +19 +— +14,661 +— +— +14,661 +— +14,661 +Exercise of stock options +4 +— +9 +— +— +9 +— +9 +Shares issued upon vesting +199 +2 +(2 +) +— +— +— +— +— +Deficient tax benefit from stock compensation +— +— +(381 +) +— +— +(381 +) +— +(381 +) +Shares withheld for taxes +— +— +(5,888 +) +— +— +(5,888 +) +— +(5,888 +) +Stock repurchase +(4,514 +) +(45 +) +— +(220,650 +) +— +(220,695 +) +— +(220,695 +) +Net income +— +— +— +128,866 +— +128,866 +148 +129,014 +Acquisition of noncontrolling interest +— +— +(14,037 +) +— +— +(14,037 +) +(5,642 +) +(19,679 +) +Total other comprehensive income +— +— +— +— +330 +330 +— +330 +Balance, December 31, 2012 +34,400 +$ +344 +$ +139,046 +$ +600,811 +$ +(1,400 +) +$ +738,801 +$ +— +$ +738,801 +Stock compensation expense +15 +— +13,136 +— +— +13,136 +— +13,136 +Exercise of stock options +8 +— +52 +— +— +52 +— +52 +Shares issued upon vesting +195 +2 +(2 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +319 +— +— +319 +— +319 +Shares withheld for taxes +— +— +(8,635 +) +— +— +(8,635 +) +— +(8,635 +) +Net income +— +— +— +145,689 +— +145,689 +— +145,689 +Total other comprehensive loss +— +— +— +— +(1,243 +) +(1,243 +) +— +(1,243 +) +Balance, December 31, 2013 +34,618 +$ +346 +$ +143,916 +$ +746,500 +$ +(2,643 +) +$ +888,119 +$ +— +$ +888,119 +Stock compensation expense +5 +— +2,865 +— +— +2,865 +— +2,865 +Shares issued upon vesting +1 +— +— +— +— +— +— +— +Shares withheld for taxes +— +— +(50 +) +— +— +(50 +) +— +(50 +) +Net loss +— +— +— +(2,685 +) +— +(2,685 +) +— +(2,685 +) +Total other comprehensive income +— +— +— +— +600 +600 +— +600 +Balance, March 31, 2014 +34,624 +$ +346 +$ +146,731 +$ +743,815 +$ +(2,043 +) +$ +888,849 +$ +— +$ +888,849 +Stock compensation expense +11 +— +13,524 +— +— +13,524 +— +13,524 +Shares issued upon vesting +93 +1 +(1 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +4,197 +— +— +4,197 +— +4,197 +Shares withheld for taxes +— +— +(5,674 +) +— +— +(5,674 +) +— +(5,674 +) +Stock repurchase +(1,436 +) +(14 +) +— +(107,225 +) +— +(107,239 +) +— +(107,239 +) +Net income +— +— +— +161,780 +— +161,780 +— +161,780 +Total other comprehensive loss +— +— +— +— +(18,425 +) +(18,425 +) +— +(18,425 +) +Balance, March 31, 2015 +33,292 +$ +333 +$ +158,777 +$ +798,370 +$ +(20,468 +) +$ +937,012 +$ +— +$ +937,012 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Cash flows from operating activities: +Net income (loss) +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +129,014 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and accretion +49,293 +10,569 +41,439 +33,367 +Change in fair value of contingent consideration +(3,574 +) +705 +1,815 +8,659 +Provision for (recovery of) doubtful accounts, net +1,107 +(169 +) +125 +2,128 +Deferred tax provision +9,970 +(2,736 +) +(4,092 +) +(5,657 +) +Stock compensation +13,524 +2,865 +13,136 +14,661 +Other +2,969 +111 +1,306 +1,229 +Changes in operating assets and liabilities, net of assets and liabilities acquired in the acquisition of businesses: +Trade accounts receivable +(36,885 +) +77,983 +6,618 +491 +Inventories +(26,748 +) +49,272 +40,580 +(46,903 +) +Prepaid expenses and other current assets +(10,376 +) +68,837 +(58,554 +) +23,511 +Income tax receivable +(15,170 +) +— +— +— +Other assets +(144 +) +(758 +) +(4,290 +) +(3,028 +) +Trade accounts payable +8,912 +(74,898 +) +21,251 +18,932 +Contingent consideration +(364 +) +(2,974 +) +(6,458 +) +(959 +) +Accrued expenses +3,761 +(33,666 +) +33,556 +(9,983 +) +Income taxes payable +4,883 +(46,545 +) +24,386 +(5,820 +) +Long-term liabilities +6,716 +1,998 +5,618 +4,264 +Net cash provided by operating activities +169,654 +47,909 +262,125 +163,906 +Cash flows from investing activities: +Purchases of property and equipment +(91,147 +) +(17,603 +) +(79,829 +) +(61,575 +) +Acquisitions of businesses and equity method investment +— +— +— +(8,829 +) +Purchases of intangibles and other assets, net +(9,489 +) +(30 +) +(5,368 +) +(4,958 +) +Net cash used in investing activities +(100,636 +) +(17,633 +) +(85,197 +) +(75,362 +) +Cash flows from financing activities: +Proceeds from issuance of short-term borrowings +199,784 +— +320,728 +307,000 +Repayments of short-term borrowings +(201,705 +) +(3,000 +) +(344,000 +) +(274,000 +) +Cash paid for shares withheld for taxes +(5,674 +) +(3,752 +) +(6,736 +) +(6,535 +) +Excess tax benefit from stock compensation +4,197 +— +2,071 +2,457 +Cash received from issuances of common stock +— +— +52 +— +Loan origination costs on short-term borrowings +(818 +) +— +— +(1,807 +) +Contingent consideration paid +(115 +) +(15,852 +) +(22,628 +) +(29,041 +) +Cash paid for noncontrolling interest +— +— +— +(20,000 +) +Cash paid for repurchases of common stock +(107,239 +) +— +— +(220,695 +) +Proceeds from mortgage loan +33,931 +— +— +— +Mortgage loan origination costs +(338 +) +— +— +— +Repayment of mortgage principal +(283 +) +— +— +— +Net cash used in financing activities +(78,260 +) +(22,604 +) +(50,513 +) +(242,621 +) +Effect of exchange rates on cash +(10,703 +) +291 +463 +718 +Net change in cash and cash equivalents +(19,945 +) +7,963 +126,878 +(153,359 +) +Cash and cash equivalents at beginning of period +245,088 +237,125 +110,247 +263,606 +Cash and cash equivalents at end of period +$ +225,143 +$ +245,088 +$ +237,125 +$ +110,247 +See accompanying notes to consolidated financial statements. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(Continued) +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Income taxes +$ +53,504 +$ +48,040 +$ +39,122 +$ +66,899 +Interest +$ +2,674 +$ +187 +$ +2,586 +$ +3,338 +Non-cash investing and financing activity: +Deferred purchase payments for acquisition of business +$ +— +$ +— +$ +— +$ +3,671 +Accruals for purchases of property and equipment +$ +3,419 +$ +4,265 +$ +2,283 +$ +489 +Contingent consideration arrangement for acquisition of business +$ +— +$ +— +$ +— +$ +1,128 +Accruals for asset retirement obligations +$ +786 +$ +19 +$ +1,936 +$ +526 +Accruals for shares withheld for taxes +$ +— +$ +— +$ +3,702 +$ +1,804 +Write-off for shares exercised with a tax deficit +$ +— +$ +— +$ +1,752 +$ +2,838 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +(1) The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively referred to as the "Company"). Accordingly, all references herein to Deckers Outdoor Corporation or "Deckers" include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers Outdoor Corporation is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's business is seasonal, with the highest percentage of UGG® brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva® and Sanuk® brand net sales occurring in the quarters ending March 31 and June 30 of each year. The other brands do not have a significant seasonal impact on the Company. +Prior to April 2, 2012, the Company owned 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of the Company's major manufacturers in China. On April 2, 2012, the Company purchased the 49% noncontrolling interest owned by Stella International for a total purchase price of approximately $20,000 . The Company accounted for this transaction as an acquisition of the remaining interest of an entity that had already been majority-owned by the Company. The purchase resulted in a reduction to additional paid in capital of $14,037 representing excess purchase price over the carrying amount of the noncontrolling interest. Prior to this purchase, the Company already had a controlling interest in this entity, and therefore, the subsidiary had been and continues to be consolidated with the Company's operations. +In May 2012, the Company purchased a noncontrolling interest in the Hoka One One® (Hoka) brand, a privately held footwear company, which was accounted for as an equity method investment. In September 2012, the Company acquired the remaining ownership interest in Hoka. The acquisition of Hoka was not material to the Company’s consolidated financial statements and does not have a significant seasonal impact on the Company. +In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change was intended to better align the Company's planning, financial and reporting functions with the seasonality of the business. The 2015, 2013 and 2012 fiscal years ended on March 31, 2015 , December 31, 2013 and December 31, 2012 , respectively. The transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +In July 2014, the Company acquired its UGG brand distributor that sold to retailers in Germany and now operates a wholesale business in Germany through the newly acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to the Company’s consolidated financial statements. +In April 2015, the Company acquired inventory and certain intangible assets, including the trade name related to the Koolaburra® brand, a sheepskin and wool based footwear brand. The purchase price of the acquisition was not material to the Company’s consolidated financial statements. +We sell our brands through quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce business and retail stores. Independent third parties manufacture all of our products. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends, and the retail environment. +Revenue Recognition +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The Company recognizes wholesale, E-Commerce, and international distributor revenue when products are shipped and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recorded. For E-Commerce sales, allowances for estimated returns and bad debts are provided for when related revenue is recorded. For retail sales, allowances for estimated returns are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as a cost of sales. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +Accounting for Long-Lived Assets +Other long-lived assets, such as machinery and equipment, leasehold improvements, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. Intangible assets subject to amortization are amortized over their respective estimated useful lives to their estimated residual values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, except for certain intangible assets where the Company can reliably determine the pattern in which the economic benefits of the assets will be consumed. +At least quarterly, the Company evaluates whether any impairment triggering events, including the following, have occurred which would require such asset groups to be tested for impairment: +• +A significant decrease in the market price of a long-lived asset group; +• +a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its physical condition; +• +a significant adverse change in legal factors or in business climate that could affect the value of a long-lived asset group, including an adverse action or assessment by a regulator; +• +an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset group; +• +a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• +a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. +When an impairment triggering event has occurred, the Company tests for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses potential impairment of its retail group long-lived assets by comparing trailing twelve month (TTM) store cash flows to the current carrying value of the store's long-lived assets. Stores that have been opened for more than one year, or have otherwise been identified by management as having one or more indicators of impairment, with TTM cash flows less than the current carrying amount of the store's long-lived assets are then reviewed to determine if an impairment exists. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets. +Goodwill and Other Intangible Assets +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Intangible assets consist primarily of goodwill, trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually, as of December 31, except for the Teva trademarks and Sanuk goodwill, which are tested as of October 31. +The assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating segments. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate the fair value of the reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company determines this, then the first quantitative step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired. If the fair value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated and the fair values of the intangible assets with indefinite lives. +The Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to their carrying values. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of the indefinite life intangible asset. The Company does not calculate the fair value of the indefinite life intangible unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the indefinite life intangible to its carrying amount, and if the fair value of the indefinite life intangible exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge to write-down the intangible asset to its fair value. +Determining fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including future revenues, royalty rates, discount rates, attrition rates, and market multiples, among others. The Company also considers the following factors: +• +the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• +changes in consumer demand or acceptance of the related brand names, products, or features associated with the assets; and +• +other considerations that could affect fair value or otherwise indicate potential impairment. +In addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such conditions, and increased competition. These or other factors could result in changes to the calculation of fair value which could result in impairment of the Company's remaining goodwill and other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Property and Equipment, Depreciation and Amortization +Property and equipment has a useful life expectancy of at least one year. Property and equipment includes tangible, non-consumable items owned by the Company valued at or above $3 , certain computer software costs and internal or external computer system consulting work valued at or above $3 as defined below, and portable electronic devices valued at or above $1.5 . Tangible, non-consumable items below these amounts are expensed. The value includes the purchase price, as well as costs to acquire (shipping and handling), sales tax, install (excluding site preparation costs), secure, and prepare the item for its intended use. +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives. Machinery and equipment has estimated useful lives ranging from two to ten years, and furniture and fixtures has estimated useful lives ranging from three to seven years. Capitalized website costs, which are included in the machinery & equipment category, are immaterial to the Company's consolidated financial statements. Leasehold improvements are amortized to their residual value on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold improvement lives range from one to fifteen years. Buildings are depreciated over 39 years. The Company allocates depreciation and amortization of property, plant, and equipment to cost of sales and selling, general and administrative (SG&A) expenses. The majority of the Company's depreciation and amortization is included in SG&A expenses due to the nature of its operations. Most of the Company's +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +depreciation and amortization is from its warehouses, its corporate headquarters and its retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Fair Value Measurements +The fair values of the Company's cash and cash equivalents, trade accounts receivable, prepaid expenses, income tax receivable and other current assets, short-term borrowings, trade accounts payable, accrued payroll, other accrued expenses, income taxes payable and the value added tax payable approximate the carrying values due to the relatively short maturities of these instruments. The fair values of the Company's long-term liabilities, other than contingent consideration, recalculated using current interest rates, would not significantly differ from the carrying values. The fair value of the contingent consideration related to acquisitions and of the Company's derivatives are measured and recorded at fair value on a recurring basis. Changes in fair value resulting from either accretion or changes in discount rates or in the expectations of achieving the performance targets are recorded in SG&A expenses. The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the consolidated balance sheets. +The inputs used in measuring fair value are prioritized into the following hierarchy: +• +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability. +The tables below summarize the Company's financial liabilities and assets that are measured on a recurring basis at fair value: +Fair Value at March 31, 2015 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation asset +$ +5,581 +$ +5,581 +$ +— +$ +— +Nonqualified deferred compensation liability +$ +(5,581 +) +$ +(5,581 +) +$ +— +$ +— +Designated derivatives liability +$ +(487 +) +$ +— +$ +(487 +) +$ +— +Contingent consideration for acquisition of business +$ +(26,000 +) +$ +— +$ +— +$ +(26,000 +) +Fair Value at March 31, 2014 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation asset +$ +4,534 +$ +4,534 +$ +— +$ +— +Nonqualified deferred compensation liability +$ +(4,534 +) +$ +(4,534 +) +$ +— +$ +— +Designated derivatives liability +$ +(832 +) +$ +— +$ +(832 +) +$ +— +Contingent consideration for acquisition of business +$ +(30,000 +) +$ +— +$ +— +$ +(30,000 +) +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Fair Value at December 31, 2013 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation asset +$ +4,410 +$ +4,410 +$ +— +$ +— +Nonqualified deferred compensation liability +$ +(4,410 +) +$ +(4,410 +) +$ +— +$ +— +Designated derivatives liability +$ +(550 +) +$ +— +$ +(550 +) +$ +— +Contingent consideration for acquisition of business +$ +(48,000 +) +$ +— +$ +— +$ +(48,000 +) +The Level 2 inputs consist of forward spot rates at the end of the reporting period (see Note 8). +The fair value of the contingent consideration is based on subjective assumptions. It is reasonably possible the estimated fair value of the contingent consideration could change in the near-term and the effect of the change could be material. The estimated fair value of the contingent consideration attributable to our Sanuk® (Sanuk) brand acquisition is based on the Sanuk brand's estimated future gross profits, using a probability weighted average sales forecast to determine a best estimate of gross profits. Estimated contingent consideration payments of approximately $24,200 are included within other accrued expenses in the consolidated balance sheet as of March 31, 2015 . The estimated sales forecasts include a compound annual growth rate (CAGR) of 14.6% from calendar year 2014 through calendar year 2015, the final year of the contingent consideration arrangement. The gross profit forecast for calendar year 2015 is approximately $64,000 , which is then used to apply the contingent consideration percentages in accordance with the applicable agreement (see Note 6). The total estimated contingent consideration is then discounted to the present value with a discount rate of 7.0% . The Company's use of different estimates and assumptions could produce different estimates of the value of the contingent consideration. For example, a 5.0% change in the estimated CAGR would change the total liability balance at March 31, 2015 by approximately $2,000 . +In connection with the Company's acquisition of the Hoka brand, the purchase price includes contingent consideration with maximum payments of $2,000 which is based on the Hoka brand's net sales for calendar years 2013 through 2017. As of March 31, 2015 , approximately $500 has been paid. The Company estimates future net sales using a probability weighted average sales forecast to determine a best estimate. Estimated future contingent consideration payments of approximately $1,500 are included within other accrued expenses and other long-term liabilities in the consolidated balance sheet as of March 31, 2015 . The Company's use of different estimates and assumptions is not expected to have a material impact to the value of the contingent consideration. +Refer to Note 6 for further information on the contingent consideration arrangements. +The following table presents a reconciliation of the Level 3 measurement (rounded): +Beginning balance, January 1, 2013 +$ +71,500 +Payments +(25,400 +) +Change in fair value +1,900 +Balance, December 31, 2013 +$ +48,000 +Payments +(19,000 +) +Change in fair value +1,000 +Balance, March 31, 2014 +$ +30,000 +Payments +(500 +) +Change in fair value +(3,500 +) +Balance, March 31, 2015 +$ +26,000 +Stock Compensation +All of the Company's stock compensation issuances are classified within stockholders' equity. Stock compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. The Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. Determining the expense of share-based awards requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +probabilities change during a period, stock compensation expense and the Company's results of operations could be materially impacted. +Nonqualified Deferred Compensation +In 2010, the Company established a nonqualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a nonqualified basis. For each plan year, on behalf of the Company, the Company's Board of Directors (the Board) may, but is not required to, contribute any amount it desires to any participant under this program. The Company's contribution will be determined by the Board annually. As of March 31, 2015 , no such contribution has been approved by the Board . The value of the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust for the purpose of supporting the benefits payable under this program. Deferred compensation of $540 is included in other accrued expenses and $5,041 is included in other long-term liabilities in the consolidated balance sheets at March 31, 2015 . Deferred compensation of $4,534 and $4,410 are included in other long-term liabilities in the consolidated balance sheets as of March 31, 2014 and December 31, 2013 , respectively. +Use of Estimates +The preparation of the Company's consolidated financial statements in accordance with United States generally accepted accounting principles (US GAAP) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable allowances, returns liabilities, stock compensation, performance based compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated contingent consideration payments. Actual results could differ materially from these estimates. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $20,872 , $4,486 , $19,257 and $15,617 for the year ended March 31, 2015 , quarter ended March 31, 2014 and the years ended December 31, 2013 and 2012 , respectively, and are included in SG&A expenses in the consolidated statements of comprehensive income (loss). +Advertising, Marketing, and Promotion Costs +Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing, and promotion are expensed as incurred. These expenses charged to operations for the year ended March 31, 2015 , quarter ended March 31, 2014 and the years ended December 31, 2013 and 2012 were $111,162 , $21,158 , $86,510 and $78,528 , respectively. Included in prepaid and other current assets at March 31, 2015 , March 31, 2014 , and December 31, 2013 were $1,899 , $209 and $212 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after such dates. +Rent Expense +Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated amounts. Rent expenses are included SG&A expenses in the consolidated statements of comprehensive income (loss). +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +interest and penalties generated by income tax contingencies as interest expense and SG&A expenses, respectively in the consolidated statements of comprehensive income (loss). +Net Income (Loss) per Share Attributable to Deckers Outdoor Corporation Common Stockholders +Basic net income (loss) per share represents net income (loss) attributable to Deckers Outdoor Corporation divided by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share represents net income (loss) attributable to Deckers Outdoor Corporation divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. For the years ended March 31, 2015 , December 31, 2013 and December 31, 2012 and quarter ended March 31, 2014 , the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), restricted stock awards (RSAs), stock appreciation rights (SARs), and options to purchase common stock. The reconciliations of basic to diluted weighted-average common shares outstanding were as follows: +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Weighted-average shares used in basic computation +34,433,000 +34,621,000 +34,473,000 +36,879,000 +Dilutive effect of stock-based awards* +300,000 +— +356,000 +455,000 +Weighted-average shares used for diluted computation +34,733,000 +34,621,000 +34,829,000 +37,334,000 +*Excluded NSUs +— +331,000 +— +200,000 +*Excluded RSUs +624,000 +729,000 +795,000 +671,000 +*Excluded outside director RSAs +— +6,000 +— +— +*Excluded SARs +525,000 +730,000 +525,000 +525,000 +For the years ended March 31, 2015 and December 31, 2013 and 2012 , the share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance. For the quarter ended March 31, 2014 , the Company excluded all NSUs, RSUs, RSAs and SARs from the diluted net loss per share computation because they were antidilutive due to the net loss during the period. As of March 31, 2015 , the excluded RSUs include the maximum amount of the 2012, 2013 and 2015 Long-Term Incentive Plan (LTIP) Awards. As of March 31, 2014 and December 31, 2013 the excluded RSUs included the maximum amount of the Level III, 2012 and 2013 LTIP Awards. As of December 31, 2012 , the excluded RSUs included the maximum amount of the Level III and 2012 LTIP Awards (see Note 7). +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with functional currencies other than the US dollar. In most cases, the Company's foreign subsidiaries' local currency is the same as the designated functional currency. The Company holds a portion of its cash and other monetary assets and liabilities in currencies other than its subsidiary's functional currency, and is exposed to financial statement transaction gains and losses as a result of remeasuring the operating results and financial positions into their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate as of the end of the reporting period, which results in gains and losses that are included in SG&A expenses in the results of operations as incurred, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income (loss)(OCI). +Derivative Instruments and Hedging Activities +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign exchange forward and option contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency contracts for trading purposes. +Certain of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted intercompany sales and are subject to foreign currency exposures. These contracts allow the Company to sell Euros, British Pounds and Yen in exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted intercompany sales over specific quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in the consolidated statements of comprehensive income (loss) during the period which approximates the time the corresponding third-party sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in SG&A expenses in the consolidated statements of comprehensive income (loss). The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in SG&A expenses. See Note 8 for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements. +The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The Level 2 inputs consist of forward spot rates at the end of the reporting period. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. +For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivatives. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in OCI related to the hedging relationship. +Comprehensive Income (Loss) +Comprehensive income (loss) is the total of net earnings and all other non-owner changes in equity. Except for net income (loss), foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges, the Company does not have any transactions and other economic events that qualify as comprehensive income (loss). +Business Segment Reporting +Management of the Company has determined its reportable segments are its strategic business units and it is by these segments that information is reported to the Chief Operating Decision Maker (CODM). The six reportable segments are the UGG, Teva, Sanuk and other brands wholesale divisions, the E-Commerce business, and the retail store business. The CODM is the Principal +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Executive Officer. The Company performs an annual analysis of the appropriateness of its reportable segments. Information related to the Company's business segments is summarized in Note 11. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include $127,900 , $143,816 and $154,105 of money market funds at March 31, 2015 , March 31, 2014 and December 31, 2013 , respectively. +Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $1,726 , $601 , $1,386 and $1,066 during the year ended March 31, 2015 , quarter ended March 31, 2014 , and the years ended December 31, 2013 and 2012 , respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing contributions for the year ended March 31, 2015 , quarter ended March 31, 2014 , and the years ended December 31, 2013 and 2012 . +Recent Accounting Pronouncements +On May 28, 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in US GAAP when it becomes effective. The new standard is effective for the Company on April 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. Subsequent to March 31, 2015 , the FASB proposed a one year deferral of the effective date of ASU No. 2014-09. +Subsequent to March 31, 2015 , FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset). This ASU is effective for the Company on April 1, 2016, with early adoption permitted. The adoption of this ASU will only change the presentation of prepaid expenses, other assets and short-term borrowings in the Company’s consolidated balance sheet. The Company is considering early adoption of this update during its fiscal year 2016. +(2) Property and Equipment +Property and equipment is summarized as follows: +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +3/31/2015 +3/31/2014 +12/31/2013 +Land +$ +25,543 +$ +25,531 +$ +19,954 +Buildings +38,841 +36,387 +— +Machinery and equipment +158,136 +98,035 +84,941 +Furniture and fixtures +36,751 +31,085 +25,961 +Leasehold improvements +102,048 +96,622 +142,683 +361,319 +287,660 +273,539 +Less accumulated depreciation and amortization +129,002 +103,090 +99,473 +Net property and equipment +$ +232,317 +$ +184,570 +$ +174,066 +(3) Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the Sanuk reportable segment, with the remaining related to the UGG and other brands reportable segments. The Company's goodwill and other intangible assets are summarized as follows: +3/31/2015 +3/31/2014 +12/31/2013 +Intangibles subject to amortization +Weighted-Average Amortization Period +13 years +14 years +14 years +Gross Carrying Amount +$ +109,604 +$ +101,982 +$ +101,963 +Accumulated Amortization +37,316 +26,026 +24,140 +Net Carrying Amount +72,288 +75,956 +77,823 +Intangibles not subject to amortization +Goodwill +127,934 +127,934 +128,725 +Trademarks +15,455 +15,455 +15,455 +Total goodwill and other intangible assets +$ +215,677 +$ +219,345 +$ +222,003 +Changes in the Company's goodwill are summarized as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance at January 1, 2013 +$ +144,556 +$ +(15,831 +) +$ +128,725 +Changes related to additions, impairments and other adjustments +— +— +— +Balance at December 31, 2013 +144,556 +(15,831 +) +128,725 +Adjustments related to prior acquisitions +(791 +) +— +(791 +) +Balance at March 31, 2014 +143,765 +(15,831 +) +127,934 +Changes related to additions, impairments and other adjustments +— +— +— +Balance at March 31, 2015 +$ +143,765 +$ +(15,831 +) +$ +127,934 +As of December 31, 2014 and 2013 , the Company performed its annual impairment tests and evaluated its UGG and other brands' goodwill. As of October 31, 2014 and 2013 , the Company performed its annual impairment tests and evaluated its Teva trademarks and Sanuk goodwill. Based on the carrying amounts of the UGG, Teva, Sanuk, and other brands' goodwill, trademarks, and net assets, the brands' fiscal year 2015 , quarter ended March 31, 2014 and fiscal year 2013 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill, as well as the Teva trademarks, were not impaired. The Sanuk brand goodwill was evaluated based on Level 3 inputs as of October 31, 2013 and based on qualitative analyses as of October 31, 2014. As of December 31, 2014 and 2013 , and as of October 31, 2014 and 2013, all goodwill other than the Sanuk brand goodwill and all other nonamortizable intangibles were evaluated based on qualitative analyses. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The Company's goodwill by segment is as follows: +3/31/2015 +3/31/2014 +12/31/2013 +UGG brand +$ +6,101 +$ +6,101 +$ +6,101 +Sanuk brand +113,944 +113,944 +113,944 +Other brands +7,889 +7,889 +8,680 +Total +$ +127,934 +$ +127,934 +$ +128,725 +Aggregate amortization expense for amortizable intangible assets for the year ended March 31, 2015 , quarter ended March 31, 2014 and years ended December 31, 2013 and 2012 , was $11,291 , $1,886 , $7,975 and $9,312 , respectively. The following table summarizes the expected amortization expense on existing intangible assets, excluding indefinite-lived intangible assets of $8,044 and trademarks of $15,455 , for the next five years : +Year ending March 31, +2016 +$ +9,358 +2017 +8,361 +2018 +6,278 +2019 +5,621 +2020 +3,813 +Thereafter +30,813 +$ +64,244 +(4) Income Taxes +Components of income tax expense (benefit) are as follows: +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Current: +Federal +$ +35,459 +$ +(572 +) +$ +51,058 +$ +50,911 +State +6,861 +(4 +) +6,252 +6,482 +Foreign +7,069 +5,255 +6,650 +3,368 +Total +49,389 +4,679 +63,960 +60,761 +Deferred: +Federal +8,234 +1,669 +(2,580 +) +(6,083 +) +State +624 +(1 +) +(209 +) +414 +Foreign +1,112 +(4,404 +) +(1,303 +) +12 +Total +9,970 +(2,736 +) +(4,092 +) +(5,657 +) +Income tax expense +$ +59,359 +$ +1,943 +$ +59,868 +$ +55,104 +Foreign income before income taxes was $95,850 during the year ended March 31, 2015 . Foreign loss before income taxes was $3,631 during the quarter ended March 31, 2014 . Foreign income before income taxes was $60,851 and $51,409 during the years ended December 31, 2013 and 2012 , respectively. +Actual income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Computed expected income taxes +$ +77,399 +$ +(260 +) +$ +71,945 +$ +64,282 +State income taxes, net of federal income tax benefit +3,564 +90 +4,435 +3,562 +Foreign rate differential +(25,535 +) +1,904 +(16,399 +) +(12,908 +) +Unrecognized tax benefits +3,566 +— +— +— +Other +365 +209 +(113 +) +168 +$ +59,359 +$ +1,943 +$ +59,868 +$ +55,104 +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below: +3/31/2015 +3/31/2014 +12/31/2013 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +4,040 +$ +4,114 +$ +5,492 +Bad debt and other reserves +8,984 +9,901 +10,655 +State taxes +482 +(1,739 +) +508 +Prepaid expenses +(3,546 +) +(2,217 +) +(2,193 +) +Accrued bonus +4,120 +2,093 +5,071 +Foreign currency hedge +434 +305 +348 +Net operating loss carry forwards +— +9,414 +— +Other +(448 +) +— +— +Total deferred tax assets, current +14,066 +21,871 +19,881 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +1,004 +5,267 +4,603 +Depreciation of property and equipment +(6,148 +) +(4,833 +) +(6,034 +) +Share-based compensation +12,044 +10,638 +11,226 +Foreign currency translation +720 +382 +667 +Deferred rent +4,885 +4,290 +4,028 +Acquisition costs +764 +756 +755 +Other +1,327 +128 +— +Net operating loss carry forwards +421 +434 +506 +Total deferred tax assets, noncurrent +15,017 +17,062 +15,751 +Net deferred tax assets +$ +29,083 +$ +38,933 +$ +35,632 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $76,000 . The deferred tax assets are primarily related to the Company's domestic operations. The change in net deferred tax assets between March 31, 2015 and March 31, 2014 includes approximately $100 attributable to OCI. The change in net deferred tax assets between March 31, 2014 and December 31, 2013 includes approximately $800 attributable to goodwill, partially offset by approximately $200 attributable to OCI. Domestic taxable income for the year ended March 31, 2015 , the quarter ended March 31, 2014 and the years ended December 31, 2013 and 2012 was $91,017 , $0 , $ 151,204 and $141,660 , respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance was recorded in fiscal years 2015, 2013 and 2012. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +As of March 31, 2015 , withholding and US taxes have not been provided on approximately $362,000 of unremitted earnings of non-US subsidiaries because the earnings are expected to be reinvested outside of the US indefinitely. Repatriation of all foreign earnings would result in approximately $118,000 of US income tax. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2015 , the Company had approximately $132,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if they were to be repatriated. If the Company were to repatriate foreign cash, the Company would record the US tax liability net of any foreign income taxes previously paid on this cash. The Company has no plans to repatriate any of its foreign cash. For fiscal year 2015 , the Company generated approximately 25.0% of its pre-tax earnings from a country which does not impose a corporate income tax. +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement. The portion of the benefits that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. +A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +Balance at January 1, 2013 +$ +— +Gross change related to current and prior years' tax positions +— +Balance, December 31, 2013 +$ +— +Gross change related to current and prior years' tax positions +— +Balance, March 31, 2014 +$ +— +Gross increase related to current year tax positions +1,293 +Gross increase related to prior year tax positions +3,374 +Balance, March 31, 2015 +$ +4,667 +The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2015 was $3,566 . It is reasonably possible that approximately $300 of unrecognized tax benefits will be settled within the next 12 months . As of March 31, 2015 , interest and potential penalties of $1,246 were accrued in the consolidated balance sheets resulting from tax positions that are subject to examination. As of March 31, 2014 and December 31, 2013 , interest and potential penalties of $349 and $360 , respectively, were accrued in the consolidated balance sheets resulting from outstanding state liabilities as a result of resolved Federal examinations. +The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for years before 2009. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +The Company has on-going income tax examinations under various state and foreign tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a material impact on the Company's consolidated financial statements. +(5) Notes Payable and Long-Term Debt +In August 2011, the Company entered into a Credit Agreement (Credit Agreement) with JPMorgan Chase Bank, National Association (JPMorgan) as the administrative agent, Comerica Bank and HSBC Bank USA, National Association as syndication agents, and the lenders party thereto. In August 2012 and again in November 2014, the Company amended and restated in its entirety the Credit Agreement. The Second Amended and Restated Credit Agreement is a five -year, $400,000 secured revolving +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +credit facility that contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and matures on November 13, 2019. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Second Amended and Restated Credit Agreement by up to an additional $200,000 , resulting in maximum available principal amount of $600,000 . None of the lenders under the Second Amended and Restated Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments. In addition to allowing borrowings in US dollars, the Second Amended and Restated Credit Agreement provides a $150,000 sublimit for borrowings in Euros, British pounds and any other currency that is subsequently approved by JPMorgan, each lender and the issuing bank. At the Company's option, revolving loans issued under the Second Amended and Restated Credit Agreement will initially bear interest at either the adjusted London Interbank Offered Rate (LIBOR) for 30 days ( 0.18% at March 31, 2015 ) plus 1.25% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 2.00% per annum (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 1.00% per annum), based upon the Company's total adjusted leverage ratio at such time. In addition, the Company will initially be required to pay fees of 0.175% per annum on the daily amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.175% and 0.30% per annum, based upon the Company's total adjusted leverage ratio. +The Company's obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Company's existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries) (the Guarantors), and is secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company's domestic and first-tier foreign subsidiaries. +The Second Amended and Restated Credit Agreement contains financial covenants which include: the total adjusted leverage ratio must not be greater than 3.25 to 1.00 ; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 ; and other customary limitations. The Second Amended and Restated Credit Agreement contains certain other covenants which include: the maximum amount paid for capital expenditures may not exceed $110,000 per year if the total adjusted leverage ratio is equal to or exceeds 2.75 to 1.00; the maximum additional unsecured debt may not exceed $200,000 ; the Company may not have aggregate ERISA events that are considered materially adverse; the Company may not have a change of control (as defined in the Second Amended and Restated Credit Agreement); and no restrictions on dividends, share repurchases or acquisitions if the total adjusted leverage ratio does not exceed 2.75 to 1.00 . +At March 31, 2015 , the Company had no outstanding borrowings under the Second Amended and Restated Credit Agreement and had outstanding letters of credit of approximately $100 . As a result, the unused balance under the Second Amended and Restated Credit Agreement was approximately $ 399,900 at March 31, 2015 . In August 2012 the Company incurred approximately $1,800 of deferred financing costs which are included in prepaid expenses and amortized over the term of the Amended and Restated Credit Agreement using the straight-line method. In November 2014, the Company incurred approximately $800 of additional deferred financing costs which were combined with the remaining unamortized balance from the Amended and Restated Credit Agreement included in prepaid expenses. The combined amount is being amortized over the term of the Second Amended and Restated Credit Agreement using the straight-line method. +In August 2013, Deckers (Beijing) Trading Co., LTD, a fully owned subsidiary, entered into a credit facility in China (China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 60,000 , or approximately $10,000 , in the quarters ending September 30 and December 31 and CNY 20,000 , or approximately $3,300 , in the quarters ending March 31 and June 30. The China Credit Facility is payable on demand and subject to annual review and renewal. The obligations under the China Credit Agreement are guaranteed by the Company for 110% of the facility amount in USD. In December 2013, the China Credit Facility was revised to provide for the uncommitted revolving line of credit of up to CNY 60,000 to be extended to the entire year. In October 2014, the China Credit Facility was amended (Amended China Credit Facility) to include, among other things, an extension of the aggregate period of borrowing from 12 months to 18 months. At March 31, 2015 , the Company had approximately $4,900 of outstanding borrowings under the Amended China Credit Facility. Interest is based on the People’s Bank of China rate, which was 5.35% at March 31, 2015 . +In July 2014, the Company obtained a mortgage secured by its corporate headquarters property for approximately $33,900 . At March 31, 2015 the outstanding balance under the mortgage was approximately $33,600 , which includes approximately $500 in short-term borrowings and approximately $33,100 in mortgage payable in the consolidated balance sheet. The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +30 -year period, however the loan will mature and have a balloon payment due in 15 years of approximately $23,400 . Minimum principal payments over the next 5 years are approximately $2,700 . In December 2014, the mortgage financial covenants were amended to be consistent with the financial covenants of the Second Amended and Restated Credit Agreement as discussed above. +(6) Commitments and Contingencies +The Company leases office, distribution, retail facilities, and automobiles, under operating lease agreements, which expire through 2028 . Some of the leases contain renewal options for approximately one to fifteen years. Future minimum commitments under the lease agreements are as follows: +Year ending March 31, +2016 +$ +53,664 +2017 +55,325 +2018 +49,357 +2019 +39,293 +2020 +32,809 +Thereafter +118,451 +$ +348,899 +The following schedule shows the composition of total rental expense. +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Minimum rentals +$ +61,363 +$ +14,260 +$ +47,871 +$ +37,270 +Contingent rentals +14,707 +3,099 +12,318 +9,366 +$ +76,070 +$ +17,359 +$ +60,189 +$ +46,636 +Purchase Obligations. The Company had $ 664,659 of outstanding purchase orders with its manufacturers as of March 31, 2015 . In addition, the Company entered into agreements for the build out of new retail stores, promotional activities and other services. Future commitments under these purchase orders and other agreements for the year ending March 31, 2016 total $664,429 . Included in the fiscal year 2016 amount are remaining commitments, net of deposits, that are also unconditional purchase obligations relating to sheepskin contracts. The Company enters into contracts requiring minimum purchase commitments of sheepskin that Deckers' affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. Under certain contracts, the Company may pay an advance deposit that shall be repaid to the Company as Buyers purchase goods under the terms of these agreements. Included in other current assets on the consolidated balance sheets are approximately $14,000 , $11,000 and $67,000 of advance deposits as of March 31, 2015 , March 31, 2014 and December 31, 2013 , respectively. In the event that a Buyer does not purchase certain minimum commitments on or before certain target dates, the supplier may retain a portion of the advance deposit until the amounts of the commitments are fulfilled. These agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company shall be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyers purchase the remaining minimum commitments. The contracts do not permit net settlement. Minimum commitments for these contracts as of March 31, 2015 were as follows: +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Contract +Effective Date +Final +Target Date +Advance +Deposit +Total +Minimum +Commitment +Remaining +Deposit +Remaining +Commitment, +Net of Deposit +October 2011 +September 2015 +$50,000 +$286,000 +$13,783 +— +October 2014 +September 2015 +— +$51,240 +— +$32,487 +September 2014 +September 2015 +— +$47,960 +— +$15,434 +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to 5 years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors and promotional partners in connection with claims that the Company’s products infringe the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination was made based on a prior history of insignificant claims and related payments. There are no currently pending claims relating to indemnification matters involving the Company's intellectual property. +Contingent Consideration. In July 2011, the Company acquired the Sanuk brand, and the total purchase price included contingent consideration payments. As of March 31, 2015 , the remaining contingent consideration payment, which has no maximum, is 40.0% of the Sanuk brand gross profit in calendar year 2015 and is to be paid within 60 days following the end of the performance period. +As of March 31, 2015 , March 31, 2014 and December 31, 2013 , the Company had total contingent consideration for the acquisition of the Sanuk brand of approximately $24,200 , $ 28,000 and $46,200 , respectively, of which approximately $24,200 , $0 and $18,600 is included within other accrued expenses and approximately $0 , $28,000 and $27,600 is included within other long-term liabilities at March 31, 2015 , March 31, 2014 and December 31, 2013 , respectively, in the consolidated balance sheets. +In September 2012, the Company acquired Hoka, and the total purchase price included contingent consideration payments with a maximum of $2,000 which is based on the Hoka brand's net sales for calendar years 2013 through 2017, of which approximately $500 has been paid. As of March 31, 2015 , March 31, 2014 and December 31, 2013 contingent consideration for the acquisition of the Hoka brand of approximately $1,500 , $1,800 and $1,800 , respectively are included within other accrued expenses and other long-term liabilities in the consolidated balance sheets. Refer to Note 1 for further information on the contingent consideration amounts. +Future Capital Commitments . As of March 31, 2015 , the Company had approximately $8,000 of material commitments for future capital expenditures primarily related to equipment costs of its new distribution center. +(7) Stockholders' Equity +In May 2006, the Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which was amended May 9, 2007. The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company's continued success. The 2006 Plan provides for 6,000,000 shares of the Company's common stock that are reserved for issuance to employees, directors, or consultants. The maximum aggregate number of shares that may be issued under the 2006 Plan through the exercise of incentive stock options is 4,500,000 . Pursuant to the Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Plan, a participant may elect to defer settlement of their outstanding unvested awards until such time as elected by the participant. +The Company has elected to grant NSUs annually to key personnel. The NSUs granted entitle the employee recipients to receive shares of common stock in the Company upon vesting of the NSUs. The vesting of most NSUs is subject to achievement of certain performance targets, with the remaining NSUs subject only to time restrictions. For the majority of NSUs granted in 2013 and after, if the performance goals are achieved, these awards vest in equal one-third installments at the end of each of the +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +three years after the performance goals are achieved. For NSUs granted in 2012, the performance target was not met and, therefore, the awards did not vest. +The Company also has long-term incentive award agreements under the 2006 Plan for issuance of SARs and RSUs, which were awarded to certain executive officers of the Company. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. One-half of the SAR and RSU awards vested 80% on December 31, 2010 and 20% on December 31, 2011, and, provided that the conditions are met, one-half of the SAR and RSU awards vest 80% on December 31, 2015 and 20% on December 31, 2016. The Company considers achievement of the remaining performance conditions as probable and is recognizing such compensation cost over the service period. +In June 2011, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (Level III Awards). The shares under these awards were available for issuance to current and future members of the Company's management team, including the Company's named executive officers. These awards were to vest on December 31, 2014 subject to certain long-term performance objectives and certain long-term service conditions. Under this program, the Company granted a maximum amount of 275,000 RSUs during the year ended December 31, 2011. For all Level III Awards granted, the performance objectives were not met and, therefore, the awards did not vest. +In May 2012, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (2012 LTIP Awards). The shares under these awards were available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient received a specified maximum number of RSUs, each of which represents the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on December 31, 2015 only if the Company meets certain revenue targets ranging between $2,200,000 and $2,900,000 and certain diluted earnings per share targets ranging between $7.00 and $10.50 for the year ended December 31, 2015. No vesting of any 2012 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending December 31, 2015. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this program, the Company granted awards that contain a maximum amount of 352,000 RSUs during the year ended December 31, 2012. The grant date fair value of these RSUs was $56.12 per share. As of March 31, 2015 and 2014 and December 31, 2013, the Company did not believe that the achievement of the performance objectives of these awards was probable, and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become probable, the Company will then begin recording an expense for the 2012 LTIP Awards and would recognize a cumulative catch-up adjustment in the period they become probable. As of March 31, 2015 , the cumulative amount would be approximately $12,000 based on the maximum number of units if the performance objectives were probable. +In December 2013, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (2013 LTIP Awards). The shares under these awards were available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient received a specified maximum number of RSUs, each of which represents the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The recipients of these awards are divided into two participant groups, revenue generating and non-revenue generating. The awards for the non-revenue generating participants will vest on March 31, 2016 only if the Company meets certain revenue targets ranging between $2,290,000 and $2,558,000 and certain EBITDA targets ranging between $372,000 and $415,000 for the fiscal year ending March 31, 2016. The awards for the revenue generating participants will vest on March 31, 2016 only if the Company achieves EBITDA of $350,000 and the respective revenue by brand and channel managed by each participant meets certain revenue targets that are tailored to each brand and channel for the fiscal year ending March 31, 2016. No vesting of any 2013 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending March 31, 2016. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this program, the Company granted awards that contain a maximum amount of 156,000 RSUs during the year ended December 31, 2013 . The grant date fair value of these RSUs was $84.52 per share. As of March 31, 2015 , the Company did not believe that the achievement of the performance objectives of these awards was probable, and therefore the Company reversed compensation expense accrued in prior periods. The amount reversed was immaterial to the Company's consolidated financial statements. If the performance objectives become probable, the Company will then begin recording an expense for the 2013 LTIP Awards and would recognize a cumulative catch-up adjustment in the period they become probable. As of March 31, 2015 , the cumulative amount would be approximately $2,000 based on the maximum number of units if the performance objectives were probable. +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +In September 2014, the Board of Directors of the Company approved a long-term incentive award (2015 LTIP Awards) under its 2006 Equity Incentive Plan. The shares under these awards were available for issuance to current and future members of the Company's leadership team, including the Company's named executive officers. Each recipient received a specified maximum number of RSUs, each of which represents the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on March 31, 2017 only if the Company meets certain revenue targets ranging between approximately $2,155,000 and approximately $2,447,000 and certain EBITDA targets ranging between approximately $336,000 and approximately $394,000 for the fiscal year ending March 31, 2017. No vesting of any 2015 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending March 31, 2017. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this new program, the Company granted awards that contain a maximum amount of approximately 160,000 RSUs during the year ended March 31, 2015 . The average grant date fair value of these RSUs was $98.29 per share. As of March 31, 2015 , future unrecognized compensation cost for the 2015 LTIP Awards, excluding estimated forfeitures, was approximately $6,100 . As of March 31, 2015 , based on the Company's long-range forecast, the Company believed that the achievement of at least the threshold performance objectives of these awards was probable, and therefore the Company recognized compensation expense accordingly. +In June 2012, the Company approved a stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of February 28, 2015, the Company had repurchased approximately 3,823,000 shares under this program, for approximately $200,000 , or an average price of $52.31 . As of February 28, 2015, the Company had repurchased the full amount authorized under this program. +In January 2015, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of March 31, 2015 , the Company had repurchased approximately 377,000 shares under this program, for approximately $27,900 , or an average price of $74.09 leaving the remaining approved amount at $172,100 . +On a quarterly basis, the Company grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of issuance. +The table below summarizes stock compensation amounts recognized in the consolidated statements of comprehensive income (loss): +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Compensation expense recorded for: +NSUs +$ +9,295 +$ +1,863 +$ +10,545 +$ +11,849 +SARs +1,846 +381 +1,302 +1,501 +RSUs +1,323 +354 +287 +231 +Directors' shares +1,060 +267 +1,002 +1,080 +Total compensation expense +13,524 +2,865 +13,136 +14,661 +Income tax benefit recognized +(5,143 +) +(1,082 +) +(4,950 +) +(5,573 +) +Net compensation expense +$ +8,381 +$ +1,783 +$ +8,186 +$ +9,088 +The table below summarizes the total remaining unrecognized compensation cost related to nonvested awards that are considered probable of vesting as of March 31, 2015 , and the weighted-average period over which the cost is expected to be recognized as of March 31, 2015 : +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Unrecognized +Compensation +Cost +Weighted-Average +Remaining +Vesting Period (Years) +NSUs +$ +13,917 +1.5 +SARs +1,355 +0.9 +RSUs +6,317 +1.5 +Total +$ +21,589 +The unrecognized compensation cost excludes a maximum of $15,637 and $10,396 of compensation cost on the 2012 LTIP Awards and 2013 LTIP Awards, respectively, as achievement of the performance conditions are not considered probable. +Nonvested Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2012 +677,000 +$ +48.14 +Granted +209,000 +63.18 +Vested +(297,000 +) +35.90 +Forfeited +(18,000 +) +63.68 +Cancelled* +(200,000 +) +62.17 +Nonvested at December 31, 2012 +371,000 +$ +58.51 +Granted +304,000 +57.30 +Vested +(315,000 +) +53.19 +Forfeited +(20,000 +) +61.08 +Nonvested at December 31, 2013 +340,000 +$ +62.23 +Granted +— +— +Vested +(2,000 +) +58.11 +Forfeited +(7,000 +) +64.15 +Nonvested at March 31, 2014 +331,000 +$ +62.21 +Granted +196,000 +82.34 +Vested +(142,000 +) +68.39 +Forfeited +(30,000 +) +64.18 +Cancelled* +(15,000 +) +84.04 +Nonvested at March 31, 2015 +340,000 +$ +70.11 +* Nonvested Stock Units cancelled during the period represent awards granted whose performance criteria were not met. +Stock Appreciation Rights Issued Under the 2006 Plan +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Number of +SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2012 +760,000 +$ +26.73 +8.8 +$ +37,118 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2012 +745,000 +$ +26.73 +7.9 +$ +10,087 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2013 +730,000 +$ +26.73 +6.9 +$ +42,143 +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at March 31, 2014 +730,000 +$ +26.73 +6.7 +$ +38,690 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at March 31, 2015 +715,000 +$ +26.73 +5.8 +$ +32,990 +Exercisable at March 31, 2015 +190,000 +$ +26.73 +2.1 +$ +8,767 +Expected to vest and exercisable at March 31, 2015 +702,000 +$ +26.73 +5.8 +$ +32,396 +The maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the amount outstanding and the amount expected to vest and exercisable at March 31, 2015 was estimated forfeitures for estimated failure to meet the long-term service conditions. +Restricted Stock Units Issued Under the 2006 Plan +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2012 +319,000 +$ +70.15 +Granted +352,000 +56.12 +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2012 +671,000 +$ +62.80 +Granted +156,000 +84.52 +Vested +— +— +Forfeited +(32,000 +) +63.69 +Nonvested at December 31, 2013 +795,000 +$ +67.03 +Granted +— +— +Vested +— +— +Forfeited +(66,000 +) +67.23 +Nonvested at March 31, 2014 +729,000 +$ +67.01 +Granted +160,000 +98.29 +Vested +— +— +Forfeited +(35,000 +) +78.39 +Cancelled +(230,000 +) +82.09 +Nonvested at March 31, 2015 +624,000 +$ +68.82 +The amounts granted are the maximum amount under the respective awards. +(8) Foreign Currency Exchange Contracts and Hedging +The Company had foreign currency forward contracts designated as cash-flow hedges with notional amounts totaling approximately $46,000 , $64,000 and $77,000 as of March 31, 2015 and 2014 , and December 31, 2013 , respectively. These contracts were held by four counterparties and, as of March 31, 2015, were expected to mature over the next 12 months . +The nonperformance risk of the Company and the counterparties did not have a material impact on the fair value of the derivatives. During the year ended March 31, 2015 , the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2015 . The effective portion of the gain or loss on the derivative is reported in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of March 31, 2015 , the total amount in accumulated other comprehensive income (loss) (see Note 10) was expected to be reclassified into income within the next 15 months . +Subsequent to March 31, 2015 , the Company entered into non-designated derivative contracts with notional amounts totaling approximately $42,000 and designated derivative contracts with notional amounts totaling approximately $31,000 . All derivative contracts were held by six counterparties. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The following tables summarize the effect of derivative instruments on the consolidated financial statements: +Year ended +Quarter ended (transition period) +Year ended +3/31/2015 +3/31/2014 +12/31/2013 +Derivatives in Designated Cash Flow Hedging Relationships +Foreign Exchange Contracts +Foreign Exchange Contracts +Foreign Exchange Contracts +Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) +$1,556 +$(47) +$(779) +Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) +Net Sales +Net Sales +Net Sales +Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) +$1,226 +$(283) +$17 +Location of Amount Excluded from Effectiveness Testing +SG&A expenses +SG&A expenses +SG&A expenses +Gain (Loss) from Amount Excluded from Effectiveness Testing +$(69) +$(31) +$(11) +Year ended +Quarter ended (transition period) +Year ended +3/31/2015 +3/31/2014 +12/31/2013 +Derivatives Not Designated as Hedging Instruments +Foreign Exchange Contracts +Foreign Exchange Contracts +Foreign Exchange Contracts +Location of Gain (Loss) Recognized in Income on Derivatives +SG&A expenses +SG&A expenses +SG&A expenses +Amount of Gain Recognized in Income on Derivatives +$6,383 +$— +$728 +(9) Transition Period +In February 2014, our Board of Directors approved a change in the Company's fiscal year (FY) end from December 31 to March 31. Accordingly, the Company is presenting audited financial statements for the quarter transition period ended March 31, 2014. The following table provides certain unaudited comparative financial information for the same period of the prior year. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Three Months Ended March 31, +2014 +2013 (unaudited) +Net sales +$ +294,716 +$ +263,760 +Cost of sales +150,456 +140,201 +Gross profit +144,260 +123,559 +Selling, general and administrative expenses +144,668 +120,907 +(Loss) income from operations +(408 +) +2,652 +Other expense (income), net: +Interest income +(65 +) +(26 +) +Interest expense +516 +339 +Other, net +(117 +) +(171 +) +Total other expense +334 +142 +(Loss) income before income taxes +(742 +) +2,510 +Income tax expense +1,943 +1,503 +Net (loss) income +(2,685 +) +1,007 +Other comprehensive income (loss), net of tax: +Unrealized (loss) income on foreign currency hedging +(273 +) +1,530 +Foreign currency translation adjustment +873 +(674 +) +Total other comprehensive income +600 +856 +Comprehensive (loss) income +$ +(2,085 +) +$ +1,863 +Net (loss) income per share: +Basic +$ +(0.08 +) +$ +0.03 +Diluted +$ +(0.08 +) +$ +0.03 +Weighted-average common shares outstanding: +Basic +34,621,000 +34,404,000 +Diluted +34,621,000 +34,788,000 +(10) Accumulated Other Comprehensive Loss +Accumulated balances of the components within accumulated other comprehensive loss are as follows: +3/31/2015 +3/31/2014 +12/31/2013 +Cumulative foreign currency translation adjustment +$ +(20,159 +) +$ +(1,284 +) +$ +(2,157 +) +Unrealized loss on foreign currency hedging, net of tax +(309 +) +(759 +) +(486 +) +Accumulated other comprehensive loss +$ +(20,468 +) +$ +(2,043 +) +$ +(2,643 +) +(11) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting policies (see Note 1), except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income (loss) from operations. The Company's reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, and its other brands, its E-Commerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +sourcing, and sales strategies. The E-Commerce and retail store segments are managed separately because they are Direct-to-Consumer sales, while the brand segments are wholesale sales. The income (loss) from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, selling and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs include: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others. During the quarter ended (transition period) March 31, 2014, certain operating expenses were reclassified between segments. This change in segment reporting only changed the presentation within the below table and did not impact the Company's consolidated financial statements for any period. The segment information for prior periods have been adjusted retrospectively to conform to the current period presentation. +Beginning January 1, 2013, all gross profit derived from the sales to third parties of the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments, respectively. +During the year ended March 31, 2015 , the Company converted seven of its retail stores in China to partner retail stores, whereby, upon conversion, the stores became wholly-owned and operated by local, third-party companies within China. These conversions included the assignment of the lease and the sale of both the Company's on-hand inventory and store leasehold improvements to the operator. As of the date of conversion, partner retail stores sales are included in the UGG brand wholesale segment and not included in the retail stores segment. +The Company's other brands include Ahnu®, Hoka, MOZO® and TSUBO®. The results of operations for Hoka are included in the other brands segments beginning from the acquisition date of September 27, 2012. The wholesale operations of the Company's other brands are included as one reportable segment, "other brands wholesale", presented in the figures below. Business segment information is summarized as follows: +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Net sales to external customers: +UGG wholesale +$ +903,926 +$ +83,271 +$ +818,377 +$ +819,256 +Teva wholesale +116,931 +45,283 +109,334 +108,591 +Sanuk wholesale +102,690 +28,793 +94,420 +89,804 +Other brands wholesale +76,152 +18,662 +38,276 +20,194 +E-Commerce +233,070 +38,584 +169,534 +130,592 +Retail stores +384,288 +80,123 +326,677 +245,961 +$ +1,817,057 +$ +294,716 +$ +1,556,618 +$ +1,414,398 +Income (loss) from operations: +UGG wholesale +$ +269,489 +$ +13,595 +$ +224,738 +$ +206,039 +Teva wholesale +13,320 +6,425 +9,166 +9,228 +Sanuk wholesale +21,914 +7,530 +20,591 +14,398 +Other brands wholesale +(9,838 +) +(758 +) +(9,807 +) +(4,523 +) +E-Commerce +92,392 +13,272 +66,849 +56,190 +Retail stores +57,928 +7,646 +65,683 +63,306 +Unallocated overhead +(220,786 +) +(48,118 +) +(169,323 +) +(157,690 +) +$ +224,419 +$ +(408 +) +$ +207,897 +$ +186,948 +Depreciation and amortization: +UGG wholesale +$ +5,029 +$ +137 +$ +641 +$ +622 +Teva wholesale +94 +33 +641 +515 +Sanuk wholesale +6,969 +1,769 +7,761 +8,838 +Other brands wholesale +940 +250 +507 +1,622 +E-Commerce +949 +242 +744 +839 +Retail stores +20,139 +4,967 +21,117 +12,073 +Unallocated overhead +15,030 +3,140 +9,959 +8,911 +$ +49,150 +$ +10,538 +$ +41,370 +$ +33,420 +Capital expenditures: +UGG wholesale +$ +246 +$ +119 +$ +313 +$ +314 +Teva wholesale +51 +— +63 +326 +Sanuk wholesale +487 +2 +91 +448 +Other brands wholesale +351 +26 +477 +197 +E-Commerce +644 +8 +676 +347 +Retail stores +18,484 +3,549 +34,993 +34,004 +Unallocated overhead +71,590 +13,916 +43,217 +25,966 +$ +91,853 +$ +17,620 +$ +79,830 +$ +61,602 +Total assets from reportable segments: +UGG wholesale +$ +194,720 +$ +153,341 +$ +314,122 +$ +377,997 +Teva wholesale +77,423 +81,766 +54,868 +59,641 +Sanuk wholesale +224,974 +214,627 +208,669 +209,861 +Other brands wholesale +53,634 +41,281 +34,315 +29,446 +E-Commerce +4,485 +3,129 +7,331 +5,058 +Retail stores +142,938 +160,535 +182,491 +134,804 +$ +698,174 +$ +654,679 +$ +801,796 +$ +816,807 +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Inter-segment sales from the Company’s wholesale segments to the Company’s E-Commerce and retail stores segments are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. Income (loss) from operations of the wholesale segments does not include any inter-segment gross profit from sales to the E-Commerce and retail stores segments. +The assets allocable to each segment include accounts receivable, inventory, fixed assets, goodwill, other intangible assets, and certain other assets that are specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically related to the segments and include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the consolidated balance sheets are as follows: +3/31/2015 +3/31/2014 +12/31/2013 +Total assets from reportable segments +$ +698,174 +$ +654,679 +$ +801,796 +Unallocated cash and cash equivalents +225,143 +245,088 +237,125 +Unallocated deferred tax assets +29,083 +38,933 +35,632 +Other unallocated corporate assets +217,533 +125,504 +185,176 +Consolidated total assets +$ +1,169,933 +$ +1,064,204 +$ +1,259,729 +The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments. Long-lived assets, which consist of property and equipment, in the US and all other countries combined were as follows: +3/31/2015 +3/31/2014 +12/31/2013 +US +$ +196,513 +$ +148,178 +$ +136,726 +All other countries* +35,804 +36,392 +37,340 +Total +$ +232,317 +$ +184,570 +$ +174,066 +* No other country's long-lived assets comprised more than 10% of total long-lived assets as of March 31, 2015 , March 31, 2014 and December 31, 2013 . +The Company sells its products to customers throughout the US and to foreign customers located in Europe, Asia, Canada, Australia, and Latin America, among other regions. International sales were 35.9% , 32.7% , 33.0% and 31.2% , of the Company's total net sales for the year ended March 31, 2015 , quarter ended March 31, 2014 , and the years ended December 31, 2013 and 2012 , respectively. For the year ended March 31, 2015 , quarter ended March 31, 2014 , and the years ended December 31, 2013 and 2012 , no single foreign country comprised more than 10% of total sales. +Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. No single customer accounted for more than 10% of net sales in the year ended March 31, 2015 , quarter ended March 31, 2014 , and the years ended December 31, 2013 and 2012 . As of March 31, 2015 , March 31, 2014 and December 31, 2013 the Company had one customer representing 11.8% , 11.8% and 11.4% of net trade accounts receivable, respectively. At March 31, 2015 , March 31, 2014 and December 31, 2013 the Company had a second customer representing 11.0% , 11.4% and 19.7% of net trade accounts receivable, respectively. +The Company's production is concentrated at a limited number of independent contractor factories in Asia. Sheepskin is the principal raw material for certain UGG products and the majority of sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. We began using a new raw material, UGGpure, a wool woven into a durable backing, in some of our UGG products in 2013 and which we currently purchase from one supplier. The other materials used by the Company in production are sourced primarily in Asia. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's control. Further, the price of sheepskin is impacted by demand, industry, and competitors. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +A portion of the Company's cash and cash equivalents are held as cash in operating accounts that are with third-party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. +The remainder of the Company's cash equivalents is invested in interest bearing funds managed by third-party investment management institutions. These investments can include US treasury bonds and securities, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and sovereign debt concerns in Europe, which have affected various sectors of the financial markets. As of March 31, 2015 , the Company had experienced no loss or lack of access to cash in its operating accounts, invested cash and cash equivalents. The Company's cash and cash equivalents are as follows: +3/31/2015 +3/31/2014 +12/31/2013 +Money market fund accounts +$ +127,900 +$ +143,816 +$ +154,105 +Cash +97,243 +101,272 +83,020 +Total cash and cash equivalents +$ +225,143 +$ +245,088 +$ +237,125 +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(12) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +Fiscal year 2015 +6/30/2014 +9/30/2014 +12/31/2014 +3/31/2015 +Net sales +$ +211,469 +$ +480,273 +$ +784,678 +$ +340,637 +Gross profit +86,772 +223,873 +415,139 +152,324 +Net (loss) income +(37,062 +) +40,730 +156,706 +1,406 +Net (loss) income per share: +Basic +$ +(1.07 +) +$ +1.18 +$ +4.54 +$ +0.04 +Diluted +$ +(1.07 +) +$ +1.17 +$ +4.50 +$ +0.04 +Fiscal year 2013 +3/31/2013 +6/30/2013 +9/30/2013 +12/31/2013 +Net sales +$ +263,760 +$ +170,085 +$ +386,725 +$ +736,048 +Gross profit +123,559 +69,832 +166,892 +376,200 +Net income (loss) +1,007 +(29,275 +) +33,060 +140,897 +Net income (loss) per share: +Basic +$ +0.03 +$ +(0.85 +) +$ +0.96 +$ +4.08 +Diluted +$ +0.03 +$ +(0.85 +) +$ +0.95 +$ +4.04 +F-35 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Year ended +Quarter ended (transition period) +Years ended +3/31/2015 +3/31/2014 +12/31/2013 +12/31/2012 +Allowance for doubtful accounts (1) +Balance at Beginning of Period +$ +1,798 +$ +2,039 +$ +2,782 +$ +1,719 +Additions +1,107 +594 +125 +2,128 +Deductions +608 +835 +868 +1,065 +Balance at End of Period +$ +2,297 +$ +1,798 +$ +2,039 +$ +2,782 +Allowance for sales discounts (2) +Balance at Beginning of Period +$ +2,121 +$ +3,540 +$ +3,836 +$ +4,629 +Additions +68,620 +978 +46,989 +35,759 +Deductions +68,393 +2,397 +47,285 +36,552 +Balance at End of Period +$ +2,348 +$ +2,121 +$ +3,540 +$ +3,836 +Allowance for sales returns (3) +Balance at Beginning of Period +$ +8,586 +$ +14,554 +$ +12,905 +$ +11,313 +Additions +94,138 +674 +67,800 +53,165 +Deductions +93,192 +6,642 +66,151 +51,573 +Balance at End of Period +$ +9,532 +$ +8,586 +$ +14,554 +$ +12,905 +Chargeback allowance (4) +Balance at Beginning of Period +$ +3,064 +$ +4,935 +$ +5,563 +$ +4,031 +Additions +2,610 +213 +187 +5,879 +Deductions +1,633 +2,084 +815 +4,347 +Balance at End of Period +$ +4,041 +$ +3,064 +$ +4,935 +$ +5,563 +(1) +The additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the collectability of our accounts receivable, with actual recoveries netted into additions. Deductions are the actual write offs of the receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) +The additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of products. +(4) +The additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. For the fiscal years 2015, 2013 and 2012 and the transition period quarter ended March 31, 2014, the Company has estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See accompanying report of independent registered public accounting firm. +F-36 \ No newline at end of file diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/filing_metadata.csv b/raw/filings/0000910521/2014/0000910521-15-000018/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..7e667112d169f1c81073e11a0adb87ee4d53c896 --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2015-06-01,2015-03-31,2015-06-01T21:12:15.000Z,0000910521-15-000018,deckfy2015331201510-k.htm,10-K,17016341,1,0,https://www.sec.gov/Archives/edgar/data/910521/000091052115000018/deckfy2015331201510-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052115000018/,2014,2014,1 diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/item1.txt b/raw/filings/0000910521/2014/0000910521-15-000018/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..febe48d53ac55212c218d3f3b64bbda00f48f84a --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/item1.txt @@ -0,0 +1,83 @@ +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for employees, share quantity, per share data and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2015, 2013 and 2012 fiscal years ended March 31, 2015 , December 31, 2013 and December 31, 2012 , respectively. The transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +Products +We market our products primarily under three proprietary brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility. +We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga Mat TM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. +We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brands unique attitude. We also continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +3 +Table of Contents +In addition to our primary brands, our other brands include Ahnu, a line of outdoor performance and lifestyle footwear; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; MOZO, a line of footwear crafted for culinary professionals that redefines the industry's dress code; and TSUBO, a line of mid and high-end dress and dress casual footwear that incorporates style, function, and maximum comfort. +With respect to MOZO and TSUBO, we are seeking strategic alternatives for these businesses. +In April 2015, the Company acquired inventory and certain intangible assets, including the trade name related to the Koolaburra® brand, a sheepskin and wool based footwear brand. The purchase price of the acquisition was not material to the Company’s consolidated financial statements. +Sales and Distribution +At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market maximizes our selling efforts. +We distribute products sold in the US through our distribution centers in Camarillo, Moreno Valley and Ventura, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. +Internationally, we distribute our products through independent distributors and retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites and our retail stores. For our wholesale and Direct-to-Consumer businesses, we operate distribution centers with third-party logistics (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +Our five largest customers accounted for approximately 22.2% of worldwide net sales for the year ended March 31, 2015 compared to 23.0% for the year ended December 31, 2013 . No single customer accounted for greater than 10% of our consolidated net sales in the years ended March 31, 2015 and December 31, 2013 , respectively. +UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Journeys, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +Other brands. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +4 +Table of Contents +E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com, Teva.com, Sanuk.com, Ahnu.com, Hokaoneone.com, Mozo.com, and Tsubo.com websites. Our websites also drive wholesale and distributor sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +We have expanded our international capabilities by developing websites to service certain international markets. These websites are translated into the local language, may provide product through local distribution centers and price the products in the consumers' local currency. In 2012, we launched mobile websites for several of our brands in Europe, Japan and the US, in addition to websites in the US for our Sanuk brand. Our E-Commerce business sells products directly to consumers throughout the world, including the US, the United Kingdom (UK), Japan and China. In March 2015, we launched our first multi-brand E-Commerce website in the Asia-Pacific region, which is live in Singapore, Australia and Hong Kong and is expected to debut in Malaysia and South Korea during fiscal year 2016. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in California, the UK, the Netherlands, China and Japan. Products sold through our E-Commerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction. +Through our integrated OmniChannel strategy, we believe that consumers try on product in our retail stores, perform further online research and order products online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are mutually dependent in a way that will allow us to view them on a combined basis. Further, a number of our stores allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores. +Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013, we expanded our fleet and opened our first Sanuk (two concept, one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. +In fiscal year 2015 , we opened new stores in the US and internationally. A large majority of the new stores were in the US and China, with the remaining new stores in Japan, Canada and Hong Kong. As of March 31, 2015 , we had a total of 142 stores worldwide. As of December 31, 2013 , we had 113 stores worldwide. During fiscal year 2016 , we plan to open additional retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates new innovative footwear products that combine our standards of high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our research and development costs for the last three years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and +5 +Table of Contents +environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances policy as a condition of doing business with our company. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, a wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report). We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers. +Patents and Trademarks +We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, identifying the Company, and distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Ahnu, Hoka One One, MOZO, TSUBO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. As of March 31, 2015 , we hold approximately 180 utility and design patent registrations in the US and abroad and have filed more than 20 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent or group of patents expiring in the same year is critical to our business. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Hoka brand beginning September 27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors". For further discussion on our working capital and inventory management, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources". +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including +6 +Table of Contents +seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading. +At March 31, 2015 , our backlog of orders from our wholesale customers and distributors was approximately $609,000 compared to approximately $614,000 at March 31, 2014 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2016 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail stores during the year. Backlog is also affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete depends on our ability to: +• +shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +• +anticipate and respond to changing consumer demands in a timely manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +price our products suitably; +• +provide strong and effective marketing support; and +• +ensure product availability. +We believe we are well positioned to compete in the footwear industry. We continually look to acquire or develop more footwear brands to complement our existing portfolio and grow our existing consumer base. +Employees +At March 31, 2015 , we employed approximately 3,400 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,900 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,200 employees at December 31, 2013, including approximately 2,000 employees in our retail stores. The decrease in retail employees was largely due to employing fewer seasonal workers at March 31, 2015 compared to December 31, 2013. The overall increase in employees during fiscal year 2015 was primarily related to increased expansion efforts. As we open new retail stores and expand our operations, we expect that our employee count will increase accordingly. We believe that we have good relationships with our employees. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for further discussion of our business segments. Refer to Part I, Item 1A "Risk Factors" for a discussion of the risks related to our foreign operations. +7 +Table of Contents +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy. We have included the Chief Executive Officer (CEO) and Chief Financial Officer certifications regarding the Company’s public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1and Exhibit 31.2, respectively, to this report on Form 10-K. Additionally, we filed with the New York Stock Exchange (NYSE) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (Listing Standards) pursuant to Section 303A.12(a) of the Listing Standards, which indicated that the CEO was not aware of any violations of the Listing Standards by the Company. \ No newline at end of file diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/item13.txt b/raw/filings/0000910521/2014/0000910521-15-000018/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..5736640a37c0ef1b0873cd096cc7de761be1b10c --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/item9a.txt b/raw/filings/0000910521/2014/0000910521-15-000018/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6b640352a0571eeffb3477b1ca42555d124f283 --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/item9a.txt @@ -0,0 +1,12 @@ +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. +Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +50 +Table of Contents +As of March 31, 2015 , our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of March 31, 2015 , our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our accompanying consolidated financial statements in Part IV of this Annual Report has issued an attestation report on the Company's internal control over financial reporting. Please see the section entitled “Report of Independent Registered Public Accounting Firm” on page F-2 of this Annual Report. +(c) Changes in Internal Control over Financial Reporting. +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/rp_note.txt b/raw/filings/0000910521/2014/0000910521-15-000018/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2014/0000910521-15-000018/rpt_disclosure.txt b/raw/filings/0000910521/2014/0000910521-15-000018/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..ae06feb76b093104011cf51d6eee55517e8437f2 --- /dev/null +++ b/raw/filings/0000910521/2014/0000910521-15-000018/rpt_disclosure.txt @@ -0,0 +1,7 @@ +Certain Relationships and Related Person Transactions +Our Company's legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, executive officers, certain of our stockholders or their immediate family members are participants, to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to identify potential related person transactions, our Company's legal department annually prepares and distributes to all directors and executive officers a written questionnaire which includes questions intended to elicit information about any current or proposed related person transactions. In addition, our Company's Code of Ethics addresses conflicts of interest where an individual's private interests interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or appear to impair the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Company's Code of Ethics may be reported to our Company's anonymous reporting hotline and may be subsequently obtained by the Chair of the Audit Committee, the Chair of our Board of Directors and the highest ranking manager of internal audit. +If a related person transaction is identified by our legal department as one which must be reported in our Company's proxy statement pursuant to applicable SEC regulations, the Audit Committee is responsible for reviewing and approving or ratifying any such related person transaction. In evaluating related person transactions, the Audit Committee members apply the same standards of good faith and fiduciary duty that they apply to their general responsibilities as members of the Audit Committee and as individual directors. The Audit Committee may approve a related person transaction when, in its good faith judgment, the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons requiring disclosure under Item 404 of Regulation S-K during the fiscal year ended March 31, 2015, nor are any such transactions currently proposed. +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we will indemnify directors and executive officers to the fullest extent now or hereafter permitted by the Delaware General Corporation Law. In addition, we have entered into indemnification agreements with our directors and executive officers. +We maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in connection with the defense of claims, actions, suits or proceedings, and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them by reason of their being or having been directors or officers of our Company. This policy extends to, among other things, liability arising under the Securities Act. \ No newline at end of file diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/filing.txt b/raw/filings/0000910521/2015/0000910521-16-000058/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..edba17f135a24a433271a36cf8c9941df28bd560 --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/filing.txt @@ -0,0 +1,5661 @@ +10-K +1 +deckfy2016331201610-k.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +Annual Report Pursuant To Section 13 or 15(d) +of the Securities Exchange Act of 1934 +For The Fiscal Year Ended March 31, 2016 +Commission File Number: 001-36436 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +95-3015862 +(State of incorporation) +(I.R.S. Employer Identification No.) +250 Coromar Drive, Goleta, California 93117 +(Address of principal executive offices) +(805) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock, par value $0.01 per share +New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer o +Non-accelerated filer o +Smaller reporting company o +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý +At September 30, 2015 , the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,866,513,908 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on the New York Stock Exchange on that date, which was $58.06 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +The number of shares of the registrant's Common Stock outstanding at May 13, 2016 was 32,023,300 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2016 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +* +Item 2. +Properties +25 +Item 3. +Legal Proceedings +26 +Item 4. +Mine Safety Disclosures +* +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +27 +Item 6. +Selected Financial Data +29 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +32 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +62 +Item 8. +Financial Statements and Supplementary Data +63 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +* +Item 9A. +Controls and Procedures +63 +Item 9B. +Other Information +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +65 +Item 11. +Executive Compensation +65 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +65 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +65 +Item 14. +Principal Accounting Fees and Services +65 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +66 +Signatures +69 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on May 31, 2016 (Annual Report on Form 10-K), and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains forward-looking statements relating to, among other things: +• +the results of our retail store fleet optimization and brand office consolidation; +• +the successful implementation of our Business Transformation Project, as defined herein; +• +our global business, growth, operating, investing, and financing strategies; +• +our product offerings, distribution channels, and geographic mix; +• +the success of new products, brands, and growth initiatives; +• +the impact of seasonality and weather on our operations; +• +expectations regarding our net sales and earnings growth and other financial metrics; +• +our development of worldwide distribution channel; +• +trends affecting our financial condition, results of operations, or cash flows; +• +our expectations for expansion of our Direct-to-Consumer (DTC) capabilities; +• +overall global economic trends including foreign currency exchange rate fluctuations; +• +reliability of overseas factory production and storage; +• +the availability and cost of raw materials; and +• +the impact of recent accounting pronouncements. +Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K, as well as in our other filings with the SEC. You should read this Annual Report on Form 10-K, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements. +We qualify all of our forward-looking statements by these cautionary statements. +2 +Table of Contents +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. UGG®, Teva®, Sanuk®, Hoka One One® (Hoka), Ahnu®, Koolaburra® by UGG (Koolaburra) and UGGpure TM are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Unless otherwise specifically indicated, all amounts in Items 1 and 1A herein are expressed in thousands, except for employees, store and country counts and share data. +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +Change in Fiscal Year +In February 2014, our Board of Directors approved a change in our fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2016, 2015 and 2013 fiscal years relate to the periods ended March 31, 2016 , March 31, 2015 and December 31, 2013 , respectively. The 2014 transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +Recent Developments +In July 2014, we acquired our UGG brand distributor that had been selling to retailers in Germany and continues to operate as a wholesale business in Germany through the acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to our consolidated financial statements. +In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We believe there is significant consumer demand for footwear using sheepskin and other plush materials at price points below those of the UGG brand. We intend to position Koolaburra as a high-quality, fashionable and affordable alternative to UGG and to distribute Koolaburra primarily through channels which do not offer the UGG brand. In November 2015, we added the "by UGG" attribute to the Koolaburra name to communicate to the consumer that the Koolaburra products come from the same company that designs and manufactures the UGG line. +In July 2015, we sold certain tangible and intangible assets related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, we sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to our consolidated financial statements. +In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. We have begun to realign our brands +3 +Table of Contents +across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, we also relocated our Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, we closed our Ahnu brand operations office in Richmond, California. Furthermore, we are in the process of evaluating our portfolio of retail stores. We have identified 24 retail stores that are candidates for potential closure or relocation. +Subsequent to the sales of the MOZO and TSUBO brands, the operating results for our other brands only include Hoka, Ahnu and Koolaburra. We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts. +For the past several years, we have been planning and preparing to improve, automate and streamline our operational systems, processes, infrastructure and management (Business Transformation Project or BT). One such initiative was to upgrade our enterprise resource planning (ERP) system. Our ERP system integrates finance and accounting, purchase order management, inventory control, and sales across all lines of business. The ERP system centralizes all of our transactional data. We anticipate that the result is to increase efficiencies within the entire company. The initiative to upgrade our ERP system worldwide went live in April 2016. +Products +We currently market our products primarily under six proprietary brands, composed of the following three primary brands and other brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. Our long term growth strategy for the UGG brand relies on a combination of expanded distribution through wholesale partners, owned, branded third-party retail stores and our E-Commerce websites globally. We expect to continue to diversify the product offering to drive growth through our women’s, men’s and children's footwear offering, and enter new categories of loungewear, outerwear and home. We intend to do this by leveraging our industry expertise for capabilities and distribution as we target both existing and new customers of the brand. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility. We are focused on regaining our leadership position as a premium brand by focusing on the modern outdoor market, and continuing to expand our casual offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga Mat TM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brand's unique attitude. We also expect to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +Other Brands. In addition to our three primary brands, our three other brands include Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; Ahnu, a line of performance outdoor and yoga footwear which we have discontinued operating as a separate brand and are looking to leverage under the Teva brand umbrella; and Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials. +4 +Table of Contents +With respect to Hoka, we plan to focus on growing awareness with a broader audience, focusing on women, and telling bold and brave innovative product stories through digital and social communications. We also plan to continue to build on Hoka’s authentic position in the specialty running market through relationships with prominent professional athletes and ambassadors. +We plan to launch the Koolaburra line with a targeted group of national footwear retailers and mid-market department stores. +Sales and Distribution +US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and owned retail stores. Our brands are generally advertised and promoted through a variety of primarily digital consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market currently maximizes our selling efforts, while we continue to explore synergies in our sales force operations to reflect the constantly evolving retail marketplace. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. +International Distribution. Internationally, we distribute our products through independent distributors and directly to retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites, e-commerce marketplaces and our owned retail stores. For our wholesale and DTC businesses, we operate distribution centers with third-party logistics providers (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +UGG Wholesale. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean and Dick's Sporting Goods, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Urban Outfitters, as well as family footwear with DSW, Famous Footwear and Rack Room. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk Wholesale. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +5 +Table of Contents +Other Brands Wholesale. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +Direct-to-Consumer. Our DTC business is comprised of our retail store and E-Commerce businesses. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC channel. +• +“Infinite UGG”: We provide online shopping access, inside retail stores, for all SKUs available on our E-Commerce websites. +• +“Buy online / return in-store”: Our consumers can buy online and return unwanted products to the store. +• +“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to directly impact our consumers' experiences, meet the growing demand for these products, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG concept stores and UGG outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. At March 31, 2016 , we had a total of 153 retail stores worldwide. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 "Restructuring" to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further disclosure and discussion. +Product Design and Development +The design and product development team for each of our brands creates new innovative footwear products that combine our standards of aesthetic leadership, high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This helps to ensure that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +6 +Table of Contents +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us. Primarily, as we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples to shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. +Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers. +Patents and Trademarks +We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our Company, and distinguishing our products from the products of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Hoka One One, Ahnu, Koolaburra and UGGpure, and other marks in the US and in many other countries, including Canada, China, various countries in the European Union, Japan and Korea. At March 31, 2016 , we hold 186 utility and design patent registrations in the US and abroad and have filed 17 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 (our second fiscal quarter) and December 31 (our third fiscal quarter) and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 (our fourth fiscal quarter) and June 30 (our first fiscal quarter) of each year. With the large growth in the UGG brand over the past several years, our aggregate net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon a number of factors, including consumer preferences, unexpected changes in weather conditions, availability of product and raw materials, competition, and the willingness of our wholesale and distributor customers to continue to carry and promote our various product lines, among other risks and uncertainties. Refer to Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Inventory Management +Inventory management is important to the financial condition and operating results of our business. We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels. +Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, and inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading. +At March 31, 2016 , our backlog of orders from our wholesale customers and distributors was approximately $582,000 compared to approximately $609,000 at March 31, 2015 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2017 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons, including that backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and it excludes potential sales in our DTC business during the year. Backlog is also affected by the timing of customers' orders and product availability. +8 +Table of Contents +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our ability to successfully compete depends on our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +produce products that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain brand loyalty and authenticity; +• +price our products in a competitive manner; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; +• +implement our Business Transformation Project in a cost-effective manner; and +• +manage the impact on our business of the rapidly changing retail environment. +We believe we are well positioned to compete in our industry. However, we cannot ensure that we will be able to compete effectively, and competitive pressure may have a material adverse effect on our business, financial condition and results of operations. +Employees +At March 31, 2016 , we employed approximately 3,500 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,400 employees at March 31, 2015 , including approximately 1,900 employees in our retail stores. The overall increase in employees during fiscal year 2016 was primarily related to the increase in retail employees as a result of the net increase in retail stores open at March 31, 2016 compared to March 31, 2015 . As we optimize our retail store fleet, we expect that our employee count will fluctuate accordingly. We believe that we have good relationships with our employees. +Financial Information about Segments and Geographic Areas +Our five reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Notes 12 and 13 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our business segments. Refer to Note 13 of our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks. Refer to Part I, Item 1A, "Risk Factors" for a discussion of the risks related to our foreign operations. +9 +Table of Contents +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only. +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Investing in our common stock involves substantial risk. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report on Form 10-K, as well as the other information we file with the Securities and Exchange Commission. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K. +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, estimate our inventory requirements, manage our expenses, and forecast our financial results. +Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). In light of the significant growth of the UGG brand over the past several years, and the relative size of the UGG brand as compared to our other brands, this trend has resulted in our aggregate net sales for the third and fourth fiscal quarters significantly exceeding our aggregate net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence or worsening economic conditions, will have a disproportionate impact on our business, and could result in our failure to achieve financial performance that is in line with our expectations. +10 +Table of Contents +In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG products, which we experienced during fiscal 2016 when temperatures hit record highs in certain key markets during the fall months and holiday season. Because we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable, at the time manufacturing decisions are made, it is difficult for our management to predict how future weather conditions may impact consumer spending patterns generally, and the demand for our products in particular. In addition, this production cycle requires us to incur significant expenses relating to the manufacturing and marketing of our products in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. This also makes it challenging for us to estimate and manage our inventory requirements, especially as our product offerings continue to broaden and diversify. Furthermore, this production cycle makes it difficult for our management to timely adjust expenses in reaction to unfavorable weather patterns, and the resulting order cancellations and weak consumer demand. As a result, unanticipated weather conditions have had, and may in the future have, a material, negative impact on our financial condition and results of operations. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin that meets our quality expectations, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design requires sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries, and the resulting products we deliver to consumers, do not conform to our quality specifications or fail to meet consumer expectations, we could experience a higher rate of customer returns, which would reduce our net sales and harm our reputation. Similarly, if the tanneries are not able to deliver sheepskin in the quantities required, this would negatively impact our manufacturing process and lead to inventory shortages, which would result in a loss of sales and strain our relationships with our customers. +In addition, any factors that negatively impact the business of these tanneries, such as loss of customers, financial instability or bankruptcy, could prevent them from delivering sheepskin to us in the quantities expected or at all. In addition, our sheepskin suppliers currently warehouse their inventory at a limited number of facilities in China. The loss or destruction of any of these facilities, whether as a result of a natural disaster, the outbreak of hostilities, work stoppages or other unforeseen events, would likely result in shortages in our supply of sheepskin. These events are unpredictable and not within our control. If any of these events were to occur, it would likely result in interruptions in our manufacturing process, the loss of sales and harm to our reputation. +There have been significant fluctuations in the price of sheepskin in recent years as the demand for this commodity from our customers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include: weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Similarly, sheepskin is a by-product of the food industry, and the demand for sheep meat has generally been decreasing, thus leading to an overall reduction in the number of sheep available. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a new raw material, UGGpure TM , in some of our UGG products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the impact of fluctuations in sheepskin prices. However, in the event of a significant and prolonged increase in sheepskin prices, such as what we experienced in the past several years, these strategies may not be sufficient to fully offset the impact on our financial results from the increased prices. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer. +11 +Table of Contents +The footwear and fashion industry is subject to rapid changes in consumer preferences, and if we do not accurately forecast consumer demand, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished. +The footwear and fashion industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products, estimate our inventory requirements, and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• +consumer acceptance of our products; +• +consumer demand for products of our competitors; +• +the extent to which consumers view certain of our products as substitutes for other products we manufacture; +• +the lifecycle of our products and consumer replenishment behavior; +• +evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• +brand loyalty; +• +seasonality, including the impact of anticipated and unanticipated weather conditions; +• +our reliance on manual processes and judgment for certain manufacturing and inventory planning functions; +• +changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; and +• +changes in general economic and market conditions. +Like other companies in the footwear industry, we have an extended design and manufacturing process, which requires us to forecast production volumes and estimate inventory requirements many months before consumer preferences become apparent and consumers make a decision to purchase our products. The significant expansion of our product offerings in recent years, both within and across brands, has only made these activities more challenging. If we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand for certain products or styles, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +Our success depends on our ability to anticipate and promptly respond to changing consumer preferences and fashion trends, and to effectively market our new and existing products. +Our success depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear and apparel consumers. As our brands and product offerings continue to expand, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG products include a fashion element and could go out of style at any time. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our UGG brand image to be outdated or associate our UGG brand with styles that are no longer popular. This problem is exacerbated by the fact that our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of a purchasing decision by the consumer. If we are not successful in anticipating or reacting to changes in consumer preferences and fashion trends, our sales may decline and our overall financial performance may be adversely affected. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and one or more missteps with respect to factors such as product quality, product design or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding our company, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +12 +Table of Contents +Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear or accessories in the quantities projected or at all. In addition, attempting to achieve market acceptance for new products requires us to incur substantial product development and marketing costs, which are typically incurred many months in advance of the completion of the sale of the products. If we introduce new products that do not gain market acceptance, it could erode our competitive position, adversely affect the image of our brands, and result in sales below our expectations. +If our Business Transformation Project does not result in the anticipated benefits to us, or if it results in unanticipated disruption to our business, our financial condition and operating results could be adversely affected and our business may become less competitive. +As part of our ongoing effort to improve the overall efficiency and competitiveness of our business, we have taken steps to implement a Business Transformation Project, including upgrading our enterprise resource program systems , and inventory management and control systems. We have additional plans to continue to improve, automate and streamline our other operational systems, processes, infrastructure and management. While we believe our Business Transformation Project has the potential to reduce our expenses, increase our efficiency and enhance our ability to be competitive in the long term, we have incurred, and expect to continue to incur, significant expenses to implement the project. Many of these expenditures have been, and will continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful in implementing our Business Transformation Project, or that our efforts will result in the anticipated benefits to us. If we are not successful in implementing our Business Transformation Project in a cost-effective manner, our financial condition and operating results could be adversely affected and our business may become less competitive. +In addition, implementation of our Business Transformation Project has the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems , and adapt to new operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our Business Transformation Project, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business. +If we are unsuccessful in implementing our retail store fleet optimization and brand office consolidation plans, we may incur significant costs and expenses without any corresponding benefits to our business, in which case our financial condition and operating results may be adversely affected. +We are in the process of implementing a restructuring plan, including a retail store fleet optimization and brand office consolidation, which is designed to realign our brands, streamline brand operations, reduce infrastructure and overhead costs, create operating efficiencies, and improve collaboration. This initiative involves the potential closure of approximately 24 of our retail stores, the relocation of our Sanuk brand operations office, and the closure of our Ahnu brand operations office. In connection with the restructuring efforts, we have incurred, and expect to continue to incur, significant costs and expenses relating to the write-off of leasehold improvements, the early termination of office and store leases, employee relocation and severance costs, and the disposal of equipment. There can be no assurance that the benefits from the retail store fleet optimization and brand office consolidation, including from any potential reduction in overhead costs or improvement in operating efficiencies, will be sufficient to offset the costs and other charges that we have already incurred and that we expect to incur in the future. If we fail to realize the anticipated benefits from the implementation of these strategies, or if we incur costs or expenses in amounts that are greater than our estimates, our financial condition and operating results may be adversely affected. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to close or relocate a number of retail stores in connection with our retail store fleet optimization plans, we are concurrently working to identify opportunities to open new retail stores. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail segment, the closure of a retail store can result in a significant negative financial impact, including write-offs of leasehold improvements and inventory, lease termination costs, and severance costs. As a result of our ongoing retail store fleet optimization plans, and in light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect +13 +Table of Contents +to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we identify will ultimately generate a positive return on our investment. In addition, in light of the difficult and rapidly changing retail environment, it may prove challenging to identify a sufficient number of retail locations that meet our stringent financial requirements, in which case we may not be able to fully execute our growth strategy. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which would harm our financial condition and results of operations. +The footwear industry is highly competitive and we expect to continue to face intense competitive pressures. We believe that we compete on the basis of a number of factors, including our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +produce products that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain brand loyalty and authenticity; +• +price our products in a competitive manner; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; +• +implement our Business Transformation Project in a cost-effective manner; and +• +manage the impact on our business of the rapidly changing retail environment. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which would harm our financial condition and results of operations. +Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered into the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and apparel markets. Our competitors’ greater capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, identify or influence consumer preferences, and withstand periodic downturns in the footwear industry or in economic conditions generally. With respect to newer entrants into the market, we believe that access to offshore manufacturing and changes in technology will continue to make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may require us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Furthermore, the competitive environment makes it more difficult to forecast inventory requirements as production decisions are required to be made several months in advance of the purchase of our products. If we fail to compete effectively in the future, our sales could decline and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +14 +Table of Contents +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands through to consumers. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk. In addition, there is no guarantee that any replacement retailer or distributor will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us. These risks have been exacerbated recently as our retail customers face a retail industry that continues to undergo significant structural changes fueled by technology that is altering consumer behavior. As a result, we could experience a significant decline in sales, write downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. +Our five largest customers accounted for approximately 21.9% of worldwide net sales in fiscal year 2016 and 22.2% of worldwide net sales in fiscal year 2015. Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our financial condition and results of operations. +Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business. Any unexpected increases in legal fees and other costs associated with the defense of our intellectual property rights could result in higher operating expenses, which would negatively impact our profitability. +The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products of infringers, it could adversely affect the value of our brands. +In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. Any court decision or settlement of these matters that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales. +15 +Table of Contents +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, increase our overall retail presence, and improve our financial performance and operational efficiency. For example, we continue to pursue opportunities to expand our Direct-to-Consumer presence, including through new retail stores and expanded E-commerce capabilities. We are also considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth, and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position. +As part of our overall growth strategy, we consider strategic acquisitions in order to extend our brands into complementary product categories and markets. For example, in April 2015 we acquired substantially all the assets related to the Koolaburra brand. Our ability to continue this practice depends on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, challenges and uncertainties, including the potential to: +• +expose us to risks inherent in entering a new market or geographic region; +• +lose significant customers or key personnel of the acquired business; +• +encounter difficulties managing geographically-remote operations; +• +divert management’s time and attention away from other aspects of our business operations; +• +issue equity securities to finance the acquisition, which would be dilutive to our existing stockholders; +• +incur indebtedness to finance the acquisition, which would result in debt service costs and potentially include covenants restricting our operations; and +• +incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. +Additionally, we may not be able to successfully integrate the operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new brands and products with our existing products, aggressively target different consumers for our newly-acquired products, and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Our business could be adversely affected by the loss of key members of our management team or other key personnel. +Our future success and growth depend largely upon the continued services of our executive officers and other key employees. From time to time, there may be changes in our executive officers or other key employees resulting from the hiring or departure of such personnel, which may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. For example, we have hired new executives in key leadership roles over the last several years, including the President of Fashion Lifestyle and President of OmniChannel. The loss of one or more of our executive officers or other key employees, and the often extensive process of identifying and hiring other personnel who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business. +16 +Table of Contents +We depend on skilled personnel and, if we are unable to retain or hire additional qualified personnel, we may not be able to achieve our strategic objectives and our operating results may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified and motivated personnel across our company. In particular, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessory designers and information technology specialists. Competition for these skilled professionals is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining suitably skilled personnel with the qualifications and motivation to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer and we may be unable to compete in the market. +In addition, prospective and existing employees often consider the value of the stock awards they receive in connection with their employment when deciding whether to take a job. If the perceived value of our equity awards decline, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed. +Additionally, as part of our efforts to improve overall efficiency and competitiveness of our business, we have added new leadership both within our brands and to our Omni-Channel platform, as well as streamlining and restructuring our existing personnel and brand management. If we fail to effectively implement these management and personnel changes, we may be unable to achieve our strategic objectives and operating efficiencies. +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products through self-managed distribution centers in Camarillo and Moreno Valley, California. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of certain equipment, power outages or software problems. These risks are exacerbated by the ongoing implementation of our Business Transformation Project since the warehouse management system is required to work together with our enterprise resource program systems and inventory management and control systems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to delivery product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +In addition, we began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015. In general, building out a new distribution facility, and incorporating the operations of the new facility into our business in an efficient and cost effective manner presents many challenges. During the first several months of operations of the Moreno Valley facility, we experienced logistical challenges which caused shipment delays and resulted in lost +17 +Table of Contents +sales, primarily for the Sanuk brand. While we continue to work on improving operations at the Moreno Valley facility, we expect to continue to experience disruption to our business as a result of bringing the facility online, including the potential for additional shipment delays, cancelled orders and other logistical issues. In addition, any new distribution facilities that we build or acquire in the future may experience similar difficulties. +Internationally, we distribute our products through a number of distribution centers managed by third-party logistics providers (3PLs). We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. The loss of, or disruption to the operations of, any one or more of these facilities, whether due to natural disasters, the outbreak of hostilities, work stoppages, or other adverse events, could materially adversely impact our sales, business performance and operating results. +We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to obtain timely delivery of products in sufficient quantities that meet our quality standards. In that event, we may not be able to fill customer orders, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of acceptable quality and competitively-priced products from our independent manufacturers. While we do have long-standing relationships with most of these manufacturers, any of the manufacturers may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge us, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products or services of a comparable quality, at an acceptable price, or on a timely basis. If we must find alternative manufacturers, we would likely experience increased costs as well as substantial disruption to our business, which could result in a loss of sales and earnings. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. We keep proprietary materials that are required for the production of our products, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; +• +increasing transportation costs and a limited supply of international shipping capacity; +• +delays during shipping, at the port of entry or at the port of departure; +• +increasing labor costs and labor disruptions; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds from foreign jurisdictions; +• +changing economic and market conditions; +• +changes in governmental policies and regulations including intellectual property, labor, safety, and environmental regulations; +18 +Table of Contents +• +refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; +• +customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +decreased scrutiny by custom officials for counterfeit products; +• +political instability, which can interrupt commerce, including acts of war and other external factors, over which we have no control; +• +heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• +disruptions at manufacturing or distribution facilities caused by natural or other disasters; and +• +adverse changes in consumer perception of goods, trade, or political relations with China or Vietnam. +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of such standards and laws could result in negative publicity, which could damage our reputation and the value of our brands. +We conduct business outside the US, which exposes us to foreign currency risk, and could have a negative impact on our financial results. +We operate on a global basis, with approximately 35.0% of our net sales for the year ended March 31, 2016 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future changes in foreign currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material fluctuations in foreign currency translation amounts or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected. +We currently utilize forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign currency hedging activities, transactions, remeasurements or translations could materially impact our consolidated financial statements. +19 +Table of Contents +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor dispute s that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions . +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include: +• +changes in foreign currency exchange rates, which impact the prices at which products are sold to international consumers; +• +limitations on our ability to move currency out of international markets; +• +burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of which are uncertain; +• +legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; +• +inability to import products into a foreign country; +• +changes in US and foreign tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting and marketing products in unfamiliar cultures; +• +political instability; +• +changes in diplomatic and trade relationships between the US and other countries; and +• +general economic fluctuations in specific countries or markets. +International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays . +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. +We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +20 +Table of Contents +Key business processes and supporting information systems could be interrupted and such interruption can adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• +critical business systems become inoperable or require significant costs to restore; +• +key personnel are unable to perform their duties, communicate, or access information systems; +• +significant quantities of merchandise are damaged or destroyed; +• +we are required to make unanticipated investment in state-of-the-art technologies and security measures; +• +key wholesale and distributor customers cannot place or receive orders; +• +E-Commerce customer orders may not be received or fulfilled; +• +confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; +• +we are exposed to unanticipated liabilities; or +• +carriers cannot ship or unload shipments. +Interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +Furthermore, we rely on certain information technology management and enterprise resource planning systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected. +The loss, theft or misuse of sensitive customer or company information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business . +Our business involves the storage and transmission of sensitive information, including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and proprietary company financial and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information. +As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relationships with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience. +21 +Table of Contents +Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our brands, and subject us to potential litigation, liability, fines and penalties. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, suppliers, employees or other parties, or be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition. +We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +Our revolving credit facility agreement, which provides our lenders with a first-priority lien against substantially all of our assets, exposes us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under a revolving credit facility. Our credit facility provides for a committed revolving credit line of up to $400,000. Our obligations under the agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all of our assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries. +Our credit facility also contains a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under the credit facility could cause the lenders to accelerate the timing of payments and exercise their lien on our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because borrowings under the credit facility bear interest at variable interest rates, which we do not currently anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. There were outstanding borrowings of approximately $53,000 under our credit facility at March 31, 2016. +In addition, we have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY 150,000 , or approximately $23,200 . At March 31, 2016, we had approximately $14,000 of outstanding borrowings under the China Credit Facility. +The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries, including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, Germany, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and those countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments. +22 +Table of Contents +We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, it is possible that tax proposals could result in changes to the existing US tax laws that affect us, although we are unable to predict whether any proposals will ultimately be enacted. Any changes in tax laws, treaties or regulations could increase our income tax liability and adversely affect our net income and long term effective tax rates. +We may incur disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +New regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. +In August 2012, the SEC adopted a new rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform due diligence, and to annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We file a Form SD, Specialized Disclosure Report, on or about May 31 each year. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the New York Stock Exchange under the symbol “DECK”. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $42.27 to $76.14 for the 52-week period ended May 13, 2016. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future performance, whether realized or perceived; +• +changes in estimates by securities analysts or failure to meet such estimates; +• +published research and opinions by securities analysts and other market forecasters; +• +quarterly fluctuations in our sales, margins, expenses, and financial results; +• +the financial results and liquidity of our customers; +• +the shift of revenue recognition as a result of changes in our distribution model; +• +claims brought against us by a regulatory agency or our stockholders; +• +announcements to repurchase our stock; +• +the declaration of stock or cash dividends; +• +general market and economic conditions; +• +consumer confidence; +• +broad market fluctuations in volume and price; and +• +a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry +23 +Table of Contents +factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, and decreases in available credit. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +Furthermore, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. +Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions: +• +authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• +provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• +provide that board vacancies can only be filled by directors; +• +prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• +require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and +• +require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. +Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We do not expect to declare any dividends in the foreseeable future. +We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future +24 +Table of Contents +earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends. +Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. +Generally accepted accounting principles in the United States, or US GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. +Item 2. Properties +Our corporate headquarters are located in Goleta, California. The construction of our new fourteen acre corporate headquarters in Goleta, California was substantially completed in January 2014. Subsequent to March 31, 2016, we acquired 3.7 acres of land adjacent to our corporate headquarters to accommodate future expansion. +We have two US distribution centers, both in California. We began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015 and continue to operate our distribution center in Camarillo. Our international distribution centers, located in China, Hong Kong, Japan, the Netherlands and the UK are managed by 3PLs. +We also have offices in China, Hong Kong and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, offices in China, Hong Kong and Japan to coordinate sales and marketing efforts, and offices in France, Germany, the Netherlands and the UK to oversee European operations and administration. +At March 31, 2016 , we had 54 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had 99 retail stores in Austria, Belgium, Canada, China, France, Hong Kong, Japan, the Netherlands and the UK. Our E-Commerce operations are in Arizona, China, Japan and the UK and many other European countries. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers. +Other than our new corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our DTC facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table reflects the location, use and approximate size of our significant physical properties at March 31, 2016 : +Facility Location +Description +Lease or Own +Facility Size (Square Footage) +Moreno Valley, California +Warehouse Facility +Lease +794,000 +Camarillo, California +Warehouse Facility +Lease +723,000 +Goleta, California +Corporate Offices +Own +196,000 +25 +Table of Contents +Item 3. Legal Proceedings +As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including our trademark registration and design patents for UGG. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG, Teva and Sanuk products. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements. +26 +Table of Contents +PART II +Unless otherwise specifically indicated, all amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for share data and store count. +Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock is traded on the NYSE under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK". +The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated. +Common Stock +Price Per Share +Low +High +Year ended March 31, 2016 +First Quarter +$ +68.15 +$ +76.58 +Second Quarter +56.75 +74.37 +Third Quarter +46.30 +62.16 +Fourth Quarter +42.27 +60.55 +Year ended March 31, 2015 +First Quarter +$ +76.11 +$ +86.33 +Second Quarter +81.53 +99.38 +Third Quarter +81.56 +98.57 +Fourth Quarter +66.05 +94.10 +At May 13, 2016 , we had approximately 49 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2016 that were not registered under the Securities Act of 1933, as amended. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year and one quarter period commencing December 31, 2010 and ending March 31, 2016. The data represented below assumes one hundred dollars invested in each of the Company's common stock, the NYSE Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2011. +The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under either of such Acts. Total return assumes reinvestment of dividends; we have not declared or paid any cash dividends on our common stock since our inception. +27 +Table of Contents +The following table assumes $100 invested on January 1, 2011 and assumes dividend reinvested. +12/31/2010 +12/31/2011 +12/31/2012 +12/31/2013 +3/31/2015 +3/31/2016 +Deckers Outdoor Corporation +$ +100.0 +$ +94.8 +$ +50.5 +$ +105.9 +$ +91.4 +$ +75.1 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +124.4 +127.6 +159.4 +152.2 +135.1 +The NYSE Composite Index* +100.0 +96.4 +112.1 +141.7 +155.5 +149.6 +*The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00. At March 31, 2016 , we were in compliance with this provision and we remain in compliance as of May 31, 2016 . +Stock Repurchase Program +In June 2012, we approved a stock repurchase program to repurchase up to $200,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. At February 28, 2015, we had repurchased approximately 3,823,000 shares under this program for approximately $200,000, or an average price of $52.31 per share. +28 +Table of Contents +In January 2015, we approved a new stock repurchase program to repurchase up to $200,000 of our common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. At March 31, 2016 , we have repurchased approximately 1,797,000 shares under this program for approximately $122,100, or an average price of $67.95 per share, leaving the remaining approved amount at approximately $77,900. +The following table summarizes the activity under our stock repurchase programs during the period from December 31, 2013 through March 31, 2016: +Total number +of shares +purchased* +(in thousands) +Average price +paid per share +Approximate dollar +value of shares +added/(purchased) +(in thousands) +Approximate dollar +value of shares that +may yet be purchased +(in thousands) +December 31, 2013 +$ +79,300 +January 1, 2014 — September 30, 2014 +— +$ +— +$ +— +79,300 +October 1, 2014 — October 31, 2014 +157 +84.66 +(13,300 +) +66,000 +January 1, 2015 — January 31, 2015 +— +— +200,000 +266,000 +February 1, 2015 — February 28, 2015 +1,089 +73.41 +(79,900 +) +186,100 +March 1, 2015 — March 31, 2015 +190 +73.73 +(14,000 +) +172,100 +June 1, 2015 — June 30, 2015 +625 +72.69 +(45,400 +) +126,700 +August 1, 2015 — August 31, 2015 +321 +67.68 +(21,700 +) +105,000 +September 1, 2015 — September 30, 2015 +33 +62.32 +(2,100 +) +102,900 +February 1, 2016 — February 29, 2016 +266 +56.41 +(15,000 +) +87,900 +March 1, 2016 — March 31, 2016 +175 +56.97 +(10,000 +) +77,900 +Total +2,856 +$ +67.95 +* All shares purchased were purchased as part of a publicly announced program in open-market transactions. +Item 6. Selected Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements. +The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report on Form 10-K: +• Consolidated statements of comprehensive income for the years ended December 31, 2012 and 2011 . +• Consolidated balance sheets at March 31, 2014 , and December 31, 2013 . +The financial data are further derived from, and qualified by reference to, the following accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K: +• +Consolidated statements of comprehensive income (loss) for the years ended March 31, 2016 , March 31, 2015 and December 31, 2013 and the transition quarter ended March 31, 2014 . +• Consolidated balance sheets at March 31, 2016 and March 31, 2015 . +29 +Table of Contents +Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K and the related notes and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Years ended March 31, +Quarter ended (transition period) March 31, +Years ended December 31, +2016 +2015 +2014 +2013 +2012 +2011 +(In thousands, except per share data) +Statements of operations data +Net sales: +UGG wholesale +$ +918,102 +$ +903,926 +$ +83,271 +$ +818,377 +$ +819,256 +$ +915,203 +Teva wholesale +121,239 +116,931 +45,283 +109,334 +108,591 +118,742 +Sanuk wholesale +90,719 +102,690 +28,793 +94,420 +89,804 +26,039 +Other brands wholesale +100,820 +76,152 +18,662 +38,276 +20,194 +21,801 +Direct-to-Consumer +644,317 +617,358 +118,707 +496,211 +376,553 +295,498 +Total net sales +1,875,197 +1,817,057 +294,716 +1,556,618 +1,414,398 +1,377,283 +Cost of sales +1,028,529 +938,949 +150,456 +820,135 +782,244 +698,288 +Gross profit +846,668 +878,108 +144,260 +736,483 +632,154 +678,995 +Selling, general and administrative expenses +684,541 +653,689 +144,668 +528,586 +445,206 +394,157 +Income (loss) from operations +162,127 +224,419 +(408 +) +207,897 +186,948 +284,838 +Other expense (income), net +5,242 +3,280 +334 +2,340 +2,830 +(424 +) +Income (loss) before income taxes +156,885 +221,139 +(742 +) +205,557 +184,118 +285,262 +Income taxes +34,620 +59,359 +1,943 +59,868 +55,104 +83,404 +Net income (loss) +122,265 +161,780 +(2,685 +) +145,689 +129,014 +201,858 +Net income attributable to noncontrolling interest +— +— +— +— +(148 +) +(2,806 +) +Net income (loss) attributable to Deckers Outdoor Corporation +$ +122,265 +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +128,866 +$ +199,052 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +3.76 +$ +4.70 +$ +(0.08 +) +$ +4.23 +$ +3.49 +$ +5.16 +Diluted +$ +3.70 +$ +4.66 +$ +(0.08 +) +$ +4.18 +$ +3.45 +$ +5.07 +Weighted-average common shares outstanding: +Basic +32,556 +34,433 +34,621 +34,473 +36,879 +38,605 +Diluted +33,039 +34,733 +34,621 +34,829 +37,334 +39,265 +30 +Table of Contents +As of +Years ended March 31, +Quarter ended (transition period) March 31, +Years ended December 31, +2016 +2015 +2014 +2013 +2012 +2011 +(In thousands) +Balance Sheet Data +Cash and cash equivalents +$ +245,956 +$ +225,143 +$ +245,088 +$ +237,125 +$ +110,247 +$ +263,606 +Working capital +547,267 +519,051 +501,647 +508,786 +424,569 +585,823 +Total assets +1,278,068 +1,169,933 +1,064,204 +1,259,729 +1,068,064 +1,146,196 +Long-term liabilities +72,099 +65,379 +53,140 +51,092 +62,246 +72,687 +Total Deckers Outdoor Corporation stockholders' equity +967,471 +937,012 +888,849 +888,119 +738,801 +835,936 +31 +Table of Contents +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation +References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. The following discussion of our financial condition and results of operations should be read together with our accompanying consolidated financial statements and the accompanying notes included in Part IV of this Annual Report on Form 10-K. Certain reclassifications were made for all prior periods presented including the year ended March 31, 2015, the quarter ended March 31, 2014 (transition period) and years ended December 31, 2013, 2014, and 2015 to conform to the current period presentation. +Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share data, and store count. +Overview +We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under six proprietary brands, composed of the following three primary brands and our other brands: +• +UGG®: Premier brand in luxurious comfort footwear, and expanding into handbags, apparel, home and cold weather accessories; +• +Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and +• +Sanuk®: Authentic Southern California casual footwear for those seeking a playful escape. +In addition to our three primary brands, our other brands include Hoka One One® (Hoka), a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; Ahnu®, a line of performance outdoor and yoga footwear; and Koolaburra® by UGG (Koolaburra), a line of fashion casual footwear using sheepskin and other plush materials. +We sell our brands through quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our Direct-to-Consumer (DTC) business. Independent third parties manufacture all of our products. +Change in Fiscal Year +In February 2014, our Board of Directors approved a change in our fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2016, 2015 and 2013 fiscal years are for the periods ended March 31, 2016 , March 31, 2015 and December 31, 2013 , respectively. The 2014 transition period was the quarter ended March 31, 2014 , to coincide with the change in our fiscal year end. +Recent Developments +In July 2014, we acquired our UGG brand distributor that had been selling to retailers in Germany and continues to operate as a wholesale business in Germany through the acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to our consolidated financial statements. +In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We believe there is significant consumer demand for footwear using sheepskin and other plush materials at price points below those of the UGG brand. +In July 2015, we sold certain tangible and intangible assets, and the trade name related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, we sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to our consolidated financial statements. +32 +Table of Contents +In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. We have begun to realign our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, we also relocated our Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, we closed our Ahnu brand operations office in Richmond, California and consolidated our European offices. Furthermore, we are in the process of evaluating our portfolio of retail stores. We have identified 24 retail stores that are candidates for potential closure. Subsequent to the sales of the MOZO and TSUBO brands, the operating results for our other brands only include Hoka, Ahnu and Koolaburra. We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. Refer to Note 2 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information. +As a result of the retail store fleet optimization, office consolidation and software impairments, we have expensed restructuring charges totaling approximately $25,000 at March 31, 2016. Of this amount, approximately $9,000 is related to lease termination costs, $4,000 is related to severance costs, $6,000 is related to impairment of leasehold improvements and various assets, $4,000 is related to various BT supply chain software impairments, and $2,000 for termination of various contracts. Of the total amount, approximately $15,000 was accrued as a non-cash impact at March 31, 2016, but will have cash impacts in the fiscal year ended March 31, 2017. Approximately $2,000 of the charges was recognized in cost of sales and the remainder was recorded in selling, general and administrative (SG&A). It is anticipated that we will incur an additional $10,000 to $15,000 of similar restructuring charges in the fiscal year ending March 31, 2017. The segment impacts of the total restructuring charges is as follow: Sanuk brand wholesale charges of approximately $3,000, other brands wholesale charges of approximately $2,500 related to the Ahnu brand, DTC charges of approximately $10,500, and the remainder of approximately $9,000 to unallocated overhead expenses, primarily BT supply chain software impairments and European office consolidation. The restructuring is expected to result in annualized expense savings in the range of $30,000 to $35,000. We expect to complete a majority of the restructuring activity by the end of the fiscal year ended March 31, 2017. It is anticipated that these cost savings will be offset by increases in other SG&A expenses during the fiscal year ended March 31, 2017. +For the past several years, we have been planning and preparing to improve, automate and streamline our operational systems, processes, infrastructure and management (Business Transformation Project or BT). One such initiative was to upgrade our enterprise resource planning (ERP) system. Our ERP system integrates finance and accounting, purchase order management, inventory control, operations and sales across all lines of business. The ERP system centralizes all of our transactional data. We anticipate that the result is to increase efficiencies within the entire company. The initiative to upgrade our ERP system worldwide went live in April 2016. +Trends Impacting our Overall Business +Our business has been, and we expect that it will continue to be, impacted by several important trends: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we continue to expand our product lines and create more year-round styles for our brands, the effect of favorable or unfavorable weather on our aggregate sales has been, and is likely to continue to be, significant. We especially saw the impact of this trend during the third quarter when weather was unseasonably warm in many of our key markets. Weather will continue to be a significant factor impacting our business, and it will continue to be difficult for us to predict the impact that weather conditions in any future period will have on our financial condition and operating results. +• +We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions, and we expect these behaviors will continue to evolve. In particular, the retail industry appears to be experiencing a significant and prolonged decrease in consumer traffic. +• +Fluctuations in currency exchange rates have significantly increased the value of the US dollar compared to most major foreign currencies over the past couple of years. We believe that this has been a significant factor contributing to a slowdown in traffic within our domestic retail locations, particularly within our flagship stores, which are located in major tourist cities. While we seek to hedge some of the risks associated with currency exchange rate fluctuations, these changes are largely outside +33 +Table of Contents +of our control. We expect these changes will continue to impact the demand for our products and our operating results. +• +The sheepskin used in certain UGG and Koolaburra products is in high demand and limited supply, and there have been significant fluctuations in the price of sheepskin in the past, as the demand for this material has fluctuated. While we continually strive to contain our material costs by entering into fixed price contracts, exploring new footwear materials and utilizing new production technologies, we expect that fluctuations in sheepskin prices will continue to materially impact our financial condition and operating results. In recent years, the impact of sheepskin price fluctuations on our operating results have been less dramatic, which we believe is partially a result of our introduction of UGGpure™, which is real wool material woven into a durable backing. +• +Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. +• +We believe that consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders. We also believe that consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable. +• +We believe that the growth and evolution of the DTC channel is a principal factor that has allowed us to evolve the lifestyle nature of our brands and to diversify our product lines. The DTC channel exposes individual consumers to the full line of our products, including non-core products such as casual boots and specialty classics. In addition, sales through the DTC channel are typically associated with higher gross margins, which have a favorable impact on our operating results. +• +We have responded and intend to continue to respond to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental conservation, and community affairs. +By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. In addition, by continuing to diversify our brands, and responding to our customers’ demands for innovative product offerings, we believe we can mitigate the impact of seasonality on our business and provide sustainable growth across our brands. +Use of Non-GAAP Measures +In order to provide a framework for assessing how our underlying businesses performed during the relevant periods excluding the effect of foreign currency rate fluctuations, throughout this Annual Report on Form 10-K we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with United States generally accepted accounting principles (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. We believe that evaluating certain financial and operating measures, such as net sales, net income (loss) and reportable segment information on a constant currency basis is important, as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency rate fluctuations that are not indicative of our core operating results and are largely outside of our control. However, constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US GAAP. +Segment Overview +Below is an overview of each of the operating segments of our business, including some key trends and factors that we believe affect each segment, as well as some of our strategies for growing each segment. +34 +Table of Contents +UGG Brand +For almost 40 years, the UGG brand has been one of the most iconic and recognized brands in the global footwear industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including mobile, digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand and its products. +We believe the continued demand for UGG products has been, and will continue to be, driven by the following: +• +High consumer brand loyalty, due to almost 40 years of delivering quality and luxuriously comfortable UGG footwear. +• +Evolution of our Classics business through the evolution of features in our Classic boot and the introduction of innovative, Classics-inspired products such as the Classic Slim, the Classic Luxe, and the Classic Street, alongside targeted marketing campaigns. +• +Continued growth and diversification of our UGG footwear product lines in non-core categories, including weather, casual boots, slippers, specialty classics, and transitional products that bridge the seasons, which has been driven by an important shift in the way we guide our wholesale customers in the pre-booking process. +• +Exploration of opportunities in new product categories and styles beyond footwear, such as loungewear, handbags, cold-weather accessories and new home offerings. +• +Continued growth of the DTC channel, which we believe will continue to allow us to diversify our UGG product lines, as the DTC channel exposes individual consumers to the full line of our products. +• +Continued enhancement of our Omni-Channel capabilities to enable us to increasingly engage existing and prospective consumers in a more connected environment and expose them to the brand. In particular, we are working towards a more segmented channel and product approach to the market, whereby we can customize our product offerings based on unique consumer reach, market positioning and brand experience. +• +Continued evolution of our men’s product lines, alongside targeted UGG for Men campaigns. +We believe the iconic status and luxurious comfort of UGG products will continue to drive long-term consumer demand for the brand. Recognizing that there is a significant fashion element to UGG footwear, and that footwear fashions and consumer preferences fluctuate, one of our key strategies involves diversifying the UGG product line and presenting UGG as a year-round, global, premium lifestyle brand with a broad product line suitable for a variety of climates and a number of occasions. As part of this strategic approach, we have increased our product offerings, including expanding our line of Classics-inspired products, evolving our core product offerings such as the Classic to deliver more qualities desired by the consumer, growing our transitional collection and spring lines, expanding our men’s and children's lines, as well as introducing a variety of home offerings, handbags, cold weather accessories and apparel products. We also continue to focus on our marketing and promotional efforts, which we believe have contributed, and will continue to contribute, to our growth. In April 2016, we continued the evolution of our UGG stylized logo to reflect a more modern, simplified aesthetic. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to result in UGG brand growth. +35 +Table of Contents +Teva Brand +For over 30 years Teva has fueled the expression of freedom through the adventure and outdoor lifestyle around the globe. Teva pioneered the sport sandal category in 1984, and the Originals Collection honors the heritage of Teva by revamping the styles on that the brand was founded by blending their original simplicity with modern sophistication. In the US, our focus will be to bolster our leadership position in sandals and to grow our market share through the modern outdoor lifestyle category extensions. +Within the US, we expect that Teva will grow its position as a market leader within the sport sandal and modern outdoor lifestyle categories (shoes and boots). Growth opportunities within our current core channels of distribution - outdoor specialty, sporting goods, and family footwear retail chains - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However, we cannot assure investors that these efforts will be successful. +Sanuk Brand +The Sanuk brand was founded almost 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with an expanding fan base and growing presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and playful branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat™ sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides growth opportunities, especially within the casual shoe and sandal markets, supporting our strategic initiatives spanning new product launches and Omni-Channel development. However, we cannot assure investors that our efforts to grow the brand will be successful. +Other Brands +Our other brands consist primarily of Hoka, Ahnu and Koolaburra. These brands are sold through most of our distribution channels, and primarily through our wholesale channels. +The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. These shoes are used by marathon runners, ultra-marathon runners and everyday runners. +We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. +In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We intend to position Koolaburra as a high-quality, fashionable and affordable alternative to UGG and to distribute Koolaburra primarily through channels which do not offer the UGG brand. In November 2015, we added the "by UGG" attribute to the Koolaburra name to communicate to the consumer that the Koolaburra products come from the same company that designs and manufactures the UGG line. +With respect to Hoka and Koolaburra, we expect to continue to leverage our design, marketing, and distribution capabilities to grow these brands. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful. +Direct-to-Consumer +Our DTC business is comprised of our retail store and E-Commerce businesses. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites, before making purchase decisions. For example, consumers may feel or try-on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined include the following: +36 +Table of Contents +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC channel. +• +“Infinite UGG”: We provide online shopping access inside retail stores, for all SKUs available on our E-Commerce websites. +• +“Buy online / return in-store”: Our consumers can buy online and return products to the store. +• +“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. +Our owned retail stores enable us to directly impact our consumers' experiences, meet the growing demand for these products, sell the products at retail prices and generate annual operating income. Our retail stores are predominantly UGG concept stores and UGG outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. At March 31, 2016 , we had a total of 153 retail stores worldwide. +We converted three of our retail stores in China to partner retail stores during the year ended March 31, 2016 and seven during the year ended March 31, 2015. Upon conversion, each of these stores became wholly-owned and operated by third parties in China. Sales made to the partner retail stores are included in our UGG brand wholesale segment and not in our DTC segment, as of the date of conversion. We anticipate opening more partner retail stores in China in the coming years. +The E-Commerce business provides us with an opportunity to communicate to consumers with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. At March 31, 2016 , we operate our E-Commerce business through an aggregate of 20 Company-owned websites in nine different countries. +We believe that results for our DTC segment have been impacted, and will continue to be impacted, by the following important trends and factors: +• +We intend to launch certain products directly through the DTC segment, including certain Classics-inspired products, which we believe will drive growth within the segment. +• +The evaluation of the growth of the DTC channel provides us with important data about product demand that we share with wholesale customers to help them make more informed ordering decisions. +• +We expect operating profit to remain strong for the DTC channel, and for the DTC channel to serve as a key driver of our overall profitability. This is principally because the gross margins associated with sales made through our DTC channel are typically higher than those associated with sales made through our wholesale channel. +• +We believe that our retail store fleet is an important component of our DTC segment. We have already penetrated the major metropolitan markets globally with our retail presence, and we intend to maintain our retail presence in these top markets and to continue further expansion in secondary markets, as appropriate. However, we are in the process of evaluating our portfolio of retail stores with the goal of optimizing our fleet, and have identified 24 retail stores that are candidates for closure. +• +We continue to expect that our E-Commerce business will be a driver of growth, although we expect the growth rate will decline over time as the size of the E-Commerce business increases. +• +We believe the results of the retail component of our DTC business have been negatively impacted by recent weather patterns, which differ from historical weather patterns. +37 +Table of Contents +• +We believe the strengthening of the US dollar as compared to most major foreign currencies has reduced tourism traffic in our domestic retail stores, which has further negatively impacted the results of the retail component of our DTC business. +We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales in contrast to some of our competitors and other apparel retailers. As a result, information included in this Annual Report on Form 10-K regarding our comparable DTC sales may not be comparable to similar data made available by our competitors or other apparel retailers. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 (our second fiscal quarter) and December 31 (our third fiscal quarter) and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 (our fourth fiscal quarter) and June 30 (our first fiscal quarter) of each year. +The following table summarizes our quarterly net sales and income (loss) from operations: +Fiscal Year 2016 +Quarter Ended +6/30/2015 +Quarter Ended +9/30/2015 +Quarter Ended +12/31/2015 +Quarter Ended +3/31/2016 +Net sales +$ +213,805 +$ +486,855 +$ +795,902 +$ +378,635 +(Loss) income from operations +(63,708 +) +51,213 +202,500 +(27,878 +) +Fiscal Year 2015 +Quarter Ended +6/30/2014 +Quarter Ended +9/30/2014 +Quarter Ended +12/31/2014 +Quarter Ended +3/31/2015 +Net sales +$ +211,469 +$ +480,273 +$ +784,678 +$ +340,637 +(Loss) income from operations +(50,482 +) +59,583 +214,581 +737 +With the large growth in the UGG brand over the past several years, net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, unexpected changes in weather conditions, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. Refer to Part I, Item 1A, "Risk Factors" for a further discussion of our risk factors. +38 +Table of Contents +Results of Operations +Year Ended March 31, 2016 Compared to Year Ended March 31, 2015 +The following table summarizes our results of operations: +Years ended +3/31/2016 +3/31/2015 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,875,197 +100.0 +% +$ +1,817,057 +100.0 +% +$ +58,140 +3.2 +% +Cost of sales +1,028,529 +54.8 +938,949 +51.7 +89,580 +9.5 +Gross profit +846,668 +45.2 +878,108 +48.3 +(31,440 +) +(3.6 +) +Selling, general and administrative expenses +684,541 +36.5 +653,689 +36.0 +30,852 +4.7 +Income from operations +162,127 +8.7 +224,419 +12.3 +(62,292 +) +(27.8 +) +Other expense, net +5,242 +0.3 +3,280 +0.2 +1,962 +59.8 +Income before income taxes +156,885 +8.4 +221,139 +12.1 +(64,254 +) +(29.1 +) +Income tax expense +34,620 +1.9 +59,359 +3.2 +(24,739 +) +(41.7 +) +Net income +$ +122,265 +6.5 +% +$ +161,780 +8.9 +% +$ +(39,515 +) +(24.4 +)% +39 +Table of Contents +Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel: +Years ended +3/31/2016 +3/31/2015 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,219,744 +$ +1,165,350 +$ +54,394 +4.7 +% +International +655,453 +651,707 +3,746 +0.6 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +918,102 +$ +903,926 +$ +14,176 +1.6 +% +Direct-to-Consumer +606,247 +589,267 +16,980 +2.9 +Total +1,524,349 +1,493,193 +31,156 +2.1 +Teva: +Wholesale +121,239 +116,931 +4,308 +3.7 +Direct-to-Consumer +11,810 +9,812 +1,998 +20.4 +Total +133,049 +126,743 +6,306 +5.0 +Sanuk: +Wholesale +90,719 +102,690 +(11,971 +) +(11.7 +) +Direct-to-Consumer +15,522 +12,021 +3,501 +29.1 +Total +106,241 +114,711 +(8,470 +) +(7.4 +) +Other brands: +Wholesale +100,820 +76,152 +24,668 +32.4 +Direct-to-Consumer +10,738 +6,258 +4,480 +71.6 +Total +111,558 +82,410 +29,148 +35.4 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +Total Wholesale +$ +1,230,880 +$ +1,199,699 +$ +31,181 +2.6 +% +Total Direct-to-Consumer +644,317 +617,358 +26,959 +4.4 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +The increase in overall net sales was due to increases in total DTC sales and other brands, UGG brand and Teva brand wholesale sales, partially offset by a decrease in Sanuk brand wholesale sales. We experienced an increase in the number of pairs sold in the UGG brand, other brands and Teva brand wholesale segments, as well as the DTC segment, offset in part by a decrease in the number of pairs sold in the Sanuk brand wholesale segment. This resulted in an increase in the overall volume of footwear sold for all brands of 4.6% to approximately 32,100 pairs sold for the year ended March 31, 2016 from approximately 30,700 pairs for the year ended March 31, 2015 . The mitigating impacts on overall net sales were foreign currency exchange rate fluctuations as the US dollar continues to strengthen against most major currencies and increased promotional activity, which consisted of vendor-specific markdowns, price reductions, chargebacks, sales discounts, and sales reserves. On a constant currency basis, overall net sales increased to approximately $1,925,000. +Wholesale net sales of our UGG brand were positively impacted by an increase in the volume of pairs sold in the amount of approximately $73,000. Wholesale net sales were negatively impacted by an increase in promotional activity of approximately $27,000 to promote sales that were slow due to warmer weather and to clear out inventory that will be obsolete in future seasons. Wholesale net sales were also negatively impacted by a decrease in weighted-average selling price per pair (WASPP) of approximately $26,000 reflecting unfavorable foreign currency exchange rates and an increased impact of approximately $7,000 from closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 4.5% to approximately $945,000. +40 +Table of Contents +Wholesale net sales of our Teva brand increased largely due to an increase in the volume of pairs sold and an increase in WASPP. The increase in the volume of pairs sold had an impact of approximately $1,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold, offset in part by an increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $13,000 and the increase in WASPP had an impact of approximately $1,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period. +The increase in other brands net sales was due to an increase in the volume of pairs sold primarily for the Hoka brand and an increase in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP mainly reflects a shift in product mix. +Net sales of our DTC segment increased 4.4% to approximately $644,000 primarily due to an increase in net sales from our E-Commerce business of approximately $32,000, partially offset by a decrease in net sales from our retail store business of approximately $5,000. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $92,000 primarily due to UGG and Teva. The increase in DTC net sales was primarily due to the number of stores opened since March 31, 2015 , increased traffic to our websites and improved conversion rates in both E-Commerce and retail businesses due to improved product offerings and new promotions offered on Classic products, offset in part, by declining traffic trends in our retail stores worldwide. These increases were offset in part by a decrease in WASPP of approximately $66,000 and an increase in promotional activity of approximately $3,000 primarily related to the UGG brand. The decrease in WASPP was primarily due to a shift in store mix from concept to outlet, a shift in sales mix to lower priced product in the stores, increased offering of lower price point products for both businesses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 7.4% to approximately $663,000. +Comparable DTC sales on a constant currency basis for the 52 weeks ended March 27, 2016 decreased 1.0% to approximately $511,000 compared to the same period in fiscal year 2015 primarily as a result of a decrease in comparable retail store sales of approximately $42,000, largely offset by an increase in comparable sales from E-Commerce operations of approximately $37,000. The decrease in comparable DTC sales was primarily due to declining traffic trends in our retail stores worldwide, offset in part by increased website traffic, and improved conversion rates in both our E-Commerce and retail store businesses due to improved product offerings and new promotions offered on Classic products. The decrease in comparable DTC sales was primarily the result of a decrease in WASPP of approximately $41,000, largely offset by an increase in the number of pairs sold in the amount of $36,000. The decrease in the comparable DTC WASPP was primarily due to a shift in product mix. +International sales, which are included in the segment sales above, for all of our products combined, increased 0.6%. International sales represented 35.0% and 35.9% of worldwide net sales for the years ended March 31, 2016 and 2015 , respectively. The increase in international sales was due to increases of approximately $11,000 for other brand products, primarily Hoka, and $7,000 for Teva brand products. The net sales increase was largely offset by sales decreases of approximately $11,000 and $3,000 in UGG and Sanuk brand products, respectively. On a constant currency basis, international sales increased 8.2% to approximately $705,000. +Gross Profit. Gross margin was 45.2% for fiscal year 2016 compared to 48.3% for the same period last year. The decline in gross margin was driven by a negative impact from foreign currency exchange rate fluctuations of approximately $13,000 caused by the strengthening of the US dollar, greater promotional activity of approximately $13,000, restructuring and other charges of approximately $5,000, and greater closeouts of approximately $4,000, offset, in part, by improved sheepskin costs of approximately $4,000. +41 +Table of Contents +Selling, General and Administrative (SG&A) Expenses. The change in SG&A expenses was primarily due to: +• +increased salaries of approximately $19,000, largely attributable to transition and stabilization costs related to the move from Irvine to our new distribution center in Moreno Valley and a timing difference attributable to full operations commencing in the first quarter of fiscal year 2016 at Moreno Valley. Salaries were also impacted by $4,000 of severance related to restructuring expenses for our retail store fleet optimization and office consolidation and $4,000 for new retail stores opened subsequent to March 31, 2015 ; +• +increased occupancy and rent expense of approximately $16,000, largely driven by the $9,000 restructuring charges for early termination of office and store leases related to our retail store fleet optimization and office consolidation and new retail stores opened subsequent to March 31, 2015 ; +• +increased impairment charges for retail stores of approximately $9,800 for which the fair values did not exceed their carrying values based on our long-lived assets impairment analysis; +• +increased expense of approximately $6,000 for store closure and lease termination costs related to our retail store fleet optimization and office consolidation; +• +increased information technology costs of approximately $5,000, largely related to the restructuring charge of $4,000 for impairment of certain supply chain software related to the BT implementation and the reorganization of our supply chain team causing older software to be obsolete; +• +increased depreciation expense of approximately $4,000 related to operations commencing at our new distribution center in Moreno Valley in the first quarter of fiscal year 2016; +• +an increase in our accounts receivable allowances of approximately $4,000, reflecting our ongoing assessments of credit risks for several customers whose recent payment history and financial condition necessitated an increase in the allowance; +• +decreased recognition of performance-based compensation of approximately $18,000 because the threshold level of the performance objectives relating to fiscal year 2016 was not achieved as compared to the partial achievement of performance objectives in the prior fiscal year; +• +decreased expenses of approximately $12,000 related to the impact of foreign currency exchange rate fluctuations in the current period compared to the prior period; and +• +decreased amortization expense of approximately $3,000, primarily attributable to the acquisition of our UGG brand distributor that had been selling to retailers in Germany in the prior year period that did not carry forward to the current period. +Income (loss) from Operations. The following table summarizes operating income (loss) by segment: +Years ended +3/31/2016 +3/31/2015 +Change +Amount +Amount +Amount +% +UGG wholesale +$ +246,990 +$ +269,489 +$ +(22,499 +) +(8.3 +)% +Teva wholesale +17,692 +13,320 +4,372 +32.8 +Sanuk wholesale +15,565 +21,914 +(6,349 +) +(29.0 +) +Other brands wholesale +(4,384 +) +(9,838 +) +5,454 +55.4 +Direct-to-Consumer +101,756 +150,320 +(48,564 +) +(32.3 +) +Unallocated overhead costs +(215,492 +) +(220,786 +) +5,294 +2.4 +Total +$ +162,127 +$ +224,419 +$ +(62,292 +) +(27.8 +)% +42 +Table of Contents +The decrease in income from operations resulted from lower gross margins driven by the negative impact of foreign currency exchange rate fluctuations, increased promotional activity of approximately $29,000 and higher SG&A expenses primarily as a result of approximately $25,000 of restructuring and other charges. +The decrease in income from operations of UGG brand wholesale was the result of the increased promotional activity of approximately $27,000. These factors were partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses is attributable to the decrease in amortization related to the conversion of our Germany distributor in the prior year period and a decrease in marketing and advertising, offset in part by an increase in accounts receivable allowances. +The increase in income from operations of Teva brand wholesale was primarily the result of a 2.6% increase in gross margin. The increase in gross margin was due to a decreased impact from closeout sales. +The decrease in income from operations of our Sanuk brand wholesale from the prior year period was primarily due to a decrease in sales and $3,000 of restructuring charges, partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses was primarily attributable to lower marketing and advertising and lower sales and commission expenses. +The operating results of our other brands wholesale improved over the prior year period due to an increase in net sales and a 3.2% increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000 reflecting $2,500 of restructuring charges. The increase in gross margin was primarily attributable to a shift to higher margin Hoka brand products. The increase in operating expenses was also attributable to marketing expenses for the Hoka brand. +The decrease in income from operations of our DTC business resulted from an increase in DTC operating expenses of approximately $37,000, a decrease in gross profit and the increase in promotional activity of approximately $3,000. The increase in DTC operating expenses was largely attributable to restructuring charges of $10,500 related to our retail store fleet optimization, $9,800 of other impairment charges for retail stores during fiscal year 2016 and operating expenses for stores opened subsequent to March 31, 2015 . +The decrease in unallocated overhead costs was primarily due to a lower unfavorable impact of foreign currency exchange rate fluctuations in the current period compared to the prior period of approximately $22,000 and a reduction in performance-based compensation of approximately $12,000, partially offset by increased salaries of approximately $11,000 primarily for our Moreno Valley distribution center, increased depreciation expense of approximately $7,000 primarily for our Moreno Valley distribution center, increased information technology costs of approximately $3,000 largely related to supply chain software impairment charges and increased occupancy and rent expense of approximately $3,000 primarily for additional corporate office space and our Moreno Valley distribution center and increased general expenses of $4,000. +Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable business segments. +Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the balances outstanding under our lines of credit during fiscal year 2016. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years ended +3/31/2016 +3/31/2015 +Income tax expense +$ +34,620 +$ +59,359 +Effective income tax rate +22.1 +% +26.8 +% +Our effective tax rate decreased 4.7%. The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was the result of greater promotional activity and restructuring charges reducing domestic profitability in combination with the strategic supply chain reorganization completed during the year ended March 31, 2015 . +43 +Table of Contents +Foreign income before income taxes was $105,938 and $95,850 and worldwide income before income taxes was $156,885 and $221,139 for the year ended March 31, 2016 and 2015 , respectively. The increase in foreign income before income taxes was primarily due to an increase in compensation earned by our foreign-based global product sourcing organization, which commenced operations on July 1, 2014 and lower foreign operating expenses as a result of amortization related to conversion of our Germany distributor in the prior period and expense reduction efforts. +For the fiscal year 2016, we generated approximately 23.0% of our pre-tax earnings from a country which does not impose a corporate income tax compared to 25% for fiscal year 2015. Undistributed earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. At March 31, 2016 , we had approximately $233,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. +We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives and global product sourcing organization. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international DTC business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years. +Net Income. Our net income decreased as a result of the factors discussed above. Our income per share decreased due to lower net income, offset in part by a reduction in the weighted-average common shares outstanding. The overall reduction in the weighted-average common shares outstanding was primarily the result of our share repurchases made during the twelve months ended March 31, 2016 . +Year Ended March 31, 2015 Compared to Year Ended December 31, 2013 +The following table summarizes our results of operations: +Years ended +3/31/2015 +12/31/2013 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,817,057 +100.0 +% +$ +1,556,618 +100.0 +% +$ +260,439 +16.7 +% +Cost of sales +938,949 +51.7 +820,135 +52.7 +118,814 +14.5 +Gross profit +878,108 +48.3 +736,483 +47.3 +141,625 +19.2 +Selling, general and administrative expenses +653,689 +36.0 +528,586 +33.9 +125,103 +23.7 +Income from operations +224,419 +12.3 +207,897 +13.4 +16,522 +7.9 +Other expense, net +3,280 +0.2 +2,340 +0.2 +940 +40.2 +Income before income taxes +221,139 +12.1 +205,557 +13.2 +15,582 +7.6 +Income tax expense +59,359 +3.2 +59,868 +3.8 +(509 +) +(0.9 +) +Net income +$ +161,780 +8.9 +% +$ +145,689 +9.4 +% +$ +16,091 +11.0 +% +Overview. Overall net sales increased for all distribution channels of all segments. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses. +44 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and channel: +Years ended +3/31/2015 +12/31/2013 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,165,350 +$ +1,042,274 +$ +123,076 +11.8 +% +International +651,707 +514,344 +137,363 +26.7 +Total +$ +1,817,057 +$ +1,556,618 +$ +260,439 +16.7 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +903,926 +$ +818,377 +$ +85,549 +10.5 +% +Direct-to-Consumer +589,267 +480,503 +108,764 +22.6 +Total +1,493,193 +1,298,880 +194,313 +15.0 +Teva: +Wholesale +116,931 +109,334 +7,597 +6.9 +Direct-to-Consumer +9,812 +7,053 +2,759 +39.1 +Total +126,743 +116,387 +10,356 +8.9 +Sanuk: +Wholesale +102,690 +94,420 +8,270 +8.8 +Direct-to-Consumer +12,021 +7,260 +4,761 +65.6 +Total +114,711 +101,680 +13,031 +12.8 +Other brands: +Wholesale +76,152 +38,276 +37,876 +99.0 +Direct-to-Consumer +6,258 +1,395 +4,863 +348.6 +Total +82,410 +39,671 +42,739 +107.7 +Total +$ +1,817,057 +$ +1,556,618 +$ +260,439 +16.7 +% +Total Wholesale +$ +1,199,699 +$ +1,060,407 +$ +139,292 +13.1 +% +Total Direct-to-Consumer +617,358 +496,211 +121,147 +24.4 +Total +$ +1,817,057 +$ +1,556,618 +$ +260,439 +16.7 +% +We experienced an increase in net sales in all brands and distribution channels with the largest impact due to increased total DTC sales and UGG and other brands wholesale sales. On a constant currency basis, net sales increased by 18.0% to approximately $1,837,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 17.6% overall increase in the volume of footwear sold for all brands and channels to approximately 30,700 pairs for the year ended March 31, 2015 compared to approximately 26,100 pairs for the year ended December 31, 2013 . Our WASPP decreased to $46.53 for the year ended March 31, 2015 from $46.87 for the year ended December 31, 2013 . The decreased WASPP was primarily due to our Teva and Sanuk wholesale segments, partially offset by an increase in WASPP in our other brands wholesale segment. +Wholesale net sales of our UGG brand increased primarily due to an increase in the volume of pairs sold, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, wholesale sales of our UGG brand increased by 11.1% to approximately $909,000. For UGG wholesale net sales, the increase in volume had an impact of approximately $89,000, including approximately $5,000 related to the negative impact of foreign currency exchange rate fluctuations. +Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the WASPP. The decrease in WASPP was primarily due to a shift in product mix and an increased impact from closeout sales. For Teva wholesale net sales, the increase in volume had an impact of approximately $15,000 and the decrease in WASPP had an impact of approximately $7,000. +45 +Table of Contents +Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in WASPP. The decrease in WASPP was primarily due to a shift in product mix. For Sanuk wholesale net sales, the increase in volume had an impact of approximately $14,000 and the decrease in WASPP had an impact of approximately $5,000. +Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold as well as an increase in the WASPP. The increase in WASPP was primarily due to a shift in brand mix. The increase in volume of pairs sold had an impact of approximately $36,000 and the increase in WASPP had an impact of approximately $2,000. +Net sales of our DTC segment increased 24.4% to approximately $617,000 primarily due to an increase in net sales from our E-Commerce business of approximately $63,000 as well as an increase in net sales from our retail store business of approximately $58,000 due to the addition of new stores opened subsequent to December 31, 2013. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $171,000, offset in part by a decrease in WASPP of approximately $53,000 and an increase in sales discounts. The decrease in WASPP was primarily due to increased offering of lower price point products for our E-Commerce and retail businesses, a shift in store mix from concept to outlet and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 27.0% to approximately $496,000. +Comparable DTC sales on a constant currency basis for the fifty-two weeks ended March 29, 2015 increased 14.4% to approximately $345,000 compared to the fifty-two weeks ended December 29, 2013 primarily as a result of an increase in comparable sales from E-Commerce operations of approximately $56,000, offset in part by a decrease in comparable retail store sales of approximately $12,000. The increase in comparable DTC sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $79,000, offset in part by a decrease in WASPP in the amount of $36,000. The decrease in WASPP was primarily due to increased offering of lower price point products for our comparable E-Commerce and retail businesses and a shift in store mix from concept to outlet. The increase in comparable DTC sales was primarily due to increased web traffic to our E-Commerce websites partially offset by a shift in sales from our retail to E-Commerce channel. +International sales, which are included in the segment sales above, for all of our products combined increased by 26.7% for the year ended March 31, 2015 as compared to the year ended December 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 30.5% to approximately $671,000. International sales represented 35.9% and 33.0% of worldwide net sales for the years ended March 31, 2015 and December 31, 2013 , respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand internationally across all channels of approximately $122,000. +Gross Profit. Overall gross margin increased 100 basis points, primarily due to an increase in the mix of DTC sales, which generally carry higher margins than our wholesale segments. The increased mix of DTC sales contributed approximately 70 basis points to the overall increase in gross margin. An increase in the UGG brand wholesale gross margin, primarily related to the July 2014 acquisition of our UGG brand distributor in Germany, contributed approximately 20 basis points to the overall increase in gross margin. The factors discussed above include the negative impact of foreign currency exchange rate fluctuations. Our gross margins fluctuate based on several factors including the factors discussed above. +Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to: +• +increased DTC costs of approximately $62,000 largely related to new retail stores opened subsequent to December 31, 2013 of approximately $44,000 and related corporate infrastructure for our retail business and increased marketing and advertising and expansion for our E-Commerce business of approximately $18,000; +• +increased expenses of approximately $20,000 for marketing and promotions related to our wholesale business, primarily for the Hoka and UGG brands; +• +increased expenses of approximately $16,000 for corporate infrastructure to support our international wholesale expansion and OmniChannel transformation; +46 +Table of Contents +• +increased information technology costs of approximately $8,000, in part due to accelerating the amortization expense for certain software projects that will not be used; +• +increased sales and commission expenses of approximately $8,000 largely driven by the increase in wholesale sales; +• +increased US distribution center costs of approximately $7,000, largely driven by the increase in sales and our new Moreno Valley distribution center; and +• +increased expenses of approximately $7,000 related to the negative impact of foreign currency exchange rate fluctuations. +These increases were partially offset by decreased recognition of performance-based compensation of approximately $8,000. +Income (loss) from Operations. Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment: +Years ended +3/31/2015 +12/31/2013 +Change +Amount +Amount +Amount +% +UGG wholesale +$ +269,489 +$ +224,738 +$ +44,751 +19.9 +% +Teva wholesale +13,320 +9,166 +4,154 +45.3 +Sanuk wholesale +21,914 +20,591 +1,323 +6.4 +Other brands wholesale +(9,838 +) +(9,807 +) +(31 +) +(0.3 +) +Direct-to-Consumer +150,320 +132,532 +17,788 +13.4 +Unallocated overhead costs +(220,786 +) +(169,323 +) +(51,463 +) +(30.4 +) +Total +$ +224,419 +$ +207,897 +$ +16,522 +7.9 +% +Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.5% to approximately $236,000. +The increase in income from operations of UGG brand wholesale was primarily the result of the increase in net sales as well as a 3.1 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $16,000 including the negative impact of foreign currency exchange rate fluctuations. The increase in gross margin was primarily due to an increase in higher-margin wholesale sales, largely related to the acquisition of our UGG brand distributor in Germany. The increase in operating expenses was primarily due to marketing and promotions, amortization and sales and commissions. +The increase in income from operations of Teva brand wholesale was primarily the result of a decrease in operating expenses of approximately $5,000 as well as the increase in net sales, partially offset by a 3.1 percentage point decrease in gross margin. The decrease in operating expenses was primarily due to decreased design and sales and commission expenses. The decrease in gross margin was primarily due to an increased impact from closeout sales. +The increase in income from operations of Sanuk brand wholesale was primarily the result of the increase in net sales as well as a decrease in operating expenses of approximately $2,000, partially offset by a 4.8 percentage point decrease in gross margin. The decrease in gross margin was primarily due to a shift in sales mix as well as an increased impact from closeout sales. +Loss from operations of our other brands wholesale was comparable to the prior period. +The increase in income from operations of our DTC business resulted from the increase in net sales, a 1.9% decrease in gross margin due to increased sales discounts and the positive impact of foreign currency rate fluctuations +47 +Table of Contents +of approximately $9,000, offset in part by an increase in DTC operating expenses of approximately $61,000 and an increase in sales discounts. The increase in DTC operating expenses was largely attributable to stores opened subsequent to December 31, 2013 and related corporate infrastructure for our retail business, and marketing and advertising and expansion for our E-Commerce business. +The increase in unallocated overhead costs was primarily due to (1) expense related to increased corporate infrastructure of approximately $16,000 to support our Omni-Channel transformation and international wholesale expansion, (2) the negative impact of foreign currency exchange rate fluctuations of approximately $16,000, (3) increased information technology costs of approximately $8,000, (4) increased US distribution center costs of approximately $7,000 and (5) increased depreciation expenses of approximately $4,000 related to our corporate headquarters buildings, partially offset by a reduction in performance-based compensation of approximately $5,000. +Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable business segments +Other Expense, Net. The increase in other expense, net was primarily due to an increase in interest expense. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years ended +3/31/2015 +12/31/2013 +Income tax expense +$ +59,359 +$ +59,868 +Effective income tax rate +26.8 +% +29.1 +% +The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of the strategic supply chain reorganization completed during the year ended March 31, 2015 , which reduced our effective tax rate 4.2%. The decrease was partially offset by overall discrete tax liabilities of approximately $1,600 recognized during the year ended March 31, 2015 compared to overall discrete tax benefits of approximately $900 recognized during the year ended December 31, 2013 . The discrete tax liabilities relate to provisions recorded for unrecognized tax benefits as well as prior year US federal and state tax adjustments. The discrete tax benefits relate to a combination of prior year US federal, state and foreign tax adjustments. +For the fiscal year 2015, we generated approximately 25.0% of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. At March 31, 2015 , we had approximately $132,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. +Foreign income before income taxes was $95,850 and $60,851, and worldwide income before income taxes was $221,139 and $205,557 for the years ended March 31, 2015 and December 31, 2013 , respectively. Foreign income before income taxes represented 43.3% and 29.6% of worldwide income before income taxes for the years ended March 31, 2015 and December 31, 2013 , respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of a strategic supply chain reorganization completed during the year ended March 31, 2015. +We expect that our foreign income before income taxes will fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years. +Net Income. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding +48 +Table of Contents +was the result of our share repurchases during the year ended March 31, 2015 . The weighted-average impact of the share repurchases was a reduction of approximately 200,000 shares. +Transition Period Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 (Unaudited) +The following table summarizes our results of operations: +Three Months Ended March 31, +2014 +2013 (unaudited) +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +294,716 +100.0 +% +$ +263,760 +100.0 +% +$ +30,956 +11.7 +% +Cost of sales +150,456 +51.1 +140,201 +53.2 +10,255 +7.3 +Gross profit +144,260 +48.9 +123,559 +46.8 +20,701 +16.8 +Selling, general and administrative expenses +144,668 +49.1 +120,907 +45.8 +23,761 +19.7 +(Loss) income from operations +(408 +) +(0.2 +) +2,652 +1.0 +(3,060 +) +(115.4 +) +Other expense, net +334 +0.1 +142 +0.1 +192 +135.2 +(Loss) income before income taxes +(742 +) +(0.3 +) +2,510 +0.9 +(3,252 +) +(129.6 +) +Income tax expense +1,943 +0.6 +1,503 +0.5 +440 +29.3 +Net (loss) income +$ +(2,685 +) +(0.9 +)% +$ +1,007 +0.4 +% +$ +(3,692 +) +(366.6 +)% +Overview. The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce websites as well as an increase in our other brands wholesale sales, partially offset by a decrease in Teva wholesale sales. We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations for the three months ended March 31, 2013 . The change resulted from higher SG&A expenses, partially offset by an increase in gross profit. +49 +Table of Contents +Net Sales. The following tables summarize net sales by location, brand, and distribution channel: +Three Months Ended March 31, +2014 +2013 (unaudited) +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +198,293 +$ +182,693 +$ +15,600 +8.5 +% +International +96,423 +81,067 +15,356 +18.9 +Total +$ +294,716 +$ +263,760 +$ +30,956 +11.7 +% +Net sales by brand and channel: +UGG: +Wholesale +$ +83,271 +$ +82,706 +$ +565 +0.7 +% +Direct-to-Consumer +114,309 +87,875 +26,434 +30.1 +Total +197,580 +170,581 +26,999 +15.8 +Teva: +Wholesale +45,283 +50,504 +(5,221 +) +(10.3 +) +Direct-to-Consumer +1,564 +1,103 +461 +41.8 +Total +46,847 +51,607 +(4,760 +) +(9.2 +) +Sanuk: +Wholesale +28,793 +30,011 +(1,218 +) +(4.1 +) +Direct-to-Consumer +1,909 +935 +974 +104.2 +Total +30,702 +30,946 +(244 +) +(0.8 +) +Other brands: +Wholesale +18,662 +10,369 +8,293 +80.0 +Direct-to-Consumer +925 +257 +668 +259.9 +Total +19,587 +10,626 +8,961 +84.3 +Total +$ +294,716 +$ +263,760 +$ +30,956 +11.7 +% +Total Wholesale +$ +176,009 +$ +173,590 +$ +2,419 +1.4 +% +Total Direct-to-Consumer +118,707 +90,170 +28,537 +31.6 +Total +$ +294,716 +$ +263,760 +$ +30,956 +11.7 +% +The increase in overall net sales was due to increases in total DTC sales and other brands and UGG brand wholesale sales, partially offset by decreases in Teva and Sanuk brand wholesale sales. We experienced an increase in the number of pairs sold in the total DTC other brands wholesale segments, partially offset by a decrease in the number of pairs sold in the Teva, Sanuk and UGG brand wholesale segments. This resulted in an increase in the overall volume of footwear sold for all brands of 3.3% to approximately 6,200 pairs sold for the three months ended March 31, 2014 from approximately 6,000 pairs for the three months ended March 31, 2013 . On a constant currency basis, net sales increased by 12.4% to approximately $296,000. +Wholesale net sales of our UGG brand increased primarily due to an increase in WASPP, partially offset by a decrease in the volume of pairs sold. The increase in WASPP was primarily due to a shift in product mix of cold weather shoe products that generally carry higher price points and higher average closeout prices. For UGG wholesale net sales, the increase in WASPP had an impact of approximately $1,000 and the decrease in volume had an impact of approximately $500. +Wholesale net sales of our Teva brand decreased due to a decrease in WASPP as well as a decrease in volume of pairs sold. The decrease in WASPP was primarily due to a shift in product mix. For Teva wholesale net sales, the +50 +Table of Contents +decrease in WASPP had an impact of approximately $3,000 and the decrease in volume had an impact of approximately $2,000. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold outside the US as well as a decrease in WASPP, partially offset by an increase in the volume of pairs sold in the US. The decrease in WASPP was primarily due to increased closeout sales. For Sanuk wholesale net sales, the decrease in volume of pairs sold outside the US had an impact of approximately $3,000, the decrease in WASPP had an impact of approximately $2,000 and the increase in volume of pairs sold in the US had an impact of approximately $4,000. +Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold of approximately $8,500. The increase in volume was primarily due to the continued growth of the Hoka brand. The change in WASPP had no material impact on sales. +Net sales of our DTC segment increased 31.6% to approximately $119,000 due to increases in net sales from our retail store business of approximately $17,000 and from our E-Commerce business of approximately $12,000. The increase in DTC net sales was primarily due to the addition of 42 stores opened subsequent to March 31, 2013 , offset in part by the negative impact of foreign currency exchange rate fluctuations. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $29,000 through additional website and store visitors and improved conversion rates in both retail and E-Commerce channels due to improved product offerings, while the change in WASPP had no material impact. On a constant currency basis, DTC net sales increased 33.5% to approximately $120,000. +Comparable DTC sales on a constant currency basis for the thirteen weeks ended March 30, 2014 increased 16.7% to approximately $92,000 compared to the same period in fiscal year 2013 primarily as a result of an increase in comparable sales from E-Commerce operations of approximately $11,000 and an increase in comparable retail store sales of approximately $2,000. The increase in comparable DTC sales was primarily the result of an increase in the number of pairs sold of approximately $16,000, offset in part by a decrease in WASPP in the amount of $3,000. The decrease in WASPP is attributed to product mix shifts to lower priced products. The comparable DTC sales growth is attributed to worldwide increases in number of visits to our E-Commerce websites and strong conversion improvements in China and Japan retail stores, particularly in the outlets. +International sales, which are included in the segment sales above, for all of our products combined increased by 18.9% for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 21.0% to approximately $98,000. International sales represented 32.7% and 30.7% of worldwide net sales for the three months ended March 31, 2014 and 2013 , respectively. The increase in international sales as a percentage of worldwide net sales was primarily due to the continued growth in our UGG brand's international retail and E-Commerce business of approximately $16,000. +Gross Profit. As a percentage of net sales, gross margin increased compared to the same period in 2013 due to reduced sheepskin costs and increased use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix of DTC sales, which generally carry higher margins than our wholesale segments. The change in sales between our wholesale customers and distributors was immaterial to gross margin. +Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to: +• +increased DTC costs of approximately $19,000 largely related to new retail stores opened subsequent to December 31, 2013 and related corporate infrastructure for our retail business and increased marketing and advertising, the negative impact of foreign currency exchange rate fluctuations, and increased expenses related to the international expansion for our E-Commerce business; and +• +increased expenses of approximately $3,000 for marketing and promotions, largely related to the UGG and Hoka brands. +51 +Table of Contents +Income (loss) from Operations. The following table summarizes operating income (loss) by segment: +Three Months Ended March 31, +2014 +2013 (unaudited) +Change +Amount +Amount +Amount +% +UGG wholesale +$ +13,595 +$ +14,081 +$ +(486 +) +(3.5 +)% +Teva wholesale +6,425 +9,640 +(3,215 +) +(33.4 +) +Sanuk wholesale +7,530 +9,360 +(1,830 +) +(19.6 +) +Other brands wholesale +(758 +) +(2,580 +) +1,822 +70.6 +Direct-to-Consumer +20,918 +19,402 +1,516 +7.8 +Unallocated overhead costs +(48,118 +) +(47,251 +) +(867 +) +(1.8 +) +Total +$ +(408 +) +$ +2,652 +$ +(3,060 +) +(115.4 +)% +We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations during the three months ended March 31, 2013 due to increased SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by increased gross profit. On a constant currency basis, income from operations decreased by 59.2% to approximately $1,000. +The slight decrease in income from operations of UGG brand wholesale was primarily the result of an increase in operating expenses of approximately $2,000 as well as the negative impact of foreign currency rate fluctuations of approximately $300, partially offset by a 2.0 percentage point increase in gross margin, primarily due to decreased sheepskin costs. +The decrease in income from operations of Teva brand wholesale was primarily the result of a 5.8 percentage point decrease in gross margin as well as the decrease in net sales, partially offset by a decrease in operating expenses of approximately $1,000. The decrease in gross margin was primarily due to a shift in sales mix as well as increased freight expense. +The decrease in income from operations of Sanuk brand wholesale was primarily the result of the decrease in net sales, as well as increased operating expenses of approximately $1,000. +The decrease in loss from operations of our other brands wholesale was primarily the result of the increase in net sales as well as a 7.8 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $2,000. The increase in sales and gross margin is largely due to the continued growth of the Hoka brand which generally carries higher margins than the other brands included in this segment. +The increase in income from operations of our DTC business resulted from the increase in net sales and a 2.1 percentage point increase in gross margin, largely offset by an increase in DTC operating expenses of approximately $18,000 and the negative impact of foreign currency exchange rate fluctuations of approximately $1,000. The increase in gross margin was largely due to the reduced sheepskin costs related to our UGG brand products. The increase in DTC operating expenses was largely attributable to new stores opened subsequent to March 31, 2013 and related corporate infrastructure for the retail store business, and marketing and advertising and increased expenses related to the international expansion for the E-Commerce business. +Unallocated overhead costs were comparable to the same period in 2013. +Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable segments. +Other Expense, Net. The increase in other expense, net was primarily due to expenses related to our credit facilities. +52 +Table of Contents +Income Taxes. Income taxes for the three months ended March 31, 2014 are computed using the actual tax rate for the transition period. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for an explanation of our change in fiscal year. Income taxes for the three months ended March 31, 2013 were computed using the effective tax rate estimated to be applicable for the full fiscal year ended December 31, 2013. Income tax expense and effective income tax rates were as follows: +Three Months Ended March 31, +2014 +2013 (unaudited) +Income tax expense +$ +1,943 +$ +1,503 +Effective income tax rate +(261.9 +)% +59.9 +% +We recognized income tax expense of $1,943 on a pre-tax loss of $742 for the three months ended March 31, 2014 compared to income tax expense of $1,503 on pre-tax earnings of $2,510 for the three months ended March 31, 2013. The income tax expense of $1,943 primarily relates to taxable income in the US and certain foreign jurisdictions during the three months ended March 31, 2014 . The pre-tax loss of $742 includes the loss of a foreign subsidiary in a jurisdiction with no corporate income tax, therefore providing no tax benefit from the loss that was recognized. +Foreign loss before income taxes and worldwide loss before income taxes was $3,631 and $742, respectively, during the three months ended March 31, 2014 , as compared to foreign income before income taxes and worldwide income before income taxes of $335 and $2,510, respectively, during the three months ended March 31, 2013 . The change from foreign income before income taxes to a foreign loss before income taxes was primarily due to an increase in foreign operating expenses of approximately $14,000, which is primarily related to the expansion of our international retail and E-Commerce operations. The increase in foreign operating expenses was partially offset by an increase in foreign gross margin of 2.2 percentage points, which was primarily related to the increase in international retail and E-Commerce sales which generally carry higher margins than wholesale sales. +We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in improved foreign operating results in future years. +Net (Loss) Income. We experienced a net loss for the three months ended March 31, 2014 compared to net income for the three months ended March 31, 2013 as a result of the items discussed above. As a result of the net loss for the three months ended March 31, 2014 , we recognized a loss per share compared to diluted earnings per share during the three months ended March 31, 2013 . +Off-Balance Sheet Arrangements +We do not have off-balance sheet arrangements. +Liquidity and Cash Flows +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the credit available under our credit agreements. In an economic recession or under other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing lines of credit. These factors may impact our working capital reserves and have a material adverse effect on our business. +Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30 and September 30 to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30 and December 31; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31 and March 31 in anticipation of the spring selling season that occurs in the quarters ending March 31 and June 30. Given the seasonality +53 +Table of Contents +of our business, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has historically been provided using internal cash balances, cash from ongoing operating activities and short-term borrowings under our credit agreements. +We believe that cash generated from operations, the available borrowings under our existing Second Amended and Restated Credit Agreement, as amended with JPMorgan as the administrative Agent, Comerica and HSBC as co-syndication agents, and the lenders party thereto (Second Amended and Restated Credit Agreement), our Second Amended China Credit Facility, our Japan Credit Facility and our cash and cash equivalents will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months and the foreseeable future. However, risks and uncertainties that could impact our ability to maintain or grow our cash position include our earnings growth rate, the continued strength of our brands, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories, unexpected changes in weather conditions, and the timing and extent of restructuring charges, among others. Furthermore, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a new credit agreement or draw on our existing lines of credit. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. Refer to Part I, Item 1A, "Risk Factors" for a discussion of additional factors that may affect our cash position and liquidity. +The following table summarizes our cash flows: +Years ended +3/31/2016 +3/31/2015 +12/31/2013 +Net cash provided by operating activities +$ +125,581 +$ +169,654 +$ +262,125 +Net cash used in investing activities +(67,221 +) +(100,636 +) +(85,197 +) +Net cash used in financing activities +(36,340 +) +(78,260 +) +(50,513 +) +Cash from Operating Activities. Our primary source of liquidity is net cash flows provided by operating activities, which is driven by the level of net income, noncash adjustments and changes in working capital. The reduction in net cash provided by operations in fiscal year 2016 compared to fiscal year 2015 was primarily due to: (1) changes in inventory levels and trade accounts receivable, (2) the net impact of changes in noncash adjustments, primarily related to depreciation, amortization and accretion and restructuring costs and (3) a decrease in net income. The change in inventory levels relates to lower than anticipated sales. The change in trade accounts receivable relates to payment delays from customers as a result of slower sell-through primarily caused by warmer weather. These cash flows were offset in part by changes in trade accounts payable compared to fiscal year ended March 31, 2015. The change in payables relates to the change in inventory levels. +The reduction in net cash provided by operations during fiscal year ended March 31, 2015 compared to fiscal year ended December 31, 2013 is due to: (1) the changes in trade accounts payable, income taxes payable and accrued expenses, and (2) noncash adjustments related to depreciation, amortization and accretion. These cash flows were offset in part by the changes in prepaid expenses and other assets, trade accounts receivable and inventories as well as an increase in net income. The changes in payables, accrued expenses, receivables and inventories related to the different ending dates of the comparative fiscal years and reflected the seasonal nature of our business. The change in prepaid expenses and other current assets was primarily due to deposits for future leather purchases. +Wholesale accounts receivable turnover decreased to 6.8 times in the 12 months ended March 31, 2016 compared to 7.2 times for the 12 months ended March 31, 2015 primarily due to the impact of higher average accounts receivable balances outweighing the impact of the increase in wholesale sales. +Inventory turnover decreased to 2.7 times in the 12 months ended March 31, 2016 compared to 2.9 times in the 12 months ended March 31, 2015 primarily due to the impact of higher average inventory levels outweighing the impact of the increase in sales. +54 +Table of Contents +Cash from Investing Activities. Net cash used in investing activities for the year ended March 31, 2016 resulted primarily from the purchases of property and equipment and our acquisition of the Koolaburra brand, partially offset by proceeds from the sale of the assets of the MOZO and TSUBO brands. The capital expenditures were primarily related to our BT project, the build-out of our distribution center and retail stores, and purchases of computer hardware and software. +Net cash used in investing activities for the year ended March 31, 2015 resulted primarily from the purchases of property and equipment and purchase of intangibles. The capital expenditures were primarily related to infrastructure improvements to support our Omni-Channel transformation and international expansion, the build-out of our distribution center and retail stores, and purchases of computer hardware and software. The purchase of intangible and other assets, net was related to the acquisition of our UGG brand distributor that sold to retailers in Germany. +Net cash used in investing activities for the year ended December 31, 2013 resulted primarily from the purchases of property and equipment. The capital expenditures included the build-out of our new corporate facilities and retail stores, and purchases of computer hardware and software. The new corporate facilities replaced several leased spaces. +At March 31, 2016 , we had approximately $14,000 of material commitments for future capital expenditures primarily related to the acquisition of land adjacent to our corporate headquarters, completed in April 2016, and tenant improvements for retail store space in the US and Asia. We estimate that the capital expenditures for fiscal year 2017 including the aforementioned commitments will range from approximately $60,000 to $65,000. We anticipate these expenditures will primarily include the build-out of our retail stores, our BT project and equipment costs of our distribution centers. The actual amount of capital expenditures for the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures. +Cash from Financing Activities. For the year ended March 31, 2016 , net cash used in financing activities resulted primarily from net borrowings and repayments of short-term borrowings and cash paid for repurchases of common stock. +For the year ended March 31, 2015 , net cash used in financing activities resulted primarily from repayments of short-term borrowings and cash paid for repurchases of common stock. This was partially offset by short-term borrowings provided by our lines of credit and funding received from the mortgage obtained on our corporate headquarters property. +For the year ended December 31, 2013 , net cash used in financing activities was comprised primarily of repayments of short-term borrowings, as well as contingent consideration paid related to our Sanuk acquisition. The cash used was partially offset by cash from our short-term borrowings. +During fiscal years 2016, 2015 and 2013, we repurchased approximately 1,420,000,000 , 1,436,000 and zero shares, respectively of our common stock. The respective cost was approximately $94,200 and $107,200 at an average price of $66.32 per share in fiscal year 2016 and $74.68 in fiscal year 2015. At February 28, 2015, we had repurchased approximately 3,823,000 shares at an average price of $52.31 per share for approximately $200,000, which was the full amount authorized under the program approved in June 2012. At March 31, 2015 , we had repurchased approximately 377,000 shares under a new $200,000 stock purchase program approved in January 2015 for approximately $27,900, or an average price of $74.09 per share, leaving the remaining approved amount at $172,100. At March 31, 2016 , the remaining approved amount under the January 2015 program was approximately $77,900 . +Capital Resources +Domestic Line of Credit. In August 2011, we entered into a Credit Agreement (Credit Agreement), which was amended and restated in August 2012 (Amended and Restated Credit Agreement) and amended in its entirety in November 2014. In June 2013, we further amended the Amended and Restated Credit Agreement to permit additional borrowings in China of $12,500 and revised certain financial covenants including an increase in the maximum amount permitted to be spent on the headquarters building from $75,000 to $80,000. +55 +Table of Contents +In November 2014, we entered into the Second Amended and Restated Credit Agreement with JPMorgan as the administrative Agent, Comerica and HSBC as co-syndication agents, and the lenders party thereto. The Second Amended and Restated Credit Agreement amends and restates, in its entirety, the Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit facility. In August 2015, we entered into Amendment 1 to the Second Amended and Restated Credit Agreement to add certain foreign subsidiaries as borrowers. +During the year ended March 31, 2016 , we borrowed $426,000 and repaid $373,000 under the Second Amended and Restated Credit Agreement. At March 31, 2016 , we had outstanding borrowings of $53,000 and outstanding letters of credit of approximately $700 , leaving an unused balance of approximately $346,300 under the Second Amended and Restated Credit Agreement. At March 31, 2016 , we were in compliance with all covenants and we remain in compliance as of May 31, 2016 . +Subsequent to March 31, 2016, we borrowed $76,000 and repaid $16,000 resulting in a total outstanding balance of $113,000 under the Second Amended and Restated Credit Agreement as of May 31, 2016. +China Line of Credit. In October 2015, we amended the amended China Credit Facility to include an increase in the uncommitted revolving line of credit of up to CNY 150,000 , or approximately $23,000 , including a sublimit of CNY 50,000 , or approximately $8,000 , for our fully owned subsidiary, Deckers Footwear (Shanghai) Co., LTD. +During the year ended March 31, 2016, we borrowed $23,200 and repaid $14,100 under the Second Amended China Credit Facility. At March 31, 2016 , we had approximately $14,000 of outstanding borrowings under the Second Amended China Credit Facility. +Subsequent to March 31, 2016, we repaid $4,800 resulting in a total outstanding balance of $9,200 under the Second Amended China Credit Facility at May 31, 2016. +Japan Line of Credit . In March 2016, Deckers Japan, G.K., a wholly owned subsidiary, entered into a credit facility in Japan (Japan Credit Facility) that provides for an uncommitted bilateral revolving line of credit of up to JPY 5,500,000 , or approximately $49,000 , for a maximum term of six months. The Japan Credit Facility renews annually, and it is guaranteed by Deckers Outdoor Corporation. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) for three months plus 0.40% . At March 31, 2016, TIBOR for three months was 0.10% and the effective interest rate was 0.50% . +At March 31, 2016, we had no borrowings under the Japan Credit Facility. At March 31, 2016 , we were in compliance with all covenants and we remain in compliance as of May 31, 2016 . +At March 31, 2016 , we were in compliance with all covenants and we remain in compliance as of May 31, 2016 . +Mortgage. In July 2014, we obtained a mortgage on our corporate headquarters property for approximately $33,900. At March 31, 2016 the outstanding balance under the mortgage is approximately $33,200. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that will amortize the principal balance over a thirty -year period. Minimum principal payments over the next five years are approximately $2,900. The loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,400. The loan will be used for working capital and other general corporate purposes. In December 2014, the mortgage financial covenants were amended to be consistent with the financial covenants of the Second Amended and Restated Credit Agreement. +Refer to Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our indebtedness. +56 +Table of Contents +Contractual Obligations +The following table summarizes our contractual obligations at March 31, 2016 and the effects such obligations are expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +315,440 +$ +50,763 +$ +94,297 +$ +66,052 +$ +104,328 +Purchase obligations (2) +990,922 +915,465 +67,707 +7,750 +— +Mortgage obligation (3) +52,519 +2,168 +4,336 +4,336 +41,679 +Contingent consideration obligations (4) +20,018 +20,018 +— +— +— +Unrecognized tax benefits (5) +7,236 +856 +2,459 +3,921 +— +Total +$ +1,386,135 +$ +989,270 +$ +168,799 +$ +82,059 +$ +146,007 +(1) +Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. +(2) +Our purchase obligations consist mostly of open purchase orders. They also consist of capital expenditures, service contracts and promotional expenses. Outstanding purchase orders are primarily with our third-party manufacturers and most are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and service contracts are due periodically during fiscal years 2017 through 2021. +We have also entered into purchase commitments with certain suppliers. Refer to Note 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K. Certain agreements require that we advance specified minimum payment amounts. The total remaining cash commitments under these agreements, net of deposits, at March 31, 2016 are included in this table. We expect our sheepskin purchases will eventually exceed the minimum commitment levels; therefore we believe the deposits will become fully refundable, and thus, we believe this will not materially affect our results of operations, as it is in the normal course of our business. +(3) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,400. Refer to Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K. +(4) +Our contingent consideration obligations consist of final contingent consideration payments for the acquisitions of the Sanuk and Hoka brands. For additional information, refer to the "Commitments and Contingencies" section below and Notes 1 and 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K. +(5) +The unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate, if recognized. Refer to Note 5 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K. +Commitments and Contingencies. The following reflect the additional commitments and contingent liabilities that may have a material impact on liquidity and cash flow in future periods. +Sanuk. The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 , which is 40.0% of the Sanuk brand gross profit in calendar year 2015, was paid subsequent to March 31, 2016. +Hoka. The purchase price for the Hoka brand, acquired in September 2012, includes contingent consideration through calendar year 2017, with a maximum of $2,000 , of which approximately $1,700 has been paid. The maximum +57 +Table of Contents +of $2,000 was achieved during the fiscal year ended March 31, 2016. At March 31, 2016, the final contingent consideration payment of approximately $300 is pending final disbursement. +At March 31, 2016, contingent consideration for both brands is included in other accrued expenses in the consolidated balance sheets. +Refer to Note 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K. +Impact of Foreign Exchange Rate Fluctuations +Foreign exchange rate fluctuations in fiscal years 2015 and 2013 had a significant negative impact on our net sales and gross margins caused by the strengthening of the US dollar. In fiscal year 2016 foreign exchange rate fluctuations had an incremental negative impact compared to fiscal year 2015. Refer to “Results of Operations” above, the consolidated statements of comprehensive income (loss) and Notes 9 and 11 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a further discussion of the impact of foreign exchange rate fluctuations. +Critical Accounting Policies and Estimates +Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our significant accounting policies. Those policies and estimates that we believe are most critical to the understanding of our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K are revenue recognition, use of estimates, which includes the below reserves and allowances, inventories, accounting for long-lived assets, goodwill and other intangible assets, fair value of contingent consideration, and stock compensation. +Use of Estimates. The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period. Management reasonably could use different estimates and assumptions, and changes in estimates and assumptions could occur from period to period, with the result in each case being a potential material change in the financial statement presentation of our financial condition or results of operations. We have historically been materially accurate in our estimates used for the reserves and allowances below. +The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +March 31, 2016 +March 31, 2015 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +190,349 +$ +161,323 +Allowance for doubtful accounts +5,494 +2.9 +% +2,297 +1.4 +% +Allowance for sales discounts +2,672 +1.4 +2,348 +1.5 +Allowance for estimated chargebacks +4,968 +2.6 +4,041 +2.5 +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +378,635 +$ +340,637 +Allowance for estimated returns +17,061 +4.5 +% +9,532 +2.8 +% +Estimated returns liability +1,889 +0.5 +1,741 +0.5 +Allowance for Doubtful Accounts. We provide a reserve against trade accounts receivable for estimated losses that may result from customers' inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are +58 +Table of Contents +charged or written off against this reserve. The reserve includes specific reserves for accounts, which all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses of this nature. The allowance for doubtful accounts increased over the prior year as a result of the difficult retail environment experienced by certain of our customers which lead to an increased risk that the related outstanding receivables may not be collected. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for the accounts we consider to have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at March 31, 2016 by approximately $1,000. +Allowance for Sales Discounts. A significant portion of our wholesale sales and resulting trade accounts receivable reflects a discount that our customers may take, generally based upon meeting certain order, shipment and payment timelines. We use the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Estimated Chargebacks. When our wholesale customers pay their invoices, they often take deductions for chargebacks against their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks taken against invoices. +Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated future returns of goods shipped prior to period end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products. We also have a policy whereby we accept returns from our DTC customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. The increase in the sales return reserve in 2016 was primarily due to customer requests for returns. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the allowance and liability reserves for returns in total at March 31, 2016 by approximately $2,000. +Inventory Write-Downs. We review the various items in inventory on a regular basis for excess, obsolete, and impaired inventory. In doing so, we write the inventory down to the lower of cost or expected future net selling prices. Inventories were stated at $299,911 and $238,911 , net of inventory write-downs of $7,303 and $3,601 at March 31, 2016 and March 31, 2015 , respectively. The increase in inventory write-downs at March 31, 2016 compared to March 31, 2015 was primarily due to write-downs related to Teva brand styles that are not being continued and Sanuk brand restructuring charges. The amount of inventory write-downs as a percentage of inventories was 2.4% and 1.5% at March 31, 2016 and March 31, 2015 respectively. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve at March 31, 2016 by approximately $1,000. +Valuation of Goodwill, Intangible and Other Long-Lived Assets. We assess the impairment of goodwill, intangible, and other long-lived assets on a separate asset basis based on assumptions and judgments regarding the carrying amount of these assets individually. +We performed our annual impairment tests for goodwill and nonamortizable intangible assets. We evaluated our UGG, Sanuk and other brands' goodwill and our Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk and other brands' goodwill, trademarks, and net assets, the brands' fiscal year 2016 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, we concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill and the Teva trademarks, were not impaired. Our Teva trademarks were evaluated under Accounting Standards Update (ASU) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, and we concluded, based on an evaluation of all relevant qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity-specific events, and legal, regulatory, contractual, political, business, or other factors, that it is not more likely than not that the fair value of the Teva trademarks is less than its carrying amount, and accordingly we did not perform a quantitative impairment test for the Teva trademarks. Our goodwill balance at March 31, 2016 represents goodwill in the UGG, Sanuk and other brands' reporting units. We believe that it is not more likely than not that the fair value of the UGG reporting unit's fair value and the other brands' reporting units' fair value are less than their respective carrying values. The UGG and other brands' goodwill were evaluated based on qualitative analyses. +59 +Table of Contents +We performed a quantitative analysis of the Sanuk reporting unit's fair value at October 31, 2015, and concluded that it was not impaired with a significant excess compared to its carrying value. +We also qualitatively evaluated amortizable long-lived assets, including intangible assets at December 31, 2015 and December 31, 2014. During the fiscal year ended March 31, 2016 , we recorded impairment losses of approximately $4,000 for 24 of our retail stores and other long-lived assets impacted by the retail store fleet optimization. Refer to Note 2 of our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our retail store fleet optimization. We also recognized impairment charges of approximately $9,800 for retail stores for which the fair values did not exceed their carrying values, $4,000 related to various BT supply chain software and $2,000 for various other assets as a result of the office consolidation plan. At March 31, 2015 , we recorded immaterial impairment losses for four of our retail stores for which the fair values did not exceed their carrying values. Our other valuation methodologies used at March 31, 2016 did not change from the prior years. +Performance-Based Compensation +The recognition of performance-based compensation decreased approximately $18,000 in fiscal year 2016 compared to fiscal year 2015. At March 31, 2016, the threshold level of the performance objectives relating to our fiscal year 2016 performance-based compensation awards was not achieved, nor were the goals against peer companies, and we reversed expense for those awards. In contrast, at March 31, 2015, the target level of the performance objectives relating to our fiscal year 2015 performance-based compensation awards was partially achieved, and we recognized the expense accordingly. +The recognition of performance-based compensation decreased by approximately $8,000 in fiscal year 2015 compared to the prior fiscal year period. At March 31, 2015 , the target level of the performance objectives relating to our fiscal year 2015 performance-based compensation awards was only partially achieved, and we have recognized the expense accordingly. In contrast, at December 31, 2013 , we achieved at or above the threshold level of the performance objectives relating to our 2013 performance-based cash awards and we recognized expense for those 2013 awards accordingly at that time. +At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for the next fiscal year and for subsequent fiscal years. The committee then establishes specific annual Company financial goals and specific strategic goals for each executive. Performance-based compensation awards for the fiscal year ended March 31, 2015 were partially earned, and performance-based compensation awards for the fiscal year ended March 31, 2016 were not earned, based on our achievement of certain targets for annual revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), and earnings per share, as well as achievement of pre-determined individual financial performance goals that are tailored to individual employees based on their role and responsibilities with us. The performance objectives and goals, as well as the targets, differ each year and are based upon many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior year's performance, business and general economic conditions and market and peer group analysis. For example, in evaluating targets for the 2015 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2013 , which was approximately $251,800 and in evaluating targets for the 2016 fiscal year, our Compensation Committee reviewed among other things, our EBITDA for the fiscal year ended March 31, 2015, which was approximately $270,900. Performance objectives for the 2016 fiscal year were based, in part, upon the expected achievement of growth in our revenue, EBITDA and earnings per share for the fiscal year ended March 31, 2016 as compared to our EBITDA for the fiscal year ended March 31, 2015. Our higher EBITDA for the fiscal year ended March 31, 2015 as compared to the fiscal year ended December 31, 2013 resulted in fiscal year 2016 EBITDA targets that were higher than the 2015 EBITDA targets. +In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the compensation expense we recognize may also fluctuate from period to period. +60 +Table of Contents +Recent Accounting Pronouncements +On May 28, 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in US GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which provides for a one year deferral of the effective date of ASU No. 2014-09, as well as early application, which will be effective for us on April 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply the implementation guidance related to principal versus agent considerations within ASU No. 2014-09. We are evaluating the effect that all of the ASUs related to Revenue from Contracts with Customers will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. +In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset). This ASU is effective for us on April 1, 2016, with early adoption permitted. On August 18, 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which allows an entity to continue to present debt issuance costs related to line of credit arrangements as deferred charges. The adoption of ASU No. 2015-03 and ASU No. 2015-15 will not have a material impact on our consolidated financial statements or related disclosures. +In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies whether a cloud computing arrangement should be treated as a software license or a service contract. Customers that have a cloud computing arrangement that includes a software license are required to account for the software license element of the arrangement consistent with the acquisition of other software licenses. Customers that have a cloud computing arrangement that does not include a software license are required to account for the arrangement as a service contract. This ASU is effective for us on April 1, 2016, with early adoption permitted. The adoption of ASU No. 2015-05 is not expected to have a material impact on our consolidated financial statements or related disclosures. +In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Current US GAAP requires, at each financial statement date, that entities measure inventory at the lower of cost or market, most commonly the current replacement cost. This ASU is effective for us on April 1, 2017, with early adoption permitted. We are evaluating the effect that ASU No. 2015-11 will have on our consolidated financial statements and related disclosures, but we believe it will not have a material impact. +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that an entity classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard, deferred tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification of the related asset or liability. This ASU is effective for us on April 1, 2017, with early adoption permitted. We have prospectively adopted this ASU beginning with the period ending March 31, 2016 in our Annual Report on Form 10-K. The adoption of ASU No. 2015-17 did not have a material impact on our consolidated financial statements. +In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the Balance Sheet a liability to make lease payments (the lease liability) at fair value and an offsetting right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. This ASU is effective for us on April 1, 2019. We +61 +Table of Contents +are evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures. Since we utilize operating leases for most of our facilities and retail stores, it is anticipated that adoption of the ASU will have a material impact on our balance sheet presentation. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires that an entity recognize excess tax benefits and certain tax deficiencies of employee share-based payment awards in the income statement instead of in additional paid-in-capital when the awards vest or are settled and present excess tax benefits as an operating activity on the statement of cash flows instead of as a financing activity. This ASU also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to either estimate the number of awards that are expected to vest or to account for forfeitures as they occur. In addition, the cash paid by an entity to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation is required to be classified as a financing activity on its statement of cash flows. This ASU is effective for us on April 1, 2017, with early adoption permitted. We are evaluating the impact of ASU No. 2016-09 on our consolidated financial statements and related disclosures. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. There have been significant changes in the price of sheepskin in recent years as the demand from our competitors, and the demand from our customers, for this commodity has changed. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, global economic conditions, and other factors which are not considered predictable or within our control. Beginning in 2013, in an effort to reduce our dependency on sheepskin, we began using a new raw material, UGGpure TM , in some of our UGG products. In addition, we use purchasing contracts, pricing arrangements, and refundable deposits to attempt to reduce the impact of price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact on our margins. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Other than an increasing amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. At May 31, 2016 , we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +We utilize forward currency exchange contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect to purchase and sell in foreign currencies. At March 31, 2016 , our foreign currency exchange contracts designated as cash-flow hedges had notional amounts totaling approximately $105,000, held by seven counterparties, which are expected to mature at various dates over the next 12 months. During the year ended March 31, 2016 , we settled foreign currency exchange contracts designated as cash flow hedges with notional amounts totaling approximately $46,000 that were entered in the prior fiscal year and approximately $32,000 that were entered in fiscal year 2016. During the year ended March 31, 2016 , we also entered into, and settled, non-designated derivative foreign currency exchange contracts with total notional amounts of approximately $261,000 . Based upon sensitivity analysis at March 31, 2016 , a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $10,000. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes. Subsequent to March 31, 2016 , we entered into non-designated derivative contracts with notional amounts totaling approximately $63,000, which are expected to mature over the next three months, and designated derivative contracts with notional amounts totaling approximately $11,000, which are expected to mature over the next 12 months. All hedging contracts held at May 31, 2016 were held by a total of seven counterparties. +Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local +62 +Table of Contents +currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our European and Asian operations. Approximately $526,000, or 28.1%, of our total net sales for the year ended March 31, 2016 were denominated in foreign currencies. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of remeasuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US dollar functional and also from remeasuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. We remeasure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries' local currency is their designated functional currency, and we translate those subsidiaries' assets and liabilities into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income (loss). Changes in foreign exchange rates affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, and retailers, which may have a negative impact on our net sales and gross margins. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the US and changes in the London Interbank Offered Rate (LIBOR). Our Second Amended and Restated Credit Agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At March 31, 2016 , the adjusted LIBOR for 30 days was 0.44% and our weighted-average interest rate was 2.27%. Our Second Amended China Credit Facility provides for interest on outstanding borrowings at rates based on the People’s Bank of China rate, which was 4.35% at March 31, 2016 . Our Japan Credit Facility provides for interest on outstanding borrowings at rates tied to the Tokyo Interbank Offered Rate (TIBOR) plus 0.40%. At March 31, 2016, TIBOR for three months was 0.10%. A 1.0% increase in interest rates on the above borrowings would result in an approximately $1,200 increase to interest expense for the year ended March 31, 2016 . Refer to Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our notes payable and long-term debt. +Item 8. Financial Statements and Supplementary Data +Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm are filed with this Annual Report on Form 10-K in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report on Form 10-K. +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +We carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures at March 31, 2016 . Based upon that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2016. +63 +Table of Contents +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2016 , our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, at March 31, 2016 , our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K. +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +64 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2016 annual meeting of stockholders and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2016 pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +65 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedules +Refer to the “Index to Consolidated Financial Statements and Financial Statement Schedules” on page F-1 of this Annual Report on Form 10-K. +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 8, 2011 and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as amended through September 10, 2015 (Exhibit 3.1 to the Registrant’s Form 8-K filed on September 16, 2015 and incorporated by reference herein) +10.2 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.6 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.7 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.8 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Equity Incentive Plan, adopted by the Board of Directors on December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filed on March 1, 2011 and incorporated by reference herein) +#10.10 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective August 1, 2013 (Exhibit 10.10 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.11 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +66 +Table of Contents +Exhibit +Number +Description of Exhibit +#10.12 +Form of Restricted Stock Unit Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.13 +Form of Restricted Stock Unit Award Agreement (Level III) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and incorporated by reference herein) +#10.14 +Form of Stock Appreciation Rights Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.15 +Form of Restricted Stock Unit Award Agreement (2012 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on May 31, 2012 and incorporated by reference herein) +#10.16 +Form of Restricted Stock Unit Award Agreement (2013 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on December 19, 2013 and incorporated by reference herein) +#10.17 +Form of Restricted Stock Unit Award Agreement (2014 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on September 24, 2014 and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.19 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.20 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Angel Martinez and Deckers Outdoor Corporation (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.21 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Thomas George and Deckers Outdoor Corporation (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.22 +Change of Control and Severance Agreement, dated December 22, 2009, by and between Constance Rishwain and Deckers Outdoor Corporation (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.23 +Consulting Agreement and General Release, dated January 16, 2015, by and between Zohar Ziv and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on January 21, 2015 and incorporated by reference herein) +#10.24 +Consulting Agreement and General Release, dated May 6, 2015, by and between Constance Rishwain and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 12, 2015 and incorporated by reference herein) +#10.25 +Employment Agreement, dated February 28, 2011, by and between Stephen Murray and Deckers Europe Limited (Exhibit 10.23 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.26 +Second Amended and Restated Credit Agreement, dated November 13, 2014, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 19, 2014 and incorporated by reference herein) +10.27 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.28 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.29 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +67 +Table of Contents +Exhibit +Number +Description of Exhibit +#10.30 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.31 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.32 +Management Incentive Plan (Exhibit 10.1 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.33 +2016 Non-Vested Stock Unit (NSU) Award Agreement (Exhibit 10.2 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.34 +Form of Restricted Stock Unit Award Agreement under 2015 Stock Incentive Plan (2016 LTIP Financial Performance Award) (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 24, 2015 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +*31.2 +Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +**32 +Certification Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +*101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at March 31, 2016 and March 31, 2015; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2016 and March 31, 2015, quarter transition period ended March 31, 2014, and year ended December 31, 2013; (iii) Consolidated Statements of Cash Flows for the years ended March 31, 2016 and March 31, 2015, quarter transition period ended March 31, 2014, and year ended December 31, 2013, and (iv) Notes to Consolidated Financial Statements. +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +68 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chairman and Chief Executive Officer +Date: May 31, 2016 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ ANGEL R. MARTINEZ +Chairman of the Board, +Chief Executive +Officer (Principal Executive Officer) +May 31, 2016 +Angel R. Martinez +/s/ THOMAS A. GEORGE +Chief Financial Officer +(Principal Financial and Accounting Officer) +May 31, 2016 +Thomas A. George +/s/ MICHAEL F. DEVINE, III +Director +May 31, 2016 +Michael F. Devine, III +/s/ KARYN O. BARSA +Director +May 31, 2016 +Karyn O. Barsa +/s/ JOHN M. GIBBONS +Director +May 31, 2016 +John M. Gibbons +/s/ JOHN G. PERENCHIO +Director +May 31, 2016 +John G. Perenchio +/s/ LAURI SHANAHAN +Director +May 31, 2016 +Lauri Shanahan +/s/ JAMES QUINN +Director +May 31, 2016 +James Quinn +/s/ BONITA C. STEWART +Director +May 31, 2016 +Bonita C. Stewart +/s/ NELSON C. CHAN +Director +May 31, 2016 +Nelson C. Chan +69 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets at March 31, 2016 and March 31, 2015 +F-4 +Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2016 and March 31, 2015, quarter ended (transition period) March 31, 2014, and year ended December 31, 2013 +F-5 +Consolidated Statements of Stockholders' Equity for the years ended March 31, 2016 and March 31, 2015, quarter ended (transition period) March 31, 2014, and year ended December 31, 2013 +F-6 +Consolidated Statements of Cash Flows for the years ended March 31, 2016 and March 31, 2015, quarter ended (transition period) March 31, 2014, and year ended December 31, 2013 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule: +Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2016 and March 31, 2015, quarter ended (transition period) March 31, 2014, and year ended December 31, 2013 +F-42 +All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deckers Outdoor Corporation and subsidiaries as of March 31, 2016 and March 31, 2015 , and the results of their operations and their cash flows for the years ended March 31, 2016 and March 31, 2015 , the quarter ended (transition period) March 31, 2014 , and the year ended December 31, 2013 in conformity with US generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the internal control over financial reporting of Deckers Outdoor Corporation at March 31, 2016 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 31, 2016 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of Deckers Outdoor Corporation. +As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of the presentation of deferred income taxes as of March 31, 2016 due to the adoption of Accounting Standards Update 2015-17, Accounting for Income Taxes: Balance Sheet Classification of Deferred Taxes. Prior period amounts have not been reclassified. +/s/ KPMG LLP +Los Angeles, California +May 31, 2016 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the internal control over financial reporting of Deckers Outdoor Corporation as of March 31, 2016 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A(b). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting at March 31, 2016 , based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries at March 31, 2016 and March 31, 2015 , and the results of their operations and their cash flows for the years ended March 31, 2016 and March 31, 2015 , the quarter ended (transition period) March 31, 2014 , and the year ended December 31, 2013 and our report dated May 31, 2016 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Los Angeles, California +May 31, 2016 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +March 31, +2016 +2015 +ASSETS +Current assets: +Cash and cash equivalents +$ +245,956 +$ +225,143 +Trade accounts receivable, net of allowances ($30,195 at March 31, 2016 and $18,218 at March 31, 2015) +160,154 +143,105 +Inventories +299,911 +238,911 +Prepaid expenses +18,249 +15,141 +Other current assets +38,039 +35,057 +Income tax receivable +23,456 +15,170 +Deferred tax assets +— +14,066 +Total current assets +785,765 +686,593 +Property and equipment, net of accumulated depreciation ($163,807 at March 31, 2016 and $129,002 at March 31, 2015) +237,246 +232,317 +Goodwill +127,934 +127,934 +Other intangible assets, net of accumulated amortization ($45,302 at March 31, 2016 and $37,316 at March 31, 2015) +83,026 +87,743 +Deferred tax assets +20,636 +15,017 +Other assets +23,461 +20,329 +Total assets +$ +1,278,068 +$ +1,169,933 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Short-term borrowings +$ +67,475 +$ +5,383 +Trade accounts payable +100,593 +85,714 +Accrued payroll +20,625 +27,300 +Other accrued expenses +39,449 +41,066 +Income taxes payable +6,461 +6,858 +Value added tax payable +3,895 +1,221 +Total current liabilities +238,498 +167,542 +Long-term liabilities: +Mortgage payable +32,631 +33,154 +Income tax liability +9,073 +5,087 +Deferred rent obligations +16,139 +15,663 +Other long-term liabilities +14,256 +11,475 +Total long-term liabilities +72,099 +65,379 +Commitments and contingencies (Note 7) +Stockholders' equity: +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 32,020 at March 31, 2016 and 33,292 at March 31, 2015) +320 +333 +Additional paid-in capital +161,259 +158,777 +Retained earnings +826,449 +798,370 +Accumulated other comprehensive loss +(20,557 +) +(20,468 +) +Total stockholders' equity +967,471 +937,012 +Total liabilities and stockholders' equity +$ +1,278,068 +$ +1,169,933 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(amounts in thousands, except per share data) +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Net sales +$ +1,875,197 +$ +1,817,057 +$ +294,716 +$ +1,556,618 +Cost of sales +1,028,529 +938,949 +150,456 +820,135 +Gross profit +846,668 +878,108 +144,260 +736,483 +Selling, general and administrative expenses +684,541 +653,689 +144,668 +528,586 +Income (loss) from operations +162,127 +224,419 +(408 +) +207,897 +Other expense (income), net: +Interest income +(420 +) +(207 +) +(65 +) +(60 +) +Interest expense +5,814 +4,220 +516 +3,079 +Other, net +(152 +) +(733 +) +(117 +) +(679 +) +Total other expense, net +5,242 +3,280 +334 +2,340 +Income (loss) before income taxes +156,885 +221,139 +(742 +) +205,557 +Income tax expense +34,620 +59,359 +1,943 +59,868 +Net income (loss) +122,265 +161,780 +(2,685 +) +145,689 +Other comprehensive income (loss), net of tax: +Unrealized gain (loss) on foreign currency hedging +461 +450 +(273 +) +(486 +) +Foreign currency translation adjustment +(550 +) +(18,875 +) +873 +(757 +) +Total other comprehensive (loss) income +(89 +) +(18,425 +) +600 +(1,243 +) +Comprehensive income (loss) +$ +122,176 +$ +143,355 +$ +(2,085 +) +$ +144,446 +Net income (loss) per share: +Basic +$ +3.76 +$ +4.70 +$ +(0.08 +) +$ +4.23 +Diluted +$ +3.70 +$ +4.66 +$ +(0.08 +) +$ +4.18 +Weighted-average common shares outstanding: +Basic +32,556 +34,433 +34,621 +34,473 +Diluted +33,039 +34,733 +34,621 +34,829 +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Income (Loss) +Total Stockholders' +Equity +Shares +Amount +Balance, December 31, 2012 +34,400 +$ +344 +$ +139,046 +$ +600,811 +$ +(1,400 +) +$ +738,801 +Stock compensation expense +15 +— +13,136 +— +— +13,136 +Exercise of stock options +8 +— +52 +— +— +52 +Shares issued upon vesting +195 +2 +(2 +) +— +— +— +Excess tax benefit from stock compensation +— +— +319 +— +— +319 +Shares withheld for taxes +— +— +(8,635 +) +— +— +(8,635 +) +Net income +— +— +— +145,689 +— +145,689 +Total other comprehensive loss +— +— +— +— +(1,243 +) +(1,243 +) +Balance, December 31, 2013 +34,618 +346 +143,916 +746,500 +(2,643 +) +888,119 +Stock compensation expense +5 +— +2,865 +— +— +2,865 +Shares issued upon vesting +1 +— +— +— +— +— +Shares withheld for taxes +— +— +(50 +) +— +— +(50 +) +Net loss +— +— +— +(2,685 +) +— +(2,685 +) +Total other comprehensive income +— +— +— +— +600 +600 +Balance, March 31, 2014 +34,624 +346 +146,731 +743,815 +(2,043 +) +888,849 +Stock compensation expense +11 +— +13,524 +— +— +13,524 +Shares issued upon vesting +93 +1 +(1 +) +— +— +— +Excess tax benefit from stock compensation +— +— +4,197 +— +— +4,197 +Shares withheld for taxes +— +— +(5,674 +) +— +— +(5,674 +) +Stock repurchase +(1,436 +) +(14 +) +— +(107,225 +) +— +(107,239 +) +Net income +— +— +— +161,780 +— +161,780 +Total other comprehensive loss +— +— +— +— +(18,425 +) +(18,425 +) +Balance, March 31, 2015 +33,292 +333 +158,777 +798,370 +(20,468 +) +937,012 +Stock compensation expense +16 +— +6,622 +— +— +6,622 +Shares issued upon vesting +132 +1 +(1 +) +— +— +— +Excess tax benefit from stock compensation +— +— +471 +— +— +471 +Shares withheld for taxes +— +— +(4,610 +) +— +— +(4,610 +) +Stock repurchase +(1,420 +) +(14 +) +— +(94,186 +) +— +(94,200 +) +Net income +— +— +— +122,265 +— +122,265 +Total other comprehensive loss +— +— +— +— +(89 +) +(89 +) +Balance, March 31, 2016 +32,020 +$ +320 +$ +161,259 +$ +826,449 +$ +(20,557 +) +$ +967,471 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Cash flows from operating activities: +Net income (loss) +$ +122,265 +$ +161,780 +$ +(2,685 +) +$ +145,689 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and accretion +50,024 +49,293 +10,569 +41,439 +Change in fair value of contingent consideration +(4,411 +) +(3,574 +) +705 +1,815 +Provision for (recovery of) doubtful accounts, net +5,120 +1,107 +(169 +) +125 +Deferred tax provision +8,167 +9,970 +(2,736 +) +(4,092 +) +Stock compensation +6,622 +13,524 +2,865 +13,136 +Gain on sale of assets +(1,338 +) +— +— +— +Impairment of long-lived assets +9,773 +— +— +— +Restructuring costs +24,856 +— +— +— +Other +56 +2,969 +111 +1,306 +Changes in operating assets and liabilities: +Trade accounts receivable +(23,545 +) +(36,885 +) +77,983 +6,618 +Inventories +(61,492 +) +(26,748 +) +49,272 +40,580 +Prepaid expenses and other current assets +(3,681 +) +(10,376 +) +68,837 +(58,554 +) +Income tax receivable +(8,286 +) +(15,170 +) +— +— +Other assets +(3,082 +) +(144 +) +(758 +) +(4,290 +) +Trade accounts payable +14,775 +8,912 +(74,898 +) +21,251 +Contingent consideration +(819 +) +(364 +) +(2,974 +) +(6,458 +) +Accrued expenses +(16,221 +) +3,761 +(33,666 +) +33,556 +Income taxes payable +(397 +) +4,883 +(46,545 +) +24,386 +Long-term liabilities +7,195 +6,716 +1,998 +5,618 +Net cash provided by operating activities +125,581 +169,654 +47,909 +262,125 +Cash flows from investing activities: +Purchases of property and equipment +(65,356 +) +(91,147 +) +(17,603 +) +(79,829 +) +Purchases of tangible, intangible, and other assets, net +(4,700 +) +(9,489 +) +(30 +) +(5,368 +) +Proceeds from sale of assets +2,835 +— +— +— +Net cash used in investing activities +(67,221 +) +(100,636 +) +(17,633 +) +(85,197 +) +Cash flows from financing activities: +Proceeds from issuance of short-term borrowings +449,200 +199,784 +— +320,728 +Repayments of short-term borrowings +(387,120 +) +(201,705 +) +(3,000 +) +(344,000 +) +Cash paid for shares withheld for taxes +(3,691 +) +(5,674 +) +(3,752 +) +(6,736 +) +Excess tax benefit from stock compensation +471 +4,197 +— +2,071 +Cash received from issuances of common stock +— +— +— +52 +Cash paid for repurchases of common stock +(94,200 +) +(107,239 +) +— +— +Contingent consideration paid +(445 +) +(115 +) +(15,852 +) +(22,628 +) +Loan origination costs on short-term borrowings +(62 +) +(818 +) +— +— +Proceeds from mortgage loan +— +33,931 +— +— +Mortgage loan origination costs +— +(338 +) +— +— +Repayment of mortgage principal +(493 +) +(283 +) +— +— +Net cash used in financing activities +(36,340 +) +(78,260 +) +(22,604 +) +(50,513 +) +Effect of exchange rates on cash +(1,207 +) +(10,703 +) +291 +463 +Net change in cash and cash equivalents +20,813 +(19,945 +) +7,963 +126,878 +Cash and cash equivalents at beginning of period +225,143 +245,088 +237,125 +110,247 +Cash and cash equivalents at end of period +$ +245,956 +$ +225,143 +$ +245,088 +$ +237,125 +See accompanying notes to consolidated financial statements. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(Continued) +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Income taxes +$ +29,916 +$ +53,504 +$ +48,040 +$ +39,122 +Interest +4,640 +4,315 +187 +2,586 +Non-cash investing and financing activities: +Accrued for purchases of property and equipment +2,640 +3,419 +4,265 +2,283 +Accrued for asset retirement obligations +1,394 +786 +19 +1,936 +Accrued for shares withheld for taxes +919 +— +— +3,702 +Write-off for shares exercised with a tax deficit +— +— +— +1,752 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 1. The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively referred to as the "Company"). Accordingly, all references herein to Deckers Outdoor Corporation or "Deckers" include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers Outdoor Corporation is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's business is seasonal, with the highest percentage of UGG® brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva® and Sanuk® brand net sales occurring in the quarters ending March 31 and June 30 of each year. +The Company sells its products through quality domestic retailers and international distributors and retailers, as well as directly to end-user consumers through the Direct-to-Consumer (DTC) reporting segment. Independent third parties manufacture all of the Company's products. +In July 2014, the Company acquired its UGG brand distributor that sold to retailers in Germany and continues to operate as a wholesale business in Germany through the newly acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to the Company’s consolidated financial statements. +In April 2015, the Company acquired inventory and certain intangible assets, including the trade name related to the Koolaburra® brand, a sheepskin and wool based footwear brand. The purchase price of the acquisition was not material to the Company's consolidated financial statements. +In July 2015, the Company sold certain tangible and intangible assets, including approximately $1,500 of inventory, and the trade name related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, the Company sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to the Company's consolidated financial statements. +Change in Fiscal Year +In February 2014, the Company's Board of Directors (the Board) approved a change in its fiscal year end from December 31 to March 31. The change was intended to better align the Company's planning, financial and reporting functions with the seasonality of the business. The 2016, 2015 and 2013 fiscal years are for the periods ended March 31, 2016 , March 31, 2015 and December 31, 2013 , respectively. The transition period was the quarter ended March 31, 2014 to coincide with the change in the Company's fiscal year end. +Business Segment Reporting +During the first quarter of fiscal year 2016, the Company changed its reportable operating segments to combine the previously separated retail store and E-Commerce operating components into one DTC reportable operating segment. The Company now has five reportable operating segments including the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, other brands, and the DTC business and it is by these segments that information is reported to the Chief Operating Decision Maker (CODM). The CODM is the Principal Executive Officer. The Company performs an annual analysis of the appropriateness of its reportable segments. Refer to Note 12 for further information related to the Company's business segments. +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include $195,575 and $127,900 of money market funds at March 31, 2016 and March 31, 2015 , respectively. +Allowance for Doubtful Accounts +The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers' inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Write-offs against this allowance are recorded in selling, general and administrative (SG&A) expense in the consolidated statements of comprehensive income (loss). The allowance includes specific allowances for trade accounts, all or a portion of which are identified as potentially uncollectible, plus a non-specific allowance for the balance of accounts based on the Company's historical loss experience. Allowances have been established for all projected losses of this nature. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales in the consolidated statements of comprehensive income (loss). Cost also includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends and the retail environment. +Property and Equipment, Depreciation and Amortization +Property and equipment has a useful life expectancy of at least one year. Property and equipment includes tangible, non-consumable items owned by the Company valued at or above $3 , certain computer software costs and internal or external computer system consulting work valued at or above $3 as defined below, and portable electronic devices valued at or above $1.5 . Tangible, non-consumable items below these amounts are expensed. The value includes the purchase price, sales tax and costs to acquire (shipping and handling), install (excluding site preparation costs), secure and prepare the item for its intended use. +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives. Capitalized website costs, which are included in the machinery and equipment category, are immaterial to the Company's consolidated financial statements. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. The Company allocates depreciation and amortization of property, plant, and equipment to cost of sales and SG&A expenses in the consolidated statements of comprehensive income (loss). The majority of the Company's depreciation and amortization is included in SG&A expenses in the consolidated statements of comprehensive income (loss) due to the nature of its operations. Most of the Company's depreciation and amortization is from its warehouses, its corporate headquarters and its retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually, at December 31, except for the Teva trademarks and Sanuk goodwill, which are tested at October 31. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +The assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating segments. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate the fair value of the reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company determines this, then the first quantitative step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired. If the fair value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated and the fair values of the intangible assets with indefinite lives. +The Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to their carrying values. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of the indefinite life intangible asset. The Company does not calculate the fair value of the indefinite life intangible unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the indefinite life intangible to its carrying amount, and if the fair value of the indefinite life intangible exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge to write-down the intangible asset to its fair value. Impairment and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). +Determining fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including future revenues, royalty rates, discount rates, attrition rates, and market multiples, among others. The Company also considers the following factors: +• +the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• +changes in consumer demand or acceptance of the related brand names, products, or features associated with the assets; and +• +other considerations that could affect fair value or otherwise indicate potential impairment. +In addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such conditions, and increased competition. These or other factors could result in changes to the calculation of fair value which could result in impairment of the Company's remaining goodwill and other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Accounting for Long-Lived Assets +Other long-lived assets, such as machinery and equipment, internal use software, leasehold improvements, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. Intangible assets subject to amortization are amortized over their respective estimated useful lives to their estimated residual values, if any. The Company uses the straight-line method for depreciation and amortization of long-lived assets, except for certain intangible assets where the Company can reliably determine the pattern in which the economic benefits of the assets will be consumed. +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +At least quarterly, the Company evaluates whether any impairment triggering events, including the following, have occurred which would require such asset groups to be tested for impairment: +• +A significant decrease in the market price of a long-lived asset group; +• +a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its physical condition; +• +a significant adverse change in legal factors or in business climate that could affect the value of a long-lived asset group, including an adverse action or assessment by a regulator; +• +an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset group; +• +a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• +a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. +When an impairment triggering event has occurred, the Company tests for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses potential impairment of its retail group long-lived assets by comparing projected 12 months store cash flows to the current carrying value of the store's long-lived assets. Stores that have been opened for more than one year, or have otherwise been identified by management as having one or more indicators of impairment, with projected 12 months cash flows less than the current carrying amount of the store's long-lived assets are then reviewed to determine if an impairment exists. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets. Impairment is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the financial statements only if those positions are more likely than not of being sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income (loss). +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Fair Value Measurements +The fair values of the Company's cash and cash equivalents, trade accounts receivable, prepaid expenses, income taxes receivable, other current assets, short-term borrowings, trade accounts payable, accrued payroll, other accrued expenses, income taxes payable and value added tax payable approximate the carrying values due to the relatively short maturities of these instruments. The fair values of the Company's long-term liabilities, other than contingent consideration, recalculated using current interest rates, would not significantly differ from the carrying values. The fair value of the contingent consideration related to acquisitions and of the Company's derivatives are measured and recorded at fair value on a recurring basis. Changes in fair value of contingent consideration resulting from either accretion or changes in discount rates or in the expectations of achieving the performance targets are recorded in SG&A expenses. The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the consolidated balance sheets. +The inputs used in measuring fair value are prioritized into the following hierarchy: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the reporting entity to develop its own assumptions. +The assets and liabilities that are measured on a recurring basis at fair value are summarized as follows: +Fair Value at March 31, 2016 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value +Nonqualified deferred compensation asset +$ +6,083 +$ +6,083 +$ +— +$ +— +Nonqualified deferred compensation liability +(6,301 +) +(6,301 +) +— +— +Designated derivatives asset +2,903 +— +2,903 +— +Designated derivatives liability +(2,549 +) +— +(2,549 +) +— +Contingent consideration for acquisition of business +(20,000 +) +— +— +(20,000 +) +Fair Value at March 31, 2015 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value +Nonqualified deferred compensation asset +$ +5,581 +$ +5,581 +$ +— +$ +— +Nonqualified deferred compensation liability +(5,581 +) +(5,581 +) +— +— +Designated derivatives liability +(487 +) +— +(487 +) +— +Contingent consideration for acquisition of business +(25,700 +) +— +— +(25,700 +) +The Level 2 inputs consist of forward spot rates at the end of the reporting period. +Sanuk. The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 , which is 40.0% of the Sanuk brand gross profit in calendar year 2015, was paid subsequent to March 31, 2016. +Hoka. The purchase price for the Hoka brand, acquired in September 2012, includes contingent consideration through calendar year 2017, with a maximum of $2,000 , of which approximately $1,700 has been paid. The maximum +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +of $2,000 was achieved during the fiscal year ended March 31, 2016. At March 31, 2016, the final contingent consideration payment of approximately $300 is pending final disbursement. +At March 31, 2016, contingent consideration for both brands was included in other accrued expenses in the consolidated balance sheets. +The following table presents a reconciliation of the Level 3 measurement (rounded): +Balance, April 1, 2014 +$ +29,800 +Payments +(500 +) +Change in fair value +(3,600 +) +Balance, March 31, 2015 +25,700 +Payments +(1,300 +) +Change in fair value +(4,400 +) +Balance, March 31, 2016 +$ +20,000 +Refer to Note 7 for further information on the contingent consideration arrangements. +Nonqualified Deferred Compensation +In 2010, the Company established a nonqualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a nonqualified basis. For each plan year, on behalf of the Company, the Company's Board may, but is not required to, contribute any amount it desires to any participant under this program. The Company's contribution will be determined by the Board annually. In March 2015, the Board approved a contribution for calendar year 2016 and gave the authority to management to approve the payment. At March 31, 2016, no payment was pending. The value of the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust for the purpose of supporting the benefits payable under this program, with the assets invested in company-owned life insurance (COLI) policies. Deferred compensation of $308 is included in other accrued expenses and $5,993 is included in other long-term liabilities in the consolidated balance sheets at March 31, 2016. Deferred compensation of $540 is included in other accrued expenses and $5,041 is included in other long-term liabilities in the consolidated balance sheets at March 31, 2015 . +Stock Compensation +All of the Company's stock compensation awards are classified within stockholders' equity. Stock compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. Determining the fair value and related expense of share-based awards requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock compensation expense and the Company's results of operations could be materially impacted. Stock compensation expense is included in SG&A expense in the consolidated statements of comprehensive income (loss). +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Revenue Recognition +The Company recognizes wholesale, E-Commerce, and international distributor revenue when products are shipped and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recorded. For E-Commerce sales, allowances for estimated returns and bad debts are provided for when related revenue is recorded. For retail sales, allowances for estimated returns are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as a cost of sales. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $22,176 , $20,872 , $4,486 and $19,257 for the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 and the year ended December 31, 2013 , respectively, and are included in SG&A expenses in the consolidated statements of comprehensive income (loss). +Advertising, Marketing, and Promotion Costs +Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing, and promotion are expensed as incurred. These expenses of $109,738 , $111,162 , $21,158 and $86,510 for the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 and year ended December 31, 2013 , respectively, are included in SG&A expense in the consolidated statements of comprehensive income (loss). Included in prepaid and other current assets at March 31, 2016 and March 31, 2015 were $1,084 and $1,899 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after such dates. +Rent Expense +Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments under some of the Company's retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated amounts. Rent expenses are included in SG&A expenses in the consolidated statements of comprehensive income (loss). +Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $2,182 , $1,726 , $601 and $1,386 during the years ended March 31, 2016 and 2015 , quarter ended March 31, 2014 , and the year ended December 31, 2013 , respectively, and was included in SG&A expenses in the consolidated statements of comprehensive income (loss). In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing contributions for the years ended March 31, 2016 and 2015 , quarter ended March 31, 2014 , and the year ended December 31, 2013 . +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Derivative Instruments and Hedging Activities +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign currency exchange contracts and other derivative instruments to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency contracts for trading purposes. +Certain of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted sales and are subject to foreign currency exposures. These contracts allow the Company to sell Euros, British Pounds and Yen in exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted sales over specific quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in the consolidated statements of comprehensive income (loss) during the period which approximates the time the corresponding third-party sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in SG&A expenses in the consolidated statements of comprehensive income (loss). The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in SG&A expenses. Refer to Note 9 for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements. +The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The Level 2 inputs consist of forward spot rates at the end of the reporting period. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. +For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivatives. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (loss) (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in OCI related to the hedging relationship. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with functional currencies other than the US dollar. In most cases, the Company's foreign subsidiaries' local currency is the same as the designated functional currency. The Company holds a portion of its cash and other monetary assets and liabilities in currencies other than its subsidiary's functional currency, and is exposed to financial statement transaction gains and losses as a result of remeasuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are included in SG&A expenses in the consolidated statements of comprehensive income (loss) as incurred, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in OCI. +Comprehensive Income (Loss) +Comprehensive income (loss) is the total of net earnings and all other non-owner changes in equity. Except for net income (loss), foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges, the Company does not have any transactions or other economic events that qualify as comprehensive income (loss). +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Net Income (Loss) per Share +Basic net income (loss) per share represents net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share represents net income (loss) divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. For the years ended March 31, 2016 and 2015 , quarter ended March 31, 2014 and year ended December 31, 2013 , the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), restricted stock awards (RSAs), stock appreciation rights (SARs) and options to purchase common stock. The reconciliations of basic to diluted weighted-average common shares outstanding were as follows: +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Weighted-average shares used in basic computation +32,556,000 +34,433,000 +34,621,000 +34,473,000 +Dilutive effect of stock-based awards* +483,000 +300,000 +— +356,000 +Weighted-average shares used for diluted computation +33,039,000 +34,733,000 +34,621,000 +34,829,000 +*Excluded NSUs +— +— +331,000 +— +*Excluded RSUs +389,000 +624,000 +729,000 +795,000 +*Excluded outside director RSAs +— +— +6,000 +— +*Excluded SARs +90,000 +525,000 +730,000 +525,000 +*For the years ended March 31, 2016 , March 31, 2015 and December 31, 2013 , the share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance. For the quarter ended March 31, 2014 , the Company excluded all NSUs, RSUs, RSAs and SARs from the diluted net loss per share computation because they were antidilutive due to the net loss during the period. At March 31, 2016 , the excluded RSUs include the maximum amount of the 2015 and 2016 Long-Term Incentive Plan (LTIP) Awards. At March 31, 2015 , the excluded RSUs included the maximum amount of the 2012, 2013 and 2015 LTIP Awards. At March 31, 2014 and December 31, 2013, the excluded RSUs included the maximum amount of the Level III, 2012 and 2013 LTIP Awards. Refer to Note 8 for further information related to the LTIP awards. +Use of Estimates +The preparation of the Company's consolidated financial statements in accordance with United States generally accepted accounting principles (US GAAP) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable allowances, returns liabilities, stock compensation, performance based compensation, impairment assessments, depreciation and amortization, income tax liabilities, uncertain tax positions and income taxes receivable, the fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated contingent consideration payments. Actual results could differ materially from these estimates. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Recent Accounting Pronouncements +On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in US GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which provides for a one year deferral of the effective date of ASU No. 2014-09, as well as early application, which will be effective for the Company on April 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply the implementation guidance related to principal versus agent considerations within ASU No. 2014-09. The Company is evaluating the effect that all of the ASUs related to Revenue from Contracts with Customers will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The adoption of the new revenue standard is not expected to have a material impact on the Company's consolidated financial statements. +In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset). This ASU is effective for the Company on April 1, 2016, with early adoption permitted. On August 18, 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which allows an entity to continue to present debt issuance costs related to line of credit arrangements as deferred charges. The adoption of ASU No. 2015-03 and ASU No. 2015-15 will not have a material impact on the Company’s consolidated financial statements or related disclosures. +In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies whether a cloud computing arrangement should be treated as a software license or a service contract. Customers that have a cloud computing arrangement that includes a software license are required to account for the software license element of the arrangement consistent with the acquisition of other software licenses. Customers that have a cloud computing arrangement that does not include a software license are required to account for the arrangement as a service contract. This ASU is effective for the Company on April 1, 2016, with early adoption permitted. The adoption of ASU No. 2015-05 is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures. +In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Current US GAAP requires, at each financial statement date, that entities measure inventory at the lower of cost or market, most commonly the current replacement cost. This ASU is effective for the Company on April 1, 2017, with early adoption permitted. The Company is evaluating the effect that ASU No. 2015-11 will have on its consolidated financial statements and related disclosures, but believes it will not have a material impact. +In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that an entity classify deferred tax assets and liabilities as noncurrent on the balance sheet. Prior to the issuance of the standard, deferred tax assets and liabilities were required to be separated into current and noncurrent amounts on the basis of the classification of the related asset or liability. This ASU is effective for the Company on April 1, 2017, with early adoption permitted. The Company has prospectively adopted this ASU beginning with the period ending March 31, 2016 in its Annual Report on Form 10-K. The adoption of ASU No. 2015-17 did not have a material impact on the Company’s consolidated financial statements. +In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the Balance Sheet +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +a liability to make lease payments (the lease liability) at fair value and an offsetting right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. This ASU is effective for the Company on April 1, 2019. The Company is evaluating the effect that the ASU will have on its consolidated financial statements and related disclosures. Since the Company utilizes operating leases for most of its facilities and retail stores, it is anticipated that adoption of the ASU will have a material impact on its balance sheet presentation. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires that an entity recognize excess tax benefits and certain tax deficiencies of employee share-based payment awards in the income statement instead of in additional paid-in-capital when the awards vest or are settled and present excess tax benefits as an operating activity on the statement of cash flows instead of as a financing activity. This ASU also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to either estimate the number of awards that are expected to vest or to account for forfeitures as they occur. In addition, the cash paid by an entity to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation is required to be classified as a financing activity on its statement of cash flows. This ASU is effective for the Company on April 1, 2017, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU No. 2016-09 on the Company’s consolidated financial statements and related disclosures. +Note 2. Restructuring +In February 2016, the Company announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. The Company has begun to realign its brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, the Company also relocated its Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, the Company closed its Ahnu brand operations office in Richmond, California. Furthermore, the Company is in the process of evaluating its portfolio of retail stores. The Company has identified 24 retail stores that are candidates for potential closure. Subsequent to the sales of the MOZO and TSUBO brands, neither of which were material, the operating results for its other brands only include Hoka, Ahnu and Koolaburra. The Company plans to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. +As a result of the retail store fleet optimization, office consolidation and software impairments, the Company has incurred charges totaling approximately $25,000 at March 31, 2016. Of this amount, $9,000 is related to early lease termination costs, $4,000 is related to severance costs to be paid to employees, $6,000 is related to impairment of leasehold improvements and various assets, $4,000 is related to various Business Transformation Project (BT) supply chain software impairments, and $2,000 for termination of various contracts. Of the total amount, approximately $15,000 was accrued at March 31, 2016, and expected to be paid in 2017. Approximately $2,000 of the charges were recognized in cost of sales and the remainder were recorded in selling, general and administrative expenses. The segment impacts of the total restructuring charges are as follows: Sanuk brand wholesale charges of approximately $3,000 , other brands wholesale charges of approximately $2,500 related to the Ahnu brand, DTC charges of approximately $10,500 , and the remainder of approximately $9,000 to unallocated overhead costs, primarily BT supply chain software impairments and European office consolidation. It is anticipated that the Company will incur an additional $10,000 to $15,000 of similar restructuring costs in the fiscal year ending March 31, 2017. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 3. Property and Equipment +Property and equipment is summarized as follows: +Useful life (years) +3/31/2016 +3/31/2015 +Land +Indefinite +$ +25,543 +$ +25,543 +Building +1 - 39 +38,920 +38,841 +Machinery and equipment +1-10 +189,085 +158,136 +Furniture and fixtures +1-7 +38,948 +36,751 +Leasehold improvements +1-10 +108,557 +102,048 +401,053 +361,319 +Less accumulated depreciation and amortization +163,807 +129,002 +Net property and equipment +$ +237,246 +$ +232,317 +Note 4. Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the Sanuk reportable segment, with the remaining related to the UGG and other brands reportable segments. The Company's goodwill and other intangible assets are summarized as follows: +3/31/2016 +3/31/2015 +Intangibles subject to amortization +Weighted-average amortization period +13 years +13 years +Gross carrying amount +$ +112,873 +$ +109,604 +Accumulated amortization +45,302 +37,316 +Net carrying amount +67,571 +72,288 +Intangibles not subject to amortization +Goodwill +127,934 +127,934 +Trademarks +15,455 +15,455 +Total goodwill and other intangible assets +$ +210,960 +$ +215,677 +There were no changes in the Company's goodwill during the fiscal years ended March 31, 2016 and March 31, 2015. +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance, April 1, 2014 +$ +143,765 +$ +(15,831 +) +$ +127,934 +Additions through acquisitions +— +— +— +Changes related to additions, impairments and other adjustments +— +— +— +Balance, March 31, 2015 +143,765 +(15,831 +) +127,934 +Additions through acquisitions +— +— +— +Changes related to additions, impairments and other adjustments +— +— +— +Balance, March 31, 2016 +$ +143,765 +$ +(15,831 +) +$ +127,934 +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +At December 31, 2015 and 2014 , the Company performed its annual impairment tests and evaluated its UGG and other brands' goodwill. At October 31, 2015 and 2014 , the Company performed its annual impairment tests and evaluated its Sanuk goodwill and Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk, and other brands' goodwill, trademarks, and net assets, the brands' fiscal year 2016 and 2015 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill, as well as the Teva trademarks, were not impaired. We performed a quantitative analysis of the Sanuk reporting unit's fair value at October 31, 2015, and concluded that it was not impaired with a significant excess compared to its carrying value. The Sanuk brand goodwill was evaluated based on qualitative analysis at October 31, 2014 . At December 31, 2015 and 2014 , and at October 31, 2015 and 2014 , all goodwill other than the Sanuk brand goodwill and all other nonamortizable intangibles were evaluated based on qualitative analyses. +The Company's goodwill by segment is as follows: +3/31/2016 +3/31/2015 +UGG brand +$ +6,101 +$ +6,101 +Sanuk brand +113,944 +113,944 +Other brands +7,889 +7,889 +Total +$ +127,934 +$ +127,934 +The Company’s other intangible assets are summarized as follows: +Balance, March 31, 2015 +$ +87,743 +Purchase of intangible assets +3,197 +Amortization expense +(8,850 +) +Changes in foreign currency exchange rates +936 +Balance, March 31, 2016 +$ +83,026 +Aggregate amortization expense for amortizable intangible assets for the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 and year ended December 31, 2013 , was $8,850 , $11,291 , $1,886 and $7,975 , respectively. The following table summarizes the expected amortization expense on existing intangible assets, excluding indefinite-lived intangible assets of $7,843 and trademarks of $15,455 , for the next five years : +Year ending March 31: +Expected Amortization Expense +2017 +$ +8,191 +2018 +8,078 +2019 +6,521 +2020 +4,193 +2021 +3,591 +Thereafter +29,154 +$ +59,728 +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 5. Income Taxes +Income Tax Expense +Components of income tax expense (benefit) are as follows: +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Current: +Federal +$ +11,971 +$ +35,459 +$ +(572 +) +$ +51,058 +State +2,443 +6,861 +(4 +) +6,252 +Foreign +12,039 +7,069 +5,255 +6,650 +Total +26,453 +49,389 +4,679 +63,960 +Deferred: +Federal +7,887 +8,234 +1,669 +(2,580 +) +State +1,113 +624 +(1 +) +(209 +) +Foreign +(833 +) +1,112 +(4,404 +) +(1,303 +) +Total +8,167 +9,970 +(2,736 +) +(4,092 +) +Income tax expense +$ +34,620 +$ +59,359 +$ +1,943 +$ +59,868 +Foreign income (loss) before income taxes was $105,938 , $95,850 , $(3,631) and $60,851 during the years ended March 31, 2016 , March 31, 2015 , during the quarter ended March 31, 2014 and during the year ended December 31, 2013 , respectively. +Income Tax Expense Reconciliation +Income tax expense differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Computed expected income taxes +$ +54,910 +$ +77,399 +$ +(260 +) +$ +71,945 +State income taxes, net of federal income tax benefit +1,298 +3,564 +90 +4,435 +Foreign rate differential +(28,233 +) +(25,535 +) +1,904 +(16,399 +) +Unrecognized tax benefits +3,670 +3,566 +— +— +Foreign tax expense on diminution of operations +1,352 +— +— +— +Other +1,623 +365 +209 +(113 +) +Income tax expense +$ +34,620 +$ +59,359 +$ +1,943 +$ +59,868 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Deferred Taxes +The Company has early adopted ASU 2015-17 prospectively. As a result, deferred taxes are presented as noncurrent at March 31, 2016 and the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented as follows: +3/31/2016 +3/31/2015 +Deferred tax assets (liabilities), current +Uniform capitalization adjustment to inventory +$ +— +$ +4,040 +Bad debt and other reserves +— +8,984 +State taxes +— +482 +Prepaid expenses +— +(3,546 +) +Accrued bonus +— +4,120 +Foreign currency hedge +— +434 +Other +— +(448 +) +Total deferred tax assets, current +— +14,066 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +(5,128 +) +1,004 +Depreciation of property and equipment +(8,804 +) +(6,148 +) +Share-based compensation +10,118 +12,044 +Foreign currency translation +151 +720 +Deferred rent +5,383 +4,885 +Acquisition costs +745 +764 +Uniform capitalization adjustment to inventory +5,280 +— +Bad debt and other reserves +14,163 +— +State taxes +863 +— +Prepaid expenses +(3,622 +) +— +Accrued bonus +536 +— +Foreign currency hedge +(94 +) +— +Other +1,045 +1,327 +Net operating loss carryforwards +— +421 +Total deferred tax assets, noncurrent +20,636 +15,017 +Net deferred tax assets, noncurrent +$ +20,636 +$ +29,083 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $62,000 . The deferred tax assets are primarily related to the Company's domestic operations and are expected to be realized between fiscal years 2017and 2019. The change in net deferred tax assets between March 31, 2016 and March 31, 2015 includes approximately $300 attributable to OCI. Domestic income before income taxes for the years ended March 31, 2016 and March 31, 2015 , the quarter ended March 31, 2014 and the year ended December 31, 2013 was $50,947 , $125,289 , $2,889 and $ 144,706 , respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance was recorded in fiscal years 2016 and 2015 . +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Tax Impact of Foreign Earnings +At March 31, 2016 , the Company has not provided deferred taxes on approximately $454,000 of undistributed earnings from non-US subsidiaries where the earnings are considered to be permanently reinvested. Management’s intent is to continue to reinvest these earnings to support the strategic priority for growth in international markets. If management decides at a later date to repatriate these funds to the US, the Company would be required to provide taxes on these amounts based on applicable US tax rates, net of foreign taxes already paid. The Company has not determined the deferred tax liability associated with these undistributed earnings and, as such, determining our tax liability upon repatriation is not practicable. At March 31, 2016 , the Company had approximately $233,000 of cash and cash equivalents outside the US. For fiscal year 2016 , the Company generated approximately 23.0% of its pre-tax earnings from a country which does not impose a corporate income tax. +Unrecognized Tax Benefits +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefits that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. +A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +Balance, April 1, 2014 +$ +— +Gross increase related to current year tax positions +1,293 +Gross increase related to prior year tax positions +3,374 +Balance, March 31, 2015 +4,667 +Gross increase related to current year tax positions +2,332 +Gross increase related to prior year tax positions +2,059 +Settlements +(363 +) +Balance, March 31, 2016 +$ +8,695 +The amount of accrued unrecognized tax benefits, net of federal benefit that, if recognized, would affect the effective tax rate at March 31, 2016 was $3,996 . The accrual relates to tax positions taken in years that are open to examination. At March 31, 2016 , interest and potential penalties of $1,842 were accrued in the consolidated balance sheet resulting from tax positions that are subject to examination and were recorded in interest expense on the Company’s consolidated statements of comprehensive income (loss). At March 31, 2015 , interest and potential penalties of $1,246 were accrued in the consolidated balance sheet resulting from tax positions that are subject to examination. It is reasonably possible that approximately $856 of unrecognized tax benefits will be settled within the next 12 months. +The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for years before 2011. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a material impact on the Company's consolidated financial statements. +Note 6. Notes Payable and Long-Term Debt +Domestic Line of Credit. In August 2011, the Company entered into a Credit Agreement (Credit Agreement), which was amended and restated in August 2012 (Amended and Restated Credit Agreement) and amended in its entirety in November 2014 (Second Amended and Restated Credit Agreement). The Second Amended and Restated Credit Agreement entered into with JPMorgan Chase Bank, National Association (JPMorgan) as the administrative Agent, Comerica and HSBC as co-syndication agents, and the party lenders thereto, is a five -year, $400,000 secured revolving credit facility that contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans, and matures on November 13, 2019. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Second Amended and Restated Credit Agreement by up to an additional $200,000 , resulting in a maximum available principal amount of $600,000 . None of the lenders under the Second Amended and Restated Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments. In addition to allowing borrowings in US dollars, the Second Amended and Restated Credit Agreement provides a $150,000 sublimit for borrowings in Euros, British pounds and any other currency that is subsequently approved by JPMorgan, each lender and the issuing bank. +At the Company's option, revolving loans issued under the Second Amended and Restated Credit Agreement will initially bear interest at either the adjusted London Interbank Offered Rate (LIBOR) for 30 days ( 0.44% at March 31, 2016) plus 1.25% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 2.00% per annum (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 1.00% per annum), based upon the Company's total adjusted leverage ratio at such time. In addition, the Company will initially be required to pay fees of 0.175% per annum on the daily amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.175% and 0.30% per annum, based upon the Company's total adjusted leverage ratio. +The Company's obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Company's existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries) (the Guarantors), and is secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company's domestic and first-tier foreign subsidiaries. +The Second Amended and Restated Credit Agreement contains financial covenants which include: the total adjusted leverage ratio must not be greater than 3.25 to 1.00 ; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 on a pro forma basis; and other customary limitations. The Second Amended and Restated Credit Agreement contains certain other covenants which include: the maximum amount paid for capital expenditures may not exceed $110,000 per year if the total adjusted leverage ratio is equal to or exceeds 2.75 to 1.00; the maximum additional unsecured debt may not exceed $200,000 ; the Company may not have aggregate ERISA events that are considered materially adverse; the Company may not have a change of control (as defined in the Second Amended and Restated Credit Agreement); and no restrictions on dividends, share repurchases or acquisitions may be made if the total adjusted leverage ratio does not exceed 2.75 to 1.00 on a pro forma basis. +In August 2015, the Company entered into Amendment 1 to the Second Amended and Restated Credit Agreement to add certain foreign subsidiaries as borrowers. During the year ended March 31, 2016 , the Company borrowed $426,000 and repaid $373,000 . At March 31, 2016 , the Company had outstanding borrowings of $53,000 under the +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Second Amended and Restated Credit Agreement, as amended and had outstanding letters of credit of approximately $700 . As a result, the unused balance under the Second Amended and Restated Credit Agreement, as amended was approximately $346,300 at March 31, 2016 . At March 31, 2016 , the Company had a remaining balance of approximately $1,300 in deferred financing costs related to the Amended and Restated Credit Agreement of August 2012 and Second Amended and Restated Agreement of November 2014 included in prepaid expenses. This amount is being amortized over the term of the Second Amended and Restated Credit Agreement using the straight-line method. At March 31, 2016 , the Company was in compliance with all financial covenants. +Subsequent to March 31, 2016, the Company borrowed $76,000 and repaid $16,000 resulting in a total outstanding balance of $113,000 under the Second Amended and Restated Credit Agreement, at May 31, 2016. +China Line of Credit. In August 2013, Deckers (Beijing) Trading Co., LTD, a fully owned subsidiary, entered into a credit facility in China (China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 60,000 , or approximately $10,000 , in the quarters ending September 30 and December 31 and CNY 20,000 , or approximately $3,300 , in the quarters ending March 31 and June 30. The China Credit Facility is payable on demand and subject to annual review and renewal. The obligations under the China Credit Facility are guaranteed by the Company for 110% of the facility amount in USD. In December 2013, the China Credit Facility was revised to provide for the uncommitted revolving line of credit of up to CNY 60,000 to be extended to the entire year. In October 2014, the China Credit Facility was amended (Amended China Credit Facility) to include, among other things, an extension of the aggregate period of borrowing from 12 months to 18 months. In October 2015, the Amended China Credit Facility was amended (Second Amended China Credit Facility) to include an increase in the uncommitted revolving line of credit of up to CNY 150,000 , or approximately $23,000 , including a sublimit of CNY 50,000 , or approximately $8,000 , for the Company's fully owned subsidiary, Deckers Footwear (Shanghai) Co., LTD. During the year ended March 31, 2016 , the Company borrowed approximately $23,200 and repaid $14,100 under the Second Amended China Credit Facility for total outstanding borrowings of approximately $ 14,000 under the Second Amended China Credit Facility at March 31, 2016 . Interest is based on the People’s Bank of China rate, which was 4.35% at March 31, 2016 . +Subsequent to March 31, 2016, the Company repaid $4,800 resulting in a total outstanding balance of $9,200 under the Second Amended China Credit Facility at May 31, 2016. +Japan Line of Credit. In March 2016, Deckers Japan, G.K., a fully owned subsidiary, entered into a credit facility in Japan (Japan Credit Facility) that provides for an uncommitted bilateral revolving line of credit of up to JPY 5,500,000 , or approximately $49,000 , for a maximum term of six months. The Japan Credit Facility renews annually, and it is guaranteed by the Company. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) for three months plus 0.40% . At March 31, 2016, TIBOR for three months was 0.10% and the effective interest rate was 0.50% . The Japan Credit Facility has customary covenants including not having losses for two consecutive years, maintaining an interest coverage ratio of greater than one and maintaining higher assets than liabilities. At March 31, 2016 , the Company had no borrowings under the Japan Credit Facility. +Mortgage. In July 2014, the Company obtained a mortgage secured by its corporate headquarters property for approximately $33,900 . At March 31, 2016 , the outstanding balance under the mortgage was approximately $33,200 , which includes approximately $600 in short-term borrowings and approximately $32,600 in mortgage payable in the consolidated balance sheet. The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,400 . Minimum principal payments over the next 5 years are approximately $2,900 . In December 2014, the mortgage financial covenants were amended to be consistent with the financial covenants of the Second Amended and Restated Credit Agreement as discussed above. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 7. Commitments and Contingencies +Lease Commitments. The Company leases office, distribution and retail facilities, and automobiles, under operating lease agreements which continue in effect through 2028 . Some of the leases contain renewal options of anywhere from one to fifteen years. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the consolidated balance sheets. Future minimum commitments under the lease agreements are as follows: +Year ending March 31: +Future Minimum Lease Commitments +2017 +$ +50,763 +2018 +51,087 +2019 +43,210 +2020 +35,179 +2021 +30,873 +Thereafter +104,328 +$ +315,440 +The following schedule shows the composition of total rental expense: +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Minimum rentals +$ +61,227 +$ +61,363 +$ +14,260 +$ +47,871 +Contingent rentals +16,067 +14,707 +3,099 +12,318 +$ +77,294 +$ +76,070 +$ +17,359 +$ +60,189 +Purchase Obligations. The Company had $957,887 of outstanding purchase orders with its manufacturers at March 31, 2016 . In addition, the Company entered into agreements for the build-out of new retail stores, promotional activities and other services. Future commitments under these purchase orders and other agreements for the year ending March 31, 2017 total $915,465 . Included in the fiscal year 2017 amount are remaining commitments, net of deposits, that are also unconditional purchase obligations relating to sheepskin contracts. The Company enters into contracts requiring purchase commitments of sheepskin that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. Under certain supplier contracts, the Company pays an advance deposit that is repaid to the Company as a Buyer purchases goods under the terms of these agreements. Included in other current assets on the consolidated balance sheets are approximately $20,000 and $14,000 of advance deposits at March 31, 2016 and March 31, 2015 , respectively. +In the event that a Buyer does not purchase certain minimum commitments on or before certain target dates, the supplier may retain a portion of the advance deposit until the amounts of the commitments are fulfilled. These agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. Minimum commitments for these contracts at March 31, 2016 were as follows: +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Contract +Effective Date +Final +Target Date +Advance +Deposit +Total +Minimum +Commitment +Remaining +Deposit +Remaining +Commitment, +Net of Deposit +May 2015 +September 2016 +$ +— +$ +82,800 +$ +16,651 +$ +13,374 +September 2015 +September 2016 +— +46,865 +— +28,060 +September 2015 +September 2017 +— +7,200 +— +5,711 +September 2015 +September 2017 +— +55,200 +— +55,200 +Litigation. The Company is currently involved in various legal claims arising in the ordinary course of business. Management does not believe that the disposition of these matters, whether individually or in the aggregate, will have a material effect on the Company’s financial position or results of operations. +Contingent Consideration. The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 , which is 40.0% of the Sanuk brand's gross profit in calendar year 2015, was paid subsequent to March 31, 2016. +The purchase price for the Hoka brand, acquired in September 2012, includes contingent consideration through calendar year 2017, with a maximum of $2,000 , of which approximately $1,700 has been paid. The maximum of $2,000 was achieved during the fiscal year ended March 31, 2016. At March 31, 2016, the final contingent consideration payment of approximately $300 is pending final disbursement. +At March 31, 2016, contingent consideration for both brands is included in other accrued expenses in the consolidated balance sheets. +Future Capital Commitments . At March 31, 2016 , the Company had approximately $ 14,000 of material commitments for future capital expenditures primarily related to the acquisition of land adjacent to its corporate headquarters, completed in April 2016, and tenant improvements for retail store space in the US and Asia. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to 5 years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors and promotional partners in connection with claims that the Company’s products infringe the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination was made based on a prior history of insignificant claims and related payments. There are no currently pending claims relating to indemnification matters involving the Company's intellectual property. +Note 8. Stockholders' Equity +Equity Incentive Plans +In May 2006, the Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which was amended on May 9, 2007. In September 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (2015 SIP), which replaced the Company's 2006 Plan. As with the 2006 Plan, the primary purpose of the 2015 SIP is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors, plus any additional shares that are forfeited, or are otherwise terminated under the 2006 Plan. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Nonvested Stock Unit Grants. The Company has elected to grant NSUs annually to key personnel. The NSUs granted entitle the employee recipients to receive shares of common stock of the Company upon vesting. The vesting of most NSUs is subject to achievement of certain performance targets, with the remaining NSUs subject only to time-based vesting restrictions. For the majority of NSUs granted in 2013 and after, the performance-based NSUs vest in equal one-third installments at the end of each of the three years after the performance goals are achieved, and the time-based NSUs vest in equal annual installments over a three -year period following the date of grant. +Long-Term Incentive Plans. In May 2007, the Company adopted long-term incentive award agreements under the 2006 Plan for issuance of SARs and RSUs, which were awarded to certain executive officers of the Company. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. One-half of the SAR and RSU awards vested 80% on December 31, 2010 and 20% on December 31, 2011. The other half of the SAR and RSU awards vested 80% on December 31, 2015 and, provided that the conditions are met, 20% will vest on December 31, 2016. The Company considers achievement of the remaining performance conditions as probable and is recognizing such compensation cost over the service period. +2013 LTIP Awards. In December 2013, the Board of the Company adopted long-term incentive awards (2013 LTIP Awards) under the 2006 Plan. The shares under these awards were available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient received a specified maximum number of RSUs, each of which represented the right to receive one share of the Company's common stock. These awards were to vest subject to certain long-term performance objectives and certain long-term service conditions. At March 31, 2016 , the Company did not meet the threshold performance criteria and the awards did not vest. +2015 LTIP Awards. In September 2014, the Board of the Company approved long-term incentive awards (2015 LTIP Awards) under the 2006 Plan. The shares under these awards were available for issuance to current and future members of the Company's leadership team, including the Company's named executive officers. Each recipient received a specified maximum number of RSUs, each of which represents the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on March 31, 2017 only if the Company meets certain revenue targets ranging between approximately $2,155,000 and approximately $2,447,000 and certain EBITDA targets ranging between approximately $336,000 and approximately $394,000 for the fiscal year ending March 31, 2017. No vesting of any 2015 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending March 31, 2017. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this award program, the Company granted awards that contain a maximum amount of approximately 160,000 RSUs during the year ended March 31, 2015 . The average grant date fair value of these RSUs was $98.29 per share. At March 31, 2016 , the Company believed that the achievement of at least the threshold performance objectives was remote. During the year ended March 31, 2016 , the Company reversed approximately $ 1,400 of compensation expense previously recognized. If the performance objectives become probable, the Company will then begin recording an expense for the 2015 LTIP Awards and would recognize a cumulative catch-up adjustment in the period they become probable. At March 31, 2016 , the cumulative amount would be approximately $6,000 based on the maximum number of units if the performance objectives were probable. +2016 LTIP Awards. In November 2015, the Board approved long-term incentive awards (2016 LTIP Awards) under the 2015 SIP. The shares under these awards will be available for issuance to current and future members of the Company's leadership team, including the Company's named executive officers. Each recipient will receive a specified maximum number of restricted stock units (RSUs), each of which will represent the right to receive one share of the Company's common stock. The awards will vest on March 31, 2018 only if the Company meets certain revenue targets and certain consolidated EBITDA targets for the fiscal year ending March 31, 2018. To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of RSUs that will vest will increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2016 LTIP Awards will occur if the Company fails to achieve revenue and EBITDA amounts equal to at least 90% of either threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and EBITDA criteria for the performance period, the vesting of each 2016 LTIP Award will be subject +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +to adjustment based on the application of a total stockholder return (TSR) modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period commencing on April 1, 2015 and ending on March 31, 2018. A Monte-Carlo simulation model, which is a generally accepted statistical technique, was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the TSR 36-month performance period. Under this award program, the Company granted awards covering a maximum of approximately 308,000 RSUs during the year ended March 31, 2016. The average grant date fair value of these RSUs was $50.05 per share. Based on the Company's current long-range forecast, the Company believed that the achievement of at least the threshold performance objectives of these awards was remote, and therefore has not recognized compensation expense for the fiscal year ended March 31, 2016 . If the performance objectives become probable, the Company will then begin recording an expense for the 2016 LTIP Awards and would recognize a cumulative catch-up adjustment in the period they become probable. At March 31, 2016 , the cumulative amount would be approximately $2,000 based on the maximum number of units if the performance objectives were probable. +Grants to Directors +On a quarterly basis, the Company grants shares of its common stock to each of its outside directors. The fair value of such shares, which is determined based on the closing price at the date of issuance, is expensed on the date of issuance. +Employee Stock Purchase Plan +In September 2015, the Company's stockholders approved the 2015 Employee Stock Purchase Plan (2015 ESPP). The primary purpose of the 2015 ESPP is to enhance the Company’s ability to attract and retain the services of eligible employees and provide additional incentives to eligible employees to devote their effort and skill to the Company’s advancement by providing them an opportunity to participate in the ownership of the Company’s stock. The 2015 ESPP provides for the initial authorization of 1,000,000 shares of the Company’s common stock. Eligible employees commenced participation in the 2015 ESPP in March 2016 with payroll deductions. Each consecutive purchase period will be 6 months in duration and shares will be purchased on the last trading day of the purchase period at a price that reflects a 15% discount to the closing price. +Stock Repurchase Programs +In June 2012, the Company approved a stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program may have been suspended at any time at the Company's discretion. At February 28, 2015, the Company had repurchased approximately 3,823,000 shares under this program at an average price of $52.31 per share for approximately $200,000 . At February 28, 2015, the Company had repurchased the full amount authorized under this program. +In January 2015, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. Under the new program, during the year ended March 31, 2016 , the Company repurchased approximately 1,420,000 shares for $94,200 , or an average price of $66.32 per share. Through March 31, 2016 , the Company had repurchased a total of approximately 1,797,000 shares under this program for approximately $122,100 , or an average price of $67.95 per share, leaving the remaining approved amount at approximately $77,900 . +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Stock Compensation +The table below summarizes stock compensation amounts recognized in the consolidated statements of comprehensive income (loss): +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Compensation expense recorded for: +NSUs +$ +6,163 +$ +9,295 +$ +1,863 +$ +10,545 +SARs +893 +1,846 +381 +1,302 +RSUs +(1,511 +) +1,323 +354 +287 +Directors' shares +1,077 +1,060 +267 +1,002 +Total compensation expense +6,622 +13,524 +2,865 +13,136 +Income tax benefit recognized +(2,525 +) +(5,143 +) +(1,082 +) +(4,950 +) +Net compensation expense +$ +4,097 +$ +8,381 +$ +1,783 +$ +8,186 +The table below summarizes the total remaining unrecognized compensation cost related to nonvested awards that the Company considers are probable to vest and the weighted-average period over which the cost is expected to be recognized at March 31, 2016 : +Unrecognized +Compensation +Cost +Weighted-Average +Remaining +Vesting Period (Years) +NSUs +$ +6,568 +1.2 +SARs +117 +0.8 +RSUs +17 +0.8 +Total +$ +6,702 +The unrecognized compensation cost excludes a maximum of $9,657 and $13,950 of compensation cost on the 2015 LTIP Awards and 2016 LTIP Awards, respectively. Achievement of the performance conditions are not considered probable. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Nonvested Stock Units Issued Under the 2006 Plan and the 2015 SIP +The table below summarizes the 2006 Plan and the 2015 SIP activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2013 +371,000 +$ +58.51 +Granted +304,000 +57.30 +Vested +(315,000 +) +53.19 +Forfeited +(20,000 +) +61.08 +Nonvested at December 31, 2013 +340,000 +62.23 +Granted +— +— +Vested +(2,000 +) +58.11 +Forfeited +(7,000 +) +64.15 +Nonvested at March 31, 2014 +331,000 +62.21 +Granted +196,000 +82.34 +Vested +(142,000 +) +68.39 +Forfeited +(30,000 +) +64.18 +Cancelled* +(15,000 +) +84.04 +Nonvested at March 31, 2015 +340,000 +70.11 +Granted +240,000 +70.82 +Vested +(132,000 +) +66.74 +Forfeited +(91,000 +) +72.84 +Cancelled* +(154,000 +) +74.22 +Nonvested at March 31, 2016 +203,000 +68.80 +*Nonvested Stock Units cancelled during the period represent awards granted with respect to which performance criteria were not met. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Stock Appreciation Rights Issued Under the 2006 Plan +No stock appreciation rights have been issued under the 2015 SIP. The table below summarizes stock appreciation rights activity under the 2006 Plan: +Number of +SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2013 +745,000 +$ +26.73 +7.9 +$ +10,100 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2013 +730,000 +26.73 +6.9 +42,100 +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at March 31, 2014 +730,000 +26.73 +6.7 +38,700 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at March 31, 2015 +715,000 +26.73 +5.8 +33,000 +Granted +— +— +Exercised +(80,000 +) +26.73 +Forfeited +(15,000 +) +26.73 +Outstanding at March 31, 2016 +620,000 +26.73 +3.5 +20,600 +Exercisable at March 31, 2016 +530,000 +26.73 +3.3 +17,600 +Expected to vest and exercisable at March 31, 2016 +620,000 +26.73 +3.5 +20,600 +The maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Restricted Stock Units Issued Under the 2006 Plan and the 2015 SIP +The table below summarizes the restricted stock unit activity under the 2006 Plan and 2015 SIP: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2013 +671,000 +$ +62.80 +Granted +156,000 +84.52 +Vested +— +— +Forfeited +(32,000 +) +63.69 +Nonvested at December 31, 2013 +795,000 +67.03 +Granted +— +— +Vested +— +— +Forfeited +(66,000 +) +67.23 +Nonvested at March 31, 2014 +729,000 +67.01 +Granted +160,000 +98.29 +Vested +— +— +Forfeited +(35,000 +) +78.39 +Cancelled* +(230,000 +) +82.09 +Nonvested at March 31, 2015 +624,000 +68.82 +Granted +308,000 +50.05 +Vested +(47,000 +) +26.73 +Forfeited +(232,000 +) +70.98 +Cancelled* +(264,000 +) +63.22 +Nonvested at March 31, 2016 +389,000 +61.53 +*Nonvested Stock Units cancelled during the period represent awards granted with respect to which performance criteria were not met. +The amounts granted are the maximum amounts under the respective awards. +Note 9. Foreign Currency Exchange Contracts and Hedging +At March 31, 2016, the Company had foreign currency exchange contracts designated as cash-flow hedges with notional amounts totaling approximately $105,000 held by seven counterparties, which will mature at various dates over the next 12 months . At March 31, 2015 , the Company had foreign currency exchange contracts designated as cash flow hedges with notional amounts totaling approximately $46,000 , held by four counterparties. During the year ended March 31, 2016 , the Company settled foreign currency exchange contracts designated as cash flow hedges with notional amounts totaling approximately $46,000 that were entered into in the prior fiscal year and approximately $32,000 that were entered in fiscal year 2016. The Company also entered into, and settled, non-designated derivative contracts with total notional amounts of approximately $261,000 . +The nonperformance risk of the Company and the counterparties did not have a material impact on the fair value of the derivatives. During the year ended March 31, 2016 , the hedges remained effective. The effective portion of the gain or loss on the derivative is reported in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. At March 31, 2016 , the total amount in accumulated OCI (refer to Note 11) is expected to be reclassified into income within the next 15 months . +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +The following table summarizes the effect of foreign currency exchange contracts designated as cash flow hedging relationships: +Years ended March 31, +2016 +2015 +Derivatives in designated cash flow hedging relationships +Foreign currency exchange contracts +Foreign currency exchange contracts +Amount of (loss) gain recognized in other comprehensive income (loss) on derivatives (effective portion) +$(850) +$1,556 +Location of amount reclassified from accumulated other comprehensive income (loss) into income (effective portion) +Net Sales +Net Sales +Amount of (loss) gain reclassified from accumulated other comprehensive income (loss) into income (effective portion) +$(1,592) +$1,226 +Location of amount excluded from effectiveness testing +Selling, general and administrative expenses +Selling, general and administrative expenses +Amount of gain (loss) excluded from effectiveness testing +$207 +$(69) +The following table summarizes the effect of foreign currency exchange contracts not designated as hedging instruments: +Years ended March 31, +2016 +2015 +Derivatives not designated as hedging instruments +Foreign currency exchange contracts +Foreign currency exchange contracts +Location of amount recognized in income on derivatives +Selling, general and administrative expenses +Selling, general and administrative expenses +Amount of (loss) gain recognized in income on derivatives +$(1,532) +$6,383 +Subsequent to March 31, 2016 , the Company entered into non-designated derivative contracts with notional amounts totaling approximately $63,000 , which are expected to mature over the next three months, and designated derivative contracts with notional amounts totaling approximately $11,000 , which are expected to mature over the next 12 months . All hedging contracts held at May 31, 2016 were held by a total of seven counterparties. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 10. Transition Period +In February 2014, the Company's Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. Accordingly, the Company is presenting audited financial statements for the quarter transition period ended March 31, 2014. The following table provides certain unaudited comparative financial information for the same period of the prior year. +Three Months Ended March 31, +2014 +2013 (unaudited) +Net sales +$ +294,716 +$ +263,760 +Cost of sales +150,456 +140,201 +Gross profit +144,260 +123,559 +Selling, general and administrative expenses +144,668 +120,907 +(Loss) income from operations +(408 +) +2,652 +Other expense (income), net: +Interest income +(65 +) +(26 +) +Interest expense +516 +339 +Other, net +(117 +) +(171 +) +Total other expense, net +334 +142 +(Loss) income before income taxes +(742 +) +2,510 +Income tax expense +1,943 +1,503 +Net (loss) income +(2,685 +) +1,007 +Other comprehensive (loss) income, net of tax: +Unrealized (loss) gain on foreign currency hedging +(273 +) +1,530 +Foreign currency translation adjustment +873 +(674 +) +Total other comprehensive income +600 +856 +Comprehensive (loss) income +$ +(2,085 +) +$ +1,863 +Net (loss) income per share: +Basic +$ +(0.08 +) +$ +0.03 +Diluted +$ +(0.08 +) +$ +0.03 +Weighted-average common shares outstanding: +Basic +34,621 +34,404 +Diluted +34,621 +34,788 +Note 11. Accumulated Other Comprehensive Loss +Accumulated balances of the components within accumulated other comprehensive loss are as follows: +3/31/2016 +3/31/2015 +Cumulative foreign currency translation adjustment +$ +(20,709 +) +$ +(20,159 +) +Unrealized gain (loss) on foreign currency hedging, net of tax +152 +(309 +) +Accumulated other comprehensive loss +$ +(20,557 +) +$ +(20,468 +) +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 12. Business Segments +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting policies (refer to Note 1), except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income (loss) from operations. +During the first quarter of fiscal year 2016, the Company changed its reportable operating segments to combine the previously separated E-Commerce and retail store operating components into one DTC reportable operating segment. After the reorganization, the Company has five reportable operating segments including the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, other brands, and the DTC business. During the first quarter of fiscal year 2016, the Company’s other brands included Hoka One One® (Hoka), Ahnu®, Koolaburra® by UGG, TSUBO® and MOZO®. +The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, sales and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs include: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others. +For the year ended March 31, 2015, the quarter ended (transition period) March 31, 2014 and the year ended December 31, 2013, certain reclassifications were made to conform to the current period presentation. These changes in segment reporting only changed the presentation within the below table and did not impact the Company's consolidated financial statements for any period. The segment information for prior periods has been adjusted retrospectively to conform to the current period presentation. Refer to Note 1 “The Company and Summary of Significant Accounting Policies”, Note 2 "Restructuring" and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further disclosure and discussion of the change in segment reporting. +The Company converted three of its retail stores in China to partner retail stores during the year ended March 31, 2016 and seven during the year ended March 31, 2015. Upon conversion, each of these stores became wholly-owned and operated by third-parties in China. Sales made to the partner retail stores are included in the UGG brand wholesale segment and not included in the DTC segment as of the date of conversion. +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Business segment information is summarized as follows: +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Net sales to external customers: +UGG wholesale +$ +918,102 +$ +903,926 +$ +83,271 +$ +818,377 +Teva wholesale +121,239 +116,931 +45,283 +109,334 +Sanuk wholesale +90,719 +102,690 +28,793 +94,420 +Other brands wholesale +100,820 +76,152 +18,662 +38,276 +Direct-to-Consumer +644,317 +617,358 +118,707 +496,211 +$ +1,875,197 +$ +1,817,057 +$ +294,716 +$ +1,556,618 +Income (loss) from operations: +UGG wholesale +$ +246,990 +$ +269,489 +$ +13,595 +$ +224,738 +Teva wholesale +17,692 +13,320 +6,425 +9,166 +Sanuk wholesale +15,565 +21,914 +7,530 +20,591 +Other brands wholesale +(4,384 +) +(9,838 +) +(758 +) +(9,807 +) +Direct-to-Consumer +101,756 +150,320 +20,918 +132,532 +Unallocated overhead costs +(215,492 +) +(220,786 +) +(48,118 +) +(169,323 +) +$ +162,127 +$ +224,419 +$ +(408 +) +$ +207,897 +Depreciation and amortization: +UGG wholesale +$ +2,107 +$ +5,029 +$ +137 +$ +641 +Teva wholesale +54 +94 +33 +641 +Sanuk wholesale +6,556 +6,969 +1,769 +7,761 +Other brands wholesale +1,101 +940 +250 +507 +Direct-to-Consumer +18,931 +21,088 +5,209 +21,861 +Unallocated overhead costs +20,992 +15,030 +3,140 +9,959 +$ +49,741 +$ +49,150 +$ +10,538 +$ +41,370 +Capital expenditures: +UGG wholesale +$ +1,458 +$ +246 +$ +119 +$ +313 +Teva wholesale +— +51 +— +63 +Sanuk wholesale +881 +487 +2 +91 +Other brands wholesale +51 +351 +26 +477 +Direct-to-Consumer +18,445 +19,128 +3,557 +35,669 +Unallocated overhead costs +45,351 +71,590 +13,916 +43,217 +$ +66,186 +$ +91,853 +$ +17,620 +$ +79,830 +Total assets from reportable segments: +UGG wholesale +$ +248,937 +$ +194,720 +$ +153,341 +$ +314,122 +Teva wholesale +87,225 +77,423 +81,766 +54,868 +Sanuk wholesale +212,816 +224,974 +214,627 +208,669 +Other brands wholesale +65,072 +53,634 +41,281 +34,315 +Direct-to-Consumer +148,733 +147,423 +163,664 +189,822 +$ +762,783 +$ +698,174 +$ +654,679 +$ +801,796 +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Inter-segment sales from the Company’s wholesale segments to the Company’s DTC segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. Income (loss) from operations of the wholesale segments does not include any inter-segment gross profit from sales to the DTC segment. +The assets allocable to each segment include accounts receivable, inventory, fixed assets, goodwill, other intangible assets, and certain other assets that are specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically related to the segments and include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the consolidated balance sheets are as follows: +3/31/2016 +3/31/2015 +Total assets from reportable segments +$ +762,783 +$ +698,174 +Unallocated cash and cash equivalents +245,956 +225,143 +Unallocated deferred tax assets +20,636 +29,083 +Other unallocated corporate assets +248,693 +217,533 +Consolidated total assets +$ +1,278,068 +$ +1,169,933 +Note 13. Concentration of Business, Significant Customers and Credit Risk +The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments. Long-lived assets, which consist of property and equipment, in the US and all other countries combined were as follows: +3/31/2016 +3/31/2015 +US +$ +211,111 +$ +196,513 +All other countries* +26,135 +35,804 +Total +$ +237,246 +$ +232,317 +*No other country's long-lived assets comprised more than 10% of total long-lived assets at March 31, 2016 and March 31, 2015 . +The Company sells its products to customers throughout the US and to foreign customers located in Europe, Asia, Canada, Australia, and Latin America, among other regions. Approximately $526,000 , or 28.1% , and approximately $519,000 , or 28.6% , of total net sales were denominated in foreign currencies for the years ended March 31, 2016 and 2015 , respectively. International sales were 35.0% , 35.9% , 32.7% and 33.0% , of the Company's total net sales for the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 , and the year ended December 31, 2013 , respectively. For the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 , and the year ended December 31, 2013 , no single foreign country comprised more than 10% of total sales. +Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's five largest customers accounted for approximately 21.9% of worldwide net sales for the year ended March 31, 2016 compared to 22.2% for the year ended March 31, 2015 . No single customer accounted for more than 10% of net sales in the years ended March 31, 2016 and March 31, 2015 , quarter ended March 31, 2014 , and the year ended December 31, 2013 . At March 31, 2016 and March 31, 2015 , the Company had one customer representing 12.8% and 11.0% of net trade accounts receivable, respectively. At March 31, 2015 , the Company had a second customer representing 11.8% of net trade accounts receivable. +The Company's production is concentrated at a limited number of independent manufacturing factories in Asia. Sheepskin is the principal raw material for certain UGG products and the majority of sheepskin is purchased from two +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +tanneries in China and is sourced primarily from Australia and the UK. The Company began using a new raw material, UGGpure TM , wool woven into a durable backing, in many of the Company's UGG products in 2013 and which the Company currently purchases from one supplier. The other production materials used by the Company are sourced primarily in Asia. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's control. Furthermore, the price of sheepskin is impacted by demand, industry, and competitors. +A portion of the Company's cash and cash equivalents is held as cash in operating accounts with third-party financial institutions. These balances, at times exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. +The remainder of the Company's cash equivalents is invested in interest-bearing funds managed by third-party investment management institutions. These investments can include US treasury bonds and securities, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and sovereign debt concerns in Europe, which have affected various sectors of the financial markets. At March 31, 2016 , the Company had experienced no loss or lack of access to cash in its operating accounts, invested cash and cash equivalents. The Company's cash and cash equivalents are as follows: +3/31/2016 +3/31/2015 +Money market fund accounts +$ +195,575 +$ +127,900 +Cash +50,381 +97,243 +Total cash and cash equivalents +$ +245,956 +$ +225,143 +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2016, March 31, 2015, March 31, 2014 and December 31, 2013 +(amounts in thousands, except per share data) +Note 14. Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +Fiscal Year 2016 +6/30/2015 +9/30/2015 +12/31/2015 +3/31/2016* +Net sales +$ +213,805 +$ +486,855 +$ +795,902 +$ +378,635 +Gross profit +86,596 +214,113 +391,017 +154,942 +Net (loss) income +(47,327 +) +36,377 +156,921 +(23,706 +) +Net (loss) income per share: +Basic +$ +(1.43 +) +$ +1.12 +$ +4.85 +$ +(0.73 +) +Diluted +$ +(1.43 +) +$ +1.11 +$ +4.78 +$ +(0.73 +) +*Includes restructuring charges of approximately $25,000. Refer to Note 2 for further information. +Fiscal Year 2015 +6/30/2014 +9/30/2014 +12/31/2014 +3/31/2015 +Net sales +$ +211,469 +$ +480,273 +$ +784,678 +$ +340,637 +Gross profit +86,772 +223,873 +415,139 +152,324 +Net (loss) income +(37,062 +) +40,730 +156,706 +1,406 +Net (loss) income per share: +Basic +$ +(1.07 +) +$ +1.18 +$ +4.54 +$ +0.04 +Diluted +$ +(1.07 +) +$ +1.17 +$ +4.50 +$ +0.04 +F-41 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +Years ended March 31, +Quarter ended (transition period) March 31, +Year ended December 31, +2016 +2015 +2014 +2013 +Allowance for doubtful accounts (1) +Balance at Beginning of Year +$ +2,297 +$ +1,798 +$ +2,039 +$ +2,782 +Additions +5,120 +1,107 +594 +125 +Deductions +1,923 +608 +835 +868 +Balance at End of Year +$ +5,494 +$ +2,297 +$ +1,798 +$ +2,039 +Allowance for sales discounts (2) +Balance at Beginning of Year +$ +2,348 +$ +2,121 +$ +3,540 +$ +3,836 +Additions +93,431 +68,620 +978 +46,989 +Deductions +93,107 +68,393 +2,397 +47,285 +Balance at End of Year +$ +2,672 +$ +2,348 +$ +2,121 +$ +3,540 +Allowance for sales returns (3) +Balance at Beginning of Year +$ +9,532 +$ +8,586 +$ +14,554 +$ +12,905 +Additions +112,675 +94,138 +674 +67,800 +Deductions +105,146 +93,192 +6,642 +66,151 +Balance at End of Year +$ +17,061 +$ +9,532 +$ +8,586 +$ +14,554 +Chargeback allowance (4) +Balance at Beginning of Year +$ +4,041 +$ +3,064 +$ +4,935 +$ +5,563 +Additions +2,267 +2,610 +213 +187 +Deductions +1,340 +1,633 +2,084 +815 +Balance at End of Year +$ +4,968 +$ +4,041 +$ +3,064 +$ +4,935 +Total +$ +30,195 +$ +18,218 +$ +15,569 +$ +25,068 +(1) +The additions to the allowance for doubtful accounts represent estimates of the Company's bad debt expense based upon the factors for which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are the actual write offs of the receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company's customers based upon the amount of available outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by the Company's customers. +(3) +The additions to the allowance for sales returns represent estimates of returns based upon the Company's historical returns experience. Deductions are the actual returns of products. +(4) +The additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. For the fiscal years 2016, 2015 and 2013 and the quarter ended March 31, 2014, the Company has estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See accompanying report of independent registered public accounting firm. +F-42 \ No newline at end of file diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/filing_metadata.csv b/raw/filings/0000910521/2015/0000910521-16-000058/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..335b42fa7934b8eafe98b5c1a287b1a9b43b1420 --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2016-05-31,2016-03-31,2016-05-31T20:50:00.000Z,0000910521-16-000058,deckfy2016331201610-k.htm,10-K,12334543,1,0,https://www.sec.gov/Archives/edgar/data/910521/000091052116000058/deckfy2016331201610-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052116000058/,2015,2015,1 diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/item1.txt b/raw/filings/0000910521/2015/0000910521-16-000058/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5b0d1cee8e24239d1edab0d40dc96f38a71ea11 --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/item1.txt @@ -0,0 +1,111 @@ +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +Change in Fiscal Year +In February 2014, our Board of Directors approved a change in our fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2016, 2015 and 2013 fiscal years relate to the periods ended March 31, 2016 , March 31, 2015 and December 31, 2013 , respectively. The 2014 transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. +Recent Developments +In July 2014, we acquired our UGG brand distributor that had been selling to retailers in Germany and continues to operate as a wholesale business in Germany through the acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to our consolidated financial statements. +In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We believe there is significant consumer demand for footwear using sheepskin and other plush materials at price points below those of the UGG brand. We intend to position Koolaburra as a high-quality, fashionable and affordable alternative to UGG and to distribute Koolaburra primarily through channels which do not offer the UGG brand. In November 2015, we added the "by UGG" attribute to the Koolaburra name to communicate to the consumer that the Koolaburra products come from the same company that designs and manufactures the UGG line. +In July 2015, we sold certain tangible and intangible assets related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, we sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to our consolidated financial statements. +In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. We have begun to realign our brands +3 +Table of Contents +across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, we also relocated our Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, we closed our Ahnu brand operations office in Richmond, California. Furthermore, we are in the process of evaluating our portfolio of retail stores. We have identified 24 retail stores that are candidates for potential closure or relocation. +Subsequent to the sales of the MOZO and TSUBO brands, the operating results for our other brands only include Hoka, Ahnu and Koolaburra. We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts. +For the past several years, we have been planning and preparing to improve, automate and streamline our operational systems, processes, infrastructure and management (Business Transformation Project or BT). One such initiative was to upgrade our enterprise resource planning (ERP) system. Our ERP system integrates finance and accounting, purchase order management, inventory control, and sales across all lines of business. The ERP system centralizes all of our transactional data. We anticipate that the result is to increase efficiencies within the entire company. The initiative to upgrade our ERP system worldwide went live in April 2016. +Products +We currently market our products primarily under six proprietary brands, composed of the following three primary brands and other brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. Our long term growth strategy for the UGG brand relies on a combination of expanded distribution through wholesale partners, owned, branded third-party retail stores and our E-Commerce websites globally. We expect to continue to diversify the product offering to drive growth through our women’s, men’s and children's footwear offering, and enter new categories of loungewear, outerwear and home. We intend to do this by leveraging our industry expertise for capabilities and distribution as we target both existing and new customers of the brand. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility. We are focused on regaining our leadership position as a premium brand by focusing on the modern outdoor market, and continuing to expand our casual offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga Mat TM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brand's unique attitude. We also expect to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +Other Brands. In addition to our three primary brands, our three other brands include Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; Ahnu, a line of performance outdoor and yoga footwear which we have discontinued operating as a separate brand and are looking to leverage under the Teva brand umbrella; and Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials. +4 +Table of Contents +With respect to Hoka, we plan to focus on growing awareness with a broader audience, focusing on women, and telling bold and brave innovative product stories through digital and social communications. We also plan to continue to build on Hoka’s authentic position in the specialty running market through relationships with prominent professional athletes and ambassadors. +We plan to launch the Koolaburra line with a targeted group of national footwear retailers and mid-market department stores. +Sales and Distribution +US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and owned retail stores. Our brands are generally advertised and promoted through a variety of primarily digital consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market currently maximizes our selling efforts, while we continue to explore synergies in our sales force operations to reflect the constantly evolving retail marketplace. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. +International Distribution. Internationally, we distribute our products through independent distributors and directly to retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites, e-commerce marketplaces and our owned retail stores. For our wholesale and DTC businesses, we operate distribution centers with third-party logistics providers (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +UGG Wholesale. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean and Dick's Sporting Goods, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Urban Outfitters, as well as family footwear with DSW, Famous Footwear and Rack Room. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk Wholesale. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +5 +Table of Contents +Other Brands Wholesale. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +Direct-to-Consumer. Our DTC business is comprised of our retail store and E-Commerce businesses. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC channel. +• +“Infinite UGG”: We provide online shopping access, inside retail stores, for all SKUs available on our E-Commerce websites. +• +“Buy online / return in-store”: Our consumers can buy online and return unwanted products to the store. +• +“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to directly impact our consumers' experiences, meet the growing demand for these products, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG concept stores and UGG outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. At March 31, 2016 , we had a total of 153 retail stores worldwide. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 "Restructuring" to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further disclosure and discussion. +Product Design and Development +The design and product development team for each of our brands creates new innovative footwear products that combine our standards of aesthetic leadership, high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This helps to ensure that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +6 +Table of Contents +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us. Primarily, as we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples to shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. +Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers. +Patents and Trademarks +We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our Company, and distinguishing our products from the products of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Hoka One One, Ahnu, Koolaburra and UGGpure, and other marks in the US and in many other countries, including Canada, China, various countries in the European Union, Japan and Korea. At March 31, 2016 , we hold 186 utility and design patent registrations in the US and abroad and have filed 17 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 (our second fiscal quarter) and December 31 (our third fiscal quarter) and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 (our fourth fiscal quarter) and June 30 (our first fiscal quarter) of each year. With the large growth in the UGG brand over the past several years, our aggregate net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon a number of factors, including consumer preferences, unexpected changes in weather conditions, availability of product and raw materials, competition, and the willingness of our wholesale and distributor customers to continue to carry and promote our various product lines, among other risks and uncertainties. Refer to Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Inventory Management +Inventory management is important to the financial condition and operating results of our business. We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels. +Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, and inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading. +At March 31, 2016 , our backlog of orders from our wholesale customers and distributors was approximately $582,000 compared to approximately $609,000 at March 31, 2015 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2017 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons, including that backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and it excludes potential sales in our DTC business during the year. Backlog is also affected by the timing of customers' orders and product availability. +8 +Table of Contents +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our ability to successfully compete depends on our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +produce products that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain brand loyalty and authenticity; +• +price our products in a competitive manner; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; +• +implement our Business Transformation Project in a cost-effective manner; and +• +manage the impact on our business of the rapidly changing retail environment. +We believe we are well positioned to compete in our industry. However, we cannot ensure that we will be able to compete effectively, and competitive pressure may have a material adverse effect on our business, financial condition and results of operations. +Employees +At March 31, 2016 , we employed approximately 3,500 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,400 employees at March 31, 2015 , including approximately 1,900 employees in our retail stores. The overall increase in employees during fiscal year 2016 was primarily related to the increase in retail employees as a result of the net increase in retail stores open at March 31, 2016 compared to March 31, 2015 . As we optimize our retail store fleet, we expect that our employee count will fluctuate accordingly. We believe that we have good relationships with our employees. +Financial Information about Segments and Geographic Areas +Our five reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Notes 12 and 13 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our business segments. Refer to Note 13 of our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks. Refer to Part I, Item 1A, "Risk Factors" for a discussion of the risks related to our foreign operations. +9 +Table of Contents +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/item13.txt b/raw/filings/0000910521/2015/0000910521-16-000058/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8887a019d4eb587883ceee213e6e23076950ccdb --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/item9a.txt b/raw/filings/0000910521/2015/0000910521-16-000058/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..3ef83433d8c4470cd09b33991a32cd70943eb789 --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +We carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures at March 31, 2016 . Based upon that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2016. +63 +Table of Contents +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2016 , our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, at March 31, 2016 , our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K. +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +64 +Table of Contents +PART III \ No newline at end of file diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/rp_note.txt b/raw/filings/0000910521/2015/0000910521-16-000058/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2015/0000910521-16-000058/rpt_disclosure.txt b/raw/filings/0000910521/2015/0000910521-16-000058/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b358d2846c94538b4d62c6b5a4ae006b728396ba --- /dev/null +++ b/raw/filings/0000910521/2015/0000910521-16-000058/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, executive officers, certain of our stockholders or their immediate family members are participants, to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to identify potential related person transactions, our legal department annually prepares and distributes to all directors and executive officers a written questionnaire which includes questions intended to elicit information about any current or proposed related person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual's private interests interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or appear to impair the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline and may be subsequently obtained by the Chairman of our Audit Committee, the Chairman of our Board of Directors and the highest ranking manager of internal audit. +If a related person transaction is identified by our legal department as one which must be reported in our proxy statement pursuant to applicable SEC regulations, the Audit Committee is responsible for reviewing and approving or ratifying any such related person transaction. In evaluating related person transactions, the Audit Committee members apply the same standards of good faith and fiduciary duty that they apply to their general responsibilities as members of the Audit Committee and as individual directors. The Audit Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under Item 404 of Regulation S-K during the fiscal year ended March 31, 2016, nor are any such transactions currently proposed. +67 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/filing.txt b/raw/filings/0000910521/2016/0000910521-17-000008/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5ec6e68d5e4fb911bea4ec8c4fc681463781519d --- /dev/null +++ b/raw/filings/0000910521/2016/0000910521-17-000008/filing.txt @@ -0,0 +1,5173 @@ +10-K +1 +deckfy2017331201710-kdocum.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +Annual Report Pursuant To Section 13 or 15(d) +of the Securities Exchange Act of 1934 +For The Fiscal Year Ended March 31, 2017 +Commission File Number: 001-36436 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +95-3015862 +(State of incorporation) +(I.R.S. Employer Identification No.) +250 Coromar Drive, Goleta, California 93117 +(Address of principal executive offices) +(805) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock, par value $0.01 per share +New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý +At September 30, 2016 , the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,897,849,329 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on the New York Stock Exchange on that date, which was $59.55 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +The number of shares of the registrant's Common Stock outstanding as of close of business on May 12, 2017 was 31,990,065 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2017 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For The Fiscal Year Ended March 31, 2017 +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +* +Item 2. +Properties +25 +Item 3. +Legal Proceedings +26 +Item 4. +Mine Safety Disclosures +* +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +27 +Item 6. +Selected Financial Data +29 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +31 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +53 +Item 8. +Financial Statements and Supplementary Data +54 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +* +Item 9A. +Controls and Procedures +54 +Item 9B. +Other Information +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +56 +Item 11. +Executive Compensation +56 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +56 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +56 +Item 14. +Principal Accounting Fees and Services +56 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +57 +Signatures +60 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on May 30, 2017 (Annual Report on Form 10-K), and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “should”, “will”, or “would”, and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains forward-looking statements relating to, among other things: +• +the results of and costs associated with our Savings Plan (as defined herein) and ongoing restructuring plan, including our retail store fleet optimization and office consolidations; +• +our global business, growth, operating, investing, and financing strategies; +• +our product offerings, distribution channels, and geographic mix; +• +consumer preferences with respect to new brands and products; +• +the purchasing behavior and buying patterns of retail consumers; +• +the impact of seasonality and weather on our operations; +• +our review of a broad range of strategic alternatives; +• +expectations regarding our net sales and earnings growth and other financial metrics; +• +our development of worldwide distribution channels; +• +purchasing behavior of wholesale customers, including the timing of orders and management of inventory; +• +trends affecting our financial condition, results of operations, liquidity or cash flows; +• +our expectations for expansion of our Direct-to-Consumer capabilities, primarily in our E-Commerce business; +• +overall global economic trends, including foreign currency exchange rate fluctuations; +• +reliability of overseas factory production and storage; +• +the availability and cost of raw materials; +• +the value of goodwill and other intangible assets, and future write-downs or impairment charges; +• +changes impacting our tax liability and effective tax rates, including as a result of changes in tax laws or treaties, foreign income or loss, and the realization of net deferred tax assets; +• +potential impacts of our ongoing operational systems upgrades and costs associated with our business transformation project implementation; +• +commitments and contingencies, including purchase obligations for product and sheepskin; and +• +the impact of recent accounting pronouncements. +Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in this Annual Report on Form 10-K, as well as in our other filings with the SEC. You should read this Annual Report on Form 10-K, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation +2 +Table of Contents +to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements. +3 +Table of Contents +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), Hoka One One® (Hoka), Koolaburra® by UGG (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Annual Report on Form 10-K are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for employees, store and country counts and share data. The defined periods for the fiscal years ended March 31, 2017, 2016, and 2015 are stated herein as "year ended" or "years ended". +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers primarily in Asia. Our growth will depend on our ability to diversify our product offerings, increase the appeal of our products to consumers, optimize domestic and international distribution, drive sales to consumers, and develop or acquire new brands. +Recent Developments +Restructuring. In February 2016, we announced the implementation of a restructuring plan, which included a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. This restructuring plan is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with these restructuring efforts, we incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of $29,100 and $22,800 recognized in selling, general and administrative (SG&A) expenses and approximately $0 and $2,000 in cost of sales, respectively. Related to these charges, we closed 25 retail stores, including five retail stores during fiscal year 2016 and 20 retail stores during fiscal year 2017, and consolidated several offices as of March 31, 2017 . In fiscal year 2016, we relocated our Sanuk brand operations in Irvine, California to our corporate headquarters in Goleta, California and closed our Ahnu brand operations in Richmond, California, as well as consolidated our European offices. +As part of our continuing evaluation of our retail store fleet, we identified additional stores for closure during the year ended March 31, 2017 . During fiscal year 2017, we recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for retail store assets for 12 of these stores. In May 2017, we announced that we expect to further reduce our global brick and mortar footprint by 30 to 40 stores compared to our store count at March 31, 2017 , discussed below, which includes a combination of store closures and conversion of owned stores to partner retail stores. We are targeting a worldwide store count of approximately 125 stores by the end of fiscal year 2020. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 2, "Restructuring", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts, and the impact to our results of operations and our reportable operating segments. +4 +Table of Contents +Savings Plan. In February 2017, we announced a plan to implement significant cost savings, excluding reinvestment (Savings Plan). The Savings Plan includes a combination of both cost of sales improvements and SG&A expense savings. Cost of sales improvements are expected to come from reducing product development cycle times, optimizing material yields, consolidating our factory base and continuing to move production outside of China. SG&A expense savings are expected to come from further retail store consolidations, process improvement efficiencies and lower unallocated indirect spend. In May 2017, we provided an update that the goal of the Savings Plan is to drive approximately $100,000 in operating profit improvement by the end of fiscal year 2020. +Review of Strategic Alternatives . In April 2017, we announced that our Board of Directors has initiated a process to review a broad range of strategic alternatives. This review process includes an exploration and evaluation of strategic alternatives to enhance stockholder value, which may include a sale or other transaction. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our three primary brands and our other brands. Collectively, our brands compete across the fashion and casual lifestyle, outdoor, and running markets. +UGG. The UGG brand is one of the most iconic and recognized brands in footwear and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand by developing more year-round product that includes spring and summer footwear, as well as growing men's products and non-footwear. The UGG brand is sold both domestically and internationally in key markets including the US, UK, Germany, China, Japan, and Canada, among others. +Teva. Teva is a modern outdoor active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, the Teva brand's product line now includes sandals, shoes, and boots built for ultimate versatility. +Sanuk. Sanuk is a surf lifestyle footwear brand rooted in Southern California culture. The Sanuk brand is best known for its SIDEWALK SURFERS shoe, Yoga Mat and Beer Cozy sandal collections. The brand has a history of product invention, comfort, unexpected materials and clever branding. +Other Brands. Other brands consist of: Hoka, a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities; Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials; and Ahnu, a line of performance outdoor footwear, which we have discontinued operating and have begun to leverage under the Teva brand umbrella. +Sales and Distribution +US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to end-user consumers through our DTC business. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers. However, there is some overlap between the sales teams and customers, and we are aligning our brands' sales forces to position them for the future of the brands. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +International Distribution. Internationally, we distribute our products through independent distributors and wholly-owned subsidiaries in many countries, including Europe, Asia-Pacific, and Canada, among others. In addition, in certain countries we sell products through DTC. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. Sales through partner retail stores are primarily attributed to the UGG and Sanuk brand wholesale reportable operating segments. +5 +Table of Contents +For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by third-party logistics providers (3PLs) in certain international locations. +UGG Wholesale. We sell the UGG brand primarily through domestic higher-end department stores such as Nordstrom and Dillard's, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon and Zappos.com. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor, sporting goods, department stores and family footwear, including retailers such as REI, Famous Footwear, DSW and online retailers such as Amazon and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains, including Journeys, Dillard's, DSW, REI and online retailers such as Amazon and Zappos.com. +Other Brands Wholesale. Our other brands are sold primarily at domestic specialty running stores, department stores, outdoor and independent specialty retailers, and with online retailers. Key accounts of the Hoka brand include Running Warehouse, Road Runner Sports, Running Specialty Group, REI and Zappos.com. Key accounts of the Koolaburra brand include Kohl's and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined and help improve our inventory productivity include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +"Ship from Store": Inventory that is available in our stores, but is out of stock online can be shipped from our stores. Future advancements in the capability will use algorithms to select the optimal fulfillment source. +• +"UGG Closet": an online portal that functions similar to an outlet store in that it provides a way to closeout inventory directly to consumers. +• +“Buy online / return in-store”: Our consumers can buy online and return products to the store. +• +“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater breadth of product, directly impact our consumers' experiences, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG brand concept and outlet stores. Through our outlet stores, depending on the location, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2017 , we had a total of 160 retail stores worldwide, which includes 96 concept stores and 64 outlet stores. During fiscal year 2017, we opened 17 new retail stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 retail stores. Concession stores are considered concept stores that are operated by us within a department or other store, which we lease from the store +6 +Table of Contents +owner by paying a percentage of concession store sales. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Refer to Note 1, "The Company and Summary of Significant Accounting Policies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three fiscal years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. +Manufacturing and Supply Chain +We do not manufacture our products. We outsource the production of our brand footwear to independent manufacturers, primarily in Asia. We require our independent manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and on-site supervisory offices in Pan Yu City, China and Hai Phong City, Vietnam, which together serve as a link to our independent manufacturers. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. The majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high-quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary new raw material, UGGpure™, which is a wool woven into a durable backing, in some of our UGG brand products. Excluding sheepskin and UGGpure™, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +7 +Table of Contents +Patents and Trademarks +We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for "UGG", "Teva", "Sanuk", "Hoka One One", "Koolaburra", "Ahnu", "UGGpure", and other marks in the US and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan, and Korea. As of March 31, 2017 , we hold 176 designs and inventions with corresponding design or utility patent registrations, plus 14 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. For further discussion, including regarding the factors that may cause actual results to differ materially from our expectations, refer to Part I, Item 1A, "Risk Factors", and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Inventory Management +We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. We have put in place systems and processes designed to improve our forecasting and supply planning capabilities. In addition, we believe that added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels are key areas of focus that will enhance inventory performance. +Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as pre-season orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through pre-season programs to enable us to better plan our production schedule, and inventory and shipping needs. We refer to backlog as unfilled customer orders from our wholesale customers and distributors as of any date, which represent orders scheduled to be shipped at a future date, some of which can be cancelled prior to shipment. As such, these orders may not be indicative of actual future shipments. Therefore, we believe backlog is an imprecise indicator and is not material for understanding the business in its entirety, especially since backlog excludes sales in our DTC business. +As of March 31, 2017 , our backlog was approximately $649,000. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments, as well as variations in when wholesale customers and distributors place orders. As a result, comparisons of the backlog from period-to-period may not provide an accurate indication of future results. +Competition +The footwear markets that we operate in are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, and in part due to the popularity of our UGG brand products, we face increasing competition from a significant number of domestic +8 +Table of Contents +and international competitors selling products designed to compete directly or indirectly with our UGG brand products. We believe that our ability to successfully compete depends on numerous factors, including responding to consumer preferences, producing appealing product, and pricing products competitively, among others. For a discussion on how we compete, refer to Part 1, Item 1A, "Risk Factors". +Employees +At March 31, 2017 , we employed approximately 3,300 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,800 employees in our retail stores worldwide, which includes part-time and seasonal employees. +Financial Information about Reportable Operating Segments and Geographic Areas +Our five reportable operating segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our reportable operating segments. Refer to Note 13, "Concentration of Business, Significant Customers and Credit Risk", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only. +9 +Table of Contents +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Investing in our common stock involves substantial risk. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report on Form 10-K, as well as the other information we file with the SEC. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K. +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the size of the UGG brand relative to our other brands, this trend has resulted in our aggregate net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence or worsening economic conditions, will have a disproportionate impact on our business, and could result in our failure to achieve financial performance that is in line with our expectations. +In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG products. Unanticipated weather conditions may continue to have a material, negative impact on our financial condition and results of operations. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin that meets our quality expectations, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers, do not conform to our quality specifications or fail to meet consumer expectations, we could experience a higher rate of customer returns, which would reduce our net sales and harm our reputation. Similarly, if the tanneries are not able to deliver sheepskin in the quantities required this would negatively impact our manufacturing process and lead to inventory shortages, which would result in a loss of sales and strain our relationships with our customers. +In addition, any factors that negatively impact the business of these tanneries, such as loss of customers, financial instability or bankruptcy, could prevent them from delivering sheepskin to us in the quantities expected or at all. Our sheepskin suppliers currently warehouse their inventory at a limited number of facilities in China. The loss, destruction, or disruption of work at any of these facilities would likely result in shortages in our supply of sheepskin. These events are unpredictable and not within our control. If any of these events were to occur, it would likely result in interruptions in our manufacturing process, the loss of sales and harm to our reputation. +10 +Table of Contents +In some, but not all recent years, there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our customers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Similarly, sheepskin is a by-product of the food industry, and the demand for sheep meat has generally been decreasing, thus leading to an overall reduction in the number of sheep available. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary raw material, UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the impact of fluctuations in sheepskin prices. However, in the event of a prolonged increase in sheepskin prices such as what we experienced in the past, which at times has been significant, these strategies may not be sufficient to fully offset the impact on our financial results from the increased prices. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer. +The footwear and fashion industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, including through effective marketing, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished. +The footwear and fashion industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• +seasonality, including the impact of anticipated and unanticipated weather conditions; +• +continued consumer acceptance of our existing products and acceptance of our new products; +• +consumer demand for products of our competitors; +• +consumer perception and preference for our brands; +• +the extent to which consumers view certain of our products as substitutes for other products we manufacture; +• +publicity, including social media, related to us, products, brands, and marketing campaigns; +• +the life cycle of our products and consumer replenishment behavior; +• +evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• +brand loyalty; +• +changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; and +• +changes in general economic and market conditions. +Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear and apparel consumers. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG products include a fashion element and could go out of style at any time. Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear or accessories in the quantities projected or at all. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our brands and products to be outdated or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and one or more missteps with respect to factors such as product quality, product design or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative +11 +Table of Contents +perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +If we are unsuccessful in implementing our ongoing restructuring plan and our Savings Plan, we may incur significant charges and costs without any corresponding benefits to our business, in which case our financial condition and operating results may be adversely affected. +We are in the ongoing process of restructuring our business in order to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. This includes a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. Key components to executing this plan include organizational changes, continued retail store closures, and conversion of owned stores to partner retail stores, among others. +As part of our ongoing restructuring plan, we have incurred, and expect to continue to incur, significant restructuring charges and other costs, which have and may continue to include SG&A expenses related to the write-off of retail store related assets, the early termination of retail store leases, employee severance costs, termination of various contracts, and the disposal of equipment and software impairments, among others. There can be no assurance that the benefits from these restructuring efforts, including from any potential reduction in overhead costs or improvement in operating efficiencies, will be sufficient to offset the restructuring charges and other costs that we have already incurred and that we expect to incur in the future. If we fail to realize the anticipated benefits from these measures, or if we incur charges or costs in amounts that are greater than our estimates, our financial condition and operating results may be adversely affected. +We have also begun implementing our Savings Plan with the goal of driving operating profit improvement through a combination of both cost of sales improvements and SG&A expense savings. However, there can be no assurance that we will be successful in realizing cost of sales improvements, especially if we fail to reduce product development cycle times, optimize material yields, consolidate our factory base, or move production outside of China. Further, if we fail to execute on our plans with respect to further retail store consolidations, process improvement efficiencies, and lower unallocated indirect spend, we may not achieve the SG&A expense savings which are a key component of the Savings Plan. If we are unable to realize cost of sales improvements and SG&A expense savings, then we may not be able to achieve the estimated profitability improvements or other expected benefits of the Savings Plan. Further, the implementation of our Savings Plan may require additional investments and divert management’s time and resources, which may impede our ability to achieve our goal of driving operating profit improvement. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to close or relocate a number of retail stores, we may identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including write-offs of retail store assets and inventory, lease termination costs, and severance costs. As a result of our ongoing retail store fleet optimization plans, and in light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer. +12 +Table of Contents +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which would harm our financial condition and results of operations. +The footwear industry is highly competitive and we expect to continue to face intense competitive pressures. We believe that we compete on the basis of a number of factors, including our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +produce products that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain brand loyalty and authenticity; +• +price our products in a competitive manner; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; and +• +manage the impact of the rapidly changing retail environment on our business. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which would harm our financial condition and results of operations. +Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered into the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and apparel markets. Our competitors’ greater capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, identify or influence consumer preferences, and withstand periodic downturns in the footwear industry or in economic conditions generally. With respect to newer entrants into the market, we believe that access to offshore manufacturing and changes in technology will continue to make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may require us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. If we fail to compete effectively in the future, our sales could decline and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and operating results could be adversely affected and our business may become less competitive. +We strive to improve, automate and streamline our operational systems, processes, infrastructure and management as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. We recently completed our business transformation project implementation, which included upgrading our Enterprise Resource Planning (ERP) systems , and inventory management and control systems. While we believe that this and other improvements to our operational systems have the potential to reduce our expenses, increase our efficiency and enhance our ability to be competitive in the long term, we expect to continue to incur expenses to implement operational systems upgrades. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational systems upgrades are not successful, our financial condition and operating results could be adversely affected and our business may become less competitive. +In addition, our operational systems upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems , and adapt to new +13 +Table of Contents +operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business. +If we are unsuccessful at managing production decisions, which are required to be made months in advance of the purchase of our products, we may inaccurately forecast our inventory requirements, which may adversely affect the image of our brands, and result in sales below our expectations. +Like other companies in the footwear industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of a purchasing decision by the consumer, it may be challenging for us to estimate and manage our inventory requirements. +At the time manufacturing decisions are made, it is difficult for our management to predict and to timely adjust expenses in reaction to the following factors, which may result in order cancellations and weak consumer demand: +• +unfavorable weather patterns and their potential impacts on consumer spending patterns generally, and the demand for our products in particular; +• +changes in consumer preferences and fashion trends; +• +market acceptance of new products; +• +future sales and trends with our wholesale customers; +• +changing general economic conditions; and +• +the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products. +The evolution of our product offerings has made these activities more challenging. If we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand for certain products or styles, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands through to consumers. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk. In addition, there is no guarantee that any replacement retailer or distributor will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us. These risks have been exacerbated recently as our retail customers face a retail industry that continues to undergo significant structural changes fueled by technology that is altering consumer behavior. +14 +Table of Contents +As a result, we could experience a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. +Our five largest customers accounted for approximately 20.3% of worldwide net sales for the year ended March 31, 2017 and 21.9% of worldwide net sales for the year ended March 31, 2016 . Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our financial condition and results of operations. +Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our performance. +The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands. +In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. We have faced claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. For example, in response to an infringement lawsuit that we filed in March 2016 against Australian Leather Pty Ltd. (Australian Leather), Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. Any court decision or settlement of such matters that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales. +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth, and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +15 +Table of Contents +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions in order to extend our brands into complementary product categories and markets. For example, in April 2015 we acquired substantially all the assets related to the Koolaburra brand. Our ability to continue this practice depends on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, challenges and uncertainties, including the potential to: +• +expose us to risks inherent in entering a new market or geographic region; +• +lose significant customers or key personnel of the acquired business; +• +encounter difficulties managing geographically-remote operations; +• +divert management’s time and attention away from other aspects of our business operations; +• +issue equity securities to finance the acquisition, which would be dilutive to our existing stockholders; +• +incur indebtedness to finance the acquisition, which would result in debt service costs and potentially include covenants restricting our operations; and +• +incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. +Additionally, we may not be able to successfully integrate the operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new brands and products with our existing products, aggressively target different consumers for our newly-acquired products, and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our operating results may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessory designers and information technology specialists. +Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain qualified personnel. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining qualified personnel with the skills to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer and we may be unable to compete in the market. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees, and the often extensive process of identifying and hiring other personnel who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business. +16 +Table of Contents +Additionally, as part of our efforts to improve overall efficiency and competitiveness of our business, we have added new leadership both within our brands and to our Omni-Channel platform, including the President of Fashion Lifestyle and the President of Performance Lifestyle, as well as streamlining and restructuring our existing personnel and brand management. If we fail to effectively implement these management and personnel changes, we may be unable to achieve our strategic objectives and operating efficiencies. +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products through self-managed distribution centers in Camarillo and Moreno Valley, California. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of certain equipment, power outages or software problems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +Internationally, we distribute our products through a number of distribution centers managed by 3PLs. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, in the second quarter of fiscal year 2017, we experienced a delay in shipments from our European 3PL that impacted sales. The loss of, or disruption to the operations of, any one or more of these facilities, whether due to natural disasters, the outbreak of hostilities, work stoppages, or other adverse events, could materially adversely impact our sales, business performance and operating results. +We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to obtain timely delivery of products in sufficient quantities that meet our quality standards. In that event, we may not be able to fill customer orders, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of acceptable quality and competitively-priced products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge us, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products or services of a comparable quality, at an acceptable price, or on a timely basis. If we must find alternative manufacturers, we would likely experience increased costs, as well as substantial disruption to our business, which could result in a loss of sales and earnings. +17 +Table of Contents +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. We keep proprietary materials that are required for the production of our products, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; +• +increasing transportation costs and a limited supply of international shipping capacity; +• +delays during shipping, at the port of entry or at the port of departure; +• +increasing labor costs and labor disruptions; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds from foreign jurisdictions; +• +changing economic and market conditions; +• +changes in governmental policies and regulations including intellectual property, labor, safety, and environmental regulations; +• +refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; +• +customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +decreased scrutiny by custom officials for counterfeit products; +• +political instability, which can interrupt commerce, including acts of war and other external factors, over which we have no control; +• +heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• +disruptions at manufacturing or distribution facilities caused by natural or other disasters; and +• +adverse changes in consumer perception of goods, trade, or political relations with China or Vietnam. +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of such standards and laws could result in negative publicity, which could damage our reputation and the value of our brands. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with approximately 36.2% of our net sales for the year ended March 31, 2017 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as +18 +Table of Contents +their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected. +We currently utilize foreign currency exchange rate contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our foreign currency exchange rate contracts may negate our efforts to hedge our foreign currency exchange rate risk and result in material foreign currency exchange rate or hedge contract losses. Foreign currency exchange rate hedges, transactions, re-measurements or translations could materially impact our consolidated financial statements. +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor dispute s that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions . +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include: +• +foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• +limitations on our ability to move currency out of international markets; +• +burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of which are uncertain; +• +legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; +• +inability to import products into a foreign country; +• +changes in US and foreign tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting and marketing products in unfamiliar cultures; +• +political instability; +• +changes in diplomatic and trade relationships between the US and other countries; and +• +general economic fluctuations in specific countries or markets. +International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays . +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. +19 +Table of Contents +We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +Key business processes and supporting information systems could be interrupted and such interruption could adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• +critical business systems become inoperable or require significant costs to restore; +• +key personnel are unable to perform their duties, communicate, or access information systems; +• +significant quantities of merchandise are damaged or destroyed; +• +we are required to make unanticipated investment in state-of-the-art technologies and security measures; +• +key wholesale and distributor customers cannot place or receive orders; +• +E-Commerce customer orders may not be received or fulfilled; +• +confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; +• +we are exposed to unanticipated liabilities; or +• +carriers cannot ship or unload shipments. +Interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +Furthermore, we rely on certain information technology management and ERP systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected. +20 +Table of Contents +The loss, theft or misuse of sensitive customer or our related information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business . +Our business involves the storage and transmission of sensitive information, including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and our proprietary financial and strategic data. The protection of our customer, employee and our data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputation or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information. +As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relationships with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience. +Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our brands, and subject us to potential litigation, liability, fines and penalties. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, suppliers, employees or other parties, or be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition. +We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our revolving credit facility agreements also contain a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under any of our revolving credit facility agreements could cause the lenders party thereto to accelerate the timing of payments and exercise their liens on our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, we do not currently anticipate hedging against borrowings under the revolving credit facilities because the facilities bear interest at variable interest rates. Any increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. +21 +Table of Contents +We have a revolving credit facility agreement with JPMorgan Chase Bank, National Association as the administrative agent, Comerica and HSBC as co-syndication agents, and the lenders party hereto (as amended, Domestic Credit Facility), which provides for a committed revolving line of credit of up to an aggregate of $400,000 . Our obligations under our Domestic Credit Facility are guaranteed by our existing and future wholly-owned domestic subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all of our and those subsidiaries' assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries. As of March 31, 2017 , we had no outstanding borrowings under our Domestic Credit Facility with debt capacity of $378,000 out of $400,000 , due to limitations on consolidated worldwide borrowings under the terms of the Domestic Credit Facility. +In addition, we have a revolving credit facility in China (as amended, China Credit Facility), which provides for an uncommitted revolving line of credit of up to an aggregate of CNY 300,000 , or approximately $44,000 . As of March 31, 2017 , we had no outstanding borrowings under our China Credit Facility. +In addition, we have a revolving credit facility in Japan (Japan Credit Facility), which provides for an uncommitted revolving line of credit of up to an aggregate of JPY 5,500,000 , or approximately $49,000 . As of March 31, 2017 , we had no outstanding borrowings under our Japan Credit Facility. +The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries, including, but not limited to, the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, Germany, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and those countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments. +We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, it is possible that tax proposals could result in changes to the existing US tax laws that affect us, although we are unable to predict whether any proposals will ultimately be enacted. Any changes in tax laws, treaties or regulations could increase our income tax liability and adversely affect our net income and long term effective tax rates. +We may incur disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +22 +Table of Contents +Regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. +The SEC has adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform a reasonable country of origin inquiry, and to annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We file a Form SD, Specialized Disclosure Report, on or about May 31st each year. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “DECK”. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $44.99 to $68.57 for the 52-week period ended May 12, 2017 . The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future performance, whether realized or perceived; +• +changes in estimates by securities analysts or failure to meet such estimates; +• +changes in our stockholder base or public actions taken by investors; +• +announcements related to our review of a broad range of strategic alternatives; +• +published research and opinions by securities analysts and other market forecasters; +• +quarterly fluctuations in our sales, margins, expenses, and financial results; +• +the financial results and liquidity of our customers; +• +claims brought against us by a regulatory agency or our stockholders; +• +announcements to repurchase our common stock; +• +the declaration of stock or cash dividends; +• +general market and economic conditions; +• +consumer confidence; +• +broad market fluctuations in volume and price; and +• +a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations. +23 +Table of Contents +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, and decreases in available credit. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +Furthermore, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. +Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions: +• +authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• +provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• +provide that board vacancies can only be filled by directors; +• +prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• +require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and +• +require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. +Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +We do not expect to declare any dividends in the foreseeable future. +We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends. +Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. +United States generally accepted accounting principles are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. +24 +Table of Contents +Item 2. Properties +Our corporate headquarters are located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. In April 2016, we completed the acquisition of 3.7 acres of land adjacent to our corporate headquarters to accommodate future expansion. +We have two US distribution centers in California. We began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015 and continue to operate our distribution center in Camarillo. Our international distribution centers, located in Canada, China, Hong Kong, Japan, the Netherlands and the UK are managed by 3PLs. +We also have offices in China, Hong Kong and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, offices in China, Hong Kong and Japan to coordinate sales and marketing efforts, and offices in France, Germany, the Netherlands and the UK to oversee European sales, operations and administration. +At March 31, 2017 , we had 55 retail stores in the US ranging from approximately 1,000 to 9,000 square feet. Internationally, we had 105 retail stores in Austria, Belgium, Canada, China, France, Hong Kong, Germany, Japan, the Netherlands, Switzerland and the UK. Our E-Commerce operations are in the US, China, Japan, the UK and many other European countries. We have no manufacturing facilities, as all of our products are manufactured by independent third party contractors. +Other than our corporate headquarters, we lease our facilities from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments of our business and are not allocated to our reportable operating segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties at March 31, 2017 : +Facility Location +Description +Lease or Own +Facility Size (Square Footage) +Moreno Valley, California +Warehouse Facility +Lease +794,000 +Camarillo, California +Warehouse Facility +Lease +723,000 +Goleta, California +Corporate Offices +Own +185,000 +25 +Table of Contents +Item 3. Legal Proceedings +As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement and trademark dilution, under applicable laws. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that our UGG brand trademark registrations and design patents are invalid or unenforceable. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +On March 28, 2016, we filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the United States District Court for the Northern District of Illinois Eastern Division against Australian Leather. In response, Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. The counterclaims seek declaratory judgment, an injunction, cancellation of certain of our US trademark registrations, compensatory damages, attorneys' fees and other relief. We believe the counterclaims are without merit and intend to defend the counterclaims vigorously. While we believe there is no legal basis for liability, a judgment invalidating the UGG brand trademark would have a material adverse effect on our business. Further, due to uncertainty surrounding the litigation process, we are unable to reasonably estimate a range of loss, if any, at this time. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or our consolidated financial statements. +26 +Table of Contents +PART II +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +Certain reclassifications were made for all prior periods presented including the years ended March 31, 2016 and 2015, the quarter ended March 31, 2014 (transition period) and the years ended December 31, 2013 and 2012, to conform to the current period presentation. +Unless otherwise specifically indicated, all amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for share data and store count. The defined periods for the fiscal years ended March 31, 2017, 2016 and 2015 are stated herein as "year ended" or "years ended". +Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK". +The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated. +Common Stock +Price Per Share +Low +High +Year Ended March 31, 2017 +Fourth Quarter +$ +44.99 +$ +60.98 +Third Quarter +50.76 +64.80 +Second Quarter +56.99 +68.57 +First Quarter +48.89 +59.25 +Year Ended March 31, 2016 +Fourth Quarter +$ +42.27 +$ +60.55 +Third Quarter +46.30 +62.16 +Second Quarter +56.75 +74.37 +First Quarter +68.15 +76.58 +At May 12, 2017 , we had approximately 48 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2017 that were not registered under the Securities Act of 1933, as amended (Securities Act). +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year period commencing December 31, 2011 and ending March 31, 2017 , excluding the transition period for the quarter ended March 31, 2014 . The data represented below assumes one hundred dollars invested in each share of our common stock, the NYSE Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2012. +The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act, or under the Securities Exchange Act of 1934, as amended (Exchange Act), except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under either of the Securities Act or Exchange +27 +Table of Contents +Act. Total return assumes reinvestment of dividends, of which we have not declared or paid any cash dividends on our common stock since our inception. +The following table assumes $100 invested on January 1, 2012 and assumes dividends are reinvested. +Years Ended December 31, +Years Ended March 31, +2011 +2012 +2013 +2015 +2016 +2017 +Deckers Outdoor Corporation +$ +100.0 +$ +53.3 +$ +111.8 +$ +96.4 +$ +79.3 +$ +79.0 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +102.6 +128.2 +122.4 +108.7 +86.3 +The NYSE Composite Index* +100.0 +116.3 +147.0 +161.3 +155.2 +179.4 +*The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allows us to make cash dividends, provided that no event of default has occurred or is continuing, and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00 on a pro-forma basis. At March 31, 2017 , we were in compliance with this provision and we remain in compliance as of May 30, 2017 . +28 +Table of Contents +Stock Repurchase Program +In June 2012, we approved a stock repurchase program to repurchase up to $200,000 of our common stock in the open market or in privately-negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate us to acquire any particular amount of common stock and the program may have been suspended at any time at our discretion. At February 28, 2015, we had repurchased the full $200,000 amount authorized under the program through the repurchase of approximately 3,823,000 shares, at an average price of $52.31 per share. +In January 2015, we approved a new stock repurchase program to repurchase up to $200,000 of our common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. Since inception through March 31, 2017 , we had repurchased approximately 2,020,000 shares under this program for approximately $134,706 , or an average price of $66.69 per share, leaving the remaining approved amount at approximately $65,294 . Refer to Note 8, "Stockholders' Equity", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on repurchases of our common stock. +The following table summarizes the activity under our January 2015 stock repurchase program during the year ended March 31, 2017 : +Total number +of shares +purchased* (in thousands) +Average price +paid per share +Approximate dollar +value of shares +added/(purchased) +Approximate dollar +value of shares that +may yet be purchased +November 1, 2016 — November 30, 2016 +222 +$ +56.51 +$ +(12,572 +) +$ +65,294 +*All shares were repurchased as part of a publicly-announced program in open-market transactions. The shares repurchased in November 2016 were the only shares repurchased during fiscal year 2017. +Item 6. Selected Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements. +The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report on Form 10-K: +• +Consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2014 (transition period), and the calendar years ended December 31, 2013 and 2012 . +• Consolidated balance sheets as of March 31, 2015 and March 31, 2014 (transition period). +The financial data are further derived from, and qualified by reference to, the following consolidated financial statements in Part IV of this Annual Report on Form 10-K: +• +Consolidated statements of comprehensive income (loss) for the years ended March 31, 2017 , 2016 and 2015 . +• Consolidated balance sheets as of March 31, 2017 and 2016 . +Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements in Part IV of this Annual Report on Form 10-K and the accompanying notes thereto and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +29 +Table of Contents +Change in Fiscal Year +In February 2014, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2017, 2016 and 2015 years presented relate to the fiscal years ended March 31, 2017 , 2016 and 2015 , respectively. The 2014 transition period relates to the quarter ended March 31, 2014 , to coincide with the change in our fiscal year end. The 2013 and 2012 years presented relate to the calendar years ended December 31, 2013 and 2012 . +Years Ended March 31, +Quarter Ended March 31,(transition period) +Years Ended December 31, +2017 +2016 +2015 +2014 +2013 +2012 +Income Statement Data: +Net sales: +UGG brand wholesale +$ +826,355 +$ +918,102 +$ +903,926 +$ +83,271 +$ +818,377 +$ +819,256 +Teva brand wholesale +103,694 +121,239 +116,931 +45,283 +109,334 +108,591 +Sanuk brand wholesale +77,552 +90,719 +102,690 +28,793 +94,420 +89,804 +Other brands wholesale +116,206 +100,820 +76,152 +18,662 +38,276 +20,194 +Direct-to-Consumer +666,340 +644,317 +617,358 +118,707 +496,211 +376,553 +Total net sales +1,790,147 +1,875,197 +1,817,057 +294,716 +1,556,618 +1,414,398 +Cost of sales +954,912 +1,028,529 +938,949 +150,456 +820,135 +782,244 +Gross profit +835,235 +846,668 +878,108 +144,260 +736,483 +632,154 +Selling, general and administrative expenses +837,154 +684,541 +653,689 +144,668 +528,586 +445,206 +(Loss) income from operations +(1,919 +) +162,127 +224,419 +(408 +) +207,897 +186,948 +Other expense, net +5,067 +5,242 +3,280 +334 +2,340 +2,830 +(Loss) income before income taxes +(6,986 +) +156,885 +221,139 +(742 +) +205,557 +184,118 +Income tax (benefit) expense +(12,696 +) +34,620 +59,359 +1,943 +59,868 +55,104 +Net income (loss) +5,710 +122,265 +161,780 +(2,685 +) +145,689 +129,014 +Total other comprehensive (loss) income +(5,894 +) +(89 +) +(18,425 +) +600 +(1,243 +) +330 +Comprehensive (loss) income +$ +(184 +) +$ +122,176 +$ +143,355 +$ +(2,085 +) +$ +144,446 +$ +129,344 +Net income (loss) attributable to: +Deckers Outdoor Corporation +$ +5,710 +$ +122,265 +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +129,014 +Non-controlling interest +— +— +— +— +— +(148 +) +Net income (loss), excluding non-controlling interest +$ +5,710 +$ +122,265 +$ +161,780 +$ +(2,685 +) +$ +145,689 +$ +128,866 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.18 +$ +3.76 +$ +4.70 +$ +(0.08 +) +$ +4.23 +$ +3.49 +Diluted +$ +0.18 +$ +3.70 +$ +4.66 +$ +(0.08 +) +$ +4.18 +$ +3.45 +Weighted-average common shares outstanding: +Basic +32,000 +32,556 +34,433 +34,621 +34,473 +36,879 +Diluted +32,355 +33,039 +34,733 +34,621 +34,829 +37,334 +30 +Table of Contents +As of March 31, +As of March 31, (transition period) +As of December 31, +2017 +2016 +2015 +2014 +2013 +2012 +Balance Sheet Data: +Cash and cash equivalents +$ +291,764 +$ +245,956 +$ +225,143 +$ +245,088 +$ +237,125 +$ +110,247 +Working capital +661,770 +547,267 +519,051 +501,647 +508,786 +424,569 +Total assets +1,191,780 +1,278,068 +1,169,933 +1,064,204 +1,259,729 +1,068,064 +Long-term liabilities +78,474 +72,099 +65,379 +53,140 +51,092 +62,246 +Stockholders' equity +954,255 +967,471 +937,012 +888,849 +888,119 +738,801 +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes thereto included in Part IV of this Annual Report on Form 10-K. +Overview +We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva, and Sanuk. +We sell our products through quality domestic and international retailers, international distributors and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. Independent third parties manufacture all of our products. +Recent Developments +Restructuring. In February 2016, we announced the implementation of a restructuring plan, which includes a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. This restructuring plan is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with these restructuring efforts, we incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of approximately $29,100 and $22,800 recognized in selling, general and administrative (SG&A) expenses and approximately $0 and $2,000 recognized in cost of sales, respectively. The following table summarizes these restructuring charges by category: +Years Ended March 31, +2017 +2016 +Lease termination costs +$ +9,000 +$ +8,900 +Retail store fixed asset impairments +3,600 +5,800 +Severance costs +5,800 +4,000 +Software and office fixed asset impairments +3,200 +3,800 +Termination of various contracts and other services +7,500 +2,300 +Total restructuring charges +$ +29,100 +$ +24,800 +31 +Table of Contents +The following table summarizes these restructuring charges by reportable operating segment: +Years Ended March 31, +2017 +2016 +UGG brand wholesale +$ +2,100 +$ +— +Teva brand wholesale +— +— +Sanuk brand wholesale +100 +3,000 +Other brands wholesale +100 +2,500 +Direct-to-Consumer +12,900 +10,500 +Unallocated overhead costs +13,900 +8,800 +Total restructuring charges +$ +29,100 +$ +24,800 +Of the total amount incurred in fiscal year 2017, $11,100 is accrued as of March 31, 2017 and is expected to be paid during fiscal year 2018. Refer to Note 2, "Restructuring", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the remaining liability related to these restructuring charges as of March 31, 2017. +Related to these charges, we closed 25 retail stores, including five stores during fiscal year 2016 and 20 stores during fiscal year 2017, and consolidated several offices as of March 31, 2017 . We believe our retail stores remain an important component of our Omni-Channel strategy; however, in light of the recent and continuing changes in the retail environment, we also believe it is prudent to further reduce our global brick and mortar footprint. Accordingly, we anticipate generating future costs savings through further retail store closures and the conversion of owned stores to partner retail stores. We also realigned our brands across two groups as part of our Omni-Channel platform: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands. As part of this realignment, during fiscal year 2016, we relocated our Sanuk brand operations in Irvine, California to our corporate headquarters in Goleta, California and closed our Ahnu brand operations office in Richmond, California, as well as consolidated our European offices. +As part of our continuing evaluation of our retail store fleet, we identified additional s tores for closure d uring the year ended March 31, 2017 . During fiscal year 2017, we recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for retail store assets for 12 of these stores. In May 2017, we announced that we expect to reduce our global owned brick and mortar footprint by 30 to 40 stores compared to our store count at March 31, 2017 , discussed below, which includes a combination of store closures and conversion of owned stores to partner retail stores. We are targeting a worldwide store count of approximately 125 owned stores by the end of fiscal year 2020. It is anticipated that we will incur restructuring costs similar in nature to our historical activities in future fiscal years, primarily in connection with reaching our target store count. +Savings Plan. In February 2017, we announced a plan to implement significant cost savings, excluding reinvestment (Savings Plan). The Savings Plan includes a combination of both cost of sales improvements and SG&A expense savings. Cost of sales improvements are expected to come from reducing product development cycle times, optimizing material yields, consolidating our factory base and continuing to move production outside of China. SG&A expense savings are expected to come from further retail store consolidations, process improvement efficiencies and lower unallocated indirect spend. In May 2017, we provided an update that the goal of the Savings Plan is to drive approximately $100,000 in operating profit improvement by the end of fiscal year 2020. +Review of Strategic Alternatives. In April 2017, we announced that our Board of Directors has initiated a process to review a broad range of strategic alternatives. This review process includes an exploration and evaluation of strategic alternatives to enhance stockholder value, which may include a sale or other transaction. +Trends Impacting our Overall Business +Our overall business has been, and we expect that it will continue to be, impacted by several important trends: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we continue to expand our product lines and create more year-round styles +32 +Table of Contents +for our brands, the effect of favorable or unfavorable weather on our aggregate sales and operating results has been, and is likely to continue to be, significant. +• +We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. In particular, across the industry, brick and mortar retail stores are experiencing significant and prolonged decreases in consumer traffic as consumers continue to migrate to shopping online. This shift is impacting the performance of our DTC business and of our wholesale customers. +• +In light of the shift in consumer shopping behavior, we are optimizing our brick and mortar retail footprint. In connection with store closures, we have been impacted by costs to exit lease agreements, retail store fixed asset impairments and other closure costs. We expect this trend to continue as we further evaluate and optimize our retail fleet. +• +We continue to expect that our E-Commerce business will be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases. +• +We believe consumers are buying product closer to the particular wearing occasion (buy now, wear now), which we believe tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows as a way to address the evolving behavior of retail consumers and to manage their own product inventory. +• +Foreign currency exchange rate fluctuations have significantly increased the value of the US dollar compared to most major foreign currencies over the past couple of years. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the demand for our products and our operating results. +Use of Non-GAAP Measures +In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report on Form 10-K we provide certain financial information on a “constant currency basis”, which is in addition to the financial measures calculated and presented in accordance with United States generally accepted accounting principles (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and re-measurements in the consolidated balance sheets. We believe that evaluating certain financial and operating measures, such as net sales reportable operating segment information on a constant currency basis is important, as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. However, constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US GAAP. +Segment Overview +UGG Brand +The UGG brand has been one of the most iconic and recognized brands in the global footwear industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. +We believe the continued demand for UGG brand products has been, and will continue to be, driven by the following: +• +High consumer brand loyalty, due to delivering quality and luxuriously comfortable UGG footwear. +33 +Table of Contents +• +Evolution of our Classics business through the introduction of products such as the Classic Slim, the Classic Luxe, the Classic Street, and the Classic II. +• +Diversification of our UGG product lines, including women's spring and summer, men's product lines, and lifestyle product offerings. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin. +• +Continued enhancement of our Omni-Channel capabilities to enable us to increasingly engage existing and prospective consumers in a more connected environment and expose them to our brands. +Teva Brand +For over 30 years, the Teva brand has fueled the expression of freedom. The Teva brand pioneered the sport sandal category in 1984, and now is a leader within the sport sandal and modern outdoor lifestyle category. +During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand. +Sanuk Brand +The Sanuk brand was founded almost 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with an expanding fan base and presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and playful branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat™ sandal collection and the SIDEWALK SURFERS. +As part of our annual assessment of the Sanuk brand's wholesale reportable operating segment goodwill in the third quarter of fiscal year 2017, we determined that there was an indication of impairment of the Sanuk brand's wholesale reportable operating segment goodwill. Consistent with the applicable accounting guidance, we performed the two-step impairment assessment and, as a result of this assessment, we recorded an $113,944 non-cash impairment charge to the Sanuk brand's wholesale reportable segment goodwill. This conclusion was primarily the result of lower-than-forecasted sales for the Sanuk brand wholesale reportable segment, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. In connection with the Sanuk brand goodwill impairment, we evaluated the Sanuk brand's definite long-lived assets for indicators of impairment. Our analysis determined that the Sanuk brand's amortizable patent under the Sanuk wholesale reportable operating segment was fully impaired and we recorded a non-cash impairment charge to the patent of $ 4,086 . Our analysis also determined that the Sanuk brand's other intangible assets were not impaired as of the date on which the impairment test was completed, as it was determined that the undiscounted future cash flows associated with those assets exceeded the carrying value. However, additional impairment charges could be incurred in future periods. +See Note 3, “Goodwill and Other Intangible Assets”, to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information. +While we now have a more limited view of the growth and expansion opportunities for the Sanuk brand, we continue to believe that the Sanuk brand is an important component of our overall brand portfolio, especially within the casual shoe and sandal markets. However, we cannot assure investors that our efforts will result in the Sanuk brand's growth. +Other Brands +Our other brands consist of the Hoka, Koolaburra, and Ahnu brands. These brands are sold through most of our distribution channels, and primarily through our wholesale channels. +The Hoka brand is a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities. The Hoka brand is quickly becoming a top brand in the domestic run specialty channel and has received strong word-of-mouth marketing that has fueled both domestic and international sales growth. +34 +Table of Contents +The Koolaburra brand is a line of fashion casual footwear using sheepskin and other plush materials. The Ahnu brand is a line of performance outdoor footwear, which we have discontinued operating and have begun to leverage under the Teva brand umbrella, as described above. +Direct-to-Consumer +Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites, before making purchase decisions. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +At March 31, 2017, we had a total of 160 retail stores worldwide, which includes 96 concept stores and 64 outlet stores. During fiscal year 2017, we opened 17 new stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 stores. Concession stores are considered concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are branded stores that are wholly owned and operated by third parties. Upon conversion or opening of new partner retail stores, each of these stores became wholly-owned and operated by third parties in China. Sales made to the partner retail stores are included primarily in our UGG brand wholesale reportable operating segment and not in our DTC reportable operating segment, as of the date of conversion. +Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to customers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2017, we operate our E-Commerce business through an aggregate of 22 Company-owned websites in nine different countries. +We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other apparel retailers. As a result, information included in this Annual Report on Form 10-K regarding our comparable DTC sales may not be comparable to similar data made available by our competitors or other apparel retailers. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. With the size of the UGG brand relative to our other brands, net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. +See Note 14, “Quarterly Summary of Information (Unaudited)”, to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information. +35 +Table of Contents +Results of Operations +Year Ended March 31, 2017 Compared to Year Ended March 31, 2016 +The following table summarizes our results of operations: +Years Ended March 31, +2017 +2016 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,790,147 +100.0 +% +$ +1,875,197 +100.0 +% +$ +(85,050 +) +(4.5 +)% +Cost of sales +954,912 +53.3 +1,028,529 +54.8 +(73,617 +) +(7.2 +) +Gross profit +835,235 +46.7 +846,668 +45.2 +(11,433 +) +(1.4 +) +Selling, general and administrative expenses +837,154 +46.8 +684,541 +36.5 +152,613 +22.3 +(Loss) income from operations +(1,919 +) +(0.1 +) +162,127 +8.7 +(164,046 +) +(101.2 +) +Other expense, net +5,067 +0.3 +5,242 +0.3 +(175 +) +(3.3 +) +(Loss) income before income taxes +(6,986 +) +(0.4 +) +156,885 +8.4 +(163,871 +) +(104.5 +) +Income tax (benefit) expense +(12,696 +) +(0.7 +) +34,620 +1.9 +(47,316 +) +(136.7 +) +Net income (loss) +$ +5,710 +0.3 +% +$ +122,265 +6.5 +% +$ +(116,555 +) +(95.3 +)% +Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel: +Years Ended March 31, +2017 +2016 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,141,303 +$ +1,219,744 +$ +(78,441 +) +(6.4 +)% +International +648,844 +655,453 +(6,609 +) +(1.0 +) +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +Net sales by brand and channel: +UGG brand: +Wholesale +$ +826,355 +$ +918,102 +$ +(91,747 +) +(10.0 +)% +Direct-to-Consumer +624,682 +606,247 +18,435 +3.0 +Total +1,451,037 +1,524,349 +(73,312 +) +(4.8 +) +Teva brand: +Wholesale +103,694 +121,239 +(17,545 +) +(14.5 +) +Direct-to-Consumer +14,021 +11,810 +2,211 +18.7 +Total +117,715 +133,049 +(15,334 +) +(11.5 +) +Sanuk brand: +Wholesale +77,552 +90,719 +(13,167 +) +(14.5 +) +Direct-to-Consumer +14,214 +15,522 +(1,308 +) +(8.4 +) +Total +91,766 +106,241 +(14,475 +) +(13.6 +) +Other brands: +Wholesale +116,206 +100,820 +15,386 +15.3 +Direct-to-Consumer +13,423 +10,738 +2,685 +25.0 +Total +129,629 +111,558 +18,071 +16.2 +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +Total Wholesale +$ +1,123,807 +$ +1,230,880 +$ +(107,073 +) +(8.7 +)% +Total Direct-to-Consumer +666,340 +644,317 +22,023 +3.4 +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +36 +Table of Contents +The decrease in overall net sales was largely due to lower UGG, Teva and Sanuk brand wholesale sales, which was partially offset by increased other brand wholesale and DTC sales. We experienced a decrease of 2.3% in overall weighted-average selling price per pair (WASPP), primarily driven by a decrease in WASPP for the UGG brand, which drove the overall decrease in wholesale sales. We also experienced a decrease in the number of pairs sold in our UGG, Teva, and Sanuk brands which contributed to an overall decrease in volume of footwear sold for all brands of 2.2% to approximately 31,400 pairs sold for the year ended March 31, 2017 from approximately 32,100 pairs for the year ended March 31, 2016 . The decrease was largely attributable to lower North American UGG wholesale sales. In addition, we experienced reduced wholesale sales in Europe during the third quarter of fiscal year 2017 as a result of our transition to the new European third party logistics provider (3PL). On a constant currency basis, overall net sales decreased 4.1% to approximately $1,800,300 in fiscal year 2017 compared to fiscal year 2016. +Wholesale net sales of our UGG brand decreased due to a decline in WASPP and in the volume of pairs sold. The decrease in WASPP had an impact of approximately $75,000, and was primarily attributable to changes in product mix and a higher proportion of international closeout sales at lower prices relative to the prior period. The decrease in WASPP was slightly offset by a shift in channel mix to DTC. The decrease in the volume of pairs sold had an impact of approximately $31,000, primarily attributable to lower North American wholesale sales. These decreases were partially offset by positive impacts from lower sales reserves and chargebacks due to lower sales and less promotional activity compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand decreased 9.7% to approximately $829,800 in fiscal year 2017 compared to fiscal year 2016. +Wholesale net sales of our Teva brand decreased largely due to a decrease in the volume of pairs sold, partially offset by a slight net increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $17,000. The net increase in WASPP was primarily attributable to lower prices on closeout sales and a shift in product mix. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold and a decrease in WASPP. The decrease in the volume of pairs sold had an impact of approximately $9,000. The decrease in WASPP had an impact of approximately $4,200, which was primarily due to lower prices on closeout sales and a shift in product mix. +Wholesale net sales of our other brands increased primarily due to an increase in the volume of pairs sold, offset by a decrease in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 primarily driven by growth for the Hoka and Koolaburra brands, partially offset by a decrease in the discontinued brands' volume of pairs sold. The decrease in WASPP had an impact of approximately $5,000 due to a shift in product mix. +DTC net sales increased 3.4% to $666,340 primarily due to an increase in net sales from our E-Commerce business of approximately $29,200, offset by a decrease in net sales from our retail store business of approximately $7,200. The increase in total DTC net sales was largely due to an increase in the volume of pairs sold of approximately $78,500 due to growth in E-Commerce, offset by a decrease in WASPP with an impact of approximately $50,500. The decrease in WASPP was due to a shift in product mix. On a constant currency basis, DTC net sales increased 4.5% to approximately $673,800 in fiscal year 2017 compared to fiscal year 2016. +Comparable DTC net sales for the 52 weeks ended April 2, 2017 increased 2.6% on a constant currency basis to approximately $520,500 compared to the same period in fiscal year 2016. The increase in comparable DTC net sales was primarily due to improved growth in E-Commerce worldwide, partially offset by a decline in sales at our retail stores. +International sales, which are included in the reportable operating segment sales presented above, decreased by 1.0% . International sales represented 36.2% and 35.0% of worldwide net sales for the years ended March 31, 2017 and 2016, respectively. The decrease in international sales was due to lower wholesale sales for the UGG and Teva brands in Europe and the UGG and Sanuk brands in Asia. On a constant currency basis, international sales increased 1.6% to approximately $666,100 in fiscal year 2017 compared to fiscal year 2016. +Gross Profit. Gross margin was 46.7% for the year ended March 31, 2017 compared to 45.2% for the year ended March 31, 2016. The overall improvement in gross margin was driven by a higher proportion of DTC net sales and lower material costs, changes in product mix, decreased domestic promotional activity, and the lower impact of closeout sales compared to the prior period. This was slightly offset by the strengthening of the US dollar. +37 +Table of Contents +Selling, General and Administrative Expenses. The change in SG&A expenses for the year ended March 31, 2017 compared to the year ended March 31, 2016 were primarily due to: +• +impairment charges for the Sanuk brand's wholesale reportable operating segment's goodwill and patent of approximately $118,000 ; +• +increased other payroll expenses of approximately $7,300, primarily attributable to costs related to transitioning warehouse and customer service locations and less capitalization of labor costs associated with the business transformation project; +• +increased commission expenses of approximately $6,300, largely driven by terminations of sales agent agreements; +• +increased professional service costs of approximately $6,000, including restructuring charges for consulting services and other outside services; +• +increased depreciation expenses for IT-related assets for our business transformation project of approximately $6,000; +• +increased other operating expenses of approximately $4,600, primarily driven by innovation and design costs and outside services, as well as third party management fees for Asian operations in the E-Commerce channel; +• +increased expenses of approximately $4,500 due to contingent consideration credits taken in fiscal year 2016 that are not recurring in fiscal year 2017; +• +impairment charges for IT-related long-lived assets and related maintenance contract termination costs of approximately $3,400, included in restructuring charges; +• +increased warehouse expenses of approximately $2,100, largely driven by costs related to closing and transitioning 3PL warehouses; +• +decreased bad debt expense of approximately $2,500, due to a reduction in delinquent customer accounts in the current period; and +• +decreased occupancy and rent expense of approximately $1,700 due to higher restructuring charges incurred for retail store closures and office consolidations in the prior period. +(Loss) Income from Operations. The following table summarizes operating (loss) income by reportable operating segment: +Years Ended March 31, +2017 +2016 +Change +Amount +Amount +Amount +% +UGG brand wholesale +$ +213,407 +$ +246,990 +$ +(33,583 +) +(13.6 +)% +Teva brand wholesale +10,045 +17,692 +(7,647 +) +(43.2 +) +Sanuk brand wholesale +(110,582 +) +15,565 +(126,147 +) +(810.5 +) +Other brands wholesale +1,571 +(4,384 +) +5,955 +135.8 +Direct-to-Consumer +109,802 +101,756 +8,046 +7.9 +Unallocated overhead costs +(226,162 +) +(215,492 +) +(10,670 +) +(5.0 +) +Total +$ +(1,919 +) +$ +162,127 +$ +(164,046 +) +(101.2 +)% +The increase in loss from operations resulted from lower sales and higher overall SG&A expenses, primarily driven by the impairment and restructuring charges described above. These factors were partially offset by higher overall gross margins attributable to reduced material costs and changes in product mix, decreased promotional activity, and the lower impact of closeout sales compared to the prior period. +38 +Table of Contents +The decrease in income from operations of UGG brand wholesale was primarily the result of lower sales. +The decrease in income from operations of Teva brand wholesale was due to lower sales. +The increase in loss from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets of approximately $118,000 , as described above, as well as lower sales and lower gross margins. +The increase in income from operations of other brands wholesale was due to higher sales and improved gross margins primarily attributable to the Hoka and Koolaburra brands, offset by higher SG&A expenses driven by higher selling and marketing costs. +The increase in income from operations of DTC was primarily due to higher sales and improved gross margins in our E-Commerce business, offset by higher SG&A expenses driven by impairment charges for retail store assets for stores that have been identified for closure, as described above. +Unallocated overhead costs increased due to restructuring charges, as described above, slightly offset by lower performance-based compensation expenses and fluctuations in various foreign currencies. +Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable operating segments. +Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the higher average balances outstanding under our revolving credit facilities compared to fiscal year 2016. +Income Taxes. Income tax (benefit) expense and the effective income tax rates were as follows: +Years Ended March 31, +2017 +2016 +Income tax (benefit) expense +$ +(12,696 +) +$ +34,620 +Effective income tax rate +181.7 +% +22.1 +% +The change in the effective tax rate was primarily due to the domestic net operating loss generated during the year ended March 31, 2017, driven by the impact of domestic restructuring charges and non-cash impairment charges, as discussed above, as well as a decrease in domestic net sales, and a decrease in the compensation earned by our foreign-based global product sourcing organization. +Foreign income before income taxes was $49,319,000 and $105,938,000 and worldwide (loss) income before income taxes was $(6,986) and $156,885 for the years ended March 31, 2017 and 2016 , respectively. The decrease in foreign income before income taxes was primarily due to an increase in foreign operating expenses related to restructuring charges and a decrease in compensation earned by our foreign-based global product sourcing organization during the year ended March 31, 2017 compared to the year ended March 31, 2016 . Foreign income before income taxes, as a percentage of worldwide loss before taxes, increased primarily due to the recording of domestic non-cash impairment charges, as discussed above, as well as a decrease in domestic sales during the year ended March 31, 2017 compared to the year ended March 31, 2016 . +We expect that our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the outcome of optimizing our retail fleet, the impact of internal savings initiatives, the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe that the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business, will result in increases in foreign income before income taxes both in absolute terms and as a percentage of worldwide income before income taxes. In addition, we believe that our effective tax rate will continue to be impacted by our actual foreign income before income taxes relative to our actual worldwide income before income taxes. Notably, with respect to fiscal year 2017, the Sanuk brand's wholesale reportable operating segment impairment charges for goodwill and long-lived assets, as discussed above, had the effect of significantly reducing domestic and worldwide +39 +Table of Contents +income before income taxes, which increased foreign income before income taxes as a percentage of worldwide income before income taxes. +For fiscal year 2017, we generated approximately $21,569 of our pre-tax earnings from a country which does not impose a corporate income tax compared to $35,402 during fiscal year 2016. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2017 , we had approximately $265,773,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. +Net Income. Our net income decreased primarily due to lower sales and higher SG&A expenses attributable to the impairment and restructuring charges discussed above, offset by higher gross margins. Our net income per share decreased due to lower net income, partially offset by a slightly lower number of weighted-average common shares outstanding. +Other Comprehensive Loss. Other comprehensive loss increased as a result of increased foreign currency translation losses driven by changes in exchange rates for Asian and European currencies during the year ended March 31, 2017 compared to the year ended March 31, 2016. +40 +Table of Contents +Year Ended March 31, 2016 Compared to Year Ended March 31, 2015 +The following table summarizes our results of operations: +Years Ended March 31, +2016 +2015 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,875,197 +100.0 +% +$ +1,817,057 +100.0 +% +$ +58,140 +3.2 +% +Cost of sales +1,028,529 +54.8 +938,949 +51.7 +89,580 +9.5 +Gross profit +846,668 +45.2 +878,108 +48.3 +(31,440 +) +(3.6 +) +Selling, general and administrative expenses +684,541 +36.5 +653,689 +36.0 +30,852 +4.7 +Income from operations +162,127 +8.7 +224,419 +12.3 +(62,292 +) +(27.8 +) +Other expense, net +5,242 +0.3 +3,280 +0.2 +1,962 +59.8 +Income before income taxes +156,885 +8.4 +221,139 +12.1 +(64,254 +) +(29.1 +) +Income tax expense +34,620 +1.9 +59,359 +3.2 +(24,739 +) +(41.7 +) +Net income +$ +122,265 +6.5 +% +$ +161,780 +8.9 +% +$ +(39,515 +) +(24.4 +)% +Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel: +Years Ended March 31, +2016 +2015 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,219,744 +$ +1,165,350 +$ +54,394 +4.7 +% +International +655,453 +651,707 +3,746 +0.6 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +Net sales by brand and channel: +UGG brand: +Wholesale +$ +918,102 +$ +903,926 +$ +14,176 +1.6 +% +Direct-to-Consumer +606,247 +589,267 +16,980 +2.9 +Total +1,524,349 +1,493,193 +31,156 +2.1 +Teva brand: +Wholesale +121,239 +116,931 +4,308 +3.7 +Direct-to-Consumer +11,810 +9,812 +1,998 +20.4 +Total +133,049 +126,743 +6,306 +5.0 +Sanuk brand: +Wholesale +90,719 +102,690 +(11,971 +) +(11.7 +) +Direct-to-Consumer +15,522 +12,021 +3,501 +29.1 +Total +106,241 +114,711 +(8,470 +) +(7.4 +) +Other brands: +Wholesale +100,820 +76,152 +24,668 +32.4 +Direct-to-Consumer +10,738 +6,258 +4,480 +71.6 +Total +111,558 +82,410 +29,148 +35.4 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +Total Wholesale +$ +1,230,880 +$ +1,199,699 +$ +31,181 +2.6 +% +Total Direct-to-Consumer +644,317 +617,358 +26,959 +4.4 +Total +$ +1,875,197 +$ +1,817,057 +$ +58,140 +3.2 +% +The increase in overall net sales was due to increases in total DTC net sales and other brands, UGG brand and Teva brand wholesale sales, partially offset by a decrease in Sanuk brand wholesale sales. We experienced an increase +41 +Table of Contents +in the number of pairs sold in the UGG brand, other brands and Teva brand wholesale, as well as the DTC business, offset in part by a decrease in the number of pairs sold in the Sanuk brand wholesale. This resulted in an increase in the overall volume of footwear sold for all brands of 4.6% to approximately 32,100 pairs sold for the year ended March 31, 2016 from approximately 30,700 pairs for the year ended March 31, 2015. The mitigating impacts on overall net sales were increased promotional activity, which consisted of vendor-specific markdowns, price reductions, chargebacks, sales discounts, and sales reserves. On a constant currency basis, overall net sales increased 5.9% to approximately $1,925,000 in fiscal year 2016 compared to fiscal year 2015. +Wholesale net sales of our UGG brand were positively impacted by an increase in the volume of pairs sold in the amount of approximately $73,000. Wholesale net sales were negatively impacted by an increase in promotional activity of approximately $27,000 to promote sales that were slow due to warmer weather and to clear out inventory that will be obsolete in future seasons. Wholesale net sales were also negatively impacted by a decrease in WASPP of approximately $26,000 reflecting unfavorable foreign currency exchange rates and an increased impact of approximately $7,000 from closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 4.5% to approximately $945,000 in fiscal year 2016 compared to fiscal year 2015. +Wholesale net sales of our Teva brand increased largely due to an increase in the volume of pairs sold and an increase in WASPP. The increase in the volume of pairs sold had an impact of approximately $1,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold, offset in part by an increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $13,000 and the increase in WASPP had an impact of approximately $1,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period. +Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold primarily for the Hoka brand and an increase in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP mainly reflects a shift in product mix. +DTC net sales increased 4.4% to approximately $644,000 primarily due to an increase in net sales from our E-Commerce business of approximately $32,000, partially offset by a decrease in net sales from our retail store business of approximately $5,000. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $92,000 primarily due to the UGG and Teva brands. The increase in DTC net sales was primarily due to the number of stores opened since March 31, 2015, increased traffic to our websites and improved conversion rates in both E-Commerce and retail businesses due to improved product offerings and new promotions offered on Classic products, offset in part, by declining traffic trends in our retail stores worldwide. These increases were offset in part by a decrease in WASPP of approximately $66,000 and an increase in promotional activity of approximately $3,000 primarily related to the UGG brand. The decrease in WASPP was primarily due to a shift in store mix from concept to outlet, a shift in sales mix to lower priced product in the stores, increased offering of lower price point products for both businesses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 7.4% to approximately $663,000 in fiscal year 2016 compared to fiscal year 2015. +Comparable DTC net sales for the 52 weeks ended March 27, 2016 on a constant currency basis decreased 1.0% to approximately $511,000 compared to the same period in fiscal year 2015 primarily as a result of a decrease in comparable retail store sales of approximately $42,000, largely offset by an increase in comparable sales from E-Commerce operations of approximately $37,000. The decrease in comparable DTC sales was primarily due to declining traffic trends in our retail stores worldwide, offset in part by increased website traffic, and improved conversion rates in both our E-Commerce and retail store businesses due to improved product offerings and new promotions offered on Classic products. The decrease in comparable DTC sales was primarily the result of a decrease in WASPP of approximately $41,000, largely offset by an increase in the number of pairs sold in the amount of $36,000. The decrease in the comparable DTC WASPP was primarily due to a shift in product mix. +International sales, which are included in the reportable operating segment sales presented above, increased 0.6%. International sales represented 35.0% and 35.9% of worldwide net sales for the years ended March 31, 2016 and 2015 , respectively. The increase in international sales was due to increases of approximately $11,000 for other brand products, primarily the Hoka brand, and $7,000 for Teva brand products. The net sales increase was largely +42 +Table of Contents +offset by sales decreases of approximately $11,000 and $3,000 in UGG and Sanuk brand products, respectively. On a constant currency basis, international sales increased 8.2% to approximately $705,000 during fiscal year 2016 compared to fiscal year 2015. +Gross Profit. Gross margin was 45.2% for fiscal year 2016 compared to 48.3% for fiscal year 2015. The overall decline in gross margin was driven by a negative impact from foreign currency exchange rate fluctuations of approximately $13,000 caused by the strengthening of the US dollar, greater promotional activity of approximately $13,000, restructuring and other charges of approximately $5,000, and greater closeouts of approximately $4,000, offset, in part, by improved sheepskin costs of approximately $4,000. +Selling, General and Administrative Expenses. The change in SG&A expenses for the year ended March 31, 2016 compared to the year ended March 31, 2015 were primarily due to: +• +increased salaries of approximately $19,000, largely attributable to transition and stabilization costs related to the move from Irvine to our new distribution center in Moreno Valley and a timing difference attributable to full operations commencing in the first quarter of fiscal year 2016 at Moreno Valley. Salaries were also impacted by $4,000 of severance related to restructuring charges for our retail store fleet optimization and office consolidations and $4,000 for new retail stores opened subsequent to March 31, 2015; +• +increased occupancy and rent expense of approximately $16,000, largely driven by the $9,000 restructuring charges for early termination of office and store leases related to our retail store fleet optimization and office consolidations and new retail stores opened subsequent to March 31, 2015; +• +increased impairment charges for retail stores of approximately $9,800 for which the fair values did not exceed their carrying values based on our retail store asset impairment analysis; +• +increased expense of approximately $6,000 for store closure and lease termination costs related to our retail store fleet optimization and office consolidations; +• +increased information technology costs of approximately $5,000, largely related to the restructuring charge of $4,000 for impairment of certain supply chain software related to the business transformation project implementation and the reorganization of our supply chain team causing older software to be obsolete; +• +increased depreciation expense of approximately $4,000 related to operations commencing at our new distribution center in Moreno Valley in the first quarter of fiscal year 2016; +• +an increase in our accounts receivable allowances of approximately $4,000, reflecting our ongoing assessments of credit risks for several customers whose recent payment history and financial condition necessitated an increase in the allowance; +• +decreased recognition of performance-based stock compensation of approximately $18,000 because the threshold level of the performance criteria relating to fiscal year 2016 was not achieved as compared to the partial achievement of performance criteria in fiscal year 2015 ; +• +decreased expenses of approximately $12,000 related to the impact of foreign currency exchange rate fluctuations in fiscal year 2016 compared to fiscal year 2015 ; and +• +decreased amortization expense of approximately $3,000, primarily attributable to the acquisition of our UGG brand distributor that had been selling to retailers in Germany in fiscal year 2015 period that did not carry forward to fiscal year 2016. +43 +Table of Contents +Income from Operations. The following table summarizes operating income (loss) by reportable operating segment: +Years Ended March 31, +2016 +2015 +Change +Amount +Amount +Amount +% +UGG brand wholesale +$ +246,990 +$ +269,489 +$ +(22,499 +) +(8.3 +)% +Teva brand wholesale +17,692 +13,320 +4,372 +32.8 +Sanuk brand wholesale +15,565 +21,914 +(6,349 +) +(29.0 +) +Other brands wholesale +(4,384 +) +(9,838 +) +5,454 +55.4 +Direct-to-Consumer +101,756 +150,320 +(48,564 +) +(32.3 +) +Unallocated overhead costs +(215,492 +) +(220,786 +) +5,294 +2.4 +Total +$ +162,127 +$ +224,419 +$ +(62,292 +) +(27.8 +)% +The decrease in income from operations resulted from lower gross margins driven by the negative impact of foreign currency exchange rate fluctuations, increased promotional activity of approximately $29,000 and higher SG&A expenses primarily as a result of approximately $25,000 of restructuring and other charges. +The decrease in income from operations of UGG brand wholesale was the result of the increased promotional activity of approximately $27,000. These factors were partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses is attributable to the decrease in amortization related to the conversion of our Germany distributor in fiscal year 2015 and a decrease in marketing and advertising, offset in part by an increase in accounts receivable allowances. +The increase in income from operations of Teva brand wholesale was primarily the result of a 2.6% increase in gross margin. The increase in gross margin was due to a decreased impact from closeout sales. +The decrease in income from operations of our Sanuk brand wholesale was primarily due to a decrease in sales and $3,000 of restructuring charges, partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses was primarily attributable to lower marketing and advertising and lower sales and commission expenses. +The operating results of our other brands wholesale improved due to an increase in net sales and a 3.2% increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000 reflecting $2,500 of restructuring charges. The increase in gross margin was primarily attributable to a shift to higher margin Hoka brand products. The increase in operating expenses was also attributable to marketing expenses for the Hoka brand. +The decrease in income from operations of DTC resulted from an increase in operating expenses of approximately $37,000, a decrease in gross profit and the increase in promotional activity of approximately $3,000. The increase in DTC operating expenses was largely attributable to restructuring charges of $10,500 related to our retail store fleet optimization, $9,800 of other impairment charges for retail stores during fiscal year 2016 and operating expenses for stores opened subsequent to March 31, 2015. +The decrease in unallocated overhead costs was primarily due to a lower unfavorable impact of foreign currency exchange rate fluctuations in fiscal year 2016 compared to fiscal year 2015 of approximately $22,000 and a reduction in performance-based stock compensation of approximately $12,000, partially offset by increased salaries of approximately $11,000 primarily for our Moreno Valley distribution center, increased depreciation expense of approximately $7,000 primarily for our Moreno Valley distribution center, increased information technology costs of approximately $3,000 largely related to supply chain software impairment charges and increased occupancy and rent expense of approximately $3,000 primarily for additional corporate office space and our Moreno Valley distribution center and increased general expenses of $4,000. +Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable operating segments. +44 +Table of Contents +Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the higher average balances outstanding under our revolving credit facilities compared to fiscal year 2015. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended March 31, +2016 +2015 +Income tax expense +$ +34,620 +$ +59,359 +Effective income tax rate +22.1 +% +26.8 +% +The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was the result of greater promotional activity and restructuring charges reducing domestic profitability in combination with the strategic supply chain reorganization completed during the year ended March 31, 2015 . +Foreign income before income taxes was $105,938,000 and $95,850,000 and worldwide income before income taxes was $156,885 and $221,139 for the years ended March 31, 2016 and 2015, respectively. The increase in foreign income before income taxes was primarily due to an increase in compensation earned by our foreign-based global product sourcing organization, which commenced operations on July 1, 2014 and lower foreign operating expenses as a result of amortization related to conversion of our Germany distributor in the prior period and expense reduction efforts. +For fiscal year 2016, we generated approximately $35,402 of our pre-tax earnings from a country which does not impose a corporate income tax compared to $54,588 for fiscal year 2015. Undistributed earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2016 , we had approximately $233,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. +For additional information about the factors that may impact our foreign income or loss before income taxes, as well as our effective tax rate, please see the discussion under the heading "Results of Operations - Year Ended March 31, 2017 Compared to Year Ended March 31, 2016 - Income Taxes" above. +Net Income. Our net income decreased as a result of the factors discussed above. Our net income per share decreased due to lower net income, offset in part by a reduction in the weighted-average common shares outstanding. The overall reduction in the weighted-average common shares outstanding was primarily the result of repurchases of our common stock made during the year ended March 31, 2016 . +Other Comprehensive Loss. Other comprehensive loss decreased as a result of decreased net unrealized losses on foreign currency exchange rates as well as increased gains on foreign currency exchange rate hedges, largely attributable to unrealized gains on Asian currencies, partially offset by unrealized losses on Canadian currency exchange rates during the year ended March 31, 2016 compared to the year ended March 31, 2015. +Liquidity and Capital Resources +Liquidity +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the borrowings available under our credit agreements. In an economic recession or under other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing lines of credit. These factors may impact our working capital reserves and have a material adverse effect on our business. +Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue +45 +Table of Contents +until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30th and September 30th to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30th and December 31st; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31st and March 31st in anticipation of the spring selling season that occurs in the quarters ending March 31st and June 30th. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has historically been provided using internal cash balances, cash from ongoing operating activities and short-term borrowings under our credit agreements. +We believe that our cash and cash equivalents balances, cash generated from operations, and available borrowings under the revolving credit facility governed by our Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, National Association (as amended, Domestic Credit Facility), our revolving credit facility in China (as amended, China Credit Facility), and our revolving credit facility in Japan (Japan Credit Facility) will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. However, risks and uncertainties that could impact our liquidity include our worldwide sales, our profit margin, the perception of our brands among retail consumers and wholesale customers, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories, our ability to respond to ongoing changes in the retail environment, unexpected changes in weather conditions, and the timing and extent of restructuring charges, among others. Furthermore, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing sources of liquidity are insufficient to satisfy our cash requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, could result in operating and financial covenants that would restrict our operations, and could cause us to further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. Refer to Part I, Item 1A, "Risk Factors", for a discussion of additional factors that may affect our cash position and liquidity. +Capital Resources +Domestic Credit Facility +As of March 31, 2017 , we had no outstanding balance and had outstanding letters of credit of approximately $549 under our Domestic Credit Facility. The Domestic Credit Facility is a five -year, $400,000 secured revolving credit facility. As of March 31, 2017 , we had debt capacity of approximately $378,000 out of $400,000 , due to limitations on consolidated worldwide borrowings under the terms of the Domestic Credit Facility. At May 30, 2017 , we had no outstanding balance and available borrowings of approximately $378,000 under our Domestic Credit Facility. +China Credit Facility +As of March 31, 2017 , we had no outstanding balance and available borrowings of approximately $44,000 under our China Credit Facility. In October 2016, we entered into a third amendment to our China Credit Facility to provide for an increase in our uncommitted revolving line of credit of up to CNY 300,000 , or approximately $44,000 . On March 31, 2017 , we entered into a fourth amendment to our China Credit Facility which removed Deckers Footwear (Shanghai) Co., LTD, leaving Deckers (Beijing) Trading Co., LTD as the remaining borrower. At May 30, 2017 , we had no outstanding balance and available borrowings of approximately $44,000 under our China Credit Facility. +Japan Credit Facility +As of March 31, 2017 , we had no outstanding balance and available borrowings of approximately $49,000 under our Japan Credit Facility. The Japan Credit Facility renews annually, and is guaranteed by Deckers Outdoor Corporation. We have renewed the Japan Credit Facility through January 31, 2018 under the terms of the original agreement. At May 30, 2017 , we had no outstanding balance and available borrowings of approximately $49,000 under our Japan Credit Facility. +46 +Table of Contents +Mortgage +As of March 31, 2017 , we had an outstanding principal balance under the mortgage on our corporate headquarters property of approximately $32,631 . The loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,700 , in addition to any then-outstanding balance. +At March 31, 2017 , we were in compliance with all debt covenants under our borrowing arrangements and we remain in compliance at May 30, 2017 . +Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information about our borrowing arrangements. +Off-Balance Sheet Arrangements +We do not have any off-balance sheet arrangements. +Contractual Obligations +The following table summarizes our contractual obligations at March 31, 2017 and the effects such obligations are expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +311,470 +$ +51,319 +$ +90,301 +$ +67,680 +$ +102,170 +Purchase obligations for product (2) +392,716 +392,716 +— +— +— +Purchase obligations for sheepskin (3) +122,869 +69,169 +53,700 +— +— +Other purchase obligations (4) +18,942 +10,814 +8,128 +— +— +Mortgage obligation (5) +50,251 +2,168 +4,336 +4,336 +39,411 +Unrecognized tax benefits (6) +9,928 +856 +3,273 +5,799 +— +Total +$ +906,176 +$ +527,042 +$ +159,738 +$ +77,815 +$ +141,581 +(1) +Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. +(2) +Our purchase obligations for product consist mostly of open purchase orders. Outstanding purchase orders are primarily with our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. +(3) +Our purchase obligations for sheepskin represent remaining commitments under existing supply agreements for sheepskin, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. +(4) +Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts and requirements to pay promotional expenses. Our promotional expenditures and service contracts are due periodically during fiscal years 2018 through 2020. +As of March 31, 2017 , we had approximately $3,400 of commitments for future capital expenditures primarily related to information technology upgrades at our distribution centers in California and tenant improvements for retail store space and facilities in the US. We estimate that the capital expenditures for fiscal year 2018, including the aforementioned commitments, will not exceed $45,000. We anticipate these expenditures will primarily relate to the build-out of our DTC business and facilities and purchases +47 +Table of Contents +for IT infrastructure and system improvements. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on the timing of store openings or conversions from owned stores to partner retail stores, as well as unforeseen needs to replace existing assets and the timing of other expenditures. +(5) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. The mortgage has a fixed interest rate of 4.928% . Payments represent principal payments in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,700 , in addition to any then-outstanding balance. Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information regarding our mortgage obligation. +(6) +The unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate, if recognized. Refer to Note 5, "Income Taxes", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K. +Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on purchase obligations and minimum commitments. +Cash Flows +The following table summarizes our cash flows: +Years Ended March 31, +2017 +2016 +2015 +Net cash provided by operating activities +$ +198,677 +$ +125,581 +$ +169,654 +Net cash used in investing activities +(44,499 +) +(67,221 +) +(100,636 +) +Net cash used in financing activities +(103,070 +) +(36,340 +) +(78,260 +) +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is driven by the level of net income, non-cash adjustments and changes in working capital. +The increase in net cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to: (1) lower net income compared to fiscal year 2016, (2) the net impact of changes in non-cash impairment charges and related deferred tax positions, as well as additional restructuring charges, and (3) positive changes in working capital compared to the prior period primarily for inventory and accounts receivable. The change in cash used for inventory was lower compared to the prior period due to lower sales offset by improved inventory management. The change in accounts receivable levels relates to lower accounts receivable balances compared to the prior period due to lower sales and timing differences for collections. +The reduction in net cash provided by operating activities in fiscal year 2016 compared to fiscal year 2015 was primarily due to: (1) changes in inventory levels and trade accounts receivable, (2) the net impact of changes in noncash adjustments, primarily related to depreciation, amortization and accretion and restructuring charges, and (3) a decrease in net income. The change in inventory levels relates to lower than anticipated sales. The change in trade accounts receivable relates to payment delays from customers as a result of slower sell-through primarily caused by warmer weather. These cash flows were offset in part by changes in trade accounts payable in fiscal year 2016 compared to fiscal year 2015. The change in payables relates to the change in inventory levels. +Wholesale accounts receivable turnover decreased to 6.0 times in the year ended March 31, 2017 compared to 6.8 times for the year ended March 31, 2016 due to lower wholesale sales and the impact of higher average accounts receivable balances. +Inventory turnover decreased to 2.2 times in the year ended March 31, 2017 compared to 2.7 times in the year ended March 31, 2016 due to the impact of higher average inventory levels and lower cost of sales. +Investing Activities. The reduction in net cash used in investing activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to fewer capital expenditures for the business transformation project implementation and +48 +Table of Contents +business acquisition costs compared to the prior period, as well as the winding down of the build out of our new retail stores and lower costs for purchases of computer hardware and equipment. This was partially offset by the purchase of land adjacent to our corporate headquarters campus during fiscal year 2017. +Net cash used in investing activities for fiscal year 2016 resulted primarily from the purchases of property and equipment and our acquisition of the Koolaburra brand, partially offset by proceeds from the sale of the assets of the MOZO and TSUBO brands. The capital expenditures were primarily related to our business transformation project implementation, the build-out of our distribution center and retail stores, and purchases of computer hardware and software +Net cash used in investing activities for fiscal year 2015 resulted primarily from the purchases of property and equipment and purchase of intangibles. The capital expenditures were primarily related to infrastructure improvements to support our Omni-Channel transformation and international expansion, the build-out of our distribution center and retail stores, and purchases of computer hardware and software. The purchase of intangibles and other assets, net was related to the acquisition of our UGG brand distributor that sold to retailers in Germany. +Financing Activities. The increase in net cash used in financing activities for fiscal year 2017 compared to fiscal year 2016 was primarily due to an increase in short-term borrowings under our revolving credit facilities, offset by repayments of short-term borrowings, as well as repurchases of our common stock and cash paid for contingent consideration related to the Sanuk brand acquisition. +Net cash used in financing activities for fiscal year 2016 resulted primarily from repayments of short-term borrowings and cash paid for repurchases of our common stock. +Net cash used in financing activities for fiscal year 2015 resulted primarily from repayments of short-term borrowings and cash paid for repurchases of our common stock. This was partially offset by short-term borrowings provided by our lines of credit and funding received from the mortgage obtained on our corporate headquarters property. +During fiscal years 2017, 2016 and 2015, we repurchased approximately 222,000 , 1,420,000 and 1,436,000 shares, respectively, of our common stock. In fiscal years 2017, 2016 and 2015, the cost of these repurchases was approximately $12,572 , $94,200 , and $107,200 , respectively, at an average price per share of $56.51 , $66.32 , and $74.68 , respectively. At March 31, 2017 , the remaining approved amount under the January 2015 program was approximately $65,294 . +Refer to Note 8, "Stockholders' Equity", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on repurchases of our common stock. +Impact of Foreign Currency Exchange Rate Fluctuations +Foreign currency exchange rate fluctuations had an incremental negative impact on each of the years ended March 31, 2017, 2016 and 2015. +Refer to “Results of Operations”, above, the consolidated statements of comprehensive income (loss), Note 9, "Foreign Currency Exchange Rate Contracts and Hedging", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of the impact of foreign currency exchange rate fluctuations. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements and notes thereto: allowances for doubtful accounts, estimated returns liability, sales discounts, and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. +49 +Table of Contents +Refer to Note 1, "The Company and Summary of Significant Accounting Policies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Accounts Receivable Allowances and Reserves +The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +As of March 31, +2017 +2016 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +190,997 +100 +% +$ +190,349 +100 +% +Allowance for doubtful accounts +5,979 +3.1 +5,494 +2.9 +Allowance for sales discounts +3,100 +1.6 +2,672 +1.4 +Allowance for chargebacks +7,028 +3.7 +4,968 +2.6 +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +369,465 +100 +% +$ +378,635 +100 +% +Allowance for sales returns +16,247 +4.4 +17,061 +4.5 +Sales returns liability +2,736 +0.7 +1,889 +0.5 +Allowance for Doubtful Accounts +We provide a reserve against trade accounts receivable for estimated losses that may result from customers' inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this reserve. The reserve includes specific reserves for accounts, which all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses of this nature. The slight increase in the allowance for doubtful accounts over the prior year is a result of the ongoing difficult retail environment experienced by certain of our customers which lead to an increased risk that the related outstanding receivables may not be collected. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for the accounts we consider to have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at March 31, 2017 by approximately $1,000. +Allowance for Sales Discounts +A significant portion of our wholesale sales and resulting trade accounts receivable reflects a discount that our customers may take, generally based upon meeting certain order, shipment and payment terms. We use the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks +When our wholesale customers pay their invoices, they often take deductions for chargebacks against their invoices, which are often valid, and can include chargebacks for price differences, discounts or markdowns and short shipments. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks taken against wholesale customer invoices. The increase in the allowance for chargebacks compared to the prior year was primarily due to higher customer chargebacks on wholesale sales in Europe resulting from our transition to the new European 3PL. +50 +Table of Contents +Allowance for Sales Returns and Sales Returns Liability +We record an allowance for anticipated future returns of goods shipped prior to period end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products. We also have a policy whereby we accept returns from our DTC customers for a 30-day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. The decrease in the sales return reserve over the prior year was primarily due to lower customer requests for returns. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned, would change the allowance and liability reserves for total returns at March 31, 2017 by approximately $2,000. +Inventory Write-Downs +We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or expected future net selling prices. Inventories are stated at $298,851 and $299,911 , net of inventory write-downs of $7,638 and $7,303 as of March 31, 2017 and 2016 , respectively. The amount of inventory write-downs as a percentage of inventories was 2.5% and 2.4% as of March 31, 2017 and 2016 , respectively. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve at March 31, 2017 by approximately $800. +Valuation of Goodwill, Intangible and Other Long-Lived Assets +We assess the impairment of goodwill and indefinite-lived intangible assets on an annual basis using either a qualitative or quantitative approach. We evaluate the Sanuk brand's goodwill and the Teva brand's indefinite-lived trademarks for impairment at October 31st of each year, and evaluate the UGG brand and other brands’ wholesale reportable operating segment goodwill for impairment at December 31st of each year. The timing of the annual impairment evaluation is prescribed by applicable accounting guidance. We also perform interim impairment evaluations of goodwill and indefinite-lived assets if events or changes in circumstances between annual tests indicate that additional testing is warranted to determine if goodwill may be impaired. Where we use the qualitative assessment, first we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include historical financial performance, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units' projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand, and acceptance of products or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. +Definite-lived intangible and other long-lived assets, such as property and equipment and leasehold improvements, subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted cash flows. If impaired, the asset or asset group is written down to fair value based either on discounted cash flows or appraised values. +At December 31, 2016 and 2015, we performed our annual impairment tests and evaluated the UGG brand and other brands' wholesale reportable operating segment goodwill, and at October 31, 2016 and 2015 we evaluated the Teva brand's indefinite-lived trademarks. Based on comparing the carrying amounts of the UGG brand and other brands' goodwill, as well as the Teva brand's trademarks, to the brands' fiscal year 2017 and 2016 sales and operating results and the brands' long-term forecasts of sales and operating results as of their evaluation dates, we concluded that the carrying amounts of the UGG brand and other brands' goodwill, as well as the Teva brand's trademarks, were not impaired. +During the third quarter of the year ended March 31, 2017 , we performed the annual impairment assessment of the Sanuk brand's wholesale reportable operating segment goodwill as of October 31, 2016 with the assistance of a third party valuation firm, concluded that the asset was fully impaired and recorded a $113,944 non-cash impairment charge to the Sanuk brand's wholesale reportable operating segment goodwill during the third quarter of fiscal year +51 +Table of Contents +2017, which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). During the third quarter of the year ended March 31, 2016, we performed the annual impairment test assessment of the Sanuk brand's wholesale reportable operating segment goodwill as of October 31, 2015, concluding that the carrying amount of the Sanuk brand's goodwill was not impaired, based on a comparison of the carrying amounts of the Sanuk brand's goodwill to the fiscal year 2016 sales and operating results and the brand's long-term forecasts of sales and operating results as of October 31, 2015. The change in the sales forecasts between the annual impairment testing dates of October 31, 2016 (during fiscal year 2017) and October 31, 2015 (during fiscal year 2016) was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. +During the third quarter of the year ended March 31, 2017 , we evaluated the Sanuk brand's definite long-lived assets for indicators of impairment, primarily as a result of the goodwill impairment discussed above. The analysis determined that the Sanuk brand's amortizable patent under the Sanuk brand's wholesale reportable operating segment was fully impaired and we recorded a non-cash impairment charge to the patent of $ 4,086 during the third quarter of fiscal year 2017, which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). +During the third quarter of the year ended March 31, 2017 , we recorded an impairment for other intangible assets in the DTC reportable operating segment of $4,743 due to retail-related impairments primarily driven by a decline in market rental rates for European retail stores, which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). +Refer to Note 3, "Goodwill and Other Intangible Assets", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our goodwill and intangible assets and annual impairment analysis results. +During the years ended March 31, 2017 and 2016 , we recognized total impairment losses for retail store related fixed assets and software of approximately $11,300,000 and approximately $19,000,000 , respectively. Our valuation methodologies used as of March 31, 2017 did not change from the prior years. +Performance-Based Compensation +In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. The committee then establishes specific annual financial goals and specific strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their role and responsibilities with us. The performance criteria, as well as our annual targets, differ each year and are based upon many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior year's performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense decreased approximately $1,100 in fiscal year 2017 compared to fiscal year 2016. As of March 31, 2017, the performance criteria relating to our fiscal year 2017 performance-based compensation were not achieved. In fiscal year 2016, performance-based compensation expense decreased approximately $18,000 compared to fiscal year 2015. In fiscal year 2016, the performance criteria of all performance-based stock compensation were not achieved and accordingly, we reversed expense for those awards, compared to the fiscal year 2015 performance-based stock compensation where the performance criteria were partially achieved. +Refer to Note 8, "Stockholders' Equity", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our performance-based stock compensation. +52 +Table of Contents +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG brand products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. While there had been significant changes in the price of sheepskin in the years leading up to 2013, the price of sheepskin has recently stabilized. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in purchase obligations, which are not reflected in our consolidated balance sheets. Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our sheepskin contracts. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our margins. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency exchange rate risk from existing assets and liabilities. Other than changes in the amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. There has been recent increased volatility with respect to the exchange rates between US dollars and both British Pounds and Euros. This increased volatility may be due in part to tax, importation and other policies being contemplated by the US government, the withdrawal by the UK from the European Union (commonly referred to as Brexit), the recent elections in the Netherlands and France, and the upcoming elections in the UK in June 2017 and Germany in September 2017. We do not know whether this level of volatility will continue or increase in the near or long term. At May 30, 2017 , we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +As of March 31, 2017 , the notional amount of foreign currency exchange rate contracts was $100,000 and the fair value of $1,365 was recorded in other current assets in the consolidated balance sheets. As of March 31, 2017 , a hypothetical 10.0% foreign currency exchange rate fluctuation would cause the fair value of our financial instruments to increase or decrease by approximately $10,000. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effect such hypothetical changes may have on overall economic activity. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate contracts for trading purposes. Subsequent to March 31, 2017 , we entered into Non-Designated Derivative Contracts with notional amounts totaling approximately $34,000 , which are expected to mature over the next nine months, and Designated Derivative Contracts with notional amounts totaling approximately $21,000 , which are expected to mature over the next 12 months. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our foreign currency exchange rate contracts. +Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exchange rate risk is generated primarily from our European and Asian operations. Approximately $539,000 , or 30.1% , and $526,000 , or 28.1% , of our total net sales for the years ended March 31, 2017 and 2016, respectively, were denominated in foreign currencies. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of re-measuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US dollar functional and also from re-measuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. We re-measure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries’ local currency is their designated functional currency, and we translate those subsidiaries’ assets and liabilities into US dollars using the exchange rates as of the end of the reporting period, which results in financial statement translation gains and losses recognized in other comprehensive income (loss). Foreign currency exchange rate fluctuations affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors. +53 +Table of Contents +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate, the federal funds effective rate, and the London Interbank Offered Rate (LIBOR). At our election, interest under our Domestic Credit Facility is tied to adjusted LIBOR or the Alternative Base Rate (ABR), and is variable based on our total adjusted leverage ratio each quarter. The ABR is defined as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) adjusted LIBOR for a one-month interest period plus 1.00% . As of March 31, 2017 , the effective LIBOR and ABR rates were 2.48% and 4.50% , respectively. Our China Credit Facility provides for interest on outstanding borrowings at a rate based on 110.0% of the People’s Bank of China rate, which was 4.35% as of March 31, 2017 . Our Japan Credit Facility provides for interest on outstanding borrowings at a rate based on the Tokyo Interbank Offered Rate for three months plus 0.40% , and total interest was 0.46% as of March 31, 2017 . Assuming average borrowings for the period equal to the trailing 12-month average, a hypothetical 1.0% increase in interest rates under each of the three revolving credit facility agreements would result in an aggregate increase to interest expense of approximately $1,400 for the year ended March 31, 2017 . +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed with this Annual Report on Form 10-K in a separate section following Part IV, as shown on the index under Item 15, "Exhibits and Financial Statement Schedule", of this Annual Report on Form 10-K. +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +We carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017 . Based upon that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2017. +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2017 , our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that, as of March 31, 2017 , +54 +Table of Contents +our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K. +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and our Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed as Exhibits 31.1, 31.2 and 32 to this Annual Report on Form 10-K. This Part II, Item 9A should be read in conjunction with such certifications for a more complete understanding of the topics presented. +55 +Table of Contents +PART III +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2017, 2016, and 2015 are stated in Items 10, 11, 12, 13, and 14 herein as "year ended" or "years ended". +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2017 annual meeting of stockholders and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the year ended March 31, 2017 pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +56 +Table of Contents +PART IV +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2017, 2016, and 2015 are stated in Item 15 herein as "year ended" or "years ended". +Item 15. Exhibits and Financial Statement Schedule +Refer to the “Index to Consolidated Financial Statements and Financial Statement Schedule” on page F-1 of this Annual Report on Form 10-K for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 8, 2011 and incorporated by reference herein) +*3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as updated through May 24, 2016 +10.1 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.2 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.6 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.7 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.8 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Equity Incentive Plan, adopted by the Board of Directors on December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filed on March 1, 2011 and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective August 1, 2013 (Exhibit 10.10 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.10 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +57 +Table of Contents +Exhibit +Number +Description of Exhibit +#10.11 +Form of Restricted Stock Unit Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.12 +Form of Restricted Stock Unit Award Agreement (Level III) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and incorporated by reference herein) +#10.13 +Form of Stock Appreciation Rights Award Agreement (Level 2) under the 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.14 +Form of Restricted Stock Unit Award Agreement (2012 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on May 31, 2012 and incorporated by reference herein) +#10.15 +Form of Restricted Stock Unit Award Agreement (2013 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on December 19, 2013 and incorporated by reference herein) +#10.16 +Form of Restricted Stock Unit Award Agreement (2014 LTIP) under the 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on September 24, 2014 and incorporated by reference herein) +#10.17 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +*#10.19 +Form of Change of Control and Severance Agreement +#10.20 +Consulting Agreement and General Release, dated January 16, 2015, by and between Zohar Ziv and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on January 21, 2015 and incorporated by reference herein) +#10.21 +Consulting Agreement and General Release, dated May 6, 2015, by and between Constance Rishwain and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 12, 2015 and incorporated by reference herein) +#10.22 +Consulting Agreement and General Release, dated May 24, 2016 and effective May 31, 2016, entered into by and between Deckers Outdoor Corporation and Angel Martinez (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 27, 2016 and incorporated by reference herein) +10.23 +Second Amended and Restated Credit Agreement, dated November 13, 2014, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 19, 2014 and incorporated by reference herein) +10.24 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.25 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +58 +Table of Contents +Exhibit +Number +Description of Exhibit +10.26 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +#10.27 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.28 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.29 +Management Incentive Plan (Exhibit 10.1 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.30 +2016 Non-Vested Stock Unit (NSU) Award Agreement (Exhibit 10.2 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.31 +Form of Restricted Stock Unit Award Agreement under 2015 Stock Incentive Plan (2016 LTIP Financial Performance Award) (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 24, 2015 and incorporated by reference herein) +#10.32 +2017 Performance-Based Annual Restricted Stock Units Agreement (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.33 +2017 Time-Based Annual Restricted Stock Units Agreement (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.34 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 28, 2016 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +*31.2 +Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +**32 +Certification Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +*101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at March 31, 2016 and March 31, 2015; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2016 and March 31, 2015, quarter transition period ended March 31, 2014, and year ended December 31, 2013; (iii) Consolidated Statements of Cash Flows for the years ended March 31, 2016 and March 31, 2015, quarter transition period ended March 31, 2014, and year ended December 31, 2013, and (iv) Notes to Consolidated Financial Statements. +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +59 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ THOMAS A. GEORGE +Thomas A. George +Chief Financial Officer (Principal Financial and Accounting Officer) +Date: May 30, 2017 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ DAVID POWERS +Chief Executive Officer (Principal Executive Officer), President and Director +May 30, 2017 +David Powers +/s/ THOMAS A. GEORGE +Chief Financial Officer +(Principal Financial and Accounting Officer) +May 30, 2017 +Thomas A. George +/s/ ANGEL R. MARTINEZ +Chairman of the Board +May 30, 2017 +Angel R. Martinez +/s/ MICHAEL F. DEVINE, III +Director +May 30, 2017 +Michael F. Devine, III +/s/ KARYN O. BARSA +Director +May 30, 2017 +Karyn O. Barsa +/s/ JOHN M. GIBBONS +Director +May 30, 2017 +John M. Gibbons +/s/ JOHN G. PERENCHIO +Director +May 30, 2017 +John G. Perenchio +/s/ LAURI M. SHANAHAN +Director +May 30, 2017 +Lauri M. Shanahan +/s/ JAMES QUINN +Director +May 30, 2017 +James Quinn +/s/ BONITA C. STEWART +Director +May 30, 2017 +Bonita C. Stewart +/s/ NELSON C. CHAN +Director +May 30, 2017 +Nelson C. Chan +60 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of March 31, 2017 and 2016 +F-4 +Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2017, 2016 and 2015 +F-5 +Consolidated Statements of Stockholders' Equity for the years ended March 31, 2017, 2016 and 2015 +F-6 +Consolidated Statements of Cash Flows for the years ended March 31, 2017, 2016 and 2015 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts for the years ended March 31, 2017, 2016 and 2015 +F-44 +All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. +The defined periods for the fiscal years ended March 31, 2017, 2016 and 2015 in the consolidated financial statements and notes and financial statement schedule thereto are expressed herein as "year ended" or "years ended". +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deckers Outdoor Corporation and subsidiaries as of March 31, 2017 and 2016 , and the results of their operations and their cash flows for the years ended March 31, 2017 , 2016 and 2015 in conformity with US generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the internal control over financial reporting of Deckers Outdoor Corporation as of March 31, 2017 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 30, 2017 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of Deckers Outdoor Corporation. +/s/ KPMG LLP +Los Angeles, California +May 30, 2017 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the internal control over financial reporting of Deckers Outdoor Corporation (the Company) as of March 31, 2017 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A(b), "Management's Report on Internal Control over Financial Reporting". Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017 , based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of March 31, 2017 and 2016 , and the results of their operations and their cash flows for the years ended March 31, 2017 , 2016 and 2015 and our report dated May 30, 2017 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Los Angeles, California +May 30, 2017 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +As of March 31, +2017 +2016 +ASSETS +Current assets: +Cash and cash equivalents +$ +291,764 +$ +245,956 +Trade accounts receivable, net of allowances ($32,354 and $30,195 as of March 31, 2017 and 2016, respectively) +158,643 +160,154 +Inventories, net of reserves ($7,638 and $7,303 as of March 31, 2017 and 2016, respectively) +298,851 +299,911 +Prepaid expenses +15,996 +18,249 +Other current assets +30,781 +38,039 +Income tax receivable +24,786 +23,456 +Total current assets +820,821 +785,765 +Property and equipment, net of accumulated depreciation ($190,758 and $163,807 as of March 31, 2017 and 2016, respectively) +225,531 +237,246 +Goodwill +13,990 +127,934 +Other intangible assets, net of accumulated amortization ($54,361 and $45,302 as of March 31, 2017 and 2016, respectively) +65,138 +83,026 +Deferred tax assets +44,708 +20,636 +Other assets +21,592 +23,461 +Total assets +$ +1,191,780 +$ +1,278,068 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Short-term borrowings +$ +549 +$ +67,475 +Trade accounts payable +95,893 +100,593 +Accrued payroll +22,608 +20,625 +Other accrued expenses +31,816 +39,449 +Income taxes payable +2,719 +6,461 +Value added tax payable +5,466 +3,895 +Total current liabilities +159,051 +238,498 +Long-term liabilities: +Mortgage payable +32,082 +32,631 +Income tax liability +13,216 +9,073 +Deferred rent obligations +18,433 +16,139 +Other long-term liabilities +14,743 +14,256 +Total long-term liabilities +78,474 +72,099 +Commitments and contingencies (Note 7) +Stockholders' equity: +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 31,987 and 32,020 as of March 31, 2017 and 2016, respectively) +320 +320 +Additional paid-in capital +160,797 +161,259 +Retained earnings +819,589 +826,449 +Accumulated other comprehensive loss +(26,451 +) +(20,557 +) +Total stockholders' equity +954,255 +967,471 +Total liabilities and stockholders' equity +$ +1,191,780 +$ +1,278,068 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(amounts in thousands, except per share data) +Years Ended March 31, +2017 +2016 +2015 +Net sales +$ +1,790,147 +$ +1,875,197 +$ +1,817,057 +Cost of sales +954,912 +1,028,529 +938,949 +Gross profit +835,235 +846,668 +878,108 +Selling, general and administrative expenses +837,154 +684,541 +653,689 +(Loss) income from operations +(1,919 +) +162,127 +224,419 +Other expense (income), net: +Interest income +(778 +) +(420 +) +(207 +) +Interest expense +7,319 +5,814 +4,220 +Other income, net +(1,474 +) +(152 +) +(733 +) +Total other expense, net +5,067 +5,242 +3,280 +(Loss) income before income taxes +(6,986 +) +156,885 +221,139 +Income tax (benefit) expense +(12,696 +) +34,620 +59,359 +Net income +5,710 +122,265 +161,780 +Other comprehensive (loss) income, net of tax: +Unrealized gain on foreign currency exchange rate hedges +704 +461 +450 +Foreign currency translation adjustment +(6,598 +) +(550 +) +(18,875 +) +Total other comprehensive loss +(5,894 +) +(89 +) +(18,425 +) +Comprehensive (loss) income +$ +(184 +) +$ +122,176 +$ +143,355 +Net income per share: +Basic +$ +0.18 +$ +3.76 +$ +4.70 +Diluted +$ +0.18 +$ +3.70 +$ +4.66 +Weighted-average common shares outstanding: +Basic +32,000 +32,556 +34,433 +Diluted +32,355 +33,039 +34,733 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Loss +Total Stockholders' +Equity +Shares +Amount +Balance, March 31, 2014 +34,624 +$ +346 +$ +146,731 +$ +743,815 +$ +(2,043 +) +$ +888,849 +Stock compensation expense +11 +— +13,524 +— +— +13,524 +Shares issued upon vesting +93 +1 +(1 +) +— +— +— +Excess tax benefit from stock compensation +— +— +4,197 +— +— +4,197 +Shares withheld for taxes +— +— +(5,674 +) +— +— +(5,674 +) +Repurchases of common stock +(1,436 +) +(14 +) +— +(107,225 +) +— +(107,239 +) +Net income +— +— +— +161,780 +— +161,780 +Total other comprehensive loss +— +— +— +— +(18,425 +) +(18,425 +) +Balance, March 31, 2015 +33,292 +333 +158,777 +798,370 +(20,468 +) +937,012 +Stock compensation expense +16 +— +6,622 +— +— +6,622 +Shares issued upon vesting +132 +1 +(1 +) +— +— +— +Excess tax benefit from stock compensation +— +— +471 +— +— +471 +Shares withheld for taxes +— +— +(4,610 +) +— +— +(4,610 +) +Repurchases of common stock +(1,420 +) +(14 +) +— +(94,186 +) +— +(94,200 +) +Net income +— +— +— +122,265 +— +122,265 +Total other comprehensive loss +— +— +— +— +(89 +) +(89 +) +Balance, March 31, 2016 +32,020 +320 +161,259 +826,449 +(20,557 +) +967,471 +Stock compensation expense +23 +— +6,175 +— +— +6,175 +Shares issued upon vesting +166 +2 +796 +— +— +798 +Excess tax benefit from stock compensation +— +— +100 +— +— +100 +Shares withheld for taxes +— +— +(7,533 +) +— +— +(7,533 +) +Repurchases of common stock +(222 +) +(2 +) +— +(12,570 +) +— +(12,572 +) +Net income +— +— +— +5,710 +— +5,710 +Total other comprehensive loss +— +— +— +— +(5,894 +) +(5,894 +) +Balance, March 31, 2017 +31,987 +$ +320 +$ +160,797 +$ +819,589 +$ +(26,451 +) +$ +954,255 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2017 +2016 +2015 +Cash flows from operating activities: +Net income +$ +5,710 +$ +122,265 +$ +161,780 +Adjustments to reconcile net income to net cash provided by (used in) operating activities: +Depreciation, amortization and accretion +52,628 +50,024 +49,293 +Change in fair value of contingent consideration +— +(4,411 +) +(3,574 +) +Provision for doubtful accounts, net +2,847 +5,120 +1,107 +Deferred (benefit) tax provision +(24,495 +) +8,167 +9,970 +Stock-based compensation +6,175 +6,622 +13,524 +Loss (gain) on sale of assets +538 +(1,338 +) +— +Impairment of goodwill +113,944 +— +— +Impairment of long-lived assets +13,222 +9,773 +— +Restructuring costs +29,087 +24,856 +— +Other +(71 +) +56 +2,969 +Changes in operating assets and liabilities: +Trade accounts receivable, net +(1,336 +) +(23,545 +) +(36,885 +) +Inventories, net +1,060 +(61,492 +) +(26,748 +) +Prepaid expenses and other current assets +7,975 +(3,681 +) +(10,376 +) +Income tax receivable +(1,331 +) +(8,286 +) +(15,170 +) +Other assets +2,259 +(3,082 +) +(144 +) +Trade accounts payable +(7,825 +) +14,775 +8,912 +Contingent consideration +— +(819 +) +(364 +) +Accrued expenses +(990 +) +(16,221 +) +3,761 +Income taxes payable +(3,743 +) +(397 +) +4,883 +Long-term liabilities +3,023 +7,195 +6,716 +Net cash provided by operating activities +198,677 +125,581 +169,654 +Cash flows from investing activities: +Purchases of property and equipment, net +(44,499 +) +(65,356 +) +(91,147 +) +Purchases of tangible, intangible, and other assets, net +— +(4,700 +) +(9,489 +) +Proceeds from sale of assets +— +2,835 +— +Net cash used in investing activities +(44,499 +) +(67,221 +) +(100,636 +) +Cash flows from financing activities: +Proceeds from short-term borrowings +405,988 +449,200 +199,784 +Repayments of short-term borrowings +(468,938 +) +(387,120 +) +(201,705 +) +Proceeds from issuance of stock under the employee stock purchase plan +798 +— +— +Cash paid for shares withheld for taxes +(7,865 +) +(3,691 +) +(5,674 +) +Excess tax benefit from stock compensation +100 +471 +4,197 +Cash paid for repurchases of common stock +(12,572 +) +(94,200 +) +(107,239 +) +Contingent consideration paid +(20,058 +) +(445 +) +(115 +) +Loan origination costs on short-term borrowings +— +(62 +) +(818 +) +Proceeds from mortgage loan +— +— +33,931 +Mortgage loan origination costs +— +— +(338 +) +Repayment of mortgage principal +(523 +) +(493 +) +(283 +) +Net cash used in financing activities +(103,070 +) +(36,340 +) +(78,260 +) +Effect of foreign currency exchange rates on cash +(5,300 +) +(1,207 +) +(10,703 +) +Net change in cash and cash equivalents +45,808 +20,813 +(19,945 +) +Cash and cash equivalents at beginning of period +245,956 +225,143 +245,088 +Cash and cash equivalents at end of period +$ +291,764 +$ +245,956 +$ +225,143 +See accompanying notes to the consolidated financial statements. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(Continued) +Years Ended March 31, +2017 +2016 +2015 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Income taxes, net of refunds ($17,132, $501, and $4,701 as of March 31, 2017, 2016 and 2015, respectively) +$ +14,099 +$ +29,916 +$ +53,504 +Interest +5,494 +4,640 +4,315 +Non-cash investing and financing activities: +Accrued for purchases of property and equipment +1,101 +2,640 +3,419 +Accrued for asset retirement obligations +2,359 +1,394 +786 +Accrued for shares withheld for taxes +587 +919 +— +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Note 1. The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements and notes thereto include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively referred to as the "Company"). Accordingly, all references herein to Deckers Outdoor Corporation or "Deckers" include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers Outdoor Corporation is a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high performance activities. As part of its Omni-Channel platform, the Company's brands are aligned across its Fashion Lifestyle group (the UGG and Koolaburra brands) and Performance Lifestyle group (the Teva, Sanuk and Hoka brands). +The Company sells its products through quality domestic and international retailers, international distributors, and directly to its end-user consumers both domestically and internationally through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and E-Commerce websites. Independent third party contractors manufacture all of the Company's products. +The Company has five reportable operating segments consisting of the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, other brands, and DTC. The Company's other brands currently consist of the Hoka, Ahnu and Koolaburra brands. +The Company's business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. Net sales of other brands do not have significant seasonal impact on the Company. +The Company was incorporated in 1975 under the laws of the State of California and was reincorporated under the laws of the State of Delaware in 1993. +Certain reclassifications were made for all prior periods presented including the years ended March 31, 2016 and 2015, to conform to the current period presentation. +Reportable Operating Segments +During the first quarter of fiscal year 2016, the Company changed its reportable operating segments to combine the previously separated retail store and E-Commerce operating components into one DTC reportable operating segment. The Company now has five reportable operating segments including the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, other brands, and DTC. It is by these reportable operating segments that information is reported to the Chief Operating Decision Maker, who is the principal executive officer. The Company performs an annual analysis of the appropriateness of its reportable operating segments. Refer to Note 12, "Reportable Operating Segments", for further information about the Company's reportable operating segments. +Use of Estimates +The preparation of the Company's consolidated financial statements and notes thereto are in accordance with United States generally accepted accounting principles (US GAAP), which requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes thereto. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable allowances, +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +returns liabilities, stock-based compensation, impairment assessments, depreciation and amortization, income tax liabilities, uncertain tax positions and income taxes receivable, the fair value of financial instruments, and the fair values of assets and liabilities, including goodwill and other intangible assets. These estimates are based on information available as of the date of the consolidated financial statements and notes thereto. For the reasons stated, actual results could differ materially from these estimates. +Summary of Significant Accounting Policies +Cash Equivalents +The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents included $198,992 and $195,575 of money market funds as of March 31, 2017 and 2016 , respectively. +Allowance for Doubtful Accounts +The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers' inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Write-offs against this allowance are recorded in selling, general and administrative (SG&A) expenses in the consolidated statements of comprehensive income (loss). The allowance includes specific allowances for trade accounts, all or a portion of which are identified as potentially uncollectible, plus a non-specific allowance for the balance of accounts based on the Company's historical loss experience. Allowances have been established for all projected losses of this nature. +Allowance for Sales Discounts +The Company provides an allowance against sales discounts for wholesale sales and resulting trade accounts receivable, which reflects a discount that customers may take, generally based upon meeting certain order, shipment and payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance in the consolidated balance sheets. +Allowance for Chargebacks +The Company provides an allowance against chargebacks from wholesale customers. When customers pay their invoices, they may take deductions for chargebacks against their invoices, which are often valid, and can include chargebacks for price differences, discounts and short shipments. Therefore, the Company records an allowance for the balance of chargebacks that are outstanding in the accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks taken against wholesale customer invoices. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance in the consolidated balance sheets. +Allowance for Sales Returns and Sales Returns Liability +The Company provides an allowance for anticipated future returns of goods shipped prior to period end and a liability for anticipated returns of goods sold direct to consumers. In general, the Company accepts returns for damaged or defective products. The Company also has a policy whereby returns are accepted from DTC customers for a 30 -day period. The Company bases the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +among other factors. Changes to the allowance and returns liability are recorded against gross sales in the consolidated statements of comprehensive income (loss). +Inventories +Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales in the consolidated statements of comprehensive income (loss). Cost also includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends and the retail environment. +Property and Equipment, Depreciation and Amortization +Property and equipment is stated at cost less accumulated depreciation and amortization, and generally has a useful life expectancy of at least one year. Property and equipment includes tangible, non-consumable items owned by the Company valued at or above $3 , certain computer software costs and internal or external computer system consulting work valued at or above $3 as defined below, and portable electronic devices valued at or above $1.5 . Tangible, non-consumable items below these amounts are expensed. The value includes the purchase price, sales tax and costs to acquire (shipping and handling), install (excluding site preparation costs), secure and prepare the item for its intended use. +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives, as summarized below. Capitalized website costs, which are included in the machinery and equipment category below, are immaterial to the Company's consolidated financial statements. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. The Company allocates depreciation and amortization of property and equipment to cost of sales and SG&A expenses in the consolidated statements of comprehensive income (loss). The majority of the Company's depreciation and amortization, which arises from its Enterprise Resource Planning systems, warehouses, corporate headquarters and retail stores, due to the nature of its operations, is included in SG&A expenses in the consolidated statements of comprehensive income (loss). The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Property and equipment is summarized as follows: +As of March 31, +Useful life (years) +2017 +2016 +Land +Indefinite +$ +32,843 +$ +25,543 +Building +39.5 +38,990 +38,920 +Machinery and equipment +1-10 +199,602 +189,085 +Furniture and fixtures +1-7 +38,720 +38,948 +Leasehold improvements +1-11 +106,134 +108,557 +Gross property and equipment +416,289 +401,053 +Less accumulated depreciation and amortization +190,758 +163,807 +Property and equipment, net +$ +225,531 +$ +237,246 +During the years ended March 31, 2017 and 2016 , the Company recognized total impairment losses for retail store related fixed assets and software of approximately $11,300 and $19,000 , respectively. +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Goodwill and Other Intangible Assets +Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Definite-lived intangible assets are amortized over their estimated useful lives to their estimated residual values, if any, on a straight-line basis and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted cash flows. If impaired, the asset or asset group is written down to fair value based either on discounted cash flows or appraised values. +Goodwill and indefinite-lived intangible assets are not amortized, but are instead tested annually for impairment. Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of the indefinite-lived intangible asset. The Company does not calculate the fair value of the indefinite-lived intangible asset unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the indefinite-lived intangible asset to its carrying amount, and if the fair value of the indefinite-lived intangible asset exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite-lived intangible asset is less than its carrying amount, the Company will record an impairment charge to write down the indefinite-lived intangible asset to its fair value. Impairment and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). +If, as of the time of conducting the impairment test, it is determined that the value of the reporting unit the acquired net assets were assigned to, as determined by reference to product sales, operating margins or other indicators of value associated with the reporting unit, has declined to a point that the fair value of the reporting unit is below its carrying amount, the Company may be required to write down the amount of goodwill (i.e. take an impairment charge). The goodwill impairment evaluation involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. Refer to Note 12, "Reportable Operating Segments", for further information on the Company's reportable operating segments. In general, conditions that may indicate impairment include, but are not limited to: a significant adverse change in customer demand or business climate that could affect the value of an asset; change in market share; budget-to-actual performance; consistency of operating margins and capital expenditures; changes in management or key personnel; or changes in general economic conditions. +The Company evaluates the Sanuk brand's wholesale reportable segment goodwill and the Teva brand's indefinite-lived trademarks for impairment at October 31st of each year, and evaluates the UGG brand and other brands’ goodwill for impairment at December 31st of each year. The timing of the annual impairment evaluation is prescribed by applicable accounting guidance. The Company also performs interim impairment evaluations of goodwill and indefinite-lived intangible assets if events or changes in circumstances between annual tests indicate additional testing is warranted to determine if goodwill may be impaired. +The goodwill impairment test is a two-step quantitative process that combines a market and income approach, which involves the use of estimates and assumptions related to the fair value of the reporting units with which goodwill is associated. In the first step, the Company compares the fair value of each reporting unit with goodwill to its carrying value. The Company determines the fair value of its reporting unit with goodwill using a combination of a discounted cash flow analysis and a market value analysis. For purposes of assessing the fair value, the Company uses best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. The Company also considers the reporting units' projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand, and acceptance of products or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. Furthermore, the estimates and assumptions used to calculate fair value of the reporting unit may change from period to period based upon a number of factors, including actual and projected operating results, declining market conditions, changes in the retail and E-Commerce environment, +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +as well as changes in the competitive environment, and are subject to a high degree of uncertainty. Changes in estimates and assumptions used to determine whether impairment exists, or changes in actual results compared to expected results, could result in additional impairment charges in future periods. +If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform step two of the goodwill impairment test in order to determine the impairment charge, if any. +Step two of the goodwill impairment test involves a hypothetical allocation of the estimated fair value of the reporting unit to its net tangible and intangible assets (excluding goodwill) as if the reporting unit were newly acquired, which results in an implied fair value of the goodwill. If the implied fair value of goodwill, as determined by this hypothetical allocation of assets, is less than the carrying value, an impairment charge is recognized for the difference. +Refer to Note 3, "Goodwill and Other Intangible Assets", for further information on the Company's goodwill and intangible assets and annual impairment analysis results. Refer to Note 4, "Fair Value Measurements", for further information on the definition of fair value and related inputs. +Accounting for Long-Lived Assets +Other long-lived assets, such as machinery and equipment, internal use software, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. +At least quarterly, the Company evaluates whether any impairment-triggering events, including the following, have occurred which would require such asset groups to be tested for impairment: +• +a significant decrease in the market price of a long-lived asset group; +• +a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its physical condition; +• +a significant adverse change in legal factors or in business climate that could affect the value of a long-lived asset group, including an adverse action or assessment by a regulator; +• +an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset group; +• +a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• +a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its previously-estimated useful life. +When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +the cash flows of other assets and liabilities. The Company assesses potential impairment of its retail group long-lived assets by comparing projected 12 -month store cash flows to the current carrying value of the store's long-lived assets. Stores that have been opened for more than one year, or have otherwise been identified by management as having one or more indicators of impairment, with projected 12 -month cash flows less than the current carrying amount of the store's long-lived assets are then reviewed to determine if an impairment exists. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. Impairment is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). +Derivative Instruments and Hedging Activities +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency exchange rate risk. The Company may enter into foreign currency exchange rate forward or option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign currency exchange rate contracts and other derivative instruments to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency exchange rate contracts for trading purposes. +Certain of the Company's foreign currency exchange rate forward contracts are designated cash flow hedges of forecasted sales (Designated Derivative Contracts) and are subject to foreign currency exchange rate risk. These contracts allow the Company to sell Euros and British Pounds in exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted sales over specific quarters. Changes in the fair value of Designated Derivative Contracts are recognized as a component of accumulated other comprehensive income (loss) (OCI) within stockholders' equity, and are recognized in the consolidated statements of comprehensive income (loss) during the period which approximates the time the corresponding third-party sales occur. The Company may also enter into foreign currency exchange rate contracts that are not designated as hedging instruments (Non-Designated Derivative Contracts) for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of Non-Designated Derivative Contracts are recognized in SG&A expenses in the consolidated statements of comprehensive income (loss). The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in SG&A expenses. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging", for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements. +The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting. Refer to Note 4, "Fair Value Measurements", for more information on the nature of Level 2 inputs. +For all designated hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivative instruments. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivative instruments that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, such as Designated Derivative Contracts, the effective portion of the gain or loss on the derivative instrument is recognized in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The Company discontinues hedge accounting prospectively when it determines that the derivative instrument is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative instrument expires or is sold, terminated, or exercised, the cash flow hedge is non-designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative instrument remains outstanding, the Company continues to carry the derivative instrument at its fair value on the consolidated balance sheets and recognizes any subsequent changes in fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in OCI related to the hedging relationship are immediately recognized into earnings. +Comprehensive Income (Loss) +Comprehensive income (loss) is the total of net earnings and all other non-owner changes in equity. Comprehensive income (loss) includes net income (loss), foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, "Accumulated Other Comprehensive Loss", for further information on components of OCI recognized by the Company. +Net Income per Share +Basic net income per share represents net income divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share represents net income divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, "Net Income per Share", for a reconciliation of basic to diluted weighted-average common shares outstanding. +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with functional currencies other than the US dollar. In most cases, the Company's foreign subsidiaries' local currency is the same as the designated functional currency. The Company holds a portion of its cash and other monetary assets and liabilities in currencies other than its subsidiary's functional currency, and is exposed to financial statement transaction gains and losses as a result of re-measurement of the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. The Company re-measures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are included in SG&A expenses in the consolidated statements of comprehensive income (loss) as incurred, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in OCI. +Non-qualified Deferred Compensation +In 2010, the Company established a non-qualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. For each plan year, the Company's Board of Directors may, but is not required to, contribute any amount it desires to any participant under this program. The Company's contribution is determined by the Board of Directors annually. In March 2015, the Board of Directors approved a Company contribution feature for future plan years beginning in calendar year 2016 and gave management the authority to approve actual contributions. As of March 31, 2017 and 2016, no payments were made or pending under this program. The value of the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust for the purpose of supporting the benefits payable under this program, with the assets invested in company-owned life insurance policies. Deferred compensation of $609 is included in other accrued expenses and $3,531 is included in other long-term liabilities in the consolidated balance sheets as of March 31, 2017 . Deferred compensation of $308 is included in other accrued expenses and $5,993 is included in other long-term liabilities in the consolidated balance sheets as of March 31, 2016 . +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Refer to Note 4, "Fair Value Measurements", for further information on the fair value of deferred compensation assets and liabilities. +Stock-Based Compensation +All of the Company's stock-based compensation is classified within stockholders' equity. Stock compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock compensation expense and the Company's results of operations could be materially impacted. Stock compensation expense is included in SG&A expenses in the consolidated statements of comprehensive income (loss). Refer to Note 8, "Stockholders' Equity", for further information on Company stock-based compensation. +Revenue Recognition +The Company recognizes wholesale, E-Commerce, and international distributor revenue when products are shipped, and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recorded. For E-Commerce sales, allowances for estimated returns and bad debts are provided for when related revenue is recorded. For retail sales, allowances for estimated returns are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as cost of sales. The Company presents revenue net of taxes (for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes) collected from customers and remitted to governmental authorities. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $21,256 , $22,176 , and $20,872 for the years ended March 31, 2017 , 2016 and 2015 , respectively, and are included in SG&A expenses in the consolidated statements of comprehensive income (loss). +Advertising, Marketing, and Promotion Expenses +Advertising costs are expensed the first time the advertisement is run. All other costs of advertising, marketing, and promotion are expensed as incurred. These expenses of $109,579 , $109,738 , and $111,162 for the years ended March 31, 2017 , 2016 and 2015 , respectively, are included in SG&A expenses in the consolidated statements of comprehensive income (loss). Included in prepaid and other current assets as of March 31, 2017 and 2016 were $900 and $1,084 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after such dates. +Rent Expense +Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments under some of the Company's retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated amounts. Rent expenses are included in SG&A expenses in the consolidated statements of comprehensive income (loss). +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $2,124 , $2,182 , and $1,726 during the years ended March 31, 2017 , 2016 and 2015 , respectively, and was included in SG&A expenses in the consolidated statements of comprehensive income (loss). In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing contributions for the years ended March 31, 2017 , 2016 and 2015 , respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income (loss). +Recent Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in US GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers , which provides for a one-year deferral of the effective date of ASU No. 2014-09, as well as early application, which will be effective with respect to the Company's annual and interim reporting periods beginning April 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies how to apply the implementation guidance related to principal versus agent considerations within ASU No. 2014-09. The Company is continuing to evaluate the effect that the adoption of these ASUs will have on its consolidated financial statements and related disclosures, and has not yet selected a transition method. The Company is currently evaluating its business and contracts to determine any changes to accounting policies, processes or systems necessary to adopt the requirements of the new standard. The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements, but it is expected to result in expanded disclosures. +In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory , which changed the US GAAP requirement that, at each financial statement date, entities measure inventory at the lower of cost or market, which is typically determined by reference to the current replacement cost, net realizable value, and the net realizable value less an approximate normal profit margin. The definition of net realizable value under this ASU is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU only applies to inventory that is measured using the first-in, first-out or average cost methods. This ASU is effective with respect to the Company's annual and interim reporting periods beginning on April 1, 2017, +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +with early adoption permitted, and should be applied prospectively. The adoption of this ASU will not have a material impact on the Company's consolidated financial statements and related disclosures. +In February 2016, the FASB issued ASU 2016-02, Leases , to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous US GAAP. A lessee should recognize a liability in the balance sheet to make lease payments (the lease liability) at fair value and an offsetting right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee should include payments to be made in optional periods only if the lessee is reasonably certain that it will exercise an option to extend the lease or will not exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain that it will exercise that purchase option. This ASU requires a modified retrospective transition method for leases existing at the beginning of the earliest comparative period presented in the adoption-period consolidated financial statements. Any leases that expire before the initial application will not require any accounting adjustment. This ASU is effective with respect to the Company's annual and interim reporting periods beginning April 1, 2019. The Company is evaluating the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures, and currently expects an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, such as retail stores, showrooms, and distribution facilities, as well as additional disclosure on all existing lease obligations. The income statement recognition of lease expense is not expected to materially change from the current methodology. +In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , which requires an entity to recognize excess tax benefits and certain tax deficiencies associated with employee share-based payment awards in the income statement instead of in additional paid-in-capital when the awards vest or are settled, and present excess tax benefits as an operating activity on the statement of cash flows instead of as a financing activity. This ASU also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, and to make a policy election to either estimate the number of awards that are expected to vest or to account for forfeitures as they occur. In addition, the cash paid by an entity to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation is required to be classified as a financing activity on its statement of cash flows. This ASU is effective with respect to the Company's annual and interim reporting periods beginning April 1, 2017 and the Company decided to apply this ASU prospectively. The Company evaluated the effect that the adoption of this ASU would have on its consolidated financial statements and related disclosures, and concluded that its adoption will not have a material impact on income tax expenses or additional paid-in capital for results of operations. However, there will be income statement volatility due to the recognition of all excess tax benefits and deficiencies within the consolidated statements of comprehensive income (loss), which will be driven by the number of shares vesting in any given period, and the change in share price between the grant date and the date that the shares vest. Increasing share prices from the grant date to the vesting date will result in lower income tax expense and higher net income. +In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments . The ASU addresses specific cash flow issues with the objective of reducing the diversity in practice prior to issuance of the update. This ASU is effective with respect to the Company’s annual and interim reporting periods beginning April 1, 2018, with early adoption permitted. The guidance should be applied retrospectively, requiring adjustment to all comparative periods presented, unless it is impractical to do so, in which case, the guidance should be applied prospectively as of the earliest date practicable. The Company is evaluating the effect that the adoption of this ASU will have on its statement of cash flows and related disclosures, but its adoption is not expected to have a material impact. +In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairment test. In computing the implied fair value of goodwill under current step two, an entity previously had to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date following the procedure required to determine the fair value of assets acquired and liabilities assumed in +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +a business combination. Under this ASU, an entity is required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This ASU is effective with respect to the Company’s annual and interim reporting periods beginning April 1, 2020, with early adoption permitted. The Company is evaluating the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures. +Note 2. Restructuring +In connection with the Company's announced restructuring plan in the fourth quarter of fiscal year 2016, the Company closed 25 retail stores as of March 31, 2017 , and consolidated its brand operations and corporate headquarters. In connection with these restructuring efforts, the Company incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of $29,100 and $22,800 recognized in SG&A expenses and approximately $0 and $2,000 in cost of sales, respectively. The related liabilities are reflected in accrued payroll and other accrued expenses. Of the total amount, approximately $11,100 remained accrued as of March 31, 2017 , and is expected to be paid during fiscal year 2018. +During the year ended March 31, 2017, the Company identified additional s tores for closure. During fiscal year 2017, the Company recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for the retail store assets for 12 of these stores. +It is anticipated that the Company will incur restructuring costs similar in nature to its historical activities in future fiscal years and in connection with the Company closing retail stores to reach a target retail store count of 125 owned stores by the end of fiscal year 2020. +The following table summarizes the restructuring charges incurred in fiscal years 2017 and 2016: +Lease termination costs +Retail store fixed asset impairments +Severance costs +Software and office fixed asset impairments +Termination of various contracts and other services +Total +Fiscal year 2016 charges +$ +8,900 +$ +5,800 +$ +4,000 +$ +3,800 +$ +2,300 +$ +24,800 +Paid in cash +(1,200 +) +— +(600 +) +— +— +(1,800 +) +Non-cash +— +(5,800 +) +— +(3,800 +) +(500 +) +(10,100 +) +Liability as of March 31, 2016 +7,700 +— +3,400 +— +1,800 +12,900 +Additional charges +9,000 +3,600 +5,800 +3,200 +7,500 +29,100 +Paid in cash +(12,000 +) +— +(6,400 +) +— +(5,400 +) +(23,800 +) +Non-cash +— +(3,600 +) +(300 +) +(3,200 +) +— +(7,100 +) +Liability as of March 31, 2017 +$ +4,700 +$ +— +$ +2,500 +$ +— +$ +3,900 +$ +11,100 +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The following table summarizes these restructuring charges by reportable operating segment: +Years Ended March 31, +2017 +2016 +UGG brand wholesale +$ +2,100 +$ +— +Teva brand wholesale +— +— +Sanuk brand wholesale +100 +3,000 +Other brands wholesale +100 +2,500 +Direct-to-Consumer +12,900 +10,500 +Unallocated overhead costs +13,900 +8,800 +Total restructuring charges +$ +29,100 +$ +24,800 +Note 3. Goodwill and Other Intangible Assets +The Company's goodwill and other intangible assets are as follows: +As of March 31, +2017 +2016 +Goodwill +UGG brand +$ +6,101 +$ +6,101 +Sanuk brand +— +113,944 +Other brands +7,889 +7,889 +Total Goodwill +13,990 +127,934 +Other Intangible Assets +Indefinite-lived Intangible Assets +Trademarks +15,455 +15,455 +Definite-lived Intangible Assets +Trademarks +55,244 +55,244 +Other +57,629 +57,629 +Total gross carrying amount +112,873 +112,873 +Accumulated amortization +(54,361 +) +(45,302 +) +Accumulated impairment +(8,829 +) +— +Net Definite-lived Intangible Assets +49,683 +67,571 +Total Other Intangible Assets +65,138 +83,026 +Total Goodwill and Other Intangible Assets +$ +79,128 +$ +210,960 +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The weighted-average amortization period for definite-lived intangible assets is 16 years and 13 years for the years ended March 31, 2017 and 2016, respectively. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. +Goodwill is allocated to the wholesale reportable operating segments of the brands described above. Changes in the Company's goodwill balance for the periods presented in the consolidated balance sheets are as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance, March 31, 2015 +$ +143,765 +$ +(15,831 +) +$ +127,934 +Changes related to acquisitions, impairments and other adjustments +— +— +— +Balance, March 31, 2016 +143,765 +(15,831 +) +127,934 +Changes related to acquisitions, impairments and other adjustments +— +(113,944 +) +(113,944 +) +Balance, March 31, 2017 +$ +143,765 +$ +(129,775 +) +$ +13,990 +During the third quarter of the year ended March 31, 2017 , consistent with applicable accounting guidance, the Company performed the annual impairment assessment of the Sanuk brand's wholesale reportable operating segment goodwill as of October 31, 2016 with the assistance of a third party valuation firm. The annual assessment determined that there was an indication of impairment of the Sanuk brand's wholesale reportable segment goodwill. In particular, step one of the impairment assessment concluded that the fair value of the Sanuk brand's wholesale reportable operating segment was below its carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. Accordingly, the Company then performed step two of the impairment assessment, which required fair value to be allocated to all of the assets and liabilities of the Sanuk brand's wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets. As a result of this analysis, the Company recorded a $113,944 non-cash impairment charge to the Sanuk brand's wholesale reportable operating segment goodwill during the third quarter of the year ended March 31, 2017 , which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). +At October 31, 2015, the Company performed the annual impairment test and evaluated the Sanuk brand's wholesale reportable operating segment goodwill and, based on comparing the carrying amounts of the Sanuk brand's wholesale reportable operating segment goodwill to the 2016 sales and operating results and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded the carrying amount of the Sanuk brand's wholesale reportable operating segment goodwill was not impaired. The change in the sales forecasts between fiscal year 2017 and fiscal year 2016 at the annual impairment testing date of October 31st of each fiscal year, was primarily due to the change in forecast assumptions discussed above. +During the third quarter of the year ended March 31, 2017 , the Company evaluated the Sanuk brand's definite long-lived assets for indicators of impairment, primarily as a result of the goodwill impairment discussed above. The Company's analysis determined that the Sanuk brand's amortizable patent under the Sanuk brand's wholesale reportable operating segment was fully impaired as the Sanuk SIDEWALK SURFERS utility patent had very limited value in the marketplace because of its limited ability to exclude others from creating similar products. As a result, the Company recorded a non-cash impairment charge to the patent of $ 4,086 in the Sanuk wholesale reportable operating segment during the third quarter of fiscal year 2017, which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). The impairment charge to the patent will result in lower annual amortization expense of approximately $500 . The Company's analysis also determined that the Sanuk brand's other intangible assets, other than the amortizable patent discussed above, were not impaired as of the date on which the impairment test was completed, as it was determined that the undiscounted future cash flows associated with those assets exceeded their carrying values. However, as discussed above, additional impairment charges could be incurred in future periods. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +At December 31, 2016 and 2015, the Company performed its annual impairment tests and evaluated the UGG brand and other brands' wholesale reportable operating segment goodwill, and at October 31, 2016 and 2015, evaluated the Teva brand's indefinite-lived trademarks. Based on the carrying amounts of the UGG brands and other brands' wholesale reportable segment goodwill and Teva brand's trademarks, the brands' fiscal year 2017 and 2016 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that the carrying amounts of the goodwill and trademarks were not impaired. +During the third quarter of the year ended March 31, 2017 , the Company recorded an impairment for other intangible assets in the DTC reportable operating segment of $4,743 due to a decline in market rental rates for European retail stores, which was reflected in SG&A expenses in the consolidated statements of comprehensive income (loss). +Aggregate amortization expense for amortizable intangible assets during the years ended March 31, 2017 , 2016 and 2015 was $7,945 , $8,850 , and $11,291 , respectively. +Charges incurred in the consolidated statements of comprehensive income (loss) relevant to the Company's other intangible assets during the year ended March 31, 2017 are as follows: +Balance, March 31, 2016 +$ +83,026 +Impairment charges +(8,829 +) +Amortization expense +(7,945 +) +Foreign currency exchange rate fluctuations +(1,114 +) +Balance, March 31, 2017 +$ +65,138 +The following table summarizes the expected amortization expense as of March 31, 2017 for amortizable intangible assets for the next five years and thereafter: +Years Ending March 31: +2018 +$ +7,572 +2019 +6,106 +2020 +3,439 +2021 +2,526 +2022 +2,521 +Thereafter +27,519 +$ +49,683 +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Note 4. Fair Value Measurements +The fair value of the Company's cash and cash equivalents, trade accounts receivable, inventory, prepaid expenses, income taxes receivable, other current assets, short-term borrowings, trade accounts payable, accrued payroll, other accrued expenses, income taxes payable and value added tax payable approximate the carrying values due to the relatively short maturities of these assets and liabilities. The fair values of the Company's long-term liabilities do not significantly differ from the carrying values. The fair value of the contingent consideration related to acquisitions and of the Company's derivative instruments are measured and recorded at fair value on a recurring basis. Changes in fair value of contingent consideration resulting from either accretion or changes in discount rates or in the expectations of achieving the performance criteria are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the consolidated balance sheets. +The inputs used in measuring fair value are prioritized into the following hierarchy: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the reporting entity to develop its own assumptions. +The assets and liabilities that are measured on a recurring basis at fair value are summarized as follows: +Fair Value as of March 31, 2017 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value: +Non-qualified deferred compensation asset +$ +6,662 +$ +6,662 +$ +— +$ +— +Non-qualified deferred compensation liability +(4,140 +) +(4,140 +) +— +— +Designated Derivative Contracts asset +1,365 +— +1,365 +— +Fair Value as of March 31, 2016 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value: +Non-qualified deferred compensation asset +$ +6,083 +$ +6,083 +$ +— +$ +— +Non-qualified deferred compensation liability +(6,301 +) +(6,301 +) +— +— +Designated Derivative Contracts asset +2,903 +— +2,903 +— +Designated Derivative Contracts liability +(2,549 +) +— +(2,549 +) +— +Contingent consideration for acquisition of business +(20,000 +) +— +— +(20,000 +) +The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. +The Level 3 inputs include subjective assumptions used to value the contingent consideration liability in connection with prior acquisitions. The fair value of contingent consideration as of March 31, 2016 is related to the Sanuk brand and Hoka brand acquisitions. All contingent consideration payments have been fully paid as of March 31, 2017. Refer to Note 7, "Commitments and Contingencies", for additional information regarding the Company's contingent consideration payments. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The following table presents a reconciliation of the Level 3 measurement (rounded): +Balance, March 31, 2015 +$ +25,700 +Payments +(1,300 +) +Change in fair value +(4,400 +) +Balance, March 31, 2016 +20,000 +Payments +(20,000 +) +Balance, March 31, 2017 +$ +— +Note 5. Income Taxes +Income Tax (Benefit) Expense +Components of income tax (benefit) expense are as follows: +Years Ended March 31, +2017 +2016 +2015 +Current +Federal +$ +2,184 +$ +11,971 +$ +35,459 +State +1,576 +2,443 +6,861 +Foreign +8,039 +12,039 +7,069 +Total +11,799 +26,453 +49,389 +Deferred +Federal +(20,287 +) +7,887 +8,234 +State +(3,446 +) +1,113 +624 +Foreign +(762 +) +(833 +) +1,112 +Total +(24,495 +) +8,167 +9,970 +Income tax (benefit) expense +$ +(12,696 +) +$ +34,620 +$ +59,359 +Foreign income before income taxes was $49,319 , $105,938 , and $95,850 during the years ended March 31, 2017 , 2016 and 2015, respectively. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Income Tax (Benefit) Expense Reconciliation +Income tax (benefit) expense differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended March 31, +2017 +2016 +2015 +Computed expected income taxes +$ +(2,445 +) +$ +54,910 +$ +77,399 +State income taxes, net of federal income tax benefit +(1,403 +) +1,298 +3,564 +Foreign rate differential +(8,062 +) +(28,233 +) +(25,535 +) +Unrecognized tax benefits +2,691 +3,670 +3,566 +Income tax expense on diminution of operations and nondeductible goodwill +3,921 +1,352 +— +Foreign income withholding tax expense +432 +— +— +Nontaxable income +(5,055 +) +— +— +Statutory foreign income tax (benefit) expense +(2,504 +) +(477 +) +20 +Other +(271 +) +2,100 +345 +Income tax (benefit) expense +$ +(12,696 +) +$ +34,620 +$ +59,359 +Deferred Taxes +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented as follows: +As of March 31, +2017 +2016 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +$ +28,304 +$ +(5,128 +) +Depreciation of property and equipment +(19,511 +) +(8,804 +) +Stock-based compensation +6,258 +10,118 +Deferred rent +6,809 +5,383 +Acquisition costs +751 +745 +Uniform capitalization adjustment to inventory +4,971 +5,280 +Bad debt and other reserves +15,946 +14,163 +State taxes +(145 +) +863 +Prepaid expenses +(4,144 +) +(3,622 +) +Accrued bonuses +1,456 +536 +Foreign currency exchange rate hedges +(534 +) +(94 +) +Other +1,376 +1,196 +Net operating loss carry-forwards +3,171 +— +Net deferred tax assets +$ +44,708 +$ +20,636 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $126,386 . The deferred tax assets are primarily related to the Company's domestic operations and are currently expected to be realized between fiscal years 2018 and 2029. The change in net deferred tax assets between March 31, 2017 and March 31, 2016 includes approximately $400 attributable to the effective portion of Designated Derivative Contracts recognized in OCI. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging", +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +for additional information regarding the Company's derivative instruments and the impact to OCI. Domestic income (loss) before income taxes for the years ended March 31, 2017 , 2016 and 2015 was $(56,305) , $50,947 , and $125,289 , respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance was recorded in fiscal years 2017 and 2016 . +Tax Impact of Foreign Earnings +As of March 31, 2017 , the Company has not provided deferred taxes on approximately $505,124 of US GAAP undistributed earnings from non-US subsidiaries where the earnings are considered to be permanently reinvested. Management’s intent is to continue to reinvest these earnings to support the strategic priority for growth in international markets. If management decides at a later date to repatriate these funds to the US, the Company would be required to provide taxes on these amounts based on applicable US tax rates, net of foreign taxes already paid. The Company has not determined the deferred tax liability associated with these undistributed earnings, as doing so is not practicable. As of March 31, 2017 , the Company had approximately $265,773 of cash and cash equivalents outside the US. +Unrecognized Tax Benefits +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recognized in the financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is reflected as a liability for unrecognized tax benefits in the consolidated balance sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. +A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +Balance, March 31, 2015 +$ +4,667 +Gross increase related to current year tax positions +2,332 +Gross increase related to prior year tax positions +2,059 +Settlements +(363 +) +Balance, March 31, 2016 +8,695 +Gross increase related to current year tax positions +1,878 +Gross increase related to prior year tax positions +1,154 +Balance, March 31, 2017 +$ +11,727 +The amount of accrued unrecognized tax benefits, net of federal benefit, affecting the effective tax rate as of March 31, 2017 was $2,691 . The accrual relates to tax positions taken in years that are open to examination. As of March 31, 2017 , interest and potential penalties of $2,990 compared to $1,842 as of March 31, 2016 were accrued in the consolidated balance sheets resulting from tax positions that are subject to examination and were recorded in interest expense in the Company’s consolidated statements of comprehensive income (loss). It is reasonably possible that approximately $856 of unrecognized tax benefits will be settled within the next 12 months. +The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for years before 2012. +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a material impact on the Company's consolidated financial statements. +Note 6. Revolving Credit Facilities and Mortgage Payable +Domestic Credit Facility +In November 2014, the Company amended its revolving credit facility agreement with JPMorgan Chase Bank, National Association (JPMorgan) as the administrative agent, Comerica and HSBC as co-syndication agents, and the lenders party thereto, in its entirety (as amended, the Second Amended and Restated Credit Agreement) (Domestic Credit Facility). In August 2015, the Company entered into an additional amendment to the Second Amended and Restated Credit Agreement to add certain foreign subsidiaries as borrowers, and in October 2016, further amended the Second Amended and Restated Credit Agreement to allow increased borrowing under its China Credit Facility (as defined below). The Domestic Credit Facility is a five -year, $400,000 secured revolving credit facility that contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans, and which matures on November 13, 2019. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Domestic Credit Facility by up to an additional $200,000 , resulting in a maximum available principal amount of $600,000 . No lender under the Domestic Credit Facility has committed at this time or is obligated to provide any such increase in the commitments. In addition to allowing borrowings in US dollars, the Domestic Credit Facility provides a $150,000 sublimit for borrowings in Euros, British Pounds and any other currency that is subsequently approved by JPMorgan, each lender and the issuing bank. As of March 31, 2017 , the Company had debt capacity of approximately $378,000 out of $400,000 , due to limitations on consolidated worldwide borrowings under the terms of the Domestic Credit Facility. +At the Company's election, interest under the Domestic Credit Facility is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternative Base Rate (ABR), and is variable based on the Company's total adjusted leverage ratio each quarter. The initial adjusted LIBOR rate is equal to the effective LIBOR rate for the interest period elected, plus 1.25% per annum, or at the ABR plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 2.00% per annum (or between the ABR plus 0.25% per annum and the ABR plus 1.00% per annum), based upon the Company's total adjusted leverage ratio at such time. The ABR is defined in the Second Amended and Restated Credit Agreement as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% . +In addition, the Company is initially required to pay commitment fees of 0.175% per annum on the daily amount of the available borrowings under the Domestic Credit Facility, and thereafter the fee rate will fluctuate between 0.175% and 0.30% per annum, based upon the Company's total adjusted leverage ratio. As of March 31, 2017 , the adjusted LIBOR and ABR rates were 2.48% and 4.50% , respectively. +The Company's obligations under the Domestic Credit Facility are guaranteed by the Company's existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries) (Guarantors), and are secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company's domestic and first-tier foreign subsidiaries. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The Domestic Credit Facility is governed by financial covenants which include: the total adjusted leverage ratio must not be greater than 3.25 to 1.00 ; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 on a pro-forma basis; and other customary limitations. The Domestic Credit Facility is governed by certain other covenants which include: the maximum amount paid for capital expenditures may not exceed $110,000 per year if the total adjusted leverage ratio is equal to or exceeds 2.75 to 1.00 ; the maximum additional unsecured debt may not exceed $200,000 ; the Company may not have aggregate Employee Retirement Income Security Act of 1974 events that are considered materially adverse; the Company may not have a change of control (as defined in the Second Amended and Restated Credit Agreement); and no restrictions on cash dividends, share repurchases or acquisitions may be made, provided that no event of default has occurred or is continuing, and that the total adjusted leverage ratio does not exceed 2.75 to 1.00 on a pro-forma basis. +During the year ended March 31, 2017 , the Company borrowed approximately $332,000 and repaid approximately $385,000 under the Domestic Credit Facility. As of March 31, 2017 , the Company had no outstanding balance under the Domestic Credit Facility and had outstanding letters of credit of approximately $549 . As a result, the available borrowings under the Domestic Credit Facility were approximately $378,000 at March 31, 2017 . Amounts outstanding are included in short-term borrowings in the consolidated balance sheets. As of March 31, 2017 , the Company had a remaining balance of approximately $1,000 in deferred financing costs related to previous amendments to the Domestic Credit Facility included in prepaid expenses in the consolidated balance sheets. This amount is being amortized ratably over the five year term of the Second Amended and Restated Credit Agreement. +Subsequent to March 31, 2017 , the Company made no additional borrowings, resulting in no outstanding balance and available borrowings of approximately $378,000 under the Domestic Credit Facility at May 30, 2017 . +China Credit Facility +In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in China (as amended, China Credit Facility) that provided for an uncommitted revolving line of credit of up to CNY 60,000 , or approximately $9,000 , in the quarters ending September 30th and December 31st and CNY 20,000 , or approximately $3,000 , in the quarters ending March 31st and June 30th. In December 2013, the China Credit Facility was amended to provide for the uncommitted revolving line of credit of up to CNY 60,000 to be extended to the entire year. In October 2014, the China Credit Facility was further amended to include, among other things, an extension of the aggregate period of borrowing from 12 months to 18 months. In October 2015, the China Credit Facility was further amended to include an increase in the uncommitted revolving line of credit of up to CNY 150,000 , or approximately $22,000 , including a sublimit of CNY 50,000 , or approximately $7,000 , for the Company's wholly-owned subsidiary, Deckers Footwear (Shanghai) Co., LTD (DFSC) and to reduce the aggregate period of borrowing from 18 to 12 months. In October 2016, the China Credit Facility was further amended to include an increase in the uncommitted revolving line of credit of up to CNY 300,000 , or approximately $44,000 , and to remove the sublimit of CNY 50,000 , or approximately $7,000 , for DFSC. In March 2017, the China Credit Facility was amended to remove DFSC, leaving DBTC as the remaining borrower. +The China Credit Facility is payable on demand and subject to annual review and renewal. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on 110.0% of the People’s Bank of China rate, which was 4.35% as of March 31, 2017 . +During the year ended March 31, 2017 , the Company borrowed approximately $35,000 and repaid approximately $48,000 under the China Credit Facility. As of March 31, 2017 , the Company had no outstanding balance under the China Credit Facility and had available borrowings of approximately $44,000 . Amounts outstanding are included in short-term borrowings in the consolidated balance sheets. +Subsequent to March 31, 2017 , the Company made no additional borrowings, resulting in no outstanding balance and available borrowings of approximately $44,000 under the China Credit Facility at May 30, 2017 . +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Japan Credit Facility +In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in Japan (Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 5,500,000 , or approximately $49,000 , for a maximum term of six months for each draw on the facility. The Japan Credit Facility renews annually, and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2018 under the terms of the original agreement. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) for three months plus 0.40% . As of March 31, 2017 , TIBOR for three months was 0.06% and the effective interest rate was 0.46% . The Japan Credit Facility has customary covenants including a restriction against having losses for two consecutive years, maintaining an interest coverage ratio greater than 1.00 to 1.00 , and maintaining higher assets than liabilities. +During the year ended March 31, 2017 , the Company borrowed approximately $38,000 and repaid approximately $35,000 under the Japan Credit Facility. As of March 31, 2017 , the Company had no outstanding balance under the Japan Credit Facility and had available borrowings of approximately $49,000 . Amounts outstanding are included in short-term borrowings in the consolidated balance sheets. +Subsequent to March 31, 2017 , the Company made no additional borrowings, resulting in no outstanding balance and available borrowings of approximately $49,000 under the Japan Credit Facility at May 30, 2017 . +Mortgage +In July 2014, the Company obtained a mortgage secured by its corporate headquarters property for approximately $33,900 . As of March 31, 2017 , the outstanding principal balance under the mortgage was approximately $32,631 , which includes approximately $549 in short-term borrowings and approximately $32,082 in mortgage payable in the consolidated balance sheets. The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and have a balloon payment, due on July 1, 2029 of approximately $23,700 , in addition to any then-outstanding balance. Minimum principal payments over the next five years are approximately $3,040 . In December 2014, the mortgage financial covenants were amended to be consistent with the financial covenants that govern the Domestic Credit Facility, discussed above. +As of March 31, 2017 , the Company was in compliance with all debt covenants under its borrowing arrangements and remains in compliance at May 30, 2017 . +The borrowing and repayment amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using average currency exchange rates in effect as of the borrowing and repayment dates during the fiscal year 2017. The outstanding balance or available borrowing amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using spot rates in effect as of March 31, 2017 . As a result, there are differences between the debt balances within this footnote disclosure due to foreign currency exchange rates. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Note 7. Commitments and Contingencies +Lease Commitments +The Company leases office, distribution and retail facilities, and automobiles, under operating lease agreements which continue in effect through 2028 . Some of the leases contain renewal options of anywhere from 1 to 15 years. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the consolidated balance sheets. Future minimum commitments under the lease agreements are as follows: +Years Ending March 31: +Future Minimum Lease Commitments +2018 +$ +51,319 +2019 +49,040 +2020 +41,261 +2021 +36,221 +2022 +31,459 +Thereafter +102,170 +$ +311,470 +The following schedule shows the composition of total rental expense: +Years Ended March 31, +2017 +2016 +2015 +Minimum rentals +$ +63,050 +$ +61,227 +$ +61,363 +Contingent rentals +15,281 +16,067 +14,707 +$ +78,331 +$ +77,294 +$ +76,070 +Purchase Obligations +Product +The Company had $392,716 of outstanding purchase orders with its manufacturers at March 31, 2017 . The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers make a decision to purchase its products. The Company generally orders product four to eight months in advance of the anticipated shipment dates based primarily on orders received from wholesale customers and through the DTC reportable operating segment. Accordingly, the aggregate amount reflects purchase obligations for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase obligations can be cancelled by the Company under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company's binding commitments or minimum purchase obligations, and instead reflects an estimate of its future payment obligations based on information currently available. +Sheepskin +The Company had an aggregate of $122,869 of purchase obligations for sheepskin at March 31, 2017 . These obligations generally arise under two -year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring purchase commitments of sheepskin that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There were no additional deposits on remaining minimum commitments as of March 31, 2017 . Included in other current assets on the consolidated balance sheets are approximately $12,200 and $20,000 of additional deposits related to prior sheepskin contracts at March 31, 2017 and 2016 , respectively. +Minimum commitments for these contracts at March 31, 2017 were as follows: +Contract +Effective Date +Final +Target Date +Contract Value +Remaining +Commitment +May 2015 +September 2017 +$ +55,200 +$ +36,567 +September 2015 +September 2017 +7,200 +2,172 +October 2016 +September 2017 +16,105 +13,427 +November 2016 +September 2017 +24,000 +17,003 +October 2016 +September 2018 +53,700 +53,700 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or reflected as a credit against purchases. +Other +The Company had an aggregate of $18,942 of other purchase obligations at March 31, 2017 , which generally consisted of material commitments for future capital expenditures, obligations under service contracts, and requirements to pay promotional expenses. Future capital expenditures primarily related to information technology upgrades at the Company's distribution centers in California and tenant improvements for retail store space in the US. +Litigation +From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +Contingent Consideration +The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 was paid during the year ended March 31, 2017 . +The purchase price for the Hoka brand, acquired in September 2012, included contingent consideration through calendar year 2017, with a maximum contingent amount payable of $2,000 . The conditions for payment were met during the year ended March 31, 2016 ; $1,700 was paid as of March 31, 2016, and $300 was paid as of March 31, 2017. The full final contingent consideration has been paid as of March 31, 2017 . +Indemnification +The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +time, the Company also agrees to indemnify its licensees, distributors and promotional partners in connection with claims that the Company’s products infringe the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination was made based on a prior history of insignificant claims and related payments. There are no currently pending claims relating to indemnification matters involving the Company's intellectual property. +Note 8. Stockholders' Equity +Equity Incentive Plans +In May 2006, the Company adopted the 2006 Equity Incentive Plan (2006 Plan), which was amended on May 9, 2007. In September 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (2015 SIP), which replaced the Company's 2006 Plan. As with the 2006 Plan, the primary purpose of the 2015 SIP is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors, plus any additional shares that are forfeited, or are otherwise terminated under the 2006 Plan. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . +The Company uses various types of stock-based compensation under the 2006 Plan and 2015 SIP, including time-based restricted stock units (RSUs), performance-based stock units (PSUs), stock appreciation rights (SARs) and non-qualified stock options (NQSOs). Annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) are available to key personnel and certain executive officers, and long-term incentive (LTIP) awards or options are available to certain officers, including named executive officers. +Annual Awards +The Company has elected to grant Annual RSUs and Annual PSUs to key employees, including certain executive officers of the Company. These grants entitle the recipients to receive shares of common stock of the Company upon vesting. The vesting of Annual PSUs is subject to achievement of certain performance criteria measured over the fiscal year during which they are granted, while Annual RSUs are subject only to time-based vesting restrictions. Annual PSUs vest in equal one-third installments annually over three years after the performance criteria are achieved, and Annual RSUs vest in equal annual installments over a three -year period following the date of grant. During the year ended March 31, 2017 , the Company granted 83,971 Annual PSUs at a weighted-average grant date fair value of $54.51 per share and 184,531 Annual RSUs at a weighted-average grant date fair value of $61.54 per share. At March 31, 2017 , the Company determined that the performance criteria for the fiscal year 2017 Annual PSUs was not met, and therefore, the awards were cancelled and the Company recorded a reversal of total stock compensation expense recorded in fiscal year 2017 of $500 . As of March 31, 2017 , future unrecognized stock compensation expense for Annual RSUs and Annual PSUs granted to date, excluding estimated forfeitures, was $ 7,951 . +Long-Term Incentive Awards +2007 LTIP SARs and 2007 LTIP PSUs +In May 2007, the Company adopted LTIP awards under the 2006 Plan for issuance of SARs (2007 LTIP SARs) and PSUs (2007 LTIP PSUs), which were awarded to certain executive officers of the Company. These awards were subject to vesting based on certain performance criteria and service conditions. Half of the 2007 LTIP SARs and 2007 LTIP PSUs granted were fully vested as of December 31, 2011; the other half of the awards granted vested 80% on December 31, 2015, with the remaining 20% subject to vesting on December 31, 2016, provided certain performance criteria were achieved. As of December 31, 2016, it was determined that the Company had not achieved the performance +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +criteria and therefore the remaining awards did not vest and were cancelled. Accordingly, the Company recognized a net reversal of stock compensation expense of $2,400 during fiscal year 2017. +2013 LTIP PSUs +In December 2013, the Company adopted LTIP awards (2013 LTIP PSUs) under the 2006 Plan. The shares under these awards were available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient received a specified maximum number of 2013 LTIP PSUs, each of which represented the right to receive one share of the Company's common stock. The 2013 LTIP PSUs vested subject to certain performance criteria and service conditions over three years and would have vested on March 31, 2016 . At March 31, 2016 , the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +2015 LTIP PSUs +In September 2014, the Company approved LTIP awards (2015 LTIP PSUs) under the 2006 Plan. The shares under these awards were available for issuance to current and future members of the Company's leadership team, including the Company's named executive officers. Each recipient received a specified maximum number of 2015 LTIP PSUs, each of which represented the right to receive one share of the Company's common stock. The 2015 LTIP PSUs vested subject to certain performance criteria and service conditions over three years and would have vested on March 31, 2017 . Vesting would not have occurred if the minimum threshold performance criteria were not met for the year ended March 31, 2017 . To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2015 LTIP PSUs that vested would increase up to the maximum number of units granted under the award. Under this award program, the Company granted awards that contained a maximum amount of approximately 160,000 2015 LTIP PSUs during the year ended March 31, 2015 . The weighted-average grant date fair value of the 2015 LTIP PSUs was $98.29 per share. At March 31, 2016 , the Company did not believe the achievement of at least the minimum threshold performance criteria was probable, and accordingly, the Company recognized a net reversal of stock compensation expense of approximately $ 1,400 . At March 31, 2017 , the Company did not meet the minimum threshold performance criteria and the awards did not vest and were cancelled. +2016 LTIP PSUs +In November 2015, the Company approved LTIP awards (2016 LTIP PSUs) under the 2015 SIP. The shares under these awards were available for issuance to current and future members of the Company's leadership team, including the Company's named executive officers. Each recipient received a specified maximum number of 2016 LTIP PSUs, each of which represented the right to receive one share of the Company's common stock. The 2016 LTIP PSUs vest subject to certain performance and market criteria and service conditions over three years and would vest on March 31, 2018. To the extent financial performance is achieved above the minimum threshold performance criteria, the number of 2016 LTIP PSUs that will vest will increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2016 LTIP PSUs will occur if the Company fails to achieve at least 90% of the minimum threshold performance criteria. If the Company achieves the performance criteria, vesting of the 2016 LTIP PSUs will be subject to adjustment based on the application of a total stockholder return (TSR) modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period commencing on April 1, 2015 and ending on March 31, 2018. A Monte-Carlo simulation model, which is a generally accepted statistical technique, was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the TSR 36 -month performance period. Under this award program, the Company granted awards that contained a maximum amount of approximately 308,000 2016 LTIP PSUs during the year ended March 31, 2016 . The weighted-average grant date fair value of the 2016 LTIP PSUs was $50.05 per share. The Company does not believe the achievement of at least the minimum threshold performance criteria is probable, and accordingly, did not recognize stock compensation expense for these awards during the years ended March 31, 2017 and 2016 . If the performance criteria are deemed probable in fiscal year 2018, the Company will recognize a cumulative catch-up adjustment to stock compensation expense. At March 31, 2017 , the cumulative catch-up adjustment to stock +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +compensation expense would be approximately $9,813 , assuming the maximum amount of 2016 LTIP PSUs vest because the performance criteria are deemed probable. +2017 LTIP NQSOs +In November 2016, the Company adopted and approved the grant of NQSOs (2017 LTIP NQSOs) under the Company's 2015 SIP. These options were issued to the Company’s executive officers. Each option grants the recipient the right to purchase a specified number of shares of the Company's common stock at a fixed exercise price per share. The options will vest on March 31, 2019, if the recipient provides continuous service through that date and the Company achieves the minimum threshold performance criteria. The Company measures stock compensation expense for the 2017 LTIP NQSOs at the date of grant using the Black-Scholes option pricing model. This model estimates the fair value of the options based on a number of assumptions, such as expected option life, interest rates, the current fair market value and expected volatility, as well as dividend yield of the Company’s common stock. The fair value of 2017 LTIP NQSOs granted during the year ended March 31, 2017 was $5,456 , and $694 was expensed during the year ended March 31, 2017 . As of March 31, 2017 , future unrecognized stock compensation expense for the 2017 LTIP NQSOs granted to date, excluding estimated forfeitures, was $ 4,344 . +The following table presents the weighted-average valuation assumptions used for the recognition of stock compensation expense for the 2017 LTIP NQSOs granted during the year ended March 31, 2017 : +Expected life (in years) +5.94 +Expected volatility +41.8 +% +Risk free interest rate +1.95 +% +Dividend yield +— +% +Weighted-average exercise price +$ +61.86 +Weighted-average option value +$ +26.27 +Grants to Directors +On a quarterly basis, the Company grants shares of its common stock to each of its outside directors. The fair value of such shares, which is determined based on the closing price at the date of issuance, is expensed on the date of issuance. +Stock Repurchase Programs +In June 2012, the Company approved a stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately-negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program may have been suspended at any time at the Company's discretion. At February 28, 2015, the Company had repurchased the full $200,000 amount authorized under the program through the repurchase of approximately 3,823,000 shares at an average price of $52.31 per share. +In January 2015, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. During fiscal years 2017, 2016 and 2015, the Company repurchased approximately 222,000 , 1,420,000 and 1,436,000 , respectively, of its common stock. In fiscal years 2017, 2016 and 2015, the cost of these repurchases was approximately $12,572 , $94,200 , and $107,200 , respectively, at an average price per share of $56.51 , $66.32 , and $74.68 , respectively. Under the new program, during the year ended March 31, 2015 , the Company repurchased approximately 377,000 shares, out of the total 1,436,000 shares repurchased under both programs in fiscal year 2015, for approximately $27,900 , or an average price of $74.09 per share. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Since inception through March 31, 2017 , the Company had repurchased a total of approximately 2,020,000 shares under this program for approximately $134,706 , or an average price of $66.69 per share, leaving the remaining approved amount at approximately $65,294 . +The following is a reconciliation of the Company's retained earnings for repurchases of its common stock during the year ended March 31, 2017 : +Retained Earnings +Balance at March 31, 2016 +$ +826,449 +Net income +5,710 +Repurchases of common stock +(12,570 +) +Balance at March 31, 2017 +$ +819,589 +The remaining amount of approximately 222,000 shares of the purchase price of $12,572 was recorded in common stock during the year ended March 31, 2017 . +Stock Compensation Expense +The table below summarizes stock compensation expense by award or option type recognized in the consolidated statements of comprehensive income (loss): +Years Ended March 31, +2017 +2016 +2015 +Stock compensation expense recorded for: +Annual RSUs +$ +5,191 +$ +2,356 +$ +1,603 +Annual PSUs +1,203 +3,807 +7,692 +2007 LTIP SARs +(1,949 +) +893 +1,846 +LTIP PSUs* +(296 +) +(1,511 +) +1,323 +2017 LTIP NQSOs +694 +— +— +Directors' shares +1,168 +1,077 +1,060 +Employee Stock Purchase Plan** +164 +— +— +Total stock compensation expense +6,175 +6,622 +13,524 +Income tax benefit recognized +(2,322 +) +(2,525 +) +(5,143 +) +Net stock compensation expense +$ +3,853 +$ +4,097 +$ +8,381 +*2007 LTIP PSUs, 2013 LTIP PSUs, 2015 LTIP PSUs, and 2016 LTIP PSUs are collectively referred to herein as “LTIP PSUs”. +**The 2015 Employee Stock Purchase Plan (2015 ESPP) provides for the initial authorization of 1,000,000 shares of the Company’s common stock for sale to eligible employees. Eligible employees commenced participation in the 2015 ESPP in March 2016 with payroll deductions. Each consecutive purchase period is six months in duration and shares are purchased on the last trading day of the purchase period at a price that reflects a 15% discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The table below summarizes the total remaining unrecognized stock compensation expense related to nonvested awards that the Company considers are probable to vest and the weighted-average period over which the cost is expected to be recognized as of March 31, 2017 : +Unrecognized +Stock Compensation +Expense +Weighted-Average +Remaining +Vesting Period (Years) +Annual RSUs +$ +7,497 +1.4 +Annual PSUs +454 +1.0 +2007 LTIP SARs +— +— +LTIP PSUs +— +— +2017 LTIP NQSOs +4,344 +2.0 +Total +$ +12,295 +The amount of unrecognized stock compensation expense as of March 31, 2017 excludes a maximum of $13,510 of stock compensation expense on the 2016 LTIP PSUs, as achievement of the performance criteria are not deemed probable. +Annual RSUs and Annual PSUs Issued under the 2006 Plan and 2015 SIP +The table below summarizes Annual RSU and Annual PSU activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at March 31, 2014 +331,000 +$ +62.21 +Granted +196,000 +82.34 +Vested +(142,000 +) +68.39 +Forfeited +(30,000 +) +64.18 +Cancelled* +(15,000 +) +84.04 +Nonvested at March 31, 2015 +340,000 +70.11 +Granted +240,000 +70.82 +Vested +(132,000 +) +66.74 +Forfeited +(91,000 +) +72.84 +Cancelled* +(154,000 +) +74.22 +Nonvested at March 31, 2016 +203,000 +68.80 +Granted +268,000 +59.34 +Vested +(111,000 +) +65.37 +Forfeited +(66,000 +) +70.79 +Cancelled* +(68,000 +) +65.23 +Nonvested at March 31, 2017 +226,000 +$ +63.96 +*Shares cancelled during the period represent Annual PSUs granted that did not meet the required performance criteria. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +2007 LTIP SARs Issued Under the 2006 Plan +No SARs have been issued under the 2015 SIP. The table below summarizes 2007 LTIP SARs activity: +Number of +2007 LTIP SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at March 31, 2014 +730,000 +$ +26.73 +6.7 +$ +38,700 +Exercised +(15,000 +) +26.73 +Outstanding at March 31, 2015 +715,000 +26.73 +5.8 +33,000 +Exercised +(80,000 +) +26.73 +Forfeited +(15,000 +) +26.73 +Outstanding at March 31, 2016 +620,000 +26.73 +3.5 +20,600 +Exercised +(290,000 +) +26.73 +Forfeited +(90,000 +) +26.73 +Outstanding at March 31, 2017 +240,000 +$ +26.73 +5.1 +$ +7,920 +Exercisable at March 31, 2017 +240,000 +$ +26.73 +5.1 +$ +7,920 +The maximum contractual term is 10 and 15 years from the grant date for those 2007 LTIP SARs with final vesting dates of December 31, 2011 and December 31, 2015, respectively. +LTIP PSUs Issued Under the 2006 Plan and the 2015 SIP +The table below summarizes the LTIP PSU activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at March 31, 2014 +729,000 +$ +67.01 +Granted +160,000 +98.29 +Forfeited +(35,000 +) +78.39 +Cancelled* +(230,000 +) +82.09 +Nonvested at March 31, 2015 +624,000 +68.82 +Granted +308,000 +50.05 +Vested +(47,000 +) +26.73 +Forfeited +(232,000 +) +70.98 +Cancelled* +(264,000 +) +63.22 +Nonvested at March 31, 2016 +389,000 +61.53 +Granted +7,000 +56.56 +Forfeited +(27,000 +) +68.63 +Cancelled* +(100,000 +) +89.77 +Nonvested at March 31, 2017 +269,000 +$ +50.22 +*Shares cancelled represent LTIP PSUs granted that did not meet the required performance criteria. +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +2017 LTIP NQSOs Issued Under the 2015 SIP +The table below summarizes the 2017 LTIP NQSO: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at March 31, 2016 +— +$ +— +— +$ +— +Granted +208,000 +61.86 +Forfeited +(16,000 +) +61.86 +Outstanding at March 31, 2017 +192,000 +$ +61.86 +9.0 +$ +— +Exercisable at March 31, 2017 +— +$ +— +— +$ +— +The amounts granted are the maximum amounts under the respective options. +Note 9. Foreign Currency Exchange Rate Contracts and Hedging +As of March 31, 2017 , the Company had Designated Derivative Contracts with notional amounts totaling approximately $100,000 , and the fair value of approximately $1,365 was recorded in other current assets in the consolidated balance sheets. The Company did not have any Non-Designated Derivative Contracts. The Designated Derivative Contracts are collectively held by a total of four counterparties and will mature at various dates over the next 12 months. As of March 31, 2016 , the Company had Designated Derivative Contracts with notional amounts totaling approximately $105,000 , held by seven counterparties. During the year ended March 31, 2017 , the Company settled Designated Derivative Contracts with notional amounts totaling approximately $11,000 and approximately $105,000 that were entered into during fiscal years 2017 and 2016, respectively. During the year ended March 31, 2016 , the Company settled Designated Derivative Contracts with notional amounts totaling approximately $32,000 and approximately $46,000 that were entered into in fiscal years 2016 and 2015, respectively. During the years ended March 31, 2017 and 2016, the Company also entered into, and settled, Non-Designated Derivative Contracts with total notional amounts of approximately $263,000 and $261,000 , respectively. +The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of the derivative instruments. During the year ended March 31, 2017 , the designated hedges remained effective. The effective portion of the gain or loss on the derivative instrument is recognized in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of March 31, 2017 , the amount of unrealized gains on foreign currency exchange rate hedges recognized in accumulated OCI (see Note 10, "Accumulated Other Comprehensive Loss") is expected to be reclassified into income within the next 12 months. +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The following table summarizes the effect of Designated Derivative Contracts: +Years Ended March 31, +2017 +2016 +2015 +Amount of gain (loss) recognized in other comprehensive income (loss) on derivative instruments (effective portion) +$8,208 +$(850) +$1,556 +Location of amount reclassified from accumulated other comprehensive income (loss) into income (effective portion) +Net Sales +Net Sales +Net Sales +Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (effective portion) +$7,082 +$(1,592) +$1,226 +Location of amount excluded from effectiveness testing +Selling, general and administrative expenses +Selling, general and administrative expenses +Selling, general and administrative expenses +Amount of gain (loss) excluded from effectiveness testing +$534 +$207 +$(69) +The following table summarizes the effect of Non-Designated Derivative Contracts: +Years Ended March 31, +2017 +2016 +2015 +Location of amount recognized in income on derivative instruments +Selling, general and administrative expenses +Selling, general and administrative expenses +Selling, general and administrative expenses +Amount of gain (loss) recognized in income on derivative instruments +$2,202 +$(1,532) +$6,383 +Subsequent to March 31, 2017 , the Company entered into Non-Designated Derivative Contracts with notional amounts totaling approximately $34,000 , which are expected to mature over the next 9 months, and Designated Derivative Contracts with notional amounts totaling approximately $21,000 , which are expected to mature over the next 12 months. All hedging contracts held at May 30, 2017 were held by a total of four counterparties. +Note 10. Accumulated Other Comprehensive Loss +Accumulated balances of the components within accumulated other comprehensive loss are as follows: +As of March 31, +2017 +2016 +Unrealized gain on foreign currency exchange rate hedges, net of tax +$ +856 +$ +152 +Cumulative foreign currency translation adjustment +(27,307 +) +(20,709 +) +Accumulated other comprehensive loss +$ +(26,451 +) +$ +(20,557 +) +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Note 11. Net Income per Share +The reconciliation of basic to diluted weighted-average common shares outstanding is as follows: +Years Ended March 31, +2017 +2016 +2015 +Weighted-average shares used in basic computation +32,000,000 +32,556,000 +34,433,000 +Dilutive effect of stock-based awards and options +355,000 +483,000 +300,000 +Weighted-average shares used for diluted computation +32,355,000 +33,039,000 +34,733,000 +Excluded*: +Annual RSUs and Annual PSUs +17,000 +— +— +2007 LTIP SARs +— +90,000 +525,000 +LTIP PSUs +269,000 +389,000 +624,000 +2017 LTIP NQSOs +192,000 +— +— +*The stock-based awards and options excluded from the dilutive effect were excluded either because the shares were anti-dilutive or because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance for the years ended March 31, 2017, 2016 and 2015. The number of shares reflected for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. Refer to Note 8, "Stockholder's Equity", for more information on the nature of these awards. +Note 12. Reportable Operating Segments +The Company has five reportable operating segments consisting of the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, other brands, and DTC. The Company's other brands currently consist of the Hoka, Koolaburra and Ahnu brands, and included the TSUBO and MOZO brands for the years ended March 31, 2016 and 2015. +The Company's accounting policies for each reportable operating segment are the same as those described in Note 1, "The Company and Summary of Significant Accounting Policies", except that the Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments. The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. +The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations for each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, costs for research and development, design, sales and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each reportable operating segment. The unallocated corporate overhead costs include: costs of the distribution centers, certain executive and stock-based compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others. +During the first quarter of fiscal year 2016, the Company changed its reportable operating segments to combine the previously-separated E-Commerce and retail store operating components into one DTC reportable operating segment. For the year ended March 31, 2015, certain reclassifications were made to conform to the current period presentation. These changes in reportable operating segments only changed the presentation within the below table and did not impact the Company's consolidated financial statements for any period presented. The reportable operating segment information reported in prior periods has been adjusted retrospectively to conform to the current period presentation. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Reportable operating segment information for the statements of comprehensive income (loss) is summarized as follows: +Years Ended March 31, +2017 +2016 +2015 +Net sales to external customers: +UGG brand wholesale +$ +826,355 +$ +918,102 +$ +903,926 +Teva brand wholesale +103,694 +121,239 +116,931 +Sanuk brand wholesale +77,552 +90,719 +102,690 +Other brands wholesale +116,206 +100,820 +76,152 +Direct-to-Consumer +666,340 +644,317 +617,358 +$ +1,790,147 +$ +1,875,197 +$ +1,817,057 +(Loss) income from operations: +UGG brand wholesale +$ +213,407 +$ +246,990 +$ +269,489 +Teva brand wholesale +10,045 +17,692 +13,320 +Sanuk brand wholesale +(110,582 +) +15,565 +21,914 +Other brands wholesale +1,571 +(4,384 +) +(9,838 +) +Direct-to-Consumer +109,802 +101,756 +150,320 +Unallocated overhead costs +(226,162 +) +(215,492 +) +(220,786 +) +$ +(1,919 +) +$ +162,127 +$ +224,419 +Depreciation, amortization and accretion: +UGG brand wholesale +$ +3,167 +$ +2,254 +$ +5,029 +Teva brand wholesale +24 +54 +94 +Sanuk brand wholesale +5,018 +6,556 +6,969 +Other brands wholesale +971 +1,101 +931 +Direct-to-Consumer +15,669 +19,030 +21,165 +Unallocated overhead costs +27,779 +21,029 +15,105 +$ +52,628 +$ +50,024 +$ +49,293 +Capital expenditures: +UGG brand wholesale +$ +3,444 +$ +1,458 +$ +246 +Teva brand wholesale +— +— +51 +Sanuk brand wholesale +— +881 +487 +Other brands wholesale +191 +51 +351 +Direct-to-Consumer +15,277 +18,445 +19,128 +Unallocated overhead costs +25,587 +45,351 +71,590 +$ +44,499 +$ +66,186 +$ +91,853 +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. (Loss) income from operations of the wholesale reportable operating segments does not include any inter-segment gross profit from sales to the DTC reportable operating segment. +Reportable operating segment information for the consolidated balance sheets is as follows: +As of March 31, +2017 +2016 +Total assets from reportable operating segments: +UGG brand wholesale +$ +259,444 +$ +248,937 +Teva brand wholesale +82,505 +87,225 +Sanuk brand wholesale +80,102 +212,816 +Other brands wholesale +70,607 +65,072 +Direct-to-Consumer +113,400 +148,733 +$ +606,058 +$ +762,783 +The assets allocable to each reportable operating segment include accounts receivable, inventory, fixed assets, goodwill, other intangible assets, and certain other assets that are specifically identifiable with one of the Company's reportable operating segments. Unallocated assets are the assets not specifically related to the reportable operating segments and generally include cash and cash equivalents, deferred tax assets, and various other corporate assets shared by the Company's reportable operating segments. +Reconciliations of total assets from reportable operating segments to the consolidated balance sheets are as follows: +As of March 31, +2017 +2016 +Total assets from reportable operating segments +$ +606,058 +$ +762,783 +Unallocated cash and cash equivalents +291,764 +245,956 +Unallocated deferred tax assets +44,708 +20,636 +Other unallocated corporate assets +249,250 +248,693 +Consolidated total assets +$ +1,191,780 +$ +1,278,068 +Note 13. Concentration of Business, Significant Customers and Credit Risk +The Company does not consider international operations a separate reportable operating segment, as management reviews such operations in the aggregate with the aforementioned reportable operating segments. Long-lived assets, which consist of property and equipment, net, in the US and all other countries combined were as follows: +As of March 31, +2017 +2016 +US +$ +206,077 +$ +211,111 +All other countries* +19,454 +26,135 +Total +$ +225,531 +$ +237,246 +*No other country's long-lived assets comprised more than 10% of the Company's total long-lived assets as of March 31, 2017 and 2016 . +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +March 31, 2017, 2016 and 2015 +(amounts in thousands, except share data) +The Company sells its products to customers throughout the US and to foreign customers located in Europe, Asia, Canada, Australia, and Latin America, among other regions. Approximately $539,000 or 30.1% , $526,000 or 28.1% , and $519,000 or 28.6% of total net sales were denominated in foreign currencies for the years ended March 31, 2017 , 2016 and 2015, respectively. International sales were 36.2% , 35.0% , and 35.9% , of the Company's total net sales for the years ended March 31, 2017 , 2016 and 2015, respectively. For the years ended March 31, 2017 , 2016 and 2015, no single foreign country comprised more than 10% of the Company's total sales. +Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's five largest customers accounted for approximately 20.3% of worldwide net sales for the year ended March 31, 2017 compared to 21.9% for the year ended March 31, 2016 . No single customer accounted for more than 10% of the Company's net sales in the years ended March 31, 2017 , 2016 and 2015. At March 31, 2017 and 2016 , the Company had one customer representing 11.2% and 12.8% of trade accounts receivable, net, respectively. +The Company's production is concentrated at a limited number of independent manufacturing factories in Asia. Sheepskin is the principal raw material for certain UGG products and the majority of sheepskin is purchased from two tanneries in China and is sourced primarily from Australia and the UK. Beginning in 2013, in an effort to partially reduce its dependency on sheepskin, the Company began using a proprietary raw material, UGGpure™, which is a wool woven into a durable backing, in some of its UGG brand products. The Company currently purchases UGGpure from two suppliers. The other production materials used by the Company are sourced primarily in Asia. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, foreign currency exchange rate fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's control. Furthermore, the price of sheepskin is impacted by demand, industry, and competitors. +A portion of the Company's cash and cash equivalents is held as cash in operating accounts with third-party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. +The remainder of the Company's cash equivalents is invested in interest-bearing funds managed by third-party investment management institutions. These investments can include US treasury bonds and securities, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. As of March 31, 2017 , the Company had experienced no loss or lack of access to cash in its operating accounts or invested cash and cash equivalents. +The Company's cash and cash equivalents are as follows: +As of March 31, +2017 +2016 +Money market fund accounts +$ +198,992 +$ +195,575 +Cash +92,772 +50,381 +Total cash and cash equivalents +$ +291,764 +$ +245,956 +F-42 +Note 14. Quarterly Summary of Information (Unaudited) +The Company's business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. Net sales of other brands do not have significant seasonal impact on the Company. Due to the size of the UGG brand relative to the Company's other brands, the Company's aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. +Summarized unaudited quarterly financial data are as follows: +Fiscal Year 2017 +Quarter Ended +6/30/2016 +9/30/2016 +12/31/2016 +3/31/2017 +Net sales +$ +174,393 +$ +485,944 +$ +760,345 +$ +369,465 +Gross profit +76,252 +216,425 +383,634 +158,924 +(Loss) income from operations +(78,319 +) +54,023 +53,250 +(30,873 +) +Net (loss) income* +(58,918 +) +39,305 +41,027 +(15,704 +) +Net (loss) income per share: +Basic +$ +(1.84 +) +$ +1.23 +$ +1.28 +$ +(0.49 +) +Diluted +$ +(1.84 +) +$ +1.21 +$ +1.27 +$ +(0.49 +) +Fiscal Year 2016 +Quarter Ended +6/30/2015 +9/30/2015 +12/31/2015 +3/31/2016 +Net sales +$ +213,805 +$ +486,855 +$ +795,902 +$ +378,635 +Gross profit +86,596 +214,113 +391,017 +154,942 +(Loss) income from operations +(63,708 +) +51,213 +202,500 +(27,878 +) +Net (loss) income* +(47,327 +) +36,377 +156,921 +(23,706 +) +Net (loss) income per share: +Basic +$ +(1.43 +) +$ +1.12 +$ +4.85 +$ +(0.73 +) +Diluted +$ +(1.43 +) +$ +1.11 +$ +4.78 +$ +(0.73 +) +*Includes restructuring charges of approximately $29,100 for the year ended March 31, 2017 primarily incurred during the third and fourth quarter of fiscal year 2017, as well as $24,800 for the year ended March 31, 2016, incurred during the fourth quarter of fiscal year 2016. In addition, includes non-cash impairment charges of approximately $113,944 and $4,086 for the Sanuk brand's wholesale reportable operating segment goodwill and patent during the third quarter of fiscal year 2017. Refer to Note 2, "Restructuring", for further information on the nature of restructuring charges incurred and Note 3, "Goodwill and Other Intangible Assets", for further information on the Sanuk brand non-cash impairment charges. +F-43 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +The following is a summary of allowances for doubtful accounts, sales discounts, chargebacks and sales returns related to accounts receivable: +As of March 31, +2017 +2016 +2015 +Allowance for doubtful accounts (1) +Balance at Beginning of Year +$ +5,494 +$ +2,297 +$ +1,798 +Additions +2,847 +5,120 +1,107 +Deductions +(2,362 +) +(1,923 +) +(608 +) +Balance at End of Year +$ +5,979 +$ +5,494 +$ +2,297 +Allowance for sales discounts (2) +Balance at Beginning of Year +$ +2,672 +$ +2,348 +$ +2,121 +Additions +20,259 +25,560 +22,869 +Deductions +(19,831 +) +(25,236 +) +(22,642 +) +Balance at End of Year +$ +3,100 +$ +2,672 +$ +2,348 +Allowance for chargebacks (3) +Balance at Beginning of Year +$ +4,968 +$ +4,041 +$ +3,064 +Additions +4,138 +2,267 +2,610 +Deductions +(2,078 +) +(1,340 +) +(1,633 +) +Balance at End of Year +$ +7,028 +$ +4,968 +$ +4,041 +Allowance for sales returns (4) +Balance at Beginning of Year +$ +17,061 +$ +9,532 +$ +8,586 +Additions +62,122 +42,392 +31,253 +Deductions +(62,936 +) +(34,863 +) +(30,307 +) +Balance at End of Year +$ +16,247 +$ +17,061 +$ +9,532 +Total Allowances +$ +32,354 +$ +30,195 +$ +18,218 +(1) +The additions to the allowance for doubtful accounts represent estimates of the Company's bad debt expense based upon the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual write-off of the receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company's customers based upon the amount of available outstanding terms discounts in the year-end aging. Deductions are for the actual discounts taken by the Company's wholesale customers. Discounts for DTC customers are taken at the point of sale and are not reflected in the allowance for sales discounts. +(3) +The additions to the allowance for chargebacks represent chargebacks taken in the respective year, as well as an estimate of chargebacks related to sales in the current reporting period that will be taken in the future. Deductions are for the actual chargebacks written off against outstanding accounts receivables. +(4) +The additions to the allowance for sales returns represent estimates of returns based upon the Company's historical wholesale customer returns experience. Deductions are for the actual return of products. Returns of product of DTC customers are taken at the point of sale and are not reflected in the allowance for sales returns. +See accompanying reports of independent registered public accounting firm. +F-44 \ No newline at end of file diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/filing_metadata.csv b/raw/filings/0000910521/2016/0000910521-17-000008/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..60f143f4a40f20b13435bb9ab720d5a6e3920f55 --- /dev/null +++ b/raw/filings/0000910521/2016/0000910521-17-000008/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2017-05-30,2017-03-31,2017-05-30T19:23:38.000Z,0000910521-17-000008,deckfy2017331201710-kdocum.htm,10-K,12415519,1,0,https://www.sec.gov/Archives/edgar/data/910521/000091052117000008/deckfy2017331201710-kdocum.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052117000008/,2016,2016,1 diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/item1.txt b/raw/filings/0000910521/2016/0000910521-17-000008/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2992548ddccb0ad69104b8eae61441da7dd33e09 --- /dev/null +++ b/raw/filings/0000910521/2016/0000910521-17-000008/item1.txt @@ -0,0 +1,87 @@ +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers primarily in Asia. Our growth will depend on our ability to diversify our product offerings, increase the appeal of our products to consumers, optimize domestic and international distribution, drive sales to consumers, and develop or acquire new brands. +Recent Developments +Restructuring. In February 2016, we announced the implementation of a restructuring plan, which included a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. This restructuring plan is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with these restructuring efforts, we incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of $29,100 and $22,800 recognized in selling, general and administrative (SG&A) expenses and approximately $0 and $2,000 in cost of sales, respectively. Related to these charges, we closed 25 retail stores, including five retail stores during fiscal year 2016 and 20 retail stores during fiscal year 2017, and consolidated several offices as of March 31, 2017 . In fiscal year 2016, we relocated our Sanuk brand operations in Irvine, California to our corporate headquarters in Goleta, California and closed our Ahnu brand operations in Richmond, California, as well as consolidated our European offices. +As part of our continuing evaluation of our retail store fleet, we identified additional stores for closure during the year ended March 31, 2017 . During fiscal year 2017, we recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for retail store assets for 12 of these stores. In May 2017, we announced that we expect to further reduce our global brick and mortar footprint by 30 to 40 stores compared to our store count at March 31, 2017 , discussed below, which includes a combination of store closures and conversion of owned stores to partner retail stores. We are targeting a worldwide store count of approximately 125 stores by the end of fiscal year 2020. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 2, "Restructuring", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts, and the impact to our results of operations and our reportable operating segments. +4 +Table of Contents +Savings Plan. In February 2017, we announced a plan to implement significant cost savings, excluding reinvestment (Savings Plan). The Savings Plan includes a combination of both cost of sales improvements and SG&A expense savings. Cost of sales improvements are expected to come from reducing product development cycle times, optimizing material yields, consolidating our factory base and continuing to move production outside of China. SG&A expense savings are expected to come from further retail store consolidations, process improvement efficiencies and lower unallocated indirect spend. In May 2017, we provided an update that the goal of the Savings Plan is to drive approximately $100,000 in operating profit improvement by the end of fiscal year 2020. +Review of Strategic Alternatives . In April 2017, we announced that our Board of Directors has initiated a process to review a broad range of strategic alternatives. This review process includes an exploration and evaluation of strategic alternatives to enhance stockholder value, which may include a sale or other transaction. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our three primary brands and our other brands. Collectively, our brands compete across the fashion and casual lifestyle, outdoor, and running markets. +UGG. The UGG brand is one of the most iconic and recognized brands in footwear and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand by developing more year-round product that includes spring and summer footwear, as well as growing men's products and non-footwear. The UGG brand is sold both domestically and internationally in key markets including the US, UK, Germany, China, Japan, and Canada, among others. +Teva. Teva is a modern outdoor active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, the Teva brand's product line now includes sandals, shoes, and boots built for ultimate versatility. +Sanuk. Sanuk is a surf lifestyle footwear brand rooted in Southern California culture. The Sanuk brand is best known for its SIDEWALK SURFERS shoe, Yoga Mat and Beer Cozy sandal collections. The brand has a history of product invention, comfort, unexpected materials and clever branding. +Other Brands. Other brands consist of: Hoka, a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities; Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials; and Ahnu, a line of performance outdoor footwear, which we have discontinued operating and have begun to leverage under the Teva brand umbrella. +Sales and Distribution +US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to end-user consumers through our DTC business. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers. However, there is some overlap between the sales teams and customers, and we are aligning our brands' sales forces to position them for the future of the brands. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +International Distribution. Internationally, we distribute our products through independent distributors and wholly-owned subsidiaries in many countries, including Europe, Asia-Pacific, and Canada, among others. In addition, in certain countries we sell products through DTC. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. Sales through partner retail stores are primarily attributed to the UGG and Sanuk brand wholesale reportable operating segments. +5 +Table of Contents +For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by third-party logistics providers (3PLs) in certain international locations. +UGG Wholesale. We sell the UGG brand primarily through domestic higher-end department stores such as Nordstrom and Dillard's, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon and Zappos.com. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor, sporting goods, department stores and family footwear, including retailers such as REI, Famous Footwear, DSW and online retailers such as Amazon and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains, including Journeys, Dillard's, DSW, REI and online retailers such as Amazon and Zappos.com. +Other Brands Wholesale. Our other brands are sold primarily at domestic specialty running stores, department stores, outdoor and independent specialty retailers, and with online retailers. Key accounts of the Hoka brand include Running Warehouse, Road Runner Sports, Running Specialty Group, REI and Zappos.com. Key accounts of the Koolaburra brand include Kohl's and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined and help improve our inventory productivity include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +"Ship from Store": Inventory that is available in our stores, but is out of stock online can be shipped from our stores. Future advancements in the capability will use algorithms to select the optimal fulfillment source. +• +"UGG Closet": an online portal that functions similar to an outlet store in that it provides a way to closeout inventory directly to consumers. +• +“Buy online / return in-store”: Our consumers can buy online and return products to the store. +• +“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater breadth of product, directly impact our consumers' experiences, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG brand concept and outlet stores. Through our outlet stores, depending on the location, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2017 , we had a total of 160 retail stores worldwide, which includes 96 concept stores and 64 outlet stores. During fiscal year 2017, we opened 17 new retail stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 retail stores. Concession stores are considered concept stores that are operated by us within a department or other store, which we lease from the store +6 +Table of Contents +owner by paying a percentage of concession store sales. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Refer to Note 1, "The Company and Summary of Significant Accounting Policies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three fiscal years. +In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. +Manufacturing and Supply Chain +We do not manufacture our products. We outsource the production of our brand footwear to independent manufacturers, primarily in Asia. We require our independent manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us. +The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and on-site supervisory offices in Pan Yu City, China and Hai Phong City, Vietnam, which together serve as a link to our independent manufacturers. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. The majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high-quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary new raw material, UGGpure™, which is a wool woven into a durable backing, in some of our UGG brand products. Excluding sheepskin and UGGpure™, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +7 +Table of Contents +Patents and Trademarks +We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for "UGG", "Teva", "Sanuk", "Hoka One One", "Koolaburra", "Ahnu", "UGGpure", and other marks in the US and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan, and Korea. As of March 31, 2017 , we hold 176 designs and inventions with corresponding design or utility patent registrations, plus 14 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. For further discussion, including regarding the factors that may cause actual results to differ materially from our expectations, refer to Part I, Item 1A, "Risk Factors", and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Inventory Management +We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. We have put in place systems and processes designed to improve our forecasting and supply planning capabilities. In addition, we believe that added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels are key areas of focus that will enhance inventory performance. +Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as pre-season orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through pre-season programs to enable us to better plan our production schedule, and inventory and shipping needs. We refer to backlog as unfilled customer orders from our wholesale customers and distributors as of any date, which represent orders scheduled to be shipped at a future date, some of which can be cancelled prior to shipment. As such, these orders may not be indicative of actual future shipments. Therefore, we believe backlog is an imprecise indicator and is not material for understanding the business in its entirety, especially since backlog excludes sales in our DTC business. +As of March 31, 2017 , our backlog was approximately $649,000. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments, as well as variations in when wholesale customers and distributors place orders. As a result, comparisons of the backlog from period-to-period may not provide an accurate indication of future results. +Competition +The footwear markets that we operate in are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, and in part due to the popularity of our UGG brand products, we face increasing competition from a significant number of domestic +8 +Table of Contents +and international competitors selling products designed to compete directly or indirectly with our UGG brand products. We believe that our ability to successfully compete depends on numerous factors, including responding to consumer preferences, producing appealing product, and pricing products competitively, among others. For a discussion on how we compete, refer to Part 1, Item 1A, "Risk Factors". +Employees +At March 31, 2017 , we employed approximately 3,300 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,800 employees in our retail stores worldwide, which includes part-time and seasonal employees. +Financial Information about Reportable Operating Segments and Geographic Areas +Our five reportable operating segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our reportable operating segments. Refer to Note 13, "Concentration of Business, Significant Customers and Credit Risk", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only. +9 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/item13.txt b/raw/filings/0000910521/2016/0000910521-17-000008/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8887a019d4eb587883ceee213e6e23076950ccdb --- /dev/null +++ b/raw/filings/0000910521/2016/0000910521-17-000008/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/item9a.txt b/raw/filings/0000910521/2016/0000910521-17-000008/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..426fa5e00e246f12a101bbb94d738d5111a3f1e6 --- /dev/null +++ b/raw/filings/0000910521/2016/0000910521-17-000008/item9a.txt @@ -0,0 +1,19 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +We carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017 . Based upon that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2017. +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2017 , our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that, as of March 31, 2017 , +54 +Table of Contents +our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K. +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and our Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed as Exhibits 31.1, 31.2 and 32 to this Annual Report on Form 10-K. This Part II, Item 9A should be read in conjunction with such certifications for a more complete understanding of the topics presented. +55 +Table of Contents +PART III +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2017, 2016, and 2015 are stated in Items 10, 11, 12, 13, and 14 herein as "year ended" or "years ended". \ No newline at end of file diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/rp_note.txt b/raw/filings/0000910521/2016/0000910521-17-000008/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2016/0000910521-17-000008/rpt_disclosure.txt b/raw/filings/0000910521/2016/0000910521-17-000008/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/filing.txt b/raw/filings/0000910521/2017/0000910521-18-000015/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf30b4817ceddb86a35e268b5994d368d36664e0 --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/filing.txt @@ -0,0 +1,5206 @@ +10-K +1 +deck331201810-k.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +Annual Report Pursuant To Section 13 or 15(d) +of the Securities Exchange Act of 1934 +For The Fiscal Year Ended March 31, 2018 +Commission File Number: 001-36436 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +95-3015862 +(State of incorporation) +(I.R.S. Employer Identification No.) +250 Coromar Drive, Goleta, California 93117 +(Address of principal executive offices) +(805) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock, par value $0.01 per share +New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý +At September 30, 2017 , the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $2,180,262,000 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on the New York Stock Exchange on that date, which was $68.41 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 11, 2018 , the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 30,447,808 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2018 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K , are incorporated by reference in Part III of this Annual Report on Form 10-K . With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K . +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2018 +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +* +Item 2. +Properties +25 +Item 3. +Legal Proceedings +26 +Item 4. +Mine Safety Disclosures +* +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +27 +Item 6. +Selected Financial Data +29 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +31 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +52 +Item 8. +Financial Statements and Supplementary Data +53 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +* +Item 9A. +Controls and Procedures +54 +Item 9B. +Other Information +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +55 +Item 11. +Executive Compensation +55 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +55 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +55 +Item 14. +Principal Accounting Fees and Services +55 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +57 +Signatures +60 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +*Not applicable. +1 +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K , filed with the Securities and Exchange Commission (SEC) on May 30, 2018 ( Annual Report on Form 10-K ), and the information and documents incorporated by reference in this Annual Report on Form 10-K , contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K , including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position, and market opportunities. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K , and the information and documents incorporated by reference in this Annual Report on Form 10-K , contain forward-looking statements relating to, among other things: +• +the results of and costs associated with our restructuring and operating profit improvement plans; +• +our global business, growth, operating, investing, and financing strategies; +• +our product offerings, distribution channels, and geographic mix; +• +consumer preferences with respect to our brands and products; +• +the purchasing trends impacting the buying patterns of wholesale customers and retail consumers; +• +the impact of seasonality and weather on consumer behavior and our results of operations; +• +expectations regarding and trends affecting our financial condition, operating results, capital expenditures, liquidity, or cash flows; +• +expectations relating to the expansion of Direct-to-Consumer capabilities; +• +our plans to consolidate certain United States distribution center operations; +• +overall global economic trends, including foreign currency exchange rate fluctuations; +• +reliability of overseas factory production and storage; +• +availability and cost of raw materials; +• +the value of goodwill and other intangible assets, and future write-downs or impairment charges; +• +changes impacting our tax liability and effective tax rates, including as a result of changes in tax laws or treaties, foreign income or loss, and the realization of net deferred tax assets; +• +the repatriation of certain cash and cash equivalents balances currently domiciled outside the United States and the related tax impact on us of that decision; +• +potential impacts of our ongoing operational system upgrades; +• +commitments and contingencies, including purchase obligations for product and sheepskin; and +• +the impact of recent accounting pronouncements. +Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry, and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K , as well as in our other filings with the SEC. You should read this Annual Report on Form 10-K , including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements. +2 +PART I +References in this Annual Report on Form 10-K to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), Hoka One One® (Hoka), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Annual Report on Form 10-K are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all dollar amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for per share data. The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 are stated herein as "year ended" or "years ended". +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers, primarily in Asia. +Recent Developments +Restructuring Plan. In February 2016, we announced the implementation of a multi-year restructuring plan which is designed to realign our brands, optimize our retail store fleet, and consolidate our management and operations. As part of this restructuring plan, we realigned our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands. In general, the intent of the restructuring plan is to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with our restructuring plan, we have closed 32 retail stores as of March 31, 2018 , including five stores in fiscal year 2016 and 20 in fiscal year 2017, and consolidated our brand operations and corporate headquarters. We have incurred cumulative restructuring charges of $55,324 through March 31, 2018 , with $1,667 , $28,984 , and $22,824 of restructuring charges recorded in selling, general and administrative (SG&A) expense during the years ended March 31, 2018 , 2017 , and 2016 , respectively, and $1,849 in cost of sales during fiscal year 2016 in the consolidated financial statements. We currently do not anticipate incurring material restructuring charges in future periods, though optimization of our owned retail stores remains a focus. +We anticipate closing stores or converting stores to partner retail stores in our wholesale channel, as we continue our strategy of retail store and fleet optimization. We continue to drive and are evolving our retail store and fleet optimization strategies in line with our long-term objectives, and we are targeting a global retail store count of approximately 125 owned stores. While we are seeing initial signs of improvement, our decision to open or close store locations will be evaluated based on the operating results of each store and our retail store and fleet optimization strategies, which may ultimately impact our global retail store count. +As a result of the implementation of our restructuring plan, we expect to realize an annualized gross SG&A expense savings in the consolidated statements of comprehensive income (loss) totaling approximately $85,000 by March 31, 2020. The SG&A expense savings are expected to be primarily derived from reductions in operating costs related to the termination of retail store leases and the conversion of certain of our foreign owned retail stores to partner retail stores, as well as a reduction in overhead costs, including payroll and related benefits, depreciation and amortization, and rent and occupancy costs, among others. As of March 31, 2018 , we realized approximately $54,000 of annualized +3 +SG&A expense savings out of the anticipated $85,000 of savings from our restructuring plan. We expect to realize approximately $31,000 of additional annualized SG&A expense savings from our restructuring plan. The additional annualized SG&A expense savings are expected to be primarily derived from further reductions in retail store-related costs, including those listed above. However, both the amount and timing of the actual savings we may achieve as a result of our restructuring plan are uncertain and are based upon numerous factors, including, but not limited to, the timing of lease terminations and store closures, the actual costs associated with closing or converting stores, and the actual and estimated results of operations of each store. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, "Restructuring," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts and the impact on our results of operations and reportable operating segments. +Operating Profit Improvement Plan. In addition to the approximate $85,000 of gross annualized SG&A expense savings expected from the implementation of our restructuring plan, as discussed above, we also expect that our other transformation initiatives, announced in February 2017, will result in approximately $65,000 of additional annualized cost of sales improvements and SG&A expense savings, for a total anticipated annual gross cost savings of approximately $150,000 . Cost of sales improvements are expected to result from reducing product development cycle times, optimizing material yields, consolidating our factory base, and continuing to move product manufacturing outside of China. Further SG&A expense savings are expected to result from lower corporate infrastructure costs, process improvement efficiencies, and reduced unallocated indirect spend. We have achieved approximately 90% of the expected cost of sales improvements as of March 31, 2018 . The remaining additional annualized costs of sales and SG&A expense savings are expected to be realized by the end of fiscal year 2020. +We expect that the approximate $150,000 of annual gross cost savings will result in approximately $100,000 of net annualized operating profit improvement (after reinvestment in marketing and other growth driving initiatives) by the end of fiscal year 2020. However, both the amount and timing of the actual operating profit improvements we may achieve as a result of these transformation initiatives are uncertain and are based upon numerous factors, including, but not limited to, the timing and success of certain production and inventory control improvements, the costs associated with improving and transitioning manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our three primary brands and our other brands. Collectively, our brands compete across the fashion and casual lifestyle, outdoor, and running markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel and accessories with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand by driving more year-round product sales, including spring and summer footwear, men's products, apparel, home goods and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), United Kingdom (UK), Germany, China, Japan, and Canada, among others. +Teva. Teva is a modern active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, the Teva brand's product line now includes sandals, shoes, and boots. +During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective as of the beginning of fiscal year 2018 , operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. +Sanuk. Sanuk is a global lifestyle footwear brand rooted in Southern California surf culture. The brand has a history of product innovation and comfort with a full range of footwear. +Other Brands. Other brands consist of: Hoka, a line of premium, running footwear and apparel that offers maximal cushioning with minimal weight and is designed for runners of all capacities, and Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials. +4 +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers. However, there is some overlap between the sales teams and customers, and we have aligned our brands' sales forces to position them for the future of the brands. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location by the end of calendar year 2019. In June 2017, we exercised our option to expand and extend the lease of our warehouse and distribution center located in Moreno Valley, California through June 2028. Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further disclosure and discussion. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. When a partner retail store is opened or a company-owned retail store is converted into a partner retail store, the related sales are recorded in our UGG or Sanuk brands wholesale reportable operating segment. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell the UGG brand primarily through domestic higher-end department stores such as Nordstrom, Dillard's, and Macy's, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon and Zappos.com. As the retail marketplace continues to evolve and change to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor, sporting goods, and department stores, including retailers such as REI, Famous Footwear, DSW, and online retailers such as Amazon and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers and larger national retail chains, including Journeys, Dillard's, DSW, REI, and online retailers such as Amazon and Zappos.com. +Other Brands Wholesale. Our other brands are sold primarily through domestic specialty running and department stores, outdoor and independent specialty retailers, and through online retailers. Key accounts of the Hoka brand include Running Warehouse, Road Runner Sports, Running Specialty Group, REI, and Zappos.com. Key accounts of the Koolaburra brand include Kohl's and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and interdependent. We believe that many consumers interact with both our brick and mortar stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined and help improve our inventory productivity include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +5 +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +"Ship from Store": Inventory that is available in our stores, but is out of stock online can be shipped from our stores. Future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +"UGG Closet": A limited E-Commerce outlet channel which we have offered since December 2016. The online portal functions similarly to an outlet store in that it provides a way to closeout inventory directly to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to the store. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater breadth of product, directly impact our consumers' experiences, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG brand concept and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2018 , we had a total of 165 retail stores worldwide, which includes 98 concept stores and 67 outlet stores. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are excluded from the total count of worldwide company-owned retail stores. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Refer to Note 1, "General," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the research and development costs we have incurred for the last three fiscal years. +To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers and the target retail price of new products. The design and development staff works closely with brand management to develop new styles for our product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. +Manufacturing and Supply Chain +We do not manufacture our products. We outsource production to independent manufacturers, primarily in Asia. We require our independent manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy, Conflict Minerals Policy, and other compliance policies and procedures as a condition of doing business with us. +Production by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and on-site supervisory offices in Pan Yu City, China and Hai Phong City, Vietnam, which together serve as a link to our independent manufacturers. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +6 +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high-quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary new raw material, UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. Excluding sheepskin and UGGpure, we believe that substantially all raw materials and components used to manufacture our footwear, apparel and accessories, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +Corporate Responsibility +Community Outreach . During fiscal year 2018 , we donated approximately $1,123 to 176 nonprofit organizations. The end of calendar year 2018 was a particularly difficult time for California. Faced with various natural disasters from fires to mudslides, we focused much of our efforts on serving our local Santa Barbara, California community. During fiscal year 2018 , 8% of our charitable contributions were dedicated to environmental impact mitigation efforts because we understand the importance of protecting our planet. We encourage employees to volunteer by compensating them for up to 24 hours of volunteer time each fiscal year. +Sustainability . As a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, our global scale is significant. Equally significant is the responsibility we have to set an example in our industry by advancing sustainable business, and we believe in developing quality products while striving for minimal environmental impact. In October 2016, we announced our official participation in the United Nations Global Compact, the world's largest voluntary corporate citizenship initiative. As part of this initiative, we adopted Sustainable Development Goals in the following areas: +• +material sourcing; +• +waste and chemical management; +• +water quality impact; +• +human rights; +• +energy usage by us and our manufacturing partners; and +• +gender equality and quality education. +The main focus of our sustainability efforts is on our product materials and supply chain. During fiscal year 2018 , we sourced 99.2% of our leather supplies from Leather Working Group certified tanneries, which maintain protocols that promote sustainable and appropriate environmental business practices within the leather industry. We are also taking a closer look into all of our materials, from packaging to product, so that we can set further sustainability targets in fiscal year 2019. We also have an Animal Welfare Policy which sets forth strict guidelines for the purchase of materials used in our products. +We are committed to measurable sustainability action in our corporate locations, retail store spaces, and distribution center operations. Our corporate headquarters is Leadership in Energy and Environmental Design (commonly referred to as LEED) certified and, during fiscal year 2018 , we installed solar panels to help offset approximately 40% of our electrical energy usage. We also continually measure electricity usage at our distribution center locations and retail store operations and strive to reduce our environmental footprint whenever possible. We +7 +have implemented waste diversion efforts at our corporate locations and have adopted a Paper and Forest Procurement Policy, which sets forth our commitment to purchasing paper products with a minimum of 30% post-consumer recycled content. +We are equally dedicated to sustainability actions within our brands' sectors. Below are some of the ways our brands are working to make a difference: +• +On behalf of the UGG brand, we contribute to the HERproject, a collaborative initiative managed by Business for Social Responsibility (commonly referred to as BSR) that strives to empower low-income women working in global supply chains. We also involve the UGG brand in the Textile Exchange’s Kickstart Program, which accelerates the availability of Responsible Wool Standards (commonly referred to as RWS) certified wool into supply chains. +• +On behalf of the Teva brand, we support the Los Padres ForestWatch, as well as Conservation Alliance, whose mission is to partner with organizations to protect wild places for their habitat and recreation values. +• +On behalf of the Sanuk brand, we have teamed up with the Surfrider Foundation, a non-profit environmental organization dedicated to the protection and enjoyment of our oceans, waves and beaches. +• +We support Camber Outdoors, the only national organization dedicated to achieving women’s equality in the active-outdoor industries, on behalf of the Hoka, Sanuk and Teva brands. +The work that we have done to date has allowed us to make great strides in promoting responsible stewardship and our Sustainable Development Goals continue to serve as guideposts for our future progress. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. For further discussion, including regarding the factors that may cause actual results to differ materially from our expectations, refer to Part I, Item 1A, "Risk Factors," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K . +Competition +The markets that we operate in are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel and accessories industry. In particular, and in part due to the popularity of our UGG brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG brand products. We believe that our ability to successfully compete depends on numerous factors, including responding to consumer preferences, producing appealing product, and pricing products competitively, among others. Refer to Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K for further discussion of how we compete. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for "UGG," "Teva," "Sanuk," "Hoka One One," "Koolaburra," "Ahnu," "UGGpure," and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan and Korea. As of March +8 +31, 2018 , we hold 184 designs and inventions with corresponding design or utility patent registrations, plus 9 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Inventory Management +We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. We have put in place systems and processes designed to improve our forecasting and supply planning capabilities. In addition, we believe that added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels are key areas of focus that will enhance inventory performance. +Our practice, and the general practice in the footwear, apparel and accessories industry, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders scheduled to be shipped at a future date, some of which are subject to cancellation prior to shipment. Effective as of the end of fiscal year 2018, our calculation of backlog also includes bulk orders which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. +As of March 31, 2018 , our backlog was approximately $855,000 . If our backlog as of March 31, 2017 had been calculated in the same manner, on a comparable basis, this represents an approximate 4% year-over-year increase over our backlog as of March 31, 2017. +We believe backlog is an imprecise indicator of our actual product shipments and future operating results and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC reportable operating segment as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, the timing of product shipments, the potential that certain orders may be cancelled, and our manufacturing schedule. As a result, comparisons of backlog from period-to-period are not necessarily indicative of our future operating results. +Employees +At March 31, 2018 , we employed approximately 3,500 employees in North America, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,700 employees in our retail stores worldwide, which includes part-time and seasonal employees. +Financial Information about Reportable Operating Segments and Geographic Areas +Our five reportable operating segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Within our consolidated financial statements in Part IV of this Annual Report on Form 10-K , refer to Note 12, "Reportable Operating Segments," for further discussion of our reportable operating segments and to Note 13, "Concentration of Business," for financial information about geographic areas and concentration of related business risks. +9 +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com . Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K , and references to our website address in this Annual Report on Form 10-K are inactive textual references only. +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Investing in our common stock involves substantial risk. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report on Form 10-K , as well as the other information we file with the SEC. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K . +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the size of the UGG brand relative to our other brands, this trend has resulted in our aggregate net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. +In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG brand products. Unexpected weather patterns may continue to have a material, negative impact on our financial condition and results of operations. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors. +10 +As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence or worsening economic conditions, will have a disproportionate impact on our business and could result in our failure to achieve financial performance that is in line with our expectations. +The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, including through effective marketing, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished. +The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• +seasonality, including the impact of anticipated and unanticipated weather conditions; +• +continued consumer acceptance of our existing products and acceptance of our new products; +• +consumer demand for products of our competitors; +• +the implementation of a segmentation approach to distribution with respect to certain of our brands and products; +• +consumer perception and preference for our brands; +• +the extent to which consumers view certain of our products as substitutes for other products we manufacture; +• +publicity, including social media, related to us, products, brands, and marketing campaigns; +• +the life cycle of our products and consumer replenishment behavior; +• +evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• +brand loyalty; +• +changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; and +• +changes in general economic and market conditions. +Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear, apparel and accessories consumers. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG brand products include a fashion element and could go out of style at any time. Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear, apparel and accessories in the quantities projected or at all. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our brands and products to be outdated or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and one or more missteps with respect to factors such as product quality, product design or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +If we are unsuccessful in implementing our ongoing restructuring and operating profit improvement plans, we may incur significant charges and costs without any corresponding benefits to our business, in which case our financial condition and operating results may be adversely affected. +We are in the ongoing process of restructuring our business in order to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. This includes optimizing our retail store fleet and consolidating offices and operations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. Key components to executing this plan include +11 +organizational changes, continued retail store closures, and conversion of owned stores to partner retail stores, among others. +As part of our ongoing restructuring plan, we have incurred significant restructuring charges and other costs, including SG&A expenses related to the write-off of retail store related assets, the early termination of retail store leases, employee severance costs, termination of various contracts, and the disposal of equipment and software impairments, among others. There can be no assurance that the benefits from these restructuring efforts, including from any potential reduction in overhead costs or improvement in operating efficiencies, will be sufficient to offset the restructuring charges and other costs that we have incurred. If we fail to realize the anticipated benefits from these measures, our financial condition and operating results may be adversely affected. While we do not currently anticipate incurring material restructuring charges in future periods, retail store and fleet optimization remains a focus. However, the potential benefits that we may realize from our retail store and fleet optimization efforts are uncertain as a result of numerous factors, including, but not limited to, the timing of lease terminations and store closures, the actual costs associated with closing or converting stores and the timing of the realization of those costs, and the actual and estimated results of operations of each store. +We have also begun implementing a plan to drive operating profit improvement through a combination of both cost of sales improvements and SG&A expense savings. However, there can be no assurance that we will be successful in realizing cost of sales improvements, especially if we fail to reduce product development cycle times, optimize material yields, consolidate our factory base, or move product manufacturing outside of China. Further, if we fail to execute on our plans to lower corporate infrastructure costs, process improvement efficiencies, and reduced unallocated indirect spend, we may not achieve the SG&A expense savings which are a key component of our operating profit improvement plan. If we are unable to realize cost of sales improvements and SG&A expense savings in the amount or on the timeline which we expect, then we may not be able to achieve the estimated profitability improvements or other expected benefits of the plan. Further, the implementation of the plan may require additional investments and divert management’s time and resources, which may impede our ability to achieve our goal of driving operating profit improvement. Both the amount and timing of the actual operating profit improvements we may achieve as a result of these transformation initiatives are uncertain and are based upon numerous factors, including, but not limited to, the timing and success of certain production and inventory control improvements, the costs associated with improving and transitioning manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to close or relocate a number of retail stores, we may identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. As a result of our ongoing retail store and fleet optimization plans, and in light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment or that our investment in a brick and mortar retail store will increase our sales. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer. +12 +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which would harm our financial condition and results of operations. +The footwear, apparel and accessories industry is highly competitive and we expect to continue to face intense competitive pressures. We believe that we compete on the basis of a number of factors, including our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +produce products that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain brand loyalty and authenticity; +• +price our products in a competitive manner; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; and +• +manage the impact of the rapidly changing retail environment on our business, including with respect to rising competition within the E-Commerce business. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which would harm our financial condition and results of operations. +Our competitors include athletic and footwear companies, branded apparel and accessories companies, home goods companies, and retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered into the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel and accessories markets. Our competitors’ greater capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, identify or influence consumer preferences, and withstand periodic downturns in the footwear, apparel and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that access to offshore manufacturing and changes in technology will continue to make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may require us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. If we fail to compete effectively in the future, our sales could decline and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and operating results could be adversely affected and our business may become less competitive. +We strive to improve, automate and streamline our operational systems, processes, infrastructure and management as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. In 2016, we completed our business transformation project implementation, which included upgrading our Enterprise Resource Planning (ERP) systems , and inventory management and control systems. While these efforts resulted in improvements to our operational systems that have reduced our expenses, increased our efficiency and enhanced our ability to be competitive in the long term, we expect to continue to incur expenses to implement additional improvements and upgrades to operational systems. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational systems upgrades and improvements are not successful, our financial condition and operating results could be adversely affected and our business may become less competitive. +13 +In addition, our operational systems upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems , and adapt to new operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business. +If we are unsuccessful at managing production decisions, which are required to be made months in advance of the purchase of our products, we may inaccurately forecast our inventory requirements, which may adversely affect the image of our brands, and result in sales below our expectations. +Like other companies in the footwear, apparel and accessories industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of a purchasing decision by the consumer, it may be challenging for us to estimate and manage our inventory requirements. +At the time manufacturing decisions are made, it is difficult for our management to predict and to timely adjust expenses in reaction to the following factors, which may result in order cancellations and weak consumer demand: +• +unfavorable weather patterns and their potential impacts on consumer spending patterns generally, and the demand for our products in particular; +• +changes in consumer preferences and fashion trends; +• +market acceptance of new products; +• +future sales and trends with our wholesale customers; +• +changing general economic conditions; and +• +the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products. +The evolution of our product offerings has made these activities more challenging. If we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand for certain products or styles, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin that meets our quality expectations, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers, do not conform to our quality specifications or fail to meet consumer expectations, we could experience a higher rate of customer returns, which would reduce our net sales and harm our reputation. Similarly, if the tanneries are not able to deliver sheepskin in the quantities required this would negatively impact our manufacturing process and lead to inventory shortages, which would result in a loss of sales and strain our relationships with our customers. +In addition, any factors that negatively impact the business of these tanneries, such as loss of customers, financial instability or bankruptcy, could prevent them from delivering sheepskin to us in the quantities expected or at all. Our +14 +sheepskin suppliers currently warehouse their inventory at a limited number of facilities in China. The loss, destruction, or disruption of work at any of these facilities would likely result in shortages in our supply of sheepskin. +Historically, in certain years, there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our customers and our competitors has changed, but recently we have seen more stable prices. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary raw material, UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the impact of fluctuations in sheepskin prices. However, in the event of a prolonged increase in sheepskin prices such as what we experienced in the past, which at times has been significant, these strategies may not be sufficient to fully offset the impact on our financial results from the increased prices. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands through to consumers. If a retailer or a distributor fails to meet annual sales goals or to make timely payments, it may be difficult to locate an acceptable substitute retailer or distributor, or convert to a wholesale direct model. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk. In addition, there is no guarantee that any replacement retailer or distributor will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us. These risks have been exacerbated recently as our retail customers face a retail industry that continues to undergo significant structural changes fueled by technology that is altering consumer behavior. We may lose key retail and wholesale customers if they fail to manage the impact of the rapidly changing retail environment. As a result, we could experience a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. +Our five largest customers accounted for approximately 23.6% of worldwide net sales for the year ended March 31, 2018 and 20.3% of worldwide net sales for the year ended March 31, 2017 . Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our financial condition and results of operations. +Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce +15 +sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our performance. +The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands. +In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. We have faced claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. For example, in response to an infringement lawsuit that we filed in March 2016 against Australian Leather Pty Ltd. (Australian Leather), Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. Any court decision or settlement of such matters that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales. +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. However, we may shift from a direct distribution model to a third-party distribution model for certain brands. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth, and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our operating results may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and information technology specialists. +Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. If we fail to attract, train and transfer institutional knowledge and +16 +expertise to our new personnel, or to retain and develop our current personnel, our future growth prospects could be adversely affected and our business could be harmed. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining qualified personnel with the skills to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer and we may be unable to compete in the market. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often extensive process of identifying and hiring other personnel who will work effectively with our employees to fill those key positions, could have a material adverse effect on our business. +Additionally, as part of our efforts to improve overall efficiency and competitiveness of our business, we have added new leadership both within our brands and to our Omni-Channel platform, including the President of Fashion Lifestyle and the President of Performance Lifestyle, as well as streamlining and restructuring our existing personnel and brand management. If we fail to effectively implement these management and personnel changes, we may be unable to achieve our strategic objectives and operating efficiencies. +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products primarily through self-managed distribution centers in Camarillo and Moreno Valley, California. We currently expect to move our Camarillo distribution operations to our Moreno Valley location by the end of calendar year 2019. We also distribute our products through a 3PL located in Pennsylvania. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of certain equipment, power outages or software problems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +Internationally, we distribute our products through a number of distribution centers managed by 3PLs. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, in the second quarter of fiscal year 2017, we experienced a delay in shipments from our European 3PL that impacted sales. The loss of, or disruption to the operations of, any one or more of these facilities, whether due to natural disasters, the outbreak of hostilities, work stoppages, or other adverse events, could materially adversely impact our sales, business performance and operating results. Although we believe we possess adequate insurance for the disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +17 +We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to obtain timely delivery of products in sufficient quantities that meet our quality standards. In that event, we may not be able to fill customer orders, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of acceptable quality and competitively-priced products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge us, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products or services of a comparable quality, at an acceptable price, or on a timely basis. If we must find alternative manufacturers, we would likely experience increased costs, as well as substantial disruption to our business, which could result in a loss of sales and earnings. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. We keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; +• +increasing transportation costs, delays and interruptions, and a limited supply of international shipping capacity; +• +delays during shipping, at the port of entry or at the port of departure; +• +increasing labor costs and labor disruptions; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds from foreign jurisdictions; +• +changing economic and market conditions; +• +changes in governmental policies and regulations including intellectual property, labor, safety, and environmental regulations; +• +refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; +• +customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +decreased scrutiny by custom officials for counterfeit products; +• +practices involving corruption, extortion, bribery, pay-offs, theft and other fraudulent activity; +• +social unrest and political instability, which can interrupt commerce, including acts of war and other external factors, over which we have no control; +• +heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; +18 +• +disruptions at manufacturing or distribution facilities caused by natural or other disasters; and +• +adverse changes in consumer perception of goods, trade, or political relations with China or Vietnam. +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of such standards and laws could result in negative publicity, which could damage our reputation and the value of our brands. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with approximately 38.3% of our net sales for the year ended March 31, 2018 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected. +We currently utilize foreign currency exchange rate contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our foreign currency exchange rate contracts may negate our efforts to hedge our foreign currency exchange rate risk and result in material foreign currency exchange rate or hedge contract losses. Foreign currency exchange rate hedges, transactions, re-measurements or translations could materially impact our consolidated financial statements . +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor dispute s that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions . +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include: +• +foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• +limitations on our ability to move currency out of international markets; +19 +• +burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of which are uncertain; +• +legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; +• +inability to import products into a foreign country; +• +changes in US and foreign tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting and marketing products in unfamiliar cultures; +• +political corruption or instability; +• +anti-American sentiment in international markets in which we operate; +• +economic uncertainty associated with the pending exit of the United Kingdom from the European Union or any other similar referendums that may be held; +• +changes in diplomatic and trade relationships between the US and other countries; and +• +general economic fluctuations in specific countries or markets. +International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays . +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. +In addition, we cannot predict whether future domestic and foreign laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Changes in tax policy or trade regulations, such as the recently enacted US H.R. 1, also known as the Tax Cuts and Jobs Act (Tax Reform Act), could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. +Further, the current political landscape has introduced significant uncertainty with respect to future trade regulations and existing international trade agreements, as shown by the recent US-initiated renegotiation of the North America Free Trade Agreement, and Brexit in Europe . This uncertainty includes the possibility of imposing tariffs or penalties on products manufactured outside the US, including the March 22, 2018 announcement of the US government’s institution of a 25% tariff on a range of products from China and the potential for increased trade barriers between the UK and the European Union. We cannot predict whether, and to what extent, there may be changes to international trade agreements or whether quotas, duties, tariffs, exchange controls or other restrictions on our products will be changed or imposed. If we are unable to source our products from the countries where we wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition and results of operations. +The continued negotiation of bilateral and multilateral free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers. Manufacturers in these locations may seek to export footwear, apparel and accessories to our target markets at preferred rates of duty which may negatively impact our sales and operations. +Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions in order to extend our brands into complementary product categories and markets. Our ability to do so depends on our ability to identify and +20 +successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, challenges and uncertainties, including the potential to: +• +expose us to risks inherent in entering a new market or geographic region; +• +lose significant customers or key personnel of the acquired business; +• +encounter difficulties managing geographically-remote operations; +• +divert management’s time and attention away from other aspects of our business operations; +• +issue equity securities to finance the acquisition, which would be dilutive to our existing stockholders; +• +incur indebtedness to finance the acquisition, which would result in debt service costs and potentially include covenants restricting our operations; and +• +incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. +Additionally, we may not be able to successfully integrate the operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new brands and products with our existing products, aggressively target different consumers for our newly-acquired products, and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Key business processes and supporting information systems could be interrupted and such interruption could adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• +critical business systems become inoperable or require significant costs to restore; +• +key personnel are unable to perform their duties, communicate, or access information systems; +• +significant quantities of merchandise are damaged or destroyed; +• +we are required to make unanticipated investment in state-of-the-art technologies and security measures; +• +key wholesale and distributor customers cannot place or receive orders; +• +E-Commerce customer orders may not be received or fulfilled; +• +confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; +• +we are exposed to unanticipated liabilities; or +• +carriers cannot ship or unload shipments. +Interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +Furthermore, we rely on certain information technology management and ERP systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected. +The loss, theft or misuse of sensitive customer or our related information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business . +Our business involves the storage and transmission of sensitive information, including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and our +21 +proprietary financial and strategic data. The protection of our customer, employee and our data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputation or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information and to comply with data privacy laws in the US and abroad. +As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relationships with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience. +Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our brands, and subject us to potential litigation, liability, fines and penalties. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. If we fail to adequately protect such information or respond to a breach, we could be held liable to our customers, suppliers, employees or other parties. Furthermore, we could be subject to regulatory or other actions pursuant to domestic and international privacy laws, including newer regulations such as the Action on the Protection of Personal Information in Japan and the General Data Protection Regulation (known as GDPR) in the European Union. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition. +We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our revolving credit facility agreements also contain a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under any of our revolving credit facility agreements could cause the lenders party thereto to accelerate the timing of payments and exercise their liens on our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, we do not currently anticipate hedging against borrowings under the revolving credit facilities because the facilities bear interest at variable interest rates. Any increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations. +We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, the enactment of the Tax Reform Act resulted in changes to the existing US tax laws that have and will continue to affect us. Additional +22 +proposed regulations, clarifications, interpretations and other changes to the Tax Reform Act may ultimately be enacted in a future period, which could increase our income tax liability or adversely affect our net income and long-term effective tax rates. Any changes in tax laws, treaties or regulations could increase our income tax liability or adversely affect our net income and long term effective tax rates. +In future years, certain additional provisions of the Tax Reform Act, such as a tax on global intangible low-taxed income, will apply to us and, as a result, could increase our effective tax rate. Taxes due over a period of time as a result of the new tax law, including the one-time, mandatory deemed repatriation tax on certain foreign earnings, could be accelerated upon various triggering events, including failure to pay such taxes when due. The new law makes broad and complex changes to the US tax code and we expect to see future regulatory, administrative or legislative guidance. We are analyzing the Tax Reform Act to determine the full impact of the new tax law, and to the extent any future guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations. +In addition, many countries in the European Union and around the globe have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our US and international business activities, many of these enacted and proposed changes could increase our worldwide effective tax rate and harm our financial position and results of operations. +We may be subject to additional tax liabilities as a result of audits by various taxing authorities. +We conduct our operations through subsidiaries in several countries and foreign territories, including, but not limited to, the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, Germany, Canada, Austria, Belgium and Switzerland. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between these countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments. +We may incur disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +Regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. +The SEC has adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform a reasonable country of origin inquiry, and to annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as +23 +costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We file a Form SD, Specialized Disclosure Report, on or about May 31st each year. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “DECK”. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $55.78 to $98.29 for the year ended March 31, 2018 . The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future performance, whether realized or perceived; +• +changes in estimates by securities analysts or failure to meet such estimates; +• +changes in our stockholder base or public actions taken by investors; +• +announcements related to our review of a broad range of strategic alternatives; +• +published research and opinions by securities analysts and other market forecasters; +• +quarterly fluctuations in our sales, margins, expenses, and financial results; +• +the financial results and liquidity of our customers; +• +claims brought against us by a regulatory agency or our stockholders; +• +announcements to repurchase our common stock; +• +the declaration of stock or cash dividends; +• +general market and economic conditions; +• +consumer confidence; +• +broad market fluctuations in volume and price; and +• +a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, and decreases in available credit. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +Furthermore, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. +Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions +24 +that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions: +• +authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• +provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• +provide that board vacancies can only be filled by directors; +• +prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• +require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and +• +require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. +Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +Our business could be negatively affected as a result of the actions of activist stockholders. +Responding to the actions of activist stockholders can be costly and time-consuming, disruptive to our operations, and result in the diversion of the attention of management and our employees. For example, we were recently involved in a proxy contest with a hedge fund, which required us to incur significant legal fees and proxy solicitation expenses, and required significant time and attention by management and our Board. Any perceived uncertainties as to the impact of the activities of activist stockholders, or of our future strategic direction, could also affect the market price and volatility of our common stock. +We do not expect to declare any dividends in the foreseeable future. +We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends. +Our reported financial results may be adversely affected by changes in US GAAP. +Generally accepted accounting principles in the US (US GAAP) are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. +Item 2. Properties +Our corporate headquarters are located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. In April 2016, we completed the acquisition of approximately four acres of land adjacent to our corporate headquarters to accommodate future expansion. +25 +We have two US distribution centers. We began operating our warehouse and distribution center in Moreno Valley, California, in the fourth quarter of fiscal year 2015 and since June 2017 have begun to expand operations at this location. While we continue to operate our distribution center in Camarillo, California, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location by the end of calendar year 2019. Our international distribution centers are managed by 3PLs and are located in Canada, China, Hong Kong, Japan, the Netherlands, and the UK, as well as a domestic distribution center located in Pennsylvania. +We also have offices in China, Hong Kong and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, offices in China, Hong Kong, and Japan to coordinate sales and marketing efforts, and offices in France, Germany, the Netherlands, Switzerland, and the UK to oversee European sales, operations and administration. +At March 31, 2018 , we had 56 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had 109 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland and the UK. We have no manufacturing facilities, as all of our products are manufactured by independent third-party contractors. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties at March 31, 2018 : +Facility Location +Description +Lease or Own +Facility Size (Square Footage) +Moreno Valley, California +Warehouse and Distribution Center +Lease +794,000 +Camarillo, California +Warehouse and Distribution Center +Lease +723,000 +Goleta, California +Corporate Headquarters +Own +185,000 +In June 2017, we exercised our option to extend the lease of our warehouse and distribution center located in Moreno Valley, California, through June 2028 and to lease approximately 736,000 of additional square feet beginning in fiscal year 2019. +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that our UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +On March 28, 2016, we filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the US District Court for the Northern District of Illinois Eastern Division against Australian Leather. In response, Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. The counterclaims seek declaratory judgment, an injunction, cancellation of certain of our US trademark registrations, compensatory damages, attorneys' fees and other relief. We believe the counterclaims are without merit and intend to defend the counterclaims vigorously. Both parties have filed briefs on Motions for Summary Judgment on various claims which are currently +26 +pending. While we believe there is no legal basis for liability, a judgment invalidating the UGG brand trademark would have a material adverse effect on our business. Further, due to uncertainty surrounding the litigation process, we are unable to reasonably estimate a range of loss, if any, at this time. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, operating results, financial condition or cash flows. +PART II +References in this Annual Report on Form 10-K to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), Hoka One One® (Hoka), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. +Certain reclassifications were made for all prior periods presented including the fiscal years ended March 31, 2017 , 2016 and 2015 , the quarter ended March 31, 2014 (transition period) and the year ended December 31, 2013, to conform to the current period presentation. +Unless otherwise specifically indicated, all dollar amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for per share data. The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 are stated herein as "year ended" or "years ended". +Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol "DECK" on the New York Stock Exchange (NYSE) since May 5, 2014 and was traded on the NASDAQ Global Select Market prior to that date. +The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated. +Common Stock +Price Per Share +Low +High +Year Ended March 31, 2018 +Fourth Quarter +$ +78.96 +$ +98.29 +Third Quarter +64.57 +80.25 +Second Quarter +61.60 +69.43 +First Quarter +55.78 +71.92 +Year Ended March 31, 2017 +Fourth Quarter +$ +44.99 +$ +60.98 +Third Quarter +50.76 +64.80 +Second Quarter +56.99 +68.57 +First Quarter +48.89 +59.25 +At May 11, 2018 , we had approximately 43 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2018 that were not registered under the Securities Act of 1933, as amended (Securities Act). +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & +27 +Luxury Goods Index for the five-year period commencing December 31, 2012 and ending March 31, 2018 , excluding the transition period for the quarter ended March 31, 2014. The data represented below assumes one hundred dollars invested in each share of our common stock, the NYSE Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2013. The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE. +The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act, or under the Securities Exchange Act of 1934, as amended (Exchange Act), except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under either of the Securities Act or Exchange Act. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. +The following table assumes one hundred dollars invested on January 1, 2013 and assumes dividends are reinvested. +January 1, +Year Ended December 31, +Years Ended March 31, +2013 +2013 +2015 +2016 +2017 +2018 +Deckers Outdoor Corporation +$ +100.0 +$ +209.7 +$ +181.0 +$ +148.8 +$ +148.3 +$ +223.6 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +124.9 +119.3 +105.9 +84.2 +108.0 +The NYSE Composite Index +100.0 +126.4 +138.7 +133.5 +154.4 +171.4 +28 +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as no event of default has occurred under these arrangements. At March 31, 2018 , we were in compliance with this provision and we remain in compliance as of May 25, 2018 . +Stock Repurchase Program +In January 2015, our Board of Directors approved a stock repurchase program to repurchase up to $200,000 of our common stock in the open market or in privately-negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. In October 2017, our Board of Directors authorized a new $335,000 stock repurchase program. Since inception through March 31, 2018 , we have repurchased approximately 3,722,502 shares under these combined programs for approximately $284,393 , or an average price of $76.40 per share, leaving the remaining approved amount at approximately $250,607 . Our repurchase programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. +Refer to Note 8, "Stockholders' Equity," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on repurchases of our common stock. +The following table summarizes the stock repurchase activity under the programs discussed above during the three months ended March 31, 2018 : +Total number +of shares +purchased* (in thousands) +Average price +paid per share +Approximate dollar +value of shares +added/(purchased) +Approximate dollar +value of shares that +may yet be purchased +February 1, 2018 — February 28, 2018 +930 +$ +93.85 +$ +(87,293 +) +$ +288,314 +March 1, 2018 — March 31, 2018 +412 +91.56 +(37,707 +) +250,607 +*All shares were repurchased as part of publicly-announced programs in open-market transactions. +Item 6. Selected Financial Data +Change in Fiscal Year +In February 2014, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The fiscal years 2018 through 2015, as presented below, relate to the years ended March 31, 2018 , 2017 , 2016 and 2015 , respectively. The 2014 transition period relates to the quarter ended March 31, 2014 to coincide with the change in our fiscal year end. The 2013 year relates to the calendar year ended December 31, 2013 . +Consolidated Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements . +The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report on Form 10-K : +• +Consolidated statements of comprehensive income (loss) for the fiscal year ended March 31, 2015 , quarter ended March 31, 2014 (transition period), and the calendar year ended December 31, 2013 . +• +Consolidated balance sheets as of March 31, 2016 , March 31, 2015 and March 31, 2014 . +The financial data are further derived from, and qualified by reference to, the following consolidated financial statements in Part IV of this Annual Report on Form 10-K : +• +Consolidated statements of comprehensive income (loss) for the years ended March 31, 2018 , March 31, 2017 and March 31, 2016 . +• +Consolidated balance sheets as of March 31, 2018 and March 31, 2017 . +29 +Historical results are not necessarily indicative of expected future results. The following consolidated financial information should be read together with our consolidated financial statements in Part IV of this Annual Report on Form 10-K and the accompanying notes thereto, and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Years Ended March 31, +Quarter Ended March 31,(transition period) +Year Ended December 31, +2018 +2017 +2016 +2015 +2014 +2013 +Income Statement Data: +Net sales to external customers: +UGG brand wholesale +$ +841,893 +$ +826,355 +$ +918,102 +$ +903,926 +$ +83,271 +$ +818,377 +Teva brand wholesale +117,478 +103,694 +121,239 +116,931 +45,283 +109,334 +Sanuk brand wholesale +78,283 +77,552 +90,719 +102,690 +28,793 +94,420 +Other brands wholesale +149,961 +116,206 +100,820 +76,152 +18,662 +38,276 +Direct-to-Consumer +715,724 +666,340 +644,317 +617,358 +118,707 +496,211 +Total net sales +1,903,339 +1,790,147 +1,875,197 +1,817,057 +294,716 +1,556,618 +Cost of sales +971,697 +954,912 +1,028,529 +938,949 +150,456 +820,135 +Gross profit +931,642 +835,235 +846,668 +878,108 +144,260 +736,483 +Selling, general and administrative expenses +709,058 +837,154 +684,541 +653,689 +144,668 +528,586 +Income (loss) from operations +222,584 +(1,919 +) +162,127 +224,419 +(408 +) +207,897 +Other expense, net +1,888 +5,067 +5,242 +3,280 +334 +2,340 +Income (loss) before income taxes +220,696 +(6,986 +) +156,885 +221,139 +(742 +) +205,557 +Income tax expense (benefit) +106,302 +(12,696 +) +34,620 +59,359 +1,943 +59,868 +Net income (loss) +114,394 +5,710 +122,265 +161,780 +(2,685 +) +145,689 +Total other comprehensive income (loss) +13,468 +(5,894 +) +(89 +) +(18,425 +) +600 +(1,243 +) +Comprehensive income (loss) +$ +127,862 +$ +(184 +) +$ +122,176 +$ +143,355 +$ +(2,085 +) +$ +144,446 +Net income (loss) per share: +Basic +$ +3.60 +$ +0.18 +$ +3.76 +$ +4.70 +$ +(0.08 +) +$ +4.23 +Diluted +$ +3.58 +$ +0.18 +$ +3.70 +$ +4.66 +$ +(0.08 +) +$ +4.18 +Weighted-average common shares outstanding: +Basic +31,758 +32,000 +32,556 +34,433 +34,621 +34,473 +Diluted +31,996 +32,355 +33,039 +34,733 +34,621 +34,829 +As of March 31, +As of December 31, +2018 +2017 +2016 +2015 +2014 +2013 +Balance Sheet Data: +Cash and cash equivalents +$ +429,970 +$ +291,764 +$ +245,956 +$ +225,143 +$ +245,088 +$ +237,125 +Working capital +721,524 +661,770 +547,267 +519,051 +501,647 +508,786 +Total assets +1,264,379 +1,191,780 +1,278,068 +1,169,933 +1,064,204 +1,259,729 +Long-term liabilities +134,434 +78,474 +72,099 +65,379 +53,140 +51,092 +Stockholders' equity +940,779 +954,255 +967,471 +937,012 +888,849 +888,119 +30 +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes thereto included in Part IV of this Annual Report on Form 10-K . +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We sell our products through quality domestic and international retailers, international distributors and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. Independent third parties manufacture all of our products. +Recent Developments +Restructuring Plan. In February 2016, we announced the implementation of a multi-year restructuring plan which is designed to realign our brands, optimize our retail store fleet, and consolidate our management and operations. As part of this restructuring plan, we realigned our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands. In general, the intent of the restructuring plan is to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +We believe our retail stores remain an important component of our Omni-Channel strategy; however, in light of the recent and continuing changes in the retail environment, we also believe it is prudent to further optimize our global brick and mortar footprint, and expect to continue to do so. Accordingly, we anticipate generating future cost savings associated with changes in our retail presence as we optimize our retail store and fleet performance, including through closing stores or converting stores to partner retail stores in our wholesale channel. We continue to drive and are evolving our retail store and fleet optimization strategies in line with our long-term objectives, and we are targeting a global retail store count of approximately 125 owned stores. Remaining store closures are expected to occur as store leases expire to avoid incurring potentially significant lease termination fees. +While we are seeing initial signs of improvement, our decision to open or close store locations will be evaluated based on the operating results of each store and our retail store and fleet optimization strategies, which may ultimately impact our global retail store count. Further, the actual number of owned stores as of any particular date is subject to uncertainty and is based upon numerous factors, including, but not limited to, the actual and projected costs associated with closing or converting stores, the actual and estimated results of operations of our overall DTC business and continuing changes in consumer buying behaviors and the retail environment. +In connection with our restructuring plan, we have closed 32 retail stores as of March 31, 2018 , including five in fiscal year 2016 and 20 in fiscal year 2017, and consolidated our brand operations and corporate headquarters. We have incurred cumulative restructuring charges of $55,324 through March 31, 2018 , with $1,667 , $28,984 , and $22,824 of restructuring charges recorded in selling, general and administrative (SG&A) expense during the years ended March 31, 2018 , 2017 , and 2016 , respectively, and $1,849 in cost of sales during fiscal year 2016 in the consolidated statements of comprehensive income (loss) . +31 +The following table summarizes restructuring charges incurred by category: +Years Ended March 31, +Cumulative Restructuring Charges +2018 +2017 +2016 +Lease termination costs +$ +149 +$ +8,986 +$ +8,852 +$ +17,987 +Retail store fixed asset impairment +— +3,614 +5,758 +9,372 +Severance costs +— +5,773 +4,003 +9,776 +Software and office fixed asset impairment +— +3,199 +3,788 +6,987 +Other* +1,518 +7,412 +2,272 +11,202 +Total restructuring charges +$ +1,667 +$ +28,984 +$ +24,673 +$ +55,324 +*Includes restructuring charges for costs related to office consolidations, termination of various contracts and other services. +We currently do not anticipate incurring material restructuring charges in future periods, though retail store and fleet optimization remains a focus. +As a result of the implementation of our restructuring plan, we expect to realize annualized gross SG&A expense savings in the consolidated statements of comprehensive income (loss) totaling approximately $85,000 by March 31, 2020. The annualized SG&A expense savings are expected to be primarily derived from reductions in operating costs related to the termination of retail store leases and the conversion of certain of our foreign owned retail stores to partner retail stores, as well as a reduction in overhead costs, including payroll and related benefits, depreciation and amortization, and rent and occupancy costs, among others. +As of March 31, 2018 , we realized approximately $54,000 of annualized SG&A expense savings out of the anticipated $85,000 of savings from our restructuring plan. The realized SG&A expense savings by reportable operating segment are as follows: +UGG brand wholesale +$ +1,000 +Sanuk brand wholesale +1,000 +Other brands wholesale +1,000 +Direct-to-Consumer +34,000 +Unallocated overhead costs +17,000 +Total +$ +54,000 +We expect to realize approximately $31,000 of additional annualized SG&A expense savings from our restructuring plan. The additional annualized SG&A expense savings are expected to be primarily derived from further reductions in retail-related costs, including those listed above. These additional savings are expected to primarily impact the DTC reportable operating segment and to be fully realized by the end of fiscal year 2020. However, both the amount and timing of the actual savings we may achieve as a result of our restructuring plan are uncertain and are based upon numerous factors, including, but not limited to, the timing of lease terminations and store closures, the actual costs associated with closing or converting stores, and the actual and estimated results of operations of each store. +Refer to Note 2, "Restructuring," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the remaining liability for charges incurred under our restructuring plan by reportable operating segment. +Operating Profit Improvement Plan. In addition to the approximate $85,000 of gross annualized SG&A expense savings expected from the implementation of our restructuring plan, as discussed above, we also expect that our other transformation, initiatives announced in February 2017, will result in approximately $65,000 of additional annualized cost of sales improvements and SG&A expense savings, for a total anticipated annual gross cost savings of approximately $150,000 . Cost of sales improvements are expected to result from reducing product development cycle times, optimizing material yields, consolidating our factory base, and continuing to move product manufacturing outside of China. Further SG&A expense savings are expected to result from lower corporate infrastructure costs, process improvement efficiencies, and reduced unallocated indirect spend. +32 +The cost of sales improvements are expected to impact each of the reportable operating segments (excluding unallocated overhead costs) in an amount that is generally proportionate to the net sales generated by that reportable operating segment as a percentage of our total net sales. We have achieved approximately 90% of the expected cost of sales improvements as of March 31, 2018 . The remaining additional annualized costs of sales and SG&A expense savings are expected to be realized by the end of fiscal year 2020. +We expect that the approximately $150,000 of annual gross cost savings will result in approximately $100,000 of net annualized operating profit improvement (after reinvestment in marketing and other growth-driving initiatives) by the end of fiscal year 2020. However, both the amount and timing of the actual operating profit improvements we may achieve as a result of these transformation initiatives are uncertain and are based upon numerous factors, including, but not limited to, the timing and success of certain production and inventory control improvements, the costs associated with improving and transitioning manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit. +Stock Repurchase Program . In October 2017, our Board of Directors authorized a new $335,000 stock repurchase program. Combined with the $65,294 remaining approved amount under our January 2015 stock repurchase program, we had the authority to repurchase up to an aggregate of $400,294 of our common stock at the time. As of March 31, 2018 , the aggregate remaining approved amount was $250,607 . Our repurchase programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. For further details on our current stock repurchase strategy and its impact on our liquidity refer to the section entitled "Liquidity and Capital Resources" within this Part II, Item 7 . +Cash Repatriation . As a result of the recently enacted US H.R.1 on December 22, 2017, also known as the Tax Cuts and Jobs Act (Tax Reform Act), our cumulative foreign earnings as of December 31, 2017 were subject to a one-time, mandatory deemed repatriation tax in transition to a territorial tax regime. In response to the new legislation, we repatriated $250,000 of cash and cash equivalents during the fourth quarter of the year ended March 31, 2018 , resulting in additional state income taxes, net of federal benefit, of approximately $607 . For further details on the impacts of the Tax Reform Act during the year ended March 31, 2018 , refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K . For further details on our current cash repatriation strategy and its impact on our liquidity refer to the section entitled "Liquidity and Capital Resources" within this Part II, Item 7 . +Trends Impacting our Overall Business +Our business and the industry in which we operate continue to be impacted by several important trends: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are unpredictable and beyond our control. Even though we continue to expand our product lines with the goal of creating more year-round styles for our brands to drive sales and offset the impact of weather conditions, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant. To address seasonality, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, and the active-lifestyle products of the Hoka brand. We believe our net sales were positively impacted by weather conditions during the fiscal year ended March 31, 2018 . +• +We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. In particular, brick and mortar retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is impacting the performance of our DTC business and our wholesale customers, and is transforming the way we approach our digital marketing efforts. +• +In light of the shift in consumer shopping behavior, we are seeking to optimize our brick and mortar retail footprint. In pursuing store closures, we have been impacted by costs to exit lease agreements, employee termination costs, retail store fixed asset impairments, and other closure costs. However, we do not expect to continue incurring significant incremental store closure costs, primarily because the majority of our remaining store closures are expected to occur as store leases expire to avoid incurring additional lease termination costs. +33 +• +We expect our E-Commerce business will continue to be a driver of long-term growth, although we expect that the year-over-year growth rate will decline over time as the size of our E-Commerce business increases. +• +For the UGG brand, and within the North American wholesale channel, we plan on implementing an allocation and segmentation approach to distribution around the UGG brand Classics franchise. +• +We believe consumers are buying product closer to the particular wearing occasion ("buy now, wear now"), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows to address the evolving behavior of retail consumers and to manage their own product inventory. +• +Foreign currency exchange rate fluctuations have the potential to cause variations in our operating results. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the future purchasing patterns of our customers as well as our operating results. +Segment Overview +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel and accessories with expanded product offerings and a growing global audience that attracts women, men, and children. +We believe demand for UGG brand products will continue to be driven by the following: +• +High consumer brand loyalty due to delivering quality and luxuriously comfortable UGG brand footwear, apparel and accessories. +• +Diversification of our UGG brand product lines, including women's spring and summer, men's, and lifestyle offerings. These efforts are part of our strategy of product diversification to decrease our reliance on sheepskin and mitigate the impacts of seasonality. +• +Continued enhancement of our Omni-Channel and digital capabilities to enable us to better engage existing and prospective consumers and expose them to our brands. +Teva Brand . For over 30 years, the Teva brand has fueled the expression of freedom. The Teva brand pioneered the sport sandal category in 1984 and now is a leader within the sport sandal and modern outdoor lifestyle categories. +During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective as of the beginning of fiscal year 2018 , operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the other brands wholesale reportable operating segment, as presented in the prior period. +Sanuk Brand . The Sanuk brand was founded 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. +Other Brands . Our other brands consist of the Hoka and Koolaburra brands. The Hoka brand is a line of running footwear and apparel that offers maximal cushioning with minimal weight and is designed for runners of all capacities. The Hoka brand is quickly becoming a top brand in the domestic run specialty channel and has received strong word-of-mouth marketing that has fueled both domestic and international sales growth. The Koolaburra brand is a line of fashion casual footwear using sheepskin and other plush materials. +Direct-to-Consumer . Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are intertwined and +34 +interdependent. We believe that many consumers interact with both our brick and mortar stores and our websites before making purchasing decisions. +Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2018 , we had a total of 165 retail stores worldwide, which includes 98 concept stores and 67 outlet stores. During the year ended March 31, 2018 , we opened six concept and six outlet stores, and closed seven stores, which included conversions of owned outlet and concept stores to partner retail stores. Although we had a net increase in store count year-over-year, management continues to target an overall reduction in our worldwide retail store count to approximately 125 owned stores through store closures and transfers to partner retail stores in China, under our restructuring plan, discussed above. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. In certain countries, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of worldwide company-owned retail stores. When a partner retail store is opened or a store is converted into a partner retail store, the store becomes wholly-owned and operated by third parties and related sales are recorded in our UGG and Sanuk brands wholesale reportable operating segment. +Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to customers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. At March 31, 2018 , we operated our E-Commerce business through an aggregate of 22 Company-owned websites in nine different countries. +Use of Non-GAAP Measures +In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report on Form 10-K we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and re-measurements. We believe that evaluating certain financial and operating measures on a constant currency basis is important as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates or to other financial measures presented in accordance with US GAAP. +We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other retailers. As a result, information included in this Annual Report on Form 10-K regarding our comparable DTC sales may not be directly comparable to similar data made available by our competitors or other retailers. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. With the size of the UGG brand relative to our other brands, net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. +Refer to Note 14, "Quarterly Summary of Information (Unaudited)," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our results of operations by quarterly period. +35 +Results of Operations +Year Ended March 31, 2018 Compared to Year Ended March 31, 2017 +The following table summarizes our results of operations: +Years Ended March 31, +2018 +2017 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,903,339 +100.0 +% +$ +1,790,147 +100.0 +% +$ +113,192 +6.3 +% +Cost of sales +971,697 +51.1 +954,912 +53.3 +(16,785 +) +(1.8 +) +Gross profit +931,642 +48.9 +835,235 +46.7 +96,407 +11.5 +Selling, general and administrative expenses +709,058 +37.3 +837,154 +46.8 +128,096 +15.3 +Income (loss) from operations +222,584 +11.7 +(1,919 +) +(0.1 +) +224,503 +11,699.0 +Other expense, net +1,888 +0.1 +5,067 +0.3 +3,179 +62.7 +Income (loss) before income taxes +220,696 +11.6 +(6,986 +) +(0.4 +) +227,682 +3,259.1 +Income tax expense (benefit) +106,302 +5.6 +(12,696 +) +(0.7 +) +(118,998 +) +(937.3 +) +Net income +$ +114,394 +6.0 +% +$ +5,710 +0.3 +% +$ +108,684 +1,903.4 +% +Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel: +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,174,061 +$ +1,141,303 +$ +32,758 +2.9 +% +International +729,278 +648,844 +80,434 +12.4 +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +Net sales by brand and channel: +UGG brand: +Wholesale +$ +841,893 +$ +826,355 +$ +15,538 +1.9 +% +Direct-to-Consumer +665,354 +624,682 +40,672 +6.5 +Total +1,507,247 +1,451,037 +56,210 +3.9 +Teva brand: +Wholesale +117,478 +103,694 +13,784 +13.3 +Direct-to-Consumer +16,116 +14,021 +2,095 +14.9 +Total +133,594 +117,715 +15,879 +13.5 +Sanuk brand: +Wholesale +78,283 +77,552 +731 +0.9 +Direct-to-Consumer +12,639 +14,214 +(1,575 +) +(11.1 +) +Total +90,922 +91,766 +(844 +) +(0.9 +) +Other brands: +Wholesale +149,961 +116,206 +33,755 +29.0 +Direct-to-Consumer +21,615 +13,423 +8,192 +61.0 +Total +171,576 +129,629 +41,947 +32.4 +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +Total Wholesale +$ +1,187,615 +$ +1,123,807 +$ +63,808 +5.7 +% +Total Direct-to-Consumer +715,724 +666,340 +49,384 +7.4 +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +36 +The increase in consolidated net sales was largely due to higher UGG, other brand, Teva wholesale and overall DTC sales. During the year ended March 31, 2018 , we experienced an increase in pairs sold of 4.1% to 32,700 compared to 31,400 during the prior period. On a constant currency basis, net sales increased 6.1% during the year ended March 31, 2018 compared to the prior period. +Wholesale net sales of our UGG brand increased primarily due to an increase in weighted-average selling price per pair (WASPP), as well as an increase in apparel and home goods sales. The increase in WASPP was approximately $8,000, driven by fewer closeout sales. Further, we experienced an increase of approximately $7,000 in apparel and home goods sales compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand increased 2.3% during the year ended March 31, 2018 compared to the prior period. +Wholesale net sales of our Teva brand increased primarily due to a higher WASPP of approximately $13,000, primarily attributable to changes in product mix and fewer closeout sales. +Wholesale net sales of our Sanuk brand remained relatively flat with a slight increase in volume of pairs sold. +Wholesale net sales of our other brands increased due to a higher volume of pairs sold of approximately $33,000 driven by the growth of the Hoka brand. +DTC net sales increased 7.4% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold of approximately $68,000, partially offset by a decrease in WASPP of approximately $28,000. The decrease in WASPP was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet offering, as well as changes in product mix in our retail stores. Further, we experienced an increase in UGG brand apparel and home goods sales of approximately $9,000 compared to the prior period. On a constant currency basis, DTC net sales increased 6.2% during the year ended March 31, 2018 compared to the prior period. +Comparable DTC net sales for the 52 weeks ended April 1, 2018 increased 7.0% on a constant currency basis compared to the same period in fiscal year 2017 . The increase in comparable DTC net sales was due to growth in E-Commerce, partially offset by a decline in sales at our retail stores. +International sales, which are included in the reportable operating segment sales presented above, increased by 12.4% . International sales represented 38.3% and 36.2% of total net sales for the years ended March 31, 2018 and 2017 , respectively. The increase in international sales was primarily due to higher sales for the UGG and Hoka brands in Europe and Asia. On a constant currency basis, international sales increased 9.2% during the year ended March 31, 2018 compared to the prior period. +Gross Profit. Gross margin was 48.9% for the year ended March 31, 2018 compared to 46.7% for the year ended March 31, 2017 . The increase in gross margin was primarily driven by lower input costs as we execute our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling partly due to favorable weather conditions, as well as favorable foreign currency fluctuations compared to the prior period. +Selling, General and Administrative Expenses. The decrease in SG&A expenses during the year ended March 31, 2018 compared to the year ended March 31, 2017 was primarily due to: +• +significantly decreased impairment and depreciation costs of approximately $138,000, primarily due to the impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store and other long-lived asset impairment charges incurred in the prior period; +• +increased payroll costs of approximately $38,000, primarily due to higher performance-based compensation, as well as time-based stock awards of approximately $35,000, and costs for our in-house converted sales team; +• +decreased commission expenses of approximately $23,000, primarily due to the conversion of sales agent agreements to an in-house sales team in the prior period, partially offset by the increased payroll costs discussed above; +• +increased costs associated with our proxy contest of approximately $8,500; +37 +• +decreased foreign currency losses of approximately $8,300, due to favorable exchange rates for European and Asian currencies in the current period, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period; +• +decreased professional and consulting service costs of approximately $8,000, primarily driven by costs savings initiatives as well as lower restructuring charges related to corporate reorganization cost compared to the prior period; +• +increased warehouse-related expenses of approximately $6,000, primarily due to new North American third party logistic provider (3PL) costs and higher warehouse costs in Europe in the current period; +• +decreased rent and occupancy expenses of approximately $7,000, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred in the prior period; +• +increased advertising, promotion, and other operating expenses of approximately $2,900, primarily due to increased international investment compared to the prior period; and +• +increased bad debt expense of approximately $1,300, primarily due to recent payment history on an unsettled customer account in the current period. +Income (Loss) from Operations. The following table summarizes operating income (loss) from operations by reportable operating segment: +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +UGG brand wholesale +$ +247,826 +$ +213,407 +$ +34,419 +16.1 +% +Teva brand wholesale +20,400 +10,045 +10,355 +103.1 +Sanuk brand wholesale +14,474 +(110,582 +) +125,056 +113.1 +Other brands wholesale +22,258 +1,571 +20,687 +1,316.8 +Direct-to-Consumer +156,896 +109,802 +47,094 +42.9 +Unallocated overhead costs +(239,270 +) +(226,162 +) +(13,108 +) +(5.8 +) +Total +$ +222,584 +$ +(1,919 +) +$ +224,503 +11,699.0 +% +The increase in total income from operations primarily resulted from higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by approximately $138,000 of impairment charges incurred in the prior period, as described above. +The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins. +The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins. +The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred in the prior period, as well as higher sales at higher gross margins in the current period. +The increase in income from operations of other brands wholesale was due to higher Hoka brand sales, partially offset by higher SG&A expenses, primarily driven by higher variable selling and marketing expenses. +The increase in income from operations of DTC was primarily due to overall higher sales in our E-Commerce business and lower SG&A expenses, primarily driven by lower restructuring charges for retail stores compared to the prior period, as well as net realized cost savings due to our operating profit improvement plan. +The increase in unallocated overhead costs was primarily due to higher performance-based compensation and warehouse and 3PL costs, net of cost savings realized from our operating profit improvement plan, partially offset by favorable fluctuations in European and Asian exchange rates. The increase in performance-based compensation of +38 +approximately $17,000 compared to the prior period is due to performance criteria associated with certain compensatory awards being achieved in the current period. The increase in warehouse costs of approximately $10,000 compared to the prior period was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments, as well as a new North American 3PL. +Refer to Note 12, "Reportable Operating Segments," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion on the nature of our reportable operating segments. +Other Expense, Net. The decrease in total other expense, net, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities during the year ended March 31, 2018 compared to the prior period. +Income Taxes. The income tax expense and the effective income tax rates were as follows: +Years Ended March 31, +2018 +2017 +Income tax expense (benefit) +$ +106,302 +$ +(12,696 +) +Effective income tax rate +48.2 +% +181.7 +% +The change in the effective tax rate was primarily due to the impacts from the enactment of the Tax Reform Act during the year ended March 31, 2018, partially offset by the impact of non-recurring restructuring charges and non-cash impairment charges recognized during the year ended March 31, 2017. Of the total income tax expense recorded during the year ended March 31, 2018 , $14,395 was recorded for the re-measurement of our deferred tax assets to the lower enacted US federal tax rates in the consolidated statements of comprehensive income (loss) . Additionally, we recorded provisional US federal and state tax estimates for the one-time mandatory deemed repatriation of foreign earnings of $59,114 , including discrete tax impacts of $46,405 related to foreign earnings and profits generated prior to April 1, 2017. These provisional estimates were offset by a benefit of $2,502 due to the reduction of the US federal income tax rate from 35% to 31.5% . For further details on the impacts of the Tax Reform Act and the related provisional estimates recorded to income tax expense during the year ended March 31, 2018 , refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K . +Our effective tax rate was further impacted by the change in the jurisdictional mix of worldwide income before income taxes during the year ended March 31, 2018 . The change in jurisdictional mix was primarily related to an increase in foreign income before income taxes relative to worldwide income before income taxes compared to the prior period. +Foreign income before income taxes was $149,214 and $63,011 and worldwide income (loss) before income taxes was $220,696 and $(6,986) during the years ended March 31, 2018 and 2017 , respectively. The increase in foreign income before income taxes was primarily due to a larger proportionate increase in foreign sales and a reduction of foreign operating expenses during the year ended March 31, 2018 compared to the prior period. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to the impact of the Sanuk brand goodwill and patent impairment charges to domestic and worldwide income recorded during the prior period. +For the year ended March 31, 2018 , we generated approximately $4,129 of pre-tax earnings from one country which does not impose a corporate income tax compared to $21,569 during the prior period. Unremitted earnings of non-US subsidiaries for which we have not recognized the one-time mandatory deemed repatriation tax are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of taxable dividends. As of March 31, 2018 , we had approximately $203,032 of cash and cash equivalents outside the US that would be subject to additional foreign withholding taxes if it were to be repatriated. +We expect that our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the outcome of our retail store and fleet optimization, the impact of internal savings initiatives, the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe that the continuing evolution and +39 +expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business, will result in increases in foreign income before income taxes both in absolute terms and as a percentage of worldwide income before income taxes. In addition, we believe that our effective tax rate will continue to be impacted by our actual foreign income before income taxes relative to our actual worldwide income before income taxes. +Net Income. Our net income increased primarily due to higher sales and gross margins, as well as lower SG&A expenses primarily driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Our net income per share increased due to higher net income and lower weighted average common shares outstanding. +Other Comprehensive Income. Other comprehensive income increased primarily due to higher foreign currency translation gains driven by changes in our net asset position and European and Asian exchange rates during the year ended March 31, 2018 compared to the prior period. +Results of Operations +Year Ended March 31, 2017 Compared to Year Ended March 31, 2016 +The following table summarizes our results of operations: +Years Ended March 31, +2017 +2016 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,790,147 +100.0 +% +$ +1,875,197 +100.0 +% +$ +(85,050 +) +(4.5 +)% +Cost of sales +954,912 +53.3 +1,028,529 +54.8 +73,617 +7.2 +Gross profit +835,235 +46.7 +846,668 +45.2 +(11,433 +) +(1.4 +) +Selling, general and administrative expenses +837,154 +46.8 +684,541 +36.5 +(152,613 +) +(22.3 +) +(Loss) income from operations +(1,919 +) +(0.1 +) +162,127 +8.7 +(164,046 +) +(101.2 +) +Other expense, net +5,067 +0.3 +5,242 +0.3 +175 +3.3 +(Loss) income before income taxes +(6,986 +) +(0.4 +) +156,885 +8.4 +(163,871 +) +(104.5 +) +Income tax (benefit) expense +(12,696 +) +(0.7 +) +34,620 +1.9 +47,316 +136.7 +Net income (loss) +$ +5,710 +0.3 +% +$ +122,265 +6.5 +% +$ +(116,555 +) +(95.3 +)% +40 +Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel: +Years Ended March 31, +2017 +2016 +Change +Amount +Amount +Amount +% +Net sales by location: +US +$ +1,141,303 +$ +1,219,744 +$ +(78,441 +) +(6.4 +)% +International +648,844 +655,453 +(6,609 +) +(1.0 +) +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +Net sales by brand and channel: +UGG brand: +Wholesale +$ +826,355 +$ +918,102 +$ +(91,747 +) +(10.0 +)% +Direct-to-Consumer +624,682 +606,247 +18,435 +3.0 +Total +1,451,037 +1,524,349 +(73,312 +) +(4.8 +) +Teva brand: +Wholesale +103,694 +121,239 +(17,545 +) +(14.5 +) +Direct-to-Consumer +14,021 +11,810 +2,211 +18.7 +Total +117,715 +133,049 +(15,334 +) +(11.5 +) +Sanuk brand: +Wholesale +77,552 +90,719 +(13,167 +) +(14.5 +) +Direct-to-Consumer +14,214 +15,522 +(1,308 +) +(8.4 +) +Total +91,766 +106,241 +(14,475 +) +(13.6 +) +Other brands: +Wholesale +116,206 +100,820 +15,386 +15.3 +Direct-to-Consumer +13,423 +10,738 +2,685 +25.0 +Total +129,629 +111,558 +18,071 +16.2 +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +Total Wholesale +$ +1,123,807 +$ +1,230,880 +$ +(107,073 +) +(8.7 +)% +Total Direct-to-Consumer +666,340 +644,317 +22,023 +3.4 +Total +$ +1,790,147 +$ +1,875,197 +$ +(85,050 +) +(4.5 +)% +The decrease in overall net sales was largely due to lower UGG, Teva, and Sanuk brands wholesale sales, which was partially offset by increased other brand wholesale and DTC sales. We experienced a decrease of 2.3% in overall WASPP, primarily driven by a decrease in WASPP for the UGG brand, which drove the overall decrease in wholesale sales. We also experienced a decrease in the number of pairs sold in our UGG, Teva, and Sanuk brands which contributed to an overall decrease in volume of footwear sold for all brands of 2.2% to approximately 31,400 pairs sold for the year ended March 31, 2017 from approximately 32,100 pairs for the year ended March 31, 2016 . The decrease was largely attributable to lower North American UGG brand wholesale sales. In addition, we experienced reduced wholesale sales in Europe during the third quarter of fiscal year 2017 as a result of our transition to the new European 3PL. On a constant currency basis, overall net sales decreased 4.1% to approximately $1,800,300 in fiscal year 2017 compared to fiscal year 2016. +Wholesale net sales of our UGG brand decreased due to a decline in WASPP and in the volume of pairs sold. The decrease in WASPP had an impact of approximately $75,000, and was primarily attributable to changes in product mix and a higher proportion of international closeout sales at lower prices relative to the prior period. The decrease in WASPP was slightly offset by a shift in channel mix to DTC. The decrease in the volume of pairs sold had an impact of approximately $31,000, primarily attributable to lower North American wholesale sales. These decreases were partially offset by positive impacts from lower sales allowances or reserves and chargebacks due to lower sales and less promotional activity compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand decreased 9.7% to approximately $829,800 in fiscal year 2017 compared to fiscal year 2016. +Wholesale net sales of our Teva brand decreased largely due to a decrease in the volume of pairs sold, partially offset by a slight net increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately +41 +$17,000. The net increase in WASPP was primarily attributable to lower prices on closeout sales and a shift in product mix. +Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold and a decrease in WASPP. The decrease in the volume of pairs sold had an impact of approximately $9,000. The decrease in WASPP had an impact of approximately $4,200, which was primarily due to lower prices on closeout sales and a shift in product mix. +Wholesale net sales of our other brands increased primarily due to an increase in the volume of pairs sold, offset by a decrease in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 primarily driven by growth in the Hoka and Koolaburra brands, partially offset by a decrease in the discontinued brands' volume of pairs sold. The decrease in WASPP had an impact of approximately $5,000 due to a shift in product mix. +DTC net sales increased 3.4% to $666,340 primarily due to an increase in net sales from our E-Commerce business of approximately $29,200, offset by a decrease in net sales from our retail store business of approximately $7,200. The increase in total DTC net sales was largely due to an increase in the volume of pairs sold of approximately $78,500 due to growth in E-Commerce, offset by a decrease in WASPP with an impact of approximately $50,500. The decrease in WASPP was due to a shift in product mix. On a constant currency basis, DTC net sales increased 4.5% to approximately $673,800 in fiscal year 2017 compared to fiscal year 2016. +Comparable DTC net sales for the 52 weeks ended April 2, 2017 increased 2.6% on a constant currency basis to approximately $520,500 compared to the same period in fiscal year 2016. The increase in comparable DTC net sales was primarily due to improved growth in E-Commerce worldwide, partially offset by a decline in sales at our retail stores. +International sales, which are included in the reportable operating segment sales presented above, decreased by 1.0%. International sales represented 36.2% and 35.0% of worldwide net sales for the years ended March 31, 2017 and 2016, respectively. The decrease in international sales was due to lower wholesale sales for the UGG and Teva brands in Europe and the UGG and Sanuk brands in Asia. On a constant currency basis, international sales increased 1.6% to approximately $666,100 in fiscal year 2017 compared to fiscal year 2016. +Gross Profit. Gross margin was 46.7% for fiscal year 2017 compared to 45.2% for fiscal year 2016. The overall improvement in gross margin was driven by a higher proportion of DTC net sales and lower material costs, changes in product mix, decreased domestic promotional activity, and the lower impact of closeout sales compared to the prior period. This was slightly offset by the strengthening of the US dollar. +Selling, General and Administrative Expenses. The increase in SG&A expenses for fiscal year 2017 compared to fiscal year 2016 was primarily due to: +• +impairment charges for the Sanuk brand wholesale reportable operating segment's goodwill and patent of approximately $118,000; +• +increased other payroll expenses of approximately $7,300, primarily attributable to costs related to transitioning warehouse and customer service locations and less capitalization of labor costs associated with the business transformation project; +• +increased commission expenses of approximately $6,300, largely driven by terminations of sales agent agreements; +• +increased professional service costs of approximately $6,000, including restructuring charges for consulting services and other outside services; +• +increased depreciation expenses for IT-related assets for our business transformation project of approximately $6,000; +• +increased other operating expenses of approximately $4,600, primarily driven by innovation and design costs and outside services, as well as third party management fees for Asian operations in the E-Commerce business; +42 +• +increased expenses of approximately $4,500 due to contingent consideration credits taken in fiscal year 2016 that are not recurring in fiscal year 2017; +• +impairment charges for IT-related long-lived assets and related maintenance contract termination costs of approximately $3,400, included in restructuring charges; +• +increased warehouse expenses of approximately $2,100, largely driven by costs related to closing and transitioning 3PL warehouses; +• +decreased bad debt expense of approximately $2,500, due to fewer delinquent customer accounts in the current period; and +• +decreased occupancy and rent expense of approximately $1,700 due to higher restructuring charges incurred for retail store closures and office consolidations in the prior period. +(Loss) Income from Operations. The following table summarizes operating (loss) income by reportable operating segment: +Years Ended March 31, +2017 +2016 +Change +Amount +Amount +Amount +% +UGG brand wholesale +$ +213,407 +$ +246,990 +$ +(33,583 +) +(13.6 +)% +Teva brand wholesale +10,045 +17,692 +(7,647 +) +(43.2 +) +Sanuk brand wholesale +(110,582 +) +15,565 +(126,147 +) +(810.5 +) +Other brands wholesale +1,571 +(4,384 +) +5,955 +135.8 +Direct-to-Consumer +109,802 +101,756 +8,046 +7.9 +Unallocated overhead costs +(226,162 +) +(215,492 +) +(10,670 +) +(5.0 +) +Total +$ +(1,919 +) +$ +162,127 +$ +(164,046 +) +(101.2 +)% +The increase in loss from operations resulted from lower sales and higher overall SG&A expenses, primarily driven by the impairment and restructuring charges described above. These factors were partially offset by higher overall gross margins attributable to reduced material costs and changes in product mix, decreased promotional activity, and the lower impact of closeout sales compared to the prior period. +The decrease in income from operations of UGG brand wholesale was primarily the result of lower sales. +The decrease in income from operations of Teva brand wholesale was due to lower sales. +The decrease in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets of approximately $118,000, as described above, as well as lower sales and lower gross margins. +The increase in income from operations of other brands wholesale was due to higher sales and improved gross margins primarily attributable to the Hoka and Koolaburra brands, offset by higher SG&A expenses driven by higher selling and marketing costs. +The increase in income from operations of DTC was primarily due to higher sales and improved gross margins in our E-Commerce business, offset by higher SG&A expenses driven by impairment charges for retail store assets for stores that have been identified for closure, as described above. +Unallocated overhead costs increased due to restructuring charges, as described above, slightly offset by lower performance-based compensation expenses and fluctuations in various foreign currencies. +Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the higher average balances outstanding under our revolving credit facilities compared to fiscal year 2016. +43 +Income Taxes. Income tax (benefit) expense and the effective income tax rates were as follows: +Years Ended March 31, +2017 +2016 +Income tax (benefit) expense +$ +(12,696 +) +$ +34,620 +Effective income tax rate +181.7 +% +22.1 +% +The change in the effective tax rate was primarily due to the domestic net operating loss generated during the year ended March 31, 2017, driven by the impact of domestic restructuring charges and non-cash impairment charges, as discussed above, as well as a decrease in domestic net sales, and a decrease in the compensation earned by our foreign-based global product sourcing organization. +Foreign income before income taxes was $63,011 and $105,938 and worldwide (loss) income before income taxes was $(6,986) and $156,885 for the years ended March 31, 2017 and 2016, respectively. The decrease in foreign income before income taxes was primarily due to an increase in foreign operating expenses related to restructuring charges and a decrease in compensation earned by our foreign-based global product sourcing organization during fiscal year 2017 compared to fiscal year 2016. Foreign income before income taxes, as a percentage of worldwide loss before taxes, increased primarily due to the recording of domestic non-cash impairment charges, as discussed above, as well as a decrease in domestic sales during fiscal year 2017 compared to fiscal year 2016. +For fiscal year 2017, we generated approximately $21,569 of our pre-tax earnings from one country which does not impose a corporate income tax compared to $35,402 during fiscal year 2016. +Net Income. Our net income decreased primarily due to lower sales and higher SG&A expenses attributable to the impairment and restructuring charges discussed above, offset by higher gross margins. Our net income per share decreased due to lower net income, partially offset by a slightly lower number of weighted-average common shares outstanding. +Other Comprehensive Loss. Other comprehensive loss increased as a result of increased foreign currency translation losses driven by changes in exchange rates for Asian and European currencies during fiscal year 2017 compared to fiscal year 2016. +Liquidity +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from ongoing operating activities and borrowings under our revolving credit facilities, as needed. +Our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting receivables. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the year. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30th and September 30th to support our major selling seasons, which historically occur during the quarters ending September 30th and December 31st; whereas the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31st and March 31st in anticipation of the spring selling season that occurs in the quarters ending March 31st and June 30th. +We believe that our cash and cash equivalents balances, cash generated from operations, and available borrowings under our revolving credit facilities, as governed by our Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, National Association, as amended (Domestic Credit Facility), our revolving credit facility in China (as amended, China Credit Facility), and our revolving credit facility in Japan (Japan Credit Facility) will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. +Pursuant to the Tax Reform Act, we recorded approximately $59,114 of US federal and state income taxes on approximately $627,787 of undistributed earnings from our non-US subsidiaries through December 31, 2017. During the quarter ended March 31, 2018, a cash distribution of $250,000 was repatriated to the US from a foreign subsidiary and we recorded a state income tax provision of $607 . No foreign withholding taxes were required. The total income tax expense recorded also includes a deferred state liability of $927 for all undistributed earnings through December 31, 2017. +44 +As of March 31, 2018, we reported approximately $385,884 of undistributed earnings from our non-US subsidiaries, of which $203,032 relates to cash that could be subject to foreign withholding taxes if repatriated. During the fourth quarter ended March 31, 2018, we earned approximately $15,389 from our non-US subsidiaries that is not subject to the one-time mandatory deemed repatriation tax and for which no taxes have been provided. We anticipate making future cash distributions only from undistributed earnings that have been or will be subject to US tax. Any remaining earnings balance that has not already been subject to US income tax is expected to be reinvested outside of the US indefinitely as it is required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. +We are evaluating our capital allocation strategy and considering further opportunities to put global cash to use in a way that will profitably grow our business and drive stockholder value, including by repurchasing our stock. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by a number of additional considerations, which include clarifications of or changes to the Tax Reform Act, including the issuance of final regulations, timing and amount of any additional tax liabilities relating to the Tax Reform Act, additional accounting or regulatory guidance, our ongoing analysis, which may result in changes to various assumptions underlying the estimates, and our actual earnings for current and future fiscal periods. +Our liquidity may be impacted by additional factors, including our operating results, brand perception, unexpected weather conditions, our ability to respond to changes in consumer preferences in the retail environment, collect our receivables in a timely manner and effectively manage our inventories. Furthermore, we may require additional cash resources due to changing business conditions, economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any acquisitions. If our existing sources of liquidity are insufficient to satisfy our cash requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations that could result in operating and financial covenants that would restrict our operations and could further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. +Capital Resources +Domestic Credit Facility. The Domestic Credit Facility is a five -year, $400,000 secured revolving credit facility which matures on November 13, 2019. As of March 31, 2018 and through May 25, 2018 , we had no outstanding balance, outstanding letters of credit of $549 , and available borrowings of $399,451 under our Domestic Credit Facility. +China Credit Facility. The China Credit Facility is an uncommitted revolving line of credit of up to CNY 300,000 , or $47,760 . As of March 31, 2018 and through May 25, 2018 , we had no outstanding balance and available borrowings of $47,760 under our China Credit Facility. +Japan Credit Facility. The Japan Credit Facility is an uncommitted revolving line of credit of up to JPY 5,500,000 , or $51,700 , for a maximum term of six months for each draw on the facility. As of March 31, 2018 and through May 25, 2018 , we had no outstanding balance and available borrowings of $51,700 under our Japan Credit Facility. We have renewed the Japan Credit Facility through January 31, 2019 under the terms of the original agreement. +Mortgage. As of March 31, 2018 , we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $32,082 . The loan will mature and require a balloon payment in the amount of $23,700 on July 1, 2029 , in addition to any then-outstanding balance. +Debt Covenants. At March 31, 2018 and through May 25, 2018 , we were in compliance with all debt covenants under our borrowing arrangements. +Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our borrowing arrangements. +45 +Cash Flows +The following table summarizes our cash flows: +Years Ended March 31, +2018 +2017 +2016 +Net cash provided by operating activities +$ +327,351 +$ +199,330 +$ +125,813 +Net cash used in investing activities +(34,697 +) +(44,499 +) +(67,221 +) +Net cash used in financing activities +(157,715 +) +(103,757 +) +(36,811 +) +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income or loss, other cash receipts and expenditure adjustments and changes in working capital. +The increase in net cash provided by operating activities during fiscal year 2018 compared to fiscal year 2017 was primarily due to the $131,684 positive change in operating assets and liabilities partially offset by the net change in net income after non-cash adjustments of $3,663 . Operating assets and liabilities provided positive operating cash flows primarily from the following activities: (1) $59,105 increase in long-term income tax liability related to the Tax Reform Act; (2) $29,030 increase in accrued expenses related to performance-based compensation and other liabilities; (3) $28,330 reduction in income tax receivable due to timing; and (4) $12,106 improved trade accounts receivable. +The increase in net cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to (1) lower net income compared to fiscal year 2016, (2) the net impact of changes in non-cash impairment charges and related deferred tax positions, as well as additional restructuring charges, and (3) positive changes in working capital compared to the prior period primarily for inventory and accounts receivable. The change in cash used for inventory was lower compared to the prior period due to lower sales offset by improved inventory management. The change in accounts receivable levels relates to lower accounts receivable balances compared to the prior period due to lower wholesale sales and timing differences for collections. +Wholesale channel trade accounts receivable turnover increased to 6.2 times during the year ended March 31, 2018 compared to 6.0 during the year ended March 31, 2017 , due to higher wholesale sales, partially offset by the impact of higher average accounts receivable balances. Inventory turnover increased to 2.4 times during the year ended March 31, 2018 compared to 2.2 times during the year ended March 31, 2017 , due to lower average inventory levels and higher costs of sales due to higher sales compared to the prior period. +Investing Activities. The decrease in net cash used in investing activities during fiscal year 2018 compared to fiscal year 2017 was due to lower capital expenditures for property and equipment primarily driven by lower expenditures on real property acquisitions, retail stores and showrooms, as well as IT infrastructure and improvements, partially offset by higher warehouse build-out costs associated with the expansion of our warehouse and distribution center located in Moreno Valley, California. +The decrease in net cash used in investing activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to fewer capital expenditures for the business transformation project implementation and business acquisition costs compared to the prior period, as well as the winding down of the build out of our new retail stores and lower costs for purchases of computer hardware and equipment. This was partially offset by the purchase of land adjacent to our corporate headquarters campus during fiscal year 2017. +Financing Activities. The increase in net cash used in financing activities in fiscal year 2018 compared to fiscal year 2017 was primarily due to larger stock repurchases, partially offset by lower net borrowings and repayments of short-term borrowings and the final Sanuk brand contingent consideration payment being made in the prior period. +The increase in net cash used in financing activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to higher net borrowings and repayments of short-term borrowings, as well as repurchases of our common stock and cash paid for contingent consideration related to the Sanuk brand acquisition. +Refer to Note 8, "Stockholders' Equity," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our stock repurchase programs and activity. +46 +Off-Balance Sheet Arrangements +We do not have any off-balance sheet arrangements. +Contractual Obligations +The following table summarizes our contractual obligations at March 31, 2018 and the effects such obligations are expected to have on liquidity and cash flow in future periods: +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +336,545 +$ +54,836 +$ +96,724 +$ +72,776 +$ +112,209 +Purchase obligations for product (2) +455,228 +455,228 +— +— +— +Purchase obligations for sheepskin (3) +106,852 +54,252 +52,600 +— +— +Other purchase obligations (4) +48,082 +28,894 +19,188 +— +— +Mortgage obligation (5) +48,083 +2,168 +4,336 +4,336 +37,243 +Net unrecognized tax benefits (6) +9,238 +— +3,722 +5,516 +— +Total +$ +1,004,028 +$ +595,378 +$ +176,570 +$ +82,628 +$ +149,452 +(1) +Our operating lease commitments consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. +(2) +Our purchase obligations for product consist mostly of open purchase orders. Outstanding purchase orders are primarily with our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. +(3) +Our purchase obligations for sheepskin represent remaining commitments under existing supply agreements for sheepskin, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. +(4) +Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts and requirements to pay promotional expenses. Our promotional expenditures and service contracts are due periodically during fiscal years 2019 through 2021. +As of March 31, 2018 , we had approximately $5,514 of commitments for future capital expenditures primarily related to our continued build-out and expansion of our warehouse and distribution center located in Moreno Valley, California. We estimate that the capital expenditures for fiscal year 2019, including the aforementioned commitments, will not exceed $35,000 to $40,000. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on the timing of facility openings, as well as unforeseen needs to replace existing assets and the timing of other expenditures. +(5) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. Payments represent principal and interest amounts. Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our mortgage obligation and payments. +(6) +Net unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate, if recognized. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our uncertain tax positions. +47 +Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Impact of Foreign Currency Exchange Rate Fluctuations +Foreign currency exchange rate fluctuations had an incremental positive impact on the year ended March 31, 2018 compared to an incremental negative impact on the years ended March 31, 2017 and 2016 , respectively. +Refer to “Results of Operations,” above, as well as the consolidated statements of comprehensive income (loss) , and Note 9, "Foreign Currency Exchange Rate Contracts and Hedging," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the impact of foreign currency exchange rate fluctuations. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements and notes thereto: allowances for doubtful accounts, estimated returns liability, sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. +Refer to Note 1, "General," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. We recognize wholesale and international distributor revenue when products are shipped or delivered, depending on the contract terms, E-Commerce revenue on delivery, and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recognized, as discussed below. For DTC sales, a sales return liability for estimated returns is provided for when related revenue is recognized. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as cost of sales. Revenue is presented net of initial direct costs, including fees and taxes (for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes). Taxes are collected from customers and remitted directly to governmental authorities. +Accounts Receivable Allowances and Reserves. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2018 +2017 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +177,166 +100.0 +% +$ +190,997 +100.0 +% +Allowance for doubtful accounts +3,487 +2.0 +5,979 +3.1 +Allowance for sales discounts +1,400 +0.8 +3,100 +1.6 +Allowance for chargebacks +7,727 +4.4 +7,028 +3.7 +48 +Three Months Ended March 31, +2018 +2017 +Amount +% of Net Sales +Amount +% of Net Sales +Wholesale net sales +$ +223,127 +100.0 +% +$ +219,116 +100.0 +% +Allowance for sales returns +20,848 +9.3 +16,247 +7.4 +Direct-to-Consumer net sales +$ +177,557 +100.0 +% +$ +150,349 +100.0 +% +Sales returns liability +2,308 +1.3 +2,736 +1.8 +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers' inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for accounts which we consider to have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at March 31, 2018 by approximately $1,000 . +Allowance for Sales Discounts . We provide an allowance for term discounts for our wholesale channel sales against trade accounts receivable, which reflects a discount that our customers may take, generally based upon meeting certain order, shipment and prompt or early payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks . We provide an allowance against chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, discounts, markdowns, short shipments and other reasons. Therefore, we record an allowance for the balance of chargebacks that are outstanding as of the end of each period. This estimate is based on historical trends of the timing and amount of chargebacks taken against wholesale channel customer invoices. +Allowance for Sales Returns . We record an allowance against trade accounts receivable for anticipated future returns of goods shipped prior to period end for our wholesale channel. Generally, we allow returns for damaged or defective product. We base the amounts of the allowance on any approved customer requests for returns, historical returns experience, and any recent events that could results in a change from historical returns rates, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the allowance for total returns at March 31, 2018 by approximately $2,000 . +Sales Returns Liability . We record a liability for anticipated future returns of goods shipped prior to period end for our DTC segment. In general, we have a policy whereby we accept returns from our customers, including for damaged or defective products, within 30 days for cash or credit for up to one year. We calculate the liability using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns rates, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate sales expected to ultimately be returned would change the liability for total returns at March 31, 2018 by approximately $300 . +Inventory Write-Downs . We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost, market or net realizable value. Inventories are stated at $299,602 and $298,851 , net of inventory write-downs of $9,020 and $7,638 as of March 31, 2018 and 2017 , respectively. The amount of inventory write-downs as a percentage of gross inventories was 2.9% and 2.5% as of March 31, 2018 and 2017 , respectively. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve at March 31, 2018 by approximately $1,000 . +Goodwill and Indefinite-Lived Intangible Assets. We assess the impairment of goodwill and indefinite-lived intangible assets on an annual basis. We also perform interim impairment assessments of goodwill and indefinite-lived intangible assets if events or changes in circumstances between annual tests indicate a potential impairment. +49 +First we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include historical financial performance, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units' projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. +During fiscal years 2018, 2017 and 2016, we performed our annual impairment assessment and evaluated the UGG and other brands' wholesale reportable operating segment goodwill at December 31st and evaluated our Teva indefinite-lived trademarks at October 31st. Based on the carrying amounts of the UGG and other brands' goodwill and Teva brand indefinite-lived trademarks, each of the brands' actual fiscal year sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, we concluded that these assets were not impaired. +During fiscal year 2017, we performed the annual impairment assessment of our Sanuk brand wholesale reportable operating segment goodwill at October 31, 2016, with the assistance of a third party valuation firm. Our assessment identified an indicator of impairment and we performed the following: +• +Under step one of the impairment assessment, management concluded that the fair value of the Sanuk brand wholesale reportable operating segment was below its carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. +• +Under step two of the impairment assessment, management concluded that the fair value allocated to all of the assets and liabilities of the Sanuk brand wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets, resulted in a non-cash impairment charge of $113,944 , which was recognized in the third quarter of fiscal year 2017 and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, such as property and equipment and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, we test for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +We did not identify any definite-lived intangible asset impairments during the years ended March 31, 2018 and 2016 . However, during fiscal year 2017, and in connection with the goodwill impairment discussed above, we identified an impairment of the Sanuk brand's amortizable patent. Our analysis determined that the Sanuk brand's amortizable patent was fully impaired as the Sanuk SIDEWALK SURFERS utility patent had very limited value in the marketplace because of its limited ability to exclude others from creating similar products. As a result, we recognized a non-cash impairment charge to the patent of $ 4,086 in the Sanuk wholesale reportable operating segment during the third quarter of fiscal year 2017, which was recorded in SG&A expenses in the consolidated statements of comprehensive income +50 +(loss) . We did not identify any additional impairments for Sanuk brand's other definite-lived intangible assets during fiscal year 2017, as the undiscounted future cash flows associated with those assets exceeded their carrying values. +During the third quarter of fiscal year 2017, we also recognized an impairment for definite-lived intangible assets in the DTC reportable operating segment of $4,743 , due to a decline in market rental rates for European retail stores, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Further, during the years ended March 31, 2018 , 2017 , and 2016 , we recognized impairment losses for other long-lived assets primarily for retail store related fixed assets and computer software of approximately $2,400 , $11,300 , and $19,000 , respectively. +Refer to Note 1, "General," and Note 3, "Goodwill and Other Intangible Assets," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our goodwill, intangible and other long-lived assets. +Performance-Based Compensation . In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each year and are based upon many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior year's performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense increased approximately $32,700 during fiscal year 2018 compared to fiscal year 2017 as the performance criteria relating to our fiscal year 2018 performance-based stock compensation and cash bonuses were achieved. Comparably, during fiscal year 2017, performance-based stock compensation expense decreased approximately $1,100 compared to fiscal year 2016 as the performance criteria in both periods were not achieved or were partially achieved, and accordingly, we reversed expense in each period for those awards. Performance-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Refer to Note 8, "Stockholders' Equity," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our performance-based stock compensation. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date. +We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. +51 +We are subject to income taxes in the US and foreign jurisdictions. We provide for income taxes at the current and future enacted tax rates and consistent with laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recognized in the consolidated financial statements in the period during which we believe it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits in the consolidated balance sheets , along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We recognize interest and penalties related to unrecognized tax benefits within operating expense in the consolidated statements of comprehensive income (loss) . While the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. +On December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118) which provides guidance on accounting for the impact of the Tax Reform Act and provides a measurement period, which should not extend beyond one year from the enactment date, during which we may complete the accounting for the impacts of the Tax Reform Act under Accounting Standard Codification Topic 740 (ASC 740). In accordance with SAB 118, we must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting under ASC 740 is complete. Any adjustments to provisional amounts that are identified during the measurement period will be recorded and disclosed in the reporting period in which the adjustment is determined. The complexity of the Tax Reform Act could necessitate the need to use the full one year measurement period to adequately interpret, analyze and draw a conclusion about the Tax Reform Act's effects on us as of the enactment date. +Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on income taxes. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk +We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG brand products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. While there have historically been significant changes in the price of sheepskin, the price of sheepskin has stabilized in recent years. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in purchase obligations, which are not reflected in our consolidated balance sheets . In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our margins. Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our sheepskin contracts. +Foreign Currency Exchange Rate Risk +We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency exchange rate risk from existing assets and liabilities. Other than changes in the amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. There has been recent increased volatility with respect to the exchange rates between US dollars and both British Pounds and Euros. This increased volatility may be due in part to tax, importation and other policies being contemplated by the US government, the withdrawal by the United Kingdom from the European Union (commonly referred to as Brexit) and other global economic and political issues. We do not know whether this level of volatility +52 +will increase or decrease in the future. At May 25, 2018 , we are not aware of any factors that are expected to result in a material change in the general nature of our primary market risk exposure. +As of March 31, 2018 , a hypothetical 10.0% foreign currency exchange rate fluctuation would have caused the fair value of our financial instruments to increase or decrease by approximately $12,000 . Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effect such hypothetical changes may have on overall economic activity. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our foreign currency exchange rate forward contracts. +Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. Our foreign currency exchange rate risk arises as a result of our European and Asian operations. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of re-measuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US-dollar functional and also from re-measuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. We re-measure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries’ local currencies are their designated functional currencies, and we translate those subsidiaries’ assets and liabilities into US dollars using the exchange rates as of the end of the reporting period, which results in financial statement translation gains and losses recognized in other comprehensive income (loss) . Foreign currency exchange rate fluctuations affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors. +Interest Rate Risk +Our market risk exposure with respect to financial instruments is tied to changes in the prime rate, the federal funds effective rate, and the London Interbank Offered Rate (LIBOR). Our Domestic Credit Facility provides, at our election, for interest on outstanding borrowings at interest rates tied to adjusted LIBOR or the Alternative Base Rate (ABR), and is variable based on our total adjusted leverage ratio each quarter. The ABR is defined as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50% , and (3) adjusted LIBOR for a one-month interest period plus 1.00% . A hypothetical 1.0% increase in interest rates under each of our revolving credit facility agreements would have resulted in an aggregate increase to interest expense of approximately $500 for the year ended March 31, 2018 . Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed with this Annual Report on Form 10-K in a separate section following Part IV , as shown on the index under Item 15, "Exhibits and Financial Statement Schedule," of this Annual Report on Form 10-K . +53 +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018 . Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2018 . +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2018 , our management, including our Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2018 . The registered public accounting firm that audited our consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K . +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report on Form 10-K . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +54 +PART III +References in this Annual Report on Form 10-K to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 are stated in Items 10, 11, 12, 13, and 14 herein as "year ended" or "years ended". +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2018 annual meeting of stockholders and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the year ended March 31, 2018 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. +55 +PART IV +References in this Annual Report on Form 10-K to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 are stated in Item 15 herein as "year ended" or "years ended". +56 +Item 15. Exhibits and Financial Statement Schedule +Refer to the “Index to Consolidated Financial Statements and Financial Statement Schedule” on page F-1 of this Annual Report on Form 10-K for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010 and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as updated through April 26, 2018 (Exhibit 3.1 to the Registrant's Form 8-K filed on April 30, 2018 and incorporated by reference herein) +10.1 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.2 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +*10.6 +First Amendment to Lease Agreement, dated June 6, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 +*10.7 +Second Amendment to Lease Agreement, dated July 17, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 +10.8 +Second Amended and Restated Credit Agreement, dated November 13, 2014, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 19, 2014 and incorporated by reference herein) +*10.9 +Amendment No. 1, dated August 28, 2015, to Second Amended and Restated Credit Agreement, dated as of November 13, 2014, among the Company, the designated borrowers, JPMorgan Chase Bank, National Association, as Administrative Agent and the lenders party thereto +*10.10 +Amendment No. 2, dated October 3, 2016, to Second Amended and Restated Credit Agreement, dated as of November 13, 2014, among the Company, the designated borrowers, JPMorgan Chase Bank, National Association, as Administrative Agent and the lenders party thereto +10.11 +Amendment No. 3, dated November 21, 2017, to Second Amended and Restated Credit Agreement, dated as of November 13, 2014, among the Company, the designated borrowers, JPMorgan Chase Bank, National Association, as Administrative Agent and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 22, 2017 and incorporated by reference herein) +10.12 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.13 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +57 +10.14 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +#10.15 +Form of Change of Control and Severance Agreement (Exhibit 10.19 to the Registrant’s Form 10-K filed on May 30, 2017 and incorporated by reference herein) +#10.16 +Consulting Agreement and General Release, dated May 24, 2016 and effective May 31, 2016, entered into by and between Deckers Outdoor Corporation and Angel Martinez (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 27, 2016 and incorporated by reference herein) +#10.17 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.18 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.19 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective as of December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.20 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.21 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.22 +Form of Stock Unit Award Agreement under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +#10.23 +Form of Stock Unit Award Agreement (2015 Performance-Based PSU) under the 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.24 +Form of Stock Unit Award Agreement (2015 Time-Based RSU) under the 2006 Equity Incentive Plan (Exhibit 10.4 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.25 +Form of Stock Unit Award Agreement (2016 Performance-Based PSU) under the 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.26 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.27 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.28 +Management Incentive Plan (Exhibit 10.1 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.29 +2016 Non-Vested Stock Unit (NSU) Award Agreement (Exhibit 10.2 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.30 +Form of Restricted Stock Unit Award Agreement under the 2015 Stock Incentive Plan (2016 LTIP Financial Performance Award) (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 24, 2015 and incorporated by reference herein) +#10.31 +Form of Stock Unit Award Agreement (2016 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.6 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.32 +Form of Stock Unit Award Agreement (2017 Performance-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.33 +Form of Stock Unit Award Agreement (2017 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.34 +Form of Stock Unit Award Agreement (2018 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.35 +Form of Stock Unit Award Agreement (2018 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +58 +#10.36 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +*101.INS +XBRL Instance Document +*101.SCH +XBRL Taxonomy Extension Schema Document +*101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB +XBRL Taxonomy Extension Label Linkbase Document +*101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +59 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ THOMAS A. GEORGE +Thomas A. George +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 30, 2018 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ DAVID POWERS +Chief Executive Officer, President and Director +(Principal Executive Officer) +May 30, 2018 +David Powers +/s/ THOMAS A. GEORGE +Chief Financial Officer +(Principal Financial and Accounting Officer) +May 30, 2018 +Thomas A. George +/s/ JOHN M. GIBBONS +Chairman of the Board +May 30, 2018 +John M. Gibbons +/s/ KARYN O. BARSA +Director +May 30, 2018 +Karyn O. Barsa +/s/ NELSON C. CHAN +Director +May 30, 2018 +Nelson C. Chan +/s/ MICHAEL F. DEVINE, III +Director +May 30, 2018 +Michael F. Devine, III +/s/ WILLIAM L. MCCOMB +Director +May 30, 2018 +William L. McComb +/s/ JAMES QUINN +Director +May 30, 2018 +James Quinn +/s/ LAURI M. SHANAHAN +Director +May 30, 2018 +Lauri M. Shanahan +/s/ BONITA C. STEWART +Director +May 30, 2018 +Bonita C. Stewart +60 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of March 31, 2018 and 2017 +F-4 +Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2018, 2017, and 2016 +F-5 +Consolidated Statements of Stockholders' Equity for the years ended March 31, 2018, 2017, and 2016 +F-6 +Consolidated Statements of Cash Flows for the years ended March 31, 2018, 2017, and 2016 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts for the years ended March 31, 2018, 2017, and 2016 +F-44 +All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. +The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 in the consolidated financial statements , notes and financial statement schedule thereto are expressed herein as "year ended" or "years ended". +F-1 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2018 and 2017 , the related consolidated statements of comprehensive income (loss) , stockholders' equity, and cash flows for each of the years ended March 31, 2018 , 2017 and 2016 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the years ended March 31, 2018 , 2017 and 2016 in conformity with United States (US) generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2018 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 30, 2018 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements , whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements . Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements . We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company's auditor since 1992. +Los Angeles, California +May 30, 2018 +F-2 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control over Financial Reporting +We have audited Deckers Outdoor Corporation (the Company) internal control over financial reporting as of March 31, 2018 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018 , based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States or US) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2018 and 2017 , the related consolidated statements of comprehensive income (loss) , stockholders' equity, and cash flows for each of the years ended March 31, 2018 , 2017 and 2016 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ), and our report dated May 30, 2018 expressed an unqualified opinion on those consolidated financial statements . +Basis for Opinion +The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's report on internal control over financial reporting in Item 9A(b). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 30, 2018 +F-3 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +As of March 31, +2018 +2017 +ASSETS +Current assets: +Cash and cash equivalents +$ +429,970 +$ +291,764 +Trade accounts receivable, net of allowances ($33,462 and $32,354 as of March 31, 2018 and March 31, 2017, respectively) +143,704 +158,643 +Inventories, net of reserves ($9,020 and $7,638 as of March 31, 2018 and March 31, 2017, respectively) +299,602 +298,851 +Prepaid expenses +17,639 +15,996 +Other current assets +17,599 +30,781 +Income tax receivable +2,176 +24,786 +Total current assets +910,690 +820,821 +Property and equipment, net of accumulated depreciation ($210,763 and $190,758 as of March 31, 2018 and March 31, 2017, respectively) +220,162 +225,531 +Goodwill +13,990 +13,990 +Other intangible assets, net of accumulated amortization ($66,065 and $56,944 as of March 31, 2018 and March 31, 2017, respectively) +57,850 +65,138 +Deferred tax assets, net +38,381 +44,708 +Other assets +23,306 +21,592 +Total assets +$ +1,264,379 +$ +1,191,780 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Short-term borrowings +$ +578 +$ +550 +Trade accounts payable +93,939 +95,893 +Accrued payroll +55,695 +22,608 +Other accrued expenses +24,446 +31,815 +Income taxes payable +11,006 +2,719 +Value added tax payable +3,502 +5,466 +Total current liabilities +189,166 +159,051 +Long-term liabilities: +Mortgage payable +31,504 +32,082 +Income tax liability +64,735 +13,216 +Deferred rent obligations +22,499 +18,433 +Other long-term liabilities +15,696 +14,743 +Total long-term liabilities +134,434 +78,474 +Commitments and contingencies +Stockholders' equity: +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 30,447 and 31,987 as of March 31, 2018 and March 31, 2017, respectively) +304 +320 +Additional paid-in capital +167,587 +160,797 +Retained earnings +785,871 +819,589 +Accumulated other comprehensive loss +(12,983 +) +(26,451 +) +Total stockholders' equity +940,779 +954,255 +Total liabilities and stockholders' equity +$ +1,264,379 +$ +1,191,780 +See accompanying notes to the consolidated financial statements . +F-4 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(amounts in thousands, except per share data) +Years Ended March 31, +2018 +2017 +2016 +Net sales +$ +1,903,339 +$ +1,790,147 +$ +1,875,197 +Cost of sales +971,697 +954,912 +1,028,529 +Gross profit +931,642 +835,235 +846,668 +Selling, general and administrative expenses +709,058 +837,154 +684,541 +Income (loss) from operations +222,584 +(1,919 +) +162,127 +Other expense (income): +Interest income +(3,057 +) +(778 +) +(420 +) +Interest expense +4,585 +7,319 +5,814 +Other expense (income), net +360 +(1,474 +) +(152 +) +Total other expense, net +1,888 +5,067 +5,242 +Income (loss) before income taxes +220,696 +(6,986 +) +156,885 +Income tax expense (benefit) +106,302 +(12,696 +) +34,620 +Net income +114,394 +5,710 +122,265 +Other comprehensive income (loss), net of tax: +Unrealized (loss) gain on foreign currency exchange rate hedges +(613 +) +704 +461 +Foreign currency translation gain (loss) +14,081 +(6,598 +) +(550 +) +Total other comprehensive income (loss) +13,468 +(5,894 +) +(89 +) +Comprehensive income (loss) +$ +127,862 +$ +(184 +) +$ +122,176 +Net income per share: +Basic +$ +3.60 +$ +0.18 +$ +3.76 +Diluted +$ +3.58 +$ +0.18 +$ +3.70 +Weighted-average common shares outstanding: +Basic +31,758 +32,000 +32,556 +Diluted +31,996 +32,355 +33,039 +See accompanying notes to the consolidated financial statements . +F-5 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Loss +Total Stockholders' +Equity +Shares +Amount +Balance, March 31, 2015 +33,292 +$ +333 +$ +158,777 +$ +798,370 +$ +(20,468 +) +$ +937,012 +Stock compensation expense +16 +— +6,622 +— +— +6,622 +Shares issued upon vesting +132 +1 +(1 +) +— +— +— +Excess tax benefit from stock compensation +— +— +471 +— +— +471 +Shares withheld for taxes +— +— +(4,610 +) +— +— +(4,610 +) +Repurchases of common stock +(1,420 +) +(14 +) +— +(94,186 +) +— +(94,200 +) +Net income +— +— +— +122,265 +— +122,265 +Total other comprehensive loss +— +— +— +— +(89 +) +(89 +) +Balance, March 31, 2016 +32,020 +320 +161,259 +826,449 +(20,557 +) +967,471 +Stock compensation expense +23 +— +6,175 +— +— +6,175 +Shares issued upon vesting +166 +2 +796 +— +— +798 +Excess tax benefit from stock compensation +— +— +100 +— +— +100 +Shares withheld for taxes +— +— +(7,533 +) +— +— +(7,533 +) +Repurchases of common stock +(222 +) +(2 +) +— +(12,570 +) +— +(12,572 +) +Net income +— +— +— +5,710 +— +5,710 +Total other comprehensive loss +— +— +— +— +(5,894 +) +(5,894 +) +Balance, March 31, 2017 +31,987 +320 +160,797 +819,589 +(26,451 +) +954,255 +Stock compensation expense +15 +— +14,302 +— +— +14,302 +Shares issued upon vesting +148 +1 +764 +— +— +765 +Recently adopted ASU impact +(refer to Note 1) +— +— +— +1,558 +— +1,558 +Shares withheld for taxes +— +— +(8,276 +) +— +— +(8,276 +) +Repurchases of common stock +(1,703 +) +(17 +) +— +(149,670 +) +— +(149,687 +) +Net income +— +— +— +114,394 +— +114,394 +Total other comprehensive income +— +— +— +— +13,468 +13,468 +Balance, March 31, 2018 +30,447 +$ +304 +$ +167,587 +$ +785,871 +$ +(12,983 +) +$ +940,779 +See accompanying notes to the consolidated financial statements . +F-6 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2018 +2017 +2016 +Cash flows from operating activities: +Net income +$ +114,394 +$ +5,710 +$ +122,265 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and accretion +48,572 +52,628 +50,024 +Change in fair value of contingent consideration +— +— +(4,411 +) +Bad debt expense +4,168 +2,847 +5,120 +Deferred tax expense (benefit) +8,138 +(24,495 +) +8,167 +Stock-based compensation +14,302 +6,175 +6,622 +Excess tax benefits from stock compensation +1,945 +100 +471 +Loss (gain) on sale of assets +387 +538 +(1,338 +) +Impairment of goodwill +— +113,944 +— +Impairment of intangible and other long-lived assets +2,417 +13,222 +9,773 +Restructuring charges +1,667 +28,984 +24,673 +Changes in operating assets and liabilities: +Trade accounts receivable, net +10,770 +(1,336 +) +(23,545 +) +Inventories, net +(751 +) +1,060 +(61,492 +) +Prepaid expenses and other current assets +11,124 +7,975 +(3,681 +) +Income tax receivable +26,999 +(1,331 +) +(8,286 +) +Other assets +(1,714 +) +2,257 +(3,082 +) +Trade accounts payable +(2,184 +) +(7,825 +) +14,775 +Contingent consideration +— +— +(819 +) +Accrued expenses +28,627 +(403 +) +(16,221 +) +Income taxes payable +(3,638 +) +(3,743 +) +(397 +) +Long-term liabilities +62,128 +3,023 +7,195 +Net cash provided by operating activities +327,351 +199,330 +125,813 +Cash flows from investing activities: +Purchases of property and equipment, net +(34,813 +) +(44,499 +) +(66,186 +) +Proceeds from sales of property and equipment, net +116 +— +830 +Purchases of tangible, intangible, and other assets, net +— +— +(4,700 +) +Proceeds from sale of net assets +— +— +2,835 +Net cash used in investing activities +(34,697 +) +(44,499 +) +(67,221 +) +Cash flows from financing activities: +Proceeds from short-term borrowings +214,751 +405,988 +449,200 +Repayments of short-term borrowings +(214,889 +) +(468,938 +) +(387,120 +) +Proceeds on issuance of stock for employee stock purchase plan +765 +798 +— +Cash paid for shares withheld for taxes +(8,105 +) +(8,452 +) +(3,691 +) +Cash paid for repurchases of common stock +(149,687 +) +(12,572 +) +(94,200 +) +Contingent consideration paid +— +(20,058 +) +(445 +) +Loan origination costs on short-term borrowings +— +— +(62 +) +Repayment of mortgage principal +(550 +) +(523 +) +(493 +) +Net cash used in financing activities +(157,715 +) +(103,757 +) +(36,811 +) +Effect of foreign currency exchange rates on cash +3,267 +(5,266 +) +(968 +) +Net change in cash and cash equivalents +138,206 +45,808 +20,813 +Cash and cash equivalents at beginning of period +291,764 +245,956 +225,143 +Cash and cash equivalents at end of period +$ +429,970 +$ +291,764 +$ +245,956 +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2018 +2017 +2016 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Income taxes paid, net of refunds ($23,133, $17,132 and $501 as of March 31, 2018, 2017 and 2016, respectively) +$ +14,407 +$ +14,099 +$ +29,916 +Interest +3,774 +5,494 +4,640 +Non-cash investing and financing activities: +Accrued for purchases of property and equipment +2,020 +1,101 +2,640 +Accrued for asset retirement obligations +1,359 +2,359 +1,394 +Accrued for shares withheld for taxes +171 +— +919 +See accompanying notes to the consolidated financial statements . +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Note 1. General +The Company and Basis of Presentation +The consolidated financial statements and notes thereto include the accounts of Deckers Outdoor Corporation together with its wholly-owned consolidated subsidiaries (collectively referred to herein as the Company). Accordingly, all references to Deckers Outdoor Corporation or Deckers include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers Outdoor Corporation is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high performance activities. As part of its Omni-Channel platform, the Company's brands are aligned across its Fashion Lifestyle group, including the UGG® (UGG) and Koolaburra® (Koolaburra) brands, and Performance Lifestyle group, including the Teva® (Teva), Sanuk® (Sanuk), and Hoka One One® (Hoka) brands. +The Company sells its products through quality domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and E-Commerce websites. Independent third party contractors manufacture all of the Company's products. +The Company was incorporated in 1975 under the laws of the State of California and was reincorporated under the laws of the State of Delaware in 1993. +Reportable Operating Segments +The Company has five reportable operating segments including the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand and other brands, as well as DTC. It is by these reportable operating segments that information is reported to the Chief Operating Decision Maker, who is the Principal Executive Officer. The Company performs an annual assessment of the appropriateness of its reportable operating segments. Refer to Note 12, "Reportable Operating Segments," for further information on the Company's reportable operating segments. +Use of Estimates +The preparation of the Company's consolidated financial statements and notes thereto are in accordance with accounting principles generally accepted in the United States (US GAAP), which requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes thereto. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable allowances, returns liabilities, stock-based compensation, impairment assessments, depreciation and amortization, income tax liabilities, uncertain tax positions and income taxes receivable, the fair value of financial instruments, and the fair values of assets and liabilities, including goodwill and other intangible assets. These estimates are based on information available as of the date of the consolidated financial statements and notes thereto, and actual results could differ materially from the results assume or implied based on these estimates. +Re-classifications +Certain re-classifications were made for all prior periods presented including the years ended March 31, 2017 and 2016 , to conform to the current period presentation. +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Foreign Currency Translation +The Company considers the United States (US) dollar as its functional currency. The Company’s wholly-owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables , and payables, which are denominated in currencies other than their functional currency. The Company re-measures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are included in selling, general and administrative (SG&A) expenses in the consolidated statements of comprehensive income (loss) as incurred, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income (loss) (OCI). +Summary of Significant Accounting Policies +Cash Equivalents . The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents included $268,976 and $198,992 of money market funds as of March 31, 2018 and 2017 , respectively. +Allowance for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers' inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Write-offs against this allowance are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. +Allowance for Sales Discounts . The Company provides an allowance for term discounts for wholesale channel sales against trade accounts receivable, which reflects a discount that customers may take, generally based upon meeting certain order, shipment and prompt or early payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . +Allowance for Chargebacks . The Company provides an allowance against chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, discounts, markdowns, short shipments and other reasons. Therefore, the Company records an allowance for the balance of chargebacks that are outstanding as of the end of each period. This estimate is based on historical trends of the timing and amount of chargebacks taken against wholesale channel customer invoices. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . +Allowance for Sales Returns and Sales Returns Liability . The Company provides an allowance against trade accounts receivable for anticipated future returns of goods shipped prior to period end for the wholesale channel and a liability for anticipated returns of goods sold direct to consumers. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit with a receipt. The Company bases the amounts of the allowance and liability on historical returns and any recent events that could result in a change from historical return rates, among other factors. Changes to the allowance and sales return liability are recorded against gross sales and costs of sales for related inventory in the consolidated statements of comprehensive income (loss) . The sales return liability is recorded in other accrued expenses and the allowance for sales returns is recorded against trade accounts +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +receivable, and the related cost of sales for estimated product returns is offset to inventories in the consolidated balance sheets . +Inventories . Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (weighted average) or market or net realizable value less an approximate normal profit margin at each financial statement date. Cost includes shipping and handling fees which are subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends and the retail environment. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Property and Equipment, Depreciation and Amortization . Property and equipment is stated at cost less accumulated depreciation and amortization, and generally has a useful life expectancy of at least one year. Property and equipment includes tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. Software costs related to cloud computing arrangements are expensed as incurred, including labor. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of useful lives may occur after an asset is placed in service, for example, as a result of the Company incurring costs that prolong the useful life of an asset, and are recognized as an adjustment to deprecation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Property and equipment is summarized as follows: +As of March 31, +Useful life (years) +2018 +2017 +Land +Indefinite +$ +32,863 +$ +32,843 +Building +39.5 +38,945 +38,990 +Machinery and equipment +1-10 +141,255 +131,852 +Furniture and fixtures +3-7 +38,473 +38,720 +Computer software +3-10 +72,310 +67,750 +Leasehold improvements +1-11 +107,079 +106,134 +Gross property and equipment +430,925 +416,289 +Less accumulated depreciation and amortization +(210,763 +) +(190,758 +) +Property and equipment, net +$ +220,162 +$ +225,531 +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. As of March 31, 2018 and 2017 , liabilities for asset retirement obligations were $8,670 and $7,554 , respectively, and are recorded in other long-term liabilities in the consolidated balance sheets . +Goodwill and Other Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Definite-lived intangible assets are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows. If impaired, the asset or asset group is written down to fair value based either on discounted future cash flows or appraised values. Impairment charges and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Goodwill and indefinite-lived intangible assets are not amortized, but are instead tested annually for impairment. The Company evaluates the Teva brand indefinite-lived trademarks for impairment at October 31st of each year, and evaluates the UGG brand and other brands’ wholesale reportable segment goodwill for impairment at December 31st of each year. The timing of the annual impairment assessment is prescribed by applicable accounting guidance. The Company also performs interim impairment assessments of goodwill and indefinite-lived intangible assets if events or changes in circumstances between annual tests indicate a potential impairment. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share; budget-to-actual performance; consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units' projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. Refer to Note 12, "Reportable Operating Segments," for further information on the Company's reportable operating segments. +Refer to Note 3, "Goodwill and Other Intangible Assets," for further information on the Company's goodwill and intangible assets and annual impairment assessment results. +Other Long-Lived Assets . Other long-lived assets, such as machinery and equipment, internal-use software, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +During the years ended March 31, 2018 , 2017 , and 2016 , the Company recognized impairment losses for other long-lived assets primarily for retail store related fixed assets and computer software of approximately $2,400 , $11,300 , and $19,000 , respectively. +Derivative Instruments and Hedging Activities . The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency exchange rate risk. The Company may enter into foreign currency exchange rate forward or option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign currency exchange rate contracts and other derivative instruments to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency exchange rate contracts for trading purposes. +Certain of the Company's foreign currency exchange rate forward contracts are designated cash flow hedges of forecasted sales (Designated Derivative Contracts) and are subject to foreign currency exchange rate risk. These contracts allow the Company to sell Euros and British Pounds in exchange for US dollars at specified contract rates. The Company may also enter into foreign currency exchange rate contracts that are not designated as hedging instruments (Non-Designated Derivative Contracts), and these contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time of repayment. +The notional amount of both the Designated and Non-Designated Derivative Contracts are recorded at fair value, based on Level 2 inputs, in other current assets or other accrued expenses in the consolidated balance sheets . The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting. Changes in the fair value of Designated Derivative Contracts are recognized as a component of accumulated other comprehensive income (loss) (AOCI) within stockholders' equity, and are recognized in earnings in the consolidated statements of comprehensive income (loss) during the period which approximates the time the corresponding third-party sales occur. Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The changes in fair value for these contracts are generally offset by the gains or losses associated with the underlying foreign currency-denominated balances, which are also recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Refer to Note 4, "Fair Value Measurements," for further information on the nature of Level 2 inputs. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging," for further information on the impact of derivative instruments and hedging activities. +For all designated hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivative instruments. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivative instruments that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For Designated Derivative Contracts, the effective portion of the gain or loss on the derivative +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +instrument is recognized in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +The Company discontinues hedge accounting prospectively when it determines that the derivative instrument is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative instrument expires or is sold, terminated, or exercised, the cash flow hedge is non-designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative instrument remains outstanding, the Company continues to carry the derivative instrument at its fair value on the consolidated balance sheets and recognizes any subsequent changes in fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in OCI related to the hedging relationship are immediately recorded in earnings. +Revenue Recognition . The Company recognizes wholesale and international distributor revenue when products are shipped or delivered, depending on the contract terms, E-Commerce revenue on delivery, and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recognized. For DTC sales, a sales return liability for estimated returns is provided for when related revenue is recognized. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as cost of sales. Revenue is presented net of initial direct costs, including fees and taxes (for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes). Taxes are collected from customers and remitted directly to governmental authorities. +Cost of Sales . Cost of sales for the Company's goods are for finished goods, which includes the purchase costs and related overhead. Overhead includes all costs for planning, purchasing, quality control, freight, duties, royalties paid to third parties and shrinkage. Cost includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income (loss) . +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $22,372 , $21,256 , and $22,176 for the years ended March 31, 2018 , 2017 and 2016 , respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Advertising, Marketing, and Promotion Expenses . Advertising, marketing and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, with $111,658 , $109,579 , and $109,738 for the years ended March 31, 2018 , 2017 and 2016 , respectively, recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Advertising costs are expensed the first time the advertisement is run. Advertising communication costs are expensed in the period the communication occurs. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid and other current assets as of March 31, 2018 and 2017 were $2,545 and $900 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Rent Expense . Rent expense is recognized using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recognized as reductions of rent expense over the lease term. The rental payments under some of the Company's retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated amounts. Rent expenses are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Refer to Note 7, "Commitments and Contingencies," for further information on the Company's lease agreements. +Stock-Based Compensation . All of the Company's stock-based compensation is classified within stockholders' equity. Stock compensation expense is measured at the grant date based on the value of the award and is expensed +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock compensation expense and the Company's results of operations could be materially impacted. Stock compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Refer to Note 8, "Stockholders' Equity," for further information on Company stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $2,269 , $2,124 , and $2,182 during the years ended March 31, 2018 , 2017 and 2016 , respectively, and was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing contributions for the years ended March 31, 2018 , 2017 and 2016 . +Non-qualified Deferred Compensation . In 2010, the Company established a non-qualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. For each plan year, the Company's Board of Directors may, but is not required to, contribute any amount it desires to any participant under this program. The Company's contribution is determined by the Board of Directors annually. In March 2015, the Board of Directors approved a Company contribution feature for future plan years beginning in calendar year 2016 and gave management the authority to approve actual contributions. As of March 31, 2018 and 2017 , no material payments were made or pending under this program. The value of the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust for the purpose of supporting the benefits payable under this program, with the assets invested in company-owned life insurance policies. Refer to Note 4, "Fair Value Measurements," for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical and dental liability exposures. Liabilities for self-insured exposures are accrued at the present value of amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current and long-term liabilities based on the expected periods of payment. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income (loss) . +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Refer to Note 5, "Income Taxes," for further information on tax impacts and components of tax balances in the consolidated financial statements . +Comprehensive Income (Loss) . Comprehensive income (loss) is the total of net earnings and all other non-owner changes in equity. Comprehensive income (loss) includes net income (loss), foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, "Accumulated Other Comprehensive Loss," for further information on components of OCI recognized by the Company. +Net Income per Share . Basic net income per share represents net income divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share represents net income divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, "Net Income per Share," for a reconciliation of basic to diluted weighted-average common shares outstanding. +Recent Accounting Pronouncements +Recently Adopted +In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory. The Company adopted this ASU on April 1, 2017 on a prospective basis and changed its accounting policy to measure inventory at the lower of cost or market or net realizable value less an approximate normal profit margin at each financial statement date. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements and related disclosures. +In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting . The Company adopted this ASU on April 1, 2017 on a prospective basis and changed its accounting policy for certain aspects of share-based payment awards to employees, including the accounting for income taxes and statutory tax withholding requirements, as well as classification of cash flows. Beginning April 1, 2017, the adoption of this ASU had the following impact on the consolidated financial statements and related disclosures: +• +The calculation of diluted weighted-average shares outstanding no longer includes excess tax benefits as assumed proceeds, which did not have a material impact on the Company’s calculation of diluted earnings per share. +• +Excess tax benefits and deficiencies were recorded as income tax benefits or expenses in the consolidated statements of comprehensive income (loss) for the year ended March 31, 2018 , rather than as additional paid-in capital in the consolidated balance sheets for settlements of share-based payment awards occurring on or after April 1, 2017. The Company's income tax benefit or expense will continue to be impacted by fluctuations in the stock price between grant and vesting dates of its share-based payment awards. +• +A cumulative adjustment from non-current deferred tax assets to retained earnings for unrecognized excess tax benefits of $1,365 was recorded on April 1, 2017 in the consolidated balance sheet as of March 31, 2018 . +• +The Company has made current and prior period reclassifications in the consolidated statements of cash flows to present cash flows from excess tax benefits as cash flows provided by operating activities instead of the historical presentation as cash flows provided by financing activities. +• +The Company elected to continue including an estimate of forfeitures as a component of stock-based compensation expense. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , that permits reclassification of the income tax effects of the Tax Cuts and Jobs Act, enacted into law in December 2017 (Tax Reform Act) from AOCI to retained earnings . The Company elected to prospectively adopt this ASU during the fourth quarter of the year ended March 31, 2018 and, as a result, reclassified an immaterial amount of stranded tax effects related to its foreign currency exchange rate derivative instruments to retained earnings. +Not Yet Adopted +In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU replaced most existing revenue recognition guidance under US GAAP. The standard permits the use of either the retrospective or cumulative effect transition method. Subsequent to the initial guidance being issued, the FASB provided for a one-year deferral of the effective date, as well as early application. Further, the FASB issued additional guidance which clarified how to apply the implementation guidance related to principal versus agent considerations, how to identify performance obligations and licensing implementation guidance. +This ASU is effective for the Company's annual and interim reporting periods beginning April 1, 2018. The Company elected the cumulative effect transition method and has evaluated its business and contracts to determine any changes to accounting policies, processes, or systems necessary to adopt the requirements of the new standard. Management concluded required changes to its accounting policies and practices are as follows: +• +Revenue for certain wholesale and E-Commerce sales arrangements have been recognized on delivery and the Company has recorded shipment deferrals for undelivered product of each reporting period. However, the Company concluded it will now recognize revenue for these arrangements at shipment rather than delivery under the new standard and will record a cumulative effect adjustment of approximately $1,000 to its retained earnings in the consolidated balance sheets on April 1, 2018 related to the adoption of this ASU. +• +The Company records an allowance for sales returns against trade accounts receivable for its wholesale channel sales. However, the Company concluded that it will reclassify the allowance for sales returns of $20,848 as of March 31, 2018 to accrued expenses in its consolidated balance sheets on April 1, 2018, as the allowance for sales returns is considered a contract liability. +• +Expanded disclosures will be provided in the first reporting period of adoption, including the nature of revenue arrangements, contract liabilities, and constraints on variable consideration. +In February 2016, the FASB issued ASU 2016-02, Leases , to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU requires the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous US GAAP. A lessee should recognize a liability in the balance sheet to make lease payments (the lease liability) at fair value and an offsetting "right-of-use" asset representing its right to use the underlying asset for the lease term. This ASU requires a modified retrospective transition method for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. This ASU will be effective for the Company's annual and interim reporting periods beginning April 1, 2019. The Company has completed an initial assessment of the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures and currently expects an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease commitments that are currently classified as operating leases and disclosed in Note 7, "Commitments and Contingencies," such as retail stores, showrooms, and distribution facilities. The recognition of lease expenses is not expected to materially change from the current methodology. Further, the adoption of this ASU will result in expanded disclosures on existing and new lease commitments. The Company has developed an implementation team to evaluate its business operations +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +and related contracts and determine any necessary changes to accounting policies, processes, or systems in order to adopt this ASU. +In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments . This ASU eliminates the diversity in practice related to the classification of certain cash receipts and payments. This ASU will be effective for the Company’s annual and interim reporting periods beginning April 1, 2018, with early adoption permitted. The guidance should be applied retrospectively, requiring adjustment to all comparative periods presented, unless it is impractical to do so, in which case, the guidance should be applied prospectively as of the earliest date practicable. The Company has evaluated its business policies and processes around cash receipts and payments and has concluded the adoption of this ASU will not have a material impact on its consolidated financial statements and related disclosures. +In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory . This ASU requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. This ASU will be effective for the Company’s annual and interim reporting periods beginning April 1, 2018 and will require any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach, with early adoption permitted. The Company has evaluated its business policies and processes around intra-entity transfers of assets other than inventory and has concluded the adoption of this ASU will not have a material impact on its consolidated financial statements and related disclosures. +In January 2017, the FASB issued ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairment test. In computing the implied fair value of goodwill under current step two guidance, an entity previously had to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date following the procedure required to determine the fair value of assets acquired and liabilities assumed in a business combination. Under this ASU, an entity is required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This ASU will be effective for the Company’s annual and interim reporting periods beginning April 1, 2020, with early adoption permitted on or after January 1, 2017. The Company is evaluating the timing and effect that adoption of this ASU will have on its consolidated financial statements and related disclosures. +In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting , which updates the guidance for changes to the terms or conditions of a share-based payment award which would require the Company to apply modification accounting for share-based payment awards unless all of the following conditions are met: (1) the fair value; (2) vesting conditions; and (3) classification of the modified awards are the same as the fair value, vesting conditions, or classification of the original award immediately before the original award is modified. This ASU will be effective for the Company's annual and interim reporting periods beginning April 1, 2018. The Company has evaluated its business policies and processes around share-based arrangement modifications and has concluded the adoption of this ASU will not have a material impact on its consolidated financial statements and related disclosures. +In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities , which amends the hedge accounting guidance to better align an entity's risk management activities and financial reporting for hedge relationships through changes to both the designation and measurement accounting guidance for qualifying hedge relationships. Amendments include changes to align the financial statement presentation of the effects of the hedging instrument and the hedged item in the consolidated financial statements . This ASU will be effective for the Company's annual and interim reporting periods beginning April 1, 2019, with early adoption permitted. The Company is evaluating the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Note 2. Restructuring +In February 2016, the Company announced the implementation of a multi-year restructuring plan which is designed to realign its brands across its Fashion Lifestyle and Performance Lifestyle groups, optimize the Company's retail store fleet, and consolidate management and operations. In general, the intent of this restructuring plan is to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with the restructuring plan, the Company closed a total of 32 retail stores as of March 31, 2018 and consolidated its brand operations and corporate headquarters. The Company has incurred cumulative restructuring charges of $55,324 since commencement of the restructuring plan through March 31, 2018 . Restructuring charges by reportable operating segment are as follows: +Years Ended March 31, +Cumulative Restructuring Charges +2018 +2017 +2016 +UGG brand wholesale +$ +— +$ +2,238 +$ +— +$ +2,238 +Sanuk brand wholesale +— +20 +3,048 +3,068 +Other brands wholesale +— +102 +2,161 +2,263 +Direct-to-Consumer +149 +12,771 +10,534 +23,454 +Unallocated overhead costs +1,518 +13,853 +8,930 +24,301 +Total restructuring charges +$ +1,667 +$ +28,984 +$ +24,673 +$ +55,324 +During the years ended March 31, 2018 , 2017 , and 2016 , of the total restructuring charges incurred and stated above, $1,667 , $28,984 , and $22,824 were recorded in SG&A expenses, respectively, and $1,849 in cost of sales during fiscal year 2016 in the consolidated statements of comprehensive income (loss) . +Of the cumulative restructuring charges incurred through March 31, 2018 , $4,728 remained accrued as of that date, with $1,347 and $3,381 recorded in short-term liabilities and long-term liabilities, respectively, in the consolidated balance sheets . The specific categories of restructuring charges, as well as payments associated with the related accrued liabilities, were as follows: +Lease termination costs +Retail store fixed asset impairment +Severance costs +Software and office fixed asset impairment +Other* +Total +Fiscal year 2016 charges +$ +8,852 +$ +5,758 +$ +4,003 +$ +3,788 +$ +2,272 +$ +24,673 +Paid in cash +(1,223 +) +— +(567 +) +— +— +(1,790 +) +Non-cash +— +(5,758 +) +— +(3,788 +) +(463 +) +(10,009 +) +Liability as of March 31, 2016 +7,629 +— +3,436 +— +1,809 +12,874 +Additional charges +8,986 +3,614 +5,773 +3,199 +7,412 +28,984 +Paid in cash +(12,043 +) +— +(6,403 +) +— +(5,268 +) +(23,714 +) +Non-cash +— +(3,614 +) +(251 +) +(3,199 +) +— +(7,064 +) +Liability as of March 31, 2017 +4,572 +— +2,555 +— +3,953 +11,080 +Additional charges +149 +— +— +— +1,518 +1,667 +Paid in cash +(1,076 +) +— +(2,555 +) +— +(4,388 +) +(8,019 +) +Liability as of March 31, 2018 +$ +3,645 +$ +— +$ +— +$ +— +$ +1,083 +$ +4,728 +*Includes restructuring charges for costs related to office consolidations, termination of various contracts and other services. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +The Company currently does not anticipate incurring material restructuring charges in future periods, though optimization of Company-owned retail stores remains a focus. +As a result of the implementation of this restructuring plan, the Company expects to realize additional annualized SG&A expense savings by the end of fiscal year 2020. Refer to the section entitled "Recent Developments," in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Part II, Item 7 of this Annual Report on Form 10-K for further information. +Note 3. Goodwill and Other Intangible Assets +The Company's goodwill and other intangible assets are recognized as follows: +As of March 31, +2018 +2017 +Goodwill: +UGG brand +$ +6,101 +$ +6,101 +Other brands +7,889 +7,889 +Total goodwill +13,990 +13,990 +Other intangible assets: +Indefinite-lived intangible assets +Trademarks +15,454 +15,454 +Definite-lived intangible assets +Trademarks +55,245 +55,245 +Other +53,216 +51,383 +Total gross carrying amount +108,461 +106,628 +Accumulated amortization +(66,065 +) +(56,944 +) +Net definite-lived intangible assets +42,396 +49,684 +Total other intangible assets +57,850 +65,138 +Total goodwill and other intangible assets +$ +71,840 +$ +79,128 +The weighted-average amortization period for definite-lived intangible assets is 15 and 16 years for the years ended March 31, 2018 and 2017 , respectively. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Changes to the Company's goodwill in the consolidated balance sheets are as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance as of March 31, 2016 +$ +143,765 +$ +(15,831 +) +$ +127,934 +Changes related to acquisitions, impairments and other adjustments* +— +(113,944 +) +(113,944 +) +Balance as of March 31, 2017 +143,765 +(129,775 +) +13,990 +Changes related to acquisitions, impairments and other adjustments +— +— +— +Balance as of March 31, 2018 +$ +143,765 +$ +(129,775 +) +$ +13,990 +*Impairment recorded for the Sanuk brand wholesale reportable operating segment goodwill, as discussed below. +Annual Impairment Assessment +Goodwill & Indefinite-Lived Intangible Assets . During fiscal years 2018, 2017 and 2016, the Company performed its annual impairment assessment and evaluated the UGG and other brands' wholesale reportable operating segment goodwill at December 31st and evaluated its Teva indefinite-lived trademarks at October 31st. Based on the carrying amounts of the UGG and other brands' goodwill and Teva brand trademarks, the brands' actual fiscal year sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that these assets were not impaired. +During fiscal year 2017, the Company performed the annual impairment assessment of its Sanuk brand wholesale reportable operating segment goodwill at October 31, 2016, with the assistance of a third party valuation firm. The assessment identified an indicator of impairment and the Company performed the following: +• +Under step one of the impairment assessment, management concluded that the fair value of the Sanuk brand wholesale reportable operating segment was below its carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. +• +Under step two of the impairment assessment, management concluded that the fair value allocated to all of the assets and liabilities of the Sanuk brand wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets, resulted in a non-cash impairment charge of $113,944 , which was recognized in the third quarter of fiscal year 2017 and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Definite-Lived Intangible Assets . The Company did not identify any definite-lived intangible asset impairments during the years ended March 31, 2018 and 2016 . However, during fiscal year 2017, and in connection with the goodwill impairment discussed above, the Company identified an impairment of the Sanuk brand's amortizable patent. The Company's analysis determined that the Sanuk brand's amortizable patent was fully impaired as the Sanuk SIDEWALK SURFERS utility patent had very limited value in the marketplace because of its limited ability to exclude others from creating similar products. As a result, the Company recognized a non-cash impairment charge to the patent of $ 4,086 in the Sanuk wholesale reportable operating segment during the third quarter of fiscal year 2017, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The Company did not identify any additional impairments for Sanuk brand's other definite-lived intangible assets during fiscal year 2017, as the undiscounted future cash flows associated with those assets exceeded their carrying values. +During the third quarter of fiscal year 2017, the Company also recognized an impairment for definite-lived intangible assets in the DTC reportable operating segment of $4,743 , due to a decline in market rental rates for European retail stores, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Amortization Expense +A reconciliation of charges incurred in the consolidated statements of comprehensive income (loss) relevant to the Company's other intangible assets is as follows: +Balance as of March 31, 2016 +$ +83,026 +Impairment charges +(8,829 +) +Amortization expense +(7,945 +) +Foreign currency exchange rate fluctuations +(1,114 +) +Balance as of March 31, 2017 +65,138 +Amortization expense +(7,807 +) +Foreign currency exchange rate fluctuations +519 +Balance as of March 31, 2018 +$ +57,850 +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2018 is as follows: +Years Ending March 31: +2019 +$ +6,294 +2020 +3,511 +2021 +2,534 +2022 +2,525 +2023 +2,450 +Thereafter +25,082 +Total expected amortization in future periods +$ +42,396 +Note 4. Fair Value Measurements +The fair value of the Company's cash and cash equivalents, net trade accounts receivable, prepaid expenses, income taxes receivable, other current assets, short-term borrowings, trade accounts payable, accrued payroll, other accrued expenses, income taxes payable, and value added tax payable approximate the carrying values due to the relatively short maturities of these assets and liabilities. The fair values of the Company's long-term liabilities do not significantly differ from the carrying values. The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the consolidated balance sheets . +The inputs used in measuring fair value are prioritized into the following hierarchy: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the reporting entity to develop its own assumptions. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +The assets and liabilities that are measured on a recurring basis at fair value are summarized as follows: +Fair Value as of March 31, 2018 +Measured Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value: +Non-qualified deferred compensation asset +$ +7,172 +$ +7,172 +$ +— +$ +— +Non-qualified deferred compensation liability +(4,296 +) +(4,296 +) +— +— +Designated Derivative Contracts asset +950 +— +950 +— +Designated Derivative Contracts liability +(143 +) +— +(143 +) +— +Non-Designated Derivative Contracts liability +(10 +) +— +(10 +) +— +Fair Value as of March 31, 2017 +Measured Using +Level 1 +Level 2 +Level 3 +Assets (liabilities) at fair value: +Non-qualified deferred compensation asset +$ +6,662 +$ +6,662 +$ +— +$ +— +Non-qualified deferred compensation liability +(4,140 +) +(4,140 +) +— +— +Designated Derivative Contracts asset +1,365 +— +1,365 +— +The non-qualified deferred compensation asset of $7,172 is recorded in other assets in the consolidated balance sheets . The non-qualified deferred compensation liability of $4,296 is recorded in the consolidated balance sheets as of March 31, 2018 , with $575 recorded in other accrued expenses and $3,721 in other long-term liabilities. +The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the consolidated balance sheets . Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging," for further information on these derivative instruments. +Note 5. Income Taxes +Changes in Tax Law +On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act (Tax Reform Act) was enacted into law. The Tax Reform Act includes significant changes to US corporate income tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21% , limitations on the deductibility of interest expense and executive compensation, the transition of the US tax regime from a worldwide tax system to a territorial tax system, and provisions aimed at preventing base erosion of the US tax base. +Further, on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118) which provides guidance on accounting for the impact of the Tax Reform Act. SAB 118 provides a measurement period, which should not extend beyond one year from the enactment date, during which the Company may complete the accounting for the impacts of the Tax Reform Act under ASC Topic 740. In accordance with SAB 118, the Company must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting under ASC 740 is complete. +Provisional Estimates . To the extent accounting for certain income tax effects of the Tax Reform Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the consolidated financial statements in the first reporting period in which a reasonable estimate can be made. If the Company cannot determine a provisional estimate to be included in the consolidated financial statements , the Company can continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Reform Act being enacted. If the Company is unable to provide a reasonable estimate of certain impacts of the Tax +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Reform Act in a reporting period, provisional amounts must be reported in the first reporting period in which a reasonable estimate can be determined. +During the year ended March 31, 2018 , the Company recorded the following provisional estimates for the income tax expense impacts from the Tax Reform Act in the consolidated statements of comprehensive income (loss) : +• +$57,138 related to the US federal income tax associated with the one-time mandatory deemed repatriation of accumulated foreign earnings, including discrete tax impacts of $44,871 related to foreign earnings and profits generated prior to April 1, 2017, of which $4,571 is payable within 12 months and recorded in current income taxes payable in the consolidated balance sheets . +• +Non-cash income tax expense of approximately $14,395 to re-measure its deferred tax assets and liabilities to the income tax rates applicable for future periods in which they are expected to reverse. +• +State income tax of $1,976 associated with one-time mandatory deemed repatriation of accumulated foreign earnings, of which $607 relates to the state income tax liability recorded for the $250,000 cash distribution remitted from a foreign subsidiary during the quarter ended March 31, 2018 , and $927 relates to the deferred state income tax liability on unremitted foreign earnings and profits. +During the quarter ended March 31, 2018 , the Company recorded the following adjustments to amounts recorded as prior period provisional estimates for the income tax expense impacts of the Tax Reform Act in the consolidated statements of comprehensive income (loss) : +• +An overall reduction of $3,887 related to the US federal income tax associated with the one-time mandatory deemed repatriation of accumulated foreign earnings. This adjustment includes a reduction in the discrete tax impacts of $7,570 offset by an increase in the current year tax expense of $3,683 driven by corrections to earnings and profits reported for years prior to April 1, 2017. +• +An increase of $973 to non-cash income tax expense to re-measure its deferred tax assets and liabilities related to the income tax rates applicable for future periods in which they are expected to reverse. This adjustment was driven by the effects of phased-in US federal tax rate reductions from 35% to 31.5% to 21% on scheduling the reversal of temporary differences. +• +An increase of $1,558 to state income tax associated with the one-time mandatory deemed repatriation of accumulated foreign earnings. This adjustment was driven by the Company's ongoing analysis of the state income tax impacts resulting from the Tax Reform Act. +In accordance with SAB 118, the provisional estimates recorded represent reasonable estimates of the effects of the Tax Reform Act for which the analysis is not yet complete. As the Company completes its analysis of the effects of the Tax Reform Act, including collecting, preparing and analyzing necessary information regarding foreign earnings and profits, performing and refining calculations and obtaining additional guidance from such standard setting and regulatory bodies as the US Internal Revenue Service, US Treasury Department and FASB, among others, it may record adjustments to the provisional estimates. The Company expects to finalize its provisional estimates at the earlier of the time it files its US federal income tax return for the year ended March 31, 2018 or the end of the measurement period provided for under SAB 118, which is December 31, 2018. +The Tax Reform Act includes other provisions with effective dates for the Company beginning January 1, 2018 and beyond. The Company continues to account for other changes that impact business related income, exclusions, deductions and credits that cannot yet be quantified based on existing accounting guidance and the provisions of the tax laws in effect immediately prior to the enactment of the Tax Reform Act. The Company continues to analyze the provisions of the Tax Reform Act to fully assess the anticipated impact on its consolidated financial statements . +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Income Tax Expense (Benefit) +Components of income tax expense (benefit) are as follows: +Years Ended March 31, +2018 +2017 +2016 +Current +Federal +$ +80,339 +$ +2,184 +$ +11,971 +State +3,437 +1,576 +2,443 +Foreign +14,388 +8,039 +12,039 +Total +98,164 +11,799 +26,453 +Deferred +Federal +12,007 +(20,287 +) +7,887 +State +391 +(3,446 +) +1,113 +Foreign +(4,260 +) +(762 +) +(833 +) +Total +8,138 +(24,495 +) +8,167 +Income tax expense (benefit) +$ +106,302 +$ +(12,696 +) +$ +34,620 +Foreign income before income taxes was $149,214 , $63,011 , and $105,938 during the years ended March 31, 2018 , 2017 , and 2016 , respectively. +Income Tax Expense (Benefit) Reconciliation +Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes or benefit as follows: +Years Ended March 31, +2018 +2017 +2016 +Computed expected income taxes +$ +69,556 +$ +(2,445 +) +$ +54,910 +State income taxes, net of federal income tax benefit +9,044 +(1,403 +) +1,298 +Foreign rate differential +(37,090 +) +(8,062 +) +(28,233 +) +Unrecognized tax benefits +1,301 +2,691 +3,670 +Income tax expense on diminution of operations and nondeductible goodwill +— +3,921 +1,352 +Foreign income withholding tax expense +262 +432 +— +Nontaxable income +(7,006 +) +(5,055 +) +— +US tax on deemed repatriated foreign earnings +57,138 +— +— +Re-measurement of deferred taxes +14,395 +— +— +Statutory foreign income tax expense (benefit) +59 +(2,504 +) +(477 +) +Other +(1,357 +) +(271 +) +2,100 +Income tax expense (benefit) +$ +106,302 +$ +(12,696 +) +$ +34,620 +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Deferred Taxes +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2018 +2017 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +$ +18,261 +$ +28,304 +Depreciation of property and equipment +(9,638 +) +(19,511 +) +Stock-based compensation +4,027 +6,258 +Deferred rent +5,452 +6,809 +Acquisition costs +481 +751 +Uniform capitalization adjustment to inventory +3,212 +4,971 +Bad debt allowance and other reserves +12,939 +15,946 +State taxes +798 +(145 +) +Prepaid expenses +(2,686 +) +(4,144 +) +Accrued bonuses +7,573 +1,456 +Foreign currency exchange rate hedges +(80 +) +(534 +) +Other +(2,821 +) +1,376 +Net operating loss carry-forwards +863 +3,171 +Deferred tax assets, net +$ +38,381 +$ +44,708 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $118,118 . The deferred tax assets are primarily related to the Company's domestic operations and are currently expected to be realized between fiscal years 2019 and 2030. The Company recorded various adjustments to non-current deferred tax assets during the year ended March 31, 2018 related to the adoption of new ASUs, as well as $253 attributable to the effective portion of Designated Derivative Contracts recognized in OCI. Refer to the section entitled "Recent Accounting Pronouncements" in Note 1, "General," for more information regarding the adjustments to non-current deferred tax assets as a result of the adoption of ASU Nos. 2016-09 and 2018-02. +Domestic income (loss) before income taxes for the years ended March 31, 2018 , 2017 , and 2016 , was $321,482 , $(56,305) , and $50,947 , respectively, inclusive of intercompany dividends of $250,000 , $13,692 , and $0 , respectively, Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance was recorded in fiscal years 2018 and 2017 . +Tax Impact of Foreign Earnings +Pursuant to the Tax Reform Act, the Company recorded approximately $59,114 of US federal and state income taxes on approximately $627,787 of undistributed earnings from its non-US subsidiaries through December 31, 2017. During the quarter ended March 31, 2018, a cash distribution of $250,000 was remitted from a foreign subsidiary and the Company recorded a state income tax provision of $607 . No foreign withholding taxes were required. The total income tax expense recorded also includes a deferred state liability of $927 for all undistributed earnings through December 31, 2017. +As of March 31, 2018, the Company reported approximately $385,884 of undistributed earnings from its non-US subsidiaries, of which $203,032 relates to cash and cash equivalents that could be subject to foreign withholding taxes +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +if repatriated. During the fourth quarter ended March 31, 2018, the Company earned approximately $15,389 from its non-US subsidiaries that is not subject to the one-time mandatory deemed repatriation tax and for which no taxes have been provided. The Company anticipates making future cash distributions only from undistributed earnings that have been or will be subject to US tax. Any remaining earnings balance that has not already been subject to US income tax is expected to be reinvested outside of the US indefinitely as it is required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. +Unrecognized Tax Benefits +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recognized in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits in the consolidated balance sheets , along with any associated interest and penalties that would be payable to the taxing authorities upon examination. +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits is as follows: +Balance, March 31, 2016 +$ +8,695 +Gross increase related to current year tax positions +1,878 +Gross increase related to prior year tax positions +1,154 +Balance, March 31, 2017 +11,727 +Gross increase related to current year tax positions +1,168 +Gross increase related to prior year tax positions +1,243 +Settlements +(4,501 +) +Lapse of statute of limitations +(43 +) +Balance, March 31, 2018 +$ +9,594 +As of March 31, 2018 , the Company had accrued $9,594 of gross unrecognized tax benefits recorded in long-term income tax liability in the consolidated balance sheets resulting from tax positions that are subject to examination. As of March 31, 2018 , the Company accrued interest and potential penalties of $3,224 compared to $2,990 as of March 31, 2017 in the consolidated balance sheets and recorded these amounts in interest expense in the Company's consolidated statements of comprehensive income (loss) . +As of March 31, 2018 , the Company had $1,301 of net unrecognized tax benefits affecting the Company's effective tax rate and $369 of interest and penalties expenses recorded in interest expense the consolidated statements of comprehensive income (loss) . In the next 12 months the Company does not believe it is reasonably possible it will settle any unrecognized tax benefits. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdictions and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for the fiscal years before 2013. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +penalties, or interest assessments. However, it is the opinion of management that the Company does not currently expect these audits and inquiries to have a material impact on the Company's consolidated financial statements . +Note 6. Revolving Credit Facilities and Mortgage Payable +Domestic Credit Facility +In November 2014, the Company amended its Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, National Association (JPMorgan) as the administrative agent, Comerica and HSBC as co-syndication agents, and the lenders party thereto (as amended, Second Amended and Restated Credit Agreement). The Second Amended and Restated Credit Agreement provides for a five -year, $400,000 secured revolving credit facility (Domestic Credit Facility) which contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swing line loans, which matures on November 13, 2019. +In August 2015, the Company entered into an additional amendment to the Second Amended and Restated Credit Agreement to add certain foreign subsidiaries as borrowers, and in October 2016, further amended the Second Amended and Restated Credit Agreement to allow increased borrowing under its China Credit Facility (as defined below). In addition, in November 2017, the Company further amended the Second Amended and Restated Credit Agreement to revise the definition of "change in control". Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Domestic Credit Facility by up to an additional $200,000 , resulting in a maximum available principal amount of $600,000 . No lender under the Domestic Credit Facility has committed at this time or is obligated to provide any such increase in the commitments. In addition to allowing borrowings in US dollars, the Domestic Credit Facility provides a $150,000 sublimit for borrowings in Euros, British Pounds and any other currency that is subsequently approved by JPMorgan, each lender and the issuing bank. +At the Company's election, interest under the Domestic Credit Facility is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternative Base Rate (ABR), and is variable based on the Company's total adjusted leverage ratio. The initial adjusted LIBOR rate is equal to the effective LIBOR rate for the interest period elected, plus 1.25% per annum, or at the ABR plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 2.00% per annum (or between the ABR plus 0.25% per annum and the ABR plus 1.25% per annum), based upon the Company's total adjusted leverage ratio at such time. The ABR is defined in the Second Amended and Restated Credit Agreement as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% . As of March 31, 2018 , the adjusted LIBOR and ABR rates were 3.13% and 5.00% , respectively. +In addition, the Company is initially required to pay commitment fees of 0.175% per annum on the daily amount of the available borrowings under the Domestic Credit Facility, and thereafter the fee rate will fluctuate between 0.175% and 0.30% per annum, based upon the Company's total adjusted leverage ratio. +The Company's obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Company's existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries) (Guarantors), and are secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company's domestic and first-tier foreign subsidiaries. +The Domestic Credit Facility is governed by financial covenants which include: the total adjusted leverage ratio must not be greater than 3.25 to 1.00 ; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 ; and other customary limitations. The Domestic Credit Facility is governed by certain other covenants which include: the maximum amount paid for capital expenditures may not exceed $110,000 per year if the total adjusted leverage ratio is equal to or exceeds 2.75 to 1.00 ; the maximum additional unsecured debt may not exceed $200,000 ; the Company may not have aggregate Employee Retirement Income Security Act of 1974 events that are considered materially adverse; the Company may not have a change of control (as defined in +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +the Second Amended and Restated Credit Agreement); and no restrictions on cash dividends, stock repurchases or acquisitions may be made, provided that no event of default has occurred. +During the year ended March 31, 2018 , the Company made borrowings and repayments of $185,000 under the Domestic Credit Facility. As of March 31, 2018 , the Company had no outstanding balance under the Domestic Credit Facility. As a result, the available borrowings under the Domestic Credit Facility as of March 31, 2018 were $399,451 , including outstanding letters of credit of $549 . Any amounts outstanding are recorded in short-term borrowings in the consolidated balance sheets . As of March 31, 2018 , the Company had a remaining balance of approximately $600 in deferred financing costs related to previous amendments to the Second Amended and Restated Credit Agreement, which includes $ 400 and $ 200 recorded in other current assets and long-term other assets, respectively, in the consolidated balance sheets . Deferred financing costs are being amortized ratably over the remaining term of the Second Amended and Restated Credit Agreement. +Subsequent to March 31, 2018 , the Company made no additional borrowings under the Domestic Credit Facility. At May 25, 2018 , the Company had no outstanding balance and available borrowings of $399,451 under the Domestic Credit Facility. +China Credit Facility +In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in China (as amended, the China Credit Facility) that provided for an uncommitted revolving line of credit. In October 2016, the China Credit Facility was amended to include an increase in the uncommitted revolving line of credit of up to CNY 300,000 , or $47,760 , and to remove the sublimit of CNY 50,000 , or $7,960 , for the Company's wholly-owned subsidiary, Deckers Footwear (Shanghai) Co., LTD (DFSC). In March 2017, the China Credit Facility was amended to remove DFSC, leaving DBTC as the only remaining borrower, and to add an overdraft facility sublimit of CNY 100,000 , or $15,920 . +The China Credit Facility is payable on demand and subject to annual review and renewal with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on 115.0% multiplied by the People’s Bank of China market rate, which was 4.35% . As of March 31, 2018 , the total effective interest rate was 5.00% . +During the year ended March 31, 2018 , the Company made borrowings and repayments of $21,026 under the China Credit Facility. As of March 31, 2018 , the Company had no outstanding balance and available borrowings of $47,760 under the China Credit Facility. Amounts outstanding are recorded in short-term borrowings in the consolidated balance sheets . +Subsequent to March 31, 2018 , the Company made no additional borrowings under the China Credit Facility. At May 25, 2018 , the Company had no outstanding balance and available borrowings of $47,760 under the China Credit Facility. +Japan Credit Facility +In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 5,500,000 , or $51,700 , for a maximum term of six months for each draw on the facility. The Japan Credit Facility renews annually, and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2019 under the terms of the original agreement. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) for three months plus 0.40% . As of March 31, 2018 , TIBOR for three months was 0.06% and the total effective interest rate was 0.46% . The Japan Credit Facility has customary covenants including a restriction against having losses for two consecutive years, maintaining an interest coverage ratio greater than 1.00 to 1.00 , and maintaining higher assets than liabilities. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +During the year ended March 31, 2018 , the Company made borrowings and repayments of $8,884 under the Japan Credit Facility. As of March 31, 2018 , the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $51,700 . Amounts outstanding are recorded in short-term borrowings in the consolidated balance sheets . +Subsequent to March 31, 2018 , the Company made no additional borrowings under the Japan Credit Facility. At May 25, 2018 , the Company had no outstanding balance and available borrowings of $51,700 under the Japan Credit Facility. +Mortgage +In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for approximately $33,900 . As of March 31, 2018 , the outstanding principal balance under the mortgage was $32,082 , which includes $578 in short-term borrowings and $31,504 in mortgage payable in the consolidated balance sheets . The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and have a balloon payment, due on July 1, 2029 of approximately $23,700 , in addition to any then-outstanding balance. Minimum principal payments over the next five years are $3,195 . In December 2014, the mortgage financial covenants were amended to be consistent with the financial covenants that govern the Domestic Credit Facility, as discussed above. +Debt Covenants +As of March 31, 2018 , the Company was in compliance with all debt covenants under the various revolving credit facilities discussed above. +The borrowing and repayment amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using average currency exchange rates in effect as of the borrowing and repayment dates. The outstanding balance or available borrowing amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using spot rates in effect as of March 31, 2018 . As a result, there are differences between the debt balances within this footnote disclosure and those presented in the consolidated statements of cash flows due to foreign currency exchange rates. +Note 7. Commitments and Contingencies +Operating Lease Commitments +The Company leases office, distribution and retail facilities, and automobiles, under operating lease agreements which continue in effect through January 2029 . Some of the leases contain renewal options of anywhere from 1 to 15 years. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments are not reflected in the consolidated balance sheets . +In June 2017, the Company entered into an addendum to the original lease agreement relating to its warehouse and distribution center located in Moreno Valley, California. Pursuant to the addendum, the Company exercised its option to lease additional square footage and extended the expiration date of the lease to June 2028. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Future minimum commitments under existing operating lease agreements at March 31, 2018 are as follows: +Years Ending March 31, +Future Minimum Lease Commitments +2019 +$ +54,836 +2020 +52,256 +2021 +44,468 +2022 +38,435 +2023 +34,341 +Thereafter +112,209 +Total +$ +336,545 +The following schedule shows the composition of total rent expense: +Years Ended March 31, +2018 +2017 +2016 +Minimum rentals +$ +59,531 +$ +63,050 +$ +61,227 +Contingent rentals +15,924 +15,281 +16,067 +Total +$ +75,455 +$ +78,331 +$ +77,294 +Purchase Obligations +Product . The Company had $455,228 of outstanding purchase orders or other obligations with its manufacturers at March 31, 2018 . The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers make a decision to purchase its products. The Company generally orders product four to nine months in advance of the anticipated shipment dates based primarily on orders received from wholesale customers and through the DTC reportable operating segment. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase commitments can be cancelled by the Company under certain circumstances, though the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company's binding commitments or minimum purchase commitments, and instead reflects an estimate of its future payment commitments based on information currently available. +Sheepskin . The Company had an aggregate of $106,852 of purchase commitments for sheepskin at March 31, 2018 . These commitments generally arise under two -year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring purchase commitments of sheepskin that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There were no additional deposits on remaining minimum commitments as of March 31, 2018 . Included in other current assets on the consolidated balance sheets are approximately $900 and $12,200 of additional deposits related to prior sheepskin contracts as of March 31, 2018 and 2017 , respectively. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Minimum commitments for these contracts at March 31, 2018 were as follows: +Contract +Effective Date +Final +Target Date +Contract Value +Remaining +Commitment +October 2016 +September 2018 +$ +53,700 +$ +15,601 +July 2017 +September 2018 +29,600 +16,920 +September 2017 +September 2018 +43,200 +21,731 +July 2017 +September 2019 +52,600 +52,600 +Total +$ +179,100 +$ +106,852 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or will be reflected as a credit against purchases. +Subsequent to March 31, 2018, the Company entered into additional sheepskin purchase commitments totaling $85,750 with targeted dates between September 2019 and September 2020. +Othe r. The Company had an aggregate of $48,082 of other purchase commitments at March 31, 2018 , which generally consisted of material commitments for future capital expenditures, commitments under service contracts, and requirements to pay promotional expenses. Future capital expenditures primarily relate to continued build-out and expansion of the warehouse and distribution center located in Moreno Valley, California. +Litigation +From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +Contingent Consideration +The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 was paid during the year ended March 31, 2017. +The purchase price for the Hoka brand, acquired in September 2012, included contingent consideration through calendar year 2017, with a maximum contingent amount payable of $2,000 . The conditions for payment were met during the year ended March 31, 2016; $1,700 was paid as of March 31, 2016, and the remaining contingent consideration payment of $300 was made as of March 31, 2017. +Indemnification +The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify it licensees, distributors, and promotional partners in connection with claims that the Company's products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company's intellectual property. +Note 8. Stockholders' Equity +Equity Incentive Plans +In May 2006, the Company adopted the 2006 Equity Incentive Plan (2006 EIP), which was amended on May 9, 2007. In September 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (2015 SIP), which replaced the Company's 2006 EIP. As with the 2006 EIP, the primary purpose of the 2015 SIP is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors, plus any additional shares that are forfeited, or are otherwise terminated under the 2006 EIP. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . +The Company uses various types of stock-based compensation under the 2006 EIP and 2015 SIP, including time-based restricted stock units (RSUs), performance-based stock units (PSUs), stock appreciation rights (SARs), and non-qualified stock options (NQSOs). Annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) are available to key personnel and certain executive officers, and long-term incentive plan (LTIP) awards or options are available to certain officers, including named executive officers. +Annual Awards +During fiscal year 2018 , the Company elected to grant Annual RSUs and Annual PSUs under the 2015 SIP to key employees, including certain executive officers of the Company. These grants entitle the recipients to receive shares of the Company's common stock upon vesting. The vesting of Annual PSUs is subject to the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted, and to the extent the performance criteria has been met, vest in equal installments over three years thereafter. The Annual RSUs are subject only to time-based vesting criteria and vest in equal installments over three years following the date of grant. During the year ended March 31, 2018 , the Company granted 54,090 Annual PSUs and 133,464 Annual RSUs at a weighted-average grant date fair value of $68.44 and $67.70 per share, respectively. At March 31, 2018 , the Company determined that the performance criteria for the fiscal year 2018 Annual PSUs were achieved. +Long-Term Incentive Plan Awards +2007 LTIP SARs and 2007 LTIP PSUs . In May 2007, the Company approved LTIP awards under the 2006 EIP for issuance of SARs (2007 LTIP SARs) and PSUs (2007 LTIP PSUs), which were awarded to certain members of the Company's management team. These awards were subject to vesting based on certain performance criteria and service conditions. Half of the 2007 LTIP SARs and 2007 LTIP PSUs granted were fully vested as of December 31, 2011; 80% of the other half of the awards vested on December 31, 2015, while the remaining 20% did not vest and were cancelled, since it was determined that the Company had not achieved the required performance criteria as of December 31, 2016. Accordingly, the Company recognized a net reversal of stock compensation expense of $2,400 during fiscal year 2017. +2013 LTIP PSUs . In December 2013, the Company approved LTIP awards under the 2006 EIP for issuance of PSUs (2013 LTIP PSUs), which were awarded to certain members of the Company's management team. The 2013 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years. As of March 31, 2015 , the Company determined that achievement of the minimum threshold performance criteria was not probable, and accordingly, the Company recognized a net reversal of stock compensation expense of approximately $ 700 . At March 31, 2016, the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +2015 LTIP PSUs . In September 2014, the Company approved LTIP awards under the 2006 EIP for issuance of PSUs (2015 LTIP PSUs), which were awarded to certain members of the Company's management team. The 2015 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years. To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2015 LTIP PSUs that vested would increase up to the maximum number of units granted under the award. Under this program, the Company granted awards that contained a maximum of approximately 160,000 2015 LTIP PSUs during the year ended March 31, 2015 . The weighted-average grant date fair value of the 2015 LTIP PSUs was $98.29 per share. As of March 31, 2016 , the Company determined that achievement of the minimum threshold performance criteria was not probable, and accordingly, the Company recognized a net reversal of stock compensation expense of approximately $ 1,400 . As of March 31, 2017, the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +2016 LTIP PSUs . In November 2015, the Company approved LTIP awards under the 2015 SIP for issuance of PSUs (2016 LTIP PSUs), which were awarded to certain members of the Company's management team The 2016 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years. To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2016 LTIP PSUs that would vest was subject to increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2016 LTIP PSUs would occur if the Company failed to achieve at least 90% of the minimum threshold performance criteria. If the Company achieved the performance criteria, vesting of the 2016 LTIP PSUs would be subject to adjustment based on the application of a total stockholder return (TSR) modifier. The amount of the adjustment would be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period. Under this program, the Company granted awards that contained a maximum of approximately 308,000 2016 LTIP PSUs during the year ended March 31, 2016 . The weighted-average grant date fair value of the 2016 LTIP PSUs was $50.05 per share. The Company did not believe the achievement of at least the minimum threshold performance criteria was probable, and accordingly, did not recognize stock compensation expense for these awards during the years ended March 31, 2018 , 2017 , or 2016 . As of March 31, 2018 , the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +Long-Term Incentive Plan Options +During fiscal year 2017 , the Company approved LTIP awards under the 2015 SIP for issuance of options (LTIP NQSOs), which were awarded to certain members of the Company’s management team. If the Company achieves the target performance criteria and the recipient provides continuous service, the LTIP NQSOs will vest in three years from the date of grant. Each LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company's common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. The Company measures stock compensation expense for LTIP NQSOs at the date of grant using the Black-Scholes option pricing model. +In November 2016, the Company approved LTIP options (2017 LTIP NQSOs), which were awarded to certain members of the Company's management team, and which will vest on March 31, 2019 if the recipient provides continuous service through that date and the Company achieves the target performance criteria. As of March 31, 2018 , the fair value of the 2017 LTIP NQSOs granted, less estimated forfeitures, was $4,825 . +In June 2017, the Company approved LTIP options (2018 LTIP NQSOs), which were awarded to certain members of the Company's management team, and which will vest on March 31, 2020 if the recipient provides continuous service through that date and the Company achieves the target performance criteria. As of March 31, 2018 , the fair value of the 2018 LTIP NQSOs granted, less estimated forfeitures, was $4,719 . +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +The following table presents the weighted-average valuation assumptions used for the recognition of stock compensation expense for the LTIP NQSOs granted in each period presented: +2018 LTIP NQSOs +2017 LTIP NQSOs +Expected life (in years) +4.90 +5.94 +Expected volatility +38.73 +% +41.80 +% +Risk free interest rate +1.78 +% +1.95 +% +Dividend yield +— +% +— +% +Weighted-average exercise price +$ +69.29 +$ +61.86 +Weighted-average option value +$ +25.03 +$ +26.27 +Grants to Directors +Each of the Company's nonemployee directors is entitled to receive common stock with a total value of approximately $125 for annual service on the Board of Directors. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company's common stock during the last 10 trading days leading up to, and including, the 15 th day of the last month of each quarterly period. Each of these shares is fully vested on the date of issuance. +Stock Compensation Expense +The table below summarizes stock compensation expense by award or option type recognized in the consolidated statements of comprehensive income (loss) : +Years Ended March 31, +2018 +2017 +2016 +Stock compensation expense recorded for: +Annual RSUs +$ +7,761 +$ +5,191 +$ +2,356 +Annual PSUs +1,829 +1,203 +3,807 +2007 LTIP SARs +— +(1,949 +) +893 +LTIP PSUs* +— +(296 +) +(1,511 +) +LTIP NQSOs** +3,432 +694 +— +Directors' shares +1,134 +1,168 +1,077 +Employee Stock Purchase Plan*** +146 +164 +— +Total stock compensation expense +14,302 +6,175 +6,622 +Income tax benefit recognized +(4,906 +) +(2,322 +) +(2,525 +) +Net stock compensation expense +$ +9,396 +$ +3,853 +$ +4,097 +*2007 LTIP PSUs, 2013 LTIP PSUs, 2015 LTIP PSUs, and 2016 LTIP PSUs are collectively referred to herein as LTIP PSUs. +**LTIP NQSOs include 2017 LTIP NQSOs and 2018 LTIP NQSOs. +***The 2015 Employee Stock Purchase Plan authorizes 1,000,000 shares of the Company's common stock for sale to eligible employees using their after-tax payroll deductions. Each consecutive purchase period is six months in duration and shares are purchased on the last trading day of the purchase period at a price that reflects a 15% discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +The table below summarizes the total remaining unrecognized stock compensation expense related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized as of March 31, 2018 : +Unrecognized +Stock Compensation +Expense +Weighted-Average +Remaining +Vesting Period (Years) +Annual RSUs +$ +7,517 +1.2 +Annual PSUs +2,115 +1.4 +LTIP NQSOs +6,057 +1.5 +Total +$ +15,689 +Annual RSUs and Annual PSUs Issued under the 2006 EIP and 2015 SIP +The table below summarizes Annual RSU and Annual PSU activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at March 31, 2015 +340,000 +$ +70.11 +Granted +240,000 +70.82 +Vested +(132,000 +) +66.74 +Forfeited +(91,000 +) +72.84 +Cancelled* +(154,000 +) +74.22 +Nonvested at March 31, 2016 +203,000 +68.80 +Granted +268,000 +59.34 +Vested +(111,000 +) +65.37 +Forfeited +(66,000 +) +70.79 +Cancelled* +(68,000 +) +65.23 +Nonvested at March 31, 2017 +226,000 +63.96 +Granted +188,000 +67.92 +Vested +(102,000 +) +67.63 +Forfeited +(23,000 +) +64.59 +Nonvested at March 31, 2018 +289,000 +$ +65.18 +*Shares cancelled represent Annual PSUs granted that did not meet the required performance criteria. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +2007 LTIP SARs Issued Under the 2006 EIP +There were no 2007 LTIP SARs outstanding or exercisable at March 31, 2018. The table below summarizes 2007 LTIP SARs activity: +2007 LTIP SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at March 31, 2015 +715,000 +$ +26.73 +5.8 +$ +33,000 +Exercised +(80,000 +) +26.73 +Forfeited +(15,000 +) +26.73 +Outstanding at March 31, 2016 +620,000 +26.73 +3.5 +20,600 +Exercised +(290,000 +) +26.73 +Cancelled* +(90,000 +) +26.73 +Outstanding at March 31, 2017 +240,000 +26.73 +5.1 +7,920 +Exercised +(240,000 +) +26.73 +Outstanding and Exercisable at March 31, 2018 +— +$ +— +— +$ +— +*Shares cancelled represent SARs granted that did not meet the required performance criteria. +No SARs have been issued under the 2015 SIP. The maximum contractual term was 10 and 15 years from the grant date for those 2007 LTIP SARs with final vesting dates of December 31, 2011 and December 31, 2015, respectively. +LTIP PSUs Issued Under the 2006 EIP and the 2015 SIP +The table below summarizes LTIP PSU activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at March 31, 2015 +624,000 +$ +68.82 +Granted +308,000 +50.05 +Vested +(47,000 +) +26.73 +Forfeited +(232,000 +) +70.98 +Cancelled* +(264,000 +) +63.22 +Nonvested at March 31, 2016 +389,000 +61.53 +Granted +7,000 +56.56 +Forfeited +(27,000 +) +68.63 +Cancelled* +(100,000 +) +89.77 +Nonvested at March 31, 2017 +269,000 +50.22 +Cancelled* +(269,000 +) +50.22 +Nonvested at March 31, 2018 +— +$ +— +*Shares cancelled represent LTIP PSUs granted that did not meet the required performance criteria. +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +LTIP NQSOs Issued Under the 2015 SIP +The table below summarizes LTIP NQSO activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Nonvested at March 31, 2016 +— +$ +— +— +$ +— +Granted +208,000 +61.86 +Forfeited +(16,000 +) +61.86 +Nonvested at March 31, 2017 +192,000 +61.86 +9.0 +— +Granted +205,000 +69.29 +Nonvested at March 31, 2018 +397,000 +$ +65.70 +7.1 +$ +9,700 +The amounts granted are the maximum amounts under the respective options. +The maximum contractual term was approximately nine and seven years from the grant date for the 2017 NQSOs and 2018 NQSOs, respectively. +Stock Repurchase Programs +In January 2015, the Company's Board of Directors approved a stock repurchase program which authorized the Company to repurchase up to $200,000 of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. In October 2017, the Company's Board of Directors authorized a new $335,000 stock repurchase program. Combined with the approximately $65,294 remaining approved amount under the previously-announced stock repurchase program, upon approval of the new repurchase program, the Company had the authority to repurchase up to an aggregate of $400,294 of its common stock at the time. The Company's repurchase programs do not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company's discretion. +The following table summarizes the stock repurchase activity under the above programs: +Years Ended March 31, +2018 +2017 +2016 +Average price paid per share +$ +87.91 +$ +56.51 +$ +66.32 +Total number of shares purchased* +1,702,653 +222,471 +1,420,349 +Approximate dollar value of shares purchased +$ +149,687 +$ +12,572 +$ +94,200 +*All shares were repurchased as part of publicly-announced programs in open-market transactions. +Since inception of the combined January 2015 and October 2017 stock repurchase programs, as of March 31, 2018 and through May 25, 2018 , the Company has repurchased an aggregate of 3,722,502 shares for $284,393 , at an average price of $76.40 per share, leaving the aggregate remaining approved amount under the October 2017 program at $250,607 . +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Note 9. Foreign Currency Exchange Rate Contracts and Hedging +As of March 31, 2018 , the Company had Designated Derivative Contracts with five counterparties and Non-Designated Derivative Contracts with two counterparties, all with various maturity dates within the next 12 months. +As of March 31, 2018 , the Company had the following foreign currency exchange rate forward contracts: +Designated Derivative Contracts +Non-Designated Derivative Contracts +Total +Notional value +$ +126,332 +$ +4,802 +$ +131,134 +Fair value recorded in other current assets +950 +— +950 +Fair value recorded in other accrued expenses +(143 +) +(10 +) +(153 +) +As of March 31, 2017 , the Company had the following foreign currency exchange rate forward contracts: +Designated Derivative Contracts +Non-Designated Derivative Contracts +Total +Notional value +$ +100,000 +$ +— +$ +100,000 +Fair value recorded in other current assets +1,365 +— +1,365 +During the years ended March 31, 2018 and 2017 , the Company entered into and settled Designated Derivative Contracts with notional values totaling approximately $21,000 and $11,000 , respectively, and Non-Designated Derivative Contracts with notional values totaling approximately $81,000 and $263,000 , respectively. During the year ended March 31, 2018 , the Company settled Designated Derivative Contracts with notional values totaling approximately $100,000 , which had been entered into in the prior period. +The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of the derivative instruments. During the years ended March 31, 2018 and 2017 , the Designated Derivative Contracts remained effective and that portion of any gain or loss was recognized in AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. As of March 31, 2018 , the amount of unrealized losses on foreign currency exchange rate forward contracts recognized in AOCI is expected to be reclassified into income within the next 15 months. Refer to Note 10, "Accumulated Other Comprehensive Loss," for further information. +The following table summarizes the effect of Designated Derivative Contracts: +Years Ended March 31, +2018 +2017 +2016 +Location of amount reclassified from accumulated other comprehensive loss into income (effective portion) +Net sales +Amount of (loss) gain recognized in other comprehensive income (loss) on derivative instruments (effective portion) +$(9,593) +$8,208 +$(850) +Amount of (loss) gain reclassified from accumulated other comprehensive loss into income (effective portion) +$(8,541) +$7,082 +$(1,592) +Location of amount excluded from effectiveness testing +SG&A expenses +Amount of gain excluded from effectiveness testing +$1,376 +$534 +$207 +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +The following table summarizes the effect of Non-Designated Derivative Contracts: +Years Ended March 31, +2018 +2017 +2016 +Location of amount recognized in income on derivative instruments +SG&A expenses +Amount of (loss) gain recognized in income on derivative instruments +$(2,574) +$2,202 +$(1,532) +Subsequent to March 31, 2018 through May 25, 2018 , the Company entered into Non-Designated Derivative Contracts with notional values totaling approximately $14,000 , which are expected to mature over the next nine months, and no Designated Derivative Contracts. At May 25, 2018 , the Company's outstanding hedging contracts were held by an aggregate of five counterparties. +Note 10. Accumulated Other Comprehensive Loss +The components within accumulated other comprehensive loss are as follows: +As of March 31, +2018 +2017 +Unrealized gain on foreign currency exchange rate hedges, net of tax +$ +243 +$ +856 +Cumulative foreign currency translation adjustment +(13,226 +) +(27,307 +) +Accumulated other comprehensive loss +$ +(12,983 +) +$ +(26,451 +) +Note 11. Net Income per Share +The reconciliation of basic to diluted weighted-average common shares outstanding is as follows: +Years Ended March 31, +2018 +2017 +2016 +Weighted-average shares used in basic computation +31,758,000 +32,000,000 +32,556,000 +Dilutive effect of stock-based awards and options +238,000 +355,000 +483,000 +Weighted-average shares used for diluted computation +31,996,000 +32,355,000 +33,039,000 +Excluded*: +Annual RSUs and Annual PSUs +200 +17,000 +— +2007 LTIP SARs +— +— +90,000 +LTIP PSUs +— +269,000 +389,000 +LTIP NQSOs +397,000 +192,000 +— +Deferred Non-Employee Director Equity Awards +1,000 +— +— +*The stock-based awards and options excluded from the dilutive effect were excluded either because the shares were anti-dilutive or because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance for the years ended March 31, 2018 , 2017 and 2016 . The number of shares reflected for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. Refer to Note 8, "Stockholders' Equity," for further information on the Company's stock-based awards and options. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Note 12. Reportable Operating Segments +The Company has five reportable operating segments consisting of the strategic business units for the worldwide wholesale operations for each of the UGG brand, Teva brand, Sanuk brand and other brands, as well as DTC. The Company's other brands currently consist of the Hoka and Koolaburra brands, and included the Ahnu® (Ahnu) brand for the years ended March 31, 2017 and 2016, as well as the TSUBO and MOZO brands for the year ended March 31, 2016. +The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations for each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each reportable operating segment. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments. The unallocated corporate overhead costs include unallocable costs associated with distribution centers, certain executive and stock compensation expenses, accounting, finance and legal costs, information technology costs, human resources costs, and facilities costs, among others. +During calendar year 2017, the Company began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective April 1, 2017, operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the other brands wholesale reportable operating segment, as presented in the prior period. During the first quarter of fiscal year 2016, the Company changed its reportable operating segments to combine the previously-separated E-Commerce and retail store operating components into one DTC reportable operating segment. +Reportable operating segment information with a reconciliation to the consolidated statements of comprehensive income (loss) is summarized as follows: +Years Ended March 31, +2018 +2017 +2016 +Net sales to external customers: +UGG brand wholesale +$ +841,893 +$ +826,355 +$ +918,102 +Teva brand wholesale +117,478 +103,694 +121,239 +Sanuk brand wholesale +78,283 +77,552 +90,719 +Other brands wholesale +149,961 +116,206 +100,820 +Direct-to-Consumer +715,724 +666,340 +644,317 +$ +1,903,339 +$ +1,790,147 +$ +1,875,197 +Income (loss) from operations: +UGG brand wholesale +$ +247,826 +$ +213,407 +$ +246,990 +Teva brand wholesale +20,400 +10,045 +17,692 +Sanuk brand wholesale +14,474 +(110,582 +) +15,565 +Other brands wholesale +22,258 +1,571 +(4,384 +) +Direct-to-Consumer +156,896 +109,802 +101,756 +Unallocated overhead costs +(239,270 +) +(226,162 +) +(215,492 +) +$ +222,584 +$ +(1,919 +) +$ +162,127 +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Years Ended March 31, +2018 +2017 +2016 +Depreciation, amortization and accretion: +UGG brand wholesale +$ +3,193 +$ +3,167 +$ +2,254 +Teva brand wholesale +12 +24 +54 +Sanuk brand wholesale +4,174 +5,018 +6,556 +Other brands wholesale +865 +971 +1,101 +Direct-to-Consumer +13,396 +15,669 +19,030 +Unallocated overhead costs +26,932 +27,779 +21,029 +$ +48,572 +$ +52,628 +$ +50,024 +Capital expenditures: +UGG brand wholesale +$ +58 +$ +3,444 +$ +1,458 +Teva brand wholesale +— +— +— +Sanuk brand wholesale +20 +— +881 +Other brands wholesale +— +191 +51 +Direct-to-Consumer +8,641 +15,277 +18,445 +Unallocated overhead costs +26,094 +25,587 +45,351 +$ +34,813 +$ +44,499 +$ +66,186 +Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments. +Assets allocable to each reportable operating segment are as follows: +As of March 31, +2018 +2017 +Total assets from reportable operating segments: +UGG brand wholesale +$ +229,894 +$ +259,444 +Teva brand wholesale +85,980 +82,505 +Sanuk brand wholesale +79,322 +80,102 +Other brands wholesale +74,809 +70,607 +Direct-to-Consumer +112,355 +113,400 +$ +582,360 +$ +606,058 +The assets allocable to each reportable operating segment include accounts receivable, inventory, fixed assets, goodwill, other intangible assets, and certain other assets that are specifically identifiable with one of the Company's reportable operating segments. Unallocated assets are the assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, and various other corporate assets shared by the Company's reportable operating segments. +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +Total assets allocable to each reportable operating segment reconciled to the consolidated balance sheets are as follows: +As of March 31, +2018 +2017 +Total assets from reportable operating segments +$ +582,360 +$ +606,058 +Unallocated cash and cash equivalents +429,970 +291,764 +Unallocated deferred tax assets +38,381 +44,708 +Unallocated other corporate assets +213,668 +249,250 +Total assets +$ +1,264,379 +$ +1,191,780 +Note 13. Concentration of Business +Significant Customers +The Company sells its products to customers throughout the US and to foreign customers located in Europe, Asia, Canada, Australia, and Latin America, among other regions. Approximately $617,867 , or 32.5% , $539,000 , or 30.1% , and $526,000 , or 28.1% , of total net sales were denominated in foreign currencies for the years ended March 31, 2018 , 2017 , and 2016 , respectively. International sales were 38.3% , 36.2% , and 35.0% of the Company's total net sales for the years ended March 31, 2018 , 2017 , and 2016 , respectively. For the years ended March 31, 2018 , 2017 , and 2016 , no single foreign country comprised more than 10.0% of the Company's total net sales. +Management performs regular evaluations concerning the ability of the Company's customers to satisfy their obligations to the Company and records an allowance for doubtful accounts based upon these evaluations. The Company's five largest customers accounted for approximately 23.6% of worldwide sales for the year ended March 31, 2018 compared to 20.3% for the year ended March 31, 2017 . No single customer accounted for 10.0% or more of the Company's net sales during the years ended March 31, 2018 , 2017 and 2016 . At March 31, 2018 , the Company had two customers that represented a combined 21.6% of net trade accounts receivable compared to one customer that made up 11.2% of net trade accounts receivable at March 31, 2017 . +Suppliers +The Company's production is concentrated at a limited number of independent manufacturing factories in Asia. Sheepskin is the principal raw material for certain UGG brand products and the majority of sheepskin is purchased from two tanneries in China and is sourced primarily from Australia and the United Kingdom. Beginning in 2013, in an effort to partially reduce its dependency on sheepskin, the Company began using a proprietary raw material, UGGpure TM (UGGpure), which is a wool woven into a durable backing, in some of its UGG brand products. The Company currently purchases UGGpure from two suppliers. The other production materials used by the Company are sourced primarily in Asia. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, foreign currency exchange rate fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes, and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside of the Company's control. Furthermore, the price of sheepskin is impacted by numerous other factors, including demand for the Company's products, demand for sheepskin by competitors, changes in consumer preferences and changes in discretionary spending. +Net Property and Equipment +The Company does not consider international operations a separate reportable operating segment. Management reviews such operations in the aggregate with the aforementioned reportable operating segments. Long-lived assets, which consist of net property and equipment, in the US and all other countries combined was as follows: +F-42 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2018, 2017 and 2016 +(dollar amounts in thousands, except per share data) +As of March 31, +2018 +2017 +US +$ +203,956 +$ +206,077 +All other countries* +16,206 +19,454 +Total +$ +220,162 +$ +225,531 +*No other country's net property and equipment comprised more than 10.0% of the Company's total net property and equipment as of March 31, 2018 and 2017 . +Note 14. Quarterly Summary of Information (Unaudited) +The Company's business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. Net sales of other brands do not have significant seasonal impact on the Company. Due to the size of the UGG brand relative to the Company's other brands, the Company's aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. +Summarized unaudited quarterly financial data are as follows: +Fiscal Year 2018 +Quarter Ended +6/30/2017 +9/30/2017 +12/31/2017 +3/31/2018 +Net sales +$ +209,717 +$ +482,460 +$ +810,478 +$ +400,684 +Gross profit +90,625 +225,117 +423,471 +192,429 +(Loss) income from operations +(56,256 +) +67,355 +193,191 +18,294 +Net (loss) income* +(42,121 +) +49,559 +86,341 +20,615 +Net (loss) income per share: +Basic +$ +(1.32 +) +$ +1.55 +$ +2.71 +$ +0.66 +Diluted +$ +(1.32 +) +$ +1.54 +$ +2.69 +$ +0.66 +Fiscal Year 2017 +Quarter Ended +6/30/2016 +9/30/2016 +12/31/2016 +3/31/2017 +Net sales +$ +174,393 +$ +485,944 +$ +760,345 +$ +369,465 +Gross profit +76,252 +216,425 +383,634 +158,924 +(Loss) income from operations +(78,319 +) +54,023 +53,250 +(30,873 +) +Net (loss) income* +(58,918 +) +39,305 +41,027 +(15,704 +) +Net (loss) income per share: +Basic +$ +(1.84 +) +$ +1.23 +$ +1.28 +$ +(0.49 +) +Diluted +$ +(1.84 +) +$ +1.21 +$ +1.27 +$ +(0.49 +) +*Includes restructuring charges of $1,667 and $28,984 for the years ended March 31, 2018 and 2017 , respectively, primarily incurred during the third and fourth quarters of fiscal year 2017 and the first and second quarters of fiscal years 2018 . Refer to Note 2, "Restructuring," for further information on the nature of restructuring charges incurred. In addition, includes non-cash impairment charges incurred of $113,944 and $4,086 for the Sanuk brand's wholesale reportable operating segment goodwill and patent, respectively, during the third quarter of fiscal year 2017 . Refer to Note 3, "Goodwill and Other Intangible Assets," for further information on the Sanuk brand non-cash impairment charges. +F-43 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +The following is a summary of allowances for doubtful accounts, sales discounts, chargebacks and sales returns against trade accounts receivable: +As of March 31, +2018 +2017 +2016 +Allowance for doubtful accounts (1) +Balance at Beginning of Year +$ +5,979 +$ +5,494 +$ +2,297 +Additions +4,168 +2,847 +5,120 +Deductions +(6,660 +) +(2,362 +) +(1,923 +) +Balance at End of Year +$ +3,487 +$ +5,979 +$ +5,494 +Allowance for sales discounts (2) +Balance at Beginning of Year +$ +3,100 +$ +2,672 +$ +2,348 +Additions +19,972 +20,259 +25,560 +Deductions +(21,672 +) +(19,831 +) +(25,236 +) +Balance at End of Year +$ +1,400 +$ +3,100 +$ +2,672 +Allowance for chargebacks (3) +Balance at Beginning of Year +$ +7,028 +$ +4,968 +$ +4,041 +Additions +19,019 +19,584 +15,750 +Deductions +(18,320 +) +(17,524 +) +(14,823 +) +Balance at End of Year +$ +7,727 +$ +7,028 +$ +4,968 +Allowance for sales returns (4) +Balance at Beginning of Year +$ +16,247 +$ +17,061 +$ +9,532 +Additions +51,677 +62,122 +42,392 +Deductions +(47,076 +) +(62,936 +) +(34,863 +) +Balance at End of Year +$ +20,848 +$ +16,247 +$ +17,061 +Total Allowances +$ +33,462 +$ +32,354 +$ +30,195 +(1) +The additions to the allowance for doubtful accounts represent estimates of the Company's bad debt expense based upon the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual write-off of the related trade accounts receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company's customers based upon the amount of outstanding discounts for prompt or early payments. Deductions are for the actual discounts taken by the Company's wholesale channel customers. Discounts for DTC customers are taken at the point of sale and are not reflected in the allowance for sales discounts. +(3) +The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(4) +The additions to the allowance for sales returns represent estimates of returns based upon the Company's historical wholesale channel customer returns experience. Deductions are for the actual return of products. Returns of DTC customer products are excluded as they are separately recorded in the sales return liability. +F-44 \ No newline at end of file diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/filing_metadata.csv b/raw/filings/0000910521/2017/0000910521-18-000015/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..10bdf94137dff4a4a3d7c318a1252735e4513a18 --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2018-05-30,2018-03-31,2018-05-30T19:12:10.000Z,0000910521-18-000015,deck331201810-k.htm,10-K,19708092,1,0,https://www.sec.gov/Archives/edgar/data/910521/000091052118000015/deck331201810-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052118000015/,2017,2017,1 diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/item1.txt b/raw/filings/0000910521/2017/0000910521-18-000015/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad67f04780135b8876401191bc469aaaeb7c2060 --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/item1.txt @@ -0,0 +1,115 @@ +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers, primarily in Asia. +Recent Developments +Restructuring Plan. In February 2016, we announced the implementation of a multi-year restructuring plan which is designed to realign our brands, optimize our retail store fleet, and consolidate our management and operations. As part of this restructuring plan, we realigned our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands. In general, the intent of the restructuring plan is to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. +In connection with our restructuring plan, we have closed 32 retail stores as of March 31, 2018 , including five stores in fiscal year 2016 and 20 in fiscal year 2017, and consolidated our brand operations and corporate headquarters. We have incurred cumulative restructuring charges of $55,324 through March 31, 2018 , with $1,667 , $28,984 , and $22,824 of restructuring charges recorded in selling, general and administrative (SG&A) expense during the years ended March 31, 2018 , 2017 , and 2016 , respectively, and $1,849 in cost of sales during fiscal year 2016 in the consolidated financial statements. We currently do not anticipate incurring material restructuring charges in future periods, though optimization of our owned retail stores remains a focus. +We anticipate closing stores or converting stores to partner retail stores in our wholesale channel, as we continue our strategy of retail store and fleet optimization. We continue to drive and are evolving our retail store and fleet optimization strategies in line with our long-term objectives, and we are targeting a global retail store count of approximately 125 owned stores. While we are seeing initial signs of improvement, our decision to open or close store locations will be evaluated based on the operating results of each store and our retail store and fleet optimization strategies, which may ultimately impact our global retail store count. +As a result of the implementation of our restructuring plan, we expect to realize an annualized gross SG&A expense savings in the consolidated statements of comprehensive income (loss) totaling approximately $85,000 by March 31, 2020. The SG&A expense savings are expected to be primarily derived from reductions in operating costs related to the termination of retail store leases and the conversion of certain of our foreign owned retail stores to partner retail stores, as well as a reduction in overhead costs, including payroll and related benefits, depreciation and amortization, and rent and occupancy costs, among others. As of March 31, 2018 , we realized approximately $54,000 of annualized +3 +SG&A expense savings out of the anticipated $85,000 of savings from our restructuring plan. We expect to realize approximately $31,000 of additional annualized SG&A expense savings from our restructuring plan. The additional annualized SG&A expense savings are expected to be primarily derived from further reductions in retail store-related costs, including those listed above. However, both the amount and timing of the actual savings we may achieve as a result of our restructuring plan are uncertain and are based upon numerous factors, including, but not limited to, the timing of lease terminations and store closures, the actual costs associated with closing or converting stores, and the actual and estimated results of operations of each store. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, "Restructuring," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts and the impact on our results of operations and reportable operating segments. +Operating Profit Improvement Plan. In addition to the approximate $85,000 of gross annualized SG&A expense savings expected from the implementation of our restructuring plan, as discussed above, we also expect that our other transformation initiatives, announced in February 2017, will result in approximately $65,000 of additional annualized cost of sales improvements and SG&A expense savings, for a total anticipated annual gross cost savings of approximately $150,000 . Cost of sales improvements are expected to result from reducing product development cycle times, optimizing material yields, consolidating our factory base, and continuing to move product manufacturing outside of China. Further SG&A expense savings are expected to result from lower corporate infrastructure costs, process improvement efficiencies, and reduced unallocated indirect spend. We have achieved approximately 90% of the expected cost of sales improvements as of March 31, 2018 . The remaining additional annualized costs of sales and SG&A expense savings are expected to be realized by the end of fiscal year 2020. +We expect that the approximate $150,000 of annual gross cost savings will result in approximately $100,000 of net annualized operating profit improvement (after reinvestment in marketing and other growth driving initiatives) by the end of fiscal year 2020. However, both the amount and timing of the actual operating profit improvements we may achieve as a result of these transformation initiatives are uncertain and are based upon numerous factors, including, but not limited to, the timing and success of certain production and inventory control improvements, the costs associated with improving and transitioning manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our three primary brands and our other brands. Collectively, our brands compete across the fashion and casual lifestyle, outdoor, and running markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel and accessories with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand by driving more year-round product sales, including spring and summer footwear, men's products, apparel, home goods and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), United Kingdom (UK), Germany, China, Japan, and Canada, among others. +Teva. Teva is a modern active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, the Teva brand's product line now includes sandals, shoes, and boots. +During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective as of the beginning of fiscal year 2018 , operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. +Sanuk. Sanuk is a global lifestyle footwear brand rooted in Southern California surf culture. The brand has a history of product innovation and comfort with a full range of footwear. +Other Brands. Other brands consist of: Hoka, a line of premium, running footwear and apparel that offers maximal cushioning with minimal weight and is designed for runners of all capacities, and Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials. +4 +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers. However, there is some overlap between the sales teams and customers, and we have aligned our brands' sales forces to position them for the future of the brands. +We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location by the end of calendar year 2019. In June 2017, we exercised our option to expand and extend the lease of our warehouse and distribution center located in Moreno Valley, California through June 2028. Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further disclosure and discussion. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. When a partner retail store is opened or a company-owned retail store is converted into a partner retail store, the related sales are recorded in our UGG or Sanuk brands wholesale reportable operating segment. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell the UGG brand primarily through domestic higher-end department stores such as Nordstrom, Dillard's, and Macy's, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon and Zappos.com. As the retail marketplace continues to evolve and change to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution approach and segmentation. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor, sporting goods, and department stores, including retailers such as REI, Famous Footwear, DSW, and online retailers such as Amazon and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers and larger national retail chains, including Journeys, Dillard's, DSW, REI, and online retailers such as Amazon and Zappos.com. +Other Brands Wholesale. Our other brands are sold primarily through domestic specialty running and department stores, outdoor and independent specialty retailers, and through online retailers. Key accounts of the Hoka brand include Running Warehouse, Road Runner Sports, Running Specialty Group, REI, and Zappos.com. Key accounts of the Koolaburra brand include Kohl's and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and interdependent. We believe that many consumers interact with both our brick and mortar stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined and help improve our inventory productivity include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +5 +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +"Ship from Store": Inventory that is available in our stores, but is out of stock online can be shipped from our stores. Future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +"UGG Closet": A limited E-Commerce outlet channel which we have offered since December 2016. The online portal functions similarly to an outlet store in that it provides a way to closeout inventory directly to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to the store. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater breadth of product, directly impact our consumers' experiences, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG brand concept and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2018 , we had a total of 165 retail stores worldwide, which includes 98 concept stores and 67 outlet stores. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are excluded from the total count of worldwide company-owned retail stores. +Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Refer to Note 1, "General," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the research and development costs we have incurred for the last three fiscal years. +To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers and the target retail price of new products. The design and development staff works closely with brand management to develop new styles for our product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. +Manufacturing and Supply Chain +We do not manufacture our products. We outsource production to independent manufacturers, primarily in Asia. We require our independent manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy, Conflict Minerals Policy, and other compliance policies and procedures as a condition of doing business with us. +Production by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and on-site supervisory offices in Pan Yu City, China and Hai Phong City, Vietnam, which together serve as a link to our independent manufacturers. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. +6 +At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high-quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues. Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. +Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary new raw material, UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. Excluding sheepskin and UGGpure, we believe that substantially all raw materials and components used to manufacture our footwear, apparel and accessories, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +Corporate Responsibility +Community Outreach . During fiscal year 2018 , we donated approximately $1,123 to 176 nonprofit organizations. The end of calendar year 2018 was a particularly difficult time for California. Faced with various natural disasters from fires to mudslides, we focused much of our efforts on serving our local Santa Barbara, California community. During fiscal year 2018 , 8% of our charitable contributions were dedicated to environmental impact mitigation efforts because we understand the importance of protecting our planet. We encourage employees to volunteer by compensating them for up to 24 hours of volunteer time each fiscal year. +Sustainability . As a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, our global scale is significant. Equally significant is the responsibility we have to set an example in our industry by advancing sustainable business, and we believe in developing quality products while striving for minimal environmental impact. In October 2016, we announced our official participation in the United Nations Global Compact, the world's largest voluntary corporate citizenship initiative. As part of this initiative, we adopted Sustainable Development Goals in the following areas: +• +material sourcing; +• +waste and chemical management; +• +water quality impact; +• +human rights; +• +energy usage by us and our manufacturing partners; and +• +gender equality and quality education. +The main focus of our sustainability efforts is on our product materials and supply chain. During fiscal year 2018 , we sourced 99.2% of our leather supplies from Leather Working Group certified tanneries, which maintain protocols that promote sustainable and appropriate environmental business practices within the leather industry. We are also taking a closer look into all of our materials, from packaging to product, so that we can set further sustainability targets in fiscal year 2019. We also have an Animal Welfare Policy which sets forth strict guidelines for the purchase of materials used in our products. +We are committed to measurable sustainability action in our corporate locations, retail store spaces, and distribution center operations. Our corporate headquarters is Leadership in Energy and Environmental Design (commonly referred to as LEED) certified and, during fiscal year 2018 , we installed solar panels to help offset approximately 40% of our electrical energy usage. We also continually measure electricity usage at our distribution center locations and retail store operations and strive to reduce our environmental footprint whenever possible. We +7 +have implemented waste diversion efforts at our corporate locations and have adopted a Paper and Forest Procurement Policy, which sets forth our commitment to purchasing paper products with a minimum of 30% post-consumer recycled content. +We are equally dedicated to sustainability actions within our brands' sectors. Below are some of the ways our brands are working to make a difference: +• +On behalf of the UGG brand, we contribute to the HERproject, a collaborative initiative managed by Business for Social Responsibility (commonly referred to as BSR) that strives to empower low-income women working in global supply chains. We also involve the UGG brand in the Textile Exchange’s Kickstart Program, which accelerates the availability of Responsible Wool Standards (commonly referred to as RWS) certified wool into supply chains. +• +On behalf of the Teva brand, we support the Los Padres ForestWatch, as well as Conservation Alliance, whose mission is to partner with organizations to protect wild places for their habitat and recreation values. +• +On behalf of the Sanuk brand, we have teamed up with the Surfrider Foundation, a non-profit environmental organization dedicated to the protection and enjoyment of our oceans, waves and beaches. +• +We support Camber Outdoors, the only national organization dedicated to achieving women’s equality in the active-outdoor industries, on behalf of the Hoka, Sanuk and Teva brands. +The work that we have done to date has allowed us to make great strides in promoting responsible stewardship and our Sustainable Development Goals continue to serve as guideposts for our future progress. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. For further discussion, including regarding the factors that may cause actual results to differ materially from our expectations, refer to Part I, Item 1A, "Risk Factors," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K . +Competition +The markets that we operate in are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel and accessories industry. In particular, and in part due to the popularity of our UGG brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG brand products. We believe that our ability to successfully compete depends on numerous factors, including responding to consumer preferences, producing appealing product, and pricing products competitively, among others. Refer to Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K for further discussion of how we compete. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for "UGG," "Teva," "Sanuk," "Hoka One One," "Koolaburra," "Ahnu," "UGGpure," and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan and Korea. As of March +8 +31, 2018 , we hold 184 designs and inventions with corresponding design or utility patent registrations, plus 9 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Inventory Management +We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. We have put in place systems and processes designed to improve our forecasting and supply planning capabilities. In addition, we believe that added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels are key areas of focus that will enhance inventory performance. +Our practice, and the general practice in the footwear, apparel and accessories industry, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders scheduled to be shipped at a future date, some of which are subject to cancellation prior to shipment. Effective as of the end of fiscal year 2018, our calculation of backlog also includes bulk orders which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. +As of March 31, 2018 , our backlog was approximately $855,000 . If our backlog as of March 31, 2017 had been calculated in the same manner, on a comparable basis, this represents an approximate 4% year-over-year increase over our backlog as of March 31, 2017. +We believe backlog is an imprecise indicator of our actual product shipments and future operating results and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC reportable operating segment as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, the timing of product shipments, the potential that certain orders may be cancelled, and our manufacturing schedule. As a result, comparisons of backlog from period-to-period are not necessarily indicative of our future operating results. +Employees +At March 31, 2018 , we employed approximately 3,500 employees in North America, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,700 employees in our retail stores worldwide, which includes part-time and seasonal employees. +Financial Information about Reportable Operating Segments and Geographic Areas +Our five reportable operating segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Within our consolidated financial statements in Part IV of this Annual Report on Form 10-K , refer to Note 12, "Reportable Operating Segments," for further discussion of our reportable operating segments and to Note 13, "Concentration of Business," for financial information about geographic areas and concentration of related business risks. +9 +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com . Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K , and references to our website address in this Annual Report on Form 10-K are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/item13.txt b/raw/filings/0000910521/2017/0000910521-18-000015/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8887a019d4eb587883ceee213e6e23076950ccdb --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/item9a.txt b/raw/filings/0000910521/2017/0000910521-18-000015/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..ced92d5f44e6c3da491ad173208326ec1015fa56 --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/item9a.txt @@ -0,0 +1,15 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018 . Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2018 . +b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +At March 31, 2018 , our management, including our Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2018 . The registered public accounting firm that audited our consolidated financial statements in Part IV of this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. Please refer to the section entitled “Report of Independent Registered Public Accounting Firm” on page F-3 of this Annual Report on Form 10-K . +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report on Form 10-K . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +54 +PART III +References in this Annual Report on Form 10-K to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2018 , 2017 , and 2016 are stated in Items 10, 11, 12, 13, and 14 herein as "year ended" or "years ended". \ No newline at end of file diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/rp_note.txt b/raw/filings/0000910521/2017/0000910521-18-000015/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2017/0000910521-18-000015/rpt_disclosure.txt b/raw/filings/0000910521/2017/0000910521-18-000015/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..7ee2a28e79f4ff840e662399f765f11d1f24c8bd --- /dev/null +++ b/raw/filings/0000910521/2017/0000910521-18-000015/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees. executive officers, principal stockholders, or their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to identify potential related person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a written questionnaire which includes questions intended to elicit information about any current or proposed related person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit Committee, the Chairman of our Board and our highest ranking manager of internal audit. +If a related person transaction is identified by our legal department as one which would be required to be reported in our proxy statement pursuant to applicable SEC rules, the Audit Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules during fiscal year 2018, and no such transactions are currently proposed. +66 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/filing.txt b/raw/filings/0000910521/2018/0000910521-19-000011/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e07132be748b5e28668fa9484240f56393c9698f --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/filing.txt @@ -0,0 +1,5348 @@ +10-K +1 +deck331201910-kdocument.htm +DECK 3 31 2019 10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +Annual Report Pursuant to Section 13 or 15(d) +of the Securities Exchange Act of 1934 +For the Fiscal Year Ended March 31, 2019 +Commission File Number: 001-36436 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +95-3015862 +(State or other jurisdiction of incorporation or organization) +(I.R.S. Employer Identification No.) +250 Coromar Drive, Goleta, California 93117 +(Address of principal executive offices) +(805) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.01 per share +DECK +New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. +Yes ý No o +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer x +Accelerated filer o +Non-accelerated filer o +Smaller reporting company o +Emerging growth company o +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes o No ý +At September 30, 2018 , the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $3,468,302,000 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $118.58 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 17, 2019 , the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 29,142,002 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2019 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2019 +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +* +Item 2. +Properties +27 +Item 3. +Legal Proceedings +28 +Item 4. +Mine Safety Disclosures +* +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +29 +Item 6. +Selected Financial Data +31 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +32 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +54 +Item 8. +Financial Statements and Supplementary Data +55 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +* +Item 9A. +Controls and Procedures +55 +Item 9B. +Other Information +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +57 +Item 11. +Executive Compensation +57 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +57 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +57 +Item 14. +Principal Accounting Fees and Services +57 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +59 +Signatures +62 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +Item 16. +Form 10-K Summary +* +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2019 ( Annual Report ), and the information and documents incorporated by reference into this Annual Report , contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report . We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report , and the information and documents incorporated by reference into this Annual Report , contain forward-looking statements relating to, among other things: +• +our business, operating, investing, capital allocation, marketing and financing strategies; +• +the impacts of our restructuring and operating profit improvement plans; +• +the impacts of our ongoing operational system upgrades; +• +the expansion of our brands and product offerings, and changes to the geographic mix of our products; +• +changes to our product distribution channels, including the implementation of our product segmentation strategy; +• +changes in consumer tastes and preferences with respect to our brands and products in particular, and the fashion industry in general; +• +trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and E-commerce businesses; +• +the impact of seasonality and weather on consumer behavior and our results of operations; +• +the impact of our efforts to continue to advance sustainable and socially conscious business operations; +• +expectations relating to the expansion of Direct-to-Consumer capabilities; +• +our plans to consolidate certain distribution center operations; +• +availability of raw materials and manufacturing capacity, and reliability of overseas production and storage; +• +commitments and contingencies, including purchase obligations for product and raw materials; +• +the impacts of new or proposed legislation, tariffs, regulatory enforcement actions or legal proceedings; +• +the value of goodwill and other intangible assets, and potential write-downs or impairment charges; +• +changes impacting our tax liability and effective tax rates; +• +completed and expected repatriation of earnings of non-United States subsidiaries and any related tax impacts; +• +the impact of recent accounting pronouncements; and +• +overall global economic trends, including foreign currency exchange rate fluctuations, increased interest rates and increased fuel costs. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report , as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report , including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), HOKA One One® (HOKA), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all dollar amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for per share, hours, or pairs data. The defined periods for the fiscal years ended March 31, 2019 , 2018 , and 2017 are stated herein as “year ended” or “years ended”. +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Recent Developments +Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the HOKA, Teva, and Sanuk brands. In general, the intent of our restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands. +As of March 31, 2019, we have completed our restructuring plan and achieved cumulative selling, general and administrative (SG&A) expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our restructuring efforts and its impact on our results of operations and reportable operating segments. +Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019 , we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our operating profit improvement plan and its impact on our results of operation and reportable operating segments. +3 +Table of Contents +Products and Brands +We currently market our products primarily under five propriety brands, composed of our four primary brands and our Other brands. Collectively, our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel and accessories with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand to drive year-round product sales, including expansion of women’s spring and summer footwear, men’s products, apparel, home goods and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), Europe, Asia-Pacific, Canada and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight, originally designed for ultra-runners, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. The HOKA brand is sold both domestically and internationally in key markets, including the US, Canada, Europe, and Asia-Pacific. +Teva. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands. Other Brands currently consists of the Koolaburra by UGG brand, as well as other discontinued brands during the periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold primarily through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +Currently, our sales force is typically separated by brand, as each brand generally has certain specialty consumers that expect a dedicated sales team with specialized knowledge of our brands’ product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of each of our brands. +We distribute products sold in the US through our distribution centers in Moreno Valley and Camarillo, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location . Once the migration of our distribution center operations from Camarillo to our Moreno Valley location is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020. +Refer to Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further disclosure and discussion. +4 +Table of Contents +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, Running Specialty Group, REI, Zappos.com, Amazon.com, and Running Warehouse. We expect to expand our HOKA brand wholesale distribution into international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, DSW, Urban Outfitters, Free People, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, and online retailers, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. Our retail stores and websites are largely intertwined and interdependent. In an Omni-Channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined, which are designed to engender brand loyalty while increasing product sales and improving our inventory productivity, include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +“Ship from Store”: Inventory that is available in our stores but is out of stock online can be shipped from our stores. We expect future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +“UGG Closet”: A limited E-Commerce outlet channel that offers an online portal designed to provide an efficient way to closeout inventory through direct sales to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to our retail stores. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +5 +Table of Contents +Our retail stores enable us to expose consumers to a greater selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2019 , we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are excluded from the total count of worldwide company-owned retail stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles for our product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and manage our inventory. However, we do have long-standing relationships with most of these independent manufacturers, and we may not be able to identify substitute alternative manufacturers to satisfy our desire for such flexibility. We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and Conflict Minerals Policy, as well as other compliance policies and procedures, as a condition to conducting business with us. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability, compliance with laws and regulations, and adherence to quality control standards and final design specifications. In addition, we have instituted pre-production, in-line, and post-production inspections to meet or exceed our product quality requirements, as well as the expectations of our consumers. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of sufficiently high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply +6 +Table of Contents +of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +In an effort to partially reduce our dependency on sheepskin, we use a proprietary raw material, UGGpure, which is a re-purposed wool woven into a durable backing, in some of our UGG brand products. In addition, as part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, most of the wool in UGGpure is sheared from the hides we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin and UGGpure. Excluding sheepskin and UGGpure, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets, and the delivery requirements of our customers. As part of our operating profit improvement plan, we have implemented systems and processes designed to improve our product forecasting, inventory control and supply chain management capabilities. In addition, added discipline around product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our practice, and the general practice in our industry, is to offer retail customers the right to return defective or improperly shipped merchandise. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders scheduled to be shipped at a future date, some of which are subject to cancellation prior to shipment. Our calculation of backlog also includes bulk orders, which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. +As of March 31, 2019 , our backlog was $978,200 , which represents a 14.4% annual increase over our backlog as of March 31, 2018 . The backlog increase primarily relates to timing where certain top customers placed orders earlier versus the prior comparative period rather than an indication of an expected significant increase in sales. +We believe backlog is an imprecise indicator of our actual product shipments and future operating results and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC segment, as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, the timing of product shipments, the potential that certain orders may be cancelled, and our manufacturing schedule. As a result, comparisons of backlog from period-to-period are not necessarily indicative of our future operating results. +7 +Table of Contents +Our People and our Culture +Employees. As of March 31, 2019 , we employed approximately 3,500 employees in North America, Europe, and Asia. This includes approximately 1,600 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, including those discussed below, we believe that our relationship with our employees is favorable. +Encouraging Diversity. We strive to create a culture of inclusion where employees are able to freely contribute equally regardless of gender, age, race, disability or sexual orientation. Our Code of Ethics, which all employees are trained on bi-annually, codifies these values. Our employee-led initiative, VOICES, is an avenue that elevates employee issues and celebrates our uniqueness. +Corporate Responsibility and Sustainability +As a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, our worldwide scope and impact is significant. Equally significant is the responsibility we believe we have to our stakeholders, including our consumers, employees, shareholders, and the communities we serve to employ socially conscious operations and sustainable business practices, with the goal of continuing to deliver quality products to our consumers and sound financial performance to our shareholders, while minimizing the environmental impact of our business footprint. Achieving measurable sustainability success is key to our future economic and business growth, and we constantly work to establish sustainable development goals (SDGs) that we believe will make the most significant impact for our business, our shareholders and our communities. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our employees, our suppliers and our customers, as well as other brands and non-governmental organizations. +In 2010, we launched our Corporate Responsibility Program, and in October 2016 we announced our participation in the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate citizenship initiative. Our Compliance Officer is tasked with identifying specific SDGs set forth in the UNGC, which guide our supply chain and brand business teams’ efforts to address environmental and social challenges, while the three independent members of the Corporate Governance Committee will oversee our corporate responsibility and sustainability efforts. Our internal audit team provides periodic targeted reviews of our policies and procedures to the Audit Committee to help us remain focused on our approach to our SDG’s and to ensure appropriate leadership involvement. +We assess risks related to environmental, social and governance issues annually as part of our overall enterprise risk management approach. This assessment informs the annual targets established for our SDGs, which are currently focused on seven categories where we believe we can make the most impact, namely, materials; waste; water; gender equality and quality education; chemicals; climate and clean energy; and human rights. We have been recognized by Barron’s as one of the Top 100 most sustainable US companies in calendar year 2019. We encourage our key manufacturing partners and suppliers to adopt sustainable business practices, which are intended to minimize adverse impact on the environment. We also have an Ethical Supply Chain Supplier Code of Conduct and Animal Welfare Policy which guides our partners to act responsibly when sourcing materials on our behalf. We also audit our operations, and the operations of key partners within our supply chain, to ensure workers are treated with dignity and respect. +The following is a brief overview of our current SDGs and fiscal year 2019 related achievements: +• +Materials: We sourced 97% of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. +• +Materials: We continue to seek sustainable alternatives for key product materials, with a goal to source at least 90% of materials from suppliers certified by third-party benchmarking organizations. +• +Water: We have reduced our water usage through manufacturing process improvements and have encouraged our manufacturing partners and suppliers to do the same by measuring their water output. Our sustainable development goal mandates that at least 90% of our core factory partners and suppliers apply industry best practices regarding water treatment and usage. +• +Chemicals: We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. We are on track to eliminate PFCs from our supply chain by calendar year 2020. +• +Climate and Clean Energy: We strive to increase our year-over-year solar power usage at our headquarters and distribution centers, as well as to integrate climate change measures into our policies +8 +Table of Contents +and planning. We measure energy usage by certain of our partners to encourage reduced energy consumption. +• +Gender Equality and Quality Education: We promote diversity, gender equality, female empowerment, and inclusion through our annual Women’s Leadership Summit, our partnership with the HERproject, and our initiation of the EDGE Certification process, the leading global assessment and business certification for gender equality. +• +Human Rights : We have established robust ethical supply chain criteria based on International Labor Organization standards and audit our supply chain pursuant to such criteria on an ongoing basis. Audit results are included on performance scorecards for regular review by executive management. +Our fiscal year 2019 Corporate Responsibility Report will provide more information on our achievements this year. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. During fiscal year 2019, we have dedicated out strategic giving and engagement efforts to categories related to our SDGs, our business and our communities because we believe that is where we can make the most impact, including arts and culture, human services, education, international affairs, environment and animal welfare, and health and society. During fiscal year 2019, we donated over $1,300 to various non-profit organizations. Since 2006, we have donated over 900,000 pairs of shoes to Soles4Souls and Good360, non-profit organizations that distribute shoes to those in need. We encourage our employees to volunteer by compensating them for up to 24 hours of volunteer time each year. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), as well as our DTC business. Refer to Note 12, “Reportable Operating Segments,” for further discussion of our reportable operating segments and to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report . +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to assess and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and adjust to changing legal and social standards, among others. +9 +Table of Contents +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA One One,” “Koolaburra,” “Ahnu,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan and Korea. As of March 31, 2019 , we hold 182 designs and inventions with corresponding design or utility patent registrations, plus ten designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements and other information regarding issuers that file with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Code of Ethics, Corporate Responsibility Report, Restricted Substance Policy, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report , and references to our website address within this Annual Report are inactive textual references only. +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report , as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements”, which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +10 +Table of Contents +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva brand and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the size of the UGG brand relative to our other brands, this trend has resulted in our net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. +In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG brand products. Unfavorable or unexpected weather patterns may have a material, negative impact on our business, financial condition, results of operations and prospects. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors. +As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence, changing consumer preferences, or uncertain economic conditions, will have a disproportionate impact on our business and could result in our failure to achieve financial performance that is in line with our expectations or the expectations of market participants. In addition, significant fluctuations in our financial performance from period to period as a result of these or other factors could increase the volatility of our stock price, which could cause our stock price to decline. +The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• +seasonality, including the impact of anticipated and unanticipated weather conditions; +• +consumer acceptance of our existing products and acceptance of our new products, including our ability to develop new products that address the needs and preferences of new consumers; +• +consumer demand for products of our competitors; +• +the implementation of our segmentation approach to the distribution of certain of our products; +• +consumer perceptions of and preferences for our products and brands, including as a result of evolving ethical or social standards; +• +the extent to which consumers view certain of our products as substitutes for other products we manufacture; +• +publicity, including social media, related to us, our products, our brands, our marketing campaigns and our celebrity endorsers; +• +the life cycle of our products and consumer replenishment behavior; +• +evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• +brand loyalty; +• +changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; +• +legislation restricting our ability to use certain materials in our products; and +• +changes in general economic, political and market conditions. +Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear, apparel and accessories consumers. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG brand products include a fashion element and could go out of style at any time. Furthermore, +11 +Table of Contents +we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear, apparel and accessories in the quantities projected or at all. If we fail to predict or react appropriately to changes in consumer preferences and fashion trends, consumers may consider our brands and products to be outdated or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +If we are unable to sustain the cost reductions and profitability improvements achieved from the implementation of our restructuring and operating profit improvement plans, we may not achieve operating results in line with our expectations, which could cause our stock price to decline. +We implemented a restructuring plan designed to reduce overhead costs and create operating efficiencies while improving collaboration across our brands. We also implemented an operating profit improvement plan designed to improve profitability by enhancing product development cycle times, optimizing material yields, consolidating our factory base, and relocating product manufacturing and distribution facilities. However, we may not be able to sustain the cost reductions, profitability improvements or other expected benefits of these plans in future periods. If we fail to sustain or expand operating profit improvements in line with our expectations, or with the expectations of research analysts or other market participants, it could have a material adverse impact on our financial performance, which could cause our stock price to decline. Further, our attempts to sustain or expand operating profit improvements may require additional investments and divert management’s time and resources, which may impede our ability to achieve our other strategic objectives. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. +The footwear, apparel and accessories industry is highly competitive, and subject to changing consumer preferences and tastes, we expect to continue to face intense competitive pressures. We believe we compete on the basis of a number of factors, including our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +continue to market current products, and develop new products, that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality and technical performance; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +• +maintain and enhance brand loyalty; +• +price our products in a competitive manner; +• +ensure availability of raw materials and production capacity; +• +implement our Omni-Channel strategy, including providing a unique customer service experience; +• +respond to new or proposed legislation impacting our products; and +• +manage the impact of the rapidly changing retail environment, including with respect to rising competition within the E-Commerce business, especially from online retailers such as Amazon.com. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. +12 +Table of Contents +Our competitors include athletic and footwear companies, branded apparel and accessories companies, home goods and sporting goods companies, and specialty retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel and accessories markets among consumers and other market participants. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, develop products with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, withstand the impacts of seasonality, and manage periodic downturns in the footwear, apparel and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +If we fail to compete effectively in the future, our sales could decline, and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers do not conform to our quality specifications or fail to meet consumer expectations, we could experience reduced consumer demand for our products, a higher rate of customer returns and negative impacts to the image of our brands, any of which could have a material adverse impact on our business. +Similarly, if the tanneries we rely upon are not able to deliver sheepskin in the quantities required, this would limit our ability to meet customer demand for our products and lead to inventory shortages, which would result in a loss of sales, strain our relationships with our customers and harm our reputation. In addition, any factors that negatively impact the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability or bankruptcy, loss or destruction of equipment or facilities, work stoppages, political instability, acts of terrorism or other catastrophic events, could prevent the tanneries from delivering sheepskin to us in the quantities expected and result in shortages in our supply of sheepskin. +While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross profits. In an effort to partially reduce our dependency on sheepskin, we began using UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the potential impact of fluctuations in sheepskin prices on our results of operations. However, in +13 +Table of Contents +the event of a prolonged increase in sheepskin prices such as what we have experienced in the past, these strategies may not be sufficient to offset the negative impact on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross profits and our financial results may suffer. +Further, our industry is characterized by rapidly changing fashion trends and consumer preferences. We believe there is a growing trend within the fashion industry towards eliminating the use of certain animal products, most notably fur. For example, legislation has been passed in the US banning the sale of fur in certain cities, and similar legislation is being considered in other geographic locations, including New York City. While the use of leather goods and sheepskin has typically not been subject to this type of legislation, it is possible that future legislation could have the impact of restricting or eliminating our ability to use sheepskin in the products we sell in certain geographic locations. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences and tastes may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is currently used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of products that include sheepskin, especially within our large target markets, could have a material adverse impact on our business, financial condition and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and operating results could be adversely affected, and our business may become less competitive. +We continually strive to improve, automate and streamline our operational systems, processes and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. While these efforts have resulted in some improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational system upgrades and improvements are not successful, our financial condition and operating results could be adversely affected, and our business may become less competitive. +In addition, our operational system upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems , and adapt to new operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business. +If we are unsuccessful at managing product manufacturing decisions, which are required to be made months in advance of the purchase of our products, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse impact on our financial condition and operating results. +Like other companies in the footwear, apparel and accessories industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +Once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses in reaction to various factors, including the following: +• +unfavorable weather patterns and their potential impacts on consumer spending patterns and the demand for our products; +• +changes in consumer preferences and tastes, as well as prevailing fashion trends; +• +market acceptance of our current products and new products, as well as market acceptance of competitive products; +14 +Table of Contents +• +future sales demand from our wholesale customers; +• +the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; and +• +uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse impact on our financial condition and operating results. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to identify additional retail stores for closure as part of our ongoing retail store fleet optimization efforts, we may simultaneously identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales at a new store location, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. In light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment or that our investment in a retail store will increase our sales. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a retailer or distributor partner fails to satisfy contractual obligations or to otherwise meet our expectations, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement retailer or distributor partner will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates for our wholesale customer orders as a key factor in forecasting our sales and earnings for future periods. If any of our major customers experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us, which could result in us failing to meet our forecasted results. These risks have been exacerbated recently as our key retail customers are operating within a retail industry that continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior and a shrinking retail footprint. We may lose key retail and wholesale customers if they fail to manage the impact of +15 +Table of Contents +the rapidly changing retail environment. Any loss of one of these key customers, the financial collapse or bankruptcy of one of these customers, or a significant reduction in purchases from one of these customers could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. +Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our business and operating results. +The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands. +In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. Any court decision or settlement that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales. +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. However, we may shift from a direct distribution model to a third-party distribution model for certain brands. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our operating results may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow +16 +Table of Contents +our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and information technology specialists. +Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer, and we may be unable to compete in the market. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel who will work effectively with our employees to fill those key positions, could have a material adverse effect on our business. +Additionally, our European headquarters is currently based in the UK. There is significant uncertainty regarding the potential future impact of Brexit on the legal and commercial relationships between the UK and countries within the European Union (EU). In particular, we could face difficulties attracting and retaining key employees in the UK, which could have a material adverse impact on our European operations. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products primarily through self-managed distribution centers in Moreno Valley and Camarillo, California. While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location. Once the migration of our distribution center operations is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +Internationally, we distribute our products through a number of distribution centers managed by 3PLs in Canada, China, Japan, the Netherlands, and the UK. We also distribute our products through a domestic 3PL, located in Pennsylvania. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, we could face disruptions in these operations as a result of ongoing uncertainty around Brexit. The loss of or disruption to the operations of any one or more of these facilities could materially adversely impact our sales, business performance and operating results. Although we believe we possess adequate insurance to cover the potential impact of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +17 +Table of Contents +We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, and products may fail to meet our quality standards. If any of these events were to occur, we may not be able to fill customer orders or product may be inadvertently delivered that does not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively impact our operating results. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are located in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; +• +increasing transportation costs, delays and interruptions, and a limited supply of international shipping capacity; +• +delays during shipping, at the port of entry or at the port of departure; +• +increasing labor costs and labor disruptions; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds from foreign jurisdictions; +• +changing economic and market conditions; +• +changes in governmental policies and regulations, including with respect to intellectual property, labor, safety, and environmental regulations; +• +refusal to adopt or comply with our Ethical Supply Chain Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; +• +customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +decreased scrutiny by custom officials for counterfeit products; +• +practices involving corruption, extortion, bribery, pay-offs, theft and other fraudulent activity; +• +social unrest and political instability, including acts of war and other external factors; +• +heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; +• +use of unauthorized or prohibited materials or reclassification of materials; +18 +Table of Contents +• +disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• +disruptions caused by natural or other disasters; and +• +adverse changes in consumer perception of goods sourced from certain countries. +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discover non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease conducting business with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of applicable laws and business standards could result in negative publicity, which could damage our reputation and the value of our brands. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions . +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include: +• +foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• +limitations on our ability to move currency out of international markets; +• +burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• +legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; +• +inability to import products into a foreign country; +• +changes in US and foreign tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting and marketing products in unfamiliar cultures; +• +political or economic uncertainty or instability, including as a result of ongoing negotiations around Brexit or any similar referendums that may be held; +• +anti-American sentiment in international markets in which we operate; +• +changes in diplomatic and trade relationships between the US and other countries; and +• +general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with 36.7% of our net sales for the year ended March 31, 2019 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to greater foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors typically sell our products in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. +We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to +19 +Table of Contents +inaccuracies. Foreign currency exchange rate hedges, transactions, re-measurements or translations could materially impact our consolidated financial statements . +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture. +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor dispute s that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. In addition, there is the potential for labor disruptions in the UK as a result of ongoing uncertainty around Brexit. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +International trade and import regulations may impose unexpected duty costs, the revision of current trade agreements may require us to alter current practices, changes in trade relations may result in tariffs, and transportation challenges and security procedures may cause significant delays and additional costs. +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. +In addition, we cannot predict whether future domestic and foreign laws, regulations or specific or broad trade remedy actions, or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. +In the US and globally, international trade policy is undergoing review and revision, introducing significant uncertainty with respect to future trade regulations and existing international trade agreements. These major revisions include the renegotiation of the North America Free Trade Agreement, now entitled the US-Mexico-Canada Trade Agreement (commonly referred to as “USMCA”), which has not yet been ratified by Congress. Brexit in Europe is undergoing a lengthy and contentious negotiation between the EU and the UK . Changes in tax policy, such as the Tax Cuts and Jobs Act (Tax Reform Act), or trade regulations could cause us to encounter new customs duties, which in turn may require us to implement new supply chains, withdraw from certain restricted markets or change our business methods, could make it difficult to obtain products of our customary quality at a competitive price and could lead to an increase in the cost of our products. +The continued negotiation of bilateral and multilateral free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers. Manufacturers in these locations may seek to export footwear, apparel and accessories to our target markets at preferred rates of duty which may negatively impact our sales and operations. +Trade relations between our sourcing venues (particularly China) and the US has created uncertainty for all US businesses that source or market in China. Since March 2018, the US has imposed import duties ranging from 5% to 25% on imports from China, which has caused China to retaliate with additional tariffs on US exports. To date, the US has, in stages, imposed tariffs on $250 billion of imports from China on top of existing tariff rates. Thus far, the footwear products we source in China have not been subjected to such increased tariffs. However, in May 2019, the US Trade Representative announced that all remaining US imports from China could be subject to punitive duties between 10% +20 +Table of Contents +to 25% of import duties, including all footwear, apparel and accessories that we import from China. Whether those threatened tariffs will be issued, and if so, what tariff would be assigned is unknown. However, any additional tariff could increase the cost of sourcing in China, our own margins, and possibly the price of our products to consumers. Previously, we had begun transitioning our sourcing of footwear from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition and results of operations. +Transportation and distribution costs may be adversely impacted by a number of factors, including new regulations, increased demand, increased fuel and labor costs, ongoing ocean carrier consolidation and reduced capacity, congestion at major international gateways and other economic factors. For example, new mandates to reduce the use of “low sulfur” fuel in certain container vessels will increase the cost of ocean transport globally, with surcharges already announced by the carriers. In addition, in the US, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations. These changes may disrupt our supply chain, which may result in a delay in the shipment of our products and cause us to incur significant additional costs. +Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions in order to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Acquisitions of businesses and assets involve numerous risks, challenges and uncertainties, including the potential to: +• +expose us to risks inherent in entering into a new market or geographic region; +• +lose significant customers or key personnel of the acquired business; +• +encounter difficulties managing and implementing acquired assets, including new brands, products, technologies and intellectual property assets; +• +encounter difficulties marketing to new consumers or managing geographically-remote operations; +• +divert management’s time and attention away from other aspects of our business operations; and +• +incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly-acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it would result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +21 +Table of Contents +A security breach or other disruption to our information technology systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition or results of operations. +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers, credit card information, the personal information of our employees, information relating to customer preferences, and our proprietary financial, operational and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputational or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial liabilities, fines, penalties or expenses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, including our information technology and global communication systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this personal, confidential, and sensitive information, and to respond quickly and effectively if data security incidents do occur. As with many businesses, we are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition or results of operations. +As has been well documented in the media, the frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents has significantly increased in recent years. As with many other businesses, we have experienced, and are continually at risk of being subject to attacks and incidents. Due to the increased risk of these types of attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our information technology systems, as well as the personal, confidential or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any cyber-attack or data security incident. Whether or not these measures are ultimately successful, these expenditures could have an adverse impact on our financial condition and results of operations, and divert management’s attention from pursuing our strategic objectives. +In addition, although we take the security of our information technology systems seriously, there can be no assurance that the security measures we employ will effectively prevent unauthorized persons from obtaining access to our systems and information. Despite the implementation of reasonable security measures by us and our third-party providers, our systems and information may be susceptible to cyber-attacks or data security incidents. In addition, because the techniques used to obtain unauthorized access to information technology systems are constantly evolving and becoming more sophisticated, we may be unable to anticipate these techniques or implement adequate preventive measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could potentially result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches that could harm our systems or result in the unauthorized disclosure of or access to information. Any measures we do take to prevent security breaches, whether caused by employees or third parties, have the potential to limit our ability to complete sales or ship products to our customers, harm relationships with our suppliers, or restrict our ability to meet our customers' expectations with respect to their online or retail shopping experience. +A cyber-attack or other data security incident could result in the significant and protracted disruption of our business such that: +• +critical business systems become inoperable or require a significant amount of time or cost to restore; +• +key personnel are unable to perform their duties, communicate with employees, customers or third-party partners; +• +it results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or company information; +• +we are prevented from accessing information necessary to conduct our business; +• +we are required to make unanticipated investments in equipment, technology or security measures; +• +key wholesale and distributor customers cannot place or receive orders, and we are unable to ship orders on a timely basis or at all; +22 +Table of Contents +• +customers cannot access our E-Commerce websites, and customer orders may not be received or fulfilled; or +• +we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations, and result in harm to our reputation. +In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with our company or impose more onerous contractual provisions, and subject us to potential litigation, liability, fines and penalties. For example, we could be subject to regulatory or other actions pursuant to domestic and international privacy laws, including newer regulations such as the Action on the Protection of Personal Information in Japan and the General Data Protection Regulation (known as “GDPR”) in the EU. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if payment card information is stolen or otherwise compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of the losses and costs associated with cyber-attacks and data incidents, such insurance coverage may be insufficient to cover all losses and would not, in any event, remedy damage to our reputation. In addition, we may face difficulties in recovering any losses from our provider and any losses we recover may be lower than we initially expect. +Key business processes, including our information technology and global communications systems, could be interrupted and such interruption could adversely affect our business and result in lost sales and harm to our business reputation. +Our future success and growth depend in part on the continued operation of our key business processes, including our information technology and global communications systems. Our key processes and systems could be interrupted by failures due to weather, natural disasters, power loss, software or equipment, telecommunication systems, information technology infrastructure, sabotage, terrorism, computer viruses, cyber-security attacks or similar events. Any interruptions to key business processes and systems could have a material adverse effect on our business and operations and result in lost sales and harm to our business reputation. +Furthermore, we rely on certain information technology management systems to prepare sales forecasts, track our financial and operating results, and otherwise manage and operate our business. As our business grows and we expand our brands and products into additional distribution channels and geographic regions, these systems may require expansion. We may experience difficulties expanding these systems, or transitioning to new or upgraded systems, which may result in loss of data, decreases in productivity, and increased costs associated with the implementation of the new or upgraded systems. If we are unable to modify our systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise manage and operate our business could be adversely affected. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under any of our revolving credit facility agreements could allow our lenders to accelerate the timing of payments and exercise their liens on our assets, which could have a material adverse effect on our business, operations, financial condition and liquidity. +23 +Table of Contents +In addition, certain of our revolving credit facility agreements bear interest at a rate that varies depending on the London Interbank Offered Rate (LIBOR). Any increases in the interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. Further, the UK’s Financial Conduct Authority, which regulates LIBOR, has announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate certain of our revolving credit facility agreements, which could have an adverse effect on our financing costs. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations. +We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, the enactment of the Tax Reform Act resulted in changes to the existing US tax laws that have and will continue to affect us. Additional changes in tax laws or proposed regulations, clarifications, interpretations and other changes to the Tax Reform Act may ultimately be enacted in a future period, which could increase our income tax liability or adversely affect our net income and long-term effective tax rates. +Certain additional provisions of the Tax Reform Act, such as the tax on global intangible low-taxed income, will continue to apply to us and, as a result, could impact our effective tax rate. Taxes due over a period of time as a result of the Tax Reform Act, including the one-time, mandatory deemed repatriation tax on certain foreign earnings, could be accelerated upon various triggering events, including failure to pay such taxes when due. The Tax Reform Act made broad and complex changes to the US tax code and we expect to see future regulatory, administrative or legislative guidance periodically issued. If we determine the guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations. +In addition, many countries in the EU and around the globe have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our US and international business activities, many of these enacted and proposed changes could increase our worldwide effective tax rate and harm our financial position and results of operations. +We may be subject to additional tax liabilities as a result of audits by various taxing authorities. +We conduct our operations through subsidiaries in several countries and foreign territories, including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, France, Germany, Canada, Austria, Belgium and Switzerland. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between these countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments. +We may incur disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, +24 +Table of Contents +could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the NYSE under the symbol DECK. The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future financial performance and operating results, whether realized or perceived; +• +changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• +changes in our stockholder base or public actions taken by investors; +• +market research and opinions published by securities analysts and other market participants, and the response to such publications; +• +quarterly fluctuations in our sales, margins, expenses, and other financial and operating results; +• +the financial stability of our customers, manufacturers and suppliers; +• +legal proceedings, regulatory actions and legislative changes; +• +announcements regarding the potential repurchase of our common stock, and our actual share repurchase activity; +• +the declaration of stock or cash dividends; +• +consumer confidence and discretionary spending levels; +• +broad market fluctuations in volume and price; +• +general market, political and economic conditions; and +• +a variety of risk factors, including the ones described elsewhere within this Annual Report and in our other filings with the SEC. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, decreases in available credit and increased competition. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +Furthermore, economic factors such as fuel or transportation costs, inflation, labor costs, tariffs, and insurance and healthcare costs may increase our cost of sales and our operating expenses. +25 +Table of Contents +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. +Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions: +• +authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• +provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• +provide that board vacancies can only be filled by directors; +• +prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• +require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and +• +require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. +Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +Our business could be negatively affected as a result of the actions of activist stockholders. +Responding to the actions of activist stockholders can be costly and time-consuming, disruptive to our operations, and result in the diversion of the attention of management and our employees. For example, we were previously involved in a proxy contest with a hedge fund, which required us to incur significant legal fees and proxy solicitation expenses and required significant time and attention by management and our Board of Directors. Any perceived uncertainties as to the impact of the activities of activist stockholders, or of our future strategic direction, could also affect the market price and volatility of our common stock. +We do not expect to declare any dividends in the foreseeable future. +We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends. +Our reported financial results may be adversely affected by changes in US GAAP. +Generally accepted accounting principles in the US (US GAAP) are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. +26 +Table of Contents +Item 2. Properties +Our corporate headquarters is located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. +We have one primary US distribution center, which is located in Moreno Valley, California. We began operating this warehouse and distribution center in the fourth quarter of fiscal year 2015 and, since June 2017, have expanded our operations at this location. While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location. Once the migration of our distribution center operations is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020. +Our international distribution centers are managed by 3PLs and are located in Canada, China, Japan, the Netherlands, and the UK. We also have a domestic distribution center managed by a 3PL, located in Pennsylvania. +We also have offices in China, Hong Kong, Vietnam, Japan, France, Germany, the Netherlands, Switzerland, and the UK for which some oversee the quality and manufacturing standards of our products, and others are for regional sales, operations and administration. We also have offices in Macau and Hong Kong to coordinate logistics and facilitate procurement. +As of March 31, 2019 , we had 54 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had 102 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland and the UK. +We have no manufacturing facilities, as all of our products are manufactured by independent third-party contractors. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. +We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties as of March 31, 2019 : +Facility Location +Description +Lease or Own +Facility Size (Square Footage) +Moreno Valley, California +Warehouse and Distribution Center +Lease +1,530,944 +Camarillo, California +Warehouse and Distribution Center +Lease +423,106 +Goleta, California +Corporate Headquarters +Own +185,000 +27 +Table of Contents +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that our UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +On May 10, 2019, a jury for the US District Court for the Northern District of Illinois Eastern Division ruled in our favor in our willful trademark infringement and counterfeiting lawsuit against Australian Leather. Australian Leather’s affirmative defense is still outstanding pending a ruling from the court. While we believe there is no basis for a judgment finding the UGG trademark unenforceable, such a ruling would have a material adverse effect on our business. Following entry of a final judgment, the court rulings are subject to appeal. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, operating results, financial condition, or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management’s time and resources, and other factors. +28 +Table of Contents +PART II +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), HOKA One One® (HOKA), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Certain reclassifications were made for all prior periods presented including the fiscal years ended March 31, 2018 , 2017 , 2016 , and 2015 , to conform to the current period presentation. +Unless otherwise specifically indicated, all dollar amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for per share data. The defined periods for the fiscal years ended March 31, 2019 , 2018 , and 2017 are stated herein as “year ended” or “years ended”. +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol DECK on the NYSE since May 2014 and was traded on the NASDAQ Global Select Market prior to that date. +As of May 17, 2019 , we had 41 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2019 that were not registered under the Securities Act. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index for the five-fiscal year periods commencing April 1, 2014 and ending March 31, 2019 . Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index on April 1, 2014. +April 1, +Years Ended March 31, +2014 +2015 +2016 +2017 +2018 +2019 +Deckers Outdoor Corporation +$ +100.0 +$ +86.3 +$ +70.9 +$ +70.7 +$ +106.6 +$ +174.0 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +95.5 +84.8 +67.4 +86.4 +83.7 +The NYSE Composite Index +100.0 +109.7 +105.6 +122.1 +135.8 +142.3 +29 +Table of Contents +The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. +Stock Repurchase Programs +In October 2017, our Board of Directors approved a stock repurchase program which, together with a stock repurchase program approved in 2015, authorized us to repurchase a total of up to $400,294 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (2017 Repurchase Program). +In January 2019, our Board of Directors approved the 2019 Repurchase Program, which authorizes us to repurchase up to $261,000 of our common stock. As of March 31, 2019 , the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, our “Stock Repurchase Programs”) was $350,212 . +Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. Our current revolving credit agreements allow us to make share repurchases under these programs, as long as we do not exceed certain leverage ratios and no event of default has occurred under these arrangements. As of March 31, 2019 , we were in compliance with these arrangements. +30 +Table of Contents +During the fourth quarter of the year ended March 31, 2019 , we did not repurchase any shares of our common stock and had an aggregate remaining approved amount under our Stock Repurchase Programs of $350,212 as of March 31, 2019. +Refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity and Capital Resources” and Note 10, “Stockholders' Equity,” of our consolidated financial statements and accompanying notes thereto (referred to herein as the “ consolidated financial statements ”) in Part IV within this Annual Report for further information on repurchases of our common stock. +Item 6. Selected Financial Data +The following tables present our selected consolidated financial data and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Part IV , Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +Years Ended March 31, +2019 +2018 +2017 +2016 +2015 +Income Statement Data +Net sales +UGG brand wholesale +$ +888,347 +$ +841,893 +$ +826,355 +$ +918,102 +$ +903,926 +HOKA brand wholesale +185,057 +132,688 +93,064 +74,937 +47,614 +Teva brand wholesale +119,390 +117,478 +103,694 +143,280 +136,028 +Sanuk brand wholesale +69,791 +78,283 +77,552 +90,719 +102,690 +Other brands wholesale +42,818 +17,273 +23,142 +3,842 +9,441 +Direct-to-Consumer +715,034 +715,724 +666,340 +644,317 +617,358 +Total net sales +2,020,437 +1,903,339 +1,790,147 +1,875,197 +1,817,057 +Cost of sales +980,187 +971,697 +954,912 +1,028,529 +938,949 +Gross profit +1,040,250 +931,642 +835,235 +846,668 +878,108 +Selling, general and administrative expenses +712,930 +709,058 +837,154 +684,541 +653,689 +Income (loss) from operations +327,320 +222,584 +(1,919 +) +162,127 +224,419 +Other (income) expense, net +(1,614 +) +1,888 +5,067 +5,242 +3,280 +Income (loss) before income taxes +328,934 +220,696 +(6,986 +) +156,885 +221,139 +Income tax expense (benefit) +64,626 +106,302 +(12,696 +) +34,620 +59,359 +Net income +264,308 +114,394 +5,710 +122,265 +161,780 +Total other comprehensive (loss) income +(9,671 +) +13,468 +(5,894 +) +(89 +) +(18,425 +) +Comprehensive income (loss) +$ +254,637 +$ +127,862 +$ +(184 +) +$ +122,176 +$ +143,355 +Net income per share +Basic +$ +8.92 +$ +3.60 +$ +0.18 +$ +3.76 +$ +4.70 +Diluted +$ +8.84 +$ +3.58 +$ +0.18 +$ +3.70 +$ +4.66 +Weighted-average common shares outstanding +Basic +29,641 +31,758 +32,000 +32,556 +34,433 +Diluted +29,903 +31,996 +32,355 +33,039 +34,733 +As of March 31, +2019 +2018 +2017 +2016 +2015 +Balance Sheet Data +Cash and cash equivalents +$ +589,692 +$ +429,970 +$ +291,764 +$ +245,956 +$ +225,143 +Working capital +844,881 +721,524 +661,770 +547,267 +519,051 +Total assets +1,427,206 +1,264,379 +1,191,780 +1,278,068 +1,169,933 +Long-term liabilities +131,552 +134,434 +78,474 +72,099 +65,379 +Stockholders' equity +1,045,130 +940,779 +954,255 +967,471 +937,012 +31 +Table of Contents +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report . +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Recent Developments +Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. In general, the intent of this restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands. +In connection with our restructuring plan, we closed 46 company-owned global retail stores as of March 31, 2019 , including conversions to partner retail stores, and consolidated our brand operations and corporate headquarters. Our decision to open or close retail store locations was evaluated based on the operating results of each store through at least two peak selling seasons, as well as our retail store fleet optimization strategies and long-term strategic objectives. +The cumulative annualized selling, general, and administrative (SG&A) expense savings by applicable reportable operating segment, realized as of March 31, 2019 , are approximately as follows: +Amount +UGG brand wholesale +$ +1,000 +Sanuk brand wholesale +1,000 +Other brands wholesale +1,000 +Direct-to-Consumer +43,000 +Unallocated overhead costs +17,000 +Total +$ +63,000 +The cumulative restructuring charges incurred by category as of March 31, 2019 , are as follows: +Amount +Lease terminations +$ +18,282 +Retail store fixed asset impairment +9,372 +Severance costs +9,776 +Software and office fixed asset impairment +6,987 +Other* +11,202 +Total +$ +55,619 +*Includes costs related to office consolidations and termination of contracts and services. +32 +Table of Contents +The cumulative restructuring charges by applicable reportable operating segment are as follows: +Years Ended March 31, +Cumulative Restructuring Charges** +2019 +2018 +2017 +UGG brand wholesale +$ +— +$ +— +$ +2,238 +$ +2,238 +Sanuk brand wholesale +— +— +20 +3,068 +Other brands wholesale +— +— +102 +2,263 +Direct-to-Consumer +— +149 +12,771 +23,454 +Unallocated overhead costs +295 +1,518 +13,853 +24,596 +Total +$ +295 +$ +1,667 +$ +28,984 +$ +55,619 +**Cumulative restructuring charges include restructuring charges of $24,673 , which were incurred during the fiscal year ended March 31, 2016. +During the years ended March 31, 2019 , 2018 , and 2017 , total restructuring charges incurred and stated above were recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +As of March 31, 2019, we have completed our restructuring plan and achieved cumulative SG&A expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan. +Refer to Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our remaining accrued liabilities under our restructuring plan. +Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019 , we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. Consistent with our strategy, the principal drivers of the net annualized operating profit improvement achieved were costs of goods sold improvements, resulting from lower input costs and improved supply chain management, and SG&A expense savings, primarily driven by retail store closures, office consolidations, lower corporate infrastructure costs and process improvement efficiencies. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business. +Trends Impacting our Overall Business +Our business and the industry in which we operate continue to be impacted by several important trends: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are unpredictable and beyond our control. To address seasonality, we continue to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance product offering of the HOKA brand. Even though we continue to expand our product lines with the goal of creating more year-round styles for our brands to drive sales and offset the impact of weather conditions, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant. +• +We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. The retail industry continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior and a shrinking retail footprint. In particular, retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is positively impacting the performance of our E-Commerce business, while creating challenges and headwinds for our retail business as well as the business of our key customers. It is also transforming the way we approach marketing, including our focus on digital marketing efforts. +33 +Table of Contents +• +In light of the shift in consumer shopping behavior, and our ongoing efforts to enhance our operating results, we are seeking to optimize our retail store footprint. While we expect to identify additional retail stores for closure, we may simultaneously identify opportunities to open new retail stores in the future. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores. +• +As a result of changes in consumer purchasing behavior, we expect our E-Commerce business will continue to be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases. +• +Starting in the second half of 2018, we implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the United States (US) wholesale marketplace. We plan to continue this strategic management of the US marketplace in future seasons and expect to implement similar strategies internationally during fiscal year 2020. +• +We believe consumers are buying product closer to the particular wearing occasion (“buy now, wear now”), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows to address the evolving behavior of retail consumers and to manage their own product-related inventories. +• +Foreign currency exchange rate fluctuations have the potential to cause variations in our operating results. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the future purchasing patterns of our customers, as well as our operating results. +• +We believe consumers are increasingly buying brands which advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. Through our Corporate Responsibility Program, we expect to continue to advance our sustainable business initiatives. +Reportable Operating Segment Overview +We perform an annual assessment of the appropriateness of our reportable operating segments during the third quarter of our fiscal year. However, due to known circumstances arising during the first quarter of the fiscal year ending March 31, 2019 (Q1 2019), management performed this assessment at that time. These circumstances included an assessment of quantitative factors, such as the actual and forecasted sales and operating income of the wholesale operations of the HOKA brand compared to our other reportable operating segments, as well as an assessment of qualitative factors, such as the ongoing growth of, and our increased investment in, the wholesale operations of the HOKA brand. As a result, beginning in Q1 2019, we added a sixth reportable operating segment to separately report the wholesale operations of the HOKA brand. The wholesale operations of the HOKA brand are no longer presented under the Other brands wholesale reportable operating segment. However, the DTC operations of the HOKA brand continue to be reported under the DTC reportable operating segment. Prior periods presented were reclassified to reflect this change. +Our six reportable operating segments now include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective April 1, 2017, the operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results of wholesale operations for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the Other brands wholesale reportable operating segment, as presented for the year ended March 31, 2017. +34 +Table of Contents +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that attracts women, men, and children. +We believe demand for UGG brand products will continue to be driven by the following: +• +High consumer brand loyalty due to consistently delivering quality and luxuriously comfortable footwear, apparel, and accessories. +• +Diversification of our product lines, including women’s spring and summer, men’s, and lifestyle offerings. Our strategy of product diversification aims to mitigate the impacts of seasonality and decrease our reliance on sheepskin. +• +Continued enhancement of our Omni-Channel and digital marketing capabilities to enable us to better engage existing and prospective consumers and expose them to our brands. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight, originally designed for ultra-runners, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth. +Teva Brand . The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands . Other brands currently consists of the Koolaburra by UGG brand, as well as other discontinued brands during the prior periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering. +Direct-to-Consumer . Our DTC business is comprised of our retail stores and E-Commerce websites which, in an Omni-Channel marketplace, are intertwined and interdependent. We believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. +Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2019 , we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Generally, we open retail store locations during the second or third quarters of each fiscal year and consider closures of retail stores during the third or fourth quarter of each fiscal year. +Flagship stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. The net sales for these stores are recorded in our DTC reportable operating segment. +Concession stores. Included in the total count of retail stores worldwide are concession stores, defined as concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. The net sales for these stores are recorded in our DTC reportable operating segment. +35 +Table of Contents +Partner Retail stores. In certain international markets, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of worldwide company-owned retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the store becomes wholly-owned and operated by third parties and related net sales are recorded in our UGG brand or Sanuk brand wholesale reportable operating segments, as applicable. +Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands’ promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2019 , we operated our E-Commerce business through an aggregate of 22 company-owned websites in nine different countries. +Use of Non-GAAP Measures +In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with principles generally accepted in the United States (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and re-measurements. We believe evaluating certain financial and operating measures on a constant currency basis is important as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates or to other financial measures presented in accordance with US GAAP. +We report comparable DTC sales on a constant currency basis for combined DTC operations that were open throughout the current and prior reporting period and have adjusted the prior reporting period to conform to the current fiscal year presentation and accounting policy change for the adoption of the new revenue standard. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other retailers. As a result, information included within this Annual Report regarding our comparable DTC sales may not be directly comparable to similar data made available by our competitors or other retailers. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. Refer to Note 14, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +36 +Table of Contents +Result of Operations +Year Ended March 31, 2019 Compared to Year Ended March 31, 2018 +The following table summarizes our results of operations for the periods presented: +Years Ended March 31, +2019 +2018 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +2,020,437 +100.0 +% +$ +1,903,339 +100.0 +% +$ +117,098 +6.2 +% +Cost of sales +980,187 +48.5 +971,697 +51.1 +(8,490 +) +(0.9 +) +Gross profit +1,040,250 +51.5 +931,642 +48.9 +108,608 +11.7 +Selling, general and administrative expenses +712,930 +35.3 +709,058 +37.3 +(3,872 +) +(0.5 +) +Income from operations +327,320 +16.2 +222,584 +11.7 +104,736 +47.1 +Other (income) expense, net +(1,614 +) +(0.1 +) +1,888 +0.1 +3,502 +185.5 +Income before income taxes +328,934 +16.3 +220,696 +11.6 +108,238 +49.0 +Income tax expense +64,626 +3.2 +106,302 +5.6 +41,676 +39.2 +Net income +$ +264,308 +13.1 +% +$ +114,394 +6.0 +% +$ +149,914 +131.1 +% +Net income per share +Basic +$ +8.92 +$ +3.60 +$ +5.32 +Diluted +$ +8.84 +$ +3.58 +$ +5.26 +Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented: +Years Ended March 31, +2019 +2018 +Change +Amount +Amount +Amount +% +Net sales by location +US +$ +1,278,358 +$ +1,174,061 +$ +104,297 +8.9 +% +International +742,079 +729,278 +12,801 +1.8 +Total +$ +2,020,437 +$ +1,903,339 +$ +117,098 +6.2 +% +Net sales by brand and channel +UGG brand +Wholesale +$ +888,347 +$ +841,893 +$ +46,454 +5.5 +% +Direct-to-Consumer +644,520 +665,354 +(20,834 +) +(3.1 +) +Total +1,532,867 +1,507,247 +25,620 +1.7 +HOKA brand +Wholesale +185,057 +132,688 +52,369 +39.5 +Direct-to-Consumer +38,092 +20,772 +17,320 +83.4 +Total +223,149 +153,460 +69,689 +45.4 +Teva brand +Wholesale +119,390 +117,478 +1,912 +1.6 +Direct-to-Consumer +18,022 +16,116 +1,906 +11.8 +Total +137,412 +133,594 +3,818 +2.9 +37 +Table of Contents +Years Ended March 31, +2019 +2018 +Change +Amount +Amount +Amount +% +Sanuk brand +Wholesale +69,791 +78,283 +(8,492 +) +(10.8 +) +Direct-to-Consumer +12,822 +12,639 +183 +1.4 +Total +82,613 +90,922 +(8,309 +) +(9.1 +) +Other brands +Wholesale +42,818 +17,273 +25,545 +147.9 +Direct-to-Consumer +1,578 +843 +735 +87.2 +Total +44,396 +18,116 +26,280 +145.1 +Total +$ +2,020,437 +$ +1,903,339 +$ +117,098 +6.2 +% +Total Wholesale +$ +1,305,403 +$ +1,187,615 +$ +117,788 +9.9 +% +Total Direct-to-Consumer +715,034 +715,724 +(690 +) +(0.1 +) +Total +$ +2,020,437 +$ +1,903,339 +$ +117,098 +6.2 +% +Consolidated net sales increased primarily due to higher HOKA, UGG, and Other brand wholesale sales. Further, we experienced an increase in total volume of pairs sold of 9.5% to 35,800 compared to 32,700 during the prior period. On a constant currency basis, net sales increased 5.8% compared to the prior period. Key drivers of the change in net sales were as follows: +• +Wholesale net sales of our UGG brand increased due to a higher volume of pairs sold, partially offset by a lower weighted-average selling price per pair (WASPP). These net impacts were driven by earlier full-priced selling compared to the prior period, as well as growth in our UGG Men’s business and non-Classic styles in UGG Women’s, complimented by our US domestic wholesale UGG Core-Classics product allocation strategy. On a constant currency basis, wholesale net sales of our UGG brand increased 4.3% compared to the prior period. +• +Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold driven by continued global growth of the brand, primarily in the US and Europe, as well as additional sales generated by updates to key franchises, including Clifton and Bondi, compared to the prior period. +• +Wholesale net sales of our Teva brand primarily increased due to Japan growth driven by premium fashion collaborations. +• +Wholesale net sales of our Sanuk brand decreased due to a lower WASPP, as well as a lower volume of pairs sold, primarily driven by lower performance in the domestic surf specialty channel and lower international sales resulting from our strategic focus on US markets. +• +Wholesale net sales of our Other brands increased due to a higher volume of pairs sold driven by continued growth in the US family value channel for the Koolaburra brand, partially offset by a lower WASPP due to product and customer mix. +• +DTC net sales remained relatively flat, primarily due to lower WASPP driven by product mix, mostly offset by a higher volume of pairs sold for the HOKA, Teva and Other brands compared to the prior period. +Comparable DTC net sales for the 52 weeks ended March 31, 2019 increased 1.9% compared to the same period during fiscal year 2018 . The increase was due to growth in our E-Commerce business primarily for the UGG and HOKA brands. +• +International net sales, which are included in the reportable operating segment net sales presented above, increased by 1.8% compared to the prior period. International net sales represented 36.7% and 38.3% of total net sales for the years ended March 31, 2019 and 2018 , respectively. The increase was primarily due to higher net sales for the HOKA and Teva brands in Europe and Asia. +38 +Table of Contents +Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 51.5% from 48.9% during the prior period due to higher-full priced selling driven by less discounting and promotional activity, higher margin on products sold through our closeout channel due to more efficient inventory management, lower air-freight costs for our domestic wholesale business, and lower input costs as we executed our supply chain initiatives as part of our operating profit improvement plan. +Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of: +• +increased variable advertising, promotion and other operating expenses of $7,086 , primarily due to higher marketing investment to drive sales for the HOKA and UGG brands, as well as higher variable related costs for our DTC operations; +• +increased foreign currency-related losses of $8,627 driven by changes in foreign currency exchange rates for Canadian, Asian, and European currencies; +• +increased compensation costs of $6,697 , primarily due to higher payroll-related costs, partially offset by consulting costs related to the strategic review process during the prior period, as well as higher accruals for variable performance-based compensation as a result of our financial performance during the current period; +• +decreased professional service costs of $12,868 , primarily driven by lower costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current fiscal year; and +• +decreased impairment and depreciation charges of $5,880 , primarily due to lower retail store-related impairments and depreciation for retail store closures completed in prior periods. +Income from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows: +Years Ended March 31, +2019 +2018 +Change +Amount +Amount +Amount +% +Income (loss) from operations +UGG brand wholesale +$ +300,761 +$ +247,826 +$ +52,935 +21.4 +% +HOKA brand wholesale +35,717 +20,954 +14,763 +70.5 +Teva brand wholesale +27,939 +20,400 +7,539 +37.0 +Sanuk brand wholesale +12,781 +14,474 +(1,693 +) +(11.7 +) +Other brands wholesale +10,411 +1,304 +9,107 +698.4 +Direct-to-Consumer +185,449 +156,896 +28,553 +18.2 +Unallocated overhead costs +(245,738 +) +(239,270 +) +(6,468 +) +(2.7 +) +Total +$ +327,320 +$ +222,584 +$ +104,736 +47.1 +% +The increase in total income from operations, compared to the prior period, was due to higher sales at higher gross margins, partially offset by higher overall SG&A expenses, primarily driven by higher variable costs. Key drivers of the change in income from operations were as follows: +• +The increase in income from operations of UGG, HOKA, Other and Teva brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses. +• +The decrease in income from operations of Sanuk brand wholesale was primarily due to lower sales, partially offset by higher gross margins and lower SG&A expenses, driven by lower marketing and selling expenses. +39 +Table of Contents +• +The increase in income from operations of DTC was primarily due to higher gross margins, as well as lower overall retail store operating costs driven by store closures completed in prior periods, including related impairments and depreciation costs, partially offset by higher warehouse expenses. +• +The increase in unallocated overhead costs was primarily due to changes in foreign currency exchange rates for Canadian, Asian, and European currencies and higher warehouse-related expenses associated with the Moreno Valley warehouse and distribution center expansion, partially offset by lower professional and consulting service costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized in the current fiscal year. +Other (Income) Expense, Net. The increase in total other income, net, compared to the prior period, was primarily due to an increase in interest income driven by higher interest rate yields and higher average invested cash balances, as well as an increase driven by changes in penalties and interest. +Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows: +Years Ended March 31, +2019 +2018 +Income tax expense +$ +64,626 +$ +106,302 +Effective income tax rate +19.6 +% +48.2 +% +The decrease in our effective income tax rate was due to the impacts of the Tax Cuts and Jobs Act (Tax Reform Act) which were effective on or after January 1, 2018, as well as a change in the jurisdictional mix of worldwide income before income taxes for the year ended March 31, 2019 . The Tax Reform Act reduced the US federal income tax rate and our foreign earnings are now subject to US taxation as they are considered global intangible low-taxed income. The prior period included additional income tax expense for the remeasurement of deferred tax assets to the lower enacted US federal tax rate and the one-time mandatory deemed repatriation of foreign earnings. +Foreign income before income taxes was $147,204 and $149,214 , and worldwide income before income taxes was $328,934 and $220,696 , during the years ended March 31, 2019 and 2018 , respectively. The decrease in foreign income before income taxes, as a percentage of worldwide income before income taxes, was primarily due to higher growth reported in domestic net sales as compared to growth from foreign net sales. +For the years ended March 31, 2019 and 2018 , we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As of March 31, 2019 , we had $214,876 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries. +We expect our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business will result in increases in foreign income or loss before income taxes both in absolute terms and as a percentage of worldwide income or loss before income taxes. In addition, we believe our effective tax rate will continue to be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes. For further information on the impacts of the Tax Reform Act, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report . +Net Income. Net income increased, compared to the prior period, primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted average common shares outstanding due to stock repurchases. +40 +Table of Contents +Other Comprehensive Loss. Other comprehensive loss increased, compared to the prior period, primarily due to higher foreign currency translation losses driven by changes in our net asset position and European and Asian foreign currency exchange rates. +Year Ended March 31, 2018 Compared to Year Ended March 31, 2017 +The following table summarizes our results of operations for the periods presented: +Years Ended March 31, +2018 +2017 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,903,339 +100.0 +% +$ +1,790,147 +100.0 +% +$ +113,192 +6.3 +% +Cost of sales +971,697 +51.1 +954,912 +53.3 +(16,785 +) +(1.8 +) +Gross profit +931,642 +48.9 +835,235 +46.7 +96,407 +11.5 +Selling, general and administrative expenses +709,058 +37.3 +837,154 +46.8 +128,096 +15.3 +Income (loss) from operations +222,584 +11.7 +(1,919 +) +(0.1 +) +224,503 +11,699.0 +Other expense, net +1,888 +0.1 +5,067 +0.3 +3,179 +62.7 +Income (loss) before income taxes +220,696 +11.6 +(6,986 +) +(0.4 +) +227,682 +3,259.1 +Income tax expense (benefit) +106,302 +5.6 +(12,696 +) +(0.7 +) +(118,998 +) +(937.3 +) +Net income +$ +114,394 +6.0 +% +$ +5,710 +0.3 +% +$ +108,684 +1,903.4 +% +Net income per share +Basic +$ +3.60 +$ +0.18 +$ +3.42 +Diluted +$ +3.58 +$ +0.18 +$ +3.40 +Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented: +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +Net sales by location +US +$ +1,174,061 +$ +1,141,303 +$ +32,758 +2.9 +% +International +729,278 +648,844 +80,434 +12.4 +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +Net sales by brand and channel +UGG brand +Wholesale +$ +841,893 +$ +826,355 +$ +15,538 +1.9 +% +Direct-to-Consumer +665,354 +624,682 +40,672 +6.5 +Total +1,507,247 +1,451,037 +56,210 +3.9 +HOKA brand +Wholesale +132,688 +93,064 +39,624 +42.6 +Direct-to-Consumer +20,772 +11,518 +9,254 +80.3 +Total +153,460 +104,582 +48,878 +46.7 +Teva brand +Wholesale +117,478 +103,694 +13,784 +13.3 +Direct-to-Consumer +16,116 +14,021 +2,095 +14.9 +Total +133,594 +117,715 +15,879 +13.5 +41 +Table of Contents +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +Sanuk brand +Wholesale +78,283 +77,552 +731 +0.9 +Direct-to-Consumer +12,639 +14,214 +(1,575 +) +(11.1 +) +Total +90,922 +91,766 +(844 +) +(0.9 +) +Other brands +Wholesale +17,273 +23,142 +(5,869 +) +(25.4 +) +Direct-to-Consumer +843 +1,905 +(1,062 +) +(55.7 +) +Total +18,116 +25,047 +(6,931 +) +(27.7 +) +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +Total Wholesale +$ +1,187,615 +$ +1,123,807 +$ +63,808 +5.7 +% +Total Direct-to-Consumer +715,724 +666,340 +49,384 +7.4 +Total +$ +1,903,339 +$ +1,790,147 +$ +113,192 +6.3 +% +Consolidated net sales increased primarily due to higher HOKA, UGG, and Teva wholesale sales and overall DTC sales. Further, we experienced an increase in pairs sold of 4.1% to 32,700 compared to 31,400 during the prior period. On a constant currency basis, net sales increased 6.1% compared to the prior period. Key drivers for the change in net sales were as follows: +• +Wholesale net sales of our UGG brand increased primarily due to an increase in WASPP, as well as an increase in apparel and home goods sales. The increase in WASPP was driven by fewer closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 2.3% compared to the prior period. +• +Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold due to its continued global growth, primarily in the US and Europe. +• +Wholesale net sales of our Teva brand increased due to a higher WASPP, primarily attributable to changes in product mix and fewer closeout sales. +• +Wholesale net sales of our Sanuk brand remained relatively flat with a slight increase in volume of pairs sold. +• +Wholesale net sales of our Other brands decreased due to a lower volume of pairs sold, partially offset by a higher WASPP primarily driven by the change in presentation for the results of wholesale operations of the Ahnu brand to the Teva brand wholesale reportable operating segment. +• +DTC net sales increased 7.4% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold, partially offset by a decrease in WASPP. The decrease in WASPP was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet offering, as well as changes in product mix in our retail stores. Further, we experienced an increase in UGG brand apparel and home goods sales compared to the prior period. On a constant currency basis, DTC net sales increased 6.2% during the year ended March 31, 2018 compared to the prior period. +Comparable DTC net sales for the 52 weeks ended April 1, 2018 increased 7.0% on a constant currency basis compared to the same period during fiscal year 2017. The increase in comparable DTC net sales was due to growth in E-Commerce, partially offset by a decline in net sales at our retail stores. +• +International net sales, which are included in the reportable operating segment net sales presented above, increased by 12.4% compared to the prior period. International net sales represented 38.3% and 36.2% of total net sales for the years ended March 31, 2018 and 2017, respectively. The increase was primarily due to higher net sales for the UGG and HOKA brands in Europe and Asia. +42 +Table of Contents +Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 48.9% from 46.7% during the prior period primarily driven by lower input costs as we executed our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling partly due to favorable weather conditions, as well as favorable foreign currency exchange rate fluctuations compared to the prior period. +Selling, General and Administrative Expenses. The net decrease in SG&A expenses, compared to the prior period, was primarily the result of: +• +significantly decreased impairment and depreciation charges of $138,235, primarily due to the impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store and other long-lived asset impairment charges incurred during the prior period; +• +increased compensation costs of $38,030, primarily due to approximately $35,000 driven by higher performance-based compensation and time-based stock awards, as well as other costs incurred for our in-house converted sales team; +• +decreased commission expenses of $22,988, primarily due to the conversion of sales agent agreements to an in-house sales team during the prior period, partially offset by the increased compensation costs discussed above; +• +increased costs associated with our proxy contest of $8,969; +• +decreased foreign currency losses of $8,348, due to favorable exchange rates for European and Asian currencies in the current period, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period; +• +decreased professional and consulting service costs of $7,502, primarily driven by costs savings initiatives, as well as lower restructuring charges related to corporate reorganization cost compared to the prior period; +• +increased warehouse-related expenses of $5,985, primarily due to new North American third-party logistic provider (3PL) costs and higher warehouse costs in Europe in the current period; +• +decreased rent and occupancy expenses of $6,737, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred during the prior period; +• +increased advertising, promotion, and other operating expenses of $2,911, primarily due to increased international investment compared to the prior period; and +• +increased bad debt expense of $1,321, primarily due to recent payment history on an unsettled customer account in the current period. +Income (Loss) from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows: +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +UGG brand wholesale +$ +247,826 +$ +213,407 +$ +34,419 +16.1 +% +HOKA brand wholesale +20,954 +2,556 +18,398 +719.8 +Teva brand wholesale +20,400 +10,045 +10,355 +103.1 +Sanuk brand wholesale +14,474 +(110,582 +) +125,056 +113.1 +Other brands wholesale +1,304 +(985 +) +2,289 +232.4 +Direct-to-Consumer +156,896 +109,802 +47,094 +42.9 +43 +Table of Contents +Years Ended March 31, +2018 +2017 +Change +Amount +Amount +Amount +% +Unallocated overhead costs +(239,270 +) +(226,162 +) +(13,108 +) +(5.8 +) +Total +$ +222,584 +$ +(1,919 +) +$ +224,503 +11,699.0 +% +The increase in total income from operations, compared to the prior period, was due to higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by impairment charges of $138,235 incurred during the prior period, as described above. Key drivers for the changes in income from operations were as follows: +• +The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins. +• +The increase in income from operations of HOKA brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses. +• +The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins. +• +The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred during the prior period, as well as higher sales at higher gross margins in the current period. +• +The increase in income from operations of Other brands wholesale was due to higher gross margins and lower marketing and selling expenses. +• +The increase in income from operations of DTC was primarily due to overall higher sales in our E-Commerce business and lower SG&A expenses, primarily driven by lower restructuring charges for retail stores, compared to the prior period, as well as net realized cost savings due to our operating profit improvement plan. +• +The increase in unallocated overhead costs was primarily due to higher performance-based compensation and warehouse and 3PL costs, net of cost savings realized from our operating profit improvement plan, partially offset by favorable fluctuations in European and Asian exchange rates. The increase in performance-based compensation of approximately $17,000, compared to the prior period, is due to performance criteria associated with certain compensatory awards being achieved in the current period. The increase in warehouse costs of approximately $10,000, compared to the prior period, was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments, as well as a new North American 3PL. +Other Expense, Net. The decrease in total other expense, net, compared to the prior period, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities. +Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows: +Years Ended March 31, +2018 +2017 +Income tax expense (benefit) +$ +106,302 +$ +(12,696 +) +Effective income tax rate +48.2 +% +181.7 +% +The decrease in our effective income tax rate was primarily due to the impacts from the enactment of the Tax Reform Act during the year ended March 31, 2018, partially offset by the impact of non-recurring restructuring charges and non-cash impairment charges recognized during the year ended March 31, 2017. Of the total income tax expense recorded during the year ended March 31, 2018, $14,395 was recorded for the re-measurement of our deferred tax assets to the lower enacted US federal tax rates in the consolidated statements of comprehensive income (loss). +44 +Table of Contents +Additionally, we recorded provisional US federal and state tax estimates for the one-time mandatory deemed repatriation of foreign earnings of $59,114, including discrete tax impacts of $46,405 related to foreign earnings and profits generated prior to April 1, 2017. These provisional estimates were offset by a benefit of $2,502 due to the reduction of the US federal income tax rate from 35.0% to 31.5%. +Foreign income before income taxes was $149,214 and $63,011 and worldwide income (loss) before income taxes was $220,696 and $(6,986) during the years ended March 31, 2018 and 2017, respectively. The increase in foreign income before income taxes, as a percentage of worldwide income (loss) before income taxes, was primarily due to a larger proportionate increase in foreign sales and a reduction of foreign operating expenses during the year ended March 31, 2018 compared to the prior period. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to the impact of the Sanuk brand goodwill and patent impairment charges to domestic and worldwide income recorded during the prior period. +Net Income. Net income increased, compared to the prior period, primarily due to higher sales at higher gross margins, as well as lower SG&A expenses largely driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Net income per share increased due to higher net income, combined with lower weighted average common shares outstanding due to stock repurchases. +Other Comprehensive Income. Other comprehensive income increased, compared to the prior period, primarily due to higher foreign currency translation gains driven by changes in our net asset position and European and Asian foreign currency exchange rates. +Liquidity +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash provided by ongoing operating activities, and available borrowings under our revolving credit facilities, as needed. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year. The seasonality of our business also requires us to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. We believe our cash and cash equivalents balances, cash provided by ongoing operating activities, and available borrowings under our revolving credit facilities (described below under the heading “Capital Resources”), will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. +As a result of the Tax Reform Act and the transition of the US tax regime from a worldwide tax system to a territorial tax system, we repatriated $250,000 of cash and cash equivalents during the year ended March 31, 2018 . As of March 31, 2019 , we had $214,876 of cash and cash equivalents outside the US, of which we repatriated $130,000 during April 2019. A portion of the remaining cash and cash equivalents outside the US may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, as long as such cash is not required to fund ongoing foreign operations. For further information on the impacts of the Tax Reform Act during the years ended March 31, 2019 and 2018 , refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report . +We also continue to evaluate our capital allocation strategy and consider further opportunities to put global cash to use in a way that will profitably grow our business and drive stockholder value, including by repurchasing our stock. In January 2019, our Board of Directors approved the 2019 Repurchase Program, which authorizes us to repurchase up to $261,000 of our common stock. As of March 31, 2019 , the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, our “Stock Repurchase Programs”) was $350,212 . Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. +Our cash repatriation strategy, and by extension, our liquidity, may be impacted by a number of additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods. +Our liquidity may be further impacted by additional factors, including our operating results, the strength of our brands, unexpected weather conditions, our ability to respond to changes in consumer preferences and tastes, our +45 +Table of Contents +ability to collect our receivables in a timely manner and effectively manage our inventories, and our ability to respond to legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in share repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any acquisitions. +If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations that could result in operating and financial covenants that would restrict our operations and could further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. +Capital Resources +Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended (Prior Credit Agreement). The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and U.S. Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five -year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +As of March 31, 2019 , and through May 17, 2019 , we had no outstanding balance, outstanding letters of credit of $549 , and available borrowings of $399,451 under our Primary Credit Facility. +China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY 300,000 , or $44,692 . As of March 31, 2019 , and through May 17, 2019 , we had no outstanding balance and available borrowings of $44,692 under our China Credit Facility. +Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY 5,500,000 , or $49,595 . As of March 31, 2019 , and through May 17, 2019 , we had no outstanding balance and available borrowings of $49,595 under our Japan Credit Facility. We have renewed the Japan Credit Facility through January 31, 2020 under the terms of the original agreement. +Mortgage. As of March 31, 2019 , we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $31,504 . The loan will mature and require a balloon payment in the amount of $23,695 , in addition to any then-outstanding balance, on July 1, 2029 . +Debt Covenants. As of March 31, 2019 , and through May 17, 2019 , we were in compliance with all debt covenants under our revolving credit facilities and our mortgage. +Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on the refinancing and related terms of our Primary Credit Facility, as well as our other revolving credit facilities and mortgage. +Cash Flows +The following table summarizes our cash flows for the periods presented: +Years Ended March 31, +2019 +2018 +2017 +Net cash provided by operating activities +$ +359,505 +$ +327,355 +$ +199,330 +Net cash used in investing activities +(29,018 +) +(34,697 +) +(44,499 +) +Net cash used in financing activities +(167,194 +) +(157,715 +) +(103,757 +) +46 +Table of Contents +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income, other cash receipts and expenditure adjustments, and changes in working capital. +The increase in net cash provided by operating activities during the year ended March 31, 2019 , compared to the year ended March 31, 2018 , was due to the positive net change in net income after non-cash adjustments of $140,871 , partially offset by a net negative change in operating assets and liabilities of $108,721 . The changes in operating assets and liabilities were primarily due to net negative impacts for long-term liabilities, accrued expenses, income tax receivable, trade accounts receivable, and prepaid expenses and other current assets partially offset by a net positive change in trade accounts payable. +The increase in net cash provided by operating activities during the year ended March 31, 2018 , compared to the year ended March 31, 2017 , was primarily due to a net positive change in operating assets and liabilities of $133,528 , partially offset by a net negative change in net income after non-cash adjustments of $5,503 . The changes in operating assets and liabilities were primarily due net positive impacts for long-term liabilities, accrued expenses, income tax receivable, and trade accounts receivable. +Investing Activities. The decrease in net cash used in investing activities during the year ended March 31, 2019 , compared to the year ended March 31, 2018 , was primarily due to lower capital expenditures for property and equipment primarily driven by fewer retail store and warehouse build-out costs. +The decrease in net cash used in investing activities during the year ended March 31, 2018 , compared to the year ended March 31, 2017 , was due to lower capital expenditures for property and equipment primarily driven by lower expenditures on real property acquisitions, retail stores and showrooms, as well as IT infrastructure and improvements, partially offset by higher warehouse build-out costs associated with the expansion of our warehouse and distribution center located in Moreno Valley, California. +Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2019 , compared to the year ended March 31, 2018 , was primarily due to higher stock repurchases. +The increase in net cash used in financing activities during the year ended March 31, 2018 , compared to the year ended March 31, 2017 , was primarily due to higher stock repurchases, partially offset by lower net borrowings and repayments of short-term borrowings and the final Sanuk brand contingent consideration payment being made during the year ended March 31, 2017 . +Off-Balance Sheet Arrangements +We do not have any off-balance sheet arrangements. +Contractual Obligations +The following table summarizes our contractual obligations as of March 31, 2019 and the effects of such obligations in future periods: +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +290,437 +$ +53,015 +$ +88,432 +$ +67,244 +$ +81,746 +Purchase obligations for product (2) +424,274 +424,274 +— +— +— +Purchase obligations for commodities (3) +208,577 +54,607 +153,970 +— +— +Other purchase obligations (4) +52,302 +30,583 +13,984 +7,735 +— +Mortgage obligation (5) +45,915 +2,168 +4,336 +4,336 +35,075 +Net unrecognized tax benefits (6) +2,258 +8 +2,250 +— +— +Total +$ +1,023,763 +$ +564,655 +$ +262,972 +$ +79,315 +$ +116,821 +(1) +Our operating lease commitments consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. +47 +Table of Contents +(2) +Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. +(3) +Our purchase obligations for commodities include sheepskin and leather, represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. +(4) +Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts and requirements to pay promotional expenses. Our promotional expenditures and service contracts are due periodically during fiscal years 2020 through 2024 . +As of March 31, 2019 , we had $4,891 of commitments for future capital expenditures, primarily related to retail store build-out of leasehold improvements and to our continued build-out and expansion of our warehouse and distribution center located in Moreno Valley, California. We estimate that the capital expenditures for the fiscal year ending March 31, 2020 , including the aforementioned commitments, will range from approximately $35,000 to $40,000 . We anticipate these expenditures will primarily relate to the build-out and expansion of our primary warehouse and distribution center, as well as IT infrastructure, system upgrade costs, and fixtures and upgrades for our global retail stores. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets and the timing of other expenditures. +(5) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. Payments represent principal and interest amounts. Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our mortgage obligation and payments. +(6) +Net unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2019 , the timing of future cash outflows is highly uncertain related to $8,086 of a statute of limitations liability therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Impact of Foreign Currency Exchange Rate Fluctuations +Foreign currency exchange rate fluctuations had an incremental negative impact on the years ended March 31, 2019 and 2017 compared to an incremental positive impact on the year ended March 31, 2018 . +Refer to “Results of Operations,” above within this Item 7, as well as the consolidated statements of comprehensive income (loss) , and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on the impact of foreign currency exchange rate fluctuations on our results of operations. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements , based on historical experience, existing and known circumstances, authoritative accounting +48 +Table of Contents +pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements : allowances for doubtful accounts, estimated returns liability, sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. +Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . As a result of the short durations of customer contracts, which are typically effective for one year or less and have payment terms that are generally 30-60 days, these arrangements are not considered to have a significant financing component. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and E-Commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income (loss) . Shipping and handling costs are a fulfillment service, and, for certain wholesale and all E-Commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Beginning April 1, 2018, we adopted the new revenue standard set forth in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended, using the modified retrospective transition method. Accordingly, the comparative consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. The changes in our accounting policy for the adoption of the new revenue standard and the impacts on our consolidated financial statements are as follows: +• +Deferral of In Transit Net Sales. Prior to adoption of the new revenue standard, we deferred recognition of revenue for certain wholesale and E-Commerce sales arrangements until the product was delivered. However, we now recognize revenue for these arrangements upon shipment of product, rather than delivery. As a result, on adoption of the new revenue standard, we recorded a cumulative effect adjustment net after tax increase to opening retained earnings of approximately $1,000 in our consolidated balance sheets . +• +Allowance for Sales Returns. We historically recorded a trade accounts receivable allowance for sales returns (allowance for sales returns) related to our wholesale channel sales, and the cost of sales for the product-related inventory was recorded in inventories, net of reserves, in our consolidated balance sheets . As of March 31, 2018, we recorded an allowance for sales returns for the wholesale channel of $20,848 and product-related inventory for all channels of $11,251 in our consolidated balance sheets . On adoption of the new revenue standard, we reclassified the allowance for sales returns for the wholesale channel to other accrued expenses and the product-related inventory for all channels to other current assets in our consolidated balance sheets . For the DTC channel, the allowance for sales returns was recorded in other accrued expenses, which is consistent with the prior period presented. Refer to the section below “Other Reserves” for further detail on our accounting policy for sales returns and key assumptions. +Refer to Note 1, “General,” under the heading “Recent Accounting Pronouncements” and Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information. +49 +Table of Contents +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2019 +2018 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +197,426 +100.0 +% +$ +177,166 +100.0 +% +Allowance for doubtful accounts +(5,073 +) +(2.6 +) +(3,487 +) +(2.0 +) +Allowance for sales discounts +(710 +) +(0.4 +) +(1,400 +) +(0.8 +) +Allowance for chargebacks +(13,041 +) +(6.6 +) +(7,727 +) +(4.4 +) +Allowance for sales returns* +— +— +(20,848 +) +(11.8 +) +Trade accounts receivable, net +$ +178,602 +90.5 +% +$ +143,704 +81.1 +% +* Refer to the above section “Revenue Recognition” regarding a change in accounting policy that impacted comparability of the prior period presented. +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for accounts which we consider having credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts as of March 31, 2019 by approximately $1,000 . +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for term discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, we record an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. +Sales Return Reserve. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2019 +2018 +Amount +% of Net Sales +Amount +% of Net Sales +Net Sales +Wholesale +$ +237,491 +60.3 +% +$ +223,127 +55.7 +% +Direct-to-Consumer +156,639 +39.7 +177,557 +44.3 +Total +$ +394,130 +100.0 +% +$ +400,684 +100.0 +% +50 +Table of Contents +As of March 31, +2019 +2018 +Amount +% of Net Sales +Amount* +% of Net Sales +Sales Return Liability +Wholesale* +$ +21,538 +9.1 +% +$ +— +— +% +Direct-to-Consumer +3,249 +2.1 +2,308 +1.3 +Total +$ +24,787 +$ +2,308 +*Refer to the above section “Revenue Recognition” regarding a change in accounting policy that impacted comparability of the prior period presented due to a reclassification of $20,848 from allowance for sales returns to sales return liability as of April 1, 2018. +Sales Returns . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit with a receipt. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return reserve are recorded against gross sales for the contract liability and cost of sales for the contract asset. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the liability for total returns as of March 31, 2019 by approximately $2,000. +Inventory Reserves. The following tables summarize estimates for our inventory reserves: +As of March 31, +2019 +2018 +Amount +% of Gross Inventory +Amount +% of Gross Inventory +Gross Inventories +$ +288,565 +100.0 +% +$ +308,622 +100.0 +% +Write-down of inventories +(9,723 +) +(3.4 +) +(9,020 +) +(2.9 +) +Inventories, net +$ +278,842 +$ +299,602 +Inventory Write-Downs . We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve as of March 31, 2019 by approximately $1,700 . +Goodwill and Indefinite-Lived Intangible Assets. We assess the impairment of goodwill and indefinite-lived intangible assets on an annual basis. We also perform interim impairment assessments of goodwill and indefinite-lived intangible assets if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include historical financial performance, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. +51 +Table of Contents +During fiscal years 2019, 2018 and 2017, we performed our annual impairment assessment and evaluated the UGG and HOKA brands’ wholesale reportable operating segment goodwill as of December 31st and evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands’ goodwill and Teva brand indefinite-lived trademarks, each of the brands’ actual fiscal year sales and operating results, and the brands’ long-term forecasts of sales and operating results as of their evaluation dates, we concluded that these assets were not impaired. +During fiscal year 2017, we performed the annual impairment assessment of our Sanuk brand goodwill as of October 31, 2016, with the assistance of a third-party valuation firm. We conducted the following assessment, which identified an indication of impairment: +• +Under step one of the impairment assessment, management concluded that the fair value of the Sanuk brand wholesale reportable operating segment was below carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. +• +Under step two of the impairment assessment, management concluded that the fair value allocated to all of the assets and liabilities of the Sanuk brand wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets, resulted in a non-cash impairment charge of $113,944 , which was recognized in the third quarter of fiscal year 2017 and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, such as property and equipment and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +We did not identify any definite-lived intangible asset impairments during the years ended March 31, 2019 and 2018 . However, during fiscal year 2017, and in connection with the goodwill impairment discussed above, we identified an impairment of the Sanuk brand’s amortizable patent. Our analysis determined that the Sanuk brand’s amortizable patent, the Sanuk SIDEWALK SURFERS utility patent, was fully impaired as it had very limited value in the marketplace due to its limited ability to exclude others from creating similar products. As a result, we recognized a non-cash impairment charge to the patent of $ 4,086 in the Sanuk wholesale reportable operating segment during the third quarter of fiscal year 2017, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . We did not identify any additional impairments for the Sanuk brand’s other definite-lived intangible assets during fiscal year 2017, as the undiscounted future cash flows associated with those assets exceeded their carrying values. +During the third quarter of fiscal year 2017, we also recognized an impairment for definite-lived intangible assets in the DTC reportable operating segment of $4,743 , due to a decline in market rental rates for European retail stores, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Further, during the years ended March 31, 2019 , 2018 , and 2017 , we recognized impairment losses for other long-lived assets, primarily for retail store related fixed assets due to performance or store closures as well as computer software of $180 , $2,417 , and $11,265 , respectively, within our DTC reportable operating segment and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Refer to Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information. +52 +Table of Contents +Performance-Based Compensation . In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior year’s performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense increased $2,968 during fiscal year 2019 and $32,728 during fiscal year 2018 . The primary reason for these increases was the achievement of the performance criteria governing our performance-based stock compensation and cash bonuses in fiscal year 2019 and fiscal year 2018 , which was not the case for fiscal year 2017, which drove a higher change from fiscal year 2017 to fiscal year 2018. In addition, long-term performance-based compensation was higher during fiscal year 2019 compared to fiscal year 2018. Performance-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Refer to Note 8, “Stock Compensation,” of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation. +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and operating results. +We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion. +Tax Reform. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the impact of the Tax Reform Act. SAB 118 provides a measurement period, which should not extend beyond one year from the enactment date, during which we may complete the accounting for the impacts of the Tax Reform Act under Accounting Standard Codification Topic 740 (ASC 740). In accordance with SAB 118, we must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting under ASC 740 is complete. Any adjustments to provisional amounts that are identified during the measurement period must be recorded and disclosed in the reporting period in which the adjustment is determined. +53 +Table of Contents +In accordance with SAB 118, we completed our accounting for the effects of the Tax Reform Act during the quarter ended December 31, 2018. This includes provisions of the Tax Reform Act which were effective on or after January 1, 2018, which include but are not limited to, US taxation of foreign earnings considered global intangible low-taxed income, minimum tax on base erosion anti-abuse, and limitations on the deductibility of interest expense and executive compensation. We analyzed the effects of the Tax Reform Act, including collecting, preparing and analyzing necessary information regarding foreign earnings and profits, performing and refining calculations and obtaining additional guidance from such standard setting and regulatory bodies as the US Internal Revenue Service, US Treasury Department, and the Financial Accounting Standards Board, among others. In connection with this analysis, we finalized our provisional estimates and recorded adjustments during the measurement period ended December 31, 2018 and filed our US federal income tax return for the year ended March 31, 2018. +While we have completed our accounting of the income tax effects under SAB 118, the related tax impacts may differ, possibly materially, due to changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decisions we may take as a result of the new legislation. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on income taxes and the impacts of the Tax Reform Act. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, which include sheepskin, leather and wool. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. We presently rely on only two tanneries to provide the majority of our sheepskin. While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our customers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin. +We typically fix prices for all of our raw materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and other pricing arrangements we use for sheepskin and leather may result in purchase obligations which are not reflected in our consolidated balance sheets . With respect to sheepskin and leather, in the event of significant price increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our operating margins. +Foreign Currency Exchange Rate Risk +Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although the majority of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our financial positions that are denominated in currencies other than the subsidiaries’ functional currencies. We translate monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries’ functional currencies to US dollars are recognized in other comprehensive income or loss . Foreign currency exchange rate fluctuations affect our reported profits and can distort comparisons from year to year. +We hedge certain foreign currency exchange rate risk from existing assets and liabilities. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. +54 +Table of Contents +We do not use foreign currency exchange rate forward contracts for trading purposes. A hypothetical 10.0% foreign currency exchange rate fluctuation would have no impact on the fair value of our derivative instruments as there were none outstanding as of March 31, 2019 . Refer to Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV , within this Annual Report for further information on our use of derivative contracts. +During the year ended March 31, 2019 and through May 17, 2019 , there were no factors that we would expect to result in a material change in the general nature of our primary market risk exposure, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. +Interest Rate Risk +Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including the Alternative Base Rate, the federal funds effective rate, currency specific adjusted London Interbank Offered Rate, and the Canadian Dollar Offered Rate for our Primary Credit Facility, the People’s Bank of China market rate for our China Credit Facility, and the Tokyo Interbank Offered Rate for our Japan Credit Facility. A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an aggregate increase to interest expense of $179 during the year ended March 31, 2019 . Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements , the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed within this Annual Report in a separate section following Part IV , as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report . +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019 . Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2019 . +b) Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +55 +Table of Contents +As of March 31, 2019 , our management, including our Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2019 . The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-3 within this Annual Report . +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +56 +Table of Contents +PART III +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2019 , 2018 , and 2017 are stated in Items 10, 11, 12, 13, and 14 herein as “year ended” or “years ended”. +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2019 annual meeting of stockholders and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2019 pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +57 +Table of Contents +PART IV +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), HOKA One One® (HOKA), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpure TM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +The defined periods for the fiscal years ended March 31, 2019 , 2018 , and 2017 are stated in Item 15 herein as “year ended” or “years ended”. +58 +Table of Contents +Item 15. Exhibits and Financial Statement Schedule +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010 and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as updated through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018 and incorporated by reference herein) +*4.1 +Description of Deckers Outdoor Corporation’s Capital Stock +10.1 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.2 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant’s Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant’s Form 10-K filed on February 29, 2012 and incorporated by reference herein) +*10.5 +Amendment to Lease Agreement, dated June 5, 2018, by and between STAG Camarillo 2, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 +10.6 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.7 +First Amendment to Lease Agreement, dated June 6, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +10.8 +Second Amendment to Lease Agreement, dated July 17, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +10.9 +Credit Agreement, dated as of September 20, 2018, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC and Deckers Outdoor International Limited, as borrowers, JP Morgan Chase Bank, N.A. as Administrative Agent, Citibank, N.A., Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, MUFG Bank, Ltd. and U.S. Bank National Association, as Co-Documentation Agents, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +10.10 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +*10.11 +Second Modification Agreement, dated October 11, 2018, to Term Loan Agreement dated as of July 9, 2014, among Deckers Cabrillo, LLC as Borrower and California Bank & Trust, as Lender +10.12 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +59 +Table of Contents +10.13 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +*#10.14 +Form of Change in Control and Severance Agreement +#10.15 +Consulting Agreement and General Release, dated May 24, 2016 and effective May 31, 2016, entered into by and between Deckers Outdoor Corporation and Angel Martinez (Exhibit 10.1 to the Registrant’s Form 8-K filed on May 27, 2016 and incorporated by reference herein) +#10.16 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.17 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.18 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective as of December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.19 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.20 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.21 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.22 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.23 +Management Incentive Plan (Exhibit 10.1 to the Registrant's Form 10-Q filed on August 10, 2015 and incorporated by reference herein) +#10.24 +Form of Restricted Stock Unit Award Agreement under the 2015 Stock Incentive Plan (2016 LTIP Financial Performance Award) (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 24, 2015 and incorporated by reference herein) +#10.25 +Form of Stock Unit Award Agreement (2016 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.6 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.26 +Form of Stock Unit Award Agreement (2017 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.27 +Form of Stock Unit Award Agreement (2017 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.28 +Form of Stock Unit Award Agreement (2018 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.29 +Form of Stock Unit Award Agreement (2018 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.30 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.31 +Form of Stock Unit Award Agreement (2019 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.32 +Form of Stock Unit Award Agreement (2019 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.33 +Form of Restricted Stock Unit Award Agreement under 2015 Stock Incentive Plan (FY 2019) LTIP Agreement (Exhibit 10.2 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +60 +Table of Contents +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +*101.INS +XBRL Instance Document +*101.SCH +XBRL Taxonomy Extension Schema Document +*101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB +XBRL Taxonomy Extension Label Linkbase Document +*101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +61 +Table of Contents +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 30, 2019 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ DAVID POWERS +Chief Executive Officer, President and Director +(Principal Executive Officer) +May 30, 2019 +David Powers +/s/ STEVEN J. FASCHING +Chief Financial Officer +(Principal Financial and Accounting Officer) +May 30, 2019 +Steven J. Fasching +/s/ JOHN M. GIBBONS +Chairman of the Board +May 30, 2019 +John M. Gibbons +/s/ NELSON C. CHAN +Director +May 30, 2019 +Nelson C. Chan +/s/ CINDY L. DAVIS +Director +May 30, 2019 +Cindy L. Davis +/s/ MICHAEL F. DEVINE, III +Director +May 30, 2019 +Michael F. Devine, III +/s/ WILLIAM L. MCCOMB +Director +May 30, 2019 +William L. McComb +/s/ JAMES QUINN +Director +May 30, 2019 +James Quinn +/s/ LAURI M. SHANAHAN +Director +May 30, 2019 +Lauri M. Shanahan +/s/ BRIAN A. SPALY +Director +May 30, 2019 +Brian A. Spaly +/s/ BONITA C. STEWART +Director +May 30, 2019 +Bonita C. Stewart +62 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +F-2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +F-3 +Consolidated Balance Sheets +F-4 +Consolidated Statements of Comprehensive Income (Loss) +F-5 +Consolidated Statements of Stockholders' Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to Consolidated Financial Statements +F-9 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F-45 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2019 and 2018 , the related consolidated statements of comprehensive income (loss) , stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2019 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018 , and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2019 in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2019 , based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 30, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements , whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements . Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements . We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 30, 2019 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019 , based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2019 and 2018 , the related consolidated statements of comprehensive income (loss) , stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2019 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ), and our report dated May 30, 2019 expressed an unqualified opinion on those consolidated financial statements . +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A(b) , "Management's Report on Internal Control over Financial Reporting” . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 30, 2019 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2019 +2018 +ASSETS +Current assets +Cash and cash equivalents +$ +589,692 +$ +429,970 +Trade accounts receivable, net of allowances ($18,824 and $33,462 as of March 31, 2019 and 2018, respectively) +178,602 +143,704 +Inventories, net of reserves ($9,723 and $9,020 as of March 31, 2019 and 2018, respectively) +278,842 +299,602 +Prepaid expenses +19,901 +17,639 +Other current assets +26,028 +17,599 +Income tax receivable +2,340 +2,176 +Total current assets +1,095,405 +910,690 +Property and equipment, net of accumulated depreciation ($235,939 and $210,763 as of March 31, 2019 and 2018, respectively) +213,796 +220,162 +Goodwill +13,990 +13,990 +Other intangible assets, net of accumulated amortization ($71,186 and $66,065 as of March 31, 2019 and 2018, respectively) +51,494 +57,850 +Deferred tax assets, net +30,870 +38,381 +Other assets +21,651 +23,306 +Total assets +$ +1,427,206 +$ +1,264,379 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities +Short-term borrowings +$ +603 +$ +578 +Trade accounts payable +124,974 +93,939 +Accrued payroll +54,462 +55,695 +Other accrued expenses +47,963 +24,446 +Income taxes payable +19,283 +11,006 +Value added tax payable +3,239 +3,502 +Total current liabilities +250,524 +189,166 +Mortgage payable +30,901 +31,504 +Income tax liability +60,616 +64,735 +Deferred rent obligations +21,107 +22,499 +Other long-term liabilities +18,928 +15,696 +Total long-term liabilities +131,552 +134,434 +Commitments and contingencies +Stockholders' equity +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 29,141 and 30,447 as of March 31, 2019 and 2018, respectively) +291 +304 +Additional paid-in capital +178,227 +167,587 +Retained earnings +889,266 +785,871 +Accumulated other comprehensive loss +(22,654 +) +(12,983 +) +Total stockholders' equity +1,045,130 +940,779 +Total liabilities and stockholders' equity +$ +1,427,206 +$ +1,264,379 +See accompanying notes to the consolidated financial statements . +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2019 +2018 +2017 +Net sales +$ +2,020,437 +$ +1,903,339 +$ +1,790,147 +Cost of sales +980,187 +971,697 +954,912 +Gross profit +1,040,250 +931,642 +835,235 +Selling, general and administrative expenses +712,930 +709,058 +837,154 +Income (loss) from operations +327,320 +222,584 +(1,919 +) +Interest income +(6,028 +) +(3,057 +) +(778 +) +Interest expense +4,661 +4,585 +7,319 +Other (income) expense, net +(247 +) +360 +(1,474 +) +Total other (income) expense, net +(1,614 +) +1,888 +5,067 +Income (loss) before income taxes +328,934 +220,696 +(6,986 +) +Income tax expense (benefit) +64,626 +106,302 +(12,696 +) +Net income +264,308 +114,394 +5,710 +Other comprehensive (loss) income, net of tax +Unrealized (loss) gain on cash flow hedges +(243 +) +(613 +) +704 +Foreign currency translation (loss) gain +(9,428 +) +14,081 +(6,598 +) +Total other comprehensive (loss) income +(9,671 +) +13,468 +(5,894 +) +Comprehensive income (loss) +$ +254,637 +$ +127,862 +$ +(184 +) +Net income per share +Basic +$ +8.92 +$ +3.60 +$ +0.18 +Diluted +$ +8.84 +$ +3.58 +$ +0.18 +Weighted-average common shares outstanding +Basic +29,641 +31,758 +32,000 +Diluted +29,903 +31,996 +32,355 +See accompanying notes to the consolidated financial statements . +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional Paid-in Capital +Retained Earnings +Accumulated Other Comprehensive Loss +Total Stockholders' +Equity +Shares +Amount +Balance as of March 31, 2016 +32,020 +$ +320 +$ +161,259 +$ +826,449 +$ +(20,557 +) +$ +967,471 +Stock compensation expense +23 +— +6,175 +— +— +6,175 +Shares issued upon vesting +166 +2 +796 +— +— +798 +Excess tax benefit from stock compensation +— +— +100 +— +— +100 +Shares withheld for taxes +— +— +(7,533 +) +— +— +(7,533 +) +Repurchases of common stock +(222 +) +(2 +) +— +(12,570 +) +— +(12,572 +) +Net income +— +— +— +5,710 +— +5,710 +Total other comprehensive loss +— +— +— +— +(5,894 +) +(5,894 +) +Balance as of March 31, 2017 +31,987 +320 +160,797 +819,589 +(26,451 +) +954,255 +Stock compensation expense +15 +— +14,302 +— +— +14,302 +Shares issued upon vesting +148 +1 +764 +— +— +765 +Cumulative adjustment from adoption of new accounting guidance +— +— +— +1,558 +— +1,558 +Shares withheld for taxes +— +— +(8,276 +) +— +— +(8,276 +) +Repurchases of common stock +(1,703 +) +(17 +) +— +(149,670 +) +— +(149,687 +) +Net income +— +— +— +114,394 +— +114,394 +Total other comprehensive income +— +— +— +— +13,468 +13,468 +Balance as of March 31, 2018 +30,447 +304 +167,587 +785,871 +(12,983 +) +940,779 +Stock compensation expense +10 +— +14,773 +— +— +14,773 +Shares issued upon vesting +85 +1 +1,024 +— +— +1,025 +Cumulative adjustment from adoption of new accounting guidance +— +— +— +468 +— +468 +Shares withheld for taxes +— +— +(5,157 +) +— +— +(5,157 +) +Repurchases of common stock +(1,401 +) +(14 +) +— +(161,381 +) +— +(161,395 +) +Net income +— +— +— +264,308 +— +264,308 +Total other comprehensive loss +— +— +— +— +(9,671 +) +(9,671 +) +Balance as of March 31, 2019 +29,141 +$ +291 +$ +178,227 +$ +889,266 +$ +(22,654 +) +$ +1,045,130 +See accompanying notes to the consolidated financial statements . +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(dollar amounts in thousands) +Years Ended March 31, +2019 +2018 +2017 +OPERATING ACTIVITIES +Net income +$ +264,308 +$ +114,394 +$ +5,710 +Reconciliation of net income to cash provided by operating activities: +Depreciation, amortization and accretion +44,941 +48,572 +52,628 +Amortization on debt issuance costs +286 +375 +375 +Loss on extinguishment of debt +447 +— +— +Bad debt expense +2,849 +4,168 +2,847 +Deferred tax expense (benefit) +6,939 +8,138 +(24,495 +) +Stock-based compensation +14,585 +14,157 +6,011 +Employee stock purchase plan +189 +150 +164 +Loss on disposal of property and equipment +277 +387 +538 +Impairment of goodwill +— +— +113,944 +Impairment of intangible and other long-lived assets +180 +2,417 +13,222 +Restructuring charges +295 +1,667 +28,984 +Changes in operating assets and liabilities: +Trade accounts receivable, net +(16,157 +) +10,770 +(1,336 +) +Inventories, net +8,827 +(751 +) +1,060 +Prepaid expenses and other current assets +(515 +) +11,124 +7,975 +Income tax receivable +(165 +) +26,999 +(1,331 +) +Other assets +2,344 +(2,090 +) +1,882 +Trade accounts payable +31,035 +(2,184 +) +(7,825 +) +Accrued expenses +(7,160 +) +28,627 +(403 +) +Income taxes payable +3,809 +(1,693 +) +(3,643 +) +Long-term liabilities +2,191 +62,128 +3,023 +Net cash provided by operating activities +359,505 +327,355 +199,330 +INVESTING ACTIVITIES +Purchases of property and equipment +(29,086 +) +(34,813 +) +(44,499 +) +Proceeds from sale of property and equipment, net +68 +116 +— +Net cash used in investing activities +(29,018 +) +(34,697 +) +(44,499 +) +FINANCING ACTIVITIES +Proceeds from short-term borrowings +162,001 +214,751 +405,988 +Repayments of short-term borrowings +(161,621 +) +(214,889 +) +(468,938 +) +Debt issuance costs on short-term borrowings +(1,297 +) +— +— +Proceeds on issuance of stock for employee stock purchase plan +1,024 +765 +798 +Cash paid for repurchase of common stock +(161,395 +) +(149,687 +) +(12,572 +) +Cash paid for shares withheld for taxes +(5,328 +) +(8,105 +) +(8,452 +) +Contingent consideration paid +— +— +(20,058 +) +Repayment of mortgage principal +(578 +) +(550 +) +(523 +) +Net cash used in financing activities +(167,194 +) +(157,715 +) +(103,757 +) +Effect of foreign currency exchange rates on cash +(3,571 +) +3,263 +(5,266 +) +Net change in cash and cash equivalents +159,722 +138,206 +45,808 +Cash and cash equivalents at beginning of period +429,970 +291,764 +245,956 +Cash and cash equivalents at end of period +$ +589,692 +$ +429,970 +$ +291,764 +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(dollar amounts in thousands) +(continued) +Years Ended March 31, +2019 +2018 +2017 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period for +Income taxes, net of refunds of $3,824, $23,133 and $17,132, as of March 31, 2019, 2018 and 2017, respectively +$ +53,657 +$ +14,407 +$ +14,099 +Interest +3,811 +3,774 +5,494 +Non-cash investing activities +Accrued for purchases of property and equipment +1,789 +2,020 +1,101 +Accrued for asset retirement obligations +4,706 +1,359 +2,359 +Non-cash financing activity +Accrued for shares withheld for taxes +— +171 +— +See accompanying notes to the consolidated financial statements . +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 1. General +The Company +Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the “Company”) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its Omni-Channel platform, the Company’s proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands. +The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and E‑Commerce websites. Independent third-party contractors manufacture all of the Company’s products. A significant part of the Company’s business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter. +Reportable Operating Segments +The Company performs an annual assessment of the appropriateness of its reportable operating segments during the third quarter of its fiscal year. However, due to known circumstances arising during the first quarter of the year ended March 31, 2019 (Q1 2019), management performed this assessment at that time. These circumstances included an assessment of quantitative factors, such as the actual and forecasted sales and operating income of the wholesale operations of the HOKA brand compared to the Company’s other reportable operating segments, as well as an assessment of qualitative factors, such as the ongoing growth of, and the Company’s increased investment in, the wholesale operations of the HOKA brand. As a result, beginning in Q1 2019, the Company added a sixth reportable operating segment to separately report the wholesale operations of the HOKA brand. The wholesale operations of the HOKA brand are no longer presented under the Other brands wholesale reportable operating segment. However, the DTC operations of the HOKA brand continue to be reported under the DTC reportable operating segment. Prior periods presented were reclassified to reflect this change. +The Company’s six reportable operating segments now include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is the Company’s Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. +During calendar year 2017, the Company began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective April 1, 2017, the operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results of wholesale operations for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the Other brands wholesale reportable operating segment, as presented for the year ended March 31, 2017. +Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +Restructuring Plan +In February 2016, the Company announced the implementation of a multi-year restructuring plan which was designed to realign its brands across its Fashion Lifestyle and Performance Lifestyle groups, optimize the Company’s worldwide owned retail store fleet, and consolidate its management and operations. In general, the intent of this restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands. As of March 31, 2019, the Company has completed its restructuring plan, incurred cumulative restructuring charges to date, and does not anticipate incurring restructuring charges in connection with this plan in future periods. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +In connection with the restructuring plan, the Company has closed 46 company-owned global retail stores as of March 31, 2019 , including conversions to partner retail stores, and consolidated its brand operations and corporate headquarters. Through March 31, 2019 , the Company had incurred cumulative restructuring charges by applicable reportable operating segment as follows: +Years Ended March 31, +Cumulative Restructuring Charges* +2019 +2018 +2017 +UGG brand wholesale +$ +— +$ +— +$ +2,238 +$ +2,238 +Sanuk brand wholesale +— +— +20 +3,068 +Other brands wholesale +— +— +102 +2,263 +Direct-to-Consumer +— +149 +12,771 +23,454 +Unallocated overhead costs +295 +1,518 +13,853 +24,596 +Total +$ +295 +$ +1,667 +$ +28,984 +$ +55,619 +*Cumulative restructuring charges include restructuring charges of $24,673 , which were incurred during the fiscal year ended March 31, 2016. +During the years ended March 31, 2019 , 2018 , and 2017 , total restructuring charges incurred and stated above were recorded in selling, general & administrative (SG&A) expenses in the consolidated statements of comprehensive income (loss) . +The remaining accrued liabilities for cumulative restructuring charges incurred to date under the Company’s restructuring plan, are as follows: +Lease Termination +Retail Store Fixed Asset Impairment +Severance Costs +Software and Office Fixed Asset Impairment +Other* +Total +Balance as of March 31, 2016 +$ +7,629 +$ +— +$ +3,436 +$ +— +$ +1,809 +$ +12,874 +Additional charges +8,986 +3,614 +5,773 +3,199 +7,412 +28,984 +Paid in cash +(12,043 +) +— +(6,403 +) +— +(5,268 +) +(23,714 +) +Non-cash +— +(3,614 +) +(251 +) +(3,199 +) +— +(7,064 +) +Balance as of March 31, 2017 +4,572 +— +2,555 +— +3,953 +11,080 +Additional charges +149 +— +— +— +1,518 +1,667 +Paid in cash +(1,076 +) +— +(2,555 +) +— +(4,388 +) +(8,019 +) +Balance as of March 31, 2018 +3,645 +— +— +— +1,083 +4,728 +Additional charges +295 +— +— +— +— +295 +Paid in cash +(1,856 +) +— +— +— +(581 +) +(2,437 +) +Balance as of March 31, 2019 +$ +2,084 +$ +— +$ +— +$ +— +$ +502 +$ +2,586 +*Includes costs related to office consolidations and termination of contracts and services. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading "Recent Developments" within this Annual Report for information regarding the Company’s realized annualized SG&A expense savings resulting from the implementation of this restructuring plan. +Summary of Significant Accounting Policies +Basis of Presentation. The accompanying consolidated financial statements and notes thereto (referred to herein as “consolidated financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP). The consolidated financial statements include the accounts of the Company, +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +its wholly owned subsidiaries, and entities in which it maintains a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. +Reclassifications . Certain reclassifications were made for prior periods presented to conform to the current period presentation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements . Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, trade accounts receivable allowances, sales returns liabilities, stock-based compensation, impairment assessments, depreciation and amortization, income tax liabilities, uncertain tax positions and income taxes receivable, the fair value of financial instruments, and the fair values of assets and liabilities, including goodwill and other intangible assets. These estimates are based on information available as of the date of the consolidated financial statements , and actual results could differ materially from the results assumed or implied based on these estimates. +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly-owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI). +Cash Equivalents . The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents included $372,178 and $268,976 of money market funds as of March 31, 2019 and 2018 , respectively. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Write-offs against this allowance are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. +Inventories . Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value less an approximate normal profit margin at each financial statement date. Cost includes shipping and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements that are governed by service contracts (hosting arrangements) to support operations. Beginning October 1, 2018, the Company early adopted Accounting Standard Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, on a prospective basis. The Company historically recognized expenses for implementation costs associated with a cloud computing arrangement (CCA) as incurred. Upon adoption, application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets . Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to five years. As of March 31, 2019 and 2018 , the Company had no material prepaid expenses and other assets for hosting arrangements. +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year. Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset and are recorded as an adjustment to deprecation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Property and equipment are summarized as follows: +As of March 31, +Useful life (years) +2019 +2018 +Land +Indefinite +$ +32,864 +$ +32,863 +Building +39.5 +39,643 +38,945 +Machinery and equipment +1-10 +152,486 +141,255 +Furniture and fixtures +3-7 +38,326 +38,473 +Computer software +3-10 +77,372 +72,310 +Leasehold improvements +1-11 +109,044 +107,079 +Gross property and equipment +449,735 +430,925 +Less accumulated depreciation and amortization +(235,939 +) +(210,763 +) +Property and equipment, net +$ +213,796 +$ +220,162 +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. As of March 31, 2019 and 2018 , liabilities for asset retirement obligations (AROs) were $12,667 and $8,670 , respectively, and are recorded in other long-term liabilities in the consolidated balance sheets . The increase in liabilities for AROs during the year ended March 31, 2019 was due to $4,706 of liabilities incurred for new AROs primarily related to the expansion of the Company’s warehouse and distribution center located in Moreno Valley, California. +Goodwill and Other Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights and non-compete agreements arising from the application of purchase accounting. Definite-lived intangible assets are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows. If impaired, the asset or asset group is written +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +down to fair value based either on discounted future cash flows or appraised values. Impairment charges and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information. +Other Long-Lived Assets . Other long-lived assets, such as machinery and equipment, internal-use software, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +During the years ended March 31, 2019 , 2018 and 2017 , the Company recognized impairment losses for other long-lived assets, primarily for retail store related fixed assets due to performance or store closures as well as computer software of $180 , $2,417 , and $11,265 , respectively, within its DTC reportable operating segment and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company may enter into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage this risk and may designate these derivative contracts as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts) to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs in other current assets or other accrued expenses in the consolidated balance sheets . Refer to Note 4, “Fair Value Measurements,” for further information on the nature of Level 2 inputs. The after-tax unrealized gains or losses from the effective portion of changes in fair value of Designated Derivative Contracts are recorded in accumulated other comprehensive loss (AOCL) and are reclassified into earnings in the consolidated statements of comprehensive income (loss) in the same period or periods as the related net sales are recorded. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recorded in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in OCI related to the hedging relationship are immediately recorded in earnings. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated balances, which are also recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. +Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Revenue Recognition . Refer to the heading “Recent Accounting Pronouncements” below for further information on the impact on the Company from the adoption of ASU No. 2014-09, Revenue from Contracts with Customers , beginning April 1, 2018. Refer also to Note 2, “Revenue Recognition,” for further information regarding the Company’s accounting policy for revenue recognition and components of variable consideration, including allowances for sales discounts, chargebacks and sales return contract assets and liabilities after adoption of this ASU. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods, which includes the purchase costs and related overhead. Overhead includes all costs for planning, purchasing, quality control, freight, duties, royalties paid to third parties and shrinkage. Cost includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income (loss) . +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $23,187 , $22,372 , and $21,256 for the years ended March 31, 2019 , 2018 and 2017 , respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Advertising, Marketing, and Promotion Expenses . Advertising, marketing and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, with $118,291 , $111,658 , and $109,579 for the years ended March 31, 2019 , 2018 and 2017 , respectively, recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2019 and 2018 were $6,006 and $2,545 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Rent Expense . Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments under some of the Company’s retail store leases are based on a minimum rental plus a percentage of the store’s sales in excess of stipulated amounts. Rent expenses are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Refer to Note 7, “Commitments and Contingencies,” for further information. +Stock Compensation . All of the Company’s stock compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . Refer to Note 8, “Stock Compensation,” for further information. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50% of each eligible participant’s deferrals on up to 6% of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $3,060 , $2,269 , and $2,124 during the years ended March 31, 2019 , 2018 and 2017 , respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, the Company did not make any profit-sharing contributions for the years ended March 31, 2019 , 2018 and 2017 . +Non-qualified Deferred Compensation . In 2010, the Company established a non-qualified deferred compensation program that permits select members of management to defer earnings to a future date on a non-qualified basis. For each plan year, the Company’s Board of Directors may, but is not required to, contribute any amount it desires to any participant under this program. The Company’s contribution guidelines are determined by the Board of Directors annually. In March 2015, the Board of Directors approved a Company contribution feature for future plan years beginning in calendar year 2016 and gave management the authority to approve actual contributions. As of March 31, 2019 and 2018 , no material payments were made or pending under this program. The value of the deferred compensation is recognized based on the fair value of the participants’ accounts. The Company has established a rabbi trust for the purpose of supporting the benefits payable under this program, with the assets invested in company-owned life insurance policies. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical and dental liability exposures. Liabilities for self-insured exposures are accrued at the present value of amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current and long-term liabilities based on the expected periods of payment. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income (loss) . +Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements . +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders' Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Net Income per Share,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +Recent Accounting Pronouncements +Recently Adopted. The Financial Accounting Standards Board (FASB) has issued ASUs that have been adopted by the Company for its annual and interim reporting periods as stated below. The following is a summary of each standard and the impact on the Company: +Standard +Description +Impact on Adoption +ASU No. 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments +Eliminates the diversity in practice related to the classification of certain cash receipts and payments. +This ASU was adopted by the Company on April 1, 2018. The Company evaluated its business policies and processes around cash receipts and payments and determined that this ASU did not have a material impact on its consolidated financial statements and related disclosures. +ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory +Requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. +This ASU was adopted by the Company on April 1, 2018. The Company evaluated its business policies and processes around intra-entity transfers of assets, other than inventory, and determined that this ASU did not have a material impact on its consolidated financial statements and related disclosures. +ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting +Modification accounting is required to be applied for share-based payment awards immediately before the original award is modified unless the fair value, vesting conditions, and classification of the modified awards are the same as the fair value, vesting conditions and classification of the original award, respectively. +This ASU was adopted by the Company on April 1, 2018. The Company evaluated its business policies and processes around share-based payment modifications and determined that this ASU did not have a material impact on its consolidated financial statements and related disclosures. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Standard +Description +Impact on Adoption +ASU No. 2014-09, Revenue from Contracts with Customers (as amended by ASUs 2015-14, 2016-08, 2016-10, 2016-11, 2016-12, 2016-20, 2017-13, and 2017-14) +Requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most existing revenue recognition guidance under US GAAP. +The FASB issued additional guidance which clarifies how to apply the implementation guidance related to principal versus agent considerations, how to identify performance obligations, as well as licensing implementation guidance. +The Company adopted this ASU (the “new revenue standard”) using the modified retrospective transition method, beginning April 1, 2018. +Prior to adoption, the Company deferred recognition of revenue for certain wholesale and E-Commerce sales arrangements until the product was delivered. However, the Company elected the practical expedient allowed under the new revenue standard to define shipping and handling costs as a fulfillment service, not a performance obligation. Accordingly, the Company will now recognize revenue for these arrangements upon shipment of product, rather than delivery. As a result, on adoption of this ASU, the Company recorded a cumulative effect adjustment net after tax increase to opening retained earnings of approximately $1,000 in its consolidated balance sheets. This prospective change in accounting policy will impact comparatives to prior reported fiscal years as net sales and deferred revenue are recognized and recorded in the Company’s consolidated financial statements under legacy US GAAP. +The Company historically recorded a trade accounts receivable allowance for sales returns (“allowance for sales returns”) related to its wholesale channel sales, and the cost of sales for the product-related inventory was recorded in inventories, net of reserves, in its consolidated balance sheets. As of March 31, 2018, the Company recorded an allowance for sales returns for the wholesale channel of $20,848 and product-related inventory for all channels of $11,251 in its consolidated balance sheets. As of June 30, 2018, and in connection with the adoption of the new revenue standard, the Company reclassified the allowance for sales returns for the wholesale channel of $9,816 to other accrued expenses and the product-related inventory for all channels of $4,819 to other current assets in its consolidated balance sheets. For the DTC channel, the allowance for sales returns was recorded in other accrued expenses, which is consistent with the prior period presented. The comparative consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. +Refer to Note 2, “Revenue Recognition,” for expanded disclosures regarding this change in accounting policy and refer to Note 12, “Reportable Operating Segments,” for the Company’s disaggregation of revenue by distribution channel and region. +Not Yet Adopted. The FASB has issued the following ASUs that have not yet been adopted by the Company. The following is a summary of each such standard, the planned period of adoption and the expected impact on the Company on adoption: +Standard +Description +Planned Period of Adoption +Expected Impact on Adoption +ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (as amended by ASUs 2018-16 and 2019-04) +Seeks to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities and to reduce the complexity of and simplify the application of hedge accounting. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness. It also eases certain documentation and assessment requirements. +Q1 FY 2020 +The Company has completed an initial assessment of the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures. The Company will eliminate separate measurement of hedge ineffectiveness and will recognize the entire change in fair value for its cash flow hedges in its consolidated statements of comprehensive income (loss) in the same location as the hedged item. This change is not expected to have a material impact on the Company’s consolidated financial statements. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Standard +Description +Planned Period of Adoption +Expected Impact on Adoption +ASU No. 2016-02, Leases (as amended by ASUs 2015-14, 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01) +Requires a lessee to recognize a lease asset and lease liability in its consolidated balance sheets. A lessee should recognize a right-of-use (ROU) asset representing its right to use the underlying asset for the lease term, and a liability to make lease payments. +Q1 FY 2020 +The Company has substantially completed an assessment of the effect that the adoption of this ASU will have on its consolidated financial statements and related disclosures and expects a material impact. The result is expected to be an approximately $219,000 to $239,000 increase in assets due to the recognition of a ROU asset and approximate corresponding increase for a related lease liability of $246,000 to $266,000, including lease commitments that are currently classified as operating leases, such as retail stores, showrooms, offices, and distribution facilities. The Company does not believe the standard will materially affect the consolidated statements of comprehensive income (loss). The classification and recognition of lease expense is not expected to materially change from legacy US GAAP. Further, the adoption of this ASU will result in expanded disclosures on existing and new lease commitments, for which the Company is in the process of developing drafts of new footnote disclosures required under this ASU that will be disclosed in the Company's Form 10-Q for the first quarter of fiscal year 2020. +The Company expects to adopt this ASU on a prospective basis and elect the “package of practical expedients” allowed with adoption of this ASU, which provides a number of transition options, including (1) exemption from reassessment of prior conclusions about lease identification, classification and initial direct costs; (2) the ability to elect a short-term lease recognition exemption for current and new vehicles, IT and office equipment leases that qualify to be excluded from the recognized ROU asset and related liability; and the (3) option to not separate lease and non-lease components. In addition, the Company expects to not apply the hindsight election and will maintain lease terms as estimated at inception of the lease. +The Company does not expect a significant change in its lease portfolio and business practices leading up to adoption of this ASU. Further, the Company has selected a software provider, has a project team in place and implementation is materially complete. The Company does not believe the ASU will have a notable impact on its liquidity or expects an impact on the Company’s debt-covenant compliance under its current agreements. +ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19 and 2019-04) +Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. +Q1 FY 2021 +The Company is evaluating the timing and effect that adoption of this ASU will have on its consolidated financial statements and related disclosures. +ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment +Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized as an impairment charge. +Q1 FY 2021 +The Company is evaluating the timing and effect that adoption of this ASU will have on its consolidated financial statements and related disclosures. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 2. Revenue Recognition +Nature of Performance Obligations +Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . As a result of the short durations of customer contracts, which are typically effective for one year or less and have payment terms that are generally 30-60 days, these arrangements are not considered to have a significant financing component. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and E-Commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income (loss) . Shipping and handling costs are a fulfillment service, and, for certain wholesale and all E-Commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Variable Consideration +Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for term discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for sales discounts. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, the Company records an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income (loss) and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for chargebacks. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Contract Assets and Liabilities +Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months , advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the consolidated balance sheets . +Sales Returns . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit with a receipt. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return reserve are recorded against gross sales for the contract liability and cost of sales for the contract asset in the consolidated statements of comprehensive income (loss) . The contract liability is recorded in other accrued expenses and the related contract asset for the cost of sales for estimated product returns is recorded in other current assets in the consolidated balance sheets . +The following table provides activity during the year ended March 31, 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels: +Contract Asset +Contract Liability +Balance as of March 31, 2018 +$ +11,251 +$ +23,156 +Change in estimate of sales returns +36,223 +120,102 +Actual returns +(37,033 +) +(118,471 +) +Balance as of March 31, 2019 +$ +10,441 +$ +24,787 +Deferred Revenue . Revenue is deferred for certain wholesale channel transactions as the contract terms indicate control transfers upon product delivery or sell-through. As of March 31, 2019 and 2018 , the Company had no material contract liability for deferred revenue, which is recorded in other accrued expenses in the consolidated balance sheets . +Gift Cards . The Company defers recognition of revenue from the sale of gift cards until the gift card is redeemed by the customer or the Company determines that the likelihood of redemption is remote. As of March 31, 2019 and 2018 , the Company’s contract liability for gift cards was $3,101 and $3,105 , respectively, and is recorded in other accrued expenses in the consolidated balance sheets . +Loyalty Programs . The Company has a customer loyalty program for the UGG brand in its DTC channel where customers earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the customer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns. As of March 31, 2019 and 2018 , the Company’s contract liability for loyalty programs was $5,171 and $5,477 , respectively, and is recorded in other accrued expenses in the consolidated balance sheets . +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 3. Goodwill and Other Intangible Assets +The Company’s goodwill and other intangible assets are recognized as follows: +As of March 31, +2019 +2018 +Goodwill, net +UGG brand +$ +6,101 +$ +6,101 +HOKA brand +7,889 +7,889 +Total goodwill, net +13,990 +13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks +15,454 +15,454 +Definite-lived intangible assets +Trademarks +55,245 +55,245 +Other +51,981 +53,216 +Total gross carrying amount +107,226 +108,461 +Accumulated amortization +(71,186 +) +(66,065 +) +Net definite-lived intangible assets +36,040 +42,396 +Total other intangible assets, net +51,494 +57,850 +Total +$ +65,484 +$ +71,840 +The weighted-average amortization period for definite-lived intangible assets was 15 years for the years ended March 31, 2019 and 2018 , respectively. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +Annual Impairment Assessment +Goodwill & Indefinite-Lived Intangible Assets . During the years ended March 31, 2019 , 2018 and 2017 , the Company evaluated the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segment as of December 31st and evaluated its Teva indefinite-lived trademarks as of October 31st. Based on the evaluation performed, no impairment loss was recorded for the goodwill and indefinite-lived intangible assets during the years ended March 31, 2019 and 2018 . As of March 31, 2019 and 2018 , the gross carrying amount of goodwill was $143,765 and the accumulated impairment losses were $129,775 . +During the year ended March 31, 2017, the Company performed the annual evaluation of goodwill for impairment for the Sanuk wholesale reportable operating segment as of October 31, 2016. The Company conducted the following assessment, which identified an indication of impairment: +• +Under step one of the impairment assessment, management concluded that the fair value of the Sanuk brand wholesale reportable operating segment was below its carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. +• +Under step two of the impairment assessment, management concluded that the fair value allocated to all of the assets and liabilities of the Sanuk brand wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets, resulted in a non-cash +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +impairment charge of $113,944 , which was recognized in the third quarter of the year ended March 31, 2017 and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Definite-Lived Intangible Assets . The Company did not identify any definite-lived intangible asset impairments during the years ended March 31, 2019 and 2018 . However, during the year ended March 31, 2017, and in connection with the goodwill impairment discussed above, the Company identified an impairment of the Sanuk brand’s amortizable patent. The Company’s analysis determined that the Sanuk brand’s amortizable patent was fully impaired as the Sanuk SIDEWALK SURFERS utility patent had very limited value in the marketplace because of its limited ability to exclude others from creating similar products. As a result, the Company recognized a non-cash impairment charge to the patent of $ 4,086 in the Sanuk wholesale reportable operating segment during the third quarter of the year ended March 31, 2017, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . The Company did not identify any additional impairments for the Sanuk brand’s other definite-lived intangible assets during the year ended March 31, 2017, as the undiscounted future cash flows associated with those assets exceeded their carrying values. +During the third quarter of the year ended March 31, 2017, the Company also recognized an impairment for definite-lived intangible assets in the DTC reportable operating segment of $4,743 , due to a decline in market rental rates for European retail stores, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss) . +Amortization Expense +A reconciliation of the changes in total other intangible assets in the consolidated balance sheets is as follows: +Amounts +Balance as of March 31, 2017 +$ +65,138 +Amortization expense +(7,807 +) +Foreign currency translation +519 +Balance as of March 31, 2018 +57,850 +Amortization expense +(6,235 +) +Foreign currency translation +(121 +) +Balance as of March 31, 2019 +$ +51,494 +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2019 is as follows: +Years Ending March 31, +Amounts +2020 +$ +3,471 +2021 +2,529 +2022 +2,517 +2023 +2,450 +2024 +2,430 +Thereafter +22,643 +Total +$ +36,040 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 4. Fair Value Measurements +The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required: +• +Level 1: Quoted prices in active markets for identical assets or liabilities. +• +Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued payroll and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. +The assets and liabilities that are measured on a recurring basis at fair value as of the dates below are as follows: +As of +Measured Using +March 31, 2019 +Level 1 +Level 2 +Level 3 +Non-qualified deferred compensation asset +$ +7,300 +$ +7,300 +$ +— +$ +— +Non-qualified deferred compensation liability +(4,447 +) +(4,447 +) +— +— +As of +Measured Using +March 31, 2018 +Level 1 +Level 2 +Level 3 +Non-qualified deferred compensation asset +$ +7,172 +$ +7,172 +$ +— +$ +— +Non-qualified deferred compensation liability +(4,296 +) +(4,296 +) +— +— +Designated Derivative Contracts asset +950 +— +950 +— +Designated Derivative Contracts liability +(143 +) +— +(143 +) +— +Non-Designated Derivative Contracts liability +(10 +) +— +(10 +) +— +As of March 31, 2019 , the non-qualified deferred compensation asset of $7,300 was recorded in other assets in the consolidated balance sheets . As of March 31, 2019 , the non-qualified deferred compensation liability of $4,447 was recorded in the consolidated balance sheets , with $578 in other accrued expenses and $3,869 in other long-term liabilities. +The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The fair values of assets and liabilities associated with derivative instruments and hedging activities are recorded in other current assets and other accrued expenses, respectively, in the consolidated balance sheets . Refer to Note 9, “Derivative Instruments,” for further information. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 5. Income Taxes +Changes in Tax Law +On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform Act) was enacted into law. The Tax Reform Act includes significant changes to US corporate income tax law, including a permanent reduction in the federal corporate income tax rate from 35.0% to 21.0% , limitations on the deductibility of interest expense and executive compensation, the transition of the US tax regime from a worldwide tax system to a territorial tax system, and provisions aimed at preventing base erosion of the US tax base. +As a result of the Tax Reform Act, the Company recorded provisional estimates in accordance with Staff Accounting Bulletin No. 118 (SAB 118) during the year ended March 31, 2018 in relation to the US federal and state income tax associated with the one-time mandatory deemed repatriation of accumulated foreign earnings and the non-cash re-measurement of deferred tax assets and liabilities due to the US federal tax rate reduction. In connection with finalizing the tax effects of the Tax Reform Act, the Company recorded immaterial measurement period adjustments during the year ended March 31, 2019 including a reduction from $59,114 to $57,895 related to the one-time mandatory deemed repatriation tax on accumulated foreign earnings. Refer to below “Income Tax Expense (Benefit) Reconciliation” for further information. +Other provisions of the Tax Reform Act which were effective on or after January 1, 2018, include but are not limited to, US taxation of foreign earnings considered global intangible low-taxed income (GILTI), minimum tax on base erosion anti-abuse (BEAT), and limitations on the deductibility of interest expense and executive compensation. The Company has elected to account for temporary differences that are expected to reverse as GILTI in future periods using a period cost method. The Company continues to evaluate new guidance and legislation as it is issued. There has been no new guidance or legislation issued after the balance sheet date through May 17, 2019 that is expected to have a material impact on the Company’s consolidated financial statements . +Income (Loss) Before Income Taxes +Components of income (loss) before income taxes include the following: +Years Ended March 31, +2019 +2018 +2017 +Domestic* +$ +181,730 +$ +71,482 +$ +(69,997 +) +Foreign +147,204 +149,214 +63,011 +Total +$ +328,934 +$ +220,696 +$ +(6,986 +) +*Domestic income (loss) before income taxes for the years ended March 31, 2019 , 2018 and 2017 is presented net of intercompany dividends of $130,000 , $250,000 , and $13,692 , respectively. +Income Tax Expense (Benefit) +Components of income tax expense (benefit) are as follows: +Years Ended March 31, +2019 +2018 +2017 +Current +Federal +$ +33,334 +$ +80,339 +$ +2,184 +State +9,084 +3,437 +1,576 +Foreign +15,269 +14,388 +8,039 +Total +57,687 +98,164 +11,799 +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2019 +2018 +2017 +Deferred +Federal +6,612 +12,007 +(20,287 +) +State +2,236 +391 +(3,446 +) +Foreign +(1,909 +) +(4,260 +) +(762 +) +Total +6,939 +8,138 +(24,495 +) +Total +$ +64,626 +$ +106,302 +$ +(12,696 +) +Income Tax Expense (Benefit) Reconciliation +Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income (loss) before income taxes or benefit as follows: +Years Ended March 31, +2019 +2018 +2017 +Computed expected income taxes +$ +69,076 +$ +69,556 +$ +(2,445 +) +State income taxes, net of federal income tax benefit* +9,329 +9,044 +(1,403 +) +Foreign rate differential +(20,105 +) +(37,090 +) +(8,062 +) +Unrecognized tax benefits +786 +1,301 +2,691 +Income tax expense on diminution of operations and nondeductible goodwill +— +— +3,921 +Return to provision adjustments +(179 +) +(2,252 +) +(1,386 +) +Nontaxable income +(4,257 +) +(7,006 +) +(5,055 +) +Nondeductible expense +7,742 +1,382 +1,358 +US tax on foreign earnings** +5,848 +57,138 +— +Re-measurement of deferred taxes*** +(983 +) +14,395 +— +Statutory foreign income tax expense (benefit) +276 +59 +(2,504 +) +Other +(2,907 +) +(225 +) +189 +Total +$ +64,626 +$ +106,302 +$ +(12,696 +) +*During the year ended March 31, 2018 , the Company recorded $1,976 of state income taxes associated with one-time mandatory deemed repatriation of foreign earnings due to the Tax Reform Act. +**The amount for the year ended March 31, 2018 is the one-time mandatory deemed repatriation tax on accumulated foreign earnings due pursuant to the Tax Reform Act. The amount for the year ended March 31, 2019 is GILTI pursuant to the Tax Reform Act. +***The total non-cash re-measurement of deferred tax assets and liabilities for the year ended March 31, 2018 was driven by the US federal tax rate reduction from 35.0% to 21.0% pursuant to the Tax Reform Act. +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Deferred Taxes +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2019 +2018 +Deferred tax assets +Amortization and impairment of intangible assets +$ +13,615 +$ +18,261 +Stock compensation +3,645 +4,027 +Deferred rent obligations +4,899 +5,452 +Acquisition costs +461 +481 +Uniform capitalization adjustment to inventory +3,965 +3,212 +Bad debt allowance and other reserves +11,932 +12,939 +State taxes +239 +798 +Accrued bonuses +7,350 +7,573 +Foreign currency translation +670 +— +Net operating loss carry-forwards, net of valuation allowances +807 +863 +Other +745 +— +Total +48,328 +53,606 +Deferred tax liabilities +Prepaid expenses +3,379 +2,686 +Depreciation of property and equipment +14,079 +9,638 +Foreign currency translation +— +1,700 +Other +— +1,201 +Total +17,458 +15,225 +Deferred tax assets, net +$ +30,870 +$ +38,381 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $118,447 . The deferred tax assets are primarily related to the Company’s domestic operations and are currently expected to be realized between fiscal years 2020 and 2030 . The Company recorded a decrease of $572 to deferred tax assets, net during the year ended March 31, 2019 related to the adoption of new ASUs, the tax effect of Designated Derivative Contracts recognized in OCI and changes in cumulative translation adjustments. +Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. As of March 31, 2019 and 2018 , the Company had immaterial valuation allowances recorded against the related deferred tax assets for those loss carry-forwards that are not more likely than not to be fully utilized in reducing future taxable income. +As of March 31, 2019 and 2018 , the Company reported deferred tax assets related to tax credit carry-forwards and net operating losses, net of valuation allowances, available to reduce future taxable income of $843 and $974 , respectively. Some of the net operating losses and tax credits expire beginning in 2022 ; however, others can be carried forward indefinitely. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +US Taxation of Foreign Earnings +Pursuant to the Tax Reform Act, the Company reported $57,895 of US federal and state income taxes on undistributed earnings from its non-US subsidiaries on its March 31, 2018 income tax returns filed with the US tax authorities. During the year ended March 31, 2019 , the Company recorded $6,348 of US federal and state income tax expense, net of foreign tax credits on foreign earnings. During the year ended March 31, 2019 , the Company declared a dividend of $130,000 from a foreign subsidiary, for which no foreign withholding taxes were required. +As of March 31, 2019 , the Company reported $388,535 of undistributed earnings from its non-US subsidiaries, of which $214,876 relates to cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2019 , the Company reported $15,193 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been provided. The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. +Unrecognized Tax Benefits +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recognized in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets . +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits are as follows: +Balance as of March 31, 2016 +$ +8,695 +Gross increase related to current year tax positions +1,878 +Gross increase related to prior year tax positions +1,154 +Balance as of March 31, 2017 +11,727 +Gross increase related to current year tax positions +1,168 +Gross increase related to prior year tax positions +1,243 +Settlements +(4,501 +) +Lapse of statute of limitations +(43 +) +Balance as of March 31, 2018 +9,594 +Gross increase related to current year tax positions +1,027 +Gross increase related to prior year tax positions +3,282 +Settlements +(1,157 +) +Lapse of statute of limitations +(1,804 +) +Balance as of March 31, 2019 +$ +10,942 +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Total gross unrecognized tax benefits recorded in the consolidated balance sheets , as follows: +As of March 31, +2019 +2018 +Long-term asset +Deferred tax assets, net +$ +486 +$ +— +Current liability +Income taxes payable +7 +— +Long-term liability +Income tax liability +10,449 +9,594 +Total +$ +10,942 +$ +9,594 +As of March 31, 2019 and 2018 , the Company had $2,456 and $3,224 accrued for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets . During the years ended March 31, 2019, 2018 and 2017, the Company recognized $(110) , $369 , and $1,148 , respectively, of interest and penalties as a (decrease) or increase to interest expense in the consolidated statements of comprehensive income (loss) . +Management believes it is reasonably possible that the amount of unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $3,272 related to the expiration of statutes of limitations. Of this amount, $2,332 would result in an income tax benefit for the Company and $940 would result in a decrease to interest expense in the consolidated statements of comprehensive income (loss) . +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities for the fiscal years before 2014 . +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, it is the opinion of management that the Company does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements . +Note 6. Revolving Credit Facilities and Mortgage Payable +Primary Credit Facility +In September 2018, the Company refinanced in full and terminated its Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended (Prior Credit Agreement). The refinanced revolving credit facility agreement (the Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and U.S. Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five -year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +In addition to allowing borrowings in US dollars, the Credit Agreement provides a $175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars and any other foreign currency that is subsequently approved by JPMorgan, each lender and each bank issuing letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +under the Credit Agreement by up to an additional $200,000 , resulting in a maximum available principal amount of $600,000 . However, none of the lenders has committed at this time to provide any such increase in the commitments. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries). All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured. Amounts borrowed under the Primary Credit Facility may be prepaid at any time. In addition, the Company has the right to permanently reduce or terminate the lenders’ commitments provided under the Credit Agreement, subject to customary conditions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions and notice periods, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow under the Primary Credit Facility, subject to the foreign currency sublimit noted above. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +Interest Rate Terms. At the Company’s election, interest under the Credit Agreement is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternate Base Rate (ABR). Initial interest for the revolving loans was at adjusted LIBOR plus 1.25% per annum, in the case of LIBOR borrowings, or at ABR plus 0.25% per annum. ABR is defined as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50% , and (3) adjusted LIBOR for a one-month interest period plus 1.00% . The initial compliance certificate was delivered within 45 days from the quarter ended September 30, 2018, and interest for borrowings in US dollars is now variable and will fluctuate between adjusted LIBOR plus 1.125% per annum and adjusted LIBOR plus 1.625% per annum (or between ABR plus 0.125% per annum and ABR plus 0.625% per annum), based on the Company’s total adjusted leverage ratio. Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate if made in Canadian dollars. As of March 31, 2019 , the effective interest rates for US dollar LIBOR and ABR rates, with relevant spreads for borrowings made during the reporting period, were 3.62% and 5.63% , respectively. +Commitment Fees. The Company was initially required to pay fees of 0.15% per annum on the daily unused amount under the Primary Credit Facility. After the compliance certificate was delivered for the quarter ended September 30, 2018, the fee rate now fluctuates between 0.125% and 0.20% per annum, based upon the Company’s total adjusted leverage ratio. +Borrowing Activity. On termination of the Prior Credit Agreement, the Company repaid $27,000 of borrowings made during the quarter ended September 30, 2018 and had outstanding letters of credit of $549 , which continued to be upheld under the Credit Agreement. During the year ended March 31, 2019 , the Company borrowed and made repayments of $116,000 under the Primary Credit Facility. As of March 31, 2019 , the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $549 . As of March 31, 2019 , available borrowings under the Primary Credit Facility were $399,451 . +Subsequent to March 31, 2019 through May 17, 2019 , the Company made no additional borrowings under the Primary Credit Facility. As of May 17, 2019 , the Company had no outstanding balance, outstanding letters of credit of $549 , and available borrowings of $399,451 under the Primary Credit Facility. +Debt Issuance Costs. In connection with entering into the Primary Credit Facility, the Company paid certain commitment, arrangement and other fees to JPMorgan, Comerica and other parties to the Primary Credit Facility, and reimbursed certain of the parties’ expenses, which totaled $1,297 , and were recorded in prepaid expenses and other assets. These costs are amortized on a straight-line basis over the term of the Credit Agreement. Debt issuance costs associated with the Prior Credit Agreement had a remaining unamortized balance in prepaid expenses of $447 , and, on the date of refinancing the Primary Credit Facility, were written off as interest expense during the quarterly period ended September 30, 2018. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +China Credit Facility +In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in China (as amended, the China Credit Facility) that provided for an uncommitted revolving line of credit. In October 2016, the China Credit Facility was amended to include an increase in the uncommitted revolving line of credit of up to CNY 300,000 , or $44,692 , and to remove the sublimit of CNY 50,000 , or $7,449 , for the Company’s wholly-owned subsidiary, Deckers Footwear (Shanghai) Co., LTD (DFSC). In March 2017, the China Credit Facility was amended to remove DFSC, leaving DBTC as the only remaining borrower, and to add an overdraft facility sublimit of CNY 100,000 , or $14,897 . +The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on the People’s Bank of China market rate, which was 4.35% as of March 31, 2019 , and is multiplied by a variable liquidity factor, which resulted in an effective interest rate of 4.79% . +During the year ended March 31, 2019 , the Company borrowed and made repayments of $19,324 under the China Credit Facility. As of March 31, 2019 , the Company had no outstanding balance and available borrowings of $44,692 under the China Credit Facility. Subsequent to March 31, 2019 through May 17, 2019 , the Company made no additional borrowings, had no outstanding balance, and available borrowings of approximately $44,692 under the China Credit Facility. +Japan Credit Facility +In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 5,500,000 , or $49,595 , for a maximum term of six months for each draw on the facility. +The Japan Credit Facility renews annually and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2020 under the terms of the original agreement. Interest is based on the Tokyo Interbank Offered Rate plus 0.40% . As of March 31, 2019 , the effective interest rate was 0.46% . +During the year ended March 31, 2019 , the Company made no borrowings or repayments under the Japan Credit Facility. As of March 31, 2019 , the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $49,595 . Subsequent to March 31, 2019 through May 17, 2019 , the Company made no additional borrowings, had no outstanding balance, and available borrowings of approximately $49,595 under the Japan Credit Facility. +Mortgage +In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $33,931 . As of March 31, 2019 , the outstanding principal balance under the mortgage was $31,504 , which includes $603 in short-term borrowings and $30,901 in mortgage payable in the consolidated balance sheets . The mortgage has a fixed interest rate of 4.928% . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and requires a balloon payment of $23,695 , in addition to any then-outstanding balance, on July 1, 2029 . Minimum principal payments over the next five years are $3,354 . +Debt Covenants +As of March 31, 2019 , and through May 17, 2019 , the Company was in compliance with all debt covenants under the revolving credit facilities and the mortgage. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Primary Credit Facility. Under the Primary Credit Facility, the Company is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include: limitations on liens, additional indebtedness, investments, restricted payments and transactions with affiliates. Financial covenants (as defined in the Credit Agreement), include: +• +the total adjusted leverage ratio must not be greater than 3:75 to 1:00 ; +• +the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2:25 to 1:00 ; and +• +no limits on shares repurchases if the total adjusted leverage ratio does not exceed 3:50 to 1:00 . +Under the Primary Credit Facility, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include: non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material ERISA liabilities; and a change of control of the Company (as defined in the Credit Agreement). +China Credit Facility. Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include: limitations on liens and additional indebtedness. +Japan Credit Facility. Under the Japan Credit Facility, Deckers Japan, G.K., is subject to usual and customary provisions including a restriction against having losses for two consecutive years, maintaining an interest coverage ratio greater than 1.00 to 1.00 , and maintaining higher assets than liabilities. +Mortgage. During the third quarter of the year ended March 31, 2019, and in connection with entering into the Primary Credit Facility, the Company amended the debt covenants associated with its mortgage to mirror the debt covenants defined in the Credit Agreement. +Foreign Currency Exchange Rates +The amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using applicable foreign currency exchange spot rates in effect as of March 31, 2019 . As a result, there are differences between the net borrowing and repayment amounts within this footnote disclosure and those same amounts recorded in the consolidated statements of cash flows . Any amounts outstanding are recorded in short-term borrowings in the consolidated balance sheets . +Note 7. Commitments and Contingencies +Operating Lease Commitments +The Company leases office, distribution and retail facilities, and automobiles, under operating lease agreements which continue in effect through January 2030 . Some of the leases contain renewal options of anywhere from one to 15 years. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected in the consolidated balance sheets . +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Future minimum commitments under existing operating lease agreements as of March 31, 2019 are as follows: +Years Ending March 31, +Amounts +2020 +$ +53,015 +2021 +47,803 +2022 +40,629 +2023 +35,915 +2024 +31,329 +Thereafter +81,746 +Total +$ +290,437 +The following schedule shows the composition of total rent expense: +Years Ended March 31, +2019 +2018 +2017 +Minimum rentals +$ +60,859 +$ +59,531 +$ +63,050 +Contingent rentals +13,226 +15,924 +15,281 +Total +$ +74,085 +$ +75,455 +$ +78,331 +Purchase Obligations +Product . The Company had $424,274 of outstanding purchase orders or other obligations with its manufacturers as of March 31, 2019 . The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers decide to purchase its products. The Company generally orders product four to nine months in advance of the anticipated shipment dates based primarily on a combination of product lead time and orders received from wholesale customers and through the DTC reportable operating segment. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase commitments can be cancelled by the Company under certain circumstances, though the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase commitments, and instead reflects an estimate of its future payment commitments based on information currently available. +Commodities . The Company had an aggregate of $208,577 of purchase commitments, primarily for sheepskin, as of March 31, 2019 . These commitments generally arise under two -year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring purchase commitments of sheepskin that its affiliates, manufacturers, factories, and other agents (each or collectively, a “Buyer”) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There were no additional deposits on remaining minimum commitments as of March 31, 2019 . +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Total future net minimum commitments for these commodities contracts as of March 31, 2019 were as follows: +Contract Effective Date +Final Target Date +Contract Value +Remaining +Commitment +July 2017 +September 2019 +$ +45,600 +$ +25,792 +May 2018 +September 2019 +26,800 +18,300 +October 2018 +September 2019 +24,500 +10,515 +December 2018 +June 2020 +14,160 +14,160 +April 2018 +September 2020 +54,600 +54,600 +October 2018 +September 2020 +34,750 +34,750 +October 2018 +September 2021 +50,460 +50,460 +$ +250,870 +$ +208,577 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or will be reflected as a credit against purchases. The amounts above do not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations, and instead reflect an estimate of its future payment obligations based on information currently available. +Othe r. The Company had an aggregate of $52,302 of other purchase commitments as of March 31, 2019 , which generally consisted of material commitments for future capital expenditures, commitments under service contracts, and requirements to pay promotional expenses. Future capital expenditures primarily relate to retail store build-out of leasehold improvements and the continued build-out and expansion of the warehouse and distribution center located in Moreno Valley, California. +Litigation +From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, operating results, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +Contingent Consideration +The purchase price for the Sanuk brand, acquired in July 2011, included contingent consideration payments. The final contingent consideration payment of approximately $19,700 was paid during the year ended March 31, 2017. +Indemnification +The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 8. Stock Compensation +In May 2006, the Company adopted the 2006 Equity Incentive Plan (2006 EIP), which was amended on May 9, 2007. In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), which replaced the Company’s 2006 EIP. As with the 2006 EIP, the primary purpose of the 2015 SIP is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors, plus any additional shares that are forfeited, or are otherwise terminated under the 2006 EIP. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . +The Company uses various types of stock-based compensation under the 2006 EIP, as amended, and the 2015 SIP, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). Annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) are available to key employees and certain executive officers, and long-term incentive plan (LTIP) awards are available to certain officers, including named executive officers. +Annual Awards +The Company elected to grant Annual RSUs and Annual PSUs under the 2015 SIP to key employees, including certain executive officers of the Company, which entitle the recipients to receive shares of the Company’s common stock upon vesting. The Annual RSUs are subject to time-based vesting criteria and vest in equal annual installments over three years following the date of grant. The vesting of Annual PSUs is subject to the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted, and to the extent the performance criteria has been met, vest in equal annual installments over three years thereafter. During the year ended March 31, 2019 , the Company granted 31,320 Annual PSUs and 62,743 Annual RSUs at a weighted-average grant date fair value of $116.34 and $116.85 per share, respectively. As of March 31, 2019 , the Company determined that the target performance criteria related to the year ended March 31, 2019 Annual PSUs were achieved. +Subsequent to March 31, 2019 through May 17, 2019 , the Company granted no additional Annual RSUs or Annual PSUs. +Long-Term Incentive Plan Options +During the year ended March 31, 2019 , no LTIP NQSOs were granted. Previously, the Company approved the issuance of LTIP NQSOs under the 2015 SIP, including in November 2016 (2017 LTIP NQSOs) and June 2017 (2018 LTIP NQSOs), which were awarded to certain members of the Company’s management team. If the recipient provides continuous service, the LTIP NQSOs will vest after the Company achieves the target performance criteria by the date specified in the award. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. The 2017 LTIP NQSOs vested on March 31, 2019 and the 2018 LTIP NQSOs will vest on March 31, 2020. Subsequent to March 31, 2019 through May 17, 2019 , the Company granted no LTIP NQSOs. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +The Company measures stock compensation expense for LTIP NQSOs at the date of grant using the Black-Scholes option pricing model. The following table presents the weighted-average valuation assumptions used for the recognition of stock compensation expense for the LTIP NQSOs granted: +2018 LTIP NQSOs +2017 LTIP NQSOs +Expected life (in years) +4.90 +5.94 +Expected volatility +38.73 +% +41.80 +% +Risk free interest rate +1.78 +% +1.95 +% +Dividend yield +— +% +— +% +Weighted-average exercise price +$ +69.29 +$ +61.86 +Weighted-average option value +$ +25.03 +$ +26.27 +Long-Term Incentive Plan Awards +2019 LTIP PSUs. In September 2018, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2019 LTIP PSUs), which were awarded to certain members of the Company’s senior management team, including the Company’s named executive officers. The 2019 LTIP PSUs are subject to vesting based on service conditions over three years , as well as the Company meeting certain revenue and pre-tax income performance targets for the fiscal year ending March 31, 2021. To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of PSUs that will vest will increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2019 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90% of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the measurement period, the vesting of the 2019 LTIP PSUs will be subject to adjustment based on the application of a relative total shareholder return (TSR) modifier. The amount of the adjustment will be determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period commencing on April 1, 2018 and ending on the vesting date. A Monte Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the 36 -month performance period. +Under the new program, the Company granted awards at the target performance level of 41,793 2019 LTIP PSUs during the quarter ended September 30, 2018. The average grant date fair value of these 2019 LTIP PSUs was $120.24 per share. Based on the Company’s current long-range forecast, the Company has determined that the achievement of at least the target performance criteria of these awards continues to be probable. +2016 LTIP PSUs . In November 2015, the Company approved LTIP awards under the 2015 SIP for issuance of PSUs (2016 LTIP PSUs), which were awarded to certain members of the Company’s management team. The 2016 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years. To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2016 LTIP PSUs that would vest was subject to increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2016 LTIP PSUs would occur if the Company failed to achieve at least 90% of the minimum threshold performance criteria. If the Company achieved the performance criteria, vesting of the 2016 LTIP PSUs would be subject to adjustment based on the application of a total stockholder return (TSR) modifier. The amount of the adjustment would be determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period. Under this program, the Company granted awards that contained a maximum of approximately 308,000 2016 LTIP PSUs during the year ended March 31, 2016. The weighted-average grant date fair value of the 2016 LTIP PSUs was $50.05 per share. The Company did not believe the achievement of at least the minimum threshold performance criteria was probable, and accordingly, did not recognize stock compensation expense for these awards during the years ended March 31, 2018 and 2017. As of March 31, 2018, the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +2015 LTIP PSUs . In September 2014, the Company approved LTIP awards under the 2006 EIP for issuance of PSUs (2015 LTIP PSUs), which were awarded to certain members of the Company’s management team. The 2015 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years. To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2015 LTIP PSUs that vested would increase up to the maximum number of units granted under the award. Under this program, the Company granted awards that contained a maximum of approximately 160,000 2015 LTIP PSUs during the year ended March 31, 2015. The weighted-average grant date fair value of the 2015 LTIP PSUs was $98.29 per share. As of March 31, 2017 , the Company determined that achievement of the minimum threshold performance criteria was not probable, and accordingly, the Company recognized a net reversal of stock compensation expense of approximately $ 1,400 . As of March 31, 2017, the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +2007 LTIP SARs and 2007 LTIP PSUs . In May 2007, the Company approved LTIP awards under the 2006 EIP for issuance of SARs (2007 LTIP SARs) and PSUs (2007 LTIP PSUs), which were awarded to certain members of the Company’s management team. These awards were subject to vesting based on certain performance criteria and service conditions. Half of the 2007 LTIP SARs and 2007 LTIP PSUs granted were fully vested as of December 31, 2011; 80% of the other half of the awards vested on December 31, 2015, while the remaining 20% did not vest and were cancelled, since it was determined that the Company had not achieved the required performance criteria as of December 31, 2016. Accordingly, the Company recognized a net reversal of stock compensation expense of $2,400 during the year ended March 31, 2017. +Grants to Directors +Each of the Company’s nonemployee directors is entitled to receive common stock with a total value of $125 for annual service on the Board of Directors. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the 15 th day of the last month of each quarterly period. Each of these shares is fully vested on the date of issuance. +Stock Compensation Expense +The table below summarizes the components of stock compensation expense recognized in the consolidated statements of comprehensive income (loss) : +Years Ended March 31, +2019 +2018 +2017 +Stock-based compensation expense +Annual RSUs +$ +6,588 +$ +7,761 +$ +5,191 +Annual PSUs +2,373 +1,829 +1,203 +2007 LTIP SARs +— +— +(1,949 +) +LTIP PSUs +885 +— +(296 +) +LTIP NQSOs +3,516 +3,432 +694 +Grants to Directors +1,223 +1,135 +1,168 +Subtotal +14,585 +14,157 +6,011 +Other stock compensation +Employee Stock Purchase Plan* +189 +150 +164 +Total stock compensation expense, pretax +14,774 +14,307 +6,175 +Income tax benefit +(3,546 +) +(4,906 +) +(2,322 +) +Total stock compensation expense, net of tax +$ +11,228 +$ +9,401 +$ +3,853 +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +*The 2015 Employee Stock Purchase Plan authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period at a price that reflects a 15% discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets . +The table below summarizes the total remaining unrecognized stock compensation expense as of March 31, 2019 related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods: +Unrecognized +Stock Compensation +Expense +Weighted-Average +Remaining +Vesting Period (Years) +Annual RSUs +$ +6,391 +1.0 +Annual PSUs +2,689 +1.1 +LTIP PSUs +3,751 +2.0 +LTIP NQSOs +1,641 +1.0 +Total +$ +14,472 +Annual RSUs and Annual PSUs Issued under the 2015 SIP +The table below summarizes Annual RSU and Annual PSU activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested as of March 31, 2018 +289,297 +$ +65.18 +Granted +94,063 +116.68 +Vested +(118,903 +) +64.39 +Forfeited +(33,058 +) +77.60 +Nonvested as of March 31, 2019 +231,399 +$ +84.75 +LTIP PSUs Issued Under the 2015 SIP +The table below summarizes activity for LTIP PSUs: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested as of March 31, 2018 +— +$ +— +Granted +83,586 +120.24 +Forfeited +(6,488 +) +120.24 +Nonvested as of March 31, 2019 +77,098 +$ +120.24 +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +LTIP NQSOs Issued Under the 2015 SIP +The table below summarizes LTIP NQSO activity: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Nonvested as of March 31, 2018 +397,340 +$ +65.70 +7.1 +$ +9,666 +Forfeited +(35,957 +) +69.29 +Nonvested as of March 31, 2019 +361,383 +$ +65.35 +6.2 +$ +29,504 +The maximum contractual term was approximately nine and seven years from the grant date for the 2017 NQSOs and 2018 NQSOs, respectively. +Note 9. Derivative Instruments +As of March 31, 2019 , the Company had no outstanding derivative contracts. +As of March 31, 2018 , the Company had the following derivative contracts recorded at fair value: +Designated Derivative Contracts +Non-Designated Derivative Contracts +Total +Notional value +$ +126,332 +$ +4,802 +$ +131,134 +Fair value recorded in other current assets +950 +— +950 +Fair value recorded in other accrued expenses +(143 +) +(10 +) +(153 +) +The following table summarizes the effect of Designated Derivative Contracts: +Years Ended March 31, +2019 +2018 +2017 +Amount of gain (loss) recognized in OCI (effective portion) +$ +8,355 +$ +(9,593 +) +$ +8,208 +Amount of gain (loss) reclassified from AOCL into net sales (effective portion) +8,675 +(8,541 +) +7,082 +Amount of gain excluded from effectiveness testing recognized in SG&A expenses +1,918 +1,376 +534 +The following table summarizes the income tax effect for unrealized gains or losses for Designated Derivative Contracts recorded in AOCL: +Years Ended March 31, +2019 +2018 +2017 +Income tax expense (benefit)* +$ +77 +$ +439 +$ +(423 +) +*These amounts are inclusive of the income tax effects from the Tax Reform Act reclassified from AOCL to retained earnings in the consolidated balance sheets . +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +The following table summarizes the effect of Non-Designated Derivative Contracts: +Years Ended March 31, +2019 +2018 +2017 +Amount of gain (loss) recognized in SG&A expenses +$ +1,393 +$ +(2,574 +) +$ +2,202 +The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. During the year ended March 31, 2019 , the Designated Derivative Contracts remained effective and that portion of any gain or loss was recognized in AOCL and reclassified into earnings in the same period or periods during which the transaction affected earnings. +As of March 31, 2019 , there is no unrealized gain or loss on derivative contracts recognized in AOCL. Refer to Note 10, “Stockholders' Equity,” for further information. +Subsequent to March 31, 2019 through May 17, 2019 , the Company entered into Non-Designated Derivative Contracts with notional values totaling approximately $19,913 , which are expected to mature over the next 11 months, and no Designated Derivative Contracts. As of May 17, 2019 , the Company’s outstanding hedging contracts were held by an aggregate of two counterparties. +Note 10. Stockholders’ Equity +Stock Repurchase Programs +In October 2017, the Company’s Board of Directors approved the 2017 Repurchase Program which, together with the 2015 Repurchase Program, authorized the Company to repurchase a total of up to $400,294 of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. As of March 31, 2019 , the aggregate remaining approved amount under the 2017 Repurchase Program was $89,212 . The full amount originally authorized under the 2015 Repurchase Program has been repurchased and the 2015 Repurchase Program has been completed. In January 2019, the Company’s Board of Directors approved the 2019 Repurchase Program, which authorizes the Company to repurchase up to $261,000 of its common stock. As of March 31, 2019 , the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, the “Stock Repurchase Programs”) was $350,212 . The Company’s Stock Repurchase Programs do not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion. The Company’s current revolving credit agreements allow it to make share repurchases under these programs, as long as the Company does not exceed certain leverage ratios and no event of default has occurred under these arrangements. As of March 31, 2019 , and through May 17, 2019 , the Company was in compliance with these arrangements. +The following table summarizes the publicly-announced stock repurchase activity of open-market transactions under the Company’s Stock Repurchase Programs: +Years Ended March 31, +2019 +2018 +2017 +Average price paid per share +$ +115.22 +$ +87.91 +$ +56.51 +Total number of shares repurchased +1,400,699 +1,702,653 +222,471 +Dollar value of shares repurchased +$ +161,395 +$ +149,687 +$ +12,572 +Subsequent to March 31, 2019 through May 17, 2019 , the Company made no additional share repurchases. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Accumulated Other Comprehensive Loss +The components within AOCL, net of tax, are as follows: +As of March 31, +2019 +2018 +Unrealized gain on cash flow hedges +$ +— +$ +243 +Cumulative foreign currency translation loss +(22,654 +) +(13,226 +) +Total +$ +(22,654 +) +$ +(12,983 +) +Note 11. Net Income per Share +The reconciliation of basic to diluted weighted-average common shares outstanding was as follows: +Years Ended March 31, +2019 +2018 +2017 +Basic +29,641,000 +31,758,000 +32,000,000 +Dilutive effect of equity awards +262,000 +238,000 +355,000 +Diluted +29,903,000 +31,996,000 +32,355,000 +Excluded* +Annual RSUs and Annual PSUs +3,000 +200 +17,000 +LTIP PSUs +77,000 +— +269,000 +LTIP NQSOs +170,000 +397,000 +192,000 +Deferred Non-Employee Director Equity Awards +2,000 +1,000 +— +*The equity awards excluded from the dilutive effect are excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance; or (3) the Company recorded a net loss during the period presented. The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. Refer to Note 8, “Stock Compensation,” for further information. +Note 12. Reportable Operating Segments +The Company’s six reportable operating segments now include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. The Other brands wholesale reportable operating segment consists of the Koolaburra brand and includes other discontinued brands during the prior periods presented. Information reported to the CODM, who is the Company’s Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the aforementioned reportable operating segments. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments. +The Company evaluates reportable operating segment performance, primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments include only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with distribution centers, certain executive and stock compensation, accounting, finance, legal, information technology, human resources, and facilities, among others. +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income (loss) , is summarized as follows: +Years Ended March 31, +2019 +2018 +2017 +Net sales +UGG brand wholesale +$ +888,347 +$ +841,893 +$ +826,355 +HOKA brand wholesale +185,057 +132,688 +93,064 +Teva brand wholesale +119,390 +117,478 +103,694 +Sanuk brand wholesale +69,791 +78,283 +77,552 +Other brands wholesale +42,818 +17,273 +23,142 +Direct-to-Consumer +715,034 +715,724 +666,340 +Total +$ +2,020,437 +$ +1,903,339 +$ +1,790,147 +Years Ended March 31, +2019 +2018 +2017 +Income (loss) from operations +UGG brand wholesale +$ +300,761 +$ +247,826 +$ +213,407 +HOKA brand wholesale +35,717 +20,954 +2,556 +Teva brand wholesale +27,939 +20,400 +10,045 +Sanuk brand wholesale +12,781 +14,474 +(110,582 +) +Other brands wholesale +10,411 +1,304 +(985 +) +Direct-to-Consumer +185,449 +156,896 +109,802 +Unallocated overhead costs +(245,738 +) +(239,270 +) +(226,162 +) +Total +$ +327,320 +$ +222,584 +$ +(1,919 +) +Years Ended March 31, +2019 +2018 +2017 +Depreciation, amortization and accretion +UGG brand wholesale +$ +1,254 +$ +3,193 +$ +3,167 +HOKA brand wholesale +456 +485 +590 +Teva brand wholesale +10 +12 +24 +Sanuk brand wholesale +4,171 +4,174 +5,018 +Other brands wholesale +382 +380 +381 +Direct-to-Consumer +12,195 +13,396 +15,669 +Unallocated overhead costs +26,473 +26,932 +27,779 +Total +$ +44,941 +$ +48,572 +$ +52,628 +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2019 +2018 +2017 +Capital expenditures +UGG brand wholesale +$ +205 +$ +58 +$ +3,444 +HOKA brand wholesale +285 +— +191 +Teva brand wholesale +— +— +— +Sanuk brand wholesale +— +20 +— +Other brands wholesale +11 +— +— +Direct-to-Consumer +5,739 +8,641 +15,277 +Unallocated overhead costs +22,846 +26,094 +25,587 +Total +$ +29,086 +$ +34,813 +$ +44,499 +Assets allocated to each reportable operating segment include trade accounts receivable, net of allowances and inventories net of reserves, property and equipment, net, goodwill, other intangible assets, and certain other assets that are specifically identifiable for one of the Company’s reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, and various other corporate assets shared by the Company’s reportable operating segments. +Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets , are as follows: +As of March 31, +2019 +2018 +Assets +UGG brand wholesale +$ +240,411 +$ +229,894 +HOKA brand wholesale +94,157 +65,943 +Teva brand wholesale +76,370 +85,980 +Sanuk brand wholesale +71,285 +79,322 +Other brands wholesale +14,618 +8,866 +Direct-to-Consumer +95,501 +112,355 +Total assets from reportable operating segments +592,342 +582,360 +Unallocated cash and cash equivalents +589,692 +429,970 +Unallocated deferred tax assets +30,870 +38,381 +Unallocated other corporate assets +214,302 +213,668 +Total +$ +1,427,206 +$ +1,264,379 +Note 13. Concentration of Business +Regions and Customers +The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations as follows: +Years Ended March 31, +2019 +2018 +2017 +International net sales +$ +742,079 +$ +729,278 +$ +648,844 +% of net sales +36.7 +% +38.3 +% +36.2 +% +F-42 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2019 +2018 +2017 +Net sales in foreign currencies +$ +605,725 +$ +617,867 +$ +539,440 +% of net sales +30.0 +% +32.5 +% +30.1 +% +Ten largest customers as % of net sales +27.7 +% +28.2 +% +24.8 +% +For the years ended March 31, 2019 , 2018 , and 2017 no single foreign country comprised 10.0% or more of the Company’s total net sales. No single customer accounted for 10.0% or more of the Company’s net sales during the years ended March 31, 2019 , 2018 , and 2017 . +The Company sells its products to customers for net trade accounts receivables and as of March 31, 2019 had no customers that exceeded 10% or more of trade accounts receivable, net, compared to two customers that represented 21.6% of trade accounts receivable, net, as of March 31, 2018 . +Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and records an allowance for doubtful accounts based on these evaluations. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for doubtful accounts. +Suppliers +The Company’s production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and the majority of sheepskin is purchased from two tanneries in China and is sourced primarily from Australia and the United Kingdom. In an effort to partially reduce its dependency on sheepskin, the Company began using a proprietary raw material, UGGpure, which is a re-purposed wool woven into a durable backing, in some of its UGG brand products. The Company currently purchases UGGpure from two suppliers. The other production materials used by the Company are sourced primarily from Asia. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, foreign currency exchange rate fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes, and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather patterns, harvesting decisions, incidents of disease, and the price of other commodities such as wool and leather. Furthermore, the price of sheepskin is impacted by numerous other factors, including demand for the Company’s products, demand for sheepskin by competitors, changes in consumer preferences and changes in discretionary spending. +Long-Lived Assets +Long-lived assets, which consist of net property and equipment, was as follows: +As of March 31, +2019 +2018 +US +$ +196,702 +$ +203,956 +Foreign* +17,094 +16,206 +Total +$ +213,796 +$ +220,162 +* No single foreign country’s net property and equipment comprised 10.0% or more of the Company’s total net property and equipment as of March 31, 2019 and March 31, 2018 . +F-43 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2019, 2018, and 2017 +(dollar amounts in thousands, except per share or share data) +Note 14. Quarterly Summary of Information (Unaudited) +The Company’s business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. Net sales of Other brands do not have significant seasonal impact on the Company. Due to the size of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While the Company has taken steps to diversify its product offerings, both by creating more year-round styles and expanding product offerings within its existing brands, and by acquiring and developing new brands, the Company expects this trend to continue for the foreseeable future. +Summarized unaudited quarterly financial data are as follows: +Fiscal Year 2019 +Quarter Ended +6/30/2018 +9/30/2018 +12/31/2018 +3/31/2019 +Net sales* +$ +250,594 +$ +501,913 +$ +873,800 +$ +394,130 +Gross profit +114,965 +251,887 +470,093 +203,305 +(Loss) income from operations** +(39,414 +) +90,412 +244,718 +31,604 +Net (loss) income*** +(30,407 +) +74,372 +196,374 +23,969 +Net (loss) income per share +Basic +$ +(1.00 +) +$ +2.49 +$ +6.74 +$ +0.82 +Diluted +$ +(1.00 +) +$ +2.48 +$ +6.68 +$ +0.82 +Fiscal Year 2018 +Quarter Ended +6/30/2017 +9/30/2017 +12/31/2017 +3/31/2018 +Net sales* +$ +209,717 +$ +482,460 +$ +810,478 +$ +400,684 +Gross profit +90,625 +225,117 +423,471 +192,429 +(Loss) income from operations** +(56,256 +) +67,355 +193,191 +18,294 +Net (loss) income*** +(42,121 +) +49,559 +86,341 +20,615 +Net (loss) income per share +Basic +$ +(1.32 +) +$ +1.55 +$ +2.71 +$ +0.66 +Diluted +$ +(1.32 +) +$ +1.54 +$ +2.69 +$ +0.66 +*Reflects a difference in accounting policy in connection with the adoption of ASU No. 2014-09, Revenue from Contracts with Customers , beginning April 1, 2018. The most significant impact for this change in accounting policy was to net sales recorded for the quarter ended December 31, 2017, which reflects a deferral of in transit net sales of approximately $12,000 , primarily in the DTC reportable operating segment, for which the Company did not recognize a deferral for in transit net sales during the quarter ended December 31, 2018. The impact of this change in accounting policy to other quarterly comparative periods presented were immaterial. +**Includes restructuring charges of $295 and $1,667 for the years ended March 31, 2019 and 2018 , respectively, primarily incurred during the second quarter of fiscal year 2019 and the first and third quarters of fiscal year 2018 . Refer to Note 1, “General,” under the heading “Restructuring” for further information. +***Includes significant impacts to income tax expense for fiscal year 2018 due to the Tax Reform Act. Refer to Note 5, “Income Taxes,” under the heading “Income Tax Expense (Benefit) Reconciliation” for further information. +F-44 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +The following is a summary of allowances for doubtful accounts, sales discounts, chargebacks and sales returns against trade accounts receivable (amounts in thousands): +As of March 31, +2019 +2018 +2017 +Allowance for doubtful accounts (1) +Balance at Beginning of Year +$ +3,487 +$ +5,979 +$ +5,494 +Additions +2,849 +4,168 +2,847 +Deductions +(1,263 +) +(6,660 +) +(2,362 +) +Balance at End of Year +$ +5,073 +$ +3,487 +$ +5,979 +Allowance for sales discounts (2) +Balance at Beginning of Year +$ +1,400 +$ +3,100 +$ +2,672 +Additions +11,712 +19,972 +20,259 +Deductions +(12,402 +) +(21,672 +) +(19,831 +) +Balance at End of Year +$ +710 +$ +1,400 +$ +3,100 +Allowance for chargebacks (3) +Balance at Beginning of Year +$ +7,727 +$ +7,028 +$ +4,968 +Additions +23,369 +19,019 +19,584 +Deductions +(18,055 +) +(18,320 +) +(17,524 +) +Balance at End of Year +$ +13,041 +$ +7,727 +$ +7,028 +Allowance for sales returns (4) +Balance at Beginning of Year +$ +20,848 +$ +16,247 +$ +17,061 +Additions +— +51,677 +62,122 +Deductions +(20,848 +) +(47,076 +) +(62,936 +) +Balance at End of Year +$ +— +$ +20,848 +$ +16,247 +Total +$ +18,824 +$ +33,462 +$ +32,354 +(1) +The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual write-off of the related trade accounts receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for prompt or early payments. Deductions are for the actual discounts taken by the Company’s wholesale channel customers. Discounts for DTC customers are taken at the point of sale and are not reflected in the allowance for sales discounts. +(3) +The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(4) +The Company adopted ASU 2014-09, Revenue from Contracts with Customers , effective April 1, 2018. Under ASU 2014-09, the sales returns reserve for the wholesale channel is presented on a gross basis, with a separate asset and liability in the consolidated balance sheets. Reporting periods prior to the adoption reflect the wholesale channel sales returns reserve on a net basis. Returns for DTC customer products were previously excluded as they were separately recorded in other accrued expenses in the consolidated balance sheets. In prior periods presented, the additions to the allowance for sales returns represented estimates of returns based on the Company’s historical wholesale channel customer returns experience. Deductions were for the actual return of products. +F-45 \ No newline at end of file diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/filing_metadata.csv b/raw/filings/0000910521/2018/0000910521-19-000011/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..df9ffd64c8e9f3ffd74ca9772119b8a5eaa97dd6 --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2019-05-30,2019-03-31,2019-05-30T19:48:57.000Z,0000910521-19-000011,deck331201910-kdocument.htm,DECK 3 31 2019 10-K,13203999,1,0,https://www.sec.gov/Archives/edgar/data/910521/000091052119000011/deck331201910-kdocument.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052119000011/,2018,2018,1 diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/item1.txt b/raw/filings/0000910521/2018/0000910521-19-000011/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e63800b0389b4ea97f642e4f198e9f54f1d2e2de --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/item1.txt @@ -0,0 +1,119 @@ +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Recent Developments +Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the HOKA, Teva, and Sanuk brands. In general, the intent of our restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands. +As of March 31, 2019, we have completed our restructuring plan and achieved cumulative selling, general and administrative (SG&A) expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our restructuring efforts and its impact on our results of operations and reportable operating segments. +Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019 , we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our operating profit improvement plan and its impact on our results of operation and reportable operating segments. +3 +Table of Contents +Products and Brands +We currently market our products primarily under five propriety brands, composed of our four primary brands and our Other brands. Collectively, our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel and accessories with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand to drive year-round product sales, including expansion of women’s spring and summer footwear, men’s products, apparel, home goods and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), Europe, Asia-Pacific, Canada and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight, originally designed for ultra-runners, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. The HOKA brand is sold both domestically and internationally in key markets, including the US, Canada, Europe, and Asia-Pacific. +Teva. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands. Other Brands currently consists of the Koolaburra by UGG brand, as well as other discontinued brands during the periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold primarily through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +Currently, our sales force is typically separated by brand, as each brand generally has certain specialty consumers that expect a dedicated sales team with specialized knowledge of our brands’ product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of each of our brands. +We distribute products sold in the US through our distribution centers in Moreno Valley and Camarillo, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location . Once the migration of our distribution center operations from Camarillo to our Moreno Valley location is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020. +Refer to Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further disclosure and discussion. +4 +Table of Contents +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, Running Specialty Group, REI, Zappos.com, Amazon.com, and Running Warehouse. We expect to expand our HOKA brand wholesale distribution into international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, DSW, Urban Outfitters, Free People, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, and online retailers, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. Our retail stores and websites are largely intertwined and interdependent. In an Omni-Channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined, which are designed to engender brand loyalty while increasing product sales and improving our inventory productivity, include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. +• +“Ship from Store”: Inventory that is available in our stores but is out of stock online can be shipped from our stores. We expect future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +“UGG Closet”: A limited E-Commerce outlet channel that offers an online portal designed to provide an efficient way to closeout inventory through direct sales to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to our retail stores. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +5 +Table of Contents +Our retail stores enable us to expose consumers to a greater selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2019 , we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are excluded from the total count of worldwide company-owned retail stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles for our product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and manage our inventory. However, we do have long-standing relationships with most of these independent manufacturers, and we may not be able to identify substitute alternative manufacturers to satisfy our desire for such flexibility. We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and Conflict Minerals Policy, as well as other compliance policies and procedures, as a condition to conducting business with us. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability, compliance with laws and regulations, and adherence to quality control standards and final design specifications. In addition, we have instituted pre-production, in-line, and post-production inspections to meet or exceed our product quality requirements, as well as the expectations of our consumers. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of sufficiently high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply +6 +Table of Contents +of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +In an effort to partially reduce our dependency on sheepskin, we use a proprietary raw material, UGGpure, which is a re-purposed wool woven into a durable backing, in some of our UGG brand products. In addition, as part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, most of the wool in UGGpure is sheared from the hides we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin and UGGpure. Excluding sheepskin and UGGpure, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets, and the delivery requirements of our customers. As part of our operating profit improvement plan, we have implemented systems and processes designed to improve our product forecasting, inventory control and supply chain management capabilities. In addition, added discipline around product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our practice, and the general practice in our industry, is to offer retail customers the right to return defective or improperly shipped merchandise. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders scheduled to be shipped at a future date, some of which are subject to cancellation prior to shipment. Our calculation of backlog also includes bulk orders, which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. +As of March 31, 2019 , our backlog was $978,200 , which represents a 14.4% annual increase over our backlog as of March 31, 2018 . The backlog increase primarily relates to timing where certain top customers placed orders earlier versus the prior comparative period rather than an indication of an expected significant increase in sales. +We believe backlog is an imprecise indicator of our actual product shipments and future operating results and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC segment, as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, the timing of product shipments, the potential that certain orders may be cancelled, and our manufacturing schedule. As a result, comparisons of backlog from period-to-period are not necessarily indicative of our future operating results. +7 +Table of Contents +Our People and our Culture +Employees. As of March 31, 2019 , we employed approximately 3,500 employees in North America, Europe, and Asia. This includes approximately 1,600 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, including those discussed below, we believe that our relationship with our employees is favorable. +Encouraging Diversity. We strive to create a culture of inclusion where employees are able to freely contribute equally regardless of gender, age, race, disability or sexual orientation. Our Code of Ethics, which all employees are trained on bi-annually, codifies these values. Our employee-led initiative, VOICES, is an avenue that elevates employee issues and celebrates our uniqueness. +Corporate Responsibility and Sustainability +As a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, our worldwide scope and impact is significant. Equally significant is the responsibility we believe we have to our stakeholders, including our consumers, employees, shareholders, and the communities we serve to employ socially conscious operations and sustainable business practices, with the goal of continuing to deliver quality products to our consumers and sound financial performance to our shareholders, while minimizing the environmental impact of our business footprint. Achieving measurable sustainability success is key to our future economic and business growth, and we constantly work to establish sustainable development goals (SDGs) that we believe will make the most significant impact for our business, our shareholders and our communities. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our employees, our suppliers and our customers, as well as other brands and non-governmental organizations. +In 2010, we launched our Corporate Responsibility Program, and in October 2016 we announced our participation in the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate citizenship initiative. Our Compliance Officer is tasked with identifying specific SDGs set forth in the UNGC, which guide our supply chain and brand business teams’ efforts to address environmental and social challenges, while the three independent members of the Corporate Governance Committee will oversee our corporate responsibility and sustainability efforts. Our internal audit team provides periodic targeted reviews of our policies and procedures to the Audit Committee to help us remain focused on our approach to our SDG’s and to ensure appropriate leadership involvement. +We assess risks related to environmental, social and governance issues annually as part of our overall enterprise risk management approach. This assessment informs the annual targets established for our SDGs, which are currently focused on seven categories where we believe we can make the most impact, namely, materials; waste; water; gender equality and quality education; chemicals; climate and clean energy; and human rights. We have been recognized by Barron’s as one of the Top 100 most sustainable US companies in calendar year 2019. We encourage our key manufacturing partners and suppliers to adopt sustainable business practices, which are intended to minimize adverse impact on the environment. We also have an Ethical Supply Chain Supplier Code of Conduct and Animal Welfare Policy which guides our partners to act responsibly when sourcing materials on our behalf. We also audit our operations, and the operations of key partners within our supply chain, to ensure workers are treated with dignity and respect. +The following is a brief overview of our current SDGs and fiscal year 2019 related achievements: +• +Materials: We sourced 97% of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. +• +Materials: We continue to seek sustainable alternatives for key product materials, with a goal to source at least 90% of materials from suppliers certified by third-party benchmarking organizations. +• +Water: We have reduced our water usage through manufacturing process improvements and have encouraged our manufacturing partners and suppliers to do the same by measuring their water output. Our sustainable development goal mandates that at least 90% of our core factory partners and suppliers apply industry best practices regarding water treatment and usage. +• +Chemicals: We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. We are on track to eliminate PFCs from our supply chain by calendar year 2020. +• +Climate and Clean Energy: We strive to increase our year-over-year solar power usage at our headquarters and distribution centers, as well as to integrate climate change measures into our policies +8 +Table of Contents +and planning. We measure energy usage by certain of our partners to encourage reduced energy consumption. +• +Gender Equality and Quality Education: We promote diversity, gender equality, female empowerment, and inclusion through our annual Women’s Leadership Summit, our partnership with the HERproject, and our initiation of the EDGE Certification process, the leading global assessment and business certification for gender equality. +• +Human Rights : We have established robust ethical supply chain criteria based on International Labor Organization standards and audit our supply chain pursuant to such criteria on an ongoing basis. Audit results are included on performance scorecards for regular review by executive management. +Our fiscal year 2019 Corporate Responsibility Report will provide more information on our achievements this year. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. During fiscal year 2019, we have dedicated out strategic giving and engagement efforts to categories related to our SDGs, our business and our communities because we believe that is where we can make the most impact, including arts and culture, human services, education, international affairs, environment and animal welfare, and health and society. During fiscal year 2019, we donated over $1,300 to various non-profit organizations. Since 2006, we have donated over 900,000 pairs of shoes to Soles4Souls and Good360, non-profit organizations that distribute shoes to those in need. We encourage our employees to volunteer by compensating them for up to 24 hours of volunteer time each year. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), as well as our DTC business. Refer to Note 12, “Reportable Operating Segments,” for further discussion of our reportable operating segments and to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report . +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to assess and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and adjust to changing legal and social standards, among others. +9 +Table of Contents +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA One One,” “Koolaburra,” “Ahnu,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan and Korea. As of March 31, 2019 , we hold 182 designs and inventions with corresponding design or utility patent registrations, plus ten designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements and other information regarding issuers that file with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Code of Ethics, Corporate Responsibility Report, Restricted Substance Policy, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report , and references to our website address within this Annual Report are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/item13.txt b/raw/filings/0000910521/2018/0000910521-19-000011/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3abc767b07ec136a3bc27aaf56d1565871bb91ed --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/item9a.txt b/raw/filings/0000910521/2018/0000910521-19-000011/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..80da07f62e94d95f4924f1ef12e1cac978f2f2c1 --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/item9a.txt @@ -0,0 +1,18 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019 . Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2019 . +b) Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +55 +Table of Contents +As of March 31, 2019 , our management, including our Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2019 . The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-3 within this Annual Report . +c) Internal Control over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +56 +Table of Contents +PART III +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2019 , 2018 , and 2017 are stated in Items 10, 11, 12, 13, and 14 herein as “year ended” or “years ended”. \ No newline at end of file diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/rp_note.txt b/raw/filings/0000910521/2018/0000910521-19-000011/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2018/0000910521-19-000011/rpt_disclosure.txt b/raw/filings/0000910521/2018/0000910521-19-000011/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..2e6ce6111b1853909b0ebf2e82c4eccfc016c4c3 --- /dev/null +++ b/raw/filings/0000910521/2018/0000910521-19-000011/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees. executive officers, principal stockholders, or their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit Committee, the Chairman of our Board and our highest ranking manager of internal audit. +If a related person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules during fiscal year 2019, and no such transactions are currently proposed. +69 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/filing.txt b/raw/filings/0000910521/2019/0000910521-20-000016/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ebb74a7a45af68fb59845487760fcb09983e8be --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/filing.txt @@ -0,0 +1,6717 @@ +Document +0 0 P1Y P2Y P10D false --03-31 FY 2020 0000910521 27895000 18824000 21146000 0.01 0.01 125000000 125000000 29141000 27999000 29141000 27999000 1068000 P5Y 0 P16Y 143765000 129775000 0 0 0 9723000 12227000 P1Y P2Y 254538000 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Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.01 per share +DECK +New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. +Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2019 , the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 4,102,074,000 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $147.36 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 14, 2020 , the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 27,999,468 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2020 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2020 +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +11 +Item 1B. +Unresolved Staff Comments +* +Item 2. +Properties +31 +Item 3. +Legal Proceedings +32 +Item 4. +Mine Safety Disclosures +* +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +33 +Item 6. +Selected Financial Data +35 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +35 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +55 +Item 8. +Financial Statements and Supplementary Data +56 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +* +Item 9A. +Controls and Procedures +56 +Item 9B. +Other Information +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +58 +Item 11. +Executive Compensation +58 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +58 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +58 +Item 14. +Principal Accounting Fees and Services +58 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +60 +Signatures +63 +Index to Consolidated Financial Statements and Financial Statement Schedule +F-1 +Item 16. +Form 10-K Summary +* +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2020 ( Annual Report ), and the information and documents incorporated by reference into this Annual Report , contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report . We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report , and the information and documents incorporated by reference into this Annual Report , contain forward-looking statements relating to, among other things: +• +the impacts of the COVID-19 global pandemic on our operations, business, sales, and results of operations worldwide; +• +our business, operating, investing, capital allocation, marketing, and financing strategies; +• +the impacts of our ongoing operational system upgrades; +• +the expansion of our brands and product offerings, and changes to the geographic and seasonal mix of our products; +• +changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies and our decision to exit the warehouse channel for the Sanuk brand; +• +changes in consumer tastes and preferences to our brands and products, and the fashion industry; +• +trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and e-commerce businesses; +• +the impact of seasonality and weather on consumer behavior and our results of operations; +• +the impact of our efforts to continue to advance sustainable and socially conscious business operations; +• +expectations relating to the expansion of Direct-to-Consumer (DTC) capabilities; +• +our consolidation of certain distribution center operations; +• +availability of raw materials and manufacturing capacity, and reliability of overseas production and storage; +• +commitments and contingencies, including operating leases and purchase obligations for product and raw materials; +• +the impacts of new or proposed legislation, tariffs, regulatory enforcement actions or legal proceedings; +• +the value of goodwill and other intangible assets, and potential write-downs or impairment charges; +• +changes impacting our tax liability and effective tax rates; +• +repatriation of earnings of non-United States subsidiaries and any related tax impacts; +• +the impact from adoption of recent accounting pronouncements; and +• +overall global economic and political trends, including foreign currency exchange rate fluctuations, changes in interest rates and changes in fuel costs. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report , as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report , including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA One One® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® (Koolaburra), UGGpure® (UGGpure), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all dollar amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for per share amounts. The defined periods for the fiscal years ended March 31, 2020 , 2019 , and 2018 are stated herein as “year ended” or “years ended.” +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our DTC business, which is comprised of our retail stores and e-commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Recent Developments +COVID-19 Global Pandemic . During early calendar year 2020, the COVID-19 pandemic (referred to herein as COVID-19 or the COVID-19 pandemic) spread globally, including throughout the geographic regions in which we operate our business, and where our wholesale customers, retail stores, manufacturers, and suppliers are located. +In response to the pandemic, many federal, state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, “shelter-in-place” orders, and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders have resulted in the mandatory closure of “non-essential” businesses (including retail stores), increased unemployment rates, “social distancing” restrictions, reduced tourist activity, work-from-home policies, and other changes that have led to significant disruptions to businesses and global financial markets. The overall impact of the pandemic on our business and future results of operations is highly uncertain and subject to change, and we are not able to accurately predict the magnitude or scope of such impacts at this time. +We have experienced a number of material impacts resulting from the COVID-19 pandemic during the fiscal quarter ended March 31, 2020 and subsequent to our fiscal year end, and have taken certain precautionary measures intended to help minimize the risk to our business, employees, customers, and the communities in which we operate, including the following: +• +All of our Company-owned and operated stores, and nearly all of the retail stores of our wholesale customers and retail partners, were closed during a portion of our fourth fiscal quarter and largely remain closed during the first part of our first fiscal quarter ending June 30, 2020. +• +Our global e-commerce business, including both our owned websites as well as the online presence of our wholesale customers, has remained substantially operational throughout the COVID-19 pandemic, which has been positively impacted by customers migrating to online shopping and has mitigated some of the negative pressure we are experiencing within our wholesale and retail store businesses. +• +We experienced a brief period of disruption at our Moreno Valley, California, distribution center and, while operations have since returned, we are experiencing certain operational and logistical challenges +3 +Table of Contents +as a result of limited and modified operations resulting from safety protocols and increased social distancing measures. +• +We experienced certain disruptions to sourcing with our third-party manufacturers and, while these disruptions have been mitigated, it is possible there will be disruptions in the future. +• +We have implemented a number of temporary measures to reduce operating expenses and mitigate the adverse impact the pandemic may have on our business and operations. +• +As of March 31, 2020 , we had $649,436 in cash and cash equivalents and $469,473 available borrowings under our revolving credit facilities, providing a liquidity position of over $1,000,000. +• +We are temporarily pausing repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on the impacts to our business and results of operations and associated risks and uncertainties. Refer to Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” for further information on our stock repurchase programs. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our four primary brands and our other brands, which currently consist of the Koolaburra by UGG brand, as well as other discontinued brands during the periods presented (collectively, Other brands). Collectively, our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to women, men, and children. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of women’s spring and summer footwear, men’s products, apparel, home goods, and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), Europe, Asia-Pacific, Canada and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. We continue to build product extensions in trail and fitness. The HOKA brand is sold both domestically and internationally in key markets, including the US, Canada, Europe, and Asia-Pacific. +Teva. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands. O ther brands currently consist of the Koolaburra by UGG brand and a discontinued brand during the prior period presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +4 +Table of Contents +Currently, our sales force is typically separated by brand, as each brand generally has certain specialty consumers that expect a dedicated sales team with specialized knowledge of our brands’ product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of each of our brands. +We distribute products sold in the US through our distribution center in Moreno Valley, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution center features a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +We completed the closure of our former distribution center in Camarillo, California during fiscal year 2020 and moved all of our Camarillo distribution operations to our Moreno Valley location . +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further disclosure and discussion. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, Running Specialty Group, REI, Zappos.com, and Running Warehouse. We expect to expand our HOKA brand wholesale distribution into international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, DSW, Urban Outfitters, Free People, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, and online retailers, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and e-commerce websites. Our retail stores and websites are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined, which are collectively designed to engender brand loyalty while increasing product sales and improving our inventory productivity, include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our e-commerce websites. +5 +Table of Contents +• +“Ship from Store”: Inventory that is available in our stores but out of stock online can be shipped from our stores. We expect future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +“UGG Closet”: A limited e-commerce outlet channel that offers an online portal designed to provide an efficient way to close out inventory through direct sales to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to our retail stores. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2020 , we had a total of 145 global retail stores, which includes 76 concept stores and 69 outlet stores, and operated our e-commerce business through an aggregate of 28 Company-owned websites and mobile platforms in ten different countries. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. However, we do have long-standing relationships with most of these independent manufacturers, and we may not be able to identify substitute alternative manufacturers to satisfy our desire for such flexibility. We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy, Conflict Minerals Policy and Ethical Sourcing and Animal Welfare Policy, as well as other compliance policies and procedures, as a condition to conducting business with us. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability, compliance with laws and regulations, and adherence to quality control standards and final design specifications. In addition, we have instituted pre-production, in-line, and post-production inspections to meet or exceed our product +6 +Table of Contents +quality requirements, as well as the expectations of our consumers. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +In an effort to partially reduce our dependency on sheepskin, we use a proprietary raw material, UGGpure, which is re-purposed wool woven into a durable backing, and UGGplush, which is re-purposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, most of the wool in UGGpure and UGGplush is sheared from the hides we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets, and the delivery requirements of our customers. As part of our operating profit improvement plan, we implemented systems and processes designed to improve our product forecasting, inventory control and supply chain management capabilities. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our practice, and the general practice in our industry, is to offer retail customers the right to return defective or improperly shipped merchandise. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders expected to be shipped at a future date, some of which are subject to cancellation prior to shipment. Our calculation of backlog also includes bulk orders, which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. We believe backlog is an imprecise indicator of our actual product shipments +7 +Table of Contents +and future results of operations and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC segment, as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, and the timing of product shipments. +As of March 31, 2020 , our backlog was $1,022,900 , which represents a 4.6% annual increase over our backlog as of March 31, 2019 . Subsequent to March 31, 2020, we have experienced some cancellations related to COVID-19 disruptions, and as a result, as of May 14, 2020, our backlog has declined to be roughly flat compared to the prior period. We are currently reviewing the order book with our wholesale customers, and our backlog may decrease further due to additional order cancellations or deferrals. +Our People and Our Culture +Employees. As of March 31, 2020 , we employed approximately 3,600 employees in North America, Europe, and Asia. This includes approximately 1,600 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is favorable. +Encouraging Diversity. We strive to create a culture of inclusion where employees are able to freely contribute equally regardless of gender, age, race, disability or sexual orientation. Our Code of Ethics, which all employees are trained on bi-annually, codifies these values. Our employee-led initiative, VOICES, is an avenue that elevates employee issues and celebrates our uniqueness. We have obtained EDGE (Economic Dividends for Gender Equality) Certification in the US, the leading global assessment and business certification for gender equality. +Environmental, Social and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide scope and impact is significant. Equally significant is the responsibility we believe we have to our stakeholders, including our consumers, employees, stockholders, and the communities we serve. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. We employ socially conscious operations and sustainable business practices, with the goal of continuing to deliver quality products to our consumers and sound financial performance to our stockholders, while minimizing the environmental impact of our business footprint. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our employees, our suppliers and our customers, as well as other brands and non-governmental organizations. Through our Corporate Responsibility and Sustainability Program, we expect to continue to advance our sustainable business initiatives with the goal of consistently delivering brand promises that meet consumer expectations. As a result of our efforts, we have been recognized by Investor’s Business Daily as one of the “50 Best ESG Companies” during fiscal year 2020. +ESG Governance. Our Sustainability and Compliance Officer is responsible for the day-to-day management of our Corporate Responsibility and Sustainability program. The Corporate Governance Committee of our Board of Directors, which is comprised of three independent directors, oversees our Corporate Responsibility and Sustainability efforts. +Our Sustainability and Compliance program aligns our internal teams with our sustainable development goals (SDGs) and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and our communities. We are members of the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility Report. Our Sustainability and Compliance Officer identifies specific SDGs set forth in the UNGC, which guide our supply chain and brand business teams’ efforts to address environmental and social challenges. Our SDGs are currently focused on eight categories where we believe we can make substantial impacts. +8 +Table of Contents +The following is a brief overview of our current SDGs and related fiscal year 2020 achievements: +• +Materials. We sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally-friendly business practices within the leather industry. We continue to seek sustainable alternatives for key product materials, with a goal to source at least 90% of our materials from suppliers certified by third-party benchmarking organizations. +• +Waste . Our distribution center in Moreno Valley, California is implementing efforts to become a zero-waste facility. We are taking steps towards removing single-use plastic at our corporate headquarters, retail stores and distribution center. We are piloting tracking programs with certain manufacturing partners to monitor waste disposal methods. +• +Animal Welfare. We do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides which are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely re-purposed from hides we are already using. We require our supply chain partners to annually certify compliance with our Ethical Sourcing and Animal Welfare Policy. +• +Water. We have reduced our water usage through manufacturing process improvements and have encouraged our manufacturing partners and suppliers to do the same by measuring their water output. Our SDG seeks to reduce water consumption and improve water quality throughout our operations and the communities in which we operate including a target that at least 90% of our core factory partners and suppliers apply industry best practices regarding water treatment and usage. +• +Chemicals. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• +Climate and Clean Energy. We strive to increase our year-over-year solar power usage at our headquarters and distribution centers, as well as to integrate climate change measures into our policies and planning. We measure energy usage by certain of our partners to encourage reduced energy consumption. +• +Gender Equality and Quality Education. In addition to our own corporate diversity and inclusion efforts, we promote gender equality and quality education at our supply chain partners through our partnership with HERproject. +• +Human Rights. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct based on International Labour Organization standards and audit our supply chain pursuant to such criteria on an ongoing basis. Audit results are included on performance scorecards for regular review by our executive management. +Our fiscal year 2020 Corporate Responsibility Report, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information on our fiscal year 2020 ESG achievements. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we are working to align our Corporate Responsibility Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB) Consumer Goods Standards. The content of our Corporate Responsibility Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. Since 2006, we have donated over 1 million pairs of shoes to Soles4Souls and Good360, non-profit organizations that distribute shoes to those in need. During fiscal year 2020, we donated $1,700 to various non-profit organizations. Additionally, we have committed over $1,000 in funds and product donations to address the impacts of the COVID-19 pandemic on the communities in which we operate. Further, during fiscal year 2020, we dedicated our strategic giving and engagement efforts to categories related to our SDGs, our business, and our communities. Our community-engagement efforts focused on arts and culture, human services, education, international affairs, environment and animal welfare, and health and society. We encourage our employees to volunteer by compensating them for up to 24 hours of volunteer time each year. +9 +Table of Contents +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” for further discussion of our reportable operating segments and to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles and growing the year-round net sales of the HOKA brand as a percentage of our aggregate net sales, we expect the seasonality trends that have resulted in significant variations in our aggregate net sales from quarter to quarter to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report . +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to assess and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the COVID-19 pandemic, among others. +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA One One,” “Koolaburra,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan, and Korea. As of March 31, 2020 , we hold 185 designs and inventions with corresponding design or utility patent registrations, plus seventeen designs +10 +Table of Contents +and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements and other information regarding issuers that file with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, Corporate Responsibility Report, Restricted Substance Policy, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report , and references to our website address within this Annual Report are inactive textual references only. +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders, and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report , as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +The COVID-19 global pandemic has had, and other public health crises or epidemics could in the future have, a material adverse impact on our business, operations, liquidity, financial condition, results of operations, the operations of our customers and business partners, and the markets and communities in which we and our customers and partners operate. +The COVID-19 pandemic has had, and other public health crises or epidemics in the future could have, repercussions across local, regional, and global economies and financial markets. The outbreak of COVID-19 has significantly adversely impacted global economic activity and contributed to volatility in and negative pressure on financial markets. In response to the COVID-19 pandemic, many federal, state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, quarantines, shelter-in-place orders, and similar government orders and restrictions, in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders, or the perception that such restrictions or orders could be implemented or extended, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, and cancellation or postponement of events, among other effects that could negatively impact our operations, as well as the operations of our partner retail stores, wholesale customers, suppliers, third-party distributors, and manufacturers. +11 +Table of Contents +The COVID-19 pandemic has resulted in a significant decrease in discretionary spending and retail activity, rapid rise in unemployment, and a sudden decrease in global economic activity, and many businesses, including our Company, have experienced, and anticipate that they will continue to experience, a significant negative impact on their financial condition, results of operations, and liquidity. For example, during portions of our fourth fiscal quarter ended March 31, 2020, and during the first part of our first fiscal quarter ending June 30, 2020, nearly all of our Company-operated stores, our partner retail stores, and the retail stores of our wholesale customers were closed as a result of government orders or restrictions, and may remain closed in certain geographies in future periods. In response to such store closures, as well as the social distancing measures and other restrictions resulting from the pandemic, we have temporarily furloughed certain retail store employees while stores are closed and transitioned nearly all of our other employees able to work remotely to a remote work environment. Although we have not experienced a material impact on productivity from shifting our employees to a remote work environment, there is no guarantee that our employees will be as effective while working remotely. In addition, despite the implementation of reasonable security measures by us and our third-party providers, our systems and information may be more susceptible to cyber-attacks or data security incidents with significantly more of our work force working remotely. Furthermore, in an effort to manage the financial uncertainty involved with the COVID-19 pandemic, we have delayed the hiring of certain non-essential employees, which may have the impact of delaying the completion of certain projects or other strategic objectives. +In addition, the demand for our products, as well as our results of operations, have been and could continue to be adversely impacted due to a number of other factors, including the following: +• +reduced consumer demand for our products as consumers seek to reduce or delay spending in response to the impacts of COVID-19, including from the recent rise in unemployment rates, decreased discretionary spending, and diminished consumer confidence; +• +decreased store traffic as a result of retail store closures, social distancing restrictions or changes in consumer behavior; +• +a deterioration in our ability, or the ability of our wholesale customers, to operate in affected geographic regions; +• +reduced availability of our supply of raw materials; +• +the failure of key business partners to provide services, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us; +• +bankruptcies or other financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or resulting in cancellation of or reducing their orders; +• +seasonality impacts on the demand for certain products, which could be further exacerbated by government restrictions and changes in consumer behavior; +• +the ability of our distribution center and 3PLs to timely and accurately process orders, especially during periods of heightened demand; and +• +incremental costs resulting from adoption of preventative measures, including social distancing requirements. +The full extent of the impact of the COVID-19 pandemic on our business and operations is highly uncertain and subject to change, and will depend on a number of factors beyond our control, including, without limitation, the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, the impact of the pandemic on the businesses of our wholesale customers, suppliers, third-party distributors, manufacturers, or retail partner stores, the extent and duration of any economic recessionary conditions, and the impact on the financial markets and our access to capital. We expect any further spread of the COVID-19 pandemic (including the potential for a second wave of the disease), or even the threat or perception that this could occur, or any protracted duration of decreased economic activity, could have a material adverse impact on our business, operations and financial results, or on the business, operations and financial results of our customers and business partners. In addition, to the extent the duration of the pandemic results in negative impacts to our business during our peak selling season for the UGG brand, it could result in a significantly greater adverse effect on our financial condition and results of operations than we have experienced thus far. +12 +Table of Contents +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva brand and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the magnitude of the UGG brand relative to our other brands, this trend has resulted in our net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. It is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. +In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG brand products. Unfavorable or unexpected weather patterns may have a material, negative impact on our business, financial condition, results of operations and prospects. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors. +As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence, changing consumer preferences, or uncertain economic conditions, will have a disproportionate impact on our business and could result in our failure to achieve financial performance that is in line with our expectations or the expectations of market participants. In addition, significant fluctuations in our financial performance from period to period as a result of these or other factors could increase the volatility of our stock price, which could cause our stock price to decline. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, including consumer spending patterns, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• +seasonality, including the impact of anticipated and unanticipated weather conditions; +• +consumer acceptance of our existing products and acceptance of our new products, including our ability to develop new products that address the needs and preferences of new consumers; +• +consumer demand for products of our competitors; +• +the implementation of our segmentation approach to the distribution of certain of our products; +• +consumer perceptions of and preferences for our products and brands, including as a result of evolving ethical or social standards; +• +the extent to which consumers view certain of our products as substitutes for other products we manufacture; +• +publicity, including social media, related to us, our products, our brands, our marketing campaigns and our celebrity endorsers; +• +the life cycle of our products and consumer replenishment behavior; +• +evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• +brand loyalty; +• +changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; +• +legislation restricting our ability to use certain materials in our products; +• +changes in general economic, political, and market conditions; and +• +pandemics or other outbreaks of illness or disease, such as the COVID-19 pandemic. +13 +Table of Contents +Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes for footwear, apparel, and accessories, as well as consumer spending patterns. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG brand products include a fashion element and could go out of style at any time. Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear, apparel, and accessories in the quantities projected or at all. Further, consumer spending may be adversely impacted by economic conditions, including consumer confidence in the economy, employment, salary and wage levels, the availability of consumer credit, and general costs of living. For example, we are experiencing, and could continue to experience, decreased demand for our products arising out of the impacts of the COVID-19 pandemic. If we fail to predict or react appropriately to changes in consumer preferences and fashion trends or fail to adapt to shifting spending patterns or demand, consumers may consider our brands and products to be outdated or unattainable or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns, or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +If we are unable to sustain the cost reductions and profitability improvements achieved from the implementation of our restructuring and operating profit improvement plans, we may not achieve results of operations in line with our expectations, which could cause our stock price to decline. +As of March 31, 2019, we completed implementing a restructuring plan designed to reduce overhead costs and create operating efficiencies while improving collaboration across our brands, and also completed the implementation of an operating profit improvement plan designed to improve profitability by enhancing product development cycle times, optimizing material yields, consolidating our factory base, and relocating product manufacturing and distribution facilities. However, we may not be able to sustain the cost reductions, profitability improvements, or other expected benefits of these plans in future periods. General economic and market conditions, including the impacts and disruptions caused by the COVID-19 pandemic, could impact our revenue and increase our costs and operating expenses. If we fail to sustain or expand operating profit improvements in line with our expectations, or with the expectations of research analysts or other market participants, it could have a material adverse impact on our financial performance, which could cause our stock price to decline. Further, our attempts to sustain or expand operating profit improvements may require additional investments and divert management’s time and resources, which may impede our ability to achieve our other strategic objectives. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive, and subject to changing consumer preferences and tastes, we expect to continue to face intense competitive pressures. We believe we compete on the basis of a number of factors, including our ability to: +• +predict and respond to changing consumer preferences and tastes in a timely manner; +• +continue to market current products, and develop new products, that appeal to consumers; +• +produce products that meet our requirements and consumer expectations for quality and technical performance; +• +accurately predict and forecast consumer demand; +• +ensure product availability; +• +manage the impact of seasonality, including unexpected changes in weather conditions; +14 +Table of Contents +• +maintain and enhance brand loyalty; +• +price our products in a competitive manner; +• +ensure availability of raw materials and production capacity; +• +implement our omni-channel strategy, including providing a unique customer service experience; +• +respond to new or proposed legislation impacting our products; and +• +manage the impact of the rapidly changing retail environment, including with respect to rising competition within the e-commerce business, especially from online retailers such as Amazon.com. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. Furthermore, the disruptions and impacts caused by the COVID-19 pandemic may ultimately require us to reduce, potentially by a significant margin, our opportunities in certain markets, which could negatively impact our prospects for long-term growth. +Our competitors include athletic and footwear companies, branded apparel and accessories companies, home goods and sporting goods companies, and specialty retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers and other market participants. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, develop products with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, withstand the impacts of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +If we fail to compete effectively in the future, our sales could decline, and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers do not conform to our quality specifications or fail to meet consumer expectations, we could experience reduced consumer demand for our products, a higher rate of customer returns and negative impacts to the image of our brands, any of which could have a material adverse impact on our business. Furthermore, the significant disruptions caused by the COVID-19 global pandemic, especially in certain countries in Asia, could have a prolonged negative impact on our ability to source sufficient sheepskin from our tanneries to meet demand, which could damage our brand image and adversely impact our sales. +15 +Table of Contents +Similarly, if the tanneries we rely upon are not able to deliver sheepskin in the quantities required, this would limit our ability to meet customer demand for our products and lead to inventory shortages, which would result in a loss of sales, strain our relationships with our customers and harm our reputation. In addition, any factors that negatively impact the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability or bankruptcy, loss or destruction of equipment or facilities, work stoppages, political instability, acts of terrorism or other catastrophic events, could prevent the tanneries from delivering sheepskin to us in the quantities expected and result in shortages in our supply of sheepskin. +While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins. In an effort to partially reduce our dependency on sheepskin, we are using UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the potential impact of fluctuations in sheepskin prices on our results of operations. However, in the event of a prolonged increase in sheepskin prices such as what we have experienced in the past, these strategies may not be sufficient to offset the negative impact on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer. +Further, our industry is characterized by rapidly changing fashion trends and consumer preferences. We believe there is a growing trend within the fashion industry towards eliminating the use of certain animal products, most notably fur. For example, legislation has been passed in the US banning the sale of fur in certain cities, and similar legislation is being considered in other geographic locations, including New York City. While the use of leather goods and sheepskin has typically not been subject to this type of legislation, it is possible that future legislation could have the impact of restricting or eliminating our ability to use sheepskin in the products we sell in certain geographic locations. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences and tastes may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is currently used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of products that include sheepskin, especially within our large target markets, could have a material adverse impact on our business, financial condition, and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve, automate and streamline our operational systems, processes and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. While these efforts have resulted in some improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational system upgrades and improvements are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +In addition, our operational system upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems , and adapt to new operating requirements, while continuing to manage and operate our business. These difficulties could be exacerbated by the impacts of the COVID-19 pandemic as our employees are faced with challenges of adapting to new processes and systems while working remotely. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers, and harm to our reputation, any of which would harm our business. +16 +Table of Contents +If we are unsuccessful at managing product manufacturing decisions, which are required to be made months in advance of the purchase of our products, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse impact on our financial condition and results of operations. +Like other companies in the footwear, apparel and accessories industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +Once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses in reaction to various factors, including the following: +• +unfavorable weather patterns and their potential impacts on consumer spending patterns and the demand for our products; +• +changes in consumer preferences and tastes, discretionary spending, as well as prevailing fashion trends; +• +market acceptance of our current products and new products, as well as market acceptance of competitive products; +• +future sales demand from our wholesale customers; +• +the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• +delays in resource or product availability due to impacts from widespread illness or disease, including the COVID-19 pandemic; and +• +uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse impact on our financial condition and results of operations. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to identify additional retail stores for closure as part of our ongoing retail store fleet optimization efforts, we may simultaneously identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales at a new store location, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. In light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment or that our investment in a retail store will increase our sales. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. +17 +Table of Contents +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate, but these efforts may be delayed in light of retail store closures, work stoppages, and other disruptions due to the COVID-19 pandemic. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a retailer or distributor partner fails to satisfy contractual obligations or to otherwise meet our expectations, or experiences complete or partial closure or other operational issues resulting from government restrictions, reduced consumer demand or other factors, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement retailer or distributor partner will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates for our wholesale customer orders as a key factor in forecasting our sales and earnings for future periods. If any of our major customers experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us, which could result in us failing to meet our forecasted results. These risks have been exacerbated recently as our key retail customers are operating within a retail industry that continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior, and a shrinking retail footprint. These trends have been further impacted by the COVID-19 pandemic. We may lose key retail and wholesale customers if they fail to manage the impact of the rapidly changing retail environment. Any loss of one of these key customers, the financial collapse or bankruptcy of one of these customers, or a significant reduction in purchases from one of these customers could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. +As a result of marketplace uncertainty and competitive environment, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our business and results of operations. +18 +Table of Contents +The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands. +In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey, and the Netherlands. Any court decision or settlement that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales. +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. However, we may shift from a direct distribution model to a third-party distribution model for certain brands. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. Such efforts may be mitigated or suspended as we navigate the impacts of the COVID-19 pandemic and implement prudent cost-saving measures. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our results of operations may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and information technology specialists. +Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our results of operations may suffer, and we may be unable to compete in the market. In addition, in an effort to manage the financial uncertainty involved with the COVID-19 pandemic, we have delayed the hiring of certain non-essential employees, which could have the impact of delaying completion of certain projects or other strategic objectives. +19 +Table of Contents +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel who will work effectively with our employees to fill those key positions, could have a material adverse effect on our business. +Additionally, our European headquarters is currently based in the UK. There is significant uncertainty regarding the potential future impact of Brexit on the legal and commercial relationships between the UK and countries within the European Union (EU). In particular, we could face difficulties attracting and retaining key employees in the UK, which could have a material adverse impact on our European operations. +Lastly, in an effort to protect the health and safety of our employees during the COVID-19 pandemic, we have transitioned most employees (except for retail store and distribution center employees) to a remote work environment. Although we have not experienced a material impact from shifting our employees to a remote work environment, there is no guarantee that our employees will be as effective while working remotely due to a number of factors, including the inability of team members to communicate as effectively in a remote environment, the reality that employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family members who become sick), and employees may become sick themselves and unable to work. If the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic plan. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products primarily through a self-managed distribution center in Moreno Valley, California. During fiscal year 2020, we completed the move of all of our Camarillo, California distribution operations to our Moreno Valley location and closed our Camarillo distribution center. This distribution center features a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems, or as a result of mandatory or elective closure in response to government restrictions or orders addressing the COVID-19 pandemic. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +Internationally, we distribute our products through a number of distribution centers managed by 3PLs in Canada, China, Japan, the Netherlands, and the UK. We also distribute our products through a domestic 3PL, located in Pennsylvania. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, we could face disruptions in these operations as a result of ongoing uncertainty around Brexit or the COVID-19 pandemic. The loss of or disruption to the operations of any one or more of these facilities could materially adversely impact our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential impact of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods +20 +Table of Contents +ordered, maintaining manufacturing capacity, complying with our restricted substances policy, and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, or if they were to experience significant disruption to their business, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, and products may fail to meet our quality standards. If any of these events were to occur, we may not be able to fill customer orders or product may be inadvertently delivered that does not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively impact our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities, or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are located in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; +• +increasing transportation costs, delays and interruptions, and a limited supply of international shipping capacity; +• +delays during shipping, at the port of entry or at the port of departure; +• +increasing labor costs and labor disruptions; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds from foreign jurisdictions; +• +changing economic and market conditions; +• +changes in governmental policies and regulations, including with respect to intellectual property, labor, safety, and environmental regulations; +• +refusal to adopt or comply with our Ethical Supply Chain Supplier Code of Conduct, Conflict Minerals Policy, and Restricted Substances Policy; +• +customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +decreased scrutiny by custom officials for counterfeit products; +• +practices involving corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• +social unrest and political instability, including acts of war and other external factors; +• +heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +disease epidemics, including the COVID-19 pandemic, or other health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• +disruptions caused by natural or other disasters; and +• +adverse changes in consumer perception of goods sourced from certain countries. +21 +Table of Contents +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings. +While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discover non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease conducting business with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of applicable laws and business standards could result in negative publicity, which could damage our reputation and the value of our brands. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our results of operations in certain regions . +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +• +foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• +limitations on our ability to move currency out of international markets; +• +burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• +legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; +• +inability to import products into a foreign country; +• +changes in US and foreign tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting and marketing products in unfamiliar cultures; +• +political or economic uncertainty or instability, including as a result of ongoing negotiations around Brexit or any similar referendums that may be held; +• +changes in unemployment rates and consumer spending due to the COVID-19 pandemic or other factors that are outside of our control; +• +anti-American sentiment in international markets in which we operate; +• +changes in diplomatic and trade relationships between the US and other countries; and +• +general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with 34.3% of our net sales for the year ended March 31, 2020 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to greater foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors typically sell our products in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. +We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, re-measurements, or translations could materially impact our consolidated financial statements . +22 +Table of Contents +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus, and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture. This difficulty may be exacerbated by the COVID-19 pandemic, which has resulted in travel restrictions, quarantines, shelter-in-place orders, and similar government restrictions that collectively may make it more difficult for employees to interact, communicate and innovate. +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor disputes, shortages, and stoppages that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores, or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. In addition, there is the potential for labor disruptions in the UK as a result of ongoing uncertainty around Brexit. Furthermore, we have experienced challenges attracting and retaining employees to staff our distribution center operations as we increasingly compete with companies with e-commerce businesses. Any such challenges or disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +International trade and import regulations may impose unexpected duty costs, the revision of current trade agreements may require us to alter current practices, changes in trade relations may result in tariffs, and transportation challenges and security procedures may cause significant delays and additional costs. +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. +In addition, we cannot predict whether future domestic and foreign laws, regulations, or specific or broad trade remedy actions, or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. +In the US and globally, international trade policy is undergoing review and revision, introducing significant uncertainty with respect to future trade regulations and existing international trade agreements. These major revisions include the renegotiation and implementation of the North America Free Trade Agreement, now entitled the US-Mexico-Canada Trade Agreement (commonly referred to as USMCA), which has been ratified by all three countries. Following Brexit in Europe, the UK is undergoing a lengthy negotiation with the EU to determine the terms of the UK’s future relationship with the EU . Changes in tax policy, such as the Tax Cuts and Jobs Act (Tax Reform Act), or trade regulations could cause us to encounter new customs duties, which in turn may require us to implement new supply chains, withdraw from certain restricted markets or change our business methods, could make it difficult to obtain products of our customary quality at a competitive price and could lead to an increase in the cost of our products. +The continued negotiation of bilateral and multilateral free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers. Manufacturers in these locations may seek to export footwear, apparel, and accessories to our target markets at preferred rates of duty which may negatively impact our sales and operations. +23 +Table of Contents +Trade relations between our sourcing venues (particularly China) and the US have created uncertainty for all US businesses that source or market in China. Since March 2018, the US has imposed import duties ranging from 5% to 25% on imports from China, which has caused China to retaliate with additional tariffs on US exports. In August 2019, the US government announced a 15% import duty on approximately $300 billion of imports from China, including footwear, apparel, and accessories that we import from China. The 15% import duty became effective on September 1, 2019, for a portion of the covered products. Import duties for the remaining covered products were scheduled to become effective on December 15, 2019 but were suspended indefinitely as part of the Phase One trade agreement between the US and China that was signed on January 15, 2020. In addition, as of February 14, 2020, the 15% tariff that was implemented on September 1, 2019 was reduced to 7.5%. Due to the current status of trade relations between the US and China, the potential for further import duties or other restrictions on imports from China remains. Any additional tariff could increase the cost of sourcing in China, our own margins, and possibly the price of our products to consumers. Previously, we had begun transitioning our sourcing of footwear from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition, and results of operations. +Transportation and distribution costs may be adversely impacted by a number of factors, including new regulations, increased demand, increased fuel and labor costs, political and economic instability. As a result of the COVID-19 pandemic, reductions in the number of ocean carrier voyages and capacity may cause some delay in arrivals of imports. Ongoing ocean carrier consolidation and reduced capacity, congestion at major international gateways and other economic factors are challenging ocean transportation generally. For example, new mandates to reduce the use of “low sulfur” fuel in certain container vessels will increase the cost of ocean transport globally, with surcharges already announced by the carriers. In addition, in the US, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations. These changes, as well as COVID-19 related state and local restrictions on domestic trucking and the operation of distribution centers, may disrupt our supply chain, which may result in a delay in the shipment of our products and cause us to incur significant additional costs. +Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions in order to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Acquisitions of businesses and assets involve numerous risks, challenges and uncertainties, including the potential to: +• +expose us to risks inherent in entering into a new market or geographic region; +• +lose significant customers or key personnel of the acquired business; +• +encounter difficulties managing and implementing acquired assets, including new brands, products, technologies, and intellectual property assets; +• +encounter difficulties marketing to new consumers or managing geographically-remote operations; +• +divert management’s time and attention away from other aspects of our business operations; and +• +incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly-acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +24 +Table of Contents +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it would result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +A security breach or other disruption to our information technology systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition, or results of operations. +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers, credit card information, the personal information of our employees, information relating to customer preferences, and our proprietary financial, operational, and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputation or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial liabilities, fines, penalties, or expenses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, including our information technology and global communication systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this personal, confidential, and sensitive information, and to respond quickly and effectively if data security incidents do occur. As with many businesses, we are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents has significantly increased in recent years. As with many other businesses, we have experienced, and are continually at risk of being subject to, attacks and incidents. Due to the increased risk of these types of attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our information technology systems, as well as the personal, confidential, or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any cyber-attack or data security incident. Whether or not these measures are ultimately successful, these expenditures could have an adverse impact on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives. +In addition, although we take the security of our information technology systems seriously, there can be no assurance that the security measures we employ will effectively prevent unauthorized persons from obtaining access to our systems and information. Despite the implementation of reasonable security measures by us and our third-party providers, our systems and information may be susceptible to cyber-attacks or data security incidents. These risks may be exacerbated in the remote work environment. In addition, because the techniques used to obtain unauthorized access to information technology systems are constantly evolving and becoming more sophisticated, we may be unable to anticipate these techniques or implement adequate preventive measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could potentially result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches that could harm our systems or result in the unauthorized disclosure of or access to information. Any measures we do take to prevent security breaches, whether caused by employees or third parties, have the potential to limit our ability to complete sales or ship products to our customers, harm relationships with our suppliers, or restrict our ability to meet our customers' expectations with respect to their online or retail shopping experience. +A cyber-attack or other data security incident could result in the significant and protracted disruption of our business such that: +• +critical business systems become inoperable or require a significant amount of time or cost to restore; +• +key personnel are unable to perform their duties, communicate with employees, customers, or third-party partners; +• +it results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or company information; +25 +Table of Contents +• +we are prevented from accessing information necessary to conduct our business; +• +we are required to make unanticipated investments in equipment, technology or security measures; +• +key wholesale and distributor customers cannot place or receive orders, and we are unable to ship orders on a timely basis or at all; +• +customers cannot access our e-commerce websites, and customer orders may not be received or fulfilled; or +• +we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. +In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers, or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with our company or impose more onerous contractual provisions, and subject us to potential litigation, liability, fines, and penalties. For example, we could be subject to regulatory or other actions pursuant to domestic and international privacy laws, including newer regulations such as the California Consumer Privacy Act (CCPA), the Action on the Protection of Personal Information in Japan, and the General Data Protection Regulation (GDPR) in the EU. This could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if payment card information is stolen or otherwise compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of the losses and costs associated with cyber-attacks and data incidents, such insurance coverage may be insufficient to cover all losses and would not, in any event, remedy damage to our reputation. In addition, we may face difficulties in recovering any losses from our provider and any losses we recover may be lower than we initially expect. +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include US state laws such as the CCPA, which took effect on January 1, 2020, as well as GDPR, EU member state directives, or similar applicable laws. These laws place limits on how we may collect, use, share and store personal information, and they impose obligations to protect that information against unauthorized access, use, loss, and disclosure. +If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +We may also face new risks relating to data privacy and security as the US, individual US states, EU member states, and other international jurisdictions adopt or implement new data privacy and security laws and regulations as we continue to commercialize our products worldwide. Our business may need to adapt to the extent any such new laws place new or additional obligations on us. +26 +Table of Contents +Key business processes, including our information technology and global communications systems, could be interrupted and such interruption could adversely affect our business and result in lost sales and harm to our business reputation. +Our future success and growth depend in part on the continued operation of our key business processes, including our information technology and global communications systems. Our key processes and systems could be interrupted by failures due to weather, natural disasters, power loss, software or equipment, telecommunication systems, information technology infrastructure, sabotage, terrorism, computer viruses, cyber-security attacks, or similar events. Any interruptions to key business processes and systems could have a material adverse effect on our business and operations and result in lost sales and harm to our business reputation. +Furthermore, we rely on certain information technology management systems to prepare sales forecasts, track our financial position and results of operations, and otherwise manage and operate our business. As our business grows and we expand our brands and products into additional distribution channels and geographic regions, these systems may require expansion. We may experience difficulties expanding these systems, or transitioning to new or upgraded systems, which may result in loss of data, decreases in productivity, and increased costs associated with the implementation of the new or upgraded systems. If we are unable to modify our systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material impact on our business. Failure to comply with any of the covenants, including as a result of the impacts caused by the COVID-19 pandemic, could result in a default. A default under any of our revolving credit facility agreements could allow our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. +In addition, certain of our revolving credit facility agreements bear interest at a rate that varies depending on the London Interbank Offered Rate (LIBOR). Any increases in the interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. Further, the UK’s Financial Conduct Authority, which regulates LIBOR, has announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate certain of our revolving credit facility agreements, which could have an adverse effect on our financing costs. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations. +We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, the enactment of the Tax Reform Act resulted in changes to the existing US tax laws that have and will continue to affect us. Additional changes in tax laws or proposed regulations, clarifications, interpretations and other changes to the Tax Reform Act may ultimately be enacted in a future period, which could increase our income tax liability or adversely affect our net income and long-term effective tax rates. +27 +Table of Contents +Certain additional provisions of the Tax Reform Act, such as the tax on global intangible low-taxed income, will continue to apply to us and, as a result, could impact our effective tax rate. Taxes due over a period of time as a result of the Tax Reform Act, including the one-time, mandatory deemed repatriation tax on certain foreign earnings, could be accelerated upon various triggering events, including failure to pay such taxes when due. The Tax Reform Act made broad and complex changes to the US tax code and we expect to see future regulatory, administrative, or legislative guidance periodically issued. If we determine the guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations. +In addition, many countries in the EU and around the globe have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our US and international business activities, many of these enacted and proposed changes could increase our worldwide effective tax rate and harm our financial position and results of operations. +We may be subject to additional tax liabilities as a result of audits by various taxing authorities. +We conduct our operations through subsidiaries in several countries and foreign territories, including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, France, Germany, Canada, Austria, Belgium, and Switzerland. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between these countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our results of operations or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments. +We may incur disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +Our common stock price has been volatile, which could result in substantial losses for stockholders . +Our common stock is traded on the NYSE under the symbol DECK. The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• +changes in expectations of our future financial performance and results of operations, whether realized or perceived; +• +changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• +changes in our stockholder base or public actions taken by investors; +• +market research and opinions published by securities analysts and other market participants, and the response to such publications; +• +quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• +the financial stability of our customers, manufacturers, and suppliers; +• +legal proceedings, regulatory actions, and legislative changes; +28 +Table of Contents +• +announcements regarding the potential repurchase of our common stock, and our actual stock repurchase activity; +• +the declaration of stock or cash dividends; +• +consumer confidence and discretionary spending levels; +• +broad market fluctuations in volume and price; +• +general market, political, and economic conditions, including recessionary conditions resulting from the COVID-19 pandemic; and +• +a variety of risk factors, including the ones described elsewhere within this Annual Report and in our other filings with the SEC. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, increases in unemployment rates, or outbreaks of illness or disease, including the COVID-19 pandemic. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, decreases in available credit, and increased competition. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +Furthermore, economic factors such as fuel or transportation costs, inflation, deflation, labor costs, tariffs, and insurance and healthcare costs may impact our results of operations. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. +Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board of Directors or management. Among other things, these provisions: +• +authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• +provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• +provide that board vacancies can only be filled by directors; +• +prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• +require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and +• +require advance written notice of stockholder proposals and director nominations. +29 +Table of Contents +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock. +Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. +Our business could be negatively affected as a result of the actions of activist stockholders. +Responding to the actions of activist stockholders can be costly and time-consuming, disruptive to our operations, and result in the diversion of the attention of management and our employees. For example, we were previously involved in a proxy contest with a hedge fund, which required us to incur significant legal fees and proxy solicitation expenses and required significant time and attention by management and our Board of Directors. Any perceived uncertainties as to the impact of the activities of activist stockholders, or of our future strategic direction, could also affect the market price and volatility of our common stock. +We do not expect to declare any dividends in the foreseeable future. +We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends. +Our reported financial results may be adversely affected by changes in US GAAP. +Accounting principles generally accepted in the United States (US GAAP) are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. +30 +Table of Contents +Item 2. Properties +Our corporate headquarters is located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. +We have one primary US distribution center, which is located in Moreno Valley, California. We began operating this warehouse and distribution center in the fourth quarter of fiscal year 2015 and, since June 2017, have expanded our operations at this location. Further, during fiscal year 2020 we completed the move of all of our Camarillo, California distribution operations to our Moreno Valley location and closed our Camarillo distribution center. +We also have offices in China, Hong Kong, Vietnam, Japan, France, Germany, the Netherlands, and the UK to oversee the quality and manufacturing standards of our products, and for regional sales, operations and administration, as well as offices in Macau and Hong Kong to coordinate logistics. +As of March 31, 2020 , we had 52 retail stores in the US ranging from approximately 1,000 to 13,000 square feet. Internationally, we had 93 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. +We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties as of March 31, 2020 : +Facility Location +Description +Lease or Own +Facility Size (Square Footage) +Moreno Valley, California +Warehouse and Distribution Center +Lease +1,530,944 +Goleta, California +Corporate Headquarters +Own +185,094 +31 +Table of Contents +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +On March 28, 2016, we filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the US District Court for the Northern District of Illinois Eastern Division against Australian Leather. In response, Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. While we believe there is no legal basis for liability, a judgment invalidating the UGG brand trademark would have a material adverse effect on our business. On May 10, 2019, a jury ruled in our favor in our lawsuit against Australian Leather. On December 19, 2019, the court denied Australian Leather’s affirmative defenses. Although final judgment was entered February 6, 2020, the court's rulings are subject to appeal. +Although we are subject to legal proceedings and other disputes from time to time in the ordinary course of business, including employment, intellectual property, and product liability claims, we believe the outcome of all pending legal proceedings and other disputes in the aggregate will not have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors. +32 +Table of Contents +PART II +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA One One® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® (Koolaburra), and UGGpure® (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Certain reclassifications were made for all prior periods presented including the fiscal years ended March 31, 2019 , 2018 , 2017 , and 2016 , to conform to the current period presentation. +Unless otherwise specifically indicated, all dollar amounts in Items 5, 6, 7, and 7A herein are expressed in thousands, except for per share data. The defined periods for the fiscal years ended March 31, 2020 , 2019 , and 2018 are stated herein as “year ended” or “years ended.” +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol DECK on the NYSE since May 2014 and was previously traded on the NASDAQ Global Select Market. +As of May 14, 2020 , we had 39 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2020 that were not registered under the Securities Act. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index for the five fiscal-year periods commencing April 1, 2015 and ending March 31, 2020 . Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index on April 1, 2015. +April 1, +Years Ended March 31, +2015 +2016 +2017 +2018 +2019 +2020 +Deckers Outdoor Corporation +$ +100.0 +$ +82.2 +$ +82.0 +$ +123.6 +$ +201.7 +$ +183.9 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +88.8 +70.5 +90.5 +87.6 +43.6 +The NYSE Composite Index +100.0 +96.2 +111.3 +123.7 +129.7 +108.1 +The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. +33 +Table of Contents +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. +Stock Repurchase Programs +In January 2019, our Board of Directors approved a stock repurchase program which, together with stock repurchase programs approved in 2017 and 2015, authorized us to repurchase a total of up to $796,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (collectively, our Stock Repurchase Programs). The full amounts originally authorized under the 2017 and 2015 stock repurchase programs have been repurchased and these programs have been completed. +As of March 31, 2020 , the aggregate remaining approved amount under our Stock Repurchase Programs was $159,807 . During the fourth quarter of the year ended March 31, 2020 , we did not repurchase any shares of our common stock. We are temporarily pausing repurchases under our Stock Repurchase Programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we retain the discretion to commence repurchases in future periods. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity and Capital Resources” and Note 10, “Stockholders' Equity,” of our consolidated financial statements and accompanying notes thereto (referred to herein as the consolidated financial statements ) in Part IV within this Annual Report for further information on repurchases of our common stock. +34 +Table of Contents +Item 6. Selected Financial Data +The following tables present our selected consolidated financial data and should be read in conjunction with Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Part IV , Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +Years Ended March 31, +2020 +2019 +2018 +2017 +2016 +Statements of Comprehensive Income (Loss) +Net sales +UGG brand wholesale +$ +892,990 +$ +888,347 +$ +841,893 +$ +826,355 +$ +918,102 +HOKA brand wholesale +277,097 +185,057 +132,688 +93,064 +74,937 +Teva brand wholesale +119,108 +119,390 +117,478 +103,694 +143,280 +Sanuk brand wholesale +39,463 +69,791 +78,283 +77,552 +90,719 +Other brands wholesale +67,175 +42,818 +17,273 +23,142 +3,842 +Direct-to-Consumer +736,856 +715,034 +715,724 +666,340 +644,317 +Total net sales +2,132,689 +2,020,437 +1,903,339 +1,790,147 +1,875,197 +Cost of sales +1,029,016 +980,187 +971,697 +954,912 +1,028,529 +Gross profit +1,103,673 +1,040,250 +931,642 +835,235 +846,668 +Selling, general and administrative expenses +765,538 +712,930 +709,058 +837,154 +684,541 +Income (loss) from operations +338,135 +327,320 +222,584 +(1,919 +) +162,127 +Other (income) expense, net +(2,731 +) +(1,614 +) +1,888 +5,067 +5,242 +Income (loss) before income taxes +340,866 +328,934 +220,696 +(6,986 +) +156,885 +Income tax expense (benefit) +64,724 +64,626 +106,302 +(12,696 +) +34,620 +Net income +276,142 +264,308 +114,394 +5,710 +122,265 +Total other comprehensive (loss) income +(2,905 +) +(9,671 +) +13,468 +(5,894 +) +(89 +) +Comprehensive income (loss) +$ +273,237 +$ +254,637 +$ +127,862 +$ +(184 +) +$ +122,176 +Net income per share +Basic +$ +9.73 +$ +8.92 +$ +3.60 +$ +0.18 +$ +3.76 +Diluted +$ +9.62 +$ +8.84 +$ +3.58 +$ +0.18 +$ +3.70 +Weighted-average common shares outstanding +Basic +28,385 +29,641 +31,758 +32,000 +32,556 +Diluted +28,694 +29,903 +31,996 +32,355 +33,039 +As of March 31, +2020 +2019 +2018 +2017 +2016 +Balance Sheets +Cash and cash equivalents +$ +649,436 +$ +589,692 +$ +429,970 +$ +291,764 +$ +245,956 +Working capital +893,165 +844,881 +721,524 +661,770 +547,267 +Total assets +1,765,118 +1,427,206 +1,264,379 +1,191,780 +1,278,068 +Long-term liabilities +324,052 +131,552 +134,434 +78,474 +72,099 +Stockholders' equity +1,140,120 +1,045,130 +940,779 +954,255 +967,471 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report . This discussion includes an analysis of our financial condition and results of operations for fiscal year 2020 and fiscal year 2019 and year-over-year comparisons between those periods. For year-over-year comparisons between fiscal year 2019 and fiscal year 2018, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the SEC on May 30, 2019. +35 +Table of Contents +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our DTC business, which is comprised of our retail stores and e-commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Trends and Uncertainties Impacting Our Business +During early calendar year 2020, the COVID-19 pandemic (referred to herein as COVID-19 or the COVID-19 pandemic) spread globally, including throughout the geographic regions in which we operate our business, and where our wholesale customers, retail stores, manufacturers, and suppliers are located. +In response to the pandemic, many federal, state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, “shelter-in-place” orders, and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders have resulted in the mandatory closure of “non-essential” businesses (including retail stores), increased unemployment rates, “social distancing” restrictions, reduced tourist activity, work-from-home policies, and other changes that have led to significant disruptions to businesses and global financial markets. The overall impact of the pandemic on our business and future results of operations is highly uncertain and subject to change, and we are not able to accurately predict the magnitude or scope of such impacts at this time. +Our business and the industry in which we operate continue to be impacted by several important trends and uncertainties, including as a result of the COVID-19 pandemic. We have experienced a number of material impacts, and identified a number of material trends, within our business as follows: +Retail Environment +• +In connection with the “shelter-in-place” orders discussed above, all of our Company-owned and operated stores, and nearly all of the retail stores of our wholesale customers and retail partners, were closed for a portion of our fourth fiscal quarter ended March 31, 2020 (fourth fiscal quarter), and largely remain closed during the first part of our first fiscal quarter ending June 30, 2020. The closure of these retail stores had a negative impact on our results of operations during the fourth fiscal quarter as we experienced delays in shipment and acceptance of scheduled order shipments, which we attribute to the retail store closures and other uncertainties caused by the COVID-19 pandemic. +• +The retail stores that we and our partners operate have begun to reopen at a measured pace. We will continue to reopen our retail stores as we determine appropriate and in line with guidance provided by health officials, expert agencies and local authorities. Our decision regarding the appropriate timing to reopen our retail stores will depend on a number of factors, including the safety of our customers and employees, our ability to comply with government orders and restrictions, and our ability to deliver products to our customers. We expect the scope of allowable retail activities, as well as retail consumer traffic patterns, to vary by geographic region, including ongoing restrictions imposed by local governmental authorities, the demand for our products within the region, and the actual and expected impact of the COVID-19 pandemic on the region. +E-Commerce Business +• +Even prior to mandatory retail store closures resulting from the COVID-19 pandemic, we observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by significant and prolonged decreases in consumer retail activity as customers continue to migrate to online shopping. These trends have been positively impacting the performance of our e-commerce +36 +Table of Contents +business, while creating challenges and headwinds for our traditional retail business, as well as the retail businesses of our wholesale customers and retail partners. +• +We operate our e-commerce business through various websites and platforms, which have remained operational throughout the COVID-19 pandemic, and we expect they will continue to remain operational. +• +During our fourth fiscal quarter, as well as our first fiscal quarter ending June 30, 2020, we observed strong demand across our brands within our e-commerce business, especially for the UGG and HOKA brands. We expect our wholesale customers that have an established e-commerce presence will experience similar strong demand trends as those we have experienced, although the trends may vary from customer to customer. We continue to see demand for our products, especially within the UGG and HOKA brands, from a number of these wholesale customers, which we believe reflects strong sell-through of our products within our partners’ e-commerce platforms. We expect our wholesale customers that have a greater reliance on their retail store presence may experience more significant adverse impacts from the COVID-19 pandemic. +• +We expect our e-commerce business will continue to be a driver of long-term growth, although the growth rate will be unpredictable and may not be in line with our historical experience. We believe the key factors impacting the growth rate will include consumer demand for our products, our ability to fulfill orders through our limited distribution center operations, the scope and duration of the COVID-19 pandemic, and the impact of the COVID-19 pandemic on consumer confidence and discretionary spending . However, we do not expect the increased demand within our e-commerce businesses to fully offset the negative pressure we are experiencing within our wholesale and retail businesses due to the current retail environment, especially as we move into the second and third fiscal quarters. +Brand Strategy +• +We are exercising discipline by focusing on key products that have achieved sustained success with consumers, reducing the number and types of products offered, delaying product launches and consolidating seasonal collections. +• +Our ongoing and strategic efforts to reduce the impact of seasonality on our results of operations have had a meaningful positive impact on the year-round performance of the HOKA and UGG brands. While we expect to continue to focus on reducing the impact of seasonality through innovation and the expansion of our product offerings over the long-term, given the magnitude of the UGG brand relative to our other brands, the effect of seasonality on our aggregate net sales and results of operations may continue to be significant. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. This uncertainty makes it more difficult for us to predict future demand for our products and manage our manufacturing and inventory, especially as we approach the typical high-selling season for the UGG brand. +• +Within the UGG brand, we have experienced strong sell-through of certain product lines, including the slipper category in general, as we believe consumers are seeking out luxurious comfort in the current work-from-home environment. In addition, the UGG brand continues to experience success through the introduction of year-round products, improving the UGG brand’s overall year-round performance. However, we are experiencing softness within the UGG wholesale channel, especially within geographies impacted by extensive retail store closures. +• +Within the HOKA brand, we continue to see strong demand across our product offerings, which we believe is being fueled in part by an even greater emphasis on running and outdoor exercise as consumers seek to find healthy outlets in response to the COVID-19 pandemic. The significant growth of the HOKA brand’s year-round performance product offerings as a percentage of our aggregate net sales has had a meaningful positive impact on our seasonality trends, as well as our overall financial results. However, despite the recent growth and success of the HOKA brand, the impacts of the pandemic may cause the growth rate of HOKA brand sales to decline. +37 +Table of Contents +• +The Sanuk and Teva brands are experiencing a disproportionate negative impact from the pandemic as the highest percentage of net sales for these brands typically occur during our fourth fiscal quarter and first fiscal quarter. We are actively monitoring the cost structures associated with these brands. +Supply Chain +• +We experienced certain disruptions to sourcing with our third-party manufacturers during the fourth fiscal quarter. While these disruptions have since been mitigated, it is possible there will be disruptions in the future. +• +Our Moreno Valley, California, distribution center, as well as our global third-party logistics providers (3PLs), remain open and are operating at reduced capacity and with limited and modified operations. In order to promote the health and safety of our distribution center employees, we have implemented enhanced safety measures and protocols at our distribution center, including strict social distancing requirements and heightened cleaning of the facility in accordance with Center for Disease Control and Prevention guidelines. Due to the social distancing requirements we have implemented, we are limiting the number of employees on-site relative to our typical personnel capacity. We are experiencing, and our 3PLs are experiencing, certain operational and logistical challenges as a result of limited and modified operations, including some delays in the shipments of our products. We are working to mitigate the impact of limited and modified operations on our peak selling periods, but we may not be successful in these efforts. +• +We are encountering challenges attracting and retaining quality candidates to staff our distribution center operations as we increasingly compete with other companies with growing e-commerce operations. For example, during the past two fiscal years, we have significantly increased certain distribution center employee wages in an effort to attract and retain talent. Although growing unemployment rates resulting from the COVID-19 pandemic may result in a larger short-term candidate pool, we may face ongoing challenges with recruiting employees as our competitors grow their e-commerce channels and require additional warehouse and distribution center staff. +Omni-Channel Strategy +• +We have implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the US wholesale marketplace. These strategies are designed to assist us in controlling product inventory, reducing the impact of discounts and close-outs on our sales and gross margins, and increasing full-priced selling across our product offerings. Similarly, we are implementing a multi-year marketplace reset strategy in Europe and Asia to drive UGG brand heat. We expect the COVID-19 pandemic will delay or mitigate the benefits we may receive from these strategies. +• +As a result of changes in consumer purchasing behavior, we continue to focus on the enhancement of our omni-channel strategy to enable us to better engage existing and prospective consumers and expose them to our brands. Our strategy is transforming the way we approach marketing, including through a sustained focus on our targeted digital marketing efforts, as well as marketing activations and product seeding to drive global brand heat. For example, we have begun applying these transformation efforts in Europe to drive UGG brand heat as we work to differentiate consumer experiences across various consumer touch points as part of our marketplace reset strategy. We have also started to apply this marketing strategy shift in Asia. +• +In response to the COVID-19 pandemic, we have enhanced our focus on digital marketing as we seek to target consumers within the work-from-home environment and promote products that are desirable based on current consumer preferences, working conditions and lifestyle choices. +38 +Table of Contents +Liquidity +• +We believe we are in a strong financial position to respond to the disruptions and uncertainties caused by the COVID-19 pandemic. As of March 31, 2020 , our cash and cash equivalents balance was $649,436 . In addition, we had available borrowings of $469,473 under our existing revolving credit facilities, providing a liquidity position of over $1,000,000 as of March 31, 2020 . For additional information, see the sections entitled “Liquidity” and “Capital Resources” below. +• +We are temporarily pausing repurchases under our Stock Repurchase Programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management. +• +We are working closely with our wholesale customers, as well as our manufacturers and suppliers, to manage accounts receivable and accounts payable to maximize the availability of working capital. +Operating Expenses +• +To mitigate the adverse impact the COVID-19 pandemic may have on our business and operations, we have implemented a number of temporary measures to reduce operating expenses, including: +◦ +restricting employee travel; +◦ +canceling or postponing certain events, trainings, and conferences; +◦ +converting meetings with current and prospective customers to a virtual platform; +◦ +suspending hiring of certain non-essential employees and annual salary increases; +◦ +eliminating or deferring discretionary expenditures; +◦ +seeking payment accommodations or deferrals; and +◦ +furloughing certain retail employees while stores are closed. +• +We also believe the significant changes we implemented in connection with our previously completed restructuring and operating profit improvement plans will help mitigate any potential negative impacts on our gross margins resulting from the COVID-19 pandemic. +Completed Restructuring Plan +During February 2016, we announced the implementation of a multi-year restructuring plan designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations that was designed to reduce overhead costs and create operating efficiencies while improving collaboration across brands. As of March 31, 2019, we completed our restructuring plan and incurred cumulative restructuring charges of $55,619 against selling, general, and administrative (SG&A) expense. In addition, the cumulative annualized SG&A savings realized as of March 31, 2019 by reportable operating segment were, approximately, as follows: +Amount +UGG brand wholesale +$ +1,000 +Sanuk brand wholesale +1,000 +Other brands wholesale +1,000 +Direct-to-Consumer +43,000 +Unallocated overhead costs +17,000 +Total +$ +63,000 +We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan. +39 +Table of Contents +Completed Operating Profit Improvement Plan +During February 2017, we announced that we would implement an operating profit improvement plan to execute various business transformation initiatives to further reduce expenses and improve gross margins. As of March 31, 2019, we successfully completed our plan and achieved in excess of $100,000 of combined net annualized operating profit improvement under our restructuring and operating profit improvement plans. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to further optimize profitability and seeking to enhance results of operations throughout our business. +Reportable Operating Segment Overview +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to women, men, and children. +We believe demand for UGG brand products will continue to be driven by the following: +• +High consumer brand loyalty due to the consistent delivery of quality and luxuriously comfortable footwear, apparel, and accessories. +• +Diversification of our footwear product offerings, such as women's spring and summer lines, as well as expanded category offerings for men's, apparel, and accessories. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We continue to build product extensions in trail and fitness. +We believe demand for HOKA brand products will continue to be driven by the following: +• +Leading product innovation and key franchise management. +• +Increased brand awareness through enhanced marketing activations. +• +Category extensions in authentic performance footwear offerings. +Teva Brand . The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product offerings include sandals, shoes, and boots. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. +Other Brands . Other brands currently consist of the Koolaburra by UGG brand and a discontinued brand during the prior period presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +Direct-to-Consumer . Our DTC business for all our brands is comprised of our retail stores and e-commerce websites which, in an omni-channel marketplace, are intertwined and interdependent. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions. +40 +Table of Contents +Retail Business. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2020 , we had a total of 145 global retail stores, which includes 76 concept stores and 69 outlet stores. Generally, we open retail store locations during the second or third quarters of each fiscal year and consider closures of retail stores during the third or fourth quarters of each fiscal year. We evaluate retail store closures based on store performance and timing of lease expirations and options. While we expect to identify additional stores for closure, we may simultaneously identify opportunities to open new stores in the future to further enhance our overall DTC business. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores, further discussed below. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. +Flagship Stores. Included in the total count of global concept stores are nine UGG brand flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase the UGG brand products. Primarily located in major tourist locations, these stores are typically larger with broader product offerings and greater traffic than our general concept stores. The net sales for these stores are recorded in our DTC reportable operating segment. +Shop-in-Shop Stores. Included in the total count of global concept stores are 21 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. The net sales for these stores are recorded in our DTC reportable operating segment. +Partner Retail Stores. We rely on partner retail stores for the UGG brand and Sanuk brand in certain markets. Partner retail stores are branded stores that are wholly-owned and operated by third-parties and not included in the total count of global retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in either the UGG brand or Sanuk brand wholesale reportable operating segments, as applicable. +E-Commerce Business. Our e-commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands’ promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2020 , we operated our e-commerce business through an aggregate of 28 Company-owned websites and mobile platforms in ten different countries. +Use of Non-GAAP Financial Measures +In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report we provide certain financial information on a constant currency basis, which we disclose in addition to the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (US GAAP). For example, in order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements. Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. As a result, information included in this Annual Report regarding these financial measures, as we calculate them, may not be directly comparable to similar data of other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. +Constant currency measures should not be considered in isolation as an alternative to United States (US) dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. +41 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles and growing the year-round net sales of the HOKA brand as a percentage of our aggregate net sales, we expect the seasonality trends that have resulted in significant variations in our aggregate net sales from quarter to quarter to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. +Refer to Note 14, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +Result of Operations +Year Ended March 31, 2020 Compared to Year Ended March 31, 2019 . The following table summarizes our results of operations: +Years Ended March 31, +2020 +2019 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +2,132,689 +100.0 +% +$ +2,020,437 +100.0 +% +$ +112,252 +5.6 +% +Cost of sales +1,029,016 +48.2 +980,187 +48.5 +(48,829 +) +(5.0 +) +Gross profit +1,103,673 +51.8 +1,040,250 +51.5 +63,423 +6.1 +Selling, general and administrative expenses +765,538 +35.9 +712,930 +35.3 +(52,608 +) +(7.4 +) +Income from operations +338,135 +15.9 +327,320 +16.2 +10,815 +3.3 +Other income, net +(2,731 +) +(0.1 +) +(1,614 +) +(0.1 +) +1,117 +69.2 +Income before income taxes +340,866 +16.0 +328,934 +16.3 +11,932 +3.6 +Income tax expense +64,724 +3.1 +64,626 +3.2 +(98 +) +(0.2 +) +Net income +276,142 +12.9 +264,308 +13.1 +11,834 +4.5 +Total other comprehensive loss, net of tax +(2,905 +) +(0.1 +) +(9,671 +) +(0.5 +) +6,766 +(70.0 +) +Comprehensive income +$ +273,237 +12.8 +% +$ +254,637 +12.6 +% +$ +18,600 +7.3 +% +Net income per share +Basic +$ +9.73 +$ +8.92 +$ +0.81 +Diluted +$ +9.62 +$ +8.84 +$ +0.78 +Net Sales. The following table summarizes our net sales by location, and by brand and channel: +Years Ended March 31, +2020 +2019 +Change +Amount +Amount +Amount +% +Net sales by location +US +$ +1,401,692 +$ +1,278,358 +$ +123,334 +9.6 +% +International +730,997 +742,079 +(11,082 +) +(1.5 +) +Total +$ +2,132,689 +$ +2,020,437 +$ +112,252 +5.6 +% +42 +Table of Contents +Years Ended March 31, +2020 +2019 +Change +Amount +Amount +Amount +% +Net sales by brand and channel +UGG brand +Wholesale +$ +892,990 +$ +888,347 +$ +4,643 +0.5 +% +Direct-to-Consumer +627,817 +644,520 +(16,703 +) +(2.6 +) +Total +1,520,807 +1,532,867 +(12,060 +) +(0.8 +) +HOKA brand +Wholesale +277,097 +185,057 +92,040 +49.7 +Direct-to-Consumer +75,527 +38,092 +37,435 +98.3 +Total +352,624 +223,149 +129,475 +58.0 +Teva brand +Wholesale +119,108 +119,390 +(282 +) +(0.2 +) +Direct-to-Consumer +18,897 +18,022 +875 +4.9 +Total +138,005 +137,412 +593 +0.4 +Sanuk brand +Wholesale +39,463 +69,791 +(30,328 +) +(43.5 +) +Direct-to-Consumer +11,696 +12,822 +(1,126 +) +(8.8 +) +Total +51,159 +82,613 +(31,454 +) +(38.1 +) +Other brands +Wholesale +67,175 +42,818 +24,357 +56.9 +Direct-to-Consumer +2,919 +1,578 +1,341 +85.0 +Total +70,094 +44,396 +25,698 +57.9 +Total +$ +2,132,689 +$ +2,020,437 +$ +112,252 +5.6 +% +Total Wholesale +$ +1,395,833 +$ +1,305,403 +$ +90,430 +6.9 +% +Total Direct-to-Consumer +736,856 +715,034 +21,822 +3.1 +Total +$ +2,132,689 +$ +2,020,437 +$ +112,252 +5.6 +% +Despite the negative impact of the COVID-19 pandemic on net sales during our fourth fiscal quarter, total net sales for the full fiscal year increased primarily due to higher HOKA and Other brands wholesale sales, as well as higher DTC sales, partially offset by lower Sanuk brand wholesale sales. Further, we experienced an increase of 2.8% in total volume of pairs sold to 36,800 from 35,800 compared to the prior period. On a constant currency basis, net sales increased by 6.5% , compared to the prior period. Drivers of significant changes in net sales are as follows: +• +Wholesale net sales of the HOKA brand increased due to continued global growth through new customer acquisitions, as well as higher sales driven by key franchise updates and new product launches. +• +Wholesale net sales of the Other brands increased primarily due to continued customer penetration in US family value wholesale accounts for the Koolaburra brand. +• +Wholesale net sales of the UGG brand increased due to higher domestic net sales driven by the slipper collection and the sell-in of fall and winter products, primarily for men's and kid's product lines, partially offset by lower international sales driven by a multi-year marketplace reset in Europe and European macroeconomic factors, as well as COVID-19 related sales losses in the fourth fiscal quarter. On a constant currency basis, wholesale net sales of the UGG brand increased by 2.1% , compared to the prior period. +• +Wholesale net sales of the Sanuk brand decreased due to the strategic decision to exit the warehouse channel, lower performance within US surf specialty wholesale accounts, as well as COVID-19 related sales losses in the fourth fiscal quarter during the Sanuk brands’ peak selling season. +43 +Table of Contents +• +Comparable DTC net sales for the 52 weeks ended March 29, 2020 increased by 5.0% , compared to the same prior period, primarily due to growth in the e-commerce business globally for the HOKA brand and domestically for the UGG brand. DTC net sales were negatively impacted by the retail store closures during the fourth fiscal quarter compared to the prior period due to COVID-19. +• +International net sales, which are included in the reportable operating segment net sales presented above, decreased by 1.5% , compared to the prior period. International net sales represented 34.3% and 36.7% of total net sales for the years ended March 31, 2020 and 2019 , respectively. The decrease was primarily due to lower net sales for the UGG brand in Europe and Asia and the COVID-19 related sales losses in the fourth fiscal quarter, partially offset by higher net sales for the HOKA brand in our international markets and higher sales for the Teva brand in Asia. +Gross Profit. Gross profit as a percentage of net sales, or gross margin, increased to 51.8% from 51.5% , compared to the prior period, primarily due to favorable brand mix and rate expansion for the HOKA brand and fewer closeout sales, partially offset by unfavorable changes in foreign currency exchange rates and higher promotions in Europe and Asia. +Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of the following: +• +Increased variable advertising and promotion expenses of approximately $26,500, primarily due to higher marketing costs to drive sales for the HOKA and UGG brands. +• +Increased operating expenses of approximately $14,500, primarily due to higher professional, consulting, and travel expenses. +• +Increased other variable selling expenses of approximately $11,800, including transaction fees, warehousing and shipping costs, primarily due to higher e-commerce sales and commissions. +• +Increased payroll costs of approximately $8,200, primarily due to higher net payroll, including warehousing, partially offset by lower performance-based compensation for cash bonuses. +• +Increased expenses for allowances for trade accounts receivable of approximately $2,100. +• +Decreased depreciation and amortization expenses of approximately $6,200, primarily due to certain property and equipment and intangible assets being fully amortized during the current period. +• +Decreased rent and occupancy expenses of approximately $5,300, primarily due to lower percentage rent and lower store count, as well as the completion of the consolidation of our warehouses resulting in the closure of our Camarillo distribution center, partially offset by retail store-related operating lease asset impairment charges in the current period. +44 +Table of Contents +Income from Operations. Income from operations by reportable operating segment was as follows: +Years Ended March 31, +2020 +2019 +Change +Amount +Amount +Amount +% +Income (loss) from operations +UGG brand wholesale +$ +303,908 +$ +300,761 +$ +3,147 +1.0 +% +HOKA brand wholesale +61,860 +35,717 +26,143 +73.2 +Teva brand wholesale +30,736 +27,939 +2,797 +10.0 +Sanuk brand wholesale +3,212 +12,781 +(9,569 +) +(74.9 +) +Other brands wholesale +16,087 +10,411 +5,676 +54.5 +Direct-to-Consumer +182,548 +185,449 +(2,901 +) +(1.6 +) +Unallocated overhead costs +(260,216 +) +(245,738 +) +(14,478 +) +(5.9 +) +Total +$ +338,135 +$ +327,320 +$ +10,815 +3.3 +% +The increase in total income from operations, compared to the prior period, was due to higher net sales at higher gross margins, partially offset by slightly higher SG&A expenses as a percentage of net sales. Drivers of significant net changes in income from operations, compared to the prior period, are as follows: +• +The increase in income from operations of HOKA brand wholesale was due to higher net sales at higher gross margins, as well as lower SG&A expenses as a percentage of net sales. +• +The increase in income from operations of Other brands wholesale was due to higher net sales, partially offset by higher SG&A expenses, primarily driven by higher variable marketing and selling expenses. +• +The increase in income from operations of UGG brand wholesale was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales, primarily driven by higher variable marketing expenses. +• +The decrease in income from operations of Sanuk brand wholesale was primarily due to lower net sales at lower gross margins, partially offset by lower SG&A expenses, driven by lower variable marketing and selling expenses. +• +The decrease in income from operations of DTC was primarily due to higher SG&A expenses as a percentage of net sales, primarily driven by higher variable marketing and selling expenses and retail store-related asset impairment charges in the current period, as well as lower gross margins, partially offset by lower overall retail store operating costs due to prior period store closures. +• +The increase in unallocated overhead costs was primarily due to higher operating expenses, including for payroll, professional, consulting, and other variable warehousing costs, as well as higher foreign currency-related losses, partially offset by lower rent and occupancy expenses for our warehouse due to the consolidation of our distribution centers and lower depreciation expense for our corporate headquarters. +Other Income, Net. The increase in total other income, net, compared to the prior period, was primarily due to an increase in interest income driven by higher average invested cash balances, partially offset by higher reserves for penalties and interest on uncertain tax positions. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2020 +2019 +Income tax expense +$ +64,724 +$ +64,626 +Effective income tax rate +19.0 +% +19.6 +% +45 +Table of Contents +The decrease in our effective income tax rate, compared to the prior period, was due to changes in the jurisdictional mix of worldwide income before income taxes for the year ended March 31, 2020 , as well as higher net tax benefits, primarily driven by the favorable settlement of a state income tax audit and net return-to-provision tax benefits completed during the current period, partially offset by additional reserves for uncertain tax positions. +Foreign income before income taxes was $134,755 and $147,204 and worldwide income before income taxes was $340,866 and $328,934 during the years ended March 31, 2020 and 2019 , respectively. The decrease in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to decreased foreign sales as a percentage of worldwide sales. +For the years ended March 31, 2020 and 2019 , we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As of March 31, 2020 , we had $177,229 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries. +We expect our foreign income or loss before income taxes, as well as our effective income tax rate, will continue to fluctuate from period to period based on several factors, including the impact of our global product sourcing organization, our actual results of operations from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). Over the long-term, we believe the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business will result in increases in foreign income or loss before income taxes, both in absolute terms and as a percentage of worldwide income or loss before income taxes. In addition, we believe our effective income tax rate will continue to be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes. For further information on the impacts of the Tax Cuts and Jobs Act (Tax Reform Act), refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report . +Net Income. Net income increased, compared to the prior period, primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted-average common shares outstanding, driven by stock repurchases during the period. +Total Other Comprehensive Loss, Net of Tax. Other comprehensive loss decreased, compared to the prior period, primarily due to lower foreign currency translation losses for changes in our net asset position driven by Chinese and European foreign currency exchange rates. +Liquidity +We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we are required to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. +While subject to the uncertainty surrounding the COVID-19 pandemic, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities (further described below under the heading “Capital Resources”), will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. +As a result of the Tax Reform Act and the transition of the US tax regime from a worldwide tax system to a territorial tax system, we repatriated $150,000 and $130,000 of cash and cash equivalents during the years ended March 31, 2020 and 2019 , respectively. As of March 31, 2020 , we had $177,229 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund +46 +Table of Contents +ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods. For further information on the impacts of the Tax Reform Act, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report . +We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of March 31, 2020 , the aggregate remaining approved amount under our stock repurchase programs was $159,807 . Our Stock Repurchase Programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. We are temporarily pausing repurchases under our Stock Repurchase Programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we retain the discretion to commence repurchases in future periods. +Our liquidity may be further impacted by additional factors, including our results of operations, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivable in a timely manner and effectively manage our inventories, and our ability to respond to economic, political and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in stock repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. +If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as operating and financial covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. +Capital Resources +Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended. The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five -year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +As of March 31, 2020 , we had no outstanding balance, outstanding letters of credit of $549 , and available borrowings of $399,451 under our Primary Credit Facility. +China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY 300,000 , or $42,304 . +As of March 31, 2020 , we had no outstanding balance, outstanding bank guarantees of $28 , and available borrowings of $42,276 under our China Credit Facility. +Japan Credit Facility. We have renewed the Japan Credit Facility through January 31, 2021 substantially under the terms of the original agreement. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY 3,000,000 , or $27,746 . +As of March 31, 2020 , we had no outstanding balance and had available borrowings of $27,746 under our Japan Credit Facility. +47 +Table of Contents +Mortgage. As of March 31, 2020 , we had an outstanding principal balance under the mortgage, secured by the property on which our corporate headquarters is located, of $30,901 . The loan will mature and require a balloon payment in the amount of $23,695 , in addition to any then-outstanding balance, on July 1, 2029 . +Debt Covenants. As of March 31, 2020 , we were in compliance with all debt covenants under our revolving credit facilities and mortgage. +Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements included in Part IV within this Annual Report for further information on our revolving credit facilities and our mortgage. +Cash Flows +The following table summarizes our cash flows for the periods presented: +Years Ended March 31, +2020 +2019 +Change +Amount +Amount +Amount +% +Net cash provided by operating activities +$ +286,334 +$ +359,505 +$ +(73,171 +) +(20.4 +)% +Net cash used in investing activities +(31,964 +) +(29,018 +) +(2,946 +) +(10.2 +) +Net cash used in financing activities +(192,114 +) +(167,193 +) +(24,921 +) +(14.9 +) +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income, other cash receipts and expenditure adjustments, and changes in working capital. +The decrease in net cash provided by operating activities during the year ended March 31, 2020 , compared to the prior period, was primarily due to a net negative change in operating assets and liabilities of $74,075 , partially offset by a positive net change in net income after non-cash adjustments of $904 . The changes in operating assets and liabilities were primarily due to net negative changes in inventories, net, income taxes payable, other assets, other accrued expenses, and income tax receivable, partially offset by net positive changes in trade accounts receivable, net. +Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2020 , compared to the prior period, was primarily due to higher capital expenditures on information systems, hardware, and software, partially offset by lower expenditures for warehouse improvements due to the completion of the Moreno Valley, California distribution center during the prior period. +Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2020 , compared to the prior period, was primarily due to higher stock repurchases, partially offset by proceeds from the exercise of stock options. +Off-Balance Sheet Arrangements +We do not have any off-balance sheet arrangements. +48 +Table of Contents +Contractual Obligations +The following table summarizes our contractual obligations as of March 31, 2020 and the effects of such obligations in future periods: +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations (1) +$ +296,738 +$ +53,212 +$ +93,456 +$ +68,218 +$ +81,852 +Purchase obligations for product (2) +361,881 +361,881 +— +— +— +Purchase obligations for commodities (3) +185,969 +105,665 +80,304 +— +— +Other purchase obligations (4) +46,059 +28,613 +17,446 +— +— +Mortgage obligation (5) +43,748 +2,168 +4,336 +4,336 +32,908 +Net unrecognized tax benefits (6) +5,317 +— +5,317 +— +— +Total +$ +939,712 +$ +551,539 +$ +200,859 +$ +72,554 +$ +114,760 +(1) +Our operating lease commitments consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. +(2) +Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. Due to the impacts of the COVID-19 pandemic on the retail environment and consumer spending patterns, we are currently reviewing our inventory purchase obligations with our third-party manufacturers and may delay or cancel certain product orders that could result in changes to the currently reported amount. +(3) +Our purchase obligations for commodities include sheepskin and leather, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. +(4) +Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts, and requirements to pay promotional expenses, which are due periodically during fiscal years 2021 through 2024. +As of March 31, 2020 , we had $9,676 of commitments for future capital expenditures, primarily related to retail store build-out of leasehold improvements for a new flagship store location that is currently expected to replace an existing flagship store during the third quarter of the fiscal year ending March 31, 2021, as well as continued investments in our warehouse and distribution center located in Moreno Valley, California. +We estimate that the capital expenditures for the fiscal year ending March 31, 2021, including the aforementioned commitments, will range from approximately $45,000 to $50,000 . We anticipate these expenditures will primarily relate to continued investment in our primary warehouse and distribution center, as well as IT infrastructure, system upgrade costs, and the build-out of a new flagship retail store, as well as other fixtures and upgrades for our global retail stores. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets, the impacts of the COVID-19 pandemic, and the timing of other expenditures. +49 +Table of Contents +(5) +Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. Payments represent principal and interest amounts. Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our mortgage obligation and payments. +(6) +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2020 , the timing of future cash outflows is highly uncertain related to statute of limitations liabilities of $11,368 , therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Impact of Foreign Currency Exchange Rate Fluctuations +Foreign currency exchange rate fluctuations had an incremental negative impact on the years ended March 31, 2020 and 2019. +Refer to “Results of Operations,” above within this Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated statements of comprehensive income , and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on the impact of foreign currency exchange rate fluctuations on our results of operations. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements , based on historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements : allowances for doubtful accounts; estimated returns liability; sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated for these key estimates. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected. +Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income . +Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income . Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information. +50 +Table of Contents +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2020 +2019 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +206,742 +100.0 +% +$ +197,426 +100.0 +% +Allowance for doubtful accounts +(6,989 +) +(3.4 +) +(5,073 +) +(2.6 +) +Allowance for sales discounts +(1,030 +) +(0.5 +) +(710 +) +(0.4 +) +Allowance for chargebacks +(13,127 +) +(6.3 +) +(13,041 +) +(6.6 +) +Trade accounts receivable, net +$ +185,596 +89.8 +% +$ +178,602 +90.5 +% +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for accounts which we consider having credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts as of March 31, 2020 by approximately $1,600. +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for sales discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks and markdowns from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. +Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2020 +2019 +Amount +% of Net Sales +Amount +% of Net Sales +Net Sales +Wholesale +$ +230,677 +61.5 +% +$ +237,491 +60.3 +% +Direct-to-Consumer +144,233 +38.5 +156,639 +39.7 +Total +$ +374,910 +100.0 +% +$ +394,130 +100.0 +% +As of March 31, +2020 +2019 +Amount +% of Net Sales +Amount* +% of Net Sales +Sales Return Liability +Wholesale +$ +21,846 +9.5 +% +$ +21,538 +9.1 +% +Direct-to-Consumer +3,821 +2.6 +3,249 +2.1 +Total +$ +25,667 +6.8 +% +$ +24,787 +6.3 +% +51 +Table of Contents +Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return liability are recorded against gross sales for the contract liability and cost of sales for the contract asset. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the liability for total returns as of March 31, 2020 by approximately $3,000. +Inventory Reserves. The following tables summarize estimates for our inventory reserves: +As of March 31, +2020 +2019 +Amount +% of Gross Inventory +Amount +% of Gross Inventory +Gross Inventories +$ +323,847 +100.0 +% +$ +288,565 +100.0 +% +Write-down of inventories +(12,227 +) +(3.8 +) +(9,723 +) +(3.4 +) +Inventories, net +$ +311,620 +96.2 +% +$ +278,842 +96.6 +% +We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve as of March 31, 2020 by approximately $1,900. +Operating Lease Assets and Lease Liabilities. Beginning April 1, 2019, we adopted the new lease standard on a modified retrospective basis, as set forth in Accounting Standards Update No. 2016-02, Leases , as amended. Accordingly, the comparative consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. As a result, as of April 1, 2019, we recognized the following in our consolidated financial statements : +• +A $230,048 increase to total assets due to the recognition of right-of-use (ROU) assets, net of prior legacy US GAAP lease-related balances for deferred rent obligations and tenant allowances of $27,895 , as previously recorded in other accrued expenses, deferred rent obligations, and other long-term liabilities, in the consolidated balance sheets . In addition, we recorded a corresponding $254,538 increase to total liabilities due to the recognition of lease liabilities, net of a prior legacy US GAAP lease-related balance for prepaid rent of $4,846 , as previously recorded in prepaid expenses, in the consolidated balance sheets . ROU assets and lease liabilities include lease obligations for operating leases for retail stores, showrooms, offices, and distribution facilities. ROU assets and related lease liabilities are presented as operating lease assets and operating lease liabilities in the consolidated balance sheets . +• +A net cumulative effect after-tax decrease to opening retained earnings of $1,068 in the consolidated balance sheets due to the impairment of select operating lease assets related to retail stores whose fixed assets had been previously impaired and for which the initial carrying value of the operating lease assets were determined to be above fair market value on adoption. +52 +Table of Contents +• +No material effect on the consolidated statements of comprehensive income as the classification and recognition of lease cost did not materially change from legacy US GAAP. Similarly, it did not have a material impact on our liquidity or on its debt covenant compliance under current agreements including its borrowing strategy subject to leverage ratios. However, it did result in additional disclosures and presentation changes to the consolidated statements of cash flows in the current period, including supplemental cash flow disclosure, as well as expanded disclosures on existing and new lease commitments. +The adoption of the new lease standard had the following impact on our accounting policies applied to our consolidated financial statements : +• +We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by our options to extend (or not to terminate) the lease that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +• +We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we generally derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our noncollateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Refer to Note 1, “General,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and expanded disclosures required under the new lease standard. +Goodwill and Indefinite-Lived Intangible Assets. We do not amortize goodwill and indefinite-lived intangible assets but instead test for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable at the reporting unit level. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Qualitative factors considered include significant or adverse changes in customer demand, historical financial performance, changes in management or key personnel, macroeconomic and industry conditions, and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. +During the years ended March 31, 2020 and 2019 , we performed our annual impairment assessment and evaluated the UGG and HOKA brands’ wholesale reportable operating segment goodwill as of December 31st and evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands’ goodwill and Teva brand indefinite-lived trademarks, each of the brands’ actual fiscal year sales and results of operations, and the brands’ long-term forecasts of sales and results of operations as of their evaluation dates, we concluded that these assets were not impaired. +53 +Table of Contents +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +We did not identify any definite-lived intangible asset impairments during the years ended March 31, 2020 and 2019 . +During the years ended March 31, 2020 and 2019 , we recorded impairment losses for other long-lived assets, primarily for certain retail store operating lease assets and related leasehold improvements due to performance or store closures of $1,365 and $180 , respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income . +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information. +Performance-Based Compensation . In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Compensation Committee reviews our results of operations from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each fiscal year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior fiscal year’s performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense decreased $14,883 during the year ended March 31, 2020 compared to the year ended March 31, 2019 . The primary reason for this decrease was the partial achievement of the performance criteria governing our cash bonuses compared to an over achievement in the prior period. Performance-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income . +Refer to Note 8, “Stock-Based Compensation,” of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation. +54 +Table of Contents +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our U.S and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed income (PTI) by the US Internal Revenue Service does not require recognition of a deferred tax liability as the liability has already been recognized under the Tax Reform Act. We have not changed our indefinite reinvestment assertion of foreign earnings other than PTI. +In accordance with the SEC Staff Accounting Bulletin No. 118 (SAB 118) issued December 22, 2017, we completed our accounting for the effects of the Tax Reform Act during the quarter ended December 31, 2018. This includes provisions of the Tax Reform Act which were effective on or after January 1, 2018, which include but are not limited to, US taxation of foreign earnings considered global intangible low-taxed income (commonly referred to as GILTI), minimum tax on base erosion anti-abuse, and limitations on the deductibility of interest expense and executive compensation. SAB 118 provided guidance on accounting for the impact of the Tax Reform Act. SAB 118 provided a measurement period, which should not extend beyond one year from the enactment date, during which we completed the accounting for the impacts of the Tax Reform Act under US GAAP. We continue to analyze the additional guidance from such standard setting and regulatory bodies as the US Internal Revenue Service, US Treasury Department, and the Financial Accounting Standards Board, among others. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, which include sheepskin, leather, and wool. The supply of sheepskin, which is used to manufacture a significant portion of the UGG brand products, is in high demand and there are a limited number of suppliers that can meet our expectations for the quantity and quality of sheepskin that we require. We presently rely on two tanneries to provide most of our sheepskin. While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our customers and our competitors has changed. We believe significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin. +We typically fix prices for all of our raw materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and other pricing arrangements we use for sheepskin and leather may result in purchase obligations which are not recorded in our consolidated balance sheets . With respect to sheepskin and leather, in the event of significant price increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our gross margins. +55 +Table of Contents +Foreign Currency Exchange Rate Risk +Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position, and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although most of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than the subsidiaries’ functional currencies. We translate all assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recorded in other comprehensive income. Foreign currency exchange rate fluctuations affect our reported profits and can make comparisons from year to year more difficult. +We hedge certain foreign currency exchange rate risk from existing assets and liabilities. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. As of March 31, 2020 , a hypothetical 10.0% foreign currency exchange rate fluctuation would have had no impact on the fair value of our financial instruments as there were none outstanding. Refer to Note 9, “Derivative Instruments,” of our consolidated financial statements included in Part IV within this Annual Report for further information on our use of derivative contracts. As of March 31, 2020 , there were no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure. +Interest Rate Risk +Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including the Alternate Base Rate, the federal funds effective rate, currency-specific London Interbank Offered Rate, and the Canadian Dollar Offered Rate for our Primary Credit Facility, People’s Bank of China market rate for our China Credit Facility, and Tokyo Interbank Offered Rate for our Japan Credit Facility. A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an immaterial aggregate change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2020 . Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements included in Part IV within this Annual Report for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements , the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed within this Annual Report in a separate section following Part IV , as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report . +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +56 +Table of Contents +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020 . Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020 . +b) Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2020 , our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2020 . The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV , “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report . +c) Internal Control over Financial Reporting +During the first quarter of fiscal year 2020, we updated our control framework for certain new internal controls and changes to certain existing internal controls related to the adoption of ASU No. 2016-02, as amended, otherwise known as the new lease standard, and related financial statement reporting and disclosure. There were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +57 +Table of Contents +PART III +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2020 , 2019 , and 2018 are stated in Items 10, 11, 12, 13, and 14 herein as “year ended” or “years ended.” +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2020 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2020 pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +58 +Table of Contents +PART IV +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA One One® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® (Koolaburra), and UGGpure® (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +The defined periods for the fiscal years ended March 31, 2020 , 2019 , and 2018 are stated in Item 15 herein as “year ended” or “years ended,” +59 +Table of Contents +Item 15. Exhibits and Financial Statement Schedule +Refer to Part IV , “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010 and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as updated through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018 and incorporated by reference herein) +4.1 +Description of Deckers Outdoor Corporation’s Capital Stock (Exhibit 4.1 to the Registrant’s Form 10-K filed on May 30, 2019 and incorporated by reference herein) +10.1 +Lease Agreement, dated September 15, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.2 +First Amendment to Lease Agreement, dated December 1, 2004, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.38 to the Registrant's Form 10-K filed on March 16, 2005 and incorporated by reference herein) +10.3 +Amendment to Lease Agreement, dated September 1, 2011, by and between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.24 to the Registrant’s Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.4 +Amendment to Lease Agreement, dated September 1, 2011, by and between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.23 to the Registrant’s Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Amendment to Lease Agreement, dated June 5, 2018, by and between STAG Camarillo 2, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012 (Exhibit 10.5 to the Registrant’s Form 10-K filed on May 30, 2019 and incorporated by reference herein) +10.6 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.7 +First Amendment to Lease Agreement, dated June 6, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +10.8 +Second Amendment to Lease Agreement, dated July 17, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +10.9 +Credit Agreement, dated as of September 20, 2018, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC and Deckers Outdoor International Limited, as borrowers, JP Morgan Chase Bank, N.A. as Administrative Agent, Citibank, N.A., Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, MUFG Bank, Ltd. and U.S. Bank National Association, as Co-Documentation Agents, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +10.10 +Term Loan Agreement, dated July 9, 2014, by and among Deckers Cabrillo, LLC, as Borrower and California Bank & Trust, as Lender (Exhibit 10.1 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.11 +Second Modification Agreement, dated October 11, 2018, to Term Loan Agreement dated as of July 9, 2014, among Deckers Cabrillo, LLC as Borrower and California Bank & Trust, as Lender (Exhibit 10.11 to the Registrant’s Form 10-K filed on May 30, 2019 and incorporated by reference herein) +60 +Table of Contents +10.12 +Continuing Guaranty Agreement, dated July 9, 2014, by and among Deckers Outdoor Corporation and California Bank & Trust (Exhibit 10.2 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.13 +Deed of Trust, Assignment of Leases and Rents and Security Agreement (including Fixture Filing), dated July 9, 2014, executed by Deckers Cabrillo, LLC (Exhibit 10.3 to the Registrant’s Form 8-K filed on July 15, 2014 and incorporated by reference herein) +10.14 +Form of Change in Control and Severance Agreement (Exhibit 10.14 to the Registrant’s Form 10-K filed on May 30, 2019 and incorporated by reference herein) +#10.15 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.16 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.17 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective as of December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.18 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.19 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.20 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.21 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.22 +Form of Restricted Stock Unit Award Agreement under the 2015 Stock Incentive Plan (2016 LTIP Financial Performance Award) (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 24, 2015 and incorporated by reference herein) +#10.23 +Form of Stock Unit Award Agreement (2016 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.6 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.24 +Form of Stock Unit Award Agreement (2017 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.25 +Form of Stock Unit Award Agreement (2017 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2016 and incorporated by reference herein) +#10.26 +Form of Stock Unit Award Agreement (2018 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.27 +Form of Stock Unit Award Agreement (2018 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.28 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.29 +Form of Stock Unit Award Agreement (2019 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.30 +Form of Stock Unit Award Agreement (2019 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.31 +Form of Restricted Stock Unit Award Agreement under 2015 Stock Incentive Plan (FY 2019) LTIP Agreement (Exhibit 10.2 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +#10.32 +Form of Stock Award Agreement (2020 Time-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 8, 2019 and incorporated by referenced herein) +61 +Table of Contents +#10.33 +Form of Stock Unit Award Agreement (2020 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 8, 2019 and incorporated by reference herein) +#10.34 +Form of Restricted Stock Unit Award Agreement under the 2015 Stock Incentive Plan (FY2020) LTIP Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2019 and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +*101.INS +XBRL Instance Document +*101.SCH +XBRL Taxonomy Extension Schema Document +*101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB +XBRL Taxonomy Extension Label Linkbase Document +*101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +*104 +Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +62 +Table of Contents +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: June 1, 2020 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +/s/ DAVID POWERS +Chief Executive Officer, President and Director +(Principal Executive Officer) +June 1, 2020 +David Powers +/s/ STEVEN J. FASCHING +Chief Financial Officer +(Principal Financial and Accounting Officer) +June 1, 2020 +Steven J. Fasching +/s/ MICHAEL F. DEVINE, III +Chairman of the Board +June 1, 2020 +Michael F. Devine, III +/s/ NELSON C. CHAN +Director +June 1, 2020 +Nelson C. Chan +/s/ CINDY L. DAVIS +Director +June 1, 2020 +Cindy L. Davis +/s/ JUAN R. FIGUEREO +Director +June 1, 2020 +Juan R. Figuereo +/s/ JOHN M. GIBBONS +Director +June 1, 2020 +John M. Gibbons +/s/ JAMES QUINN +Director +June 1, 2020 +James Quinn +/s/ LAURI M. SHANAHAN +Director +June 1, 2020 +Lauri M. Shanahan +/s/ BRIAN A. SPALY +Director +June 1, 2020 +Brian A. Spaly +/s/ BONITA C. STEWART +Director +June 1, 2020 +Bonita C. Stewart +63 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +F-2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +F-4 +Consolidated Balance Sheets +F-5 +Consolidated Statements of Comprehensive Income +F-6 +Consolidated Statements of Stockholders' Equity +F-7 +Consolidated Statements of Cash Flows +F-8 +Notes to Consolidated Financial Statements +F-10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F-45 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2020 and 2019 , the related consolidated statements of comprehensive income , stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2020 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019 , and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2020 in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2020 , based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 1, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 1 and Note 7 to the consolidated financial statements , the Company changed its method of accounting for leases as of April 1, 2019 due to the adoption of Accounting Standard Update (ASU) 2016-02 and all related amendments. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements , whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements . Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements . We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements , taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Evaluation of the wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements , the Company has recorded a sales returns liability as of March 31, 2020 of $25,667 , of which the majority is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. The length of time between when a sale is made and when the customer returns the product varies on a customer-by-customer basis. Historical returns rates can also be impacted by recent events or known trends. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to develop the wholesale sales returns liability. +The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s process for estimating the wholesale sales return liability, including the development +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +of estimated return rates which is based on approved customer requests, historical return rates and recent events. We evaluated the wholesale sales return liability for a sample of wholesale customers using a combination of Company internal data, known recent trends, and actual and historical known information. We tested the sales return lag by comparing it to historical sales returns activity by brand and by return reason. We reviewed the Company’s internal data and external correspondence to assess their ability to properly consider recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements . +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +June 1, 2020 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020 , based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2020 and 2019 , the related consolidated statements of comprehensive income , stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2020 , and the related notes and financial statement schedule (collectively, the consolidated financial statements ), and our report dated June 1, 2020 expressed an unqualified opinion on those consolidated financial statements . +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +June 1, 2020 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2020 +2019 +ASSETS +Cash and cash equivalents +$ +649,436 +$ +589,692 +Trade accounts receivable, net of allowances ($21,146 and $18,824 as of March 31, 2020 and March 31, 2019, respectively) +185,596 +178,602 +Inventories, net of reserves ($12,227 and $9,723 as of March 31,2020 and March 31, 2019, respectively) +311,620 +278,842 +Prepaid expenses +17,760 +19,901 +Other current assets +21,548 +26,028 +Income tax receivable +8,151 +2,340 +Total current assets +1,194,111 +1,095,405 +Property and equipment, net of accumulated depreciation ($242,138 and $235,939 as of March 31, 2020 and March 31, 2019, respectively) +209,037 +213,796 +Operating lease assets +243,522 +— +Goodwill +13,990 +13,990 +Other intangible assets, net of accumulated amortization ($74,421 and $71,186 as of March 31, 2020 and March 31, 2019, respectively) +48,016 +51,494 +Deferred tax assets, net +28,233 +30,870 +Other assets +28,209 +21,651 +Total assets +$ +1,765,118 +$ +1,427,206 +LIABILITIES AND STOCKHOLDERS' EQUITY +Short-term borrowings +$ +638 +$ +603 +Trade accounts payable +147,892 +124,974 +Accrued payroll +42,309 +54,462 +Operating lease liabilities +49,091 +— +Other accrued expenses +46,281 +47,963 +Income taxes payable +11,104 +19,283 +Value added tax payable +3,631 +3,239 +Total current liabilities +300,946 +250,524 +Mortgage payable +30,263 +30,901 +Long-term operating lease liabilities +215,724 +— +Income tax liability +63,547 +60,616 +Deferred rent obligations +— +21,107 +Other long-term liabilities +14,518 +18,928 +Total long-term liabilities +324,052 +131,552 +Commitments and contingencies +Stockholders' equity +Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 27,999 and 29,141 as of March 31, 2020 and March 31, 2019, respectively) +280 +291 +Additional paid-in capital +191,451 +178,227 +Retained earnings +973,948 +889,266 +Accumulated other comprehensive loss +( 25,559 +) +( 22,654 +) +Total stockholders' equity +1,140,120 +1,045,130 +Total liabilities and stockholders' equity +$ +1,765,118 +$ +1,427,206 +See accompanying notes to the consolidated financial statements . +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2020 +2019 +2018 +Net sales +$ +2,132,689 +$ +2,020,437 +$ +1,903,339 +Cost of sales +1,029,016 +980,187 +971,697 +Gross profit +1,103,673 +1,040,250 +931,642 +Selling, general and administrative expenses +765,538 +712,930 +709,058 +Income from operations +338,135 +327,320 +222,584 +Interest income +( 7,261 +) +( 6,028 +) +( 3,057 +) +Interest expense +5,046 +4,661 +4,585 +Other (income) expense, net +( 516 +) +( 247 +) +360 +Total other (income) expense, net +( 2,731 +) +( 1,614 +) +1,888 +Income before income taxes +340,866 +328,934 +220,696 +Income tax expense +64,724 +64,626 +106,302 +Net income +276,142 +264,308 +114,394 +Other comprehensive (loss) income, net of tax +Unrealized loss on cash flow hedges +— +( 243 +) +( 613 +) +Foreign currency translation (loss) gain +( 2,905 +) +( 9,428 +) +14,081 +Total other comprehensive (loss) income +( 2,905 +) +( 9,671 +) +13,468 +Comprehensive income +$ +273,237 +$ +254,637 +$ +127,862 +Net income per share +Basic +$ +9.73 +$ +8.92 +$ +3.60 +Diluted +$ +9.62 +$ +8.84 +$ +3.58 +Weighted-average common shares outstanding +Basic +28,385 +29,641 +31,758 +Diluted +28,694 +29,903 +31,996 +See accompanying notes to the consolidated financial statements . +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock +Additional Paid-in Capital +Retained Earnings +Accumulated Other Comprehensive (Loss) Income +Total Stockholders' +Equity +Shares +Amount +Balance, March 31, 2017 +31,987 +$ +320 +$ +160,797 +$ +819,589 +$ +( 26,451 +) +$ +954,255 +Stock-based compensation expense +15 +— +14,302 +— +— +14,302 +Shares issued upon vesting +148 +1 +764 +— +— +765 +Cumulative adjustment from adoption of recent accounting pronouncements +— +— +— +1,558 +— +1,558 +Shares withheld for taxes +— +— +( 8,276 +) +— +— +( 8,276 +) +Repurchases of common stock +( 1,703 +) +( 17 +) +— +( 149,670 +) +— +( 149,687 +) +Net income +— +— +— +114,394 +— +114,394 +Total other comprehensive income +— +— +— +— +13,468 +13,468 +Balance, March 31, 2018 +30,447 +304 +167,587 +785,871 +( 12,983 +) +940,779 +Stock-based compensation expense +10 +— +14,773 +— +— +14,773 +Shares issued upon vesting +85 +1 +1,024 +— +— +1,025 +Cumulative adjustment from adoption of recent accounting pronouncements +— +— +— +468 +— +468 +Shares withheld for taxes +— +— +( 5,157 +) +— +— +( 5,157 +) +Repurchases of common stock +( 1,401 +) +( 14 +) +— +( 161,381 +) +— +( 161,395 +) +Net income +— +— +— +264,308 +— +264,308 +Total other comprehensive loss +— +— +— +— +( 9,671 +) +( 9,671 +) +Balance, March 31, 2019 +29,141 +291 +178,227 +889,266 +( 22,654 +) +1,045,130 +Stock-based compensation expense +10 +— +14,471 +— +— +14,471 +Shares issued upon vesting +86 +1 +1,287 +— +— +1,288 +Exercise of stock options +58 +1 +3,614 +— +— +3,615 +Cumulative adjustment from adoption of recent accounting pronouncements +— +— +— +( 1,068 +) +— +( 1,068 +) +Shares withheld for taxes +— +— +( 6,148 +) +— +— +( 6,148 +) +Repurchases of common stock +( 1,296 +) +( 13 +) +— +( 190,392 +) +— +( 190,405 +) +Net income +— +— +— +276,142 +— +276,142 +Total other comprehensive loss +— +— +— +— +( 2,905 +) +( 2,905 +) +Balance, March 31, 2020 +27,999 +$ +280 +$ +191,451 +$ +973,948 +$ +( 25,559 +) +$ +1,140,120 +See accompanying notes to the consolidated financial statements . +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2020 +2019 +2018 +OPERATING ACTIVITIES +Net income +$ +276,142 +$ +264,308 +$ +114,394 +Reconciliation of net income to net cash provided by (used in) operating activities: +Depreciation, amortization and accretion +38,912 +44,941 +48,572 +Loss on extinguishment of debt +— +447 +— +Bad debt expense +3,498 +2,849 +4,168 +Deferred tax expense +2,934 +6,939 +8,138 +Stock-based compensation +14,477 +14,774 +14,306 +Excess tax benefit from stock-based compensation +( 1,953 +) +( 546 +) +( 1,982 +) +Loss on disposal of property and equipment +698 +277 +387 +Impairment of operating lease assets and other long-lived assets +1,365 +180 +2,417 +Restructuring charges +— +295 +1,667 +Gain on settlement of asset retirement obligations +( 705 +) +— +— +Changes in operating assets and liabilities: +Trade accounts receivable, net +( 10,493 +) +( 16,157 +) +10,770 +Inventories, net +( 32,777 +) +8,827 +( 751 +) +Prepaid expenses and other current assets +2,477 +( 515 +) +11,124 +Income tax receivable +( 5,811 +) +( 165 +) +26,999 +Net operating lease assets and liabilities +( 3,264 +) +— +— +Other assets +( 6,558 +) +2,630 +( 1,714 +) +Trade accounts payable +23,312 +26,667 +( 4,462 +) +Other accrued expenses +( 11,112 +) +( 2,792 +) +30,904 +Income taxes payable +( 6,226 +) +4,355 +290 +Long-term liabilities +1,418 +2,191 +62,128 +Net cash provided by operating activities +286,334 +359,505 +327,355 +INVESTING ACTIVITIES +Purchases of property and equipment +( 32,455 +) +( 29,086 +) +( 34,813 +) +Proceeds from sales of property and equipment +491 +68 +116 +Net cash used in investing activities +( 31,964 +) +( 29,018 +) +( 34,697 +) +FINANCING ACTIVITIES +Proceeds from short-term borrowings +69,336 +162,001 +214,751 +Repayments of short-term borrowings +( 69,197 +) +( 161,621 +) +( 214,889 +) +Debt issuance costs on short-term borrowings +— +( 1,297 +) +— +Proceeds from issuance of stock +1,288 +1,025 +765 +Proceeds from exercise of options +3,615 +— +— +Repurchases of common stock +( 190,405 +) +( 161,395 +) +( 149,687 +) +Cash paid for shares withheld for taxes +( 6,148 +) +( 5,328 +) +( 8,105 +) +Repayments of mortgage principal +( 603 +) +( 578 +) +( 550 +) +Net cash used in financing activities +( 192,114 +) +( 167,193 +) +( 157,715 +) +Effect of foreign currency exchange rates on cash and cash equivalents +( 2,512 +) +( 3,572 +) +3,263 +Net change in cash and cash equivalents +59,744 +159,722 +138,206 +Cash and cash equivalents at beginning of period +589,692 +429,970 +291,764 +Cash and cash equivalents at end of period +$ +649,436 +$ +589,692 +$ +429,970 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2020 +2019 +2018 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes, net of refunds of $5,389, $3,824, and $23,133, as of March 31, 2020, 2019, and 2018, respectively +$ +74,573 +$ +53,657 +$ +14,407 +Interest +2,466 +3,811 +3,774 +Operating leases +61,120 +— +— +Non-cash investing activities +Accrued for purchases of property and equipment +1,171 +1,789 +2,020 +Accrued for asset retirement obligations +224 +4,706 +1,359 +Non-cash financing activities +Accrued for shares withheld for taxes +— +— +171 +See accompanying notes to the consolidated financial statements . +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 1. General +The Company . Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company’s proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands. +The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company’s products. A significant part of the Company’s business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements ) as of March 31, 2020 and 2019 and or the years ended March 31, 2020 , 2019 , and 2018 were prepared in accordance with accounting principles generally accepted in the United States (US GAAP). +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Reclassifications . Certain reclassifications were made for prior periods presented to conform to the current period presentation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Although the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, the Company’s consolidated financial statements may be materially affected. +Significant areas requiring the use of management estimates relate to inventory write-downs, trade accounts receivable allowances, including variable consideration for net sales provided to customers, contract assets and liabilities, stock-based compensation, impairment assessments, goodwill and other intangible assets, depreciation and amortization, income tax receivables and liabilities, uncertain tax positions, the fair value of financial instruments, the reasonably certain lease term, lease classification, and the Company's incremental borrowing rate (IBR) utilized to discount its unpaid lease payments to measure its operating lease assets and liabilities. +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly-owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in selling, general and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI). +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Reportable Operating Segments. The Company’s six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (referred to herein as reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +Restructuring Plan . In February 2016, the Company announced the implementation of a multi-year restructuring plan which was designed to realign its brands across its Fashion Lifestyle and Performance Lifestyle groups, optimize the Company’s worldwide owned retail store fleet, and consolidate its management and operations. In general, the intent of this restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands. As of March 31, 2019, the Company has completed its restructuring plan, incurred cumulative restructuring charges to date, and does not anticipate incurring restructuring charges in connection with this plan in future periods. +In connection with the restructuring plan, the Company closed 46 Company-owned global retail stores as of March 31, 2019, including conversions to partner retail stores, and consolidated its brand operations and corporate headquarters. Through March 31, 2019, the Company had incurred cumulative restructuring charges by applicable reportable operating segment as follows: +Years Ended March 31, +Cumulative Restructuring Charges* +2019 +2018 +UGG brand wholesale +$ +— +$ +— +$ +2,238 +Sanuk brand wholesale +— +— +3,068 +Other brands wholesale +— +— +2,263 +Direct-to-Consumer +— +149 +23,454 +Unallocated overhead costs +295 +1,518 +24,596 +Total +$ +295 +$ +1,667 +$ +55,619 +*Cumulative restructuring charges include restructuring charges of $ 28,984 and $ 24,673 , which were incurred during the fiscal years ended March 31, 2017 and 2016, respectively. +During the years ended March 31, 2019 and 2018, total restructuring charges incurred and stated above were recorded in SG&A expenses in the consolidated statements of comprehensive income . +The remaining accrued liabilities for cumulative restructuring charges incurred to date under the Company’s restructuring plan and recorded in the consolidated balance sheets , are as follows: +Lease Termination +Severance Costs +Other* +Total +Balance, March 31, 2017 +$ +4,572 +$ +2,555 +$ +3,953 +$ +11,080 +Additional charges +149 +— +1,518 +1,667 +Paid in cash +( 1,076 +) +( 2,555 +) +( 4,388 +) +( 8,019 +) +Balance, March 31, 2018 +3,645 +— +1,083 +4,728 +Additional charges +295 +— +— +295 +Paid in cash +( 1,856 +) +— +( 581 +) +( 2,437 +) +Balance, March 31, 2019 +2,084 +— +502 +2,586 +Paid in cash +( 656 +) +— +( 317 +) +( 973 +) +Balance, March 31, 2020 +$ +1,428 +$ +— +$ +185 +$ +1,613 +*Includes costs related to office consolidations and termination of contracts and services. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading "Recent Developments" within this Annual Report for information regarding the Company’s realized annualized SG&A expense savings as of March 31, 2019 resulting from the implementation of this restructuring plan. +Recent Accounting Pronouncements. The Financial Accounting Standards Board has issued accounting standards updates (ASUs) that have been adopted and not yet adopted by the Company for its annual and interim reporting periods as stated below. +Recently Adopted. Adopted ASUs during the year ended March 31, 2020 and the impact on the Company, were as follows: +Standard +Description +Impact on Adoption +ASU No. 2016-02, Leases (as amended by ASUs 2015-14, 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01) +Requires a lessee to recognize a lease asset and lease liability in its consolidated balance sheets. A lessee should recognize a right-of-use (ROU) asset representing its right to use the underlying asset for the estimated lease term, and a liability for related lease payments. +The Company adopted this ASU (the new lease standard) on a modified retrospective basis beginning April 1, 2019. On adoption, the Company recorded a $230,048 increase to total assets due to the recognition of ROU assets, net of prior legacy US GAAP lease-related balances for deferred rent obligations and tenant allowances of $27,895, as previously recorded in other accrued expenses, deferred rent obligations, and other long-term liabilities, in the consolidated balance sheets. In addition, the Company recorded a corresponding $254,538 increase to total liabilities due to the recognition of lease liabilities, net of a prior legacy US GAAP lease-related balance for prepaid rent of $4,846, as previously recorded in prepaid expenses, in the consolidated balance sheets. ROU assets and lease liabilities include lease obligations for operating leases for retail stores, showrooms, offices, and distribution facilities. ROU assets and related lease liabilities are presented as operating lease assets and operating lease liabilities in the consolidated balance sheets. +In addition, the Company recorded a net cumulative effect after-tax decrease to opening retained earnings of $1,068 in the consolidated balance sheets due to the impairment of select operating lease assets related to retail stores whose fixed assets had been previously impaired and for which the initial carrying value of the operating lease assets were determined to be above fair market value on adoption. +The adoption of the new lease standard did not materially affect the consolidated statements of comprehensive income as the classification and recognition of lease cost did not materially change from legacy US GAAP. Similarly, it did not have a material impact on the Company's liquidity or on its debt covenant compliance under current agreements including its borrowing strategy subject to leverage ratios. However, it did result in additional disclosures and presentation changes to the consolidated statements of cash flows in the current period, including supplemental cash flow disclosure, as well as expanded disclosures on existing and new lease commitments. +The Company elected the “package of practical expedients” permitted under the transition guidance of this ASU, which provides a number of transition options, including (1) exemption from reassessment of prior conclusions about lease identification, classification and initial direct costs; (2) the ability to elect a short-term lease recognition exemption; and (3) the option to not separate lease and non-lease components. In addition, the Company did not apply the optional hindsight election and maintained original lease terms as estimated at lease inception. +The comparative consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented. Refer to Note 7, “Leases and Other Commitments,” for further information, including expanded disclosures required under the new lease standard. Refer to the section below entitled “Operating Lease Assets and Lease Liabilities” for further details on the Company’s accounting policy. +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Standard +Description +Impact on Adoption +ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (as amended by ASUs 2018-16 and 2019-04) +Seeks to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities and to reduce the complexity of and simplify the application of hedge accounting. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness. +The Company adopted this ASU (the new hedging standard) beginning April 1, 2019 on a prospective basis, which did not have a material impact on the consolidated financial statements. +However, the Company made a change in accounting policy with respect to ineffective hedges and elected not to exclude hedge components from the periodic assessment of hedge effectiveness. Under legacy US GAAP, these amounts were excluded from hedge effectiveness and therefore excluded as a component of accumulated other comprehensive loss (AOCL), and immediately recorded in SG&A expenses in the consolidated statements of comprehensive income. Under the new hedging standard, these gains or losses will now be recorded as a component of AOCL and will be reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related net sales are recorded. +The comparative consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented. +Refer to Note 9, “Derivative Instruments,” for further information on the Company's hedging instruments. +Not Yet Adopted. Applicable ASUs issued that have not yet been adopted by the Company, the planned period of adoption, and the expected impact on the Company on adoption, are as follows: +Standard +Description +Planned Period of Adoption +Expected Impact on Adoption +ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06) +Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge. +Q1 FY 2021 +The Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements. +ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, 2019-05, 2019-11, 2020-02, and 2020-03) +Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. +Q1 FY 2021 +The Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements. +ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes +Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods, as well as reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. +Q1 FY 2022 +The Company is currently evaluating the impact of the adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its consolidated financial statements. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Standard +Description +Planned Period of Adoption +Expected Impact on Adoption +ASU No. 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting +London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. +This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022. +Q4 FY 2021 +The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements. +Summary of Significant Accounting Policies. The following are a summary of the Company’s significant accounting policies applied to its consolidated financial statements : +Cash Equivalents . The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents included $ 436,241 and $ 372,178 of money market funds as of March 31, 2020 and 2019 , respectively. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income . The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. +Inventories . Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value less an approximate normal profit margin at each financial statement date. Cost includes shipping, duty, and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements (CCA) that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets . Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to five years . +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset and are recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income . +Property and equipment, net, are summarized as follows: +As of March 31, +Useful life (years) +2020 +2019 +Land +Indefinite +$ +32,864 +$ +32,864 +Building +39.5 +35,093 +35,094 +Machinery and equipment +1-10 +145,423 +150,921 +Furniture and fixtures +3-7 +35,024 +37,157 +Computer software +3-10 +80,718 +76,495 +Leasehold improvements +1-11 +104,497 +108,717 +Construction in progress +17,556 +8,487 +Gross property and equipment +451,175 +449,735 +Less accumulated depreciation and amortization +( 242,138 +) +( 235,939 +) +Property and equipment, net +$ +209,037 +$ +213,796 +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by the Company's options to extend (or not to terminate) the lease that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, “Leases and Other Commitments,” for further information on discount rate methodology used to measure operating lease assets and lease liabilities. +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income . Lease payments recorded in the operating lease liability are (1) fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, “Leases and Other Commitments,” for further information on the nature of variable lease payments and timing of recognition in rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income . +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the paragraph titled “Other Long-Lived Assets” below for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements (asset group) for indicators of impairment. +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. As of March 31, 2020 and 2019 , liabilities for asset retirement obligations (AROs) were $ 11,505 and $ 12,667 , respectively, and are recorded in other long-term liabilities in the consolidated balance sheets . The decrease in liabilities for AROs during the year ended March 31, 2020 was primarily due to $ 1,828 of settlements mainly related to the completion of the closure of the former Camarillo distribution center. +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Indefinite-lived intangible assets consist primarily of trademarks, customer and distributor relationships, patents, lease rights and non-compete agreements arising from the application of purchase accounting. +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. +Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets, and leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income . +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset group. Fair value of the asset group is measured using an observable or quoted market price. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income . +During the years ended March 31, 2020 , 2019 , and 2018 , the Company recorded impairment losses for other long-lived assets, primarily for retail store operating lease assets and related leasehold improvements due to performance or store closures, as well as computer software, of $ 1,365 , $ 180 , and $ 2,417 , respectively, within its DTC reportable operating segment and unallocated overhead costs in SG&A expenses in the consolidated statements of comprehensive income . +Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s definite-lived intangible asset impairment assessment results. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company may enter into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage this risk and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of forward spot rates at the end of the applicable periods, recorded in other current assets or other accrued expenses in the consolidated balance sheets . The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of AOCL and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recorded. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income . +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income . The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated balances, which are also recorded in SG&A expenses in the consolidated statements of comprehensive income . +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. +Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income . The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 - 60 days. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income . Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Refer to Note 2, “Revenue Recognition,” for further information regarding the Company’s components of variable consideration, including allowances for sales discounts, chargebacks and sales return contract assets and liabilities. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods, which includes the purchase costs and related overhead. Overhead includes all costs for planning, purchasing, quality control, freight, duties, royalties paid to third parties and shrinkage. Cost includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income . +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $ 27,555 , $ 23,187 , and $ 22,372 for the years ended March 31, 2020 , 2019 and 2018 , respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income . +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Advertising, Marketing, and Promotion Expenses . Advertising, marketing and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, with $ 144,948 , $ 118,291 , and $ 111,658 for the years ended March 31, 2020 , 2019 and 2018 , respectively, recorded in SG&A expenses in the consolidated statements of comprehensive income . Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2020 and 2019 were $ 2,664 and $ 6,006 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income . Refer to Note 8, “Stock-Based Compensation,” for further information. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 3,251 , $ 3,060 , and $ 2,269 during the years ended March 31, 2020 , 2019 and 2018 , respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income . In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, the Company did not make any profit-sharing contributions for the years ended March 31, 2020 , 2019 and 2018 . +Non-qualified Deferred Compensation . In 2010, the Company sponsors a non-qualified deferred compensation plan that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. For each plan year, the Company’s Board of Directors may, but is not required to, contribute any amount it desires to any participant. The Company’s contribution guidelines are determined by the Board of Directors annually. In March 2015, the Board of Directors approved a Company contribution feature for future plan years beginning in calendar year 2016 and gave management the authority to approve actual contributions. As of March 31, 2020 and 2019 , no material payments were made or pending under the plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current liabilities in the consolidated balance sheets . Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income . +Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements . +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders' Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Basic and Diluted Shares,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +Note 2. Revenue Recognition +Variable Consideration . Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for sales discounts. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, the Company records an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets . This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for chargebacks. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Contract Assets and Liabilities . Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred . Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the consolidated balance sheets . +Sales Return Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return liability are recorded against gross sales for the contract liability and cost of sales for the contract asset in the consolidated statements of comprehensive income . The contract liability is recorded in other accrued expenses and the related contract asset for the cost of sales for estimated product returns is recorded in other current assets in the consolidated balance sheets . +Activity during the years ended March 31, 2020 and 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels, were as follows: +Contract Asset +Contract Liability +Balance, March 31, 2018 +$ +11,251 +$ +( 23,156 +) +Net additions to sales return liability* +36,223 +( 120,102 +) +Actual returns +( 37,033 +) +118,471 +Balance, March 31, 2019 +10,441 +( 24,787 +) +Net additions to sales return liability* +36,028 +( 117,969 +) +Actual returns +( 36,806 +) +117,089 +Balance, March 31, 2020 +$ +9,663 +$ +( 25,667 +) +* Net additions to sales return liability include a provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns. +Loyalty Programs . The Company has a customer loyalty program for the UGG brand in its DTC channel where customers earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the customer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns. As of March 31, 2020 and 2019 , the Company’s contract liability for loyalty programs was $ 6,950 and $ 5,171 , respectively, and is recorded in other accrued expenses in the consolidated balance sheets . +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 3. Goodwill and Other Intangible Assets +The Company’s goodwill and other intangible assets are recorded in the consolidated balance sheets , as follows: +As of March 31, +2020 +2019 +Goodwill +UGG brand +$ +6,101 +$ +6,101 +HOKA brand +7,889 +7,889 +Total goodwill +13,990 +13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks +15,454 +15,454 +Definite-lived intangible assets +Trademarks +55,245 +55,245 +Other +51,738 +51,981 +Total gross carrying amount +106,983 +107,226 +Accumulated amortization +( 74,421 +) +( 71,186 +) +Net definite-lived intangible assets +32,562 +36,040 +Total other intangible assets, net +48,016 +51,494 +Total +$ +62,006 +$ +65,484 +The weighted-average amortization period for definite-lived intangible assets was 16 years for the years ended March 31, 2020 and 2019 , respectively. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +Annual Impairment Assessment . During the years ended March 31, 2020 , 2019 , and 2018 , the Company evaluated the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segment as of December 31st and evaluated its Teva indefinite-lived trademarks as of October 31st, and based on the evaluation performed, no impairment loss was recorded for the goodwill and indefinite-lived intangible assets. As of March 31, 2020 and 2019 , the gross carrying amount of goodwill was $ 143,765 and the accumulated impairment losses were $ 129,775 . The Company did not identify any definite-lived intangible asset impairments during the years ended March 31, 2020 , 2019 , and 2018 . +Amortization Expense . A reconciliation of the changes in total other intangible assets in the consolidated balance sheets , are as follows: +Amounts +Balance, March 31, 2018 +$ +57,850 +Amortization expense +( 6,235 +) +Foreign currency translation net loss +( 121 +) +Balance, March 31, 2019 +51,494 +Amortization expense +( 3,470 +) +Foreign currency translation net loss +( 8 +) +Balance, March 31, 2020 +$ +48,016 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2020 is as follows: +Years Ending March 31, +Amounts +2021 +$ +2,527 +2022 +2,513 +2023 +2,450 +2024 +2,430 +2025 +2,276 +Thereafter +20,366 +Total +$ +32,562 +Note 4. Fair Value Measurements +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required: +• +Level 1: Quoted prices in active markets for identical assets and liabilities. +• +Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets , are as follows: +As of +Measured Using +March 31, 2020 +Level 1 +Level 2 +Level 3 +Non-qualified deferred compensation asset +$ +6,164 +$ +6,164 +$ +— +$ +— +Non-qualified deferred compensation liability +( 3,756 +) +( 3,756 +) +— +— +As of +Measured Using +March 31, 2019 +Level 1 +Level 2 +Level 3 +Non-qualified deferred compensation asset +$ +7,300 +$ +7,300 +$ +— +$ +— +Non-qualified deferred compensation liability +( 4,447 +) +( 4,447 +) +— +— +As of March 31, 2020 , the non-qualified deferred compensation asset of $ 6,164 was recorded in other assets in the consolidated balance sheets . As of March 31, 2020 , the non-qualified deferred compensation liability of $ 3,756 was recorded in the consolidated balance sheets , with $ 743 in other accrued expenses and $ 3,013 in other long-term liabilities. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 5. Income Taxes +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Domestic* +$ +206,111 +$ +181,730 +$ +71,482 +Foreign +134,755 +147,204 +149,214 +Total +$ +340,866 +$ +328,934 +$ +220,696 +*Domestic income before income taxes for the years ended March 31, 2020 , 2019 , and 2018 is presented net of intercompany dividends of $ 150,000 , $ 130,000 , and $ 250,000 , respectively. +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Current +Federal +$ +47,087 +$ +33,334 +$ +80,339 +State +635 +9,084 +3,437 +Foreign +14,068 +15,269 +14,388 +Total +61,790 +57,687 +98,164 +Deferred +Federal +4,626 +6,612 +12,007 +State +( 462 +) +2,236 +391 +Foreign +( 1,230 +) +( 1,909 +) +( 4,260 +) +Total +2,934 +6,939 +8,138 +Total +$ +64,724 +$ +64,626 +$ +106,302 +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes, as follows: +Years Ended March 31, +2020 +2019 +2018 +Computed expected income taxes +$ +71,582 +$ +69,076 +$ +69,556 +State income taxes, net of federal income tax benefit* +11,042 +9,329 +9,044 +Foreign rate differential +( 17,966 +) +( 20,105 +) +( 37,090 +) +Unrecognized tax benefits +6,695 +786 +1,301 +Return to provision adjustments +( 1,682 +) +( 179 +) +( 2,252 +) +Nontaxable income +( 4,584 +) +( 4,257 +) +( 7,006 +) +Nondeductible expense +4,162 +7,742 +1,382 +US tax on foreign earnings** +2,343 +5,848 +57,138 +Re-measurement of deferred taxes*** +— +( 983 +) +14,395 +Tax audit settlements +( 3,956 +) +— +— +Statutory foreign income tax (benefit) expense +( 906 +) +276 +59 +Other +( 2,006 +) +( 2,907 +) +( 225 +) +Total +$ +64,724 +$ +64,626 +$ +106,302 +*During the year ended March 31, 2018, the Company recorded $ 1,976 of state income taxes associated with one-time mandatory deemed repatriation of foreign earnings due to the Tax Cuts and Jobs Act (Tax Reform Act) in December 2017. +**The amount for the year ended March 31, 2018 is the one-time mandatory deemed repatriation tax on accumulated foreign earnings due pursuant to the Tax Reform Act. The amounts for the years ended March 31, 2020 and 2019 are global intangible low-taxed income (commonly referred to as GILTI) under the territorial tax system pursuant to the Tax Reform Act. +***The total non-cash re-measurement of deferred tax assets and liabilities for the year ended March 31, 2018 was driven by the US federal tax rate reduction from 35.0% to 21.0% pursuant to the Tax Reform Act. +Due to the enactment of Tax Reform Act, the Company is subject to US taxation of its foreign subsidiary earnings considered global intangible low-taxed income, as well as limitations on the deductibility of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. In accordance with the SEC Staff Accounting Bulletin No. 118 (SAB 118), issued December 22, 2017, the Company completed its accounting for the material effects of the Tax Reform Act during the quarter ended December 31, 2018. In connection with finalizing the tax effects of the Tax Reform Act, the Company recorded immaterial measurement period adjustments during the year ended March 31, 2019 including a reduction from $ 59,114 to $ 57,895 related to the one-time mandatory deemed repatriation tax on accumulated foreign earnings. Refer to section below entitled “US Taxation of Foreign Earnings” for further information. The Company continues to evaluate new guidance and legislation as it is issued. +In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27th, 2020. The Company reviewed the provisions of the CARES Act and consider the effect to be immaterial. +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities, are as follows: +As of March 31, +2020 +2019 +Deferred tax assets +Amortization and impairment of intangible assets +$ +11,471 +$ +13,615 +Nonvested stock-based compensation +5,194 +3,645 +Deferred rent obligations* +— +4,899 +Operating lease liability* +45,600 +— +Uniform capitalization adjustment to inventory +4,322 +3,965 +Bad debt allowance and other reserves +14,243 +11,932 +Accrued bonuses +6,187 +7,350 +Foreign currency translation +645 +670 +Net operating loss carry-forwards, net of valuation allowances +2,071 +1,002 +Other +1,372 +1,445 +Gross deferred tax assets +91,105 +48,523 +Valuation allowances +( 1,519 +) +( 195 +) +Total +89,586 +48,328 +Deferred tax liabilities +Prepaid expenses +( 4,252 +) +( 3,379 +) +Operating lease asset* +( 41,276 +) +— +Depreciation of property and equipment +( 15,825 +) +( 14,079 +) +Total +( 61,353 +) +( 17,458 +) +Deferred tax assets, net +$ +28,233 +$ +30,870 +*Adoption of the new lease standard as of April 1, 2019, as described in Note 1, “General,” under the section “Recent Accounting Pronouncements”, resulted in the recognition of a deferred tax asset for operating lease liabilities and a deferred tax liability for operating lease assets. These temporary differences will reverse over the estimated term of the relevant operating leases. As of March 31, 2019 , the deferred tax assets associated with operating leases were reported as deferred rent obligations under legacy US GAAP. +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $ 104,483 . The deferred tax assets are primarily related to the Company’s domestic operations and are currently expected to be realized between fiscal years 2021 and 2031 . The Company recorded a net increase of $ 297 to deferred tax assets, net during the year ended March 31, 2020 related to the adoption of new ASUs and the tax effect of changes in cumulative translation adjustments. +Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. As of March 31, 2020 and 2019 , the Company reported tax credit carry-forwards available to reduce future taxable income of $ 410 and $ 36 , respectively. Some of the net operating losses with full valuation allowances will expire beginning in 2022 ; however, other net operating losses and tax credits can be carried forward indefinitely. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +US Taxation of Foreign Earnings . Pursuant to the Tax Reform Act, the Company reported $ 57,895 of US federal and state income taxes on undistributed earnings from its non-US subsidiaries on its March 31, 2018 income tax returns filed with the US tax authorities. During the year ended March 31, 2019, the Company recorded $ 6,348 of US federal and state income tax expense, net of foreign tax credits on foreign earnings. +As of March 31, 2020 , the Company reported $ 363,140 of undistributed earnings from its non-US subsidiaries, of which $ 177,229 relates to cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2020 , the Company reported $ 8,620 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been provided. The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. During the year ended March 31, 2020 , the Company declared a dividend of $ 150,000 from a foreign subsidiary, for which no foreign withholding taxes were required. +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets . A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits, are as follows: +Balance, March 31, 2017 +$ +11,727 +Gross increase related to current fiscal year tax positions +1,168 +Gross increase related to prior fiscal year tax positions +1,243 +Settlements +( 4,501 +) +Lapse of statute of limitations +( 43 +) +Balance, March 31, 2018 +9,594 +Gross increase related to current fiscal year tax positions +1,027 +Gross increase related to prior fiscal year tax positions +3,282 +Settlements +( 1,157 +) +Lapse of statute of limitations +( 1,804 +) +Balance, March 31, 2019 +10,942 +Gross increase related to current fiscal year tax positions +1,153 +Gross increase related to prior fiscal year tax positions +8,152 +Settlements +( 246 +) +Lapse of statute of limitations +( 2,363 +) +Balance, March 31, 2020 +$ +17,638 +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Total gross unrecognized tax benefits recorded in the consolidated balance sheets , are as follows: +As of March 31, +2020 +2019 +Long-term asset +Deferred tax assets, net +$ +486 +$ +486 +Current liability +Income taxes payable +— +7 +Long-term liability +Income tax liability +17,152 +10,449 +Total +$ +17,638 +$ +10,942 +As of March 31, 2020 and 2019 , the Company had $ 3,631 and $ 2,456 accrued for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets . During the years ended March 31, 2020 , 2019 , and 2018 , the Company recorded $ 1,176 , $( 110 ) , and $ 369 , respectively, of interest and penalties as an increase or (decrease) to interest expense in the consolidated statements of comprehensive income . +Management believes it is reasonably possible that the amount of unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 788 related primarily to the expiration of statute of limitations, partially offset by additional unrecognized tax benefits relating to current fiscal year tax return positions. Of this amount, $ 563 would result in an income tax benefit for the Company and $ 937 would result in a decrease to interest expense in the consolidated statements of comprehensive income . Gross unrecognized tax benefits of $ 17,638 , $ 10,942 , and $ 9,594 for the years ended March 31, 2020 , 2019 , and 2018 , respectively, would reduce the annual effective tax rate, offset by an immaterial amount of deferred tax assets recognized for uncertain tax positions, recorded in the consolidated statements of comprehensive income . +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2016 . +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, it is the opinion of management that the Company does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements . +Note 6. Revolving Credit Facilities and Mortgage Payable +Primary Credit Facility . In September 2018, the Company entered into a credit agreement (Credit Agreement) with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year, $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +In addition to allowing borrowings in US dollars, the Credit Agreement provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars and any other foreign currency that is subsequently approved by JPMorgan, each lender and each bank issuing letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +under the Credit Agreement by up to an additional $ 200,000 , resulting in a maximum available principal amount of $ 600,000 . However, none of the lenders has committed at this time to provide any such increase in the commitments. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries). All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured. Amounts borrowed under the Primary Credit Facility may be prepaid at any time. In addition, the Company has the right to permanently reduce or terminate the lenders’ commitments provided under the Credit Agreement, subject to customary conditions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions and notice periods, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow under the Primary Credit Facility, subject to the foreign currency sublimit noted above. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +Interest Rate Terms. At the Company’s election, interest under the Credit Agreement is tied to the adjusted LIBOR or the Alternate Base Rate (ABR). Initial interest for the revolving loans is variable and fluctuates between adjusted LIBOR plus 1.125 % per annum and adjusted LIBOR plus 1.625 % per annum (or between ABR plus 0.125 % per annum and ABR plus 0.625 % per annum), based on the Company’s total adjusted leverage ratio. Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate if made in Canadian dollars. As of March 31, 2020 , the effective interest rates for US dollar LIBOR and ABR rates, with relevant spreads for borrowings made during the reporting period, were 2.12 % and 3.38 % , respectively. +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum, based upon the Company’s total adjusted leverage ratio. +Borrowing Activity. During the year ended March 31, 2020 , the Company borrowed and repaid $ 50,000 under the Primary Credit Facility. As of March 31, 2020 , the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $ 549 . As of March 31, 2020 , available borrowings under the Primary Credit Facility were $ 399,451 . +Debt Issuance Costs. In connection with entering into the Primary Credit Facility, the Company paid certain commitment, arrangement and other fees to JPMorgan, Comerica and other parties to the Primary Credit Facility, and reimbursed certain of the parties’ expenses, which totaled $ 1,297 , and were recorded in prepaid expenses and other assets. These costs are amortized on a straight-line basis over the term of the Credit Agreement. +China Credit Facility . In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly-owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 42,304 , with an overdraft facility sublimit of CNY 100,000 , or $ 14,101 . +The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. Interest is based on the People’s Bank of China market rate multiplied by a variable liquidity factor. As of March 31, 2020 , the effective interest rate was 4.46 % . +During the year ended March 31, 2020 , the Company borrowed and made repayments of $ 18,985 under the China Credit Facility. As of March 31, 2020 , the Company had no outstanding balance, outstanding bank guarantees of $ 28 , and available borrowings of $ 42,276 under the China Credit Facility. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Japan Credit Facility . In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into credit agreement in Japan (as amended, the Japan Credit Facility) that currently provides for an uncommitted revolving line of credit of up to JPY 3,000,000 , or $ 27,746 , for a maximum term of six months for each draw on the facility. The Japan Credit Facility can be renewed annually and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2021 substantially under the terms of the original credit agreement. Interest is based on the Tokyo Interbank Offered Rate plus 0.40 % . As of March 31, 2020 , the effective interest rate was 0.48 % . +During the year ended March 31, 2020 , the Company made no borrowings or repayments under the Japan Credit Facility. As of March 31, 2020 , the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $ 27,746 . +Mortgage . In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $ 33,931 . As of March 31, 2020 , the outstanding principal balance under the mortgage was $ 30,901 , which includes $ 638 in short-term borrowings and $ 30,263 in mortgage payable in the consolidated balance sheets . The mortgage has a fixed interest rate of 4.928 % . Payments include interest and principal in an amount that amortizes the principal balance over a 30 -year period; however, the loan will mature and requires a balloon payment of $ 23,695 , in addition to any then-outstanding balance, on July 1, 2029 . Minimum principal payments over the next five years are $ 3,530 . +Debt Covenants. As of March 31, 2020 , the Company was in compliance with all debt covenants under the revolving credit facilities and the mortgage. +Primary Credit Facility. Under the Primary Credit Facility, the Company is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments and transactions with affiliates. Financial covenants (as defined in the Credit Agreement), include the following: +• +The total adjusted leverage ratio must not be greater than 3.75 to 1.00 . +• +The sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 . +• +No limits on shares repurchases if the total adjusted leverage ratio does not exceed 3.50 to 1.00 . +Under the Primary Credit Facility, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include: non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material ERISA liabilities; and a change of control of the Company (as defined in the Credit Agreement). +China Credit Facility. Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +Japan Credit Facility. Under the Japan Credit Facility, Deckers Japan, G.K., is subject to usual and customary provisions including a restriction against having losses for two years consecutively, maintaining an interest coverage ratio greater than 1.00 to 1.00 , and maintaining higher assets than liabilities. +Mortgage. The debt covenants associated with the Company’s mortgage mirror the debt covenants under the Primary Credit Facility, as defined in the Credit Agreement. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Foreign Currency Exchange Rates . The amounts disclosed above for the China Credit Facility and Japan Credit Facility have been translated into US dollars using applicable foreign currency exchange spot rates in effect as of March 31, 2020 . As a result, there are differences between the net borrowing and repayment amounts within this footnote disclosure and those same amounts recorded in the consolidated statements of cash flows . Any amounts outstanding are recorded in short-term borrowings in the consolidated balance sheets . +Note 7. Leases and Other Commitments +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease agreements which continue in effect through calendar year 2031. Some of the Company's operating leases contain extension options of anywhere from one to 15 years . Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income . Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its noncollateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Rent Expense . The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income under the new lease standard, were as follows: +March 31, 2020 +Operating +$ +57,966 +Variable +26,996 +Short-term +3,332 +Total +$ +88,294 +The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income under legacy US GAAP, were as follows: +Years Ended March 31, +2019 +2018 +Minimum rentals +$ +60,859 +$ +59,531 +Contingent rentals +13,226 +15,924 +Total +$ +74,085 +$ +75,455 +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2020 under the new lease standard, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets , are as follows: +Years Ending March 31, +Amount +2021 +$ +53,212 +2022 +50,113 +2023 +43,343 +2024 +37,964 +2025 +30,254 +Thereafter +81,852 +Total undiscounted future lease payments +296,738 +Less: Imputed interest +( 31,923 +) +Total +$ +264,815 +Future minimum commitments under operating lease contracts as of March 31, 2019 under legacy US GAAP, were as follows: +Years Ending March 31, +Amount +2020 +$ +53,015 +2021 +47,803 +2022 +40,629 +2023 +35,915 +2024 +31,329 +Thereafter +81,746 +Total +$ +290,437 +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and liabilities that are outstanding and presented in the consolidated balance sheets , are as follows: +March 31, 2020 +Weighted-average remaining lease term in years +6.6 +Weighted-average discount rate +3.3 +% +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases, were as follows: +March 31, 2020 +Non-cash operating activities +Operating lease assets obtained in exchange for lease liabilities* +$ +71,097 +Reductions to operating lease assets for reductions to lease liabilities or for operating lease asset impairments* +( 7,055 +) +*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . The Company had $ 361,881 of outstanding purchase orders or other obligations with its manufacturers as of March 31, 2020 . The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers decide to purchase its products. The Company generally orders product two to nine months in advance of the anticipated shipment dates based primarily on a combination of product lead time and orders received from wholesale customers and through the DTC reportable operating segment. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase commitments can be cancelled by the Company under certain circumstances. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase commitments, and instead reflects an estimate of its future payment commitments based on information currently available. +Commodities . The Company had an aggregate of $ 185,969 remaining purchase commitments, primarily for sheepskin, as well as leather, as of March 31, 2020 . These commitments generally arise under two-year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring purchase commitments of sheepskin and leather that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There were $ 8,322 of deposits on expired sheepskin contracts that have not been fully consumed as of March 31, 2020 . +Total future net minimum commitments for these commodities contracts as of March 31, 2020 were as follows: +Contract Effective Date +Final Target Date +Contract Value +Remaining +Commitment +April 2018 +September 2020 +$ +45,600 +$ +33,205 +October 2018 +September 2020 +27,350 +26,671 +October 2018 +September 2021 +50,460 +50,460 +April 2019 +September 2020 +8,906 +5,806 +October 2019 +September 2020 +42,825 +39,983 +October 2019 +June 2021 +29,844 +29,844 +$ +204,985 +$ +185,969 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or will be reflected as a credit against purchases. The amounts above do not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations, and instead reflect an estimate of its future payment obligations based on information currently available. +Othe r. The Company had an aggregate of $ 46,059 of other purchase commitments as of March 31, 2020 , which generally consisted of material commitments for future capital expenditures, commitments under service contracts, and requirements to pay promotional expenses. Future capital expenditures primarily relate to retail store build-out of leasehold improvements for a new flagship store location that is currently intended to replace an existing flagship store during the fourth quarter of the fiscal year ending March 31, 2021, as well as the continued expansion of the Company’s warehouse and distribution center located in Moreno Valley, California. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Litigation . From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, results of operations, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. +Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +Note 8. Stock-Based Compensation +In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), for which the primary purpose is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . +The Company may grant various types of stock-based compensation under the 2015 SIP, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) to key employees and certain executive officers, and long-term incentive plan (LTIP) awards to certain officers, including named executive officers. +Annual Awards. The Company granted Annual RSUs and Annual PSUs under the 2015 SIP, which entitle the recipients to receive shares of the Company’s common stock upon vesting. The Annual RSUs are subject to time-based vesting criteria and vest in equal annual installments over three years following the date of grant. The vesting of Annual PSUs are subject to the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted, and to the extent the performance criteria has been met, vest in equal annual installments over three years thereafter. As of March 31, 2020 , the Company determined that the target performance criteria related to the Annual PSUs for the fiscal year ended March 31, 2020 were achieved. +The Company granted annual awards under the 2015 SIP, as recorded in the consolidated statements of comprehensive income , as summarized below: +Years Ended March 31, +2020 +2019 +2018 +Shares Granted +Weighted-average grant date fair value per share +Shares Granted +Weighted-average grant date fair value per share +Shares Granted +Weighted-average grant date fair value per share +Annual RSUs +47,577 +$ +171.50 +62,743 +$ +116.85 +133,464 +$ +67.70 +Annual PSUs +19,938 +174.36 +31,320 +116.34 +54,090 +68.44 +Total +67,515 +$ +172.34 +94,063 +$ +116.68 +187,554 +$ +67.92 +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Annual award activity recorded in the consolidated statements of comprehensive income , were as follows: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2017 +226,244 +$ +63.96 +Granted +187,554 +67.92 +Vested +( 101,791 +) +( 67.63 +) +Forfeited +( 22,710 +) +( 64.59 +) +Nonvested, March 31, 2018 +289,297 +65.18 +Granted +94,063 +116.68 +Vested +( 118,903 +) +( 64.39 +) +Forfeited +( 33,058 +) +( 77.60 +) +Nonvested, March 31, 2019 +231,399 +84.75 +Granted +67,515 +172.34 +Vested +( 121,572 +) +( 76.81 +) +Forfeited +( 14,993 +) +( 113.49 +) +Nonvested, March 31, 2020 +162,349 +$ +124.47 +Long-Term Incentive Plan Awards. LTIP awards recorded in the consolidated statements of comprehensive income , were as follows: +2020 LTIP PSUs. In September 2019, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2020 LTIP PSUs), which were awarded to certain members of the Company's senior management team, including the Company's named executive officers. The 2020 LTIP PSUs are subject to vesting based on service conditions over three years , as well as the Company meeting certain revenue and pre-tax income performance targets for the fiscal year ending March 31, 2022 (Measurement Period) and incorporates a relative total stockholder return (TSR) modifier for the 36 -month performance period commencing on April 1, 2019 and ending March 31, 2022 (Performance Period). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2020 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2020 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the Measurement Period, the vesting of each 2020 LTIP PSU will be subject to adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the Performance Period. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the Performance Period. +The Company granted awards at the target performance level of 38,174 2020 LTIP PSUs during the year ended March 31, 2020. The grant date fair value of these 2020 LTIP PSUs was $ 146.96 per share. Based on the Company's current long-range forecast, the Company determined that the achievement of at least the target performance criteria for these awards was probable as of the grant date . +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +2019 LTIP PSUs. In September 2018, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2019 LTIP PSUs), which were awarded to certain members of the Company’s senior management team, including the Company’s named executive officers. The 2019 LTIP PSUs are subject to vesting based on service conditions over three years , as well as the Company meeting certain revenue and pre-tax income performance targets for the fiscal year ending March 31, 2021. To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2019 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the measurement period, the vesting of each 2019 LTIP PSUs will be subject to adjustment based on the application of a TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period commencing on April 1, 2018 and ending on the vesting date. A Monte Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the 36 -month performance period. +The Company granted awards at the target performance level of 41,793 2019 LTIP PSUs during the year ended March 31, 2019. The average grant date fair value of these 2019 LTIP PSUs was $ 120.24 per share. Based on the Company’s current long-range forecast, the Company has determined that the achievement of at least the minimum threshold performance criteria for these awards was probable as of the grant date. +2016 LTIP PSUs . In November 2015, the Company approved LTIP awards under the 2015 SIP for issuance of PSUs (2016 LTIP PSUs), which were awarded to certain members of the Company’s management team. The 2016 LTIP PSUs were subject to vesting based on certain performance criteria and service conditions over three years . To the extent financial performance was achieved above the minimum threshold performance criteria, the number of 2016 LTIP PSUs that would vest was subject to increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2016 LTIP PSUs would occur if the Company failed to achieve at least 90 % of the minimum threshold performance criteria. If the Company achieved the performance criteria, vesting of the 2016 LTIP PSUs would be subject to adjustment based on the application of a TSR modifier. The amount of the adjustment would be determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the 36 -month performance period. Under this program, the Company granted awards that contained a maximum of approximately 308,000 2016 LTIP PSUs during the year ended March 31, 2016. The weighted-average grant date fair value of the 2016 LTIP PSUs was $ 50.05 per share. The Company did not believe the achievement of at least the minimum threshold performance criteria was probable, and accordingly, did not recognize stock-based compensation expense for these awards during the years ended March 31, 2018 and 2017. As of March 31, 2018, the Company did not meet the minimum threshold performance criteria, and the awards did not vest and were cancelled. +LTIP award activity recorded in the consolidated statements of comprehensive income , were as follows: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2017 +269,012 +$ +50.22 +Forfeited +( 269,012 +) +( 50.22 +) +Nonvested, March 31, 2018 +— +— +Granted* +83,586 +120.24 +Forfeited +( 6,488 +) +( 120.24 +) +Nonvested, March 31, 2019 +77,098 +120.24 +Granted* +76,348 +146.96 +Nonvested, March 31, 2020 +153,446 +$ +133.53 +*The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Long-Term Incentive Plan Options. During the years ended March 31, 2020 and 2019 , no LTIP NQSOs were granted. Previously, the Company approved the issuance of LTIP NQSOs under the 2015 SIP, including in June 2017 (2018 LTIP NQSOs), which were awarded to certain members of the Company’s management team, with a maximum contractual term of seven years from the grant date. If the recipient provides continuous service, the LTIP NQSOs will vest after the Company has determined it achieved the target performance criteria by the date specified in the award. As of March 31, 2020 , the Company determined that the target performance criteria related to the LTIP NQSOs for the fiscal year ended March 31, 2020 were achieved. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. +LTIP option activity recorded in the consolidated statements of comprehensive income , were as follows: +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Nonvested, March 31, 2017 +191,786 +$ +61.86 +9.0 +$ +— +Granted +205,554 +69.29 +Nonvested, March 31, 2018 +397,340 +65.70 +7.1 +9,666 +Forfeited +( 35,957 +) +( 69.29 +) +Nonvested, March 31, 2019 +361,383 +65.35 +6.2 +29,504 +Exercised +( 58,444 +) +( 61.86 +) +Nonvested, March 31, 2020 +302,939 +$ +66.02 +5.0 +$ +20,594 +The Company measured stock-based compensation expense for the 2018 LTIP NQSOs at the date of grant using the Black-Scholes option pricing model, with the following weighted-average valuation assumptions: +2018 LTIP NQSOs +Expected life (in years) +4.90 +Expected volatility +38.73 +% +Risk free interest rate +1.78 +% +Dividend yield +— +% +Weighted-average exercise price +$ +69.29 +Weighted-average option value +$ +25.03 +Grants to Directors. Each of the Company’s nonemployee directors is entitled to receive common stock with a total value of $ 125 for annual service on the Board of Directors. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the 15 th day of the last month of each quarterly period. Each of these shares is fully vested on the date of issuance. +Stock-Based Compensation Expense . Components of stock-based compensation expense recorded in the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Annual RSUs +$ +6,509 +$ +6,588 +$ +7,761 +Annual PSUs +2,851 +2,373 +1,829 +LTIP PSUs +2,203 +885 +— +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2020 +2019 +2018 +LTIP NQSOs +1,641 +3,516 +3,432 +Grants to Directors +1,045 +1,223 +1,135 +Employee Stock Purchase Plan* +228 +189 +149 +Total stock-based compensation expense, pre-tax +14,477 +14,774 +14,306 +Income tax benefit +( 3,308 +) +( 3,546 +) +( 4,906 +) +Total stock-based compensation expense, net of tax +$ +11,169 +$ +11,228 +$ +9,400 +*The 2015 Employee Stock Purchase Plan (ESPP) authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. ESPP shares are excluded from basic earnings per share until purchases are made, while included in diluted earnings per share computations as after-tax payroll deductions are made. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period (no look-back provision) for a fixed amount at a 15 % discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred and remeasured during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets . +Unrecognized Stock-Based Compensation Expense. Total remaining unrecognized stock-based compensation expense as of March 31, 2020 related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, are as follows: +Unrecognized +Stock-based Compensation +Expense +Weighted-Average +Remaining +Vesting Period (Years) +Annual RSUs +$ +6,913 +1.0 +Annual PSUs +2,741 +0.9 +LTIP PSUs +5,999 +1.5 +Total +$ +15,653 +Note 9. Derivative Instruments +As of March 31, 2020 and 2019 , the Company had no outstanding derivative contracts, however, settled derivative contracts with notional values were as follows: +Years Ended March 31, +2020 +2019 +Designated Derivative Contracts +$ +65,569 +$ +126,332 +Non-Designated Derivative Contracts +49,251 +38,582 +Total +$ +114,820 +$ +164,914 +*Amounts during the year ended March 31, 2019 include $ 126,332 and $ 4,803 of notional value for Designated Derivative Contracts and Non-Designated Derivative Contracts, respectively, entered into during the year ended March 31, 2018. +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Designated Derivative Contracts activity recorded in the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Gain (loss) recognized in OCI +$ +1,516 +$ +8,355 +$ +( 9,593 +) +Gain (loss) reclassified from AOCL into net sales +1,516 +8,675 +( 8,541 +) +Gain excluded from effectiveness testing recognized in SG&A expenses* +— +1,918 +1,376 +*Amounts for the years ended March 31, 2019 and 2018 were recognized under legacy US GAAP. Beginning April 1, 2019, under the new hedging standard, these amounts are now recorded as a component of AOCL and were classified in net sales during the year ended March 31, 2020 . +Amounts of income tax effects recorded in the consolidated statements of comprehensive income for changes in AOCL for unrealized gains or losses for Designated Derivative Contracts, were as follows: +Years Ended March 31, +2020 +2019 +2018 +Income tax expense* +$ +— +$ +77 +$ +439 +*Amounts for the years ended March 31, 2019 and 2018 are inclusive of the income tax effects from the Tax Reform Act reclassified from AOCL to retained earnings in the consolidated balance sheets in connection with the previous adoption of a new accounting standard. The amount for the year ended March 31, 2020 is zero as the Company had settled all its outstanding Designated Derivative Contracts as of March 31, 2020 and 2019. +Non-Designated Derivative Contracts activity recorded in the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Gain (loss) recognized in SG&A expenses +$ +328 +$ +1,393 +$ +( 2,574 +) +The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. +Note 10. Stockholders’ Equity +Stock Repurchase Programs. In January 2019, the Company’s Board of Directors approved a stock repurchase program which, together with stock repurchase programs approved in 2017 and 2015, authorized the Company to repurchase a total of up to $ 796,000 of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (collectively, the Stock Repurchase Programs). The full amounts originally authorized under the 2017 and 2015 stock repurchase programs have been repurchased and these programs have been completed. +As of March 31, 2020 , the aggregate remaining approved amount under the Company’s Stock Repurchase Programs was $ 159,807 . The Company’s Stock Repurchase Programs do not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion. The Company’s current revolving credit agreements allow it to make stock repurchases under these programs, as long as the Company does not exceed certain leverage ratios and no event of default has occurred under these arrangements. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Publicly-announced stock repurchase activity of open-market transactions under the Company’s Stock Repurchase Programs, were as follows: +Years Ended March 31, +2020 +2019 +2018 +Total number of shares repurchased* +1,296,201 +1,400,699 +1,702,653 +Average price paid per share +$ +146.89 +$ +115.22 +$ +87.91 +Dollar value of shares repurchased +$ +190,405 +$ +161,395 +$ +149,687 +*Any stock repurchases are made as part of publicly-announced programs in open-market transactions. +Accumulated Other Comprehensive Loss . The components within AOCL, net of tax, recorded in the consolidated balance sheets , were as follows: +As of March 31, +2020 +2019 +Cumulative foreign currency translation loss +$ +( 25,559 +) +$ +( 22,654 +) +Total +$ +( 25,559 +) +$ +( 22,654 +) +Note 11. Basic and Diluted Shares +The reconciliation of basic to diluted weighted-average common shares outstanding, are as follows: +Years Ended March 31, +2020 +2019 +2018 +Basic +28,385,000 +29,641,000 +31,758,000 +Dilutive effect of equity awards +309,000 +262,000 +238,000 +Diluted +28,694,000 +29,903,000 +31,996,000 +Excluded* +Annual RSUs and Annual PSUs +3,000 +3,000 +200 +LTIP PSUs +153,000 +77,000 +— +LTIP NQSOs +— +170,000 +397,000 +Deferred Non-Employee Director Equity Awards +— +2,000 +1,000 +* The equity awards excluded from the dilutive effect are generally excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented. The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards with performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures. Refer to Note 8, “Stock-Based Compensation,” for further information on the Company's equity incentive plans. +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 12. Reportable Operating Segments +Information reported to the Chief Operating Decision Maker (CODM), who is the Company’s Principal Executive Officer, is organized into six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments. +The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with distribution centers, certain executive and stock-based compensation, accounting, finance, legal, information technology, human resources, and facilities, among others. Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income , were as follows: +Years Ended March 31, +2020 +2019 +2018 +Net sales +UGG brand wholesale +$ +892,990 +$ +888,347 +$ +841,893 +HOKA brand wholesale +277,097 +185,057 +132,688 +Teva brand wholesale +119,108 +119,390 +117,478 +Sanuk brand wholesale +39,463 +69,791 +78,283 +Other brands wholesale +67,175 +42,818 +17,273 +Direct-to-Consumer +736,856 +715,034 +715,724 +Total +$ +2,132,689 +$ +2,020,437 +$ +1,903,339 +Income (loss) from operations +UGG brand wholesale +$ +303,908 +$ +300,761 +$ +247,826 +HOKA brand wholesale +61,860 +35,717 +20,954 +Teva brand wholesale +30,736 +27,939 +20,400 +Sanuk brand wholesale +3,212 +12,781 +14,474 +Other brands wholesale +16,087 +10,411 +1,304 +Direct-to-Consumer +182,548 +185,449 +156,896 +Unallocated overhead costs +( 260,216 +) +( 245,738 +) +( 239,270 +) +Total +$ +338,135 +$ +327,320 +$ +222,584 +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2020 +2019 +2018 +Depreciation, amortization, and accretion +UGG brand wholesale +$ +611 +$ +1,254 +$ +3,193 +HOKA brand wholesale +612 +456 +485 +Teva brand wholesale +1 +10 +12 +Sanuk brand wholesale +2,361 +4,171 +4,174 +Other brands wholesale +382 +382 +380 +Direct-to-Consumer +10,586 +12,195 +13,396 +Unallocated overhead costs +24,359 +26,473 +26,932 +Total +$ +38,912 +$ +44,941 +$ +48,572 +Capital expenditures +UGG brand wholesale +$ +404 +$ +205 +$ +58 +HOKA brand wholesale +434 +285 +— +Teva brand wholesale +— +— +— +Sanuk brand wholesale +— +— +20 +Other brands wholesale +64 +11 +— +Direct-to-Consumer +7,753 +5,739 +8,641 +Unallocated overhead costs +23,800 +22,846 +26,094 +Total +$ +32,455 +$ +29,086 +$ +34,813 +Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, net, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments. +Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets , are as follows: +As of March 31, +2020 +2019 +Assets +UGG brand wholesale +$ +245,239 +$ +240,411 +HOKA brand wholesale +124,958 +94,157 +Teva brand wholesale +90,305 +76,370 +Sanuk brand wholesale +50,314 +71,285 +Other brands wholesale +21,535 +14,618 +Direct-to-Consumer +243,489 +95,501 +Total assets from reportable operating segments +775,840 +592,342 +Unallocated cash and cash equivalents +649,436 +589,692 +Unallocated deferred tax assets, net +28,233 +30,870 +Unallocated other corporate assets +311,609 +214,302 +Total +$ +1,765,118 +$ +1,427,206 +F-42 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 13. Concentration of Business +Regions and Customers . The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations that were as follows: +Years Ended March 31, +2020 +2019 +2018 +International net sales +$ +730,997 +$ +742,079 +$ +729,278 +% of net sales +34.3 +% +36.7 +% +38.3 +% +Net sales in foreign currencies +$ +587,233 +$ +605,725 +$ +617,867 +% of net sales +27.5 +% +30.0 +% +32.5 +% +Ten largest customers as % of net sales +23.7 +% +27.7 +% +28.2 +% +For the years ended March 31, 2020 , 2019 , and 2018 , no single foreign country comprised 10.0% or more of the Company’s total net sales. No single customer accounted for 10.0% or more of the Company’s net sales during the years ended March 31, 2020 , 2019 , and 2018 . The Company sells its products to customers for trade accounts receivables and, as of March 31, 2020 and 2019 , had no individual customers that exceeded 10% of trade accounts receivable, net. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +Suppliers . The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company's sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. The supply of sheepskin can be adversely impacted by weather patterns, harvesting decisions, incidents of disease, and the price of other commodities, such as wool and leather. Furthermore, the price of sheepskin is impacted by numerous other factors, including demand for the Company's products, demand for sheepskin by competitors, changes in consumer preferences, and changes in discretionary spending. +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets , are as follows: +As of March 31, +2020 +2019 +US +$ +194,679 +$ +196,702 +Foreign* +14,358 +17,094 +Total +$ +209,037 +$ +213,796 +* No single foreign country’s property and equipment, net, represented 10.0% or more of the Company’s total property and equipment, net, as of March 31, 2020 and March 31, 2019 . +F-43 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2020, 2019, and 2018 +(dollar amounts in thousands, except per share or share data) +Note 14. Quarterly Summary of Information (Unaudited) +The Company’s business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded the Company’s aggregate net sales in the quarters ending March 31st and June 30th. While the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles and growing the year-round net sales of the HOKA brand as a percentage of the Company’s aggregate net sales, the Company expects the seasonality trends that have resulted in significant variations in the Company’s aggregate net sales from quarter to quarter to decrease over time. +Summarized unaudited quarterly financial data, were as follows: +Fiscal Year 2020 +Quarter Ended +6/30/2019 +9/30/2019 +12/31/2019 +3/31/2020 +Net sales +$ +276,839 +$ +542,205 +$ +938,735 +$ +374,910 +Gross profit +130,019 +273,024 +507,632 +192,998 +(Loss) income from operations +( 31,417 +) +97,131 +255,766 +16,655 +Net (loss) income +( 19,351 +) +77,810 +201,593 +16,090 +Net (loss) income per share +Basic +$ +( 0.67 +) +$ +2.73 +$ +7.21 +$ +0.57 +Diluted +$ +( 0.67 +) +$ +2.71 +$ +7.14 +$ +0.57 +Fiscal Year 2019 +Quarter Ended +6/30/2018 +9/30/2018 +12/31/2018 +3/31/2019 +Net sales +$ +250,594 +$ +501,913 +$ +873,800 +$ +394,130 +Gross profit +114,965 +251,887 +470,093 +203,305 +(Loss) income from operations +( 39,414 +) +90,412 +244,718 +31,604 +Net (loss) income +( 30,407 +) +74,372 +196,374 +23,969 +Net (loss) income per share +Basic +$ +( 1.00 +) +$ +2.49 +$ +6.74 +$ +0.82 +Diluted +$ +( 1.00 +) +$ +2.48 +$ +6.68 +$ +0.82 +F-44 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(amounts in thousands) +Allowances for doubtful accounts, sales discounts, chargebacks and sales returns against trade accounts receivable recorded in the consolidated balance sheets , are as follows: +As of March 31, +2020 +2019 +2018 +Allowance for doubtful accounts (1) +Balance at Beginning of Year +$ +5,073 +$ +3,487 +$ +5,979 +Additions +3,498 +2,849 +4,168 +Deductions +( 1,582 +) +( 1,263 +) +( 6,660 +) +Balance at End of Year +$ +6,989 +$ +5,073 +$ +3,487 +Allowance for sales discounts (2) +Balance at Beginning of Year +$ +710 +$ +1,400 +$ +3,100 +Additions +14,845 +11,712 +19,972 +Deductions +( 14,525 +) +( 12,402 +) +( 21,672 +) +Balance at End of Year +$ +1,030 +$ +710 +$ +1,400 +Allowance for chargebacks (3) +Balance at Beginning of Year +$ +13,041 +$ +7,727 +$ +7,028 +Additions +13,399 +23,369 +19,019 +Deductions +( 13,313 +) +( 18,055 +) +( 18,320 +) +Balance at End of Year +$ +13,127 +$ +13,041 +$ +7,727 +Allowance for sales returns (4) +Balance at Beginning of Year +$ +— +$ +20,848 +$ +16,247 +Additions +— +— +51,677 +Deductions +— +( 20,848 +) +( 47,076 +) +Balance at End of Year +$ +— +$ +— +$ +20,848 +Total +$ +21,146 +$ +18,824 +$ +33,462 +(1) +The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual write-off of the related trade accounts receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting certain order, shipment, and prompt payments terms. Deductions are for the actual discounts taken by the Company’s wholesale channel customers. Discounts for DTC customers are taken at the point of sale and are not reflected in the allowance for sales discounts. +(3) +The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(4) +Amounts presented as of March 31, 2018 reflect the wholesale channel sales returns reserve on a net basis, prior to the adoption of ASU 2014-09, Revenue from Contracts with Customers, which resulted in gross basis presentation in the consolidated balance sheets beginning April 1, 2018. Returns for DTC customer products were previously excluded as they were separately recorded in other accrued expenses in the consolidated balance sheets. In prior periods presented, the additions to the allowance for sales returns represented estimates of returns based on the Company’s historical wholesale channel customer returns experience. Deductions were for the actual return of products. +F-45 \ No newline at end of file diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/filing_metadata.csv b/raw/filings/0000910521/2019/0000910521-20-000016/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..12c980b2ca4bdd8023b7d7e84f2908924b8926d9 --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2020-06-01,2020-03-31,2020-06-01T16:42:44.000Z,0000910521-20-000016,deck331202010-k.htm,10-K,14219824,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052120000016/deck331202010-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052120000016/,2019,2019,1 diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/item1.txt b/raw/filings/0000910521/2019/0000910521-20-000016/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b74d8d4ce7c51376c8246b5ad5334ee7468f8c07 --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/item1.txt @@ -0,0 +1,138 @@ +Item 1. Business +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our DTC business, which is comprised of our retail stores and e-commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Recent Developments +COVID-19 Global Pandemic . During early calendar year 2020, the COVID-19 pandemic (referred to herein as COVID-19 or the COVID-19 pandemic) spread globally, including throughout the geographic regions in which we operate our business, and where our wholesale customers, retail stores, manufacturers, and suppliers are located. +In response to the pandemic, many federal, state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, “shelter-in-place” orders, and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders have resulted in the mandatory closure of “non-essential” businesses (including retail stores), increased unemployment rates, “social distancing” restrictions, reduced tourist activity, work-from-home policies, and other changes that have led to significant disruptions to businesses and global financial markets. The overall impact of the pandemic on our business and future results of operations is highly uncertain and subject to change, and we are not able to accurately predict the magnitude or scope of such impacts at this time. +We have experienced a number of material impacts resulting from the COVID-19 pandemic during the fiscal quarter ended March 31, 2020 and subsequent to our fiscal year end, and have taken certain precautionary measures intended to help minimize the risk to our business, employees, customers, and the communities in which we operate, including the following: +• +All of our Company-owned and operated stores, and nearly all of the retail stores of our wholesale customers and retail partners, were closed during a portion of our fourth fiscal quarter and largely remain closed during the first part of our first fiscal quarter ending June 30, 2020. +• +Our global e-commerce business, including both our owned websites as well as the online presence of our wholesale customers, has remained substantially operational throughout the COVID-19 pandemic, which has been positively impacted by customers migrating to online shopping and has mitigated some of the negative pressure we are experiencing within our wholesale and retail store businesses. +• +We experienced a brief period of disruption at our Moreno Valley, California, distribution center and, while operations have since returned, we are experiencing certain operational and logistical challenges +3 +Table of Contents +as a result of limited and modified operations resulting from safety protocols and increased social distancing measures. +• +We experienced certain disruptions to sourcing with our third-party manufacturers and, while these disruptions have been mitigated, it is possible there will be disruptions in the future. +• +We have implemented a number of temporary measures to reduce operating expenses and mitigate the adverse impact the pandemic may have on our business and operations. +• +As of March 31, 2020 , we had $649,436 in cash and cash equivalents and $469,473 available borrowings under our revolving credit facilities, providing a liquidity position of over $1,000,000. +• +We are temporarily pausing repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on the impacts to our business and results of operations and associated risks and uncertainties. Refer to Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” for further information on our stock repurchase programs. +Products and Brands +We currently market our products primarily under five propriety brands, composed of our four primary brands and our other brands, which currently consist of the Koolaburra by UGG brand, as well as other discontinued brands during the periods presented (collectively, Other brands). Collectively, our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to women, men, and children. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of women’s spring and summer footwear, men’s products, apparel, home goods, and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), Europe, Asia-Pacific, Canada and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. We continue to build product extensions in trail and fitness. The HOKA brand is sold both domestically and internationally in key markets, including the US, Canada, Europe, and Asia-Pacific. +Teva. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands. O ther brands currently consist of the Koolaburra by UGG brand and a discontinued brand during the prior period presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business. +4 +Table of Contents +Currently, our sales force is typically separated by brand, as each brand generally has certain specialty consumers that expect a dedicated sales team with specialized knowledge of our brands’ product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of each of our brands. +We distribute products sold in the US through our distribution center in Moreno Valley, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution center features a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. +We completed the closure of our former distribution center in Camarillo, California during fiscal year 2020 and moved all of our Camarillo distribution operations to our Moreno Valley location . +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further disclosure and discussion. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, Running Specialty Group, REI, Zappos.com, and Running Warehouse. We expect to expand our HOKA brand wholesale distribution into international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, DSW, Urban Outfitters, Free People, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, and online retailers, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our retail stores and e-commerce websites. Our retail stores and websites are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined, which are collectively designed to engender brand loyalty while increasing product sales and improving our inventory productivity, include the following: +• +“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. +• +“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our e-commerce websites. +5 +Table of Contents +• +“Ship from Store”: Inventory that is available in our stores but out of stock online can be shipped from our stores. We expect future advancements in this capability will use algorithms to select the optimal fulfillment source. +• +“UGG Closet”: A limited e-commerce outlet channel that offers an online portal designed to provide an efficient way to close out inventory through direct sales to consumers. +• +“Buy Online / Return in-Store”: Our consumers can buy online and return products to our retail stores. +• +“Click and Collect”: Our consumers can buy online and have products delivered to certain retail stores for pick-up. +• +“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store. +Our retail stores enable us to expose consumers to a greater selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2020 , we had a total of 145 global retail stores, which includes 76 concept stores and 69 outlet stores, and operated our e-commerce business through an aggregate of 28 Company-owned websites and mobile platforms in ten different countries. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. However, we do have long-standing relationships with most of these independent manufacturers, and we may not be able to identify substitute alternative manufacturers to satisfy our desire for such flexibility. We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy, Conflict Minerals Policy and Ethical Sourcing and Animal Welfare Policy, as well as other compliance policies and procedures, as a condition to conducting business with us. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability, compliance with laws and regulations, and adherence to quality control standards and final design specifications. In addition, we have instituted pre-production, in-line, and post-production inspections to meet or exceed our product +6 +Table of Contents +quality requirements, as well as the expectations of our consumers. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +In an effort to partially reduce our dependency on sheepskin, we use a proprietary raw material, UGGpure, which is re-purposed wool woven into a durable backing, and UGGplush, which is re-purposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, most of the wool in UGGpure and UGGplush is sheared from the hides we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets, and the delivery requirements of our customers. As part of our operating profit improvement plan, we implemented systems and processes designed to improve our product forecasting, inventory control and supply chain management capabilities. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our practice, and the general practice in our industry, is to offer retail customers the right to return defective or improperly shipped merchandise. +Backlog +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders expected to be shipped at a future date, some of which are subject to cancellation prior to shipment. Our calculation of backlog also includes bulk orders, which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments. We believe backlog is an imprecise indicator of our actual product shipments +7 +Table of Contents +and future results of operations and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC segment, as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, and the timing of product shipments. +As of March 31, 2020 , our backlog was $1,022,900 , which represents a 4.6% annual increase over our backlog as of March 31, 2019 . Subsequent to March 31, 2020, we have experienced some cancellations related to COVID-19 disruptions, and as a result, as of May 14, 2020, our backlog has declined to be roughly flat compared to the prior period. We are currently reviewing the order book with our wholesale customers, and our backlog may decrease further due to additional order cancellations or deferrals. +Our People and Our Culture +Employees. As of March 31, 2020 , we employed approximately 3,600 employees in North America, Europe, and Asia. This includes approximately 1,600 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is favorable. +Encouraging Diversity. We strive to create a culture of inclusion where employees are able to freely contribute equally regardless of gender, age, race, disability or sexual orientation. Our Code of Ethics, which all employees are trained on bi-annually, codifies these values. Our employee-led initiative, VOICES, is an avenue that elevates employee issues and celebrates our uniqueness. We have obtained EDGE (Economic Dividends for Gender Equality) Certification in the US, the leading global assessment and business certification for gender equality. +Environmental, Social and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide scope and impact is significant. Equally significant is the responsibility we believe we have to our stakeholders, including our consumers, employees, stockholders, and the communities we serve. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. We employ socially conscious operations and sustainable business practices, with the goal of continuing to deliver quality products to our consumers and sound financial performance to our stockholders, while minimizing the environmental impact of our business footprint. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our employees, our suppliers and our customers, as well as other brands and non-governmental organizations. Through our Corporate Responsibility and Sustainability Program, we expect to continue to advance our sustainable business initiatives with the goal of consistently delivering brand promises that meet consumer expectations. As a result of our efforts, we have been recognized by Investor’s Business Daily as one of the “50 Best ESG Companies” during fiscal year 2020. +ESG Governance. Our Sustainability and Compliance Officer is responsible for the day-to-day management of our Corporate Responsibility and Sustainability program. The Corporate Governance Committee of our Board of Directors, which is comprised of three independent directors, oversees our Corporate Responsibility and Sustainability efforts. +Our Sustainability and Compliance program aligns our internal teams with our sustainable development goals (SDGs) and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and our communities. We are members of the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility Report. Our Sustainability and Compliance Officer identifies specific SDGs set forth in the UNGC, which guide our supply chain and brand business teams’ efforts to address environmental and social challenges. Our SDGs are currently focused on eight categories where we believe we can make substantial impacts. +8 +Table of Contents +The following is a brief overview of our current SDGs and related fiscal year 2020 achievements: +• +Materials. We sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally-friendly business practices within the leather industry. We continue to seek sustainable alternatives for key product materials, with a goal to source at least 90% of our materials from suppliers certified by third-party benchmarking organizations. +• +Waste . Our distribution center in Moreno Valley, California is implementing efforts to become a zero-waste facility. We are taking steps towards removing single-use plastic at our corporate headquarters, retail stores and distribution center. We are piloting tracking programs with certain manufacturing partners to monitor waste disposal methods. +• +Animal Welfare. We do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides which are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely re-purposed from hides we are already using. We require our supply chain partners to annually certify compliance with our Ethical Sourcing and Animal Welfare Policy. +• +Water. We have reduced our water usage through manufacturing process improvements and have encouraged our manufacturing partners and suppliers to do the same by measuring their water output. Our SDG seeks to reduce water consumption and improve water quality throughout our operations and the communities in which we operate including a target that at least 90% of our core factory partners and suppliers apply industry best practices regarding water treatment and usage. +• +Chemicals. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• +Climate and Clean Energy. We strive to increase our year-over-year solar power usage at our headquarters and distribution centers, as well as to integrate climate change measures into our policies and planning. We measure energy usage by certain of our partners to encourage reduced energy consumption. +• +Gender Equality and Quality Education. In addition to our own corporate diversity and inclusion efforts, we promote gender equality and quality education at our supply chain partners through our partnership with HERproject. +• +Human Rights. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct based on International Labour Organization standards and audit our supply chain pursuant to such criteria on an ongoing basis. Audit results are included on performance scorecards for regular review by our executive management. +Our fiscal year 2020 Corporate Responsibility Report, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information on our fiscal year 2020 ESG achievements. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we are working to align our Corporate Responsibility Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB) Consumer Goods Standards. The content of our Corporate Responsibility Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. Since 2006, we have donated over 1 million pairs of shoes to Soles4Souls and Good360, non-profit organizations that distribute shoes to those in need. During fiscal year 2020, we donated $1,700 to various non-profit organizations. Additionally, we have committed over $1,000 in funds and product donations to address the impacts of the COVID-19 pandemic on the communities in which we operate. Further, during fiscal year 2020, we dedicated our strategic giving and engagement efforts to categories related to our SDGs, our business, and our communities. Our community-engagement efforts focused on arts and culture, human services, education, international affairs, environment and animal welfare, and health and society. We encourage our employees to volunteer by compensating them for up to 24 hours of volunteer time each year. +9 +Table of Contents +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” for further discussion of our reportable operating segments and to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles and growing the year-round net sales of the HOKA brand as a percentage of our aggregate net sales, we expect the seasonality trends that have resulted in significant variations in our aggregate net sales from quarter to quarter to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report . +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to assess and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the COVID-19 pandemic, among others. +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA One One,” “Koolaburra,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan, and Korea. As of March 31, 2020 , we hold 185 designs and inventions with corresponding design or utility patent registrations, plus seventeen designs +10 +Table of Contents +and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements and other information regarding issuers that file with the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, Corporate Responsibility Report, Restricted Substance Policy, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report , and references to our website address within this Annual Report are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/item13.txt b/raw/filings/0000910521/2019/0000910521-20-000016/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3abc767b07ec136a3bc27aaf56d1565871bb91ed --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/item9a.txt b/raw/filings/0000910521/2019/0000910521-20-000016/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..737cb1d997fefda89c6ec67058bd43533f97febd --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/item9a.txt @@ -0,0 +1,18 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +56 +Table of Contents +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020 . Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020 . +b) Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2020 , our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria as of March 31, 2020 . The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV , “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report . +c) Internal Control over Financial Reporting +During the first quarter of fiscal year 2020, we updated our control framework for certain new internal controls and changes to certain existing internal controls related to the adoption of ASU No. 2016-02, as amended, otherwise known as the new lease standard, and related financial statement reporting and disclosure. There were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report . This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +57 +Table of Contents +PART III +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. +The defined periods for the fiscal years ended March 31, 2020 , 2019 , and 2018 are stated in Items 10, 11, 12, 13, and 14 herein as “year ended” or “years ended.” \ No newline at end of file diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/rp_note.txt b/raw/filings/0000910521/2019/0000910521-20-000016/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2019/0000910521-20-000016/rpt_disclosure.txt b/raw/filings/0000910521/2019/0000910521-20-000016/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..ac9121bb1de3629792a1d9e1f9d0e6ec979c9d87 --- /dev/null +++ b/raw/filings/0000910521/2019/0000910521-20-000016/rpt_disclosure.txt @@ -0,0 +1,6 @@ +RELATED PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit Committee, the Chairman of our Board and our highest ranking manager of internal audit. +If a related person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules during fiscal year 2020, and no such transactions are currently proposed. +68 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/filing.txt b/raw/filings/0000910521/2020/0000910521-21-000017/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..a20b74fd1e09bb5d38eefaa713373fcb63f49fc4 --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/filing.txt @@ -0,0 +1,2131 @@ +deck-20210331 +0000910521 false 2021 FY P1Y P1Y P2M P2Y P3Y P10D 0000910521 2020-04-01 2021-03-31 iso4217:USD 0000910521 2020-09-30 xbrli:shares 0000910521 2021-05-13 0000910521 2021-03-31 0000910521 2020-03-31 iso4217:USD xbrli:shares 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0000910521 us-gaap:SalesReturnsAndAllowancesMember 2021-03-31 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the Fiscal Year Ended March 31 , 2021 +☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the transition period from to +Commission File Number: 001-36436 +DECKERS OUTDOOR CORP ORATION +(Exact name of registrant as specified in its charter) +Delaware 95-3015862 +(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, par value $0.01 per share DECK New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. +Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ +Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 6,159,309,976 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $220.01. This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 13, 2021, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 27,813,023 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2021 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2021 +TABLE OF CONTENTS +Page +Cautionary Note Regarding Forward-Looking Statements +2 +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +13 +Item 1B. Unresolved Staff Comments * +Item 2. +Properties +28 +Item 3. +Legal Proceedings +29 +Item 4. Mine Safety Disclosures * +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +30 +Item 6. +Selected Financial Data +* +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +32 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +50 +Item 8. +Financial Statements and Supplementary Data +51 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * +Item 9A. +Controls and Procedures +51 +Item 9B. Other Information * +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +53 +Item 11. +Executive Compensation +53 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +53 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +53 +Item 14. +Principal Accounting Fees and Services +53 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +54 +Signatures +56 +Index to Consolidated Financial Statements and Financial Statement Schedule +F- 1 +Item 16. Form 10-K Summary * +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2021 (Annual Report), and the information and doc uments incorporated by reference within this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference within this Annual Report, contains forward-looking statements relating to, among other things: +• the impacts of the COVID-19 global pandemic on our business, financial condition, results of operations and liquidity, and the business, financial condition, results of operations and liquidity of our customers, suppliers, and business partners; +• changes to our business resulting from changes in discretionary spending, consumer confidence, unemployment rates, retail store activity, tourist activity, or governmental restrictions; +• the impact of government orders, local authority mandates and expert agency guidance on retail store closures and operating restrictions; +• our business, operating, investing, capital allocation, marketing, and financing plans and strategies; +• the expansion of our brands and product offerings; +• changes to the geographic and seasonal mix of our brands and products; +• changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies; +• changes in consumer preferences impacting our brands and products, and the footwear and fashion industries; +• trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and e-commerce businesses; +• bankruptcies or other financial difficulties impacting our wholesale customers or other business partners; +• the impact of seasonality and weather on consumer behavior, demand for our products, and our results of operations; +• the impact of our efforts to continue to advance sustainable and socially conscious business operations, and the expectations and standards that our investors and other stakeholders have with respect to our environmental, social and governance practices; +• expansion of and investments in our Direct-to-Consumer capabilities, including our distribution facilities and e-commerce platforms; +• the operational challenges faced by our warehouse and distribution center, our global third-party logistics providers, and third-party carriers, and the related impacts on our ability to deliver products; +• availability of raw materials and manufacturing capacity, and reliability of overseas production and storage; +• commitments and contingencies, including with respect to operating leases, purchase obligations for product and raw materials, and legal or regulatory proceedings; +• the impacts of new or proposed legislation, tariffs, regulatory enforcement actions, or legal proceedings; +• the value of goodwill and other intangible assets, and potential write-downs or impairment charges; +• changes impacting our tax liability and effective tax rates; +• repatriation of earnings of non-United States subsidiaries and any related tax impacts; +• the impact of the adoption of recent accounting pronouncements; and +• overall global economic, political, and social trends, including foreign currency exchange rate fluctuations, changes in interest rates, and changes in commodity pricing. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA One One® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® (Koolaburra), UGGpure® (UGGpure), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere within this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all dollar amounts within this Annual Report are expressed in thousands, except for per share or share data. The defined periods for the fiscal years ended March 31, 2021, 2020, and 2019 are stated herein as “year ended” or “years ended.” We also refer to these fiscal years as “fiscal year 2021,” “fiscal year 2020,” and “fiscal year 2019,” respectively. +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our Direct-to-Consumer (DTC) business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Recent Developments +COVID-19 Global Pandemic . Throughout fiscal year 2021, the COVID-19 pandemic (referred to herein as the pandemic) spread globally, impacting regions in which we operate our business, and in which our wholesale customers, retail stores, manufacturers, and suppliers are located. As of the date of this Annual Report, there continue to be widespread concerns about the ongoing impacts and disruptions caused by the pandemic, including the potential for additional increases in the number of positive COVID-19 cases in various geographic regions, and governmental orders and restrictions implemented to control further spread of the disease. +We experienced a number of material impacts resulting from the pandemic during the year ended March 31, 2021, and the overall impact of the pandemic on our business continues to be uncertain and subject to change. However, we have taken certain precautionary measures intended to help minimize risk to our business, employees, customers, consumers, partners, suppliers, and the communities in which we operate, including the following: +• Many of our Company-owned-and-operated stores, and we believe that many of the retail stores of our wholesale customers and retail partners, were closed at various times throughout fiscal year 2021. +• Our global e-commerce business, including our Company-owned websites and the online presence of our wholesale customers, remained substantially operational throughout fiscal year 2021, and we observed strong demand for all of our brands within our e-commerce business. Our e-commerce business has been positively impacted by consumers migrating to online shopping. This trend, which has been exacerbated by the impacts of the pandemic, has mitigated the negative pressure we are experiencing within our wholesale and retail store businesses. +• Our warehouse and distribution center (DC), as well as our global third-party logistics providers (3PLs) and third-party carriers, are operating at reduced capacity. We are experiencing certain operational and logistical challenges as a result of these limited and modified operations, including challenges associated with shipping higher quantities of products through our e-commerce business compared to prior periods. +3 +Table of Contents +• We experienced certain capacity constraints within our sourcing network, which includes material vendors and third-party manufacturers during fiscal year 2021, primarily as a result of the pandemic. While we have mitigated the effects of these disruptions, it is possible we will experience additional disruptions to our supply chain. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on the associated risks and impacts on our business and results of operations. +Products and Brands +We market our products primarily under five proprietary brands, which consist of our four primary brands and our other brands, which consist primarily of the Koolaburra by UGG brand. Our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of Women’s spring and summer footwear, Men’s products, and apparel, home goods, and accessories. The UGG brand is sold globally, including in the United States (US), Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. The HOKA brand is quickly becoming a leading brand within the run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. We continue to build product extensions in trail, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +Other Brands. O ther brands consist primarily of the Koolaburra by UGG brand. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. Our Other brands are primarily sold in North America. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our retail stores. +Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of all of our brands. +4 +Table of Contents +We currently distribute products sold in the US through our DC in Moreno Valley, California, as well as through a 3PL in Pennsylvania. Our DC features a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. Further, we intend to expand our distribution facilities, and we are in the early stages of opening a new US DC located in Mooresville, Indiana. +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through lifestyle and sport retailers such as Foot Locker and Journeys, fashion lifestyle retailers such as Urban Outfitters and ASOS, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sport retailers, which is reducing our dependence on department stores. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, JackRabbit, REI, Zappos.com, DICK’s Sporting Goods, Running Warehouse, and Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including DSW, REI, Famous Footwear, Nordstrom, Urban Outfitters, DICK’s Sporting Goods, United Arrows, ABC Mart, Aeon Sports, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our Other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity, Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +5 +Table of Contents +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores, which are lead concept stores in key markets designed to showcase the UGG brand products, and we continue to launch flagship stores in prominent locations. For example, in November 2020 we opened a flagship store in New York City, which highlights the expansive collection of the brand’s product offerings while showcasing the breadth and depth of UGG as a lifestyle brand. We anticipate opening a curated fleet of flagship stores in future periods to continue interacting with our consumers and enhancing brand loyalty. +As of March 31, 2021, we operated our e-commerce business through Company-owned websites and mobile platforms in 58 different countries, and had a total of 140 global retail stores, which includes 71 concept stores and 69 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, conflict minerals, animal welfare, and environmental compliance before we are willing to conduct business with them. +6 +Table of Contents +We use a proprietary raw material, UGGpure, which is repurposed wool woven into a durable backing, and UGGplush, which is repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the skins we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our general practice, and the general practice in our industry, is to offer wholesale customers the right to return defective or improperly shipped merchandise, and to accept returns from our DTC consumers between 30 to 90 days from the point of sale for cash or credit. +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Liquidity” and “Contractual Obligations” for further information on our working capital and operating requirements as well as our purchase obligations for product. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2021 , we employed approximately 3,400 employees in North America, Europe, and Asia. This includes approximately 1,300 employees in our retail stores wor ldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is generally favorable. +Culture . Our purpose is to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our five key values, which guide our journey onward together, help hold us accountable to deliver on this purpose: +• Come as you are. +• Better together. +• Commit to create. +• Own it. +• Do good and do great. +7 +Table of Contents +Our values define our Company and serve as the driving force behind how we work together and with our customers, our consumers, our partners, our suppliers, and our communities. We also have detailed ethics and compliance policies that instill a commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred, and are also able to make confidential and anonymous reports using an online or telephone hotline hosted by an independent third-party provider. +Encouraging Diversity . We prioritize diversity, equity, and inclusion (DEI) and believe that it is critical to creating an organization where all employees can come as they are. We believe that the inclusion of underrepresented perspectives develops better outcomes and policies, and a diverse pool of leaders brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business. To that end, we have added five new directors to our Board of Directors since 2018, two of whom are female, and four of whom are from underrepresented communities. Our Board of Directors is now comprised of a total of ten directors, four of whom are female, and six of whom are from underrepresented communities. +Our Code of Ethics, on which we train our employees bi-annually, as well as our annual Corporate Responsibility Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support initiatives to create a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We anticipate implementing a comprehensive, global strategy for DEI, and have deployed mandatory anti-racism and implicit bias training, as well as a suite of additional learning and development resources. We have also joined The Valuable 500, which is a business-to-business initiative comprised of companies committed to disability inclusion, and the Civic Alliance which is a nonpartisan business coalition that champions democracy and civic participation. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. During fiscal year 2021, we donated to various non-profit organizations, and continued to provide monetary support and product donations to address the impacts of the pandemic on the communities in which we operate. Further, during this period we dedicated our strategic giving and community-engagement efforts to categories aligned with our sustainable development goals (SDGs), including DEI, the environment, at-risk youth, education, and community suppo rt. We also encourage our employees to volunteer by compensating each employee for up to 24 h ours of volunteer time each year. +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, and opportunities for development. For example, our leadership team mentors rising talent on an informal basis, which we believe accelerates the development of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive team and Board of Directors commits substantial time to evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, as well as annual increases based on merit. Annual incentive compensation is based on Company and individual performance. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, restricted stock units are granted to a substantial proportion of our executive employees under our broad-based stock incentive programs. In addition, we engage a nationally recognized outside compensation and benefits consulting firm to independently evaluate the effectiveness of our executive compensation and total rewards programs and to provide benchmarking against our peers within the industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave, mental health benefits and other voluntary benefits. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs that ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We operate in modern, efficient, and safe facilities, and have had minimal accident and injury rates Company-wide. +8 +Table of Contents +In an effort to protect the health and safety of our employees during the pandemic, we transitioned those employees who could perform their jobs remotely to a virtual work environment, and we are limiting the number of employees on-site relative to our typical personnel capacity. We have also implemented enhanced safety measures and protocols at our facilities. +Environmental, Social and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact by employing socially conscious operations. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers and our customers, as well as other brands and non-governmental organizations. Through our holistic Corporate Responsibility and Sustainability Program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized as one of America’s Most Responsible Companies by Newsweek, and ranked 15th of Investor’s Business Daily’s top 50 ESG companies during fiscal year 2021. +ESG Oversight. Our Board of Directors, through its Corporate Governance Committee, which is comprised of three independent directors, oversees our corporate responsibility and sustainability efforts. The Corporate Governance Committee receives quarterly updates and the full Board regularly receives updates on the status of our sustainability program. Our Sustainability and Compliance Officer is responsible for the day-to-day management of our Corporate Responsibility and Sustainability Program. +Our Corporate Responsibility and Sustainability Program aligns our internal teams with our SDGs and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility Report. Our Sustainability and Compliance Officer identifies specific SDGs established by the UNGC, which we adopt to guide our efforts to address environmental and social challenges. Our SDGs are currently focused on categories where we believe we can make substantial impacts. +The following is a brief overview of our current SDGs and related achievements during the year ended March 31, 2021: +• Materials. We strive to incorporate more certified responsible and sustainable materials in our products (including recycled, renewable, regenerated, and natural). During fiscal year 2021, we sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We finalized our raw material Lifecycle Assessment (LCA), which allowed us to seek sustainable alternatives for key product materials, including recycled polyester, repurposed wool, and plant-based materials. +• Animal Welfare. We do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides that are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely repurposed from sheepskin we are already using. Any virgin market wool must be certified by the Responsible Wool Standard. We require our supply chain partners to annually certify compliance with our Ethical Sourcing and Animal Welfare Policy. +9 +Table of Contents +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DC in Moreno Valley, California is implementing efforts to become a zero-waste facility. We are taking steps towards removing single-use plastic in our packaging, at our corporate headquarters, retail stores and DC. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods and we have extended this monitoring program to some suppliers and tannery partners. +• Water. We strive to mitigate water scarcity in the countries we operate in by reducing water consumption and improving water quality throughout our operations. We have reduced water consumption among our manufacturing partners and have set reduction targets for our suppliers. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We have finalized our raw materials LCA to guide our brands toward more preferred material selections and have engaged climate experts to measure our Scope 1, 2, and 3 carbon footprint with the goal of setting robust science-based targets in line with the Paris Agreement. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. +• Gender Equality and Quality Education. In the US we have obtained EDGE (Economic Dividends for Gender Equality) certification, the leading global assessment and business certification for gender equality. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. Further, our brands have all made a commitment to represent BIPOC, LGBTQ+, and diverse body types and abilities in their marketing campaigns. +• Human Rights. We are committed to positively impact the communities where we operate in, including assuring industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct which outlines our expectations of our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards which are regularly reviewed by our executive management. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Apparel Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a report that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our Corporate Responsibility Report for the year ended March 31, 2021, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2021 ESG achievements. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Corporate Responsibility Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB) Consumer Goods Standards. The content of our Corporate Responsibility Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +10 +Table of Contents +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st still significantly exceed our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the pandemic. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report. +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the pandemic, among others. +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2021, we hold 194 designs and inventions with corresponding design or utility patent registrations, plus 23 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +11 +Table of Contents +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, Deckers 2020 Corporate Responsibility Report, Restricted Substance Packet, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Ethics, Corporate Governance Guidelines, Deckers Environmental Policy, Ethical Sourcing and Animal Welfare Policy, Paper and Forest Procurement Policy, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +12 +Table of Contents +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +Risks Related to Our Business and Industry +Health epidemics, including the pandemic, have had, and could in the future have, a material adverse impact on our business, operations, liquidity, financial condition, results of operations, the operations of our customers and business partners, and the markets and communities in which we, our customers, and our partners operate. +The pandemic has had, and other public health crises or epidemics in the future could have, repercussions across local, regional, and global economies and financial markets. The pandemic resulted in a rapid rise in unemployment and a sudden decrease in global economic activity, and many businesses experienced, and may continue to experience, a significant negative impact on their results of operations. During portions of our year ended March 31, 2021, nearly all of our Company-operated stores, our partner retail stores, and we believe the retail stores of our wholesale customers were closed to comply with government orders or restrictions, and additional closures may occur in future periods. In response to restrictions resulting from the pandemic, we temporarily furloughed retail store employees and transitioned nearly all of our other employees to a remote work environment. Furthermore, in an effort to manage the financial uncertainty involved with the pandemic, we implemented certain cost-saving measures, such as delaying the hiring of certain non-essential employees, which has delayed the completion of certain strategic objectives. +In addition, the demand for our products, as well as our results of operations, could be adversely impacted due to a number of other factors in connection with this or other pandemics, including the following: +• reduced demand for certain products; +• decreased store traffic due to retail store closures, social distancing restrictions or changes in consumer behavior; +• a deterioration in our ability, or the ability of our wholesale customers, to operate in affected regions; +• reduced availability of our supply of raw materials; +• the failure of key business partners to provide services for our efficient operations, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us; +• financial difficulties facing our wholesale customers, which could cause them to be unable to make or delay making payments to us, or result in order cancellations for our product offerings; +• seasonality impacts on the demand for certain products, and the ability of our DC and 3PLs to timely process orders during periods of heightened demand; and +• incremental costs resulting from adoption of health and safety preventative measures. +The full extent of the impact of the pandemic on our business and operations continues to be uncertain and subject to change, and will depend on a number of factors beyond our control. We expect any further spread of the pandemic or the threat or perception that this could occur, or any protracted duration of decreased economic activity, could have a material adverse effect on our business, operations and financial results. Further, we have experienced an increase in sales of certain of our products that are desirable to wear within the work-from-home environment, and there can be no assurance that consumers will continue purchasing such products as they transition back into the workplace and restrictions on travel or gatherings are relaxed. +13 +Table of Contents +Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred during the fall and winter (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred during the spring and summer (our first and fourth fiscal quarters). Due to the magnitude of the UGG brand relative to our other brands, seasonal trends have resulted in our net sales for the second and third fiscal quarters significantly exceeding that of the first and fourth fiscal quarters. Although our ongoing strategic efforts to diversify our offerings by creating additional year-round styles and expanding product offerings within our existing brands has had a meaningful positive impact on our seasonality trends, we expect our quarterly net sales to continue fluctuating for the foreseeable future. In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter may significantly reduce demand for our UGG brand products. Unfavorable or unexpected weather patterns may have a material, negative impact on our business, financial condition, results of operations and prospects, and the effects of climate change may pronounce these conditions. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and meet the expectations of analysts and investors. +Due to the relative concentration of our sales in certain months of the year, factors impacting consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence, changing consumer preferences, or uncertain economic conditions, will disproportionately impact our business and could result in our failure to achieve financial performance that is in line with our expectations or the expectations of market participants. In addition, significant fluctuations in our financial performance from period to period due to these or other factors could increase the volatility of our stock price, which could cause our stock price to decline. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand and spending patterns, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including: +• seasonality, including the impact of anticipated and unanticipated weather conditions; +• consumer acceptance of our existing and new products, and our ability to develop new products that address the needs and preferences of consumers; +• consumer perceptions of and preferences for our products and brands, including as a result of evolving ethical, political or social standards; +• consumer demand for our competitors’ products; +• whether consumers view certain of our products as substitutes for other products we manufacture; +• the implementation of our segmentation approach to the distribution of certain of our products; +• publicity, including social media, related to us, our products, our brands, our marketing campaigns and our celebrity endorsers; +• the life cycle of our products and consumer replenishment behavior; +• evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; +• brand loyalty; +• legislation restricting our ability to use certain materials in our products; and +• changes in general economic, political, and market conditions. +Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes for footwear, apparel, and accessories, as well as consumer spending patterns. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. Many of our products, particularly our UGG brand product offerings, include a fashion element and could go out of style at any time. Further, the value of +14 +Table of Contents +our brands is largely based on evolving consumer perceptions, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, including the sustainability of products or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns, our partners or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are luxury retail products. The purchase of these products by consumers is largely discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as worsening economic conditions, consumer confidence in future economic conditions, increases in consumer debt levels, and increases in unemployment rates. Uncertainty in global economic conditions continues, particularly in light of the impacts of the pandemic, and trends in consumer discretionary spending remain unpredictable. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and profitability, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced consumer demand for luxury products, decreases in available credit, and increased competition. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive and subject to changing consumer preferences and tastes. We believe we compete on the basis of a number of factors, including our ability to: +• predict and respond to changing consumer preferences and tastes in a timely manner; +• produce products that meet our requirements and consumer expectations for quality and technical performance; +• accurately predict and forecast consumer demand; +• ensure product availability; +• manage the impact of seasonality, including unexpected changes in weather conditions; +• maintain and enhance brand loyalty; +• price our products in a competitive manner; +• ensure availability of raw materials and production capacity; +• implement our omni-channel strategy, including providing a unique customer service experience; +• respond to new or proposed legislation impacting our products; and +• manage the impact of the rapidly changing retail environment, including with respect to rising competition within the e-commerce business, especially from online retailers such as Amazon.com. +Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. Furthermore, the disruptions caused by the pandemic may ultimately require us to reduce our opportunities in certain markets, which could negatively impact our prospects for long-term growth. +15 +Table of Contents +Our competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers. Further, these competitors may have relationships with our key retail customers that are potentially more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly or with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, increase their market share, withstand the impacts of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. Efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from their competitors, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +If we fail to compete effectively in the future, our sales could decline, and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse impact on our business. +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may be found only in certain geographies. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we produce do not conform to our quality or sustainability specifications or fail to meet consumer expectations, we could experience reduced demand for our products, a higher rate of customer returns and negative impacts on the image of our brands, any of which could have a material adverse impact on our business. Similarly, if these tanneries are not able to deliver sheepskin in the quantities required, or were to cease operations, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production schedules, which would limit our ability to meet demand for our products, lead to inventory shortages, result in a loss of sales, strain our customer relationships, and harm our reputation. In addition, any factors that negatively impact the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability, loss or destruction of property, work stoppages, political instability, or acts of terrorism or catastrophic events, could result in shortages in our supply of sheepskin. +While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the potential impact of fluctuations in sheepskin prices on our results of operations. However, in the event of a prolonged increase in sheepskin prices such as what we have experienced in the past, these strategies may not be sufficient to offset the negative impact on our results of +16 +Table of Contents +operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer. In an effort to reduce our dependency on sheepskin, we are seeking sustainable alternatives for key product materials. +Further, our industry is characterized by rapidly changing fashion trends and consumer preferences. We believe there is a growing trend within the fashion industry towards eliminating the use of certain animal products, most notably fur. For example, legislation has been passed in the US banning the sale of fur in certain cities, and similar legislation is being considered in other geographies. While the use of leather goods and sheepskin has typically not been subject to this type of legislation, it is possible that future legislation could restrict our ability to use sheepskin in the products we sell in certain geographies. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is currently used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of products that include sheepskin, especially within our large target markets, could have a material adverse impact on our business, financial condition, and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve, automate and streamline our operational systems, processes and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. While these efforts have resulted in some improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational system upgrades and improvements are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +Further, our future success and growth depend in part on the continued operation of our key business processes, including our information technology and global communications systems. Our operational system upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems while continuing to manage and operate our business. In addition, as our business grows and we expand our brands and products into additional distribution channels and geographic regions, these systems may require expansion. If we are unable to modify our systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +If we are unsuccessful at managing product manufacturing decisions, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse impact on our financial condition and results of operations. +Like other companies in the footwear, apparel and accessories industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which require us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. Once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses in reaction to various factors, including the following: +• unfavorable weather patterns and related impacts on consumer spending and demand for our products; +• changes in consumer preferences, tastes, discretionary spending, and prevailing fashion trends; +• market acceptance of our current products and new products, and of competitive products; +17 +Table of Contents +• future sales demand from our wholesale customers; +• the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• delays in resource or product availability due to impacts from widespread illness or disease; and +• uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse impact on our financial condition and results of operations. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +While we expect to identify additional retail stores for closure as part of our ongoing optimization efforts, we may simultaneously identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. Since a certain amount of our retail store costs are fixed, if we have insufficient sales at a new store location, we may be unable to reduce expenses to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. In light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location will generate a positive return on our investment or increase our sales. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We currently plan for most of the partner retail stores to be operated in international markets, with the largest number anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our brand image to suffer. We will continue to evaluate our partner retail strategy and our retail approach in international markets in response to changes in consumer demand, retail store traffic patterns, and our brand and regional strategies. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a partner fails to satisfy contractual obligations or to otherwise meet our expectations, or experiences complete or partial closure or other operational issues resulting from government restrictions, reduced consumer demand or other factors, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement partner will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates for our wholesale customer orders as a key factor in forecasting our sales and earnings for future periods. If any of our major customers experience a significant downturn in business or fail to remain committed to our products or +18 +Table of Contents +brands, these customers could postpone, reduce, or discontinue purchases from us, which could result in us failing to meet our forecasted results. These risks have been exacerbated recently as our key retail customers are operating within a retail industry that continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior, and a shrinking retail footprint. These trends have been further impacted by the pandemic. We may lose key retail and wholesale customers if they fail to manage the impact of the rapidly changing retail environment. Any loss of one of these key customers, or a significant reduction in purchases from one of these customers could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. Further, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce our prices to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our results of operations may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and information technology specialists. Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. +Further, our domestic headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our location. Our European headquarters are located in the UK, and there remains significant uncertainty regarding the impact of Brexit on the legal and commercial relationships between the UK and the EU, which could make it difficult for us to attract and retain key employees in the UK. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our results of operations may suffer, and we may be unable to compete in the market. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and key employees are generally employed on an at-will basis, which means that they can terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel to fill those key positions, could have a material adverse effect on our business. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities to store, sort, package and distribute our products. In the US, we distribute products primarily through a self-managed DC in Moreno Valley, California. During fiscal year 2020, we transitioned all of our Camarillo, California distribution operations to Moreno Valley, which features a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. Further, during our fourth fiscal quarter ended March 31, 2021, we entered into a lease for a DC located in Mooresville, Indiana, to expand our distribution facilities. We could face a significant disruption in our domestic DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems, or due to mandatory or elective closure in response to government orders addressing the pandemic. In addition, if our domestic DC operations and scaling efforts are impeded or delayed for any reason, it could result in shipment delays or the inability to deliver product at +19 +Table of Contents +all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +Internationally, we distribute our products through distribution centers managed by 3PLs in Canada, China, Japan, the Netherlands, and the UK. We also distribute our products through a domestic 3PL located in Pennsylvania. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If our 3PLs fail to manage these responsibilities, our distribution operations could face significant disruptions. The loss of or disruption to the operations of any one or more of these facilities could materially adversely impact our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential impact of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +We rely upon independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, and we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our policies, including our Supplier Code of Conduct and restricted substances policy, and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, or if they were to experience significant disruption to their business, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, and products may fail to meet our quality standards. If any of these events were to occur, we may not be able to fill customer orders or product may be inadvertently delivered that does not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively impact our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Increasing scrutiny from investors and other key stakeholders with respect to our ESG practices may impose additional costs on us or expose us to new or additional risks. +Investor advocacy groups, certain institutional investors, investment funds, other market participants, stockholders, and customers are increasingly focused on corporate responsibility, specifically on the ESG practices of companies. These parties have placed increased importance on the implications of the social cost of their investments. From time to time we communicate certain ESG initiatives and goals to market participants and our customers and business partners. Any corporate responsibility disclosure we make may include our policies, practices, initiatives and goals on a variety of social and ethical matters, corporate governance, environmental compliance, sustainability, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. Although we have undertaken expansive efforts to improve and implement our ESG initiatives, it is possible that stakeholders may not be satisfied with our ESG practices or the speed of their adoption. If our ESG practices do not meet investor or other stakeholder expectations +20 +Table of Contents +and standards, which continue to evolve, or if we are perceived to have not appropriately responded to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, we may suffer from reputational damage and our business and financial condition could be materially and adversely affected. Further, we could fail, or be perceived to fail, to achieve our ESG initiatives or goals, or we could fail to fully and accurately report our progress on such initiatives and goals, which could negatively impact our business. +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus, and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture, which may be exacerbated by restrictions adopted in response to the pandemic, which may make it difficult for employees to interact, communicate and innovate. +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor disputes, shortages, and stoppages that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores, or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, strikes, or similar disruptions. For example, labor disputes at US shipping ports have impacted the delivery of our products. In addition, there is the potential for labor disruptions in the UK as a result of ongoing uncertainty around the future trade relationship between the EU and UK. Furthermore, we have experienced challenges attracting and retaining employees to staff our DC operations as we increasingly compete with companies with e-commerce businesses. Any such challenges or disruptions may potentially result in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or product could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Such acquisitions involve numerous risks, challenges and uncertainties, including the potential to: +• expose us to risks inherent in entering into a new market or geographic region; +• lose significant customers or key personnel of the acquired business; +• encounter difficulties managing and implementing acquired assets; +• encounter difficulties marketing to new consumers or managing geographically remote operations; +• divert management’s time and attention away from other aspects of our business operations; and +• incur costs relating to a potential acquisition that we fail to consummate, which we may not recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it would result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +21 +Table of Contents +Risks Related to Our Global Business Strategy and International Commerce +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. Conversely, we may shift from a direct distribution model to a third-party distribution model for certain other brands. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. Such efforts may be mitigated or suspended as we navigate the impacts of the pandemic and implement prudent cost-saving measures. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are located in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• tariffs, import and export controls, and other non-tariff barriers; +• increasing transportation costs, delays during shipping at the port of entry or port of departure, and a limited supply of international shipping capacity; +• increasing labor costs and labor disruptions; +• poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• restrictions on the transfer of funds from foreign jurisdictions; +• changing economic and market conditions; +• changes in governmental regulations, including with respect to intellectual property, labor, safety, and the environment; +• refusal to adopt or comply with our manufacturing policies; +• customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• decreased scrutiny by custom officials for counterfeit products; +• practices involving corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• social unrest and political instability, including acts of war and other external factors; +• use of unauthorized or prohibited materials or reclassification of materials; +• health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• disruptions caused by natural or other disasters; and +• adverse changes in consumer perception of goods sourced from certain countries. +These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products, which could negatively impact our sales and earnings. +While we require our independent manufacturers and their suppliers to adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discover non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease conducting business with them, which could increase our costs and interrupt our product supply chain. Our manufacturers’ violations of applicable laws and business standards could also result in negative publicity, which could damage our reputation and the value of our brands. Further, if our manufacturers or suppliers violate US or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and forfeiture of products we are attempting to import, or the loss of our import privileges, which could have a negative impact on our results of operations. +22 +Table of Contents +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our results of operations in certain regions. +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +• foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• limitations on our ability to move currency out of international markets; +• burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• legal costs related to defending allegations of non-compliance with foreign laws; +• inability to import products into a foreign country; +• difficulties associated with promoting and marketing products in unfamiliar cultures; +• political or economic uncertainty or instability; +• changes in unemployment rates and consumer spending; +• anti-American sentiment in international markets in which we operate; +• changes in diplomatic and trade relationships between the US and other countries; and +• general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with 30.8% of our net sales for the year ended March 31, 2021 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies and our foreign distributors typically sell our products in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected.We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, remeasurements, or translations could materially impact our consolidated financial statements. +International trade and import regulations may impose unexpected duty costs, the revision of current trade agreements may require us to alter current practices, changes in trade relations may result in tariffs, and transportation challenges and security procedures may cause significant delays and additional costs. Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins. In addition, we cannot predict whether future domestic and foreign laws, regulations, or specific or broad trade remedy actions, or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. +International trade policy is undergoing review and revision, introducing significant uncertainty with respect to future trade regulations and existing international trade agreements. Changes in tax policy or trade regulations could cause us to encounter new customs duties, which in turn may require us to implement new supply chains, withdraw from certain markets or change our business methods, which could make it difficult to obtain products of our customary quality at a competitive price and could lead to an increase in the cost of our products. The continued negotiation of free trade agreements with countries other than our principal sourcing venues may stimulate +23 +Table of Contents +competition for manufacturers. Manufacturers in these locations may seek to export footwear, apparel, and accessories to our target markets at preferred rates of duty which may negatively impact our sales and operations. +Trade relations between our sourcing venues, particularly those in China, and the US have created uncertainty for all US businesses that source or market in China. In January 2020, the US and China reached a trade deal which, among other things, limits import duties and tariffs. Although the trade deal currently remains in effect, there is no guarantee that the agreement will be honored by either party. Further, the potential for additional import duties or other restrictions on imports from China remains, which could increase the cost of sourcing in China, our own margins, and possibly the price of our products to consumers. We have transitioned most of our footwear sourcing from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition, and results of operations. +Transportation and distribution costs may be adversely impacted by new regulations, increased demand, increased fuel and labor costs, and political and economic instability. Due to the pandemic, reductions in the number of ocean carrier voyages and capacity may delay the arrival of imports. After the pandemic, we anticipate cost increases in ocean transports globally. Ongoing ocean carrier consolidation, reduced capacity, congestion at major international gateways and other economic factors are challenging ocean transportation. Further, in the US, trucking costs have risen dramatically due to driver shortages, increased labor costs, and safety, environmental, and labor regulations. These changes, as well as pandemic-related restrictions on trucking and our DC operations, may disrupt our supply chain and delay the shipment of our products, causing us to incur significant additional costs. Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and caused delays in bringing imported goods to market. Any tightening of security procedures could worsen these delays and increase our costs. +Risks Related to Our Legal, Compliance, and Regulatory Environment +Failure to adequately protect our intellectual property rights to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. An unfortunate reaction to the success of our brands is that we have become a target of counterfeiting and product imitation strategies. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, or we could otherwise lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product, which could reduce sales of our products and adversely affect the value of our brands. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our business and results of operations. In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey, and the Netherlands. Any court decision or settlement that invalidates or limits trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributor to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales, and could have a material adverse effect on the value of our brands. +A security breach or other disruption to our information technology systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition, or results of operations. +24 +Table of Contents +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers and employees, credit card information, and our proprietary financial, operational, and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputation or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial losses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, including our information technology and global communication systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this personal, confidential, and sensitive information, and to respond quickly and effectively if data security incidents do occur. We are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents have significantly increased in recent years. Like other businesses, we have experienced, and are continually at risk of, attacks and incidents. Due to the increased risk of such attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our information technology systems, as well as the personal, confidential, or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any attack or incident. Whether these measures are ultimately successful, these expenditures could have an adverse impact on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives. +Although we take the security of our information technology systems seriously, there can be no assurance that the measures we employ will prevent unauthorized persons from obtaining access to our systems and information. Despite our implementation of reasonable security measures, our systems and information may be susceptible to cyber-attacks or data security incidents. These risks may be exacerbated in a remote work environment. Because the techniques used to obtain unauthorized access to information technology systems are constantly evolving, we may be unable to anticipate these techniques or implement adequate protective measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches. A cyber-attack or other data security incident could result in significant disruption of our business such that: +• critical business systems become inoperable or require significant time or cost to restore; +• key personnel are unable to perform their duties or communicate with employees or third-party partners; +• it results in the loss, theft, misuse, or unauthorized disclosure of confidential information; +• we are prevented from accessing information necessary to conduct our business; +• we are required to make unanticipated investments in equipment, technology or security measures; +• customers cannot place or receive orders, and we are unable to timely ship orders or at all; or +• we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers, or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with our company or impose more onerous contractual provisions, and subject us to potential litigation, liability, fines, and penalties. For example, we could be subject to regulatory or other actions pursuant to domestic and international privacy laws, which could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +25 +Table of Contents +There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include US state laws such as the California Consumer Privacy Act, as well as the General Data Protection Regulation in the EU, EU member state directives, or similar applicable laws. These laws place limits on how we may collect, use, share and store personal information, and they impose obligations to protect that information. Further, we may be subject to new data privacy and security laws and regulations. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material impact on our business. Failure to comply with any of the covenants could result in a default, allowing our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. Certain of our revolving credit facility agreements bear interest at a rate that varies depending on the London Interbank Offered Rate. Any increases in interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate, or audits by various taxing authorities may subject us to additional tax liabilities, and materially affect our financial position and results of operations . +We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, the enactment of the Tax Cuts and Jobs Act (Tax Reform Act) resulted in changes to the existing US tax laws that have and will continue to affect us, and could impact our effective tax rate. In addition, in response to the pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and American Rescue Plan Act were signed into law, both of which contain numerous income tax provisions. This legislation made broad changes to the US tax code and we expect to see future regulatory or legislative guidance issued. If the guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations. Additional changes in tax laws or proposed regulations, interpretations and other changes to the Tax Reform Act may ultimately be enacted in a future period, which could increase our income tax liability or adversely affect our long-term effective tax rates and net income, and we are continually monitoring and assessing proposed changes in tax laws and regulations. One example is the recently announced American Families Plan, which, if enacted into law, would increase the corporate tax rate and would implement other changes to existing tax law that may result in a higher effective tax rate on our worldwide results of operations. +Many countries in the EU and around the globe have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our US and international business activities, many of these enacted and proposed changes could increase our worldwide effective tax rate and harm our financial position and results of operations. Further, we are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could +26 +Table of Contents +have a material adverse effect on our results of operations or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports. +Risks Related to Our Common Stock +Our common stock price has been volatile, which could result in substantial losses for stockholders. +The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• changes in expectations of our future financial performance and results of operations; +• changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• changes in our stockholder base or public actions taken by investors; +• market research and opinions published by securities analysts and other market participants, and the response to such publications; +• quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• the financial stability of our customers, manufacturers, and suppliers; +• legal proceedings, regulatory actions, and legislative changes; +• announcements regarding the potential repurchase of our common stock, and our actual stock repurchase activity; +• the declaration of stock or cash dividends; +• consumer confidence and discretionary spending levels; +• broad market fluctuations in volume and price; +• general market, political, and economic conditions, including recessionary conditions; and +• a variety of risk factors, including the ones described herein and in our other SEC filings. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation (Certificate) and Amended and Restated Bylaws (Bylaws), as well as provisions of Delaware law, could impair a takeover attempt. +Our Certificate and Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board of Directors or management. Among other things, these provisions: +• authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• provide that board vacancies can only be filled by directors; +• prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• require the vote of holders of not less than 66 2/3% of the voting stock then-outstanding to approve amendments to our Certificate and Bylaws; and +• require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Any provision of Delaware law, our Certificate, or our Bylaws, that has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for stockholders to receive a premium for their shares of our common stock, and could affect the price that investors are willing to pay for our common stock. +27 +Table of Contents +Item 2. Properties +Our corporate headquarters is located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. +We currently have one primary warehouse and DC located in Moreno Valley, California, which we began operations during the fourth quarter of fiscal year 2015 and have since continued optimizing and expanding our operations at this location. Further, we are in the early stages of opening a new US DC located in Mooresville, Indiana. +We also have offices in China, Hong Kong, Vietnam, Japan, France, Germany, the Netherlands, and the UK to oversee the quality and manufacturing standards of our products, and for regional sales, operations, marketing, and administration, as well as offices in Macau and Hong Kong to coordinate logistics. +As of March 31, 2021, we had 49 retail stores in the US ranging from approximately 1,000 to 13,000 square feet. Internationally, we had 91 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. +We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties that are operational as of March 31, 2021: +Facility Location Description Lease or Own Facility Size (Square Footage) +Moreno Valley, California Warehouse and Distribution Center Lease 1,530,944 +Goleta, California Corporate Headquarters Own 185,094 +28 +Table of Contents +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG brand trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +On March 28, 2016, we filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and deceptive trade practices in the US District Court for the Northern District of Illinois Eastern Division (District Court) against Australian Leather. In response, Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. On September 13, 2018, the District Court granted summary judgment that dismissed most of Australian Leather’s defenses and counterclaims. The remaining claims and defenses went to trial in May 2019. On May 10, 2019, a jury returned a ruling in our favor in our lawsuit against Australian Leather. The District Court entered judgments upholding the UGG trademark on February 6 and June 8, 2020. On August 12, 2020, Australian Leather filed an appeal to the US Court of Appeals for the Federal Circuit challenging the District Court’s dismissal of its affirmative defenses and counterclaims that the UGG brand trademark is invalid and unenforceable. The Court of Appeals heard oral arguments from the parties on May 5, 2021 and, on May 7, 2021, affirmed the District Court’s ruling dismissing Australian Leather’s affirmative defenses and counterclaims and upholding the UGG brand trademark. It is unknown whether Australian Leather will challenge the decision of the Court of Appeals. While we believe that any potential challenge would have no merit, a judgment invalidating the UGG brand trademark would have a material adverse effect on our business. +Although we are subject to legal proceedings and other disputes from time to time in the ordinary course of business, including employment, intellectual property, and product liability claims, we believe the outcome of all pending legal proceedings and other disputes in the aggregate will not have a material adverse effect on our business, results of operations, financial condition, or liquidity. However, regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors. +29 +Table of Contents +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol DECK on the New York Stock Exchange (NYSE) since May 2014 and was previously traded on the Nasdaq Global Select Market. +As of May 13, 2021, we had 39 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2021 that were not registered under the Securities Act. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index for the five fiscal-year periods commencing April 1, 2016 and ended March 31, 2021. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index on April 1, 2016. +30 +Table of Contents +April 1, Years Ended March 31, +2016 2017 2018 2019 2020 2021 +Deckers Outdoor Corporation $ 100.0 $ 99.7 $ 150.3 $ 245.4 $ 223.7 $ 551.5 +S&P 500 Apparel, Accessories & Luxury Goods Index 100.0 79.5 101.9 98.7 49.1 100.2 +The NYSE Composite Index 100.0 115.6 128.6 134.8 112.4 174.2 +The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference into this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. +Stock Repurchase Programs +In January 2019, our Board of Directors approved an additional authorization to its stock repurchase program to repurchase $261,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (our stock repurchase program). As of March 31, 2021, the aggregate remaining approved amount under our stock repurchase program was $60,660. +Below is a summary of stock repurchase activity under our stock repurchase program during the fourth fiscal quarter ended March 31, 2021: +Total number of shares repurchased* Average price paid per share Dollar value of shares repurchased Dollar value of shares remaining for repurchase +January 1 - January 31, 2021 — $ — $ — $ 159,807 +February 1 - February 28, 2021 192,361 323.33 62,196 97,611 +March 1 - March 31, 2021 114,719 322.10 36,951 60,660 +*Any share repurchases are made as part of publicly announced programs in open-market transactions. +Our Board of Directors approved an additional authorization of $750,000 during April 2021 to repurchase our common stock under the same conditions as the prior stock repurchase program. Subsequent to March 31, 2021 through May 13, 2021, we repurchased 70,881 shares for $23,466 at an average price of $331.06 per share, and had $787,194 remaining authorized under the stock repurchase program. +Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity and Capital Resources” and Note 10, “Stockholders' Equity,” of our consolidated financial statements and accompanying notes thereto (referred to herein as the consolidated financial statements) in Part IV within this Annual Report for further information on repurchases of our common stock. +31 +Table of Contents +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended March 31, 2021 and 2020 and year-over-year comparisons between those periods. For year-over-year comparisons between the years ended March 31, 2020 and 2019, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed with the SEC on June 1, 2020. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our Direct-to-Consumer (DTC) business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent third-party manufacturers. +Trends and Uncertainties Impacting Our Business and Industry +We expect our business and the industry in which we operate will continue to be impacted by several important trends and uncertainties, as follows: +COVID-19 Pandemic +• Throughout fiscal year 2021, the COVID-19 pandemic (referred to herein as the pandemic) spread globally, including throughout the geographic regions in which we operate our business, and in which our wholesale customers, retail stores, manufacturers, and suppliers are located. +• The overall impacts of the pandemic on our business, and the businesses of our wholesale customers and partners, continue to be highly uncertain and subject to change, especially in light of the significant recent increases in the number of positive COVID-19 cases in certain geographic regions. However, we believe that the actions we have taken to respond to the pandemic, combined with our strong brands, diversified product portfolio, and favorable liquidity position, have resulted in strong operational performance throughout the pandemic, and position us to emerge from the pandemic poised for continued long-term growth. +Retail Environment +• As a result of various government orders and restrictions imposed in connection with the pandemic, as well as changes in consumer behavior in response, we closed many of our Company-owned-and-operated stores at various times during fiscal year 2021. The largest impact on our retail business was from disruption at tourism-dependent locations, including both limited capacity and closure requirements that impacted store traffic. However, approximately 77% of our global retail stores were open for our entire fourth fiscal quarter, although in most cases with limited capacity. We expect temporary retail store closures in certain geographies to continue for at least a portion of our first fiscal quarter ending June 30, 2021, and that there is risk of ongoing or additional retail stores closures and operating limitations based on expert agency guidance and local authority mandates. +32 +Table of Contents +• We expect the scope of allowable retail activities and retail consumer traffic patterns to vary by geographic region due to the continued impact of the pandemic, including those associated with governmental restrictions and consumer responses. In an attempt to mitigate the impact of operating our retail stores at limited capacity, we have continued expanding the use of technology at these locations. However, we could continue to experience decreased demand or capacity threshold constraints at our retail stores. +• We believe that many of our wholesale customers and retail partners have experienced temporary retail store closures similar to those impacting our Company-owned retail stores. Although many of our customers have reopened their retail stores, we believe that many of these stores continue to operate at limited capacity. +E-Commerce Environment +• We have observed a prolonged and meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerated their migration to online shopping. These trends, which have been exacerbated by the impacts of the pandemic, have been positively impacting the performance of our e-commerce business, while creating headwinds for our traditional retail business, as well as the retail businesses of our wholesale customers and retail partners. +• We operate our e-commerce business through various websites and platforms, which have remained operational and experienced increased consumer traffic throughout the pandemic. We continue to look for ways to expand consumer access to and improve ease of use of our e-commerce platforms, which has contributed to increased consumer traffic. +• During fiscal year 2021, we observed strong demand for all of our brands within our e-commerce business. Many of our wholesale customers also experienced strong demand trends for our brands, which have consistently experienced strong sell-through on our wholesale partners’ e-commerce platforms. However, we do not expect that the growth rate that our e-commerce business experienced during fiscal year 2021 will continue in future periods. +Brand Strategy +• Within the UGG brand, we have experienced strong sell-through in all channels of certain product lines, such as the slipper category, as consumers seek out luxurious comfort in the current work-from-home environment. In addition, the UGG brand continues to experience success with counter-seasonal products, such as spring and summer collections for Women's, Men's, and Kids' categories. The brand is attracting new and younger, more diverse consumers, including through strategic fashion collaborations and design innovation. However, the brand continues to experience softness internationally within the wholesale channel. We expect to see continued UGG brand progress during fiscal year ending March 31, 2022 in Europe due to our marketplace reset strategy, as well as in Asia due to our localized marketing activations. +• As the UGG brand continues to amplify its audience with younger, more diverse consumers, it has been critical to continue our development of the brand’s e-commerce channel and expanding its digital marketing presence. The UGG brand's e-commerce platform has continued to evolve as part of our overall digital transformation and has become a strategic driver of our product development process through the launch of exclusive products. +• Within the HOKA brand, we continue to see strong demand across our product offerings through both wholesale and DTC channels, which we believe is being fueled by an emphasis on running and outdoor exercise and introducing innovative products that resonate globally with younger, more diverse consumers. Further, the HOKA brand's performance was driven by balanced growth across the brand's ecosystem of access points. For example, the HOKA brand's optimized digital marketing increased online consumer acquisition and retention rates, which we believe will collectively continue to drive DTC channel revenues as a percentage of total brand revenue. +33 +Table of Contents +Supply Chain +• We maintain a network of strategic sourcing partners which includes material vendors and third-party manufacturers. We experienced certain capacity constraints within our sourcing network during fiscal year 2021. While we have mitigated the effects of these disruptions, it is possible that we will experience additional disruptions to our supply chain, including from shipping delays and container shortages from congestion at port facilities, which has been exacerbated by the pandemic. Congestion at United States (US) and international ports could affect the capacity at ports to receive deliveries of products or the loading of shipments on to vessels. In anticipation of this, we are evaluating mitigation strategies. +• Our warehouse and DC in Moreno Valley, California, as well as our global third-party logistics providers (3PLs) and third-party carriers, remain open although they continue to operate at reduced capacity. We are experiencing certain operational and logistical challenges as a result of limited and modified operations. This includes challenges associated with shipping higher quantities of product through our e-commerce channel compared to prior periods in parallel with increased nationwide demand placed on delivery companies, which has been exacerbated by the pandemic. These impacts may continue to have an adverse effect on our ability to fulfill orders through our e-commerce platform. +• We continue to recognize the need for additional infrastructure investments to support our scaling business, including investments in and upgrades to our end-to-end planning systems as well as our global distribution and logistics capabilities. For example, we are currently in the early stages of opening a new US DC located in Mooresville, Indiana that is intended to expand our logistical capabilities. At the same time, we are encountering challenges in attracting and retaining quality candidates to staff our DC operations in the US as we increasingly compete with other companies with growing e-commerce operations. +Omni-Channel Strategy +• We have implemented a channel and product segmentation strategy, as well as franchise management for key product allocation strategies for the UGG brand’s core Classics franchise, in the US wholesale marketplace. These strategies are designed to assist us in controlling product inventory, reducing the impact of discounts and closeouts on our sales and gross margins, and increasing full-priced selling across our product offerings. Similarly, we have implemented a multi-year marketplace reset strategy in Europe and Asia to drive UGG brand demand and build a foundation of diversified product acceptance, which is driving a healthier product mix and reducing the need for promotional activity. +• As a result of changes in consumer purchasing behavior, we continue to enhance our omni-channel strategy to bolster our e-commerce capabilities and enable us to better engage with consumers and expose them to our brands. Our strategy is transforming the way we approach marketing, including through a sustained focus on digital marketing efforts, as well as localized marketing activations and authentic collaborations to drive global brand demand. We have also enhanced our focus on adaptive digital marketing as we seek to target consumers within the work-from-home environment and promote products that are desirable based on current consumer preferences, working conditions, and lifestyle choices. +Operating Expenses +• To mitigate the adverse impacts the pandemic has had on our business and operations, we implemented a number of temporary measures to reduce our operating expenses. As we return to a more normal business environment, we expect to make significant investments related to our infrastructure and other strategic initiatives to support opportunities to further scale our business. +34 +Table of Contents +Reportable Operating Segment Overview +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, our reportable operating segments). Information reported to the Chief Operating Decision Maker (CODM), who is our Chief Executive Officer, President, and Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. +We believe demand for UGG brand products will continue to be driven by the following: +• High consumer brand loyalty due to consistent delivery of quality and luxuriously comfortable footwear, apparel, and accessories. +• Diversification of our footwear product offerings, such as Women's spring and summer lines, as well as expanded category offerings for Men's products. +• Expanding apparel, home goods, and accessories business. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. The HOKA brand is quickly becoming a leading brand within run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth, driving the brand’s net sales to continue to increase as a percentage of our aggregate net sales. We continue to build product extensions in trail and fitness. +We believe demand for HOKA brand products will continue to be driven by the following: +• Leading product innovation and key franchise management. +• Increased brand awareness and adoption through enhanced global marketing activations and online customer acquisition, including building a more diverse outdoor community. +• Category extensions in authentic performance footwear offerings such as lifestyle acceleration through the trail and hiking categories. +Teva Brand . The Teva brand created the very first sport sandal when it was founded in the Grand Canyon in 1984. Since then the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet. We believe demand for Teva brand products will continue to be driven by the following: +• Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. +• Increasing brand awareness due to outdoor lifestyle participation amongst younger consumers. +• Category extensions in performance hike footwear. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. +Other Brands . Other brands consist primarily of the Koolaburra by UGG brand. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +35 +Table of Contents +Direct-to-Consumer . Our DTC business for all our brands is comprised of our retail stores and e-commerce websites which, in an omni-channel marketplace, are intertwined and interdependent. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions. +E-Commerce Business. Our e-commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands’ promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2021, we operated our e-commerce business through Company-owned websites and mobile platforms in 58 different countries, for which the net sales are recorded in our DTC reportable operating segment. +Retail Business. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. +As of March 31, 2021, we had a total of 140 global retail stores, which includes 71 concept stores and 69 outlet stores. Generally, we open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter; however, the timing of such openings and closures may vary. We evaluate potential retail store closures based on historic and anticipated store performance and timing of lease expirations and options. While we expect to identify additional stores for closure, we may simultaneously identify opportunities to open new stores in the future to further enhance our overall DTC business. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as, or near to when, retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores, further discussed below. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. +Flagship Stores. Included in the total count of global concept stores are seven UGG brand flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase the UGG brand products. Primarily located in major tourist locations, these stores are typically larger with broader product offerings and greater traffic than our general concept stores. We anticipate operating a curated fleet of flagship stores to enhance the interaction with our consumers and increase brand loyalty. For example, in November 2020 we opened a flagship store in New York City, which highlights the expansive collection of the brand’s product offerings while showcasing the breadth and depth of UGG as a lifestyle brand. The net sales for these stores are recorded in our DTC reportable operating segment. +Shop-in-Shop Stores. Included in the total count of global concept stores are 26 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. The net sales for these stores are recorded in our DTC reportable operating segment. +Partner Retail Stores. We rely on partner retail stores for the UGG brand and HOKA brand. Partner retail stores are branded stores that are wholly owned and operated by third-parties and not included in the total count of global retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in each respective brand wholesale reportable operating segments, as applicable. +Use of Non-GAAP Financial Measures +Throughout this Annual Report we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to the financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our financial results and assessing our prospects for future performance. However, the information included within this Annual Report that is presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. For example, in order to calculate our constant cur rency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements . +36 +Table of Contents +Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. +These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with US GAAP. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st still significantly exceed our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the pandemic. Refer to Note 14, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +Result of Operations +Year Ended March 31, 2021 Compared to Year Ended March 31, 2020. The following table summarizes our results of operations: +Years Ended March 31, +2021 2020 Change +Amount % Amount % Amount % +Net sales $ 2,545,641 100.0 % $ 2,132,689 100.0 % $ 412,952 19.4 % +Cost of sales 1,171,551 46.0 1,029,016 48.2 (142,535) (13.9) +Gross profit 1,374,090 54.0 1,103,673 51.8 270,417 24.5 +Selling, general, and administrative expenses 869,885 34.2 765,538 35.9 (104,347) (13.6) +Income from operations 504,205 19.8 338,135 15.9 166,070 49.1 +Other expense (income), net 2,691 0.1 (2,731) (0.1) (5,422) (198.5) +Income before income taxes 501,514 19.7 340,866 16.0 160,648 47.1 +Income tax expense 118,939 4.7 64,724 3.1 (54,215) (83.8) +Net income 382,575 15.0 276,142 12.9 106,433 38.5 +Total other comprehensive income (loss), net of tax 8,816 0.3 (2,905) (0.1) 11,721 403.5 +Comprehensive income $ 391,391 15.3 % $ 273,237 12.8 % $ 118,154 43.2 % +Net income per share +Basic $ 13.64 $ 9.73 $ 3.91 +Diluted $ 13.47 $ 9.62 $ 3.85 +37 +Table of Contents +Net Sales. The following table summarizes our net sales by location, and by brand and channel: +Years Ended March 31, +2021 2020 Change +Amount Amount Amount % +Net sales by location +US $ 1,761,477 $ 1,401,692 $ 359,785 25.7 % +International 784,164 730,997 53,167 7.3 +Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 % +Net sales by brand and channel +UGG brand +Wholesale $ 871,799 $ 892,990 $ (21,191) (2.4) % +Direct-to-Consumer 845,283 627,817 217,466 34.6 +Total 1,717,082 1,520,807 196,275 12.9 +HOKA brand +Wholesale 405,243 277,097 128,146 46.2 +Direct-to-Consumer 165,997 75,527 90,470 119.8 +Total 571,240 352,624 218,616 62.0 +Teva brand +Wholesale 105,928 119,108 (13,180) (11.1) +Direct-to-Consumer 32,860 18,897 13,963 73.9 +Total 138,788 138,005 783 0.6 +Sanuk brand +Wholesale 26,566 39,463 (12,897) (32.7) +Direct-to-Consumer 15,274 11,696 3,578 30.6 +Total 41,840 51,159 (9,319) (18.2) +Other brands +Wholesale 69,375 67,175 2,200 3.3 +Direct-to-Consumer 7,316 2,919 4,397 150.6 +Total 76,691 70,094 6,597 9.4 +Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 % +Total Wholesale $ 1,478,911 $ 1,395,833 $ 83,078 6.0 % +Total Direct-to-Consumer 1,066,730 736,856 329,874 44.8 +Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 % +Total net sales increased primarily due to higher DTC sales as well as higher HOKA brand wholesale sales, partially offset by lower UGG brand, Teva brand, and Sanuk brand wholesale sales. Further, we experienced an increase of 13.9% in total volume of pairs sold to 41,900 from 36,800 compared to the prior period. On a constant currency basis, net sales increased by 18.4%, compared to the prior period. Drivers of significant changes in net sales, compared to the prior period, were as follows: +• DTC net sales increased due to higher e-commerce net sales across all brands, partially offset by lower retail sales attributed to lower tourism traffic and store closures related to the pandemic. Due to the meaningful disruption of our retail store base for closures, we are not reporting a comparable DTC net sales metric for the year ended March 31, 2021. +• Wholesale net sales of the HOKA brand increased primarily due to global expansion of market share, including reaching new customers, driven by increased brand awareness combined with key franchise updates. +38 +Table of Contents +• Wholesale net sales of the UGG brand decreased primarily due to lower international sales, partially offset by strong domestic sales. The global wholesale channel was impacted by lower global sell-in of product, driven by pandemic related sales losses resulting from decreased store traffic and more conservative purchasing from our global wholesale partners. International wholesale sales were also lower due to the near-term impact of the marketplace reset strategies in Europe and Asia. +• Wholesale net sales of the Teva brand and Sanuk brand decreased primarily due to the pandemic related sales losses during our first fiscal quarter caused by decreased store traffic for our wholesale customers during the respective brands' peak sell-in period. +• International net sales, which are included in the reportable operating segment net sales presented above, represented 30.8% and 34.3% of total net sales for the years ended March 31, 2021 and 2020, respectively. International net sales increased by 7.3%, compared to the prior period, primarily due to higher net sales for the HOKA brand across all channels in Europe and Asia, partially offset by lower net sales in both these regions in the wholesale and retail channels for the UGG brand. The decrease in international net sales as a percentage of total sales was driven by higher domestic sales growth, primarily due to higher e-commerce sales. +Gross Profit. Gross profit as a percentage of net sales, or gross margin, increased to 54.0% from 51.8%, compared to the prior period, primarily due to favorable channel mix resulting from increased penetration of DTC, higher full-priced selling, favorable brand mix, and favorable changes in foreign currency exchange rates, partially offset by higher freight costs. +Selling, General, and Administrative Expenses. The net increase in selling, general, and administrative (SG&A) expenses, compared to the prior period, was primarily the result of the following: +• Increased payroll costs of approximately $50,700, primarily due to higher performance-based compensation, including long-term incentive plan performance-based restricted stock units, as well as warehousing costs for higher headcount and wages. +• Increased variable advertising and promotion expenses of approximately $44,000, primarily due to higher digital marketing and advertising for the UGG brand and HOKA brand to drive brand demand and awareness. +• Increased other variable net selling expenses of approximately $21,500, including information technology, as well as transaction and warehousing fees and shipping supplies, primarily due to higher DTC sales and commissions, partially offset by insurance recovery proceeds. +• Increased impairments of operating lease and long-lived assets of approximately $16,300 due to flagship retail store impairments driven by lower traffic and strategic changes in the fleet, as well as lower retail sales and early store closures, and an impairment loss for international intangible assets for the Sanuk brand. +• Increased depreciation expense of approximately $2,600 due to an increase in capital projects. +• Increased bank fees of approximately $1,200 due to the mortgage payoff on our corporate headquarters during the fourth fiscal quarter. +• Decreased variable operating expenses of approximately $18,000, primarily due to lower travel related expenses, as well as lower sales meeting expenses related to the impacts of the pandemic. +• Decreased rent and occupancy expenses of approximately $8,500, primarily due to lower retail store operating costs, including due to Company-owned retail store closures related to the pandemic and lower Company-owned retail store count. +• Decreased foreign currency-related losses of $5,400, primarily driven by favorable changes in Canadian, European, and Chinese foreign currency exchange rates. +39 +Table of Contents +Income from Operations. Income from operations by reportable operating segment was as follows: +Years Ended March 31, +2021 2020 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand wholesale $ 292,718 $ 303,908 $ (11,190) (3.7) % +HOKA brand wholesale 111,208 61,860 49,348 79.8 +Teva brand wholesale 27,120 30,736 (3,616) (11.8) +Sanuk brand wholesale (162) 3,212 (3,374) (105.0) +Other brands wholesale 21,573 16,087 5,486 34.1 +Direct-to-Consumer 349,465 182,548 166,917 91.4 +Unallocated overhead costs (297,717) (260,216) (37,501) (14.4) +Total $ 504,205 $ 338,135 $ 166,070 49.1 % +The increase in total income from operations, compared to the prior period, was primarily due to higher net sales at higher gross margins, primarily driven by DTC and HOKA brand wholesale, partially offset by higher SG&A expenses. Drivers of significant net changes in total income from operations, compared to the prior period, were as follows: +• The increase in income from operations of DTC was due to higher net sales at higher gross margins, as well as lower Company-owned retail store operating costs, partially offset by higher variable marketing and selling expenses, as well as higher e-commerce expenses. +• The increase in income from operations of HOKA brand wholesale was primarily due to higher net sales, partially offset by higher variable marketing expenses. +• The decrease in income from operations of UGG brand wholesale was due to lower net sales at lower gross margins as well as higher marketing expenses, partially offset by lower variable selling expenses. +• The increase in income from operations of Other brands wholesale was due to higher net sales at higher gross margins, partially offset by higher variable marketing expenses. +• The decrease in income from operations of Teva brand wholesale was due to lower net sales at lower gross margins, partially offset by lower variable selling expenses. +• The increase in loss from operations of Sanuk brand wholesale was primarily due the impairment of a definite-lived international trademark, as well as lower net sales at lower gross margins, partially offset by lower variable selling and marketing expenses. +• The increase in unallocated overhead costs was primarily due to higher performance-based compensation, as well as warehousing expenses, including for payroll and outside services, in addition to higher information technology expenses, and higher depreciation expenses, partially offset by lower foreign currency-related losses driven by favorable changes in foreign currency exchange rates, insurance recovery proceeds, and lower travel related expenses. +Other Expense (Income), Net. The increase in total other expense, net, compared to the prior period, was primarily due to a decrease in interest income driven by lower average interest rates, partially offset by higher average invested cash balances. +40 +Table of Contents +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2021 2020 +Income tax expense $ 118,939 $ 64,724 +Effective income tax rate 23.7 % 19.0 % +The increase in our effective income tax rate, compared to the prior period, was primarily due to changes in the geographic mix of worldwide income before income taxes for the year ended March 31, 2021 in jurisdictions with higher effective tax rates, higher non-deductible executive compensation, as well as less favorable settlement of tax audits, partially offset by higher employee share based compensation excess tax benefits. +Foreign income before income taxes was $133,186 and $134,755 and worldwide income before income taxes was $501,514 and $340,866 during the years ended March 31, 2021 and 2020, respectively. The decrease in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to higher domestic sales and higher foreign operating expenses as a percentage of worldwide sales. +For the years ended March 31, 2021 and 2020, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the section titled “Liquidity” below for further information. +We expect our foreign income or loss before income taxes, as well as our effective income tax rate, will continue to fluctuate from period to period based on several factors, including the impact of our global product sourcing organization, our actual results of operations from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). Foreign income before income taxes will continue to grow in the long-term, in both absolute terms and as a percentage of worldwide income before income taxes, as we focus on the global composition of our business, localized strategies for international markets, and investments in international regions. In addition, we believe our effective income tax rate will be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes. For further information on the impacts of the Tax Cuts and Jobs Act (Tax Reform Act), refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report. +Net Income. The increase in net income, compared to the prior period, was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted-average common shares outstanding, driven by stock repurchases in prior periods. +Total Other Comprehensive Income, Net of Tax. The increase in total other comprehensive income, net of tax, compared to the prior period, was due to higher foreign currency translation gains relating to changes to our net asset position for favorable Asian and European foreign currency exchange rates. +Liquidity +We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we are required to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. +While we are subject to uncertainty surrounding the pandemic, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and timely service our debt obligations for at least the next 12 months. +41 +Table of Contents +We repatriated $175,000 and $150,000 of cash and cash equivalents during the years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had $180,951 of cash and cash equivalents outside the US and held by all foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. At March 31, 2019, we completed the calculation of the one-time transition tax on the deemed repatriation of foreign subsidiaries’ earnings pursuant to the Tax Reform Act and previously recorded a net cumulative tax expense of $57,895, net of foreign tax credits. Beginning with the tax year ended March 31, 2018, an installment election was made to pay these taxes over eight years with 40% paid in equal installments over the first five years and the remaining 60% to be paid in installments of 15%, 20% and 25% in years six, seven and eight, respectively. The cumulative remaining balance as of March 31, 2021 is $41,452. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future periods. For further information on the impacts of the Tax Reform Act, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report. +We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of March 31, 2021, the aggregate remaining approved amount under our stock repurchase program was $60,660. Our Board of Directors approved an additional authorization of $750,000 during April 2021 to repurchase our common stock under the same conditions as the prior stock repurchase program. Subsequent to March 31, 2021 through May 13, 2021, we repurchased 70,881 shares for $23,466 at an average price of $331.06 per share, and had $787,194 remaining authorized under the stock repurchase program. Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. +Our liquidity may be further impacted by additional factors, including our results of operations, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to economic, political and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. +If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. +Capital Resources +Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended. The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +As of March 31, 2021, we had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility. +42 +Table of Contents +China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY 300,000, or $45,736. +As of March 31, 2021, we had no outstanding balance, outstanding bank guarantees of $30, and available borrowings of $45,706 under our China Credit Facility. +Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY 3,000,000, or $27,099. We renewed the Japan Credit Facility through January 31, 2022 substantially under the terms of the original credit agreement. +As of March 31, 2021, we had no outstanding balance and had available borrowings of $27,099 under our Japan Credit Facility. +Mortgage. As of March 31, 2021, there is no outstanding balance under the mortgage, previously secured by the property on which our corporate headquarters is located. During the year ended March 31, 2021, we repaid in full the outstanding principal balance, accrued interest, as well as prepayment penalties under the mortgage totaling $31,578. +Debt Covenants. As of March 31, 2021, we were in compliance with all financial covenants under our revolving credit facilities. +Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our capital resources. +Cash Flows +The following table summarizes our cash flows for the periods presented: +Years Ended March 31, +2021 2020 Change +Amount Amount Amount % +Net cash provided by operating activities $ 596,217 $ 286,334 $ 309,883 108.2 % +Net cash used in investing activities (32,169) (31,964) (205) (0.6) +Net cash used in financing activities (129,581) (192,114) 62,533 32.5 +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income, other cash receipts and expenditure adjustments, and changes in working capital. +The increase in net cash provided by operating activities during the year ended March 31, 2021, compared to the prior period, was primarily due to a net positive change in operating assets and liabilities of $185,994 and net income after non-cash adjustments of $123,889. The changes in operating assets and liabilities were primarily due to net positive changes in inventories, net, accrued expenses, trade accounts payable, income taxes payable, and income tax receivable, partially offset by net negative changes in prepaid expenses and other current assets, and trade accounts receivable, net. The positive change in inventories, net, made up a majority of the net positive change in operating assets and liabilities, which was driven by higher net sales and lower inventory on-hand due to more disciplined purchasing that focused on key products in response to the pandemic, as well as the positive change in accrued expenses, primarily driven by higher payroll related accruals. +Investing Activities. The net cash used in investing activities during the year ended March 31, 2021, was consistent with the prior period, and was primarily comprised of capital expenditures for improvements to our warehouse and DC, the build-out or refreshes made to our retail store locations, as well as information technology. +Financing Activities. The decrease in net cash used in financing activities during the year ended March 31, 2021, compared to the prior period, was primarily due to lower stock repurchases occurring in the current period, partially offset by repayment of the mortgage in full on our corporate headquarters. +43 +Table of Contents +Off-Balance Sheet Arrangements +We do not have any off-balance sheet arrangements. +Contractual Obligations +The following table summarizes our contractual obligations as of March 31, 2021 and the effects of such obligations in future periods: +Payments Due by Period +Total Less than +1 Year 1-3 Years 3-5 Years More than +5 Years +Operating lease obligations (1) $ 245,418 $ 49,528 $ 82,233 $ 56,707 $ 56,950 +Purchase obligations for product (2) 566,820 566,820 — — — +Purchase obligations for commodities (3) 150,594 114,342 36,252 — — +Other purchase obligations (4) 102,317 30,630 45,300 26,387 — +Net unrecognized tax benefits (5) 6,359 1,038 5,321 — — +Total $ 1,071,508 $ 762,358 $ 169,106 $ 83,094 $ 56,950 +(1) Our operating lease commitments consist primarily of building leases for our retail locations, our warehouse and DC, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In addition to the above operating lease commitments outstanding, there is $20,284 of legally binding minimum lease payments due pursuant to a lease signed but not yet commenced, nor recorded in our consolidated financial statements, as of March 31, 2021 for a new US distribution center. Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating lease assets and liabilities. +(2) Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. Due to increased demand for certain products combined with the impacts of the pandemic that may result in supply chain disruptions, we are currently expecting that our inventory purchases with our third-party manufacturers will be significantly higher for the fiscal year ending March 31, 2022 compared to prior fiscal years. +(3) Our purchase obligations for commodities include sheepskin and leather, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. +During the year ended March 31, 2021, we experienced a shift in product mix that used less of a certain sheepskin grade. As a result, we negotiated a deferral of additional deposit payments, which represent remaining minimum commitments under certain expired sheepskin supply agreements. As of March 31, 2021, the remaining minimum purchase commitment under these expired agreements was approximately $28,000. Subsequent to March 31, 2021 through May 13, 2021, this deposit was paid. +(4) Our other purchase obligations consist of non-cancellable minimum commitments for logistics arrangements, an IT agreement for a new inventory planning system, requirements to pay promotional expenses, and other commitments under service contracts, which are due during fiscal years 2022 through 2026. Amounts excluded from other purchase obligations above include any capital expenditures that will be purchased before the end of the fiscal year ending March 31, 2022, which we estimate will range from approximately $65,000 to $70,000. We anticipate these expenditures will primarily relate to the build-out of our new US DC, IT infrastructure and system +44 +Table of Contents +upgrades, and refreshes to our global retail store fleet including new retail stores. Other anticipated expenditures include upgrades to our existing warehouse and DC as well as our global office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets, and the timing of other expenditures. +(5) Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2021, the timing of future cash outflows is highly uncertain related to statute of limitations liabilities of $17,524, therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Impact of Foreign Currency Exchange Rate Fluctuations +Foreign currency exchange rate fluctuations had an incremental positive impact on the year ended March 31, 2021 when compared to the year ended March 31, 2020. +Refer to “Results of Operations,” above within this Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated statements of comprehensive income, and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on the impact of foreign currency exchange rate fluctuations on our results of operations. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements, based on historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements: allowances for doubtful accounts; estimated returns liability; sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. The full impact of the ongoing pandemic is unknown and cannot be reasonably estimated for these key estimates. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected. +Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +45 +Table of Contents +Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Refer to Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for sales discounts, chargebacks, and our sales return liability. +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2021 2020 +Amount % of Gross +Trade Accounts +Receivable Amount % of Gross +Trade Accounts +Receivable +Gross trade accounts receivable $ 242,234 100.0 % $ 206,742 100.0 % +Allowance for doubtful accounts (9,730) (4.0) (6,989) (3.4) +Allowance for sales discounts (3,016) (1.2) (1,030) (0.5) +Allowance for chargebacks (13,770) (5.8) (13,127) (6.3) +Trade accounts receivable, net $ 215,718 89.1 % $ 185,596 89.8 % +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for accounts which we consider having credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts as of March 31, 2021 by approximately $1,800. +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for sales discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks and markdowns from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. +Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2021 2020 +Amount % of Net Sales Amount % of Net Sales +Net Sales +Wholesale $ 326,106 58.1 % $ 230,677 61.5 % +Direct-to-Consumer 235,082 41.9 144,233 38.5 +Total $ 561,188 100.0 % $ 374,910 100.0 % +46 +Table of Contents +As of March 31, +2021 2020 +Amount % of Net Sales Amount % of Net Sales +Sales Return Liability +Wholesale $ (23,987) (7.4) % $ (21,846) (9.5) % +Direct-to-Consumer (13,730) (5.8) (3,821) (2.6) +Total $ (37,717) (6.7) % $ (25,667) (6.8) % +Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers between 30 to 90 days from the point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are an asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the asset for the right to recover the inventory are recorded against cost of sales. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the sales return liability as of March 31, 2021 by approximately $5,000. +Inventory Reserves. The following tables summarize estimates for our inventory reserves: +As of March 31, +2021 2020 +Amount % of Gross Inventory Amount % of Gross Inventory +Gross Inventories $ 297,874 100.0 % $ 323,847 100.0 % +Write-down of inventories (19,632) (6.6) (12,227) (3.8) +Inventories, net $ 278,242 93.4 % $ 311,620 96.2 % +We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve as of March 31, 2021 by approximately $1,600. +Operating Lease Assets and Lease Liabilities. Key accounting policy elections for the new lease standard applied to our consolidated financial statements are as follows: +• We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by our options to extend (or not to terminate) the lease that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +• We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we generally derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings +47 +Table of Contents +under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and disclosures. +Goodwill and Indefinite-Lived Intangible Assets. We do not amortize goodwill and indefinite-lived intangible assets but instead test for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable at the reporting unit level. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Qualitative factors considered include significant or adverse changes in customer demand, historical financial performance, changes in management or key personnel, macroeconomic and industry conditions, and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used. +During the years ended March 31, 2021 and 2020, we performed our annual impairment assessment and evaluated the UGG and HOKA brands’ wholesale reportable operating segment goodwill as of December 31st and evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands’ goodwill and Teva brand indefinite-lived trademarks, each of the brands’ actual fiscal year sales and results of operations, and the brands’ long-term forecasts of sales and results of operations as of their evaluation dates, we concluded that these assets were not impaired. +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information on our goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +During the year ended March 31, 2021, we recorded an impairment loss of $3,522 for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within our Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. We did not identify any definite-lived intangible asset impairments during the year ended March 31, 2020. +48 +Table of Contents +During the years ended March 31, 2021 and 2020, we recorded impairment losses for other long-lived assets, primarily for certain retail store operating lease assets and related leasehold improvements due to performance or store closures, of $14,084 and $1,365, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets. +Performance-Based Compensation . In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Compensation Committee reviews our results of operations from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of predetermined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each fiscal year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior fiscal year’s performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense increased approximately $28,300 during the year ended March 31, 2021 compared to the year ended March 31, 2020. The primary reason for this increase was the achievement of the maximum performance criteria for the 2020 and 2019 long-term incentive plan restricted stock units as well as the over achievement of the performance criteria governing our cash bonuses compared to the prior period. Performance-based compensation expense is primarily recorded in SG&A expenses, with cash bonuses for certain employees recorded in cost of goods sold in the consolidated statements of comprehensive income. +Refer to Note 8, “Stock-Based Compensation,” of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation. +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. +49 +Table of Contents +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed earnings and profits (PTEP) by the US Internal Revenue Service does not require recognition of a deferred tax liability as the liability has already been recognized under the Tax Reform Act. We have not changed our indefinite reinvestment assertion of foreign earnings other than PTEP. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +Commodity Price Risk +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, which include sheepskin, leather, and wool. The supply of sheepskin, which is used to manufacture a significant portion of the UGG brand products, is in high demand and there are a limited number of suppliers that can meet our expectations for the quantity and quality of sheepskin that we require. Most of our sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, use of substitute products or components, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin. +We typically fix prices for all of our raw materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and other pricing arrangements we use for sheepskin and leather typically result in purchase obligations which are not recorded in our consolidated balance sheets. With respect to sheepskin and leather, in the event of significant price increases for these commodities, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our profitability. Refer to the section titled “Contractual Obligations” above within Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum commodity purchase commitments. +Foreign Currency Exchange Rate Risk +Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position, and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although most of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than the subsidiaries’ functional currencies. We translate all assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recorded in other comprehensive income. Foreign currency exchange rate fluctuations affect our reported profits and can make comparisons from year to year more difficult. +We hedge certain foreign currency exchange rate risk from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. +50 +Table of Contents +As of March 31, 2021, a hypothetical 10.0% foreign currency exchange rate fluctuation would have had no impact on the fair value of our financial instruments as there were none outstanding. Refer to Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our use of derivative contracts. As of March 31, 2021, there were no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure. +Interest Rate Risk +Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including the Alternate Base Rate, the federal funds effective rate, currency-specific London Interbank Offered Rate and Canadian deposit offering rate for our Primary Credit Facility, People’s Bank of China market rate for our China Credit Facility, and Tokyo interbank offered rate for our Japan Credit Facility. +A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an immaterial aggregate change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2021 due to no outstanding balances under our revolving credit facilities. Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed in a separate section following Part IV, as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021. +b) Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +51 +Table of Contents +As of March 31, 2021, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +c) Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the year ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on our internal control over financial reporting and to minimize such impacts on their design and operating effectiveness. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +52 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2021 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2021 pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +53 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010 and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as updated through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018 and incorporated by reference herein) +4.1 +Description of Deckers Outdoor Corporation’s Capital Stock (Exhibit 4.1 to the Registrant’s Form 10-K filed on May 30, 2019 and incorporated by reference herein) +10.1 +Lease Agreement, dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 and incorporated by reference herein) +10.2 +First Amendment to Lease Agreement, dated June 6, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +10.3 +Second Amendment to Lease Agreement, dated July 17, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018 and incorporated by reference herein) +*10.4 +Lease Agreement, dated February 10, 2021, by and between Westpoint Building II, LLC and Deckers Outdoor Corporation for distribution center at 2633 Westpoint Blvd., Mooresville, IN 46158 +10.5 +Credit Agreement, dated as of September 20, 2018, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC and Deckers Outdoor International Limited, as borrowers, JP Morgan Chase Bank, N.A. as Administrative Agent, Citibank, N.A., Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, MUFG Bank, Ltd. and U.S. Bank National Association, as Co-Documentation Agents, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +#10.6 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on June 2, 2008 and incorporated by reference herein) +#10.7 +Form of Change in Control and Severance Agreement (Exhibit 10. 2 to the Registrant’s Form 10- Q filed on August 6, 2020 and incorporated by reference herein) +#10.8 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 and incorporated by reference herein) +#10.9 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 and incorporated by reference herein) +#10.10 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective as of December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.11 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017 and incorporated by reference herein) +#10.12 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.13 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 and incorporated by reference herein) +#10.14 +Deckers Outdoor Corporation Management Incentive Plan (Exhibit 10. 1 to the Registrant’s Form 10-Q filed on August 10 , 2015 and incorporated by reference herein) +54 +Table of Contents +#10.16 +Form of Stock Unit Award Agreement (2018 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.17 +Form of Stock Unit Award Agreement (2018 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.18 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017 and incorporated by reference herein) +#10.19 +Form of Stock Unit Award Agreement (2019 Performance-Based PSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.20 +Form of Stock Unit Award Agreement (2019 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2018 and incorporated by reference herein) +#10.21 +Form of Restricted Stock Unit Award Agreement under 2015 Stock Incentive Plan (FY 2019) LTIP Agreement (Exhibit 10.2 to the Registrant’s Form 8-K filed on September 25, 2018 and incorporated by reference herein) +#10.22 +Form of Stock Unit Award Agreement (2020 Time-Based R SU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 8, 2019 and incorporated by referenced herein) +#10.23 +Form of Stock Unit Award Agreement (2020 Performance -Based P SU) under the 2015 Stock Incentive Plan (Exhibit 10. 1 to the Registrant’s Form 10-Q filed on August 8, 2019 and incorporated by reference herein) +#10.24 +Form of Restricted Stock Unit Award Agreement under the 2015 Stock Incentive Plan (FY 2020) LTIP Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2019 and incorporated by reference herein) +#10.25 +Form of Restricted Stock Unit Award Agreement (2021 Time-Based RSU) under the 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 6, 2020 and incorporated by reference herein) +*#10.26 +Form of Restricted Stock Unit Award Agreement (FY 2021) LTIP Agreement +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +*101.INS XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) +*101.SCH XBRL Taxonomy Extension Schema Document +*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB XBRL Taxonomy Extension Label Linkbase Document +*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +55 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 28, 2021 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +/s/ DAVE POWERS Chief Executive Officer, President and Director +(Principal Executive Officer) May 28, 2021 +Dave Powers +/s/ STEVEN J. FASCHING Chief Financial Officer +(Principal Financial and Accounting Officer) May 28, 2021 +Steven J. Fasching +/s/ MICHAEL F. DEVINE, III Chairman of the Board May 28, 2021 +Michael F. Devine, III +/s/ NELSON C. CHAN Director May 28, 2021 +Nelson C. Chan +/s/ CYNTHIA (CINDY) L. DAVIS Director May 28, 2021 +Cynthia (Cindy) L. Davis +/s/ JUAN R. FIGUEREO Director May 28, 2021 +Juan R. Figuereo +/s/ MAHA S. IBRAHIM Director May 28, 2021 +Maha S. Ibrahim +/s/ VICTOR LUIS Director May 28, 2021 +Victor Luis +/s/ LAURI M. SHANAHAN Director May 28, 2021 +Lauri M. Shanahan +/s/ BRIAN A. SPALY Director May 28, 2021 +Brian A. Spaly +/s/ BONITA C. STEWART Director May 28, 2021 +Bonita C. Stewart +56 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +F- 2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +F- 4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Comprehensive Income +F- 6 +Consolidated Statements of Stockholders' Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to Consolidated Financial Statements +F- 10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F- 44 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2021 and 2020, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three year period ended March 31, 2021, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three year period ended March 31, 2021, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 28, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for leases as of April 1, 2019 due to the adoption of Accounting Standard Update (ASU) 2016-02 and all related amendments. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has recorded a sales return liability as of March 31, 2021 of $37,717, of which $23,987 is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to estimate the wholesale sales return liability. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating the +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +wholesale sales return liability, including controls related to the development of estimated return rates. We evaluated the wholesale sales return liability using a combination of Company internal data, known recent trends, and actual and historical known information. We analyzed the Company’s internal data and external correspondence to assess adjustments made by management, if any, to historical return rates based on consideration of recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 28, 2021 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2021 and 2020, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2021, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated May 28, 2021 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 28, 2021 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2021 2020 +ASSETS +Cash and cash equivalents $ 1,089,361 $ 649,436 +Trade accounts receivable, net of allowances ($ 26,516 and $ 21,146 as of March 31, 2021 and March 31, 2020, respectively) +215,718 185,596 +Inventories, net of reserves ($ 19,632 and $ 12,227 as of March 31, 2021 and March 31, 2020, respectively) +278,242 311,620 +Prepaid expenses 16,924 17,760 +Other current assets 44,244 21,548 +Income tax receivable 6,310 8,151 +Total current assets 1,650,799 1,194,111 +Property and equipment, net of accumulated depreciation ($ 266,905 and $ 242,138 as of March 31, 2021 and March 31, 2020, respectively) +206,210 209,037 +Operating lease assets 186,991 243,522 +Goodwill 13,990 13,990 +Other intangible assets, net of accumulated amortization ($ 77,473 and $ 74,421 as of March 31, 2021 and March 31, 2020, respectively) +41,945 48,016 +Deferred tax assets, net 37,194 28,233 +Other assets 30,576 28,209 +Total assets $ 2,167,705 $ 1,765,118 +LIABILITIES AND STOCKHOLDERS' EQUITY +Short-term borrowings $ — $ 638 +Trade accounts payable 231,632 147,892 +Accrued payroll 79,152 42,309 +Operating lease liabilities 46,768 49,091 +Other accrued expenses 68,995 46,281 +Income taxes payable 36,920 11,104 +Value added tax payable 4,901 3,631 +Total current liabilities 468,368 300,946 +Mortgage payable — 30,263 +Long-term operating lease liabilities 176,274 215,724 +Income tax liability 60,094 63,547 +Other long-term liabilities 18,744 14,518 +Total long-term liabilities 255,112 324,052 +Commitments and contingencies +Stockholders' equity +Common stock ($ 0.01 par value; 125,000 shares authorized; shares issued and outstanding of 27,910 and 27,999 as of March 31, 2021 and March 31, 2020, respectively) +279 280 +Additional paid-in capital 203,310 191,451 +Retained earnings 1,257,379 973,948 +Accumulated other comprehensive loss ( 16,743 ) ( 25,559 ) +Total stockholders' equity 1,444,225 1,140,120 +Total liabilities and stockholders' equity $ 2,167,705 $ 1,765,118 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2021 2020 2019 +Net sales $ 2,545,641 $ 2,132,689 $ 2,020,437 +Cost of sales 1,171,551 1,029,016 980,187 +Gross profit 1,374,090 1,103,673 1,040,250 +Selling, general, and administrative expenses 869,885 765,538 712,930 +Income from operations 504,205 338,135 327,320 +Interest income ( 2,637 ) ( 7,261 ) ( 6,028 ) +Interest expense 6,028 5,046 4,661 +Other income, net ( 700 ) ( 516 ) ( 247 ) +Total other expense (income), net 2,691 ( 2,731 ) ( 1,614 ) +Income before income taxes 501,514 340,866 328,934 +Income tax expense 118,939 64,724 64,626 +Net income 382,575 276,142 264,308 +Other comprehensive income (loss) +Unrealized loss on cash flow hedges, net of tax — — ( 243 ) +Foreign currency translation gain (loss) 8,816 ( 2,905 ) ( 9,428 ) +Total other comprehensive income (loss) 8,816 ( 2,905 ) ( 9,671 ) +Comprehensive income $ 391,391 $ 273,237 $ 254,637 +Net income per share +Basic $ 13.64 $ 9.73 $ 8.92 +Diluted $ 13.47 $ 9.62 $ 8.84 +Weighted-average common shares outstanding +Basic 28,055 28,385 29,641 +Diluted 28,406 28,694 29,903 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' +Equity +Shares Amount +Balance, March 31, 2018 30,447 $ 304 $ 167,587 $ 785,871 $ ( 12,983 ) $ 940,779 +Stock-based compensation expense 10 — 14,773 — — 14,773 +Shares issued upon vesting 85 1 1,024 — — 1,025 +Cumulative adjustment from adoption of recent accounting pronouncements — — — 468 — 468 +Shares withheld for taxes — — ( 5,157 ) — — ( 5,157 ) +Repurchases of common stock ( 1,401 ) ( 14 ) — ( 161,381 ) — ( 161,395 ) +Net income — — — 264,308 — 264,308 +Total other comprehensive loss — — — — ( 9,671 ) ( 9,671 ) +Balance, March 31, 2019 29,141 291 178,227 889,266 ( 22,654 ) 1,045,130 +Stock-based compensation expense 10 — 14,471 — — 14,471 +Shares issued upon vesting 86 1 1,287 — — 1,288 +Exercise of stock options 58 1 3,614 — — 3,615 +Cumulative adjustment from adoption of recent accounting pronouncements — — — ( 1,068 ) — ( 1,068 ) +Shares withheld for taxes — — ( 6,148 ) — — ( 6,148 ) +Repurchases of common stock ( 1,296 ) ( 13 ) — ( 190,392 ) — ( 190,405 ) +Net income — — — 276,142 — 276,142 +Total other comprehensive loss — — — — ( 2,905 ) ( 2,905 ) +Balance, March 31, 2020 27,999 280 191,451 973,948 ( 25,559 ) 1,140,120 +Stock-based compensation expense 4 — 22,695 — — 22,695 +Shares issued upon vesting 107 1 1,501 — — 1,502 +Exercise of stock options 107 1 6,774 — — 6,775 +Shares withheld for taxes — — ( 19,111 ) — — ( 19,111 ) +Repurchases of common stock ( 307 ) ( 3 ) — ( 99,144 ) — ( 99,147 ) +Net income — — — 382,575 — 382,575 +Total other comprehensive income — — — 8,816 8,816 +Balance, March 31, 2021 27,910 $ 279 $ 203,310 $ 1,257,379 $ ( 16,743 ) $ 1,444,225 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2021 2020 2019 +OPERATING ACTIVITIES +Net income $ 382,575 $ 276,142 $ 264,308 +Reconciliation of net income to net cash used in operating activities: +Depreciation, amortization, and accretion 40,530 38,912 44,941 +Amortization on cloud computing arrangements 737 — — +Loss on extinguishment of debt — — 447 +Bad debt expense 3,053 3,498 2,849 +Deferred tax (benefit) expense ( 8,171 ) 2,934 6,939 +Stock-based compensation 22,701 14,477 14,774 +Excess tax benefit from stock-based compensation ( 586 ) ( 1,953 ) ( 546 ) +Loss on disposal of long lived assets 1,019 698 277 +Impairment of intangible assets 3,522 — — +Impairment of operating lease assets and other long-lived assets 14,084 1,365 180 +Restructuring charges — — 295 +Gain on settlement of asset retirement obligations ( 207 ) ( 705 ) — +Changes in operating assets and liabilities: +Trade accounts receivable, net ( 33,173 ) ( 10,493 ) ( 16,157 ) +Inventories, net 33,378 ( 32,777 ) 8,827 +Prepaid expenses and other current assets ( 22,128 ) 2,477 ( 515 ) +Income tax receivable 1,842 ( 5,811 ) ( 165 ) +Net operating lease assets and liabilities 250 ( 3,264 ) — +Other assets ( 3,103 ) ( 6,558 ) 2,630 +Trade accounts payable 79,176 23,312 26,667 +Other accrued expenses 53,785 ( 11,112 ) ( 2,792 ) +Income taxes payable 26,403 ( 6,226 ) 4,355 +Other long-term liabilities 530 1,418 2,191 +Net cash provided by operating activities 596,217 286,334 359,505 +INVESTING ACTIVITIES +Purchases of property and equipment ( 32,218 ) ( 32,455 ) ( 29,086 ) +Proceeds from sales of property and equipment 49 491 68 +Net cash used in investing activities ( 32,169 ) ( 31,964 ) ( 29,018 ) +FINANCING ACTIVITIES +Proceeds from short-term borrowings 9,100 69,336 162,001 +Repayments of short-term borrowings ( 9,478 ) ( 69,197 ) ( 161,621 ) +Debt issuance costs on short-term borrowings — — ( 1,297 ) +Proceeds from issuance of stock 1,502 1,288 1,025 +Proceeds from exercise of stock options 6,775 3,615 — +Repurchases of common stock ( 99,147 ) ( 190,405 ) ( 161,395 ) +Cash paid for shares withheld for taxes ( 7,432 ) ( 6,148 ) ( 5,328 ) +Repayments of mortgage principal ( 30,901 ) ( 603 ) ( 578 ) +Net cash used in financing activities ( 129,581 ) ( 192,114 ) ( 167,193 ) +Effect of foreign currency exchange rates on cash and cash equivalents 5,458 ( 2,512 ) ( 3,572 ) +Net change in cash and cash equivalents 439,925 59,744 159,722 +Cash and cash equivalents at beginning of period 649,436 589,692 429,970 +Cash and cash equivalents at end of period $ 1,089,361 $ 649,436 $ 589,692 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2021 2020 2019 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes, net of refunds of $ 1,564 , $ 5,389 , and $ 3,824 , as of March 31, 2021, 2020, and 2019, respectively +$ 104,068 $ 74,573 $ 53,657 +Interest 2,931 2,466 3,811 +Operating leases 57,376 61,120 — +Non-cash investing activities +Accrued for purchases of property and equipment 2,721 1,171 1,789 +Accrued for asset retirement obligations 1,842 224 4,706 +Non-cash financing activities +Accrued for shares withheld for taxes 11,679 — — +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Note 1. General +The Company . Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company’s proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands. +The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company’s products. A significant part of the Company’s business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements) as of March 31, 2021 and 2020 and or the years ended March 31, 2021 , 2020, and 2019 were prepared in accordance with generally accepted accounting principles in the United States (US GAAP). +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of the COVID-19 global pandemic (pandemic) on its business and operations. Although the full impact of the pandemic is unknown and cannot be reasonably estimated, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company's financial condition, results of operations, and liquidity. To the extent there are differences between these estimates and actual results, the Company’s consolidated financial statements may be materially affected. +Significant areas requiring the use of management estimates and assumptions relate to inventory write-downs; trade accounts receivable allowances, including variable consideration for net sales provided to customers; contract assets and liabilities; stock-based compensation; impairment assessments, including for goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company's incremental borrowing rate utilized to discount its unpaid lease payments to measure its operating lease assets and liabilities. +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in selling, general, and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI). +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Reportable Operating Segments. The Company’s six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, the Company’s reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +Recent Accounting Pronouncements. The Financial Accounting Standards Board (FASB) has issued Accounting Standards Updates (ASUs) that have been adopted and not yet adopted by the Company for its annual and interim reporting periods as stated below. +Recently Adopted. Adopted ASUs during the year ended March 31, 2021 and the impact on the Company, were as follows: +Standard Description Impact on Adoption +ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06) +Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge. +The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its consolidated financial statements. +ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, 2019-05, 2019-11, 2020-02, and 2020-03) +Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its consolidated financial statements. +Not Yet Adopted. Applicable ASUs issued that have not yet been adopted by the Company, the planned period of adoption, and the expected impact on the Company on adoption, are as follows: +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes +Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods, as well as reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Q1 FY 2022 The Company is currently evaluating the impact of the adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its consolidated financial statements. +ASU No. 2020-04, +Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (as amended by ASU 2021-01) +London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. +This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022. Q3 FY 2023 The Company is currently evaluating the impact of the adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its consolidated financial statements. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Summary of Significant Accounting Policies. The following are a summary of the Company’s significant accounting policies applied to its consolidated financial statements: +Cash Equivalents . The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents included $ 773,092 and $ 436,241 of money market funds as of March 31, 2021 and 2020, respectively. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. +Inventories . Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes shipping, duty, and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements (CCAs) that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets. Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to three years . +As of March 31, 2021, net capitalized costs for CCAs was $ 2,983 , with $ 1,308 recorded in prepaid expenses and $ 1,675 in other assets in the consolidated balance sheets. As of March 31, 2020, net capitalized costs for CCAs was $ 626 , with $ 278 recorded in prepaid expenses and $ 348 in other assets in the consolidated balance sheets. The increase in net capitalized costs for CCAs during the year ended March 31, 2021 was primarily due to gross additions of $ 3,097 . +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset and are recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income. +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Property and equipment, net, are summarized as follows: +As of March 31, +Useful life (years) 2021 2020 +Land Indefinite $ 32,865 $ 32,864 +Building 39.5 35,094 35,093 +Machinery and equipment +2 - 10 +149,494 145,423 +Furniture and fixtures +3 - 7 +36,497 35,024 +Computer software +3 - 10 +94,365 80,718 +Leasehold improvements Useful life or remaining lease term, whichever is shorter 110,538 104,497 +Construction in progress 14,262 17,556 +Gross property and equipment 473,115 451,175 +Less accumulated depreciation and amortization ( 266,905 ) ( 242,138 ) +Total $ 206,210 $ 209,037 +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by the Company's options to extend (or not to terminate) the lease that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, “Leases and Other Commitments,” for further information on discount rate methodology used to measure operating lease assets and lease liabilities. +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income. Lease payments recorded in the operating lease liability are (1) fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, “Leases and Other Commitments,” for further information on the nature of variable lease payments and timing of recognition in rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the paragraph titled “Definite-Lived Intangible and Other Long-Lived Assets” below for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements (asset group) for indicators of impairment. +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. The Company’s asset retirement obligations (AROs) are recorded in other long-term liabilities in the consolidated balance sheets, and activity was as follows: +As of March 31, +2021 2020 +Balance, March 31, 2020 $ 11,505 $ 12,667 +Additions and changes in estimate 3,571 263 +Liabilities settled during the period ( 3,495 ) ( 1,828 ) +Accretion expenses 1,458 499 +Foreign currency translation gains ( 56 ) ( 96 ) +Balance, March 31, 2021 $ 12,983 $ 11,505 +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Indefinite-lived intangible assets consist primarily of trademarks, wholesale customer and distributor relationships, patents, lease rights and non-compete agreements arising from the application of purchase accounting. +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or factors impacting the industry generally. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets, and leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income. +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset group, which is based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income. +During the years ended March 31, 2021 , 2020, and 2019, the Company recorded impairment losses for other long-lived assets, primarily for retail store operating lease assets and related leasehold improvements due to performance or store closures, as well as computer software, of $ 14,084 , $ 1,365 , and $ 180 , respectively, within its DTC reportable operating segment and unallocated overhead costs in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s definite-lived intangible asset impairment assessment results. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company may enter into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage this risk and certain of these derivative contracts are designated as cash flow hedges of +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of forward spot rates at the end of the applicable periods, recorded in other current assets or other accrued expenses in the consolidated balance sheets. The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of AOCL and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in accumulated other comprehensive loss (AOCL) related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 - 60 days. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, “Revenue Recognition,” for further information regarding the Company’s components of variable consideration, including allowances for sales discounts, chargebacks and sales return contract assets and liabilities. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods, which includes the purchase costs and related overhead. Overhead includes all costs for planning, purchasing, quality control, freight, duties, royalties paid to third parties and shrinkage. Cost includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $ 28,626 , $ 27,555 , and $ 23,187 for the years ended March 31, 2021, 2020, and 2019, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Advertising, Marketing, and Promotion Expenses . Advertising, marketing and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, with $ 188,345 , $ 144,948 , and $ 118,291 for the years ended March 31, 2021, 2020. and 2019, respectively, recorded in SG&A expenses in the consolidated statements of comprehensive income. Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2021 and 2020 were $ 1,762 and $ 2,664 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 8, “Stock-Based Compensation,” for further information on grant activity and additional disclosure for stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 3,339 , $ 3,251 , and $ 3,060 during the years ended March 31, 2021, 2020, and 2019, respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income. In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, the Company did not make any profit-sharing contributions for the years ended March 31, 2021, 2020, and 2019. +Non-qualified Deferred Compensation . In 2010, the Company began sponsoring a non-qualified deferred compensation plan that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. For each plan year, the Company’s Board of Directors may, but is not required to, contribute any amount it desires to any participant. The Company’s contribution guidelines are determined by the Board of Directors annually. In March 2015, the Board of Directors approved a Company contribution feature for future plan years beginning in calendar year 2016 and gave management the authority to approve actual contributions. As of March 31, 2021 and 2020, no material payments were made or pending under the plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current liabilities in the consolidated balance sheets. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income. Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements. +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders' Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Basic and Diluted Shares,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +Note 2. Revenue Recognition +Variable Consideration . Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets. This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for sales discounts. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, the Company records an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets. This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for chargebacks. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Sales Return Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers between 30 to 90 days from the point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are an asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the asset for the right to recover the inventory are recorded against cost of sales in the consolidated statements of comprehensive income. The refund liability is recorded in other accrued expenses and the related asset for the right to recover the inventory is recorded in other current assets in the consolidated balance sheets. +Activity during the years ended March 31, 2021 and 2020 related to estimated sales returns were as follows: +Recovery Asset Refund Liability +Balance, March 31, 2019 $ 10,441 $ ( 24,787 ) +Net additions to sales return liability* 36,028 ( 117,969 ) +Actual returns ( 36,806 ) 117,089 +Balance, March 31, 2020 9,663 ( 25,667 ) +Net additions to sales return liability* 39,939 ( 153,742 ) +Actual returns ( 38,898 ) 141,692 +Balance, March 31, 2021 $ 10,704 $ ( 37,717 ) +* Net additions to sales return liability include a provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns. +Contract Assets and Liabilities . Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the consolidated balance sheets. +Loyalty Programs . The Company has a consumer loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns. As of March 31, 2021 and 2020, the Company’s contract liability for loyalty programs was $ 12,231 and $ 6,950 , respectively, and is recorded in other accrued expenses in the consolidated balance sheets. +Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue by reportable operating segment. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Note 3. Goodwill and Other Intangible Assets +The Company’s goodwill and other intangible assets are recorded in the consolidated balance sheets, as follows: +As of March 31, +2021 2020 +Goodwill +UGG brand $ 6,101 $ 6,101 +HOKA brand 7,889 7,889 +Total goodwill 13,990 13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks 15,454 15,454 +Definite-lived intangible assets +Trademarks 51,723 55,245 +Other 52,241 51,738 +Total gross carrying amount 103,964 106,983 +Accumulated amortization ( 77,473 ) ( 74,421 ) +Net definite-lived intangible assets 26,491 32,562 +Total other intangible assets, net 41,945 48,016 +Total $ 55,935 $ 62,006 +The weighted-average amortization period for definite-lived intangible assets was 15 and 16 years for the years ended March 31, 2021 and 2020, respectively. Intangible assets consist primarily of indefinite-lived trademarks and definite-lived trademarks, wholesale customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +Annual Impairment Assessment . During the years ended March 31, 2021, 2020, and 2019, the Company evaluated the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segment as of December 31st and evaluated its Teva indefinite-lived trademarks as of October 31st, and based on the evaluation performed, no impairment loss was recorded for the goodwill and indefinite-lived intangible assets. As of March 31, 2021 and 2020, the gross carrying amount of goodwill was $ 143,765 and the accumulated impairment losses were $ 129,775 . +During the year ended March 31, 2021, the Company recorded an impairment loss of $ 3,522 for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within our Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. The Company did no t identify any definite-lived intangible asset impairments during the years ended March 31, 2020 and 2019. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Amortization Expense . A reconciliation of the changes in total other intangible assets in the consolidated balance sheets, are as follows: +Amounts +Balance, March 31, 2018 $ 57,850 +Amortization expense ( 6,235 ) +Foreign currency translation net loss ( 121 ) +Balance, March 31, 2019 51,494 +Amortization expense ( 3,470 ) +Foreign currency translation net loss ( 8 ) +Balance, March 31, 2020 48,016 +Impairment charges ( 3,522 ) +Amortization expense ( 2,565 ) +Foreign currency translation net gain 16 +Balance, March 31, 2021 $ 41,945 +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2021 is as follows: +Years Ending March 31, Amounts +2022 $ 2,244 +2023 2,228 +2024 2,208 +2025 2,053 +2026 1,899 +Thereafter 15,859 +Total $ 26,491 +Note 4. Fair Value Measurements +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required: +• Level 1: Quoted prices in active markets for identical assets and liabilities. +• Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets, are as follows: +As of Measured Using +March 31, 2021 Level 1 Level 2 Level 3 +Non-qualified deferred compensation asset $ 9,107 $ 9,107 $ — $ — +Non-qualified deferred compensation liability ( 6,692 ) ( 6,692 ) — — +As of Measured Using +March 31, 2020 Level 1 Level 2 Level 3 +Non-qualified deferred compensation asset $ 6,164 $ 6,164 $ — $ — +Non-qualified deferred compensation liability ( 3,756 ) ( 3,756 ) — — +As of March 31, 2021, the non-qualified deferred compensation asset of $ 9,107 was recorded in other assets in the consolidated balance sheets. As of March 31, 2021, the non-qualified deferred compensation liability of $ 6,692 was recorded in the consolidated balance sheets, with $ 906 in other accrued expenses and $ 5,786 in other long-term liabilities. +Note 5. Income Taxes +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income, were as follows: +Years Ended March 31, +2021 2020 2019 +Domestic* $ 368,328 $ 206,111 $ 181,730 +Foreign 133,186 134,755 147,204 +Total $ 501,514 $ 340,866 $ 328,934 +*Domestic income before income taxes for the years ended March 31, 2021, 2020, and 2019 is presented net of intercompany dividends of $ 175,000 , $ 150,000 , and $ 130,000 , respectively. +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income, were as follows: +Years Ended March 31, +2021 2020 2019 +Current +Federal $ 93,562 $ 47,087 $ 33,334 +State 15,595 635 9,084 +Foreign 17,953 14,068 15,269 +Total 127,110 61,790 57,687 +Deferred +Federal ( 6,717 ) 4,626 6,612 +State ( 633 ) ( 462 ) 2,236 +Foreign ( 821 ) ( 1,230 ) ( 1,909 ) +Total ( 8,171 ) 2,934 6,939 +Total $ 118,939 $ 64,724 $ 64,626 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes, as follows: +Years Ended March 31, +2021 2020 2019 +Computed expected income taxes $ 105,318 $ 71,582 $ 69,076 +State income taxes, net of federal income tax benefit 16,479 11,042 9,329 +Foreign rate differential ( 15,507 ) ( 17,966 ) ( 20,105 ) +Unrecognized tax benefits 7,632 6,695 786 +Dividends from previously taxed earnings ( 5,313 ) ( 4,584 ) ( 4,257 ) +Nondeductible executive compensation 11,070 4,162 7,742 +US tax on foreign earnings* 4,252 2,343 5,848 +Re-measurement of deferred taxes — — ( 983 ) +Tax audit settlements 1,147 ( 3,956 ) — +Employee share based compensation excess tax benefits ( 6,846 ) ( 2,477 ) ( 1,445 ) +Other 707 ( 2,117 ) ( 1,365 ) +Total $ 118,939 $ 64,724 $ 64,626 +*These amounts represent global intangible low-taxed income (commonly referred to as GILTI) under the territorial tax system pursuant to the Tax Reform Act, net of foreign derived intangible income tax benefit. +Due to the enactment of Tax Reform Act, the Company is subject to US taxation of its foreign subsidiary earnings considered global intangible low-taxed income, as well as limitations on the deductions of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. In accordance with the Securities Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), issued December 22, 2017, the Company completed its accounting for the material effects of the Tax Reform Act during the quarter ended December 31, 2018. In connection with finalizing the tax effects of the Tax Reform Act, the Company recorded immaterial measurement period adjustments during the year ended March 31, 2019 including a reduction from $ 59,114 to $ 57,895 related to the one-time mandatory deemed repatriation tax on accumulated foreign earnings. Refer to section below entitled “US Taxation of Foreign Earnings” for further information. The Company continues to evaluate new guidance and legislation as it is issued. +In response to the pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27th, 2020 and the American Rescue Plan Act (ARP Act) was signed into law on March 10, 2021. This legislation made broad changes to the US tax code and the Company expects to see future regulatory and legislative guidance issued. The Company reviewed the provisions of the CARES Act and the ARP Act and considers the effect to be immaterial to its consolidated financial statements for the years ended March 31, 2021 and 2020. +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities, are as follows: +As of March 31, +2021 2020 +Deferred tax assets +Amortization and impairment of intangible assets $ 7,302 $ 11,471 +Nonvested stock-based compensation 7,138 5,194 +Operating lease liability 37,707 45,600 +Uniform capitalization adjustment to inventory 5,256 4,322 +Bad debt allowance and other reserves 19,321 14,243 +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +As of March 31, +2021 2020 +Accrued bonuses 8,491 6,187 +Foreign currency translation 646 645 +Net operating loss carry-forwards, net of valuation allowances 1,663 2,071 +Other 3,048 1,372 +Gross deferred tax assets 90,572 91,105 +Valuation allowances ( 1,197 ) ( 1,519 ) +Total 89,375 89,586 +Deferred tax liabilities +Prepaid expenses ( 3,829 ) ( 4,252 ) +Operating lease asset ( 30,754 ) ( 41,276 ) +Depreciation of property and equipment ( 17,598 ) ( 15,825 ) +Total ( 52,181 ) ( 61,353 ) +Deferred tax assets, net $ 37,194 $ 28,233 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $ 154,715 . The deferred tax assets are primarily related to the Company’s domestic operations and are currently expected to be realized between fiscal years 2022 and 2031. +Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. +US Taxation of Foreign Earnings . At March 31, 2019, the Company completed the calculation of the one-time transition tax on the deemed repatriation of foreign subsidiaries’ earnings pursuant to the Tax Reform Act and previously recorded a net cumulative tax expense of $ 57,895 , net of foreign tax credits. Beginning with tax year ended March 31, 2018, an installment election was made to pay these taxes over eight years with 40% paid in equal installments over the first five years and the remaining 60% to be paid in installments of 15%, 20% and 25% in years six, seven and eight, respectively. The cumulative remaining balance as of March 31, 2021 was $ 41,452 , with $ 2,586 recorded in income taxes payable and $ 38,866 in long-term income tax liability in the consolidated balance sheets. +As of March 31, 2021, the Company reported $ 303,171 of undistributed earnings from its non-US subsidiaries, of which $ 180,951 relates to cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2021, the Company reported $ 13,019 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been provided. The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. During the year ended March 31, 2021, the Company declared a dividend of $ 175,000 from a foreign subsidiary, for which no foreign withholding taxes were required. +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets. A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits, are as follows: +Balance, March 31, 2018 $ 9,594 +Gross increase related to current fiscal year tax positions 1,027 +Gross increase related to prior fiscal year tax positions 3,282 +Settlements ( 1,157 ) +Lapse of statute of limitations ( 1,804 ) +Balance, March 31, 2019 10,942 +Gross increase related to current fiscal year tax positions 1,153 +Gross increase related to prior fiscal year tax positions 8,152 +Settlements ( 246 ) +Lapse of statute of limitations ( 2,363 ) +Balance, March 31, 2020 17,638 +Gross increase related to current fiscal year tax positions 2,242 +Gross increase related to prior fiscal year tax positions 8,566 +Gross decrease related to prior fiscal year tax positions ( 1,215 ) +Lapse of statute of limitations ( 1,961 ) +Balance, March 31, 2021 $ 25,270 +Total gross unrecognized tax benefits recorded in the consolidated balance sheets, are as follows: +As of March 31, +2021 2020 +Long-term asset +Deferred tax assets, net $ — $ 486 +Current liability +Income taxes payable 1,038 — +Long-term liability +Income tax liability 24,232 17,152 +Total $ 25,270 $ 17,638 +As of March 31, 2021 and 2020, the Company had $ 4,782 and $ 3,631 accrued for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets. During the years ended March 31, 2021, 2020, and 2019, the Company recorded $ 1,151 , $ 1,176 , and $( 110 ), respectively, of interest and penalties as an increase or (decrease) to interest expense in the consolidated statements of comprehensive income. +Management believes it is reasonably possible that the amount of unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 4,544 related primarily to the expiration of statute of limitations, partially offset by additional unrecognized tax benefits relating to current fiscal +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +year tax return positions. Of this amount, $ 4,268 would result in an income tax benefit for the Company and $ 1,153 would result in a decrease to interest expense in the consolidated statements of comprehensive income. +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in the Company’s income tax return that would impact the Company’s effective tax rate, if recognized. Net unrecognized tax benefits of $ 23,883 , $ 16,685 , and $ 10,344 for the years ended March 31, 2021, 2020, and 2019, respectively, would reduce the annual effective tax rate recorded in the consolidated statements of comprehensive income. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2017. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, it is the opinion of management that the Company does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements. +Note 6. Revolving Credit Facilities and Mortgage Payable +Primary Credit Facility . In September 2018, the Company entered into a credit agreement (Credit Agreement) with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint book runners. The Credit Agreement provides for a five-year , $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +I n addition to allowing borrowings in US dollars, the Credit Agreement provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars and any other foreign currency that is subsequently approved by JPMorgan, each lender and each bank issuing letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $ 200,000 , resulting in a maximum available principal amount of $ 600,000 . However, none of the lenders has committed at this time to provide any such increase in the commitments. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries). All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured. Amounts borrowed under the Primary Credit Facility may be prepaid at any time. In addition, the Company has the right to permanently reduce or terminate the lenders’ commitments provided under the Credit Agreement, subject to customary conditions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions and notice periods, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow under the Primary Credit Facility, subject to the foreign currency sublimit noted above. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Interest Rate Terms. At the Company’s election, interest under the Credit Agreement is tied to the adjusted LIBOR or the alternate base rate (ABR). Initial interest for the revolving loans is variable and fluctuates between adjusted LIBOR plus 1.125 % per annum and adjusted LIBOR plus 1.625 % per annum (or between ABR plus 0.125 % per annum and ABR plus 0.625 % per annum), based on the Company’s total adjusted leverage ratio. Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate if made in Canadian dollars. As of March 31, 2021, the effective interest rates for US dollar LIBOR and ABR rates, with relevant spreads for borrowings made during the reporting period, were 1.24 % and 3.38 %, respectively. +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum, based upon the Company’s total adjusted leverage ratio. +Borrowing Activity. During the year ended March 31, 2021, the Company made no borrowings or repayments under the Primary Credit Facility. As of March 31, 2021, the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $ 549 . As of March 31, 2021, available borrowings under the Primary Credit Facility were $ 399,451 . +Debt Issuance Costs. In connection with entering into the Primary Credit Facility, the Company paid certain commitment, arrangement and other fees to JPMorgan, Comerica and other parties to the Primary Credit Facility, and reimbursed certain of the parties’ expenses, which totaled $ 1,297 , and were recorded in prepaid expenses and other assets. These costs are amortized on a straight-line basis over the term of the Credit Agreement. +China Credit Facility . In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 45,736 , with an overdraft facility sublimit of CNY 100,000 , or $ 15,245 . +The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. Interest is based on the People’s Bank of China market rate multiplied by a variable liquidity factor. As of March 31, 2021, the effective interest rate was 4.15 %. +During the year ended March 31, 2021, the Company borrowed and made repayments of $ 9,659 under the China Credit Facility. As of March 31, 2021, the Company had no outstanding balance, outstanding bank guarantees of $ 30 , and available borrowings of $ 45,706 under the China Credit Facility. +Japan Credit Facility . In March 2016, Deckers Japan, G.K., a wholly owned subsidiary of the Company, entered into a credit agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 3,000,000 , or $ 27,099 , for a maximum term of six months for each draw on the facility. The Japan Credit Facility can be renewed annually and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2022 substantially under the terms of the original credit agreement. Interest is based on the Tokyo Interbank Offered Rate plus 0.40 % . As of March 31, 2021, the effective interest rate was 0.48 %. +During the year ended March 31, 2021, the Company made no borrowings or repayments under the Japan Credit Facility. As of March 31, 2021, the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $ 27,099 . +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Mortgage . In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $ 33,931 . The mortgage had a fixed interest rate of 4.928 % and the loan was set to mature on July 1, 2029 . During the year ended March 31, 2021 , the Company repaid in full the outstanding principal balance, accrued interest, as well as prepayment penalties under the mortgage totaling $ 31,578 , and as of March 31, 2021 had no outstanding balance on its consolidated balance sheets. +Debt Covenants. As of March 31, 2021, the Company was in compliance with all financial covenants under the revolving credit facilities. +Primary Credit Facility. Under the Primary Credit Facility, the Company is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments and transactions with affiliates. Financial covenants (as defined in the Credit Agreement), include the following: +• The total adjusted leverage ratio must not be greater than 3.75 to 1.00. +• The sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00. +• No limits on shares repurchases if the total adjusted leverage ratio does not exceed 3.50 to 1.00. +Under the Primary Credit Facility, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include: non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material ERISA liabilities; and a change of control of the Company (as defined in the Credit Agreement). +China Credit Facility. Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +Japan Credit Facility. Under the Japan Credit Facility, Deckers Japan, G.K., is subject to usual and customary provisions including a restriction against having losses for two years consecutively, maintaining an interest coverage ratio greater than 1.00 , and maintaining higher assets than liabilities. +Foreign Currency Exchange Rates . The amounts disclosed above for the China Credit Facility have been translated into US dollars using applicable foreign currency exchange spot rates in effect as of March 31, 2021. As a result, there are differences between the net amount within this footnote disclosure and those same amounts recorded in the consolidated statements of cash flows. Any amounts outstanding, including any amounts disclosed above, are recorded in short-term borrowings in the consolidated balance sheets. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Note 7. Leases and Other Commitments +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease agreements which continue in effect through calendar year 2031. Some of the Company's operating leases contain extension options of anywhere from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its non-collateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Rent Expense . The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income under the new lease standard, were as follows: +Years Ended March 31, +2021 2020 +Operating $ 52,849 $ 57,966 +Variable 24,033 26,996 +Short-term 3,015 3,332 +Total $ 79,897 $ 88,294 +The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income under legacy US GAAP, prior to the adoption of ASU 2016-02 as of April 1, 2019, were as follows: +Year Ended March 31, 2019 +Minimum rentals $ 60,859 +Contingent rentals 13,226 +Total $ 74,085 +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2021 under the new lease standard, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets, are as follows: +Years Ending March 31, Amount* +2022 $ 49,528 +2023 44,165 +2024 38,068 +2025 30,307 +2026 26,400 +Thereafter 56,950 +Total undiscounted future lease payments 245,418 +Less: Imputed interest ( 22,376 ) +Total $ 223,042 +*Operating lease liabilities recorded in the consolidated balance sheets exclude $ 20,284 of legally binding undiscounted minimum lease payments due pursuant to a lease signed but not yet commenced for a new US distribution center. +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and liabilities that are outstanding and presented in the consolidated balance sheets, are as follows: +As of March 31, +2021 2020 +Weighted-average remaining lease term in years 6.0 6.6 +Weighted-average discount rate 3.1 % 3.3 % +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases, were as follows: +Years Ended March 31, +2021 2020 +Non-cash operating activities +Operating lease assets obtained in exchange for lease liabilities* $ 9,861 $ 71,097 +Reductions to operating lease assets for reductions to lease liabilities* ( 12,051 ) ( 7,055 ) +*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements. +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . The Company had $ 566,820 of outstanding purchase orders or other obligations with its manufacturers as of March 31, 2021. The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers decide to purchase its products. The Company generally orders product two to nine months in advance of the anticipated shipment dates based primarily on a combination of product lead time and orders received from wholesale customers and through the DTC reportable operating segment. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase commitments can be cancelled by the Company under certain circumstances. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase commitments, and instead reflects an estimate of its future payment commitments based on information currently available. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Commodities . The Company had an aggregate of $ 150,594 remaining purchase commitments, primarily for sheepskin, as well as leather, as of March 31, 2021. These commitments generally arise under two-year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring purchase commitments of sheepskin and leather that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There were $ 8,322 of deposits on expired sheepskin contracts that have not been fully consumed as of March 31, 2021 which is recorded in other assets in the consolidated balance sheets. +During the year ended March 31, 2021, the Company experienced a shift in product mix that used less of a certain sheepskin grade. As a result, the Company negotiated a deferral of additional deposit payments, which represent remaining minimum commitments under expired sheepskin supply agreements. As of March 31, 2021, the remaining minimum purchase commitment under these expired agreements was approximately $ 28,000 . Subsequent to March 31, 2021 through May 13, 2021, this deposit was paid. +Total future minimum commitments for commodities contracts as of March 31, 2021 were as follows: +Contract Effective Date Final Target Date Contract Value Remaining +Commitment +July 2017 September 2019 $ 7,200 $ 5,223 +April 2018 September 2020 45,600 6,443 +October 2018 September 2020 27,350 25,336 +October 2018 September 2021 41,210 41,210 +April 2019 September 2020 8,906 8,906 +October 2019 June 2020 28,800 10,580 +October 2019 June 2021 16,644 16,644 +March 2021 June 2022 21,878 21,878 +March 2021 September 2022 22,200 14,374 +$ 219,788 $ 150,594 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or will be reflected as a credit against purchases. The amounts above do not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations, and instead reflect an estimate of its future payment obligations based on information currently available. +Othe r. The Company had an aggregate of $ 102,317 of other purchase commitments as of March 31, 2021, which consisted of minimum commitments for logistics arrangements, an IT agreement for a new inventory planning system, requirements to pay promotional expenses, and other commitments under service contracts. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Litigation . From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, results of operations, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +On March 28, 2016, the Company filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the US District Court for the Northern District of Illinois Eastern Division (District Court) against Australian Leather. Australian Leather counterclaimed alleging that the UGG brand trademark is invalid. On May 10, 2019, a jury returned a verdict in the Company's favor in its lawsuit against Australian Leather. The District Court entered judgments upholding the UGG brand trademark on February 6 and June 8, 2020. On August 12, 2020, Australian Leather filed an appeal to the US Court of Appeals for the Federal Circuit. On May 7, 2021, the US Court of Appeals affirmed the District Court’s ruling dismissing Australian Leather’s affirmative defenses and counterclaims and upholding the UGG brand trademark. It is unknown whether Australian Leather will challenge the decision of the Court of Appeals. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +Note 8. Stock-Based Compensation +In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), for which the primary purpose is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . The Company may grant various types of stock-based compensation under the 2015 SIP, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) to key employees and certain executive officers, and long-term incentive plan (LTIP) awards to certain officers, including named executive officers. +Annual Awards. The Company has granted Annual RSUs and Annual PSUs under the 2015 SIP, which entitle the recipients to receive shares of the Company’s common stock upon vesting. The Annual RSUs are subject to time-based vesting criteria and vest in equal annual installments over three years following the date of grant. The vesting of Annual PSUs are subject to the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted, and to the extent the performance criteria has been met, vest in equal annual installments over three years thereafter. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +The Company granted annual awards under the 2015 SIP, as recorded in the consolidated statements of comprehensive income, as summarized below: +Years Ended March 31, +2021 2020 2019 +Shares Granted Weighted-average grant date fair value per share Shares Granted Weighted-average grant date fair value per share Shares Granted Weighted-average grant date fair value per share +Annual RSUs 47,015 $ 220.31 47,577 $ 171.50 62,743 $ 116.85 +Annual PSUs — — 19,938 174.36 31,320 116.34 +Total 47,015 $ 220.31 67,515 $ 172.34 94,063 $ 116.68 +Annual award activity recorded in the consolidated statements of comprehensive income, were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2018 289,297 $ 65.18 +Granted 94,063 116.68 +Vested ( 118,903 ) ( 64.39 ) +Forfeited ( 33,058 ) ( 77.60 ) +Nonvested, March 31, 2019 231,399 84.75 +Granted 67,515 172.34 +Vested ( 121,572 ) ( 76.81 ) +Forfeited ( 14,993 ) ( 113.49 ) +Nonvested, March 31, 2020 162,349 124.47 +Granted 47,015 220.31 +Vested ( 92,614 ) ( 104.92 ) +Forfeited ( 3,664 ) ( 147.34 ) +Nonvested, March 31, 2021 113,086 $ 179.58 +Long-Term Incentive Plan Awards. The Company evaluates at least quarterly the probability of achieving performance criteria included in its LTIP PSUs against its most current forecast. LTIP awards recorded in the consolidated statements of comprehensive income, were as follows: +2021 LTIP PSUs . In March 2021, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2021 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2021 LTIP PSUs are subject to vesting based on service conditions over either two or three years . The Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the year ended March 31, 2021, and for the fiscal years ending March 31, 2022 and 2023 (collectively, the Measurement Periods) and incorporates a relative total stockholder return (TSR) modifier for both the 24 -month performance period (commencing on April 1, 2021) and 36 -month performance period (commencing on April 1, 2020) ending March 31, 2023 (collectively, the Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2021 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2021 LTIP PSUs will occur if the Company fails to achieve the minimum revenue and pre-tax income amounts for each reporting period equal to at least 100 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the Measurement Periods, the vesting of each 2021 LTIP PSU will be subject to +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the Performance Period. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the Performance Periods. +The Company granted awards at the target performance level of 19,890 2021 LTIP PSUs during the year ended March 31, 2021. The grant date fair value of these 2021 LTIP PSUs was $ 376.45 per share. Based on the Company's current long-range forecast, the Company determined that the achievement of at least the target performance criteria for each of the Measurement Periods for these awards was probable as of the grant date. +2020 LTIP PSUs. In September 2019, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2020 LTIP PSUs), which were awarded to certain members of the Company's senior management team, including the Company's named executive officers. The 2020 LTIP PSUs are subject to vesting based on service conditions over three years , as well as the Company meeting certain revenue and pre-tax income performance targets for the fiscal year ending March 31, 2022 (2022 Measurement Period) and incorporates a relative TSR modifier for the 36 -month performance period commencing on April 1, 2019 and ending March 31, 2022 (2022 Performance Period). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2020 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2020 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2022 Measurement Period, the vesting of each 2020 LTIP PSU will be subject to adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2022 Performance Period. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the 2022 Performance Period. +The Company granted awards at the target performance level of 38,174 2020 LTIP PSUs during the year ended March 31, 2020. The grant date fair value of these 2020 LTIP PSUs was $ 146.96 per share. The Company currently expects to exceed the financial performance threshold levels as defined above for each of the performance criteria, and, therefore the maximum number of 2020 LTIP PSUs that is expected to vest is 200 % of the targeted amount for that award. +2019 LTIP PSUs. In September 2018, the Company approved LTIP awards under the 2015 SIP for the issuance of PSUs (2019 LTIP PSUs), which were awarded to certain members of the Company’s senior management team, including the Company’s named executive officers. The 2019 LTIP PSUs are subject to vesting based on service conditions over three years , as well as the Company meeting certain revenue and pre-tax income performance targets for the fiscal year ended March 31, 2021 (2021 Measurement Period) and incorporates a relative TSR modifier for the 36 -month performance period commencing on April 1, 2018 and ended March 31, 2021 (2021 Performance Period). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2019 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2019 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2021 Measurement Period, the vesting of each 2019 LTIP PSUs will be subject to adjustment based on the application of a TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for 2021 Performance Period. A Monte Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the 2022 Performance Period. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +The Company granted awards at the target performance level of 41,793 2019 LTIP PSUs during the year ended March 31, 2019. The grant date fair value of these 2019 LTIP PSUs was $ 120.24 per share. The Company exceeded the financial performance threshold levels as defined above for each of the performance criteria, and, therefore the maximum number of 2019 LTIP PSUs that vested as of March 31, 2021 was 200 % of the targeted amount for that award. +LTIP award activity recorded in the consolidated statements of comprehensive income, were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2018 — $ — +Granted* 83,586 120.24 +Forfeited ( 6,488 ) ( 120.24 ) +Nonvested, March 31, 2019 77,098 120.24 +Granted* 76,348 146.96 +Nonvested, March 31, 2020 153,446 133.53 +Granted* 39,780 376.45 +Vested ( 77,098 ) ( 106.37 ) +Nonvested, March 31, 2021 116,128 $ 215.30 +*The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +Long-Term Incentive Plan Options. During the years ended March 31, 2021, 2020, and 2019, no LTIP NQSOs were granted. Previously, the Company approved the issuance of LTIP NQSOs under the 2015 SIP, including in June 2017 (2018 LTIP NQSOs), which were awarded to certain members of the Company’s management team, with a maximum contractual term of seven years from the grant date. If the recipient provided continuous service, the LTIP NQSOs would vest after the Company had determined it achieved the target performance criteria by the date specified in the award. +As of March 31, 2020, the Company determined that the target performance criteria related to the LTIP NQSOs for the year ended March 31, 2020 were achieved. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. +LTIP option activity recorded in the consolidated statements of comprehensive income, were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value Weighted- +Average +Remaining +Contractual +Term +(Years) Aggregate +Intrinsic +Value +Nonvested, March 31, 2018 397,340 $ 65.70 7.1 $ 9,666 +Forfeited ( 35,957 ) ( 69.29 ) +Nonvested, March 31, 2019 361,383 65.35 6.2 29,504 +Exercised ( 58,444 ) ( 61.86 ) +Nonvested, March 31, 2020 302,939 66.02 5.0 20,594 +Exercised ( 107,197 ) ( 63.20 ) +Nonvested, March 31, 2021 195,742 $ 67.56 3.6 $ 51,452 +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +The Company measured stock-based compensation expense for the 2018 LTIP NQSOs at the date of grant using the Black-Scholes option pricing model, with the following weighted-average valuation assumptions: +2018 LTIP NQSOs +Expected life (in years) 4.90 +Expected volatility 38.73 % +Risk free interest rate 1.78 % +Dividend yield — % +Weighted-average exercise price $ 69.29 +Weighted-average option value $ 25.03 +Grants to Directors. Each of the Company’s nonemployee directors is entitled to receive common stock with a total value of $ 125 for annual service on the Board of Directors. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the 15 th day of the last month of each quarterly period. Each of these shares is fully vested on the date of issuance. +Stock-Based Compensation Expense . Components of stock-based compensation expense recorded in the consolidated statements of comprehensive income, were as follows: +Years Ended March 31, +2021 2020 2019 +Annual RSUs $ 7,820 $ 6,509 $ 6,588 +Annual PSUs 1,900 2,851 2,373 +LTIP PSUs 11,555 2,203 885 +LTIP NQSOs — 1,641 3,516 +Grants to Directors 1,195 1,045 1,223 +Employee Stock Purchase Plan 231 228 189 +Total stock-based compensation expense, pre-tax 22,701 14,477 14,774 +Income tax benefit ( 5,441 ) ( 3,308 ) ( 3,546 ) +Total stock-based compensation expense, net of tax $ 17,260 $ 11,169 $ 11,228 +Employee Stock Purchase Plan. The 2015 Employee Stock Purchase Plan (ESPP) authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. ESPP shares are excluded from basic earnings per share until purchases are made, while included in diluted earnings per share computations as after-tax payroll deductions are made. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period (no look-back provision) for a fixed amount at a 15 % discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred and remeasured during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets. +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Unrecognized Stock-Based Compensation Expense. Total remaining unrecognized stock-based compensation expense as of March 31, 2021 related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, are as follows: +Unrecognized +Stock-based Compensation +Expense Weighted-Average +Remaining +Vesting Period (Years) +Annual RSUs $ 8,911 1.1 +Annual PSUs 842 0.7 +LTIP PSUs 14,645 1.4 +Total $ 24,398 +Note 9. Derivative Instruments +As of March 31, 2021 and 2020, the Company had no outstanding derivative contracts, however, settled derivative contracts with notional values were as follows: +Years Ended March 31, +2021 2020 +Designated Derivative Contracts $ 68,241 $ 65,569 +Non-Designated Derivative Contracts 18,909 49,251 +Total $ 87,150 $ 114,820 +The following table summarizes the effect of Designated Derivative Contracts and the related income tax effects of unrealized gains or losses recorded in the consolidated statements of comprehensive income for changes in AOCL: +Years Ended March 31, +2021 2020 2019 +(Loss) gain recorded in Other comprehensive income $ ( 1,223 ) $ 1,516 $ 8,355 +Reclassifications from AOCL into net sales 1,223 ( 1,516 ) ( 8,675 ) +Income tax benefit in Other comprehensive income* — — 77 +Total $ — $ — $ ( 243 ) +*The amount for the year ended March 31, 2019 is inclusive of the income tax effects from the Tax Reform Act reclassified from AOCL to retained earnings in the consolidated balance sheets in connection with the previous adoption of a new accounting standard. +The Company had settled all its outstanding Designated Derivative Contracts as of March 31, 2021 and 2020, and therefore the amounts are zero for each respective year. +Amounts excluded from effectiveness testing recorded in SG&A expenses for Designated Derivative Contracts were as follows: +Years Ended March 31, +2021 2020 2019 +Gain excluded from effectiveness testing recorded in SG&A expenses* $ — $ — $ 1,918 +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +*The amount for the year ended March 31, 2019 was recognized under legacy US GAAP. Beginning April 1, 2019, under the new hedging standard, these amounts are now recorded as a component of AOCL and were classified in net sales during the years ended March 31, 2021 and 2020. +The following table summarizes the effect of Non-Designated Derivative Contracts: +Years Ended March 31, +2021 2020 2019 +Gain recorded in SG&A expenses $ 267 $ 328 $ 1,393 +The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. +Note 10. Stockholders’ Equity +Stock Repurchase Programs. In January 2019, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase a total of up to $ 261,000 of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (the stock repurchase program). +As of March 31, 2021, the aggregate remaining approved amount under the Company’s stock repurchase program was $ 60,660 . The Company’s current revolving credit agreements allow it to make stock repurchases under this program, as long as the Company does not exceed certain leverage ratios and no event of default has occurred under this arrangement. +Stock repurchase activity under the Company’s stock repurchase program, was as follows: +Years Ended March 31, +2021 2020 2019 +Total number of shares repurchased* 307,080 1,296,201 1,400,699 +Average price paid per share $ 322.87 $ 146.89 $ 115.22 +Dollar value of shares repurchased $ 99,147 $ 190,405 $ 161,395 +*Any stock repurchases are made as part of publicly announced programs in open-market transactions. +The Company’s Board of Directors approved an additional authorization of $ 750,000 during April 2021 for the Company to repurchase its common stock under the same conditions as the prior stock repurchase program. Subsequent to March 31, 2021 through May 13, 2021, the Company repurchased 70,881 shares for $ 23,466 at an average price of $ 331.06 per share, and had $ 787,194 remaining authorized under the stock repurchase program. The Company’s stock repurchase program does not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion. +Accumulated Other Comprehensive Loss . The components within AOCL recorded in the consolidated balance sheets, were as follows: +As of March 31, +2021 2020 +Cumulative foreign currency translation loss $ ( 16,743 ) $ ( 25,559 ) +Total $ ( 16,743 ) $ ( 25,559 ) +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Note 11. Basic and Diluted Shares +The reconciliation of basic to diluted weighted-average common shares outstanding, are as follows: +Years Ended March 31, +2021 2020 2019 +Basic 28,055,000 28,385,000 29,641,000 +Dilutive effect of equity awards 351,000 309,000 262,000 +Diluted 28,406,000 28,694,000 29,903,000 +Excluded +Annual RSUs and Annual PSUs 4,000 3,000 3,000 +LTIP PSUs 116,000 153,000 77,000 +LTIP NQSOs — — 170,000 +Deferred Non-Employee Director Equity Awards 1,000 — 2,000 +Excluded Awards. The equity awards excluded from the calculation of the dilutive effect have been excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be deemed issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented (such that inclusion of these equity awards in the calculation would have been antidilutive). The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards subject to the achievement of performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower or higher than the number of shares presented, which could result in a lesser or more dilutive effect, respectively. Refer to Note 8, “Stock-Based Compensation,” for further information on the Company's equity incentive plans. +Note 12. Reportable Operating Segments +Information reported to the Chief Operating Decision Maker (CODM), who is the Company’s Principal Executive Officer, is organized into the Company’s six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments. +The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with the Company’s warehouse and distribution center (DC), certain executive and stock-based compensation, accounting, finance, legal, information technology, human resources, and facilities, among others. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income, was as follows: +Years Ended March 31, +2021 2020 2019 +Net sales +UGG brand wholesale $ 871,799 $ 892,990 $ 888,347 +HOKA brand wholesale 405,243 277,097 185,057 +Teva brand wholesale 105,928 119,108 119,390 +Sanuk brand wholesale 26,566 39,463 69,791 +Other brands wholesale 69,375 67,175 42,818 +Direct-to-Consumer 1,066,730 736,856 715,034 +Total $ 2,545,641 $ 2,132,689 $ 2,020,437 +Income (loss) from operations +UGG brand wholesale $ 292,718 $ 303,908 $ 300,761 +HOKA brand wholesale 111,208 61,860 35,717 +Teva brand wholesale 27,120 30,736 27,939 +Sanuk brand wholesale ( 162 ) 3,212 12,781 +Other brands wholesale 21,573 16,087 10,411 +Direct-to-Consumer 349,465 182,548 185,449 +Unallocated overhead costs ( 297,717 ) ( 260,216 ) ( 245,738 ) +Total $ 504,205 $ 338,135 $ 327,320 +Depreciation, amortization, and accretion +UGG brand wholesale $ 532 $ 611 $ 1,254 +HOKA brand wholesale 611 612 456 +Teva brand wholesale — 1 10 +Sanuk brand wholesale 1,727 2,361 4,171 +Other brands wholesale 382 382 382 +Direct-to-Consumer 11,121 10,586 12,195 +Unallocated overhead costs 26,157 24,359 26,473 +Total $ 40,530 $ 38,912 $ 44,941 +Capital expenditures +UGG brand wholesale $ ( 31 ) $ 404 $ 205 +HOKA brand wholesale 56 434 285 +Sanuk brand wholesale 8 — — +Other brands wholesale 40 64 11 +Direct-to-Consumer 10,434 7,753 5,739 +Unallocated overhead costs 21,711 23,800 22,846 +Total $ 32,218 $ 32,455 $ 29,086 +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, net, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments. +Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets, were as follows: +As of March 31, +2021 2020 +Assets +UGG brand wholesale $ 212,277 $ 245,239 +HOKA brand wholesale 168,365 124,958 +Teva brand wholesale 87,284 90,305 +Sanuk brand wholesale 38,311 50,314 +Other brands wholesale 18,732 21,535 +Direct-to-Consumer 196,091 243,489 +Total assets from reportable operating segments 721,060 775,840 +Unallocated cash and cash equivalents 1,089,361 649,436 +Unallocated deferred tax assets, net 37,194 28,233 +Unallocated other corporate assets 320,090 311,609 +Total $ 2,167,705 $ 1,765,118 +Note 13. Concentration of Business +Regions and Customers . The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations that were as follows: +Years Ended March 31, +2021 2020 2019 +International net sales $ 784,164 $ 730,997 $ 742,079 +% of net sales 30.8 % 34.3 % 36.7 % +Net sales in foreign currencies $ 611,897 $ 587,233 $ 605,725 +% of net sales 24.0 % 27.5 % 30.0 % +Ten largest customers as % of net sales 27.8 % 28.0 % 27.7 % +For the years ended March 31, 2021, 2020, and 2019, no single foreign country comprised 10.0% or more of the Company’s total net sales. No single customer accounted for 10.0% or more of the Company’s net sales during the years ended March 31, 2021, 2020, and 2019. +The Company sells its products to customers for trade accounts receivables and, as of March 31, 2021, had one customer that made up 12.8 % of the net trade accounts receivables. As of March 31, 2020, no individual customers exceeded 10% of trade accounts receivable, net. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Suppliers. The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company's sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. The Company believes significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for the Company's products and the products of its competitors, the use of substitute products or components, and global economic conditions. +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets, are as follows: +As of March 31, +2021 2020 +US $ 194,833 $ 194,679 +Foreign* 11,377 14,358 +Total $ 206,210 $ 209,037 +*No single foreign country’s property and equipment, net, represented 10.0% or more of the Company’s total property and equipment, net, as of March 31, 2021 and 2020. +F-42 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2021, 2020, and 2019 +(dollar amounts in thousands, except per share or share data) +Note 14. Quarterly Summary of Information (Unaudited) +The Company’s business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st still significantly exceed the Company’s aggregate net sales in the quarter ending March 31st. While the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles and growing the year-round net sales of the HOKA brand as a percentage of the Company’s aggregate net sales, the Company expects the impact from seasonality to continue to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the pandemic. +Summarized unaudited quarterly financial data, were as follows: +Fiscal Year 2021 +Quarter Ended +6/30/2020 9/30/2020 12/31/2020 3/31/2021 +Net sales $ 283,169 $ 623,525 $ 1,077,759 $ 561,188 +Gross profit 142,566 318,977 613,897 298,650 +(Loss) income from operations ( 7,699 ) 128,604 328,655 54,645 +Net (loss) income ( 7,973 ) 101,554 255,536 33,458 +Net (loss) income per share +Basic $ ( 0.28 ) $ 3.62 $ 9.09 $ 1.19 +Diluted $ ( 0.28 ) $ 3.58 $ 8.99 $ 1.18 +Fiscal Year 2020 +Quarter Ended +6/30/2019 9/30/2019 12/31/2019 3/31/2020 +Net sales $ 276,839 $ 542,205 $ 938,735 $ 374,910 +Gross profit 130,019 273,024 507,632 192,998 +(Loss) income from operations ( 31,417 ) 97,131 255,766 16,655 +Net (loss) income ( 19,351 ) 77,810 201,593 16,090 +Net (loss) income per share +Basic $ ( 0.67 ) $ 2.73 $ 7.21 $ 0.57 +Diluted $ ( 0.67 ) $ 2.71 $ 7.14 $ 0.57 +F-43 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(amounts in thousands) +Allowances for doubtful accounts, sales discounts, chargebacks, and sales returns against trade accounts receivable recorded in the consolidated balance sheets, are as follows: +As of March 31, +2021 2020 2019 +Allowance for doubtful accounts (1) +Balance at Beginning of Year $ ( 6,989 ) $ ( 5,073 ) $ ( 3,487 ) +Additions ( 3,052 ) ( 3,498 ) ( 2,849 ) +Deductions 311 1,582 1,263 +Balance at End of Year $ ( 9,730 ) $ ( 6,989 ) $ ( 5,073 ) +Allowance for sales discounts (2) +Balance at Beginning of Year $ ( 1,030 ) $ ( 710 ) $ ( 1,400 ) +Additions ( 16,414 ) ( 14,845 ) ( 11,712 ) +Deductions 14,428 14,525 12,402 +Balance at End of Year $ ( 3,016 ) $ ( 1,030 ) $ ( 710 ) +Allowance for chargebacks (3) +Balance at Beginning of Year $ ( 13,127 ) $ ( 13,041 ) $ ( 7,727 ) +Additions ( 23,214 ) ( 13,399 ) ( 23,369 ) +Deductions 22,571 13,313 18,055 +Balance at End of Year $ ( 13,770 ) $ ( 13,127 ) $ ( 13,041 ) +Allowance for sales returns (4) +Balance at Beginning of Year $ — $ — $ ( 20,848 ) +Deductions — — 20,848 +Balance at End of Year $ — $ — $ — +Total $ ( 26,516 ) $ ( 21,146 ) $ ( 18,824 ) +(1) The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual write-off of the related trade accounts receivables. +(2) The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting certain order, shipment, and prompt payments terms. Deductions are for the actual discounts taken by the Company’s wholesale channel customers. Discounts for DTC consumers are taken at the point of sale and are not reflected in the allowance for sales discounts. +(3) The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(4) Amounts presented as of March 31, 2019 reflect the wholesale channel sales returns reserve on a net basis after the adoption of ASU 2014-09, Revenue from Contracts with Customers, which resulted in gross basis presentation in the consolidated balance sheets beginning April 1, 2018. Returns for DTC consumer products were previously excluded as they were separately recorded in other accrued expenses in the consolidated balance sheets. In prior periods presented, the additions to the allowance for sales returns represented estimates of returns based on the Company’s historical wholesale channel customer returns experience. Deductions were for the actual return of product . +F-44 \ No newline at end of file diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/filing_metadata.csv b/raw/filings/0000910521/2020/0000910521-21-000017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5eed87f7d437b0f0b1c4cb294bc30697e8ec0ef1 --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2021-05-28,2021-03-31,2021-05-28T17:43:58.000Z,0000910521-21-000017,deck-20210331.htm,10-K,13340183,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052121000017/deck-20210331.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052121000017/,2020,2020,1 diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/item1.txt b/raw/filings/0000910521/2020/0000910521-21-000017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c5a97bc2062594c637a2395a54d40f4705813e47 --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/item1.txt @@ -0,0 +1,115 @@ +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our Direct-to-Consumer (DTC) business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Recent Developments +COVID-19 Global Pandemic . Throughout fiscal year 2021, the COVID-19 pandemic (referred to herein as the pandemic) spread globally, impacting regions in which we operate our business, and in which our wholesale customers, retail stores, manufacturers, and suppliers are located. As of the date of this Annual Report, there continue to be widespread concerns about the ongoing impacts and disruptions caused by the pandemic, including the potential for additional increases in the number of positive COVID-19 cases in various geographic regions, and governmental orders and restrictions implemented to control further spread of the disease. +We experienced a number of material impacts resulting from the pandemic during the year ended March 31, 2021, and the overall impact of the pandemic on our business continues to be uncertain and subject to change. However, we have taken certain precautionary measures intended to help minimize risk to our business, employees, customers, consumers, partners, suppliers, and the communities in which we operate, including the following: +• Many of our Company-owned-and-operated stores, and we believe that many of the retail stores of our wholesale customers and retail partners, were closed at various times throughout fiscal year 2021. +• Our global e-commerce business, including our Company-owned websites and the online presence of our wholesale customers, remained substantially operational throughout fiscal year 2021, and we observed strong demand for all of our brands within our e-commerce business. Our e-commerce business has been positively impacted by consumers migrating to online shopping. This trend, which has been exacerbated by the impacts of the pandemic, has mitigated the negative pressure we are experiencing within our wholesale and retail store businesses. +• Our warehouse and distribution center (DC), as well as our global third-party logistics providers (3PLs) and third-party carriers, are operating at reduced capacity. We are experiencing certain operational and logistical challenges as a result of these limited and modified operations, including challenges associated with shipping higher quantities of products through our e-commerce business compared to prior periods. +3 +Table of Contents +• We experienced certain capacity constraints within our sourcing network, which includes material vendors and third-party manufacturers during fiscal year 2021, primarily as a result of the pandemic. While we have mitigated the effects of these disruptions, it is possible we will experience additional disruptions to our supply chain. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on the associated risks and impacts on our business and results of operations. +Products and Brands +We market our products primarily under five proprietary brands, which consist of our four primary brands and our other brands, which consist primarily of the Koolaburra by UGG brand. Our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets. +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of Women’s spring and summer footwear, Men’s products, and apparel, home goods, and accessories. The UGG brand is sold globally, including in the United States (US), Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. The HOKA brand is quickly becoming a leading brand within the run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. We continue to build product extensions in trail, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +Other Brands. O ther brands consist primarily of the Koolaburra by UGG brand. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. Our Other brands are primarily sold in North America. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our retail stores. +Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of all of our brands. +4 +Table of Contents +We currently distribute products sold in the US through our DC in Moreno Valley, California, as well as through a 3PL in Pennsylvania. Our DC features a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. Further, we intend to expand our distribution facilities, and we are in the early stages of opening a new US DC located in Mooresville, Indiana. +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through lifestyle and sport retailers such as Foot Locker and Journeys, fashion lifestyle retailers such as Urban Outfitters and ASOS, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sport retailers, which is reducing our dependence on department stores. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, JackRabbit, REI, Zappos.com, DICK’s Sporting Goods, Running Warehouse, and Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including DSW, REI, Famous Footwear, Nordstrom, Urban Outfitters, DICK’s Sporting Goods, United Arrows, ABC Mart, Aeon Sports, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our Other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes. +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity, Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +5 +Table of Contents +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores, which are lead concept stores in key markets designed to showcase the UGG brand products, and we continue to launch flagship stores in prominent locations. For example, in November 2020 we opened a flagship store in New York City, which highlights the expansive collection of the brand’s product offerings while showcasing the breadth and depth of UGG as a lifestyle brand. We anticipate opening a curated fleet of flagship stores in future periods to continue interacting with our consumers and enhancing brand loyalty. +As of March 31, 2021, we operated our e-commerce business through Company-owned websites and mobile platforms in 58 different countries, and had a total of 140 global retail stores, which includes 71 concept stores and 69 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, conflict minerals, animal welfare, and environmental compliance before we are willing to conduct business with them. +6 +Table of Contents +We use a proprietary raw material, UGGpure, which is repurposed wool woven into a durable backing, and UGGplush, which is repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the skins we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our general practice, and the general practice in our industry, is to offer wholesale customers the right to return defective or improperly shipped merchandise, and to accept returns from our DTC consumers between 30 to 90 days from the point of sale for cash or credit. +We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Liquidity” and “Contractual Obligations” for further information on our working capital and operating requirements as well as our purchase obligations for product. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2021 , we employed approximately 3,400 employees in North America, Europe, and Asia. This includes approximately 1,300 employees in our retail stores wor ldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is generally favorable. +Culture . Our purpose is to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our five key values, which guide our journey onward together, help hold us accountable to deliver on this purpose: +• Come as you are. +• Better together. +• Commit to create. +• Own it. +• Do good and do great. +7 +Table of Contents +Our values define our Company and serve as the driving force behind how we work together and with our customers, our consumers, our partners, our suppliers, and our communities. We also have detailed ethics and compliance policies that instill a commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred, and are also able to make confidential and anonymous reports using an online or telephone hotline hosted by an independent third-party provider. +Encouraging Diversity . We prioritize diversity, equity, and inclusion (DEI) and believe that it is critical to creating an organization where all employees can come as they are. We believe that the inclusion of underrepresented perspectives develops better outcomes and policies, and a diverse pool of leaders brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business. To that end, we have added five new directors to our Board of Directors since 2018, two of whom are female, and four of whom are from underrepresented communities. Our Board of Directors is now comprised of a total of ten directors, four of whom are female, and six of whom are from underrepresented communities. +Our Code of Ethics, on which we train our employees bi-annually, as well as our annual Corporate Responsibility Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support initiatives to create a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We anticipate implementing a comprehensive, global strategy for DEI, and have deployed mandatory anti-racism and implicit bias training, as well as a suite of additional learning and development resources. We have also joined The Valuable 500, which is a business-to-business initiative comprised of companies committed to disability inclusion, and the Civic Alliance which is a nonpartisan business coalition that champions democracy and civic participation. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. During fiscal year 2021, we donated to various non-profit organizations, and continued to provide monetary support and product donations to address the impacts of the pandemic on the communities in which we operate. Further, during this period we dedicated our strategic giving and community-engagement efforts to categories aligned with our sustainable development goals (SDGs), including DEI, the environment, at-risk youth, education, and community suppo rt. We also encourage our employees to volunteer by compensating each employee for up to 24 h ours of volunteer time each year. +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, and opportunities for development. For example, our leadership team mentors rising talent on an informal basis, which we believe accelerates the development of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive team and Board of Directors commits substantial time to evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, as well as annual increases based on merit. Annual incentive compensation is based on Company and individual performance. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, restricted stock units are granted to a substantial proportion of our executive employees under our broad-based stock incentive programs. In addition, we engage a nationally recognized outside compensation and benefits consulting firm to independently evaluate the effectiveness of our executive compensation and total rewards programs and to provide benchmarking against our peers within the industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave, mental health benefits and other voluntary benefits. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs that ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We operate in modern, efficient, and safe facilities, and have had minimal accident and injury rates Company-wide. +8 +Table of Contents +In an effort to protect the health and safety of our employees during the pandemic, we transitioned those employees who could perform their jobs remotely to a virtual work environment, and we are limiting the number of employees on-site relative to our typical personnel capacity. We have also implemented enhanced safety measures and protocols at our facilities. +Environmental, Social and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact by employing socially conscious operations. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers and our customers, as well as other brands and non-governmental organizations. Through our holistic Corporate Responsibility and Sustainability Program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized as one of America’s Most Responsible Companies by Newsweek, and ranked 15th of Investor’s Business Daily’s top 50 ESG companies during fiscal year 2021. +ESG Oversight. Our Board of Directors, through its Corporate Governance Committee, which is comprised of three independent directors, oversees our corporate responsibility and sustainability efforts. The Corporate Governance Committee receives quarterly updates and the full Board regularly receives updates on the status of our sustainability program. Our Sustainability and Compliance Officer is responsible for the day-to-day management of our Corporate Responsibility and Sustainability Program. +Our Corporate Responsibility and Sustainability Program aligns our internal teams with our SDGs and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility Report. Our Sustainability and Compliance Officer identifies specific SDGs established by the UNGC, which we adopt to guide our efforts to address environmental and social challenges. Our SDGs are currently focused on categories where we believe we can make substantial impacts. +The following is a brief overview of our current SDGs and related achievements during the year ended March 31, 2021: +• Materials. We strive to incorporate more certified responsible and sustainable materials in our products (including recycled, renewable, regenerated, and natural). During fiscal year 2021, we sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We finalized our raw material Lifecycle Assessment (LCA), which allowed us to seek sustainable alternatives for key product materials, including recycled polyester, repurposed wool, and plant-based materials. +• Animal Welfare. We do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides that are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely repurposed from sheepskin we are already using. Any virgin market wool must be certified by the Responsible Wool Standard. We require our supply chain partners to annually certify compliance with our Ethical Sourcing and Animal Welfare Policy. +9 +Table of Contents +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DC in Moreno Valley, California is implementing efforts to become a zero-waste facility. We are taking steps towards removing single-use plastic in our packaging, at our corporate headquarters, retail stores and DC. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods and we have extended this monitoring program to some suppliers and tannery partners. +• Water. We strive to mitigate water scarcity in the countries we operate in by reducing water consumption and improving water quality throughout our operations. We have reduced water consumption among our manufacturing partners and have set reduction targets for our suppliers. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We have finalized our raw materials LCA to guide our brands toward more preferred material selections and have engaged climate experts to measure our Scope 1, 2, and 3 carbon footprint with the goal of setting robust science-based targets in line with the Paris Agreement. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. +• Gender Equality and Quality Education. In the US we have obtained EDGE (Economic Dividends for Gender Equality) certification, the leading global assessment and business certification for gender equality. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. Further, our brands have all made a commitment to represent BIPOC, LGBTQ+, and diverse body types and abilities in their marketing campaigns. +• Human Rights. We are committed to positively impact the communities where we operate in, including assuring industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct which outlines our expectations of our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards which are regularly reviewed by our executive management. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Apparel Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a report that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our Corporate Responsibility Report for the year ended March 31, 2021, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2021 ESG achievements. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Corporate Responsibility Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB) Consumer Goods Standards. The content of our Corporate Responsibility Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +10 +Table of Contents +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st still significantly exceed our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the pandemic. +For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report. +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the pandemic, among others. +In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2021, we hold 194 designs and inventions with corresponding design or utility patent registrations, plus 23 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +11 +Table of Contents +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. +We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, Deckers 2020 Corporate Responsibility Report, Restricted Substance Packet, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Ethics, Corporate Governance Guidelines, Deckers Environmental Policy, Ethical Sourcing and Animal Welfare Policy, Paper and Forest Procurement Policy, and Conflict Minerals Policy. +The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +12 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/item13.txt b/raw/filings/0000910521/2020/0000910521-21-000017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3abc767b07ec136a3bc27aaf56d1565871bb91ed --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/item9a.txt b/raw/filings/0000910521/2020/0000910521-21-000017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..fc399f77a21cb090389aeaaf48c1902b99ed5c5f --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/item9a.txt @@ -0,0 +1,16 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021. +b) Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +51 +Table of Contents +As of March 31, 2021, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +c) Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the year ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on our internal control over financial reporting and to minimize such impacts on their design and operating effectiveness. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +52 +Table of Contents +PART III \ No newline at end of file diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/rp_note.txt b/raw/filings/0000910521/2020/0000910521-21-000017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2020/0000910521-21-000017/rpt_disclosure.txt b/raw/filings/0000910521/2020/0000910521-21-000017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1c76aaf06e54e3b5d90e873f829d30e10a344ad --- /dev/null +++ b/raw/filings/0000910521/2020/0000910521-21-000017/rpt_disclosure.txt @@ -0,0 +1,5 @@ +RELATED-PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related-person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related-person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit Committee, the Chairman of our Board and our highest ranking manager of internal audit. +If a related-person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules during fiscal year 2021, and no such transactions are currently proposed. +68 \ No newline at end of file diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/filing.txt b/raw/filings/0000910521/2021/0000910521-22-000017/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..379c44dd3522039dd0e0e80404e8a3c6c50385eb --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/filing.txt @@ -0,0 +1,2096 @@ +deck-20220331 +0000910521 false 2022 FY P1Y P1Y P3M P3Y P2Y P3Y P10D 0000910521 2021-04-01 2022-03-31 0000910521 2021-09-30 iso4217:USD 0000910521 2022-05-05 xbrli:shares 0000910521 2022-03-31 0000910521 2021-03-31 iso4217:USD xbrli:shares 0000910521 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or 15(d) of the Securities Exchange Act of 1934 +For the transition period from to +Commission File Number: 001-36436 +DECKERS OUTDOOR CORP ORATION +(Exact name of registrant as specified in its charter) +Delaware 95-3015862 +(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, par value $0.01 per share DECK New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ +Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 9,890,267,142 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $360.20. This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 5, 2022, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 26,789,861 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2022 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2022 +TABLE OF CONTENTS +Page +Cautionary Note Regarding Forward-Looking Statements +2 +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +13 +Item 1B. Unresolved Staff Comments * +Item 2. +Properties +28 +Item 3. +Legal Proceedings +28 +Item 4. Mine Safety Disclosures * +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +29 +Item 6. +[Reserved] * +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +31 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +48 +Item 8. +Financial Statements and Supplementary Data +49 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * +Item 9A. +Controls and Procedures +49 +Item 9B. Other Information * +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +* +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +50 +Item 11. +Executive Compensation +50 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +50 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +50 +Item 14. +Principal Accounting Fees and Services +50 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +51 +Signatures +54 +Index to Consolidated Financial Statements and Financial Statement Schedule +F- 1 +Item 16. Form 10-K Summary * +*Not applicable. +1 +Table of Conten t s +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2022 (Annual Report), and the information and documents incorporated by reference within this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference within this Annual Report, contain forward-looking statements relating to, among other things: +• the impacts of the COVID-19 global pandemic (pandemic) on our business, financial condition, results of operations and liquidity, and the business, financial condition, results of operations and liquidity of our customers, suppliers, and business partners; +• changes to our business resulting from changes in discretionary spending, consumer confidence, unemployment rates, retail store activity, tourist activity, and governmental restrictions; +• the impact of government orders, local authority mandates and expert agency guidance on retail store closures and operating restrictions; +• our business, operating, investing, capital allocation, marketing, and financing plans and strategies; +• the expansion of our brands and product offerings; +• changes to the geographic and seasonal mix of our brands and products; +• changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies; +• changes in consumer preferences impacting our brands and products, and the footwear and fashion industries; +• trends impacting the purchasing behavior of wholesale partners and consumers, including those impacting retail and e-commerce businesses; +• bankruptcies or other financial difficulties impacting our wholesale or other business partners; +• the impact of seasonality and weather on consumer behavior, demand for our products, and our results of operations; +• the impact of climate change and related regulations on our business and results of operations; +• the impact of our efforts to continue to advance sustainable and socially conscious business operations, and the expectations and standards that our investors and other stakeholders have with respect to our environmental, social and governance practices; +• expansion of and investments in our Direct-to-Consumer (DTC) capabilities, including our distribution facilities and e-commerce platforms; +• the operational challenges faced by our warehouse and distribution centers (DCs), our wholesale partners, our global third-party logistics providers (3PLs), and third-party carriers, including as a result of global supply chain disruptions and labor shortages, and the related impacts on our ability to timely deliver products; +• global uncertainty resulting from Russia’s invasion of Ukraine, including financial and economic sanctions resulting in higher transportation and energy costs, as well as other implications; +• availability of raw materials and manufacturing capacity, and reliability of overseas production and storage; +• inflationary pressures, including on labor costs and our raw material costs; +• commitments and contingencies, including with respect to operating leases, purchase obligations for product and raw materials, and legal or regulatory proceedings; +• the impacts of new or proposed legislation, tariffs, regulatory enforcement actions, or legal proceedings; +• the value of goodwill and other intangible assets, and potential write-downs or impairment charges; +• changes impacting our tax liability and effective tax rates; +• repatriation of earnings of non-United States (US) subsidiaries and any related tax impacts; and +• overall global economic, political, and social trends, including foreign currency exchange rate fluctuations, changes in interest rates, and changes in commodity pricing. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time, and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” “management,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra by UGG® brand (Koolaburra), UGGpure® (UGGpure), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere within this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. +Unless otherwise specifically indicated, all figures included within this Annual Report are expressed in thousands, except for per share or share data. The defined periods for the fiscal years ended March 31, 2022, 2021, and 2020 are stated herein as “year ended” or “years ended.” We also refer to these fiscal years as “fiscal year 2022,” “fiscal year 2021,” and “fiscal year 2020,” respectively. +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Products and Brands +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of Women’s spring and summer footwear, Men’s products, and apparel, accessories, and home goods. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth for the HOKA brand, which has quickly become a leading brand within our run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +3 +Table of Contents +Other Brands. O ther brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. Our Other brands are primarily sold in the US and Canada. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. +Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of all of our brands. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana, as well as through a 3PL in Pennsylvania. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. Further, we intend to expand our DCs in the US. +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers such as Urban Outfitters and ASOS, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, streetwear and sports style partners such as Footlocker and Journey’s, as well as online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sports style partners. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers such as Fleet Feet, JackRabbit, Road Runner Sports, REI, select online retailers such as Zappos.com, and other strategic partners, such as DICK’s Sporting Goods, Running Warehouse, and Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, United Arrows, ABC Mart, Aeon Sports, Urban Outfitters, DICK’s Sporting Goods, DSW, and Nordstrom, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, as well as larger national retail chains, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our Other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include larger national retail chains, including Kohl’s, DSW, Macy’s, QVC, Shoe Carnival, and Famous Footwear, as well as online retailers such as Amazon.com and Zappos.com. +4 +Table of Contents +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross profit as a percentage of net sales (gross margin). Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, though also include recent openings in our retail store fleet for the HOKA brand. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores and recently opened a HOKA brand flagship store, which are lead concept stores in key markets designed to showcase the UGG and HOKA brand products, respectively. We continue to evaluate future locations for a curated fleet of mono branded retail stores for the UGG and HOKA brands to continue interacting with our consumers and enhancing brand loyalty. +As of March 31, 2022, we operate our e-commerce business through Company-owned websites and mobile platforms in 59 different countries, and have a total of 149 global retail stores, which includes 75 concept stores and 74 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +5 +Table of Contents +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts and other pricing arrangements with certain sheepskin, leather, and UGGpure suppliers to manage price volatility. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, and environmental compliance, including animal welfare and conflicts minerals, before we are willing to conduct business with them. +We use a proprietary raw material, UGGpure, which is almost entirely repurposed wool woven into a durable backing, and UGGplush, which is almost entirely repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the sheepskin we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure, and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +6 +Table of Contents +Similar to other companies in our industry, we continue to experience supply chain challenges across each of the geographies in which we operate. The most significant macro-level supply chain impacts continue to be extended transit lead times and cost pressures due primarily to container shortages, port congestion, and trucking and labor scarcity. As we manage product availability, we are focused on mitigating the impacts of ongoing supply chain disruptions in both the wholesale and DTC channels, including through the early procurement of inventory in the country of sale, which will likely result in higher levels of inventory, to allow us to maintain expected service levels into our next fiscal year ending March 31, 2023 (next fiscal year). +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further information on the associated risks and impacts on our business for supply chain disruptions. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Trends and Uncertainties Impacting Our Business and Industry,” “Liquidity,” and “Contractual Obligations” for further information on the impact of supply chain disruptions on our results of operations, our working capital and operating requirements, as well as our purchase obligations for product, respectively. +Environmental, Social, and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact by employing socially conscious operations. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and our customers, as well as other brands and non-governmental organizations. Through our holistic environmental, social and governance program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized by Newsweek as one of America’s Most Responsible Companies and included on the Bloomberg Gender Equality Index during fiscal year 2022. +ESG Oversight. Our Board of Directors, through its Corporate Governance Committee, which is comprised of four independent directors, oversees our ESG efforts. The Corporate Governance Committee and full Board of Directors regularly receives updates on the status of our ESG program. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs) and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit & Risk Management Committee. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, suppliers, industry groups, communities and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our efforts to address environmental and social challenges. Our SDGs are currently focused on categories where we believe we can make substantial impacts. +7 +Table of Contents +The following is a brief overview of our SDGs and related achievements during fiscal year 2022: +• Materials. We strive to maximize the amount of environmentally preferred materials in our products (including recycled, renewable, regenerated, and natural materials). During fiscal year 2022, we sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We continued to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +Our goal through calendar year 2022 is for any virgin market wool to be certified by the Responsible Wool Standard, which addresses the welfare of sheep and the land they graze on. We require our supply chain partners to comply with our Ethical Sourcing and Animal Welfare Policy and have amplified our requirements for leathers sourced from South America by implementing detailed traceability standards to address deforestation. In addition, we do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides that are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely repurposed from sheepskin we are already using. +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DC in Moreno Valley, California has undertaken efforts to become a zero-waste facility by calendar year 2023. We have taken steps to remove most single-use plastic from our packaging at our corporate headquarters, and have eliminated single-use plastic bags from our retail stores. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods and we continue to monitor all supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries we operate in by reducing water consumption and improving water quality throughout our operations. We have reduced water consumption among our monitored manufacturing partners and have set reduction targets for our suppliers. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. Since fiscal year 2021, our Restricted Substances team manages and controls over 1,600 restricted substances and are constantly exploring cleaner chemistries where possible. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We set ambitious Scope 1, 2, and 3 carbon reduction targets with the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and have collaborated with them to establish our carbon reduction targets. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. During fiscal year 2022, we established a long-term grant with Savory Institute to support regenerative farming practices on sheep farms in Australia, influencing over 200,000 acres and 40 farms. +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. In fiscal year 2022, we debuted on the Bloomberg Gender-Equality Index, which helps bring transparency to gender-related practices and policies at publicly-listed companies around the world. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +8 +Table of Contents +• Human Rights. We are committed to positively impacting the communities in which we operate, including assuring industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct, based on International Labour Organization standards, which outlines our expectations of our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards which are regularly reviewed by our leadership team. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a list that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our brands are each fully committed to sustainability, fully embrace our targets, and continue to launch sustainable collections. For example, the UGG brand’s Plant Power Collection features carbon-neutral, plant-based materials, and the brand’s Icon Impact Collection leverages environmentally preferred materials, such as lyocell, renewable sugarcane EVA, cotton, hemp, repurposed wool and recycled polyester made from recycled plastic bottles. The HOKA brand continues to focus on integrating more environmentally preferred materials in its footwear and launched a sustainable apparel collection. Further, the Teva brand partnered with TerraCycle® to give well-worn Teva sandals new life as downcycled materials. The Sanuk brand continues to offer the SustainaSole™ Collection featuring styles comprised of 55% total recycled material by weight and undyed uppers. +Our Creating Change Report for the year ended March 31, 2022, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2022 ESG achievements with a focus on the above SDGs. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB, and now part of the Value Reporting Foundation) Consumer Goods Sector Apparel, Accessories and Footwear Index. The content of our historical Corporate Responsibility and Sustainability Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2022, we employ approximately 4,000 employees in North America, Europe, and Asia. This includes approximately 1,400 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is generally favorable. +Culture . Our purpose is to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around it, help hold us accountable to deliver on this purpose: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +9 +Table of Contents +Our values define our Company and serve as the driving force behind how we work together and work with customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that instill a commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +Promoting Diversity, Equity and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and can bring their authentic selves to work each day. We believe the inclusion of diverse perspectives, and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. To that end, our Board of Directors is currently comprised of a total of ten directors, 40% of whom are female, and 60% of whom are from underrepresented communities. As of March 31, 2022, 21% of our director-level and above employees in the US are from BIPOC communities. This represents an increase of 6% compared to fiscal year 2021 and an overall increase of more than 9% since fiscal year 2020. Further, during fiscal year 2022, 44% of all new hires reporting into the US corporate office were BIPOC. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We have implemented a comprehensive, global strategy for DEI, including the following: +• Our brands have committed to having at least 60% of individuals in our marketing campaigns who represent the BIPOC and LGBTQIA+ communities and diverse body types and abilities. +• We have created a framework for the creation of Employee Resource Groups (ERGs), which are formed around common interests, background or characteristics including gender, race, ethnicity, and other affinities. We have nine ERGs with approximately 300 employee members as of March 31, 2022. +• All director-level and above positions are interviewed by a panel that includes individuals from underrepresented communities. +• We are continuing to utilize software that optimizes job descriptions to help ensure a more diverse applicant pool, as well as redacting certain resume information that may lead to unconscious bias. +• We are expanding the pool from which we source our talent, including partnering with Historically Black Colleges and Universities, as well as local and national professional organizations. +• We have joined The Valuable 500, which is a business-to-business initiative comprised of companies committed to disability inclusion, the Civic Alliance, which is a nonpartisan business coalition that champions democracy and civic participation, and we are part of the Bloomberg Gender-Equality Index. +• We have deployed mandatory anti-racism and implicit bias training, as well as a suite of additional learning and development resources available to employees, including Inclusive Interviewing and Selection for managers, Disability Awareness & Inclusion , and Applying DEI Practices to Product Lifecycle , among others aimed at increasing employee acumen about DEI-focused topics. +• We host Coffee & Conversations, monthly small-group facilitated discussions on DEI-related topics. +• We have a global mentorship program to help provide our existing talent with networking and engagement opportunities. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. Each fiscal year, we contribute to our local communities through monetary donations, volunteer efforts and in-kind donations. During fiscal year 2022, we donated approximately $3,000 to various non-profit organizations, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our ‘Art of Kindness’ events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered over 14,000 hours in fiscal year 2022. Further, our supply chain partners followed our lead and volunteered in their local communities during fiscal year 2022. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. We also encourage our employees to volunteer by compensating each employee for up to 24 hours of volunteer time each calendar year and offer incentives for payments to employees’ charity of choice when meeting 100 hours of volunteer time per calendar year. +10 +Table of Contents +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, and opportunities for development. For example, our leadership team mentors rising talent on a formal and informal basis, which we believe accelerates the development of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commits substantial time to evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. We were also one of the first companies to increase the minimum wage in all retail stores across the US to $15 dollars per hour, since November 2020. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including maternity and paternity leave, mental health benefits and other voluntary benefits such as health savings accounts or our recent solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model (FWM), including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs that ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We operate in modern, efficient, and safe facilities. +In an effort to protect the health and safety of our employees during the pandemic, as part of our new FWM, we continue to allow those employees who could perform their jobs remotely to have a virtual work environment, and we are limiting the number of employees on-site relative to our typical personnel office capacity. We have also implemented enhanced safety measures and protocols at our facilities where on-site work is necessary, including enhanced cleaning protocols and mask requirements where locally mandated. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate +11 +Table of Contents +net sales, we expect the impact from seasonality to continue to decrease over time and we have begun to experience shifts during fiscal year 2022 for higher sales in the quarter ending March 31st. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations. +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the pandemic, among others. In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2022, we hold 193 designs and inventions with corresponding design or utility patent registrations, plus 40 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following corporate governance and responsibility documents available through our website: Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, 2021 Corporate Responsibility Report, Restricted Substance Packet, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Ethics, Corporate Governance Guidelines, Environmental Policy, Ethical Sourcing and Animal Welfare Policy, Paper and Forest Procurement Policy, Water Policy, and Conflict Minerals Policy. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +12 +Table of Contents +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +Risks Related to Our Business and Industry +Health epidemics, including the pandemic, have had, and could in the future have, a material adverse impact on our business, operations, liquidity, financial condition, results of operations, the operations of our customers and business partners, and the markets and communities in which we, our customers, and our partners operate. +Since 2020, the pandemic has had, and in the future other public health crises or epidemics could have, repercussions across local, regional, and global economies and financial markets. The pandemic has driven global uncertainty, disrupted consumer spending and consumer supply chains, contributed to global shipping delays and port congestions, and created significant volatility and disruption of financial markets. Global supply chain disruptions during fiscal year 2022 negatively impacted our profitability and could continue to do so in future periods, which could have a material adverse effect on our financial condition and results of operations. In addition, the demand for our products and our financial condition could be adversely impacted due to a number of other factors in connection with this or other pandemics, including the following: +• reduced demand for certain products, including as a result of decreased store traffic due to retail store closures, social distancing restrictions or changes in consumer behavior; +• a deterioration in our ability, or the ability of our customers, to operate in affected regions; +• reduced availability of our supply of raw materials; +• the impact on and recovery time of our supply chain, including consequential staffing shortages and manufacturing and shipping delays; +• the failure of key business partners to provide services for our efficient operations, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us; and +• financial difficulties facing our customers, which could cause them to be unable to make or delay making payments to us or result in order cancellations for our product offerings. +We expect any further spread of the pandemic or the threat or perception that this could occur, or any protracted duration of decreased economic activity, could have a material adverse effect on our business, operations and financial results. Further, we experienced an increase in sales of certain of our products that are desirable to wear within the work-from-home environment, and there can be no assurance that consumers will continue purchasing such products as they transition back into the workplace and travel restrictions are relaxed. +Many of our products are inherently seasonal, and the sales of certain of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results. +Due to the nature of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG and Koolaburra brand net sales have occurred during the fall and winter (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred during the spring and summer (our first and fourth fiscal quarters). Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand’s year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, seasonal trends have resulted in our net sales for the second and third +13 +Table of Contents +fiscal quarters significantly exceeding that of the first and fourth fiscal quarters. While we continue to diversify and expand our product offerings by creating more year-round styles and focus on increasing HOKA brand net sales as a percentage of our aggregate net sales to positively impact our seasonality trends, we expect our quarterly net sales to fluctuate for the foreseeable future. Sales of certain of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter may significantly reduce demand for our UGG brand products. Unfavorable or unexpected weather patterns may have a material, negative impact on our business, financial condition, results of operations and prospects, and the effects of climate change may pronounce these conditions. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and meet the expectations of analysts and investors. +Due to the relative concentration of our sales in certain months of the year, factors impacting consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence, changing consumer preferences, uncertain economic conditions, or inflation will disproportionately impact our business and could result in our failure to achieve financial performance that is in line with our expectations or the expectations of market participants. In addition, significant fluctuations in our financial performance due to these or other factors could increase the volatility of our stock price, which could cause our stock price to decline. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand and spending patterns, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and fashion tastes, which make it difficult to anticipate demand for our products and forecast our financial results. Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes, as well as consumer spending patterns. As our brands and product offerings evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. Many of our products, particularly our UGG brand product offerings, include a fashion element and could go out of style at any time. Further, the value of our brands is largely based on evolving consumer perceptions, including as a result of shifting ethical, political or social standards, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, including the sustainability of products or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. These concerns may be exacerbated by legislation restricting our ability to use certain materials in our products, as well as negative publicity regarding us or our products, brands, marketing campaigns, partners or celebrity endorsers, which could adversely affect our reputation and sales regardless of the accuracy of such claims. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG and HOKA brands, are premium retail products. The purchase of these products by consumers is largely discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as worsening economic conditions, consumer confidence in future economic conditions, changes to fuel and other energy costs, labor and healthcare costs, declines in income or asset values, and increases in consumer debt levels, inflation and interest rates, and unemployment rates. Uncertainty in global economic conditions continues, particularly in light of the impacts of the pandemic, and trends in consumer discretionary spending remain unpredictable. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In +14 +Table of Contents +either case, these changes could reduce our sales and profitability, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers, as well as through online marketplaces such as Amazon.com. The businesses of these customers may be impacted by factors such as changes in economic conditions, reduced consumer demand for premium products, decreases in available credit, and increased competition. If our customers face financial difficulties, it could have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive and subject to changing consumer preferences and tastes. Our inability to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations. Our competitors include both established companies and newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG and HOKA brands, certain competitors have entered the marketplace specifically in response to the success of our brands, and other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers. Further, these competitors may have relationships with our key retail customers that are potentially more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly or with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, increase their market share, withstand the impacts of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. Efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from their competitors, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +If we fail to compete effectively in the future, our sales could decline, and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse impact on our business. +We purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are limited suppliers that are able to provide the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may be found only in certain geographies. We presently rely on only two tanneries in China to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we produce do not conform to our quality or sustainability specifications or fail to meet consumer expectations, we could experience reduced demand for our products, a higher rate of customer returns and negative impacts on the image of our brands, any of which could have a material adverse impact on our business. Similarly, if these tanneries are not able to deliver sheepskin in the quantities required, or were to cease operations, we may not be able to timely obtain suitable substitute materials, which would limit our ability to meet demand for our products, lead to inventory shortages, result in a loss of sales, strain our customer relationships, and harm our reputation. In addition, any factors that +15 +Table of Contents +negatively impact the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability, loss or destruction of property, work stoppages, political instability, or acts of terrorism or catastrophic events, could result in shortages in our supply of sheepskin. +While we have experienced fairly stable pricing in recent years, fluctuations in the price of sheepskin could occur as a result of weather patterns, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margin. While we use purchasing contracts and other pricing arrangements to reduce the impact of sheepskin price fluctuations on our results of operations, these strategies may not be sufficient to offset the negative impact of a prolonged increase in such prices on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margin and our financial results may suffer. In an effort to reduce our dependency on sheepskin, we are seeking sustainable alternatives for key product materials. +In addition, our industry is characterized by rapidly changing fashion trends and consumer preferences, and we believe there is a growing trend to eliminate the use of certain animal products, most notably fur, in footwear, apparel, and accessories. For example, the sale of fur is banned in certain US cities, and similar legislation is being considered in other geographies. While the use of leather and sheepskin has typically not been subject to these restrictions, it is possible that future legislation could restrict our ability to use sheepskin in the products we sell in certain geographies. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of sheepskin products, especially within our large target markets, could have a material adverse impact on our business, financial condition, and results of operations. +If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve, automate and streamline our operational systems, processes and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. While these efforts have resulted in improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been and may continue to be incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational system upgrades, improvements and associated change management efforts are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +Our success depends in part on the continued operation of our key business processes, including our information technology (IT) and global communications systems. We rely on third-party IT service providers worldwide for many of our IT functions, including network, hardware, and software configuration. Additionally, we rely on internal networks and information systems and other technologies, including the internet and third-party hosted services, to support a variety of business processes and activities. Any disruption to these systems or networks could result in product fulfillment delays, key personnel being unable to perform duties or communicate throughout the organization, loss of sales, significant costs for data restoration, the inability to interpret data timely to enhance operations, and other adverse impacts on our business and reputation. Further, if key operational systems and processes are not properly supporting our business, it could result in information silos and inefficiencies across our organization. If we are unable to modify our systems and processes to respond to changes in our business needs, or if we or our third-party providers experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +If we are unsuccessful at managing product manufacturing decisions, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse impact on our financial condition and results of operations. +16 +Table of Contents +Like other companies in our industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing and marketing of our products in advance of the realization of revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because this cycle involves long lead times, which require us to make manufacturing decisions months in advance of an anticipated purchasing decision by the consumer, it is challenging to estimate and manage our inventory and working capital requirements, which has been exacerbated by supply chain disruptions. For example, our inventory in transit as of the end of our third and fourth fiscal quarters ended December 31, 2021, and March 31, 2022, respectively, was significantly higher than our inventory in transit in the comparable periods during fiscal year 2021, and these pressures have negatively impacted our gross margin and may continue to do so in future periods. Further, once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses in reaction to various factors, including the following: +• the impacts of unfavorable weather patterns on consumer spending and demand for our products; +• changes in consumer preferences, tastes, discretionary spending, and prevailing fashion trends; +• market acceptance of our current products and new products, and of competitive products; +• future sales demand from our customers; +• the competitive environment, including pricing pressure from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• delays in resource or product availability due to impacts from the pandemic; and +• uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margin. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse impact on our financial condition and results of operations. +It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments. +We expect to continually review our retail store fleet and may simultaneously identify opportunities for closure of underperforming locations while opening new retail stores at different locations. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. Because a certain amount of our retail store costs are fixed, if we have insufficient sales at a new store location, we may be unable to avoid losses or negative cash flows. The closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. In light of these costs and impairments, we conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location will generate a positive return on our investment or increase our sales. +Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We currently plan for most of the partner retail stores to be operated in international markets, with the largest number anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our brand image to suffer. We continue to evaluate our partner retail strategy and our retail approach in international markets in response to changes in consumer demand, retail store traffic patterns, and our brand and regional strategies. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +17 +Table of Contents +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a partner fails to satisfy contractual obligations or otherwise meet our expectations, or experiences a closure or other operational issues, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement partner will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with our customers. As a result, we face the risk that key customers may not increase their business with us as we expect or may significantly decrease their business with us or terminate our relationship. Although no single customer accounted for 10.0% or more of our net sales during fiscal year 2022, the failure to increase or maintain our sales with our key customers as much as we anticipate would have a negative impact on our growth prospects and any decrease or loss of these customers’ business could result in a material decrease in our net sales and net income or loss if we are unable to capture these sales through our DTC channel. Further, as of March 31, 2022, we have one customer that represents 11.2% of trade accounts receivable, net. Trade accounts receivable, net are typically unsecured and are thus subject to the increased risk of us being unable to collect on overdue amounts, or us doing so in a timely manner, which could impact our revenue and liquidity. Further, while we have distributor contracts with terms of up to five years, these contracts may have annual purchase minimums which must be met to retain the distribution rights, and these distributors are not otherwise obligated to purchase our products. Sales to our customers are generally on an order-by-order basis and may be cancelled or rescheduled by our customers. We rely on purchase order delivery dates as a key factor to forecast our sales and earnings for future periods, and if our customers postpone, reduce, or discontinue purchases from us, we could fail to meet our forecasted results. These risks have been exacerbated as key customers operate within a retail industry that continues to undergo significant structural changes fueled by technology, changes in consumer purchasing behavior, and a shrinking retail footprint. These trends have been further intensified by the pandemic. We may lose key customers if they fail to manage the impact of this rapidly changing retail environment. Any loss of one of these key customers, or a significant reduction in purchases from one of these customers, could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. Further, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce our prices to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our results of operations may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and IT specialists. Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. We are committed to offering competitive compensation and benefits to employees across our business to positively impact attrition, which impacts our selling, general, and administrative (SG&A) expenses. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. Further, our domestic headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our location. If we hire employees from competitors or other companies, their former employers may assert that we or these employees have breached legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. If we are unable to attract, retain, and motivate the personnel necessary to execute our growth plan or successfully operate our business, we may be unable to achieve our long-term strategic objectives, our results of operations may suffer, and it may damage our reputation as a preferred employer which would challenge our ability to effectively compete across the global labor market. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and key employees are generally employed on an at-will basis, which means that they can +18 +Table of Contents +terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel to fill those key positions, could have a material adverse effect on our business. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business. +We rely upon a broad network of warehouse and distribution facilities to store, sort, package and distribute our products. In the US, we distribute products primarily through a self-managed DC in Moreno Valley, California, which features a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. In October 2021 we opened and began operations in a DC located in Mooresville, Indiana, and we expect this facility to create long-term capacity for the domestic growth of the UGG and HOKA brands. Further, we plan to expand our DCs in the US. We could face a significant disruption in our domestic DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. In addition, if our domestic DC operations and scaling efforts are impeded or delayed for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business. +We depend on 3PLs to manage the operation of their DCs as necessary to meet our business needs in certain markets. Internationally, we distribute our products through DCs managed by 3PLs in Canada, China, Japan, the Netherlands, and the UK. We also distribute our products through a domestic 3PL located in Pennsylvania. If our 3PLs fail to manage these responsibilities, our distribution operations could face significant disruptions. The loss of or disruption to the operations of any one or more of these facilities could materially adversely impact our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential impact of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +We rely upon independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, and we do not have direct control over these manufacturers or their suppliers. We expect these manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, including our Supplier Code of Conduct and restricted substances policy, and store finished goods in a safe location pending shipment. If these manufacturers fail to manage these responsibilities, or if they experience significant disruption to their business, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, or products may fail to meet our quality standards. Further, most of our independent manufacturers are concentrated in Asia, which may lead to an increased risk of supply chain disruption, particularly in the event of a natural disaster, epidemic, geopolitical tension or other event impacting the region outside of our control. If any of these were to occur, we may not be able to timely source raw materials, manufacture product, or fill customer orders, or product delivered may not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with our independent manufacturers, and there can be no assurance of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us, and we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively impact our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent +19 +Table of Contents +manufacturers were to lose or damage these proprietary materials, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Increasing scrutiny from investors and other key stakeholders with respect to our ESG practices may impose additional costs on us or expose us to new or additional risks. +Investor advocacy groups, certain institutional investors, investment funds, stockholders, customers, and consumers are increasingly focused on corporate responsibility, specifically on the ESG practices of companies and the implications of the social cost of their investments. From time to time we communicate certain ESG initiatives and goals to market participants and our customers and business partners. Any corporate responsibility disclosure we make may include our policies, practices, initiatives and goals on a variety of social and ethical matters, corporate governance, environmental compliance, sustainability, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. Although we have undertaken expansive efforts to improve and implement our ESG initiatives, it is possible that stakeholders may not be satisfied with such disclosures, our ESG practices or the speed of their adoption. Moreover, the preparation of sustainability metrics requires management to establish criteria, make determinations as to the relevancy of information to be included, and make assumptions that affect reported information. The selection by management of different but acceptable measurement techniques could result in materially different amounts or metrics being reported. If our ESG practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, or if we are perceived to have not appropriately responded to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, it may negatively impact our employee retention, or we may suffer from reputational damage and our business and financial condition could be materially and adversely affected. We may also incur additional costs or require additional resources to monitor such stakeholder expectations and standards and to meet our targets and commitments. Further, we could fail, or be perceived to fail, to achieve our ESG initiatives or goals, or we could fail to fully and accurately report our progress on such initiatives and goals, which could negatively impact our business. +Climate change, including extreme weather conditions, natural disasters, or other events beyond our control, as well as related regulations, may adversely impact our business. +There is increasing concern regarding the effects of climate change, which include significant changes in weather patterns around the globe, an increase in the frequency, severity, and duration of extreme weather conditions and natural disasters, and water scarcity and poor water quality. These events could adversely impact the supply of raw materials, including sheepskin, which is a key resource in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our production costs, impose capacity restraints and impact the types of products that consumers purchase. These events could also compound adverse economic conditions and impact consumer confidence and discretionary spending. Further, it is possible consumers may increasingly adopt plant-based diets to minimize their carbon footprint, which could reduce the supply of sheep for the meat industry, and in turn, hinder our ability to source sufficient sheepskin for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations. Many governmental bodies worldwide are enacting regulations to mitigate the impacts of climate change. If we, our suppliers, or our contract manufacturers are required to comply with these laws and regulations, or if we choose to take voluntary steps to reduce or mitigate our impact on the climate, we may experience increased costs for energy, production, transportation, and raw materials, increased capital expenditures, or increased insurance premiums and deductibles, which could adversely impact our operations. Inconsistent regulations among jurisdictions may also affect our costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate. +Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus, and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue +20 +Table of Contents +our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture, which may be exacerbated by the prevalence of a remote or hybrid work environment, which may make it difficult for employees to interact, communicate and innovate. +Labor disruptions could negatively impact our results of operations and financial position. +Our business depends on our ability to source and distribute products in a timely manner. Labor disputes, shortages, and stoppages that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores, or DCs create significant risks for our business, particularly if these disputes result in work slowdowns, strikes, or similar disruptions. For example, labor disputes at US shipping ports have historically impacted the delivery of our products. Furthermore, we have experienced challenges attracting and retaining employees as we increasingly compete for talent. Any such challenges or disruptions may potentially result in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or product could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Such acquisitions involve numerous risks, challenges and uncertainties, including the potential to: +• expose us to risks inherent in entering into a new market or geographic region; +• lose significant customers or key personnel of the acquired business; +• encounter difficulties managing and implementing acquired assets; +• encounter difficulties marketing to new consumers or managing geographically remote operations; +• divert management’s time and attention away from other aspects of our business operations; and +• incur costs relating to a potential acquisition that we fail to consummate, which we may not recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it will result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +Risks Related to Our Global Business Strategy, Operations, and International Commerce +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. Conversely, we may shift from a direct distribution model to a third-party distribution model for certain other brands. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. For example, we continue to explore future retail opportunities for the HOKA brand, including through third-party partners in international markets. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working +21 +Table of Contents +capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +Supply chain disruptions could interrupt product manufacturing and global logistics and increase product costs. +The pandemic and related governmental and port facility actions have caused delays in shipments of our products. During fiscal year 2022, the operations of our independent manufacturers, the DCs where we manage our inventory, the operations of our 3PLs and our third-party logistic partners experienced disruptions that impacted our supply chain and increased global lead-time for our products, including port congestion, temporary closures and worker shortages. Further, due to the pandemic, reductions in the number of ocean carrier voyages and capacity have delayed the arrival of imports and increased ocean transport costs globally. Ongoing ocean carrier consolidation, reduced capacity, congestion at major international gateways and other economic factors are challenging ocean transportation. Further, in the US, trucking costs have risen dramatically due to driver shortages, increased labor costs, and safety, environmental, and labor regulations. As supply chain disruptions continue and we manage product availability, the timing of sales to our wholesale partners and consumers may continue to be impacted, and we face increased risk of order cancellations. However, we remain focused on mitigating the impacts of ongoing disruptions, including through the early procurement of inventory, which will likely result in higher inventory levels to allow us to maintain expected service levels into our next fiscal year. +In addition to logistical supply chain pressures, our network of strategic sourcing partners, which include material vendors and manufacturers, has navigated delays and disruptions due to the pandemic. Due to our dual sourcing capabilities and our strategic product prioritization, we have been able to mitigate the impacts of production disruptions. For example, we have expanded production capacity with certain of our existing sourcing partners and reallocated production among others to navigate facility closures. In addition, we have onboarded additional long-term partners to further diversify our country-level manufacturing and sourcing lines and expect to continue to grow our distribution network to support our long-term growth strategy. These efforts are intended to support our growing brands and prospectively mitigate against similar localized risks. However, in our next fiscal year we expect headwinds from this growth resulting from new sourcing partner capacity constraints and time needed to scale production to ensure the rigorous quality standards of our brands. +In addition, global inflation has contributed to already higher incremental freight costs, and such inflation may continue to fuel these costs. We have experienced significant increases in ocean shipping rates resulting in reductions to our gross margin, and we expect such fluctuations to continue in future periods. Further, we strategically used more expensive air freight to ship our products to meet demand in fiscal year 2022, which we may be required to leverage in future periods to maintain service levels. Failure to adequately produce and timely ship our products to customers could lead to lost potential revenue, failure to meet consumer demand, strained relationships with customers and diminished brand loyalty. Despite our actions to mitigate these impacts, we expect to still be impacted by global logistics challenges during our next fiscal year. While we continue to see value in utilizing air freight while ocean bottlenecks persist so that we can capture market share and continue to grow our brands, our gross margin will be impacted by utilizing air freight at increased levels. +Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce. +Most of our independent manufacturers are located in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following: +• tariffs, import and export controls, and other non-tariff barriers; +• increasing transportation costs, including as a result of global inflationary pressure, shipping delays at ports, and a limited supply of international shipping capacity; +• increasing labor costs and labor disruptions; +• poor infrastructure and equipment shortages, which can disrupt transportation and utilities; +• restrictions on the transfer of funds from foreign jurisdictions; +• changes in governmental regulations, including with respect to intellectual property, labor, safety, and the environment; +• refusal to adopt or comply with our manufacturing policies; +• customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +22 +Table of Contents +• decreased scrutiny by custom officials for counterfeit products; +• practices involving corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• social unrest and political instability, including acts of war and other external factors; +• use of unauthorized or prohibited materials or reclassification of materials; +• health-related concerns that could result in a reduced workforce or scarcity of raw materials; +• disruptions caused by natural or other disasters; and +• adverse changes in consumer perception of goods sourced from certain countries. +These or other risks and uncertainties could interfere with the manufacture or shipment of our products, which could make it more difficult to obtain adequate supplies of quality products and negatively impact our sales and earnings. While we require our independent manufacturers and their suppliers to adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discover non-compliant manufacturers or suppliers that cannot or will not become compliant, we will cease conducting business with them, which could increase our costs and interrupt our product supply chain. Our manufacturers’ violations of applicable laws and business standards could also result in negative publicity, which could damage our reputation and the value of our brands. Further, if our manufacturers or suppliers violate US or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and forfeiture of products we are attempting to import, or the loss of our import privileges, which could have a negative impact on our results of operations. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our results of operations in certain regions. +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +• foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; +• limitations on our ability to move currency out of international markets; +• burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• legal costs related to defending allegations of non-compliance with foreign laws; +• inability to import products into a foreign country; +• difficulties associated with promoting and marketing products in unfamiliar cultures; +• political or economic uncertainty or instability, including the war in Ukraine, which has disrupted European businesses and has the potential to reduce levels of consumer spending, which could have a material adverse impact on our business, particularly our UGG and HOKA brands’ net sales; +• changes in unemployment rates and consumer spending; +• anti-American sentiment in international markets in which we operate; +• changes in diplomatic and trade relationships between the US and other countries; and +• general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results. +We operate on a global basis, with 31.2% of our net sales for the year ended March 31, 2022, from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies and our foreign distributors typically sell our products in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, gross margin, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments to hedge +23 +Table of Contents +our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, remeasurements, or translations could materially impact our consolidated financial statements. +International trade and import regulations may impose unexpected duty costs, the revision of current trade agreements may require us to alter current practices, changes in trade relations may result in tariffs, and transportation challenges and security procedures may cause significant delays and additional costs. +Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented measures to comply with applicable customs regulations and to properly calculate import duties, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margin. In addition, we cannot predict whether future laws, regulations, trade remedy actions, or international agreements may impose additional duties or other restrictions on the import of products from one or more of our sourcing venues. Further, trade relations between our sourcing venues, particularly those in China, and the US have created uncertainty and there exists the potential for import duties or other restrictions on imports from China, which could increase the cost of sourcing in China. We have transitioned most of our footwear sourcing from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition, and results of operations. +International trade policy is undergoing revision, introducing significant uncertainty with respect to future trade regulations and existing trade agreements. Changes in tax policy or trade regulations could cause us to encounter new customs duties, which may require us to implement new supply chains, withdraw from certain markets or change our business methods, and could make it difficult to obtain quality products at a competitive price. The continued negotiation of free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers, which may seek to export footwear, apparel, and accessories to our target markets at preferred rates of duty which may negatively impact our results of operations. +Transportation and distribution costs may be adversely impacted by new regulations, increased demand, increased fuel and labor costs, inflation, and political and economic instability. For example, the Russian invasion of Ukraine during our fourth fiscal quarter, and the resulting financial and economic sanctions imposed by various countries and organizations has impacted transportation and energy costs. Further disruption in this region, or additional sanctions imposed in response to the conflict, could increase distribution costs in Europe and adversely impact our results of operations. Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and caused delays in bringing imported goods to market. Any tightening of security procedures could worsen these delays and increase our costs. +Risks Related to Our Legal, Compliance, and Regulatory Environment +Failure to adequately protect our intellectual property rights to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. An unfortunate reaction to the success of our brands is that we have become a target of counterfeiting and product imitation strategies. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect these rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it will allow our competitors to sell products that are similar to and directly competitive with our products, or we could otherwise lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product, which could reduce sales of our products and adversely affect the value of our brands. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our business and results of operations. In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in +24 +Table of Contents +the US, China, Turkey, and the Netherlands. Any court decision or settlement that invalidates or limits trademark protection of our brands, which allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributor to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales, and could have a material adverse effect on the value of our brands. +A security breach or other disruption to our IT systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition, or results of operations. +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers and employees, credit card information, and our proprietary financial, operational, and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputation or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial losses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this information, and to respond quickly and effectively if data security incidents occur. We are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents have significantly increased in recent years. Like other businesses, we have experienced, and are continually at risk of, attacks and incidents. Additionally, external events, such as the Russia-Ukraine conflict, can increase the likelihood of such incidents, and our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale, and the interconnectivity and interdependence of third parties to our systems. We expend significant resources on IT and data security tools, measures, and processes designed to protect our IT systems, as well as the personal, confidential, or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any attack or incident. Whether these measures are ultimately successful, these expenditures could have an adverse impact on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives. +Although we take the security of our IT systems seriously, there can be no assurance that the measures we employ will prevent unauthorized persons from obtaining access to our systems and information. Despite our implementation of reasonable security measures, our systems and information may be susceptible to cyber-attacks or data security incidents. These risks may be exacerbated in a remote work environment. Because the techniques used to obtain unauthorized access to IT systems are constantly evolving, we may be unable to anticipate these techniques or implement adequate protective measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches. A cyber-attack or other data security incident could result in significant disruption of our business such that: +• critical business systems become inoperable or require significant time or cost to restore; +• personnel are unable to perform their duties or communicate with third-party partners; +• it results in the loss, theft, misuse, or unauthorized disclosure of confidential information; +• we are prevented from accessing information necessary to conduct our business; +• we are required to make unanticipated investments in equipment, technology or security measures; +• customers cannot place or receive orders, and we are unable to timely ship orders or at all; or +• we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers, or employees, it could put us at a competitive disadvantage, +25 +Table of Contents +result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with us or impose onerous contractual provisions, and subject us to litigation, liability, fines, and penalties. We could be subject to regulatory or other actions pursuant to domestic and international privacy laws, which could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include US state laws such as the California Consumer Privacy Act, as well as the General Data Protection Regulation in the EU, EU member state directives, or similar applicable laws. These laws place limits on how we may collect, use, share and store personal information, and they impose obligations to protect that information. Further, we may be subject to new data privacy and security laws and regulations. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material impact on our business. Failure to comply with any of the covenants could result in a default, allowing our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. Certain of our revolving credit facility agreements bear interest at a rate that varies depending on the London Interbank Offered Rate or alternative borrowing rate by currency. Any increases in interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate, or audits by various taxing authorities may subject us to additional tax liabilities, and materially affect our financial position and results of operations . +We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. Future changes in these tax laws, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, global tax authorities may take differing positions in interpreting the Organization for Economic Co-operation and Development’s guidance, including with respect to base erosion and profit shifting, which could modify existing tax principles. These changes and potential other tax law changes could increase our income tax liability or adversely affect our long-term effective tax rates and net income. +Many countries in the EU and around the globe have adopted or proposed changes to current tax laws. We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our results of operations or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports. +26 +Table of Contents +Risks Related to Our Common Stock +Our common stock price has been volatile, which could result in substantial losses for stockholders. +The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• changes in expectations of our future financial performance and results of operations; +• changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• changes in our stockholder base or public actions taken by investors; +• market research and opinions published by securities analysts and other market participants, and the response to such publications; +• quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• the financial stability of our customers, manufacturers, and suppliers; +• legal proceedings, regulatory actions, and legislative changes; +• our stock repurchase activity or announcements regarding the same; +• the declaration of stock or cash dividends; +• consumer confidence and discretionary spending levels; +• broad market fluctuations in volume and price; +• general market, political, and economic conditions, including recessionary conditions; and +• a variety of risk factors, including the ones described herein and in our other SEC filings. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation (Certificate) and Amended and Restated Bylaws (Bylaws), as well as provisions of Delaware law, could impair a takeover attempt. +Our Certificate and Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board of Directors or management. Among other things, these provisions: +• authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; +• provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; +• provide that board vacancies can only be filled by directors; +• prohibit stockholders from acting by written consent without holding a meeting of stockholders; +• require the vote of holders of not less than 66 2/3% of the voting stock then-outstanding to approve amendments to our Certificate and Bylaws; and +• require advance written notice of stockholder proposals and director nominations. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Any provision of Delaware law, our Certificate, or our Bylaws, which has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for stockholders to receive a premium for their shares of our common stock, and could affect the price that investors are willing to pay for our common stock. +27 +Table of Contents +Item 2. Properties +Our corporate headquarters is located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. +We have a warehouse and DC located in Moreno Valley, California, which we began operations during the fourth quarter of fiscal year 2015 and have since continued optimizing and expanding our operations at this location. Further, since October 2021 we opened and began operations for a second US DC located in Mooresville, Indiana. In April 2022, we signed a lease for additional space at our US DC in Mooresville, Indiana for up to 1,015,192 square feet over the duration of the lease term. We expect the expanded space to be operational in the third quarter of our fiscal year ending March 31, 2024. +We also have offices in China, Hong Kong, Vietnam, Japan, France, Germany, the Netherlands, and the UK to oversee the quality and manufacturing standards of our products, and for regional sales, operations, marketing, and administration, as well as offices in Macau and Hong Kong to coordinate logistics. +As of March 31, 2022, we have 50 retail stores in the US ranging from approximately 1,000 to 13,000 square feet. Internationally, we have 99 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. +We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties that are operational as of March 31, 2022: +Facility Location Description Lease or Own Facility Size (Square Footage) +Moreno Valley, California Warehouse and Distribution Center Lease 1,530,944 +Mooresville, Indiana Warehouse and Distribution Center Lease 507,600 +Goleta, California Corporate Headquarters Own 185,094 +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG brand trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products. +Although we are subject to legal proceedings and other disputes from time to time in the ordinary course of business, including employment, intellectual property, and product liability claims, we believe the outcome of all pending legal proceedings and other disputes in the aggregate will not have a material adverse effect on our business, results of operations, financial condition, or liquidity. However, regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors. +28 +Table of Contents +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol DECK on the New York Stock Exchange (NYSE) since May 2014 and was previously traded on the Nasdaq Global Select Market. +As of May 5, 2022, we had 38 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2022, that were not registered under the Securities Act. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index for the five fiscal-year periods commencing April 1, 2017, and ended March 31, 2022. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index on April 1, 2017. +29 +Table of Contents +April 1, Years Ended March 31, +2017 2018 2019 2020 2021 2022 +Deckers Outdoor Corporation $ 100.0 $ 150.7 $ 246.1 $ 224.3 $ 553.2 $ 458.3 +S&P 500 Apparel, Accessories & Luxury Goods Index 100.0 128.3 124.2 61.8 126.1 99.7 +The NYSE Composite Index 100.0 111.2 116.6 97.2 150.7 164.4 +The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference into this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. +Stock Repurchase Programs +In January 2019, our Board of Directors approved a stock repurchase program that authorized us to repurchase $261,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. Our Board of Directors approved an additional authorization of $750,000 during April 2021 to repurchase our common stock under the same conditions as the prior stock repurchase program (collectively, the stock repurchase programs). +Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Our current revolving credit agreements allow us to make stock repurchases under these programs, so long as we do not exceed certain leverage ratios and no event of default has occurred under these agreements. As of March 31, 2022, no defaults have occurred under our credit agreements. +Below is a summary of stock repurchasing activity under our stock repurchase programs during the fourth fiscal quarter ended March 31, 2022: +Total number of shares repurchased* Average price paid per share Dollar value of shares repurchased Dollar value of shares remaining for repurchase** +January 1 - January 31, 2022 2,643 $ 368.25 $ 973 $ 543,003 +February 1 - February 28, 2022 194,912 302.69 58,998 484,005 +March 1 - March 31, 2022 110,023 272.65 29,998 454,007 +*Any share repurchases are made as part of publicly announced programs in open-market transactions. +** May not calculate on rounded dollars. +Subsequent to March 31, 2022, through May 5, 2022, we repurchased 176,046 shares for $47,997 at an average price of $272.64 per share and had $406,010 remaining authorized under the stock repurchase program. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity and Capital Resources” and Note 10, “Stockholders' Equity,” of our consolidated financial statements and accompanying notes thereto (referred to herein as the consolidated financial statements) in Part IV within this Annual Report for further information on repurchases of our common stock. +30 +Table of Contents +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended March 31, 2022, and 2021 and year-over-year comparisons between those periods. For year-over-year comparisons between the years ended March 31, 2021, and 2020, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SEC on May 28, 2021. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers. +Financial Highlights +Consolidated financial performance highlights of fiscal year 2022 compared to the prior period, are as follows: +• Net sales increased 23.8% to $3,150,339. +◦ Channel +▪ Wholesale channel net sales increased 31.0% to $1,936,739. +▪ DTC channel net sales increased 13.8% to $1,213,600. +◦ Geography +▪ Domestic net sales increased 23.1% to $2,167,793. +▪ International net sales increased 25.3% to $982,546. +• Gross margin decreased 300 basis points to 51.0%. +• Income from operations increased 12.0% to $564,707. +• Diluted earnings per share increased by $2.79 per share to $16.26 per share. +Trends and Uncertainties Impacting Our Business and Industry +We expect our business and the industry in which we operate will continue to be impacted by several important trends and uncertainties, including the following: +Supply Chain +• Similar to other companies in our industry, we continue to experience supply chain challenges across each of the geographies in which we operate. The most significant macro-level supply chain impacts continue to be extended transit lead times and cost pressures, including from inflation, due primarily to container shortages, port congestion, and trucking and labor scarcity, which have created negative downstream impacts on our results of operations. To offset the impacts of these ongoing constraints, we have used a substantial amount of air freight. These costs, together with higher ocean container shipment and trucking costs, have elevated our transportation and logistics costs and negatively impacted our gross margin during fiscal year 2022, and we expect will continue to do so in future periods, particularly as we seek to maintain strategic product launch timelines and customer service levels. As we manage product availability, we remain focused on mitigating the impacts of ongoing disruptions in both the wholesale and DTC channels into our next +31 +Table of Contents +fiscal year, including through the use of air freight (almost exclusively for the HOKA brand) and the early procurement of inventory in the country of sale, which will likely result in higher levels of inventory to allow us to maintain expected service levels into our next fiscal year. We anticipate these global supply chain pressures will continue, and we remain focused on ensuring our long-term growth strategy remains flexible to adapt to fluid conditions. +• Although our owned DCs and 3PL providers are currently operating and supporting ongoing logistics, certain of these facilities continue to experience operational challenges, which have resulted in delays distributing our products, as well as cost pressures. Further, the headwinds we have encountered transitioning to our new European 3PL as that provider refines its system and delivery levels have exacerbated supply chain pressures. While this transition has been difficult in the current logistics environment, we believe this is a critical investment to create long-term capacity that will facilitate future growth. We continue to invest in infrastructure, including in our global distribution and logistics capabilities, end-to-end planning systems, and e-commerce platforms, as well as in expanding our sourcing capabilities and distribution points, to ensure we scale our operations commensurate with consumer demand. +Inflation +• Due to recent heightened inflation in key global markets, including the United States, we experienced impacts from inflation during fiscal year 2022, primarily related to supply chain challenges including higher freight costs, discussed above. We expect our business will be impacted by continued or increasing inflation in future periods, including impacts to costs for finished goods, freight, and commodities, which will impact our gross margin in our next fiscal year, as well as potential impacts to our operating expenses, foreign currency exchange rates, wages in a competitive job market, interest rates on borrowings, and customer demand. +Brand and Omni-Channel Strategy +• We remain focused on accelerating consumer adoption of the HOKA brand globally to execute our long-term growth strategy, including through an optimized digital marketing strategy. The HOKA brand’s growth has been balanced across its ecosystem of access points, with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our seasonality trends. In our next fiscal year, we intend to focus our efforts to drive HOKA brand performance on distribution management to drive new consumer acquisition in key markets and launching innovative product offerings to increase category adoption and market share gains with existing consumers. For example, we’re looking at volume expansion with new and existing global strategic wholesale partners to drive new consumer acquisition. Further, we recently opened the HOKA brand's first owned and operated retail stores in Asia and launched pop-up stores in North America to build upon our retail strategy and define the optimal consumer experience and concept for the HOKA brand. We plan to open additional retail stores for the HOKA brand and to continue exploring opportunities to strategically expand our HOKA brand retail store fleet. +• Our marketplace strategies in Europe and Asia (international reset strategies) have continued to drive UGG brand awareness and consumer acquisition through building a foundation of diversified and counter-seasonal product acceptance, especially with younger consumers, through localized marketing investments, which is fueling a healthier product mix and reducing the need for promotional activity. +• While we experienced a channel mix shift to wholesale in fiscal year 2022 as we refilled customer inventory levels, our aggregated DTC channel mix continues to be above our historical pre-pandemic levels. Our long-term growth strategy remains focused on building our DTC channel to represent an increasing portion of our total net sales, as we prioritize consumer acquisition and experience strong demand for the HOKA and UGG brands. +32 +Table of Contents +• We continue to make selective price increases as appropriate by brand and product, taking into consideration, for example, the competitive landscape of our brands, our segmentation strategy, and higher costs, including for inflationary pressures on materials used in the production of our products, as well as ocean freight costs, which we believe can be mitigated by these price increases. However, we do not expect price increases to cover the significant use of air freight in our next fiscal year. +Reportable Operating Segment Overview +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our CEO, President, and Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. +We believe demand for UGG brand products will continue to be driven by the following: +• Successful acquisition of a diverse consumer base that resonates globally and with key markets, including for a younger, fashionable consumer, through strategic marketing activations and collaborations. +• High consumer brand loyalty due to consistent delivery of quality and luxuriously comfortable footwear, apparel, and accessories. +• Diversification of our footwear product offerings, such as Women's spring and summer lines, as well as expanded category offerings for Men's products, and more fashionable product for our Classics line. +• Thoughtful expansion of our apparel and accessories businesses. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear that offers enhanced cushioning and inherent stability with minimal weight, apparel, and accessories. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. As a result, the HOKA brand is bolstering its net sales, which continue to increase as a percentage of our aggregate net sales. +We believe demand for HOKA brand products will continue to be driven by the following: +• Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes. +• Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship. +• Thoughtful and strategic wholesale distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base. +• Category extensions in authentic performance footwear offerings such as lifestyle, trail, and hiking categories. +Teva Brand . The Teva brand created the very first sport sandal when it was founded in the Grand Canyon in 1984. Since then, the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet. +33 +Table of Contents +We believe demand for Teva brand products will continue to be driven by the following: +• Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. +• Increasing brand awareness in key major global markets due to outdoor lifestyle participation amongst younger consumers. +• Category extensions in performance hike footwear, including key franchises, as well as year-round product. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. +We believe demand for Sanuk brand products will continue to be driven by the following: +• Introducing a broader and more premium range of product, including through category extensions in casual footwear for the younger consumer, including slippers and boots. +Other Brands . O ther brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +We believe demand for Koolaburra brand products will continue to be driven by the following: +• Increasing brand awareness with younger consumers. +• Evolution of key franchises and further expansion in fashion casual boots, sneakers, and slippers. +Direct-to-Consumer . Our DTC business encompasses all our brands and is comprised of our retail stores and e-commerce websites which, in an omni-channel marketplace, are intertwined and interdependent. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions in store and online. +E-Commerce Business. Our e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands’ promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2022, we operate our e-commerce business through Company-owned websites and mobile platforms in 59 different countries, for which the net sales are recorded in our DTC reportable operating segment. +Retail Business. Our global Company-owned retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, though also include recent openings in our retail store fleet for the HOKA brand. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. As of March 31, 2022, we have a total of 149 global retail stores, which includes 75 concept stores and 74 outlet stores. While we generally open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter, the timing of such openings and closures may vary. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. +Flagship Stores. Included in the total count of global concept stores are eight flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase UGG and HOKA brand products in mono branded stores. Primarily located in major tourist locations, these stores are typically larger than our general concept stores with broader product offerings and greater traffic. We anticipate continuing to operate a curated fleet of flagship stores to enhance our interaction with our consumers and increase brand loyalty. The net sales for these stores are recorded in our DTC reportable operating segment. +34 +Table of Contents +Shop-in-Shop Stores. Included in the total count of global concept stores are 27 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. The net sales for these stores are recorded in our DTC reportable operating segment. +Partner Retail Stores. We rely on partner retail stores for the UGG and HOKA brands. Partner retail stores are branded stores that are wholly owned and operated by third parties and not included in the total count of global Company-owned retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in each respective brand’s wholesale reportable operating segment, as applicable. +Use of Non-GAAP Financial Measures +Throughout this Annual Report we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to the financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our financial results and assessing our prospects for future performance. However, the information included within this Annual Report that is presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. For example, in order to calculate our constant cur rency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements . Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. +These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with US GAAP. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time and we have begun to experience shifts during fiscal year 2022 for higher sales in the quarter ending March 31st. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Note 14, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +35 +Table of Contents +Result of Operations +Year Ended March 31, 2022, Compared to Year Ended March 31, 2021. Results of operations were as follows: +Years Ended March 31, +2022 2021 Change +Amount % Amount % Amount % +Net sales $ 3,150,339 100.0 % $ 2,545,641 100.0 % $ 604,698 23.8 % +Cost of sales 1,542,788 49.0 1,171,551 46.0 (371,237) (31.7) +Gross profit 1,607,551 51.0 1,374,090 54.0 233,461 17.0 +Selling, general, and administrative expenses 1,042,844 33.1 869,885 34.2 (172,959) (19.9) +Income from operations 564,707 17.9 504,205 19.8 60,502 12.0 +Other expense, net 69 — 2,691 0.1 2,622 97.4 +Income before income taxes 564,638 17.9 501,514 19.7 63,124 12.6 +Income tax expense 112,689 3.6 118,939 4.7 6,250 5.3 +Net income 451,949 14.3 382,575 15.0 69,374 18.1 +Total other comprehensive (loss) income, net of tax (8,212) (0.2) 8,816 0.3 (17,028) (193.1) +Comprehensive income $ 443,737 14.1 % $ 391,391 15.3 % $ 52,346 13.4 % +Net income per share +Basic $ 16.43 $ 13.64 $ 2.79 +Diluted $ 16.26 $ 13.47 $ 2.79 +Net Sales. Net sales by location, and by brand and channel were as follows: +Years Ended March 31, +2022 2021 Change +Amount Amount Amount % +Net sales by location +Domestic $ 2,167,793 $ 1,761,477 $ 406,316 23.1 % +International 982,546 784,164 198,382 25.3 +Total $ 3,150,339 $ 2,545,641 $ 604,698 23.8 % +Net sales by brand and channel +UGG brand +Wholesale $ 1,088,082 $ 871,799 $ 216,283 24.8 % +Direct-to-Consumer 893,887 845,283 48,604 5.8 +Total 1,981,969 1,717,082 264,887 15.4 +HOKA brand +Wholesale 628,674 405,243 223,431 55.1 +Direct-to-Consumer 262,920 165,997 96,923 58.4 +Total 891,594 571,240 320,354 56.1 +Teva brand +Wholesale 129,094 105,928 23,166 21.9 +Direct-to-Consumer 33,643 32,860 783 2.4 +Total 162,737 138,788 23,949 17.3 +36 +Table of Contents +Years Ended March 31, +2022 2021 Change +Amount Amount Amount % +Sanuk brand +Wholesale 30,316 26,566 3,750 14.1 +Direct-to-Consumer 12,779 15,274 (2,495) (16.3) +Total 43,095 41,840 1,255 3.0 +Other brands +Wholesale 60,573 69,375 (8,802) (12.7) +Direct-to-Consumer 10,371 7,316 3,055 41.8 +Total 70,944 76,691 (5,747) (7.5) +Total $ 3,150,339 $ 2,545,641 $ 604,698 23.8 % +Total Wholesale $ 1,936,739 $ 1,478,911 $ 457,828 31.0 % +Total Direct-to-Consumer 1,213,600 1,066,730 146,870 13.8 +Total $ 3,150,339 $ 2,545,641 $ 604,698 23.8 % +Total net sales increased primarily due to higher HOKA, UGG, and Teva brand sales across all channels, despite impacts from supply chain constraints, including extended transit lead times. Further, we experienced an increase of 22.2% in total volume of pairs sold to 51,200 from 41,900 compared to the prior period. On a constant currency basis, net sales increased by 23.2%, compared to the prior period. Drivers of significant changes in net sales, compared to the prior period, were as follows: +• Wholesale net sales of the UGG brand increased globally, driven by growth across a diversified product lineup, particularly for non-core Women's, core Men's products such as slippers, as well as Kids' core product lines, including the benefit of refilling inventory levels as well as our international reset strategies. +• Wholesale net sales of the HOKA brand increased globally, resulting from market share gains, including new consumer acquisition, driven by increased brand awareness through expanded sponsorship events and digital marketing, as well as core key franchise updates, the addition of new styles, and select door expansion with key partners. +• Wholesale net sales of the Teva brand increased primarily due to continued acceleration of US demand, as well as lapping disruptions from the pandemic, including higher reorders from our customers through the brands' peak sell-in period during the first half of fiscal year 2022. +• DTC net sales increased primarily due to higher global UGG and HOKA brand sales. Due to the disruption of our retail store base throughout fiscal year 2021, we are not reporting a comparable DTC net sales metric for fiscal year 2022. +• International net sales, which are included in the reportable operating segment net sales presented above, increased by 25.3% and represented 31.2% and 30.8% of total net sales for the years ended March 31, 2022, and 2021, respectively. These increases were primarily driven by higher international sales for the UGG and HOKA brand in all channels and regions. +Gross Profit. Gross margin decreased to 51.0% from 54.0%, compared to the prior period, almost entirely due to higher freight costs, as we incurred a substantial increase in air freight usage, ocean container rates and third-party delivery fees. Further, we experienced an unfavorable channel mix shift to wholesale, partially offset by favorable HOKA brand mix, fewer closeouts, and favorable changes in foreign cu rrency exchange rates. +37 +Table of Contents +Selling, General, and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of the following: +• Increased variable advertising and promotion expenses of approximately $67,100, primarily due to higher digital marketing and advertising development expenses for the HOKA and UGG brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing. +• Increased other variable net selling expenses of approximately $48,700, primarily due to higher warehousing fees, shipping supplies, and retail operating costs, as well as higher net insurance costs and higher e-commerce technology costs driven by higher sales and commissions. +• Increased payroll and related costs of approximately $48,000, primarily due to higher headcount, including for warehouse teams, and other related compensation, partially offset by lower annual performance-based compensation. +• Increased other operating expenses of approximately $20,800, primarily due to higher IT and related project costs, sales team costs, travel expenses, and depreciation expense. +• Increased foreign currency-related losses of $7,200, primarily due to unfavorable changes in the US dollar exchange rate against Canadian, Asian, and European foreign currency exchange rates. +• Decreased impairments of operating lease and other long-lived assets of approximately $14,500. +• Decreased expenses for allowances for trade accounts receivable of approximately $4,400, primarily due to a decrease in bad debt expense to account for the lower risk of customer payment defaults resulting from the ongoing recovery from the pandemic. +Income from Operations. Income (loss) from operations by reportable operating segment was as follows: +Years Ended March 31, +2022 2021 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand wholesale $ 315,240 $ 292,718 $ 22,522 7.7 % +HOKA brand wholesale 155,344 111,208 44,136 39.7 +Teva brand wholesale 33,294 27,120 6,174 22.8 +Sanuk brand wholesale 6,463 (162) 6,625 4,089.5 +Other brands wholesale 14,028 21,573 (7,545) (35.0) +Direct-to-Consumer 435,414 349,465 85,949 24.6 +Unallocated overhead costs (395,076) (297,717) (97,359) (32.7) +Total $ 564,707 $ 504,205 $ 60,502 12.0 % +The increase in total income from operations, compared to the prior period, was primarily due to higher net sales and lower SG&A expenses as a percentage of net sales, partially offset by lower gross margin driven by higher freight costs. Drivers of significant net changes in total income from operations, compared to the prior period, were as follows: +• The increase in income from operations of DTC was due to higher net sales and lower Company-owned retail store impairments, partially offset by higher variable e-commerce operating costs and higher variable selling costs. +• The increase in income from operations of HOKA and UGG brand wholesale was due to higher net sales, partially offset by lower gross margin driven by higher freight costs, as well as higher variable marketing expenses. +38 +Table of Contents +• The increase in unallocated overhead costs was primarily due to higher operating expenses, including warehousing fees, net insurance costs, IT costs, shipping supplies, depreciation expense, higher payroll and related costs driven by higher headcount, as well as higher foreign currency-related losses and variable advertising and promotion expenses. +Other Expense, Net. Total other expense, net, compared to the prior period, decreased due to lower interest expense resulting from repayment of our mortgage during fiscal year 2021. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2022 2021 +Income tax expense $ 112,689 $ 118,939 +Effective income tax rate 20.0 % 23.7 % +The decrease in our effective income tax rate, compared to the prior period, was due to higher net discrete tax benefits, primarily driven by favorable releases of uncertain tax positions, tax deductions for stock-based compensation, and increased benefits for return to provision adjustments, as well as changes in the jurisdictional mix of worldwide income before income taxes. +Foreign income before income taxes was $168,270 and $133,186 and worldwide income before income taxes was $564,638 and $501,514 during the years ended March 31, 2022, and 2021, respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to higher foreign gross margin as a percentage of worldwide sales. +For the years ended March 31, 2022, and 2021, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the section titled “Liquidity” below for further information. +Net Income. The increase in net income, compared to the prior period, was due to higher net sales, partially offset by lower gross margin. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted-average common shares outstanding, driven by higher stock repurchases. +Total Other Comprehensive Loss, Net of Tax. The increase in total other comprehensive loss, net of tax, compared to the prior period, was due to higher foreign currency translation losses relating to changes to our net asset position for unfavorable European and Asian foreign currency exchange rates. +Liquidity +We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. +As of March 31, 2022, our cash and cash equivalents are $843,527. While we are subject to uncertainty surrounding the pandemic, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements, contractual obligations, and timely service our debt obligations for at least the next 12 months. +Our liquidity may be impacted by additional factors, including our results of operations, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, including estimating inventory requirements +39 +Table of Contents +that require earlier purchasing windows to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to economic, political and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. +As discussed above under the heading “Trends and Uncertainties Impacting Our Business and Industry,” the pandemic has continued to create supply chain challenges that will impact the availability of inventory over the next few quarters as well as increased costs to mitigate these delays, which we expect to adversely impact our results of operations in our next fiscal year. If there are unexpected material impacts to our business in future periods from the pandemic and we need to raise or conserve additional cash to fund our operations, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity. +Repatriation of Cash . We repatriated $120,000 and $175,000 of cash and cash equivalents during the years ended March 31, 2022, and 2021, respectively. As of March 31, 2022, we have $133,053 of cash and cash equivalents outside the US and held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. Beginning with the tax year ended March 31, 2018, pursuant to the Tax Reform Act, an installment election was made to pay the one-time transition tax on the deemed repatriation of foreign subsidiaries’ earnings over eight years. The cumulative remaining balance as of March 31, 2022, is $38,263. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of, future changes to, or interpretations of global tax law and regulations, and our actual earnings for current and future periods. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on the impacts of the recent Tax Reform Act. +Stock Repurchase Programs . We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. As of March 31, 2022, the aggregate remaining approved amount under our stock repurchase programs is $454,007. Subsequent to March 31, 2022, through May 5, 2022, we repurchased 176,046 shares for $47,997 at an average price of $272.64 per share and had $406,010 remaining authorized under the stock repurchase program. +Capital Resources +Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended. The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +As of March 31, 2022, we have no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility. +40 +Table of Contents +China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY300,000, or $47,286. +As of March 31, 2022, we have no outstanding balance, outstanding bank guarantees of $32, and available borrowings of $47,254 under our China Credit Facility. +Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY3,000,000, or $24,623. We renewed the Japan Credit Facility through January 31, 2023, substantially under the terms of the original credit agreement. +As of March 31, 2022, we have no outstanding balance and available borrowings of $24,623 under our Japan Credit Facility. +Debt Covenants. As of March 31, 2022, we are in compliance with all financial covenants under our revolving credit facilities. +Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on our capital resources. +Cash Flows +The following table summarizes the major components our consolidated statements of cash flows for the periods presented: +Years Ended March 31, +2022 2021 Change +Amount Amount Amount % +Net cash provided by operating activities $ 172,353 $ 596,217 $ (423,864) (71.1) % +Net cash used in investing activities (51,009) (32,169) (18,840) (58.6) +Net cash used in financing activities (367,482) (129,581) (237,901) (183.6) +Effect of foreign currency exchange rates on cash and cash equivalents 304 5,458 (5,154) (94.4) +Net change in cash and cash equivalents $ (245,834) $ 439,925 $ (685,759) (155.9) % +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income, other cash receipts and expenditure adjustments, and changes in working capital. +The decrease in net cash provided by operating activities during the year ended March 31, 2022, compared to the prior period, was primarily due to a net unfavorable change in operating assets and liabilities, partially offset by favorable net income after non-cash adjustments. The changes in operating assets and liabilities were primarily due to net unfavorable changes in inventories, other accrued expenses, trade accounts receivable, net, income tax payable, other assets, and income tax receivable, partially offset by a net favorable change in trade accounts payable. +Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2022, compared to the prior period, was primarily due to higher capital expenditures for our second US DC, as well as higher showrooms and IT costs, partially offset by lower capital expenditures for retail stores. +Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2022, compared to the prior period, was primarily due to higher stock repurchases, higher cash paid for shares withheld for taxes, and lower proceeds from exercise of stock options, partially offset by the mortgage repayment during fiscal year 2021. +41 +Table of Contents +Contractual Obligations +The following table summarizes our significant contractual obligations as of March 31, 2022, and the effects of such obligations in future periods: +Payments Due by Period +Total Less than +1 Year 1-3 Years 3-5 Years More than +5 Years +Operating lease obligations (1) $ 238,754 $ 53,886 $ 83,667 $ 58,651 $ 42,550 +Purchase obligations for product (2) 809,812 809,812 — — — +Purchase obligations for commodities (3) 206,979 99,066 107,913 — — +Other purchase obligations (4) 207,651 69,057 66,073 72,521 — +Net unrecognized tax benefits (5) 8,642 — 8,642 — — +Total $ 1,471,838 $ 1,031,821 $ 266,295 $ 131,172 $ 42,550 +(1) Our operating lease commitments consist primarily of building leases for our retail locations, our warehouse and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In April 2022 we signed a lease for additional space at our US DC in Mooresville, Indiana with an initial lease term of ten years for a minimum commitment of approximately $46,000, which we expect to operational in the third quarter of our fiscal year ending March 31, 2024. Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating lease assets and lease liabilities. +(2) Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. Due to increased demand for certain products combined with longer logistics lead times and increased transit times from origin to destination as a result of supply chain disruptions, we are currently expecting that our inventory purchases with our third-party manufacturers will be significantly higher for our next fiscal year compared to fiscal year 2022. +(3) Our purchase obligations for commodities include sheepskin, UGGpure, and leather, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. There are $33,120 of deposits included in the amount above that have not been fully consumed as of March 31, 2022, which is recorded in other assets in the consolidated balance sheets, which represent remaining minimum commitments under certain expired sheepskin supply agreements that we currently expect to be consumed in future periods. +(4) Our other purchase obligations consist of non-cancellable minimum commitments for logistics arrangements, sales management services, supply chain services, IT services, requirements to pay promotional expenses, and other commitments under service contracts, which are due during our fiscal years ending March 31, 2023 through 2027. Amounts excluded from other purchase obligations above include any capital expenditures that will be purchased before the end of our next fiscal year, which we estimate will range from approximately $100,000 to $110,000. We anticipate these expenditures will primarily relate to the build-out of a third US DC, IT infrastructure and system upgrades, and refreshes to our global retail store fleet including new retail stores. Other anticipated expenditures include upgrades to our existing warehouse and DCs as well as our global office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets, and the timing of other expenditures. +42 +Table of Contents +(5) Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2022, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations on liabilities of $14,791, therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements based on historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements: allowances for doubtful accounts, estimated sales return liability, sales discounts and customer chargebacks, inventory valuations, valuation of goodwill, other intangible assets and long-lived assets, and performance-based stock compensation. The full impact of the ongoing pandemic is unknown and cannot be reasonably estimated for these key estimates. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected. +Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Refer to Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for sales discounts, chargebacks, and our sales return liability. +43 +Table of Contents +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2022 2021 +Amount % of Gross +Trade Accounts +Receivable Amount % of Gross +Trade Accounts +Receivable +Gross trade accounts receivable $ 333,279 100.0 % $ 242,234 100.0 % +Allowance for doubtful accounts (9,044) (2.7) (9,730) (4.0) +Allowance for sales discounts (2,831) (0.9) (3,016) (1.2) +Allowance for chargebacks (18,716) (5.6) (13,770) (5.7) +Trade accounts receivable, net $ 302,688 90.8 % $ 215,718 89.1 % +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for sales discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks and markdowns for our wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. +Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2022 2021 +Amount % of Net Sales Amount % of Net Sales +Net Sales +Wholesale $ 448,848 61.0 % $ 326,106 58.1 % +Direct-to-Consumer 287,159 39.0 235,082 41.9 +Total $ 736,007 100.0 % $ 561,188 100.0 % +As of March 31, +2022 2021 +Amount % of Net Sales Amount % of Net Sales +Sales Return Liability +Wholesale $ (31,082) (6.9) % $ (23,987) (7.4) % +Direct-to-Consumer (8,785) (3.1) (13,730) (5.8) +Total $ (39,867) (5.4) % $ (37,717) (6.7) % +44 +Table of Contents +Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers between 30 to 90 days from the point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are an asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the asset for the right to recover the inventory are recorded against cost of sales. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. +Inventories. The following tables summarize estimates for our inventories: +As of March 31, +2022 2021 +Amount % of Gross Inventory Amount % of Gross Inventory +Gross Inventories $ 527,531 100.0 % $ 297,874 100.0 % +Write-down of inventories (20,735) (3.9) (19,632) (6.6) +Inventories $ 506,796 96.1 % $ 278,242 93.4 % +We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. +Operating Lease Assets and Lease Liabilities. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by our options to extend (or not to terminate) the leases that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). We cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Refer to Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and disclosures. +45 +Table of Contents +Goodwill and Indefinite-Lived Intangible Assets. We do not amortize goodwill and indefinite-lived intangible assets but instead test for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable at the reporting unit level. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Qualitative factors considered include significant or adverse changes in consumer demand, historical financial performance, changes in management or key personnel, macroeconomic and industry conditions, and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting our industry. The fair value assessment could change materially if different estimates and assumptions were used. +During the years ended March 31, 2022, and 2021, we performed our annual impairment assessment and evaluated the UGG and HOKA brands’ wholesale reportable operating segment goodwill as of December 31st and evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands’ goodwill and Teva brand indefinite-lived trademarks, each of the brands’ actual fiscal year sales and results of operations, and the brands’ long-term forecasts of sales and results of operations as of their evaluation dates, we concluded that these assets were not impaired. +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information on our goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +We did not identify any definite-lived intangible asset impairments during the year ended March 31, 2022. During the year ended March 31, 2021, we recorded an impairment loss of $3,522 for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within our Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. +During the years ended March 31, 2022, and 2021, we recorded impairment losses for other long-lived assets, primarily for certain retail store operating lease assets and related leasehold improvements due to performance or store closures, of $3,186 and $14,084, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets. +46 +Table of Contents +Performance-Based Compensation . In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. +At the beginning of each fiscal year, our Talent & Compensation Committee reviews our results of operations from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Talent & Compensation Committee then establishes specific annual financial and strategic goals. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, and pre-tax income, as well as achievement of predetermined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each fiscal year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior fiscal year’s performance, business and general economic conditions and market and peer group analysis. +Performance-based compensation expense decreased approximately $2,900 during the year ended March 31, 2022, compared to the year ended March 31, 2021. The primary reason for this net decrease was the lower achievement of the performance criteria governing our cash bonuses compared to the prior period, partially offset by the expected achievement of the maximum performance criteria for the 2021 and 2020 long-term incentive plan performance-based restricted stock units. Performance-based compensation expense is primarily recorded in SG&A expenses, with cash bonuses for certain employees recorded in cost of goods sold in the consolidated statements of comprehensive income. +Refer to Note 8, “Stock-Based Compensation,” of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation. +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed earnings and profits (PTEP) by the US Internal Revenue Service does not require recognition of a deferred tax liability as the liability has already been recognized under the Tax Reform Act. We have not changed our indefinite reinvestment assertion of foreign earnings other than PTEP. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. +47 +Table of Contents +Item 7A. Quantitative and Qualitative Disclosures About Market Risk +Commodity Price Risk +For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, which include sheepskin, leather, and wool. The supply of sheepskin, which is used to manufacture a significant portion of the UGG brand products, is in high demand and there are a limited number of suppliers that can meet our expectations for the quantity and quality of sheepskin that we require. Most of our sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, use of substitute products or components, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin. +We typically fix prices for all of our raw materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and other pricing arrangements we use for sheepskin and leather typically result in purchase obligations which are not recorded in our consolidated balance sheets. With respect to sheepskin and leather, in the event of significant price increases for these commodities, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our profitability. Refer to the section titled “Contractual Obligations” above within Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum commodity purchase commitments. +Foreign Currency Exchange Rate Risk +Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position, and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although most of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than the subsidiaries’ functional currencies. We translate all assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recorded in other comprehensive income. Foreign currency exchange rate fluctuations affect our reported profits and can make comparisons from year to year more difficult. +We hedge certain foreign currency exchange rate risk from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. +As of March 31, 2022, there are no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure. +Refer to Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our use of derivative contracts. +48 +Table of Contents +Interest Rate Risk +Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including the Alternate Base Rate, the federal funds effective rate, currency-specific London Interbank Offered Rate and Canadian deposit offering rate for our Primary Credit Facility, People’s Bank of China market rate for our China Credit Facility, and Tokyo interbank offered rate for our Japan Credit Facility. +A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an immaterial aggregate change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2022, due to no outstanding balances under our revolving credit facilities. Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed in a separate section following Part IV, as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2022. +b) Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +49 +Table of Contents +As of March 31, 2022, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +c) Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the year ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on the design and operating effectiveness of our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2022 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2022, pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +50 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010 , and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as amended through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018 , and incorporated by reference herein) +*4.1 +Description of the Capital Stock of Deckers Outdoor Corporation +†10.1 +Standard Industrial Lease ( Net) , dated December 5, 2013, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014 , and incorporated by reference herein) +†10.2 +First Amendment to Standard Industrial Lease (Net) , dated June 6, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018 , and incorporated by reference herein) +10.3 +Second Amendment to Standard Industrial Lease (Net) , dated July 17, 2017, by and between Moreno Knox, LLC and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018 , and incorporated by reference herein) +†10.4 +Standard Industrial Lease (Net), dated February 10, 2021, by and between Seven Oaks Shopping Center L.P. and Kingstown Parcel O L.P. and Deckers Outdoor Corporation for distribution center at 2633 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.4 to the Registrant’s Form 10-K filed on May 28, 2021, and incorporated by reference herein) +†*10.5 +Standard Industrial Lease (Net), dated April 20, 2022, by and between Westpoint Building V, LLC and Deckers Outdoor Corporation for distribution center at 2723 Westpoint Blvd, Mooresville, IN 46158 +10.6 +Credit Agreement, dated September 20, 2018, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC and Deckers Outdoor International Limited, as borrowers, JP Morgan Chase Bank, N.A. as Administrative Agent, Citibank, N.A., Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, MUFG Bank, Ltd. and U.S. Bank National Association, as Co-Documentation Agents, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2018 , and incorporated by reference herein) +†10.7 +Amendment No. 1 to Credit Agreement, dated September 17, 2021, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC and Deckers Outdoor International Limited, as borrowers, JP Morgan Chase Bank, N.A. as Administrative Agent, Citibank, N.A., Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, MUFG Bank, Ltd. and U.S. Bank National Association, as Co-Documentation Agents, and the lenders party thereto (Exhibit 10.1 to the Registrants Form 10-Q filed on November 4, 2021 , and incorporated by reference herein) +#10.8 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on June 2, 2008 , and incorporated by reference herein) +#10.9 +Form of Change in Control and Severance Agreement (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 6, 2020 , and incorporated by reference herein) +#10.10 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006 , and incorporated by reference herein) +#10.11 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan , as amended through May 9, 2007 (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007 , and incorporated by reference herein) +51 +Table of Contents +Exhibit +Number Description of Exhibit +#10.12 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017 , and incorporated by reference herein) +#10.13 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017 , and incorporated by reference herein) +#10.14 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015 , and incorporated by reference herein) +#10.15 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015 , and incorporated by reference herein) +#10.16 +Deckers Outdoor Corporation Management Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 10, 2015 , and incorporated by reference herein) +#10.17 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 28, 2016 , and incorporated by reference herein) +†#10.18 +Form of Performance Stock Option Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017 , and incorporated by reference herein) +†#10.19 +Form of Stock Unit Award Agreement (2019 Performance-Based PSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2018 , and incorporated by reference herein) +#10.20 +Form of Stock Unit Award Agreement (2019 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 9, 2018 , and incorporated by reference herein) +†#10.21 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2019 LTIP Financial Performance Report (Exhibit 10.2 to the Registrant’s Form 8-K filed on September 25, 2018 , and incorporated by reference herein) +#10.22 +Form of Stock Unit Award Agreement (2020 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 8, 2019 , and incorporated by referenced herein) +†#10.23 +Form of Stock Unit Award Agreement (2020 Performance-Based PSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 8, 2019 , and incorporated by reference herein) +†#10.24 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2020 LTIP Financial Performance Award (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2019 , and incorporated by reference herein) +#10.25 +Form of Stock Unit Award Agreement (2021 Time-Based RSU) under Deckers Out door Corporation 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 6, 2020 , and incorporated by reference herein) +†#10.26 +Form of Restricted Stock Unit Award Agreement under Decker Outdoor Corporation 2015 Stock Incentive Plan FY 2021 LTIP Financial Performance Award (Exhibit 10.26 to the Registrant’s Form 10-K filed on May 28, 2021) +*#10.27 +Form of Stock Unit Award Agreement (2022 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan +†*#10.28 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2022 LTIP Financial Performance Award +†*#10.29 +Form of Restricted Stock Unit Award Agreement under Decker Outdoor Corporation 2015 Stock Incentive Plan FY 2021 LTIP Financial Performance Award, 2-year term +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +52 +Table of Contents +Exhibit +Number Description of Exhibit +*101.INS XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) +*101.SCH XBRL Taxonomy Extension Schema Document +*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB XBRL Taxonomy Extension Label Linkbase Document +*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +† Certain of the exhibits and schedules to this Exhibit Index have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request. +53 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 27, 2022 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +/s/ DAVE POWERS Chief Executive Officer, President and Director +(Principal Executive Officer) May 27, 2022 +Dave Powers +/s/ STEVEN J. FASCHING Chief Financial Officer +(Principal Financial and Accounting Officer) May 27, 2022 +Steven J. Fasching +/s/ MICHAEL F. DEVINE, III Chairman of the Board May 27, 2022 +Michael F. Devine, III +/s/ DAVID A. BURWICK Director May 27, 2022 +David A. Burwick +/s/ NELSON C. CHAN Director May 27, 2022 +Nelson C. Chan +/s/ CYNTHIA (CINDY) L. DAVIS Director May 27, 2022 +Cynthia (Cindy) L. Davis +/s/ JUAN R. FIGUEREO Director May 27, 2022 +Juan R. Figuereo +/s/ MAHA S. IBRAHIM Director May 27, 2022 +Maha S. Ibrahim +/s/ VICTOR LUIS Director May 27, 2022 +Victor Luis +/s/ LAURI M. SHANAHAN Director May 27, 2022 +Lauri M. Shanahan +/s/ BONITA C. STEWART Director May 27, 2022 +Bonita C. Stewart +54 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Comprehensive Income +F- 6 +Consolidated Statements of Stockholders' Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to Consolidated Financial Statements +F- 10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F- 42 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2022, and 2021, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2022, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2022, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 27, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit and risk management committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has recorded a sales return liability as of March 31, 2022, of $39,867, of which $31,082 is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to estimate the wholesale sales return liability. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating the wholesale sales return liability, including controls related to the development of estimated return rates. We evaluated the wholesale sales return liability using a combination of Company internal data, known recent trends, and actual and +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +historical known information. We analyzed the Company’s internal data and external correspondence to assess adjustments made by management, if any, to historical return rates based on consideration of recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 27, 2022 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2022 and 2021, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2022, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated May 27, 2022 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 27, 2022 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2022 2021 +ASSETS +Cash and cash equivalents $ 843,527 $ 1,089,361 +Trade accounts receivable, net of allowances ($ 30,591 and $ 26,516 as of March 31, 2022, and March 31, 2021, respectively) ( Note 2 and Schedule II ) +302,688 215,718 +Inventories 506,796 278,242 +Prepaid expenses 25,610 16,924 +Other current assets 55,264 44,244 +Income tax receivable 18,243 6,310 +Total current assets 1,752,128 1,650,799 +Property and equipment, net of accumulated depreciation ($ 282,571 and $ 266,905 as of March 31, 2022, and March 31, 2021, respectively) ( Note 1 and Note 13 ) +222,449 206,210 +Operating lease assets 182,459 186,991 +Goodwill ( Note 3 ) +13,990 13,990 +Other intangible assets, net of accumulated amortization ($ 79,061 and $ 77,473 as of March 31, 2022, and March 31, 2021, respectively) ( N ote 3 ) +39,688 41,945 +Deferred tax assets, net ( Note 5 ) +64,217 37,194 +Other assets 57,319 30,576 +Total assets $ 2,332,250 $ 2,167,705 +LIABILITIES AND STOCKHOLDERS' EQUITY +Trade accounts payable $ 327,487 $ 231,632 +Accrued payroll 67,553 79,152 +Operating lease liabilities ( Note 7 ) +50,098 46,768 +Other accrued expenses 81,400 68,995 +Income tax payable 12,426 36,920 +Value added tax payable 2,720 4,901 +Total current liabilities 541,684 468,368 +Long-term operating lease liabilities ( Note 7 ) +171,972 176,274 +Income tax liability 54,259 60,094 +Other long-term liabilities 25,510 18,744 +Total long-term liabilities 251,741 255,112 +Commitments and contingencies ( Note 7 ) +Stockholders' equity +Common stock ($ 0.01 par value; 125,000 shares authorized; shares issued and outstanding of 26,982 and 27,910 as of March 31, 2022, and March 31, 2021, respectively) +270 279 +Additional paid-in capital 210,825 203,310 +Retained earnings 1,352,685 1,257,379 +Accumulated other comprehensive loss ( Note 10 ) +( 24,955 ) ( 16,743 ) +Total stockholders' equity 1,538,825 1,444,225 +Total liabilities and stockholders' equity $ 2,332,250 $ 2,167,705 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2022 2021 2020 +Net sales ( Note 12 and Note 13 ) +$ 3,150,339 $ 2,545,641 $ 2,132,689 +Cost of sales 1,542,788 1,171,551 1,029,016 +Gross profit 1,607,551 1,374,090 1,103,673 +Selling, general, and administrative expenses 1,042,844 869,885 765,538 +Income from operations ( Note 12 ) +564,707 504,205 338,135 +Interest income ( 1,901 ) ( 2,637 ) ( 7,261 ) +Interest expense 2,083 6,028 5,046 +Other income, net ( 113 ) ( 700 ) ( 516 ) +Total other expense (income), net 69 2,691 ( 2,731 ) +Income before income taxes 564,638 501,514 340,866 +Income tax expense ( Note 5 ) +112,689 118,939 64,724 +Net income 451,949 382,575 276,142 +Other comprehensive (loss) income +Foreign currency translation (loss) gain ( 8,212 ) 8,816 ( 2,905 ) +Total other comprehensive (loss) income ( 8,212 ) 8,816 ( 2,905 ) +Comprehensive income $ 443,737 $ 391,391 $ 273,237 +Net income per share +Basic $ 16.43 $ 13.64 $ 9.73 +Diluted $ 16.26 $ 13.47 $ 9.62 +Weighted-average common shares outstanding ( Note 11 ) +Basic 27,508 28,055 28,385 +Diluted 27,789 28,406 28,694 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' +Equity +Shares Amount +Balance, March 31, 2019 29,141 $ 291 $ 178,227 $ 889,266 $ ( 22,654 ) $ 1,045,130 +Stock-based compensation 10 — 14,471 — — 14,471 +Shares issued upon vesting 86 1 1,287 — — 1,288 +Exercise of stock options 58 1 3,614 — — 3,615 +Cumulative adjustment from adoption of recent accounting pronouncements — — — ( 1,068 ) — ( 1,068 ) +Shares withheld for taxes — — ( 6,148 ) — — ( 6,148 ) +Repurchases of common stock ( Note 10 ) +( 1,296 ) ( 13 ) — ( 190,392 ) — ( 190,405 ) +Net income — — — 276,142 — 276,142 +Total other comprehensive loss — — — — ( 2,905 ) ( 2,905 ) +Balance, March 31, 2020 27,999 280 191,451 973,948 ( 25,559 ) 1,140,120 +Stock-based compensation 4 — 22,695 — — 22,695 +Shares issued upon vesting 107 1 1,501 — — 1,502 +Exercise of stock options 107 1 6,774 — — 6,775 +Shares withheld for taxes — — ( 19,111 ) — — ( 19,111 ) +Repurchases of common stock ( Note 10 ) +( 307 ) ( 3 ) — ( 99,144 ) — ( 99,147 ) +Net income — — — 382,575 — 382,575 +Total other comprehensive income — — — — 8,816 8,816 +Balance, March 31, 2021 27,910 279 203,310 1,257,379 ( 16,743 ) 1,444,225 +Stock-based compensation 4 — 26,780 — — 26,780 +Shares issued upon vesting 83 1 1,990 — — 1,991 +Exercise of stock options 29 — 1,204 — — 1,204 +Shares withheld for taxes — — ( 22,459 ) — — ( 22,459 ) +Repurchases of common stock ( Note 10 ) +( 1,044 ) ( 10 ) — ( 356,643 ) — ( 356,653 ) +Net income — — — 451,949 — 451,949 +Total other comprehensive loss — — — ( 8,212 ) ( 8,212 ) +Balance, March 31, 2022 26,982 $ 270 $ 210,825 $ 1,352,685 $ ( 24,955 ) $ 1,538,825 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2022 2021 2020 +OPERATING ACTIVITIES +Net income $ 451,949 $ 382,575 $ 276,142 +Reconciliation of net income to net cash provided by (used in) operating activities: +Depreciation, amortization, and accretion 42,878 40,530 38,912 +Amortization on cloud computing arrangements 1,552 737 — +Bad debt (benefit) expense ( 342 ) 3,053 3,498 +Deferred tax (benefit) expense ( 27,796 ) ( 8,171 ) 2,934 +Stock-based compensation 26,816 22,701 14,477 +Loss on disposal of long-lived assets 107 1,019 698 +Impairment of intangible assets — 3,522 — +Impairment of operating lease and other long-lived assets 3,186 14,084 1,365 +Gain on settlement of asset retirement obligations — ( 207 ) ( 705 ) +Changes in operating assets and liabilities: +Trade accounts receivable, net ( 86,627 ) ( 33,173 ) ( 10,493 ) +Inventories ( 228,554 ) 33,378 ( 32,777 ) +Prepaid expenses and other current assets ( 19,095 ) ( 22,128 ) 2,477 +Income tax receivable ( 11,933 ) 1,842 ( 5,811 ) +Net operating lease assets and lease liabilities 3,189 250 ( 3,264 ) +Other assets ( 28,296 ) ( 3,103 ) ( 6,558 ) +Trade accounts payable 89,184 79,176 23,312 +Other accrued expenses ( 20,370 ) 53,785 ( 11,112 ) +Income tax payable ( 24,494 ) 25,817 ( 8,179 ) +Other long-term liabilities 999 530 1,418 +Net cash provided by operating activities 172,353 596,217 286,334 +INVESTING ACTIVITIES +Purchases of property and equipment ( 51,017 ) ( 32,218 ) ( 32,455 ) +Proceeds from sales of property and equipment 8 49 491 +Net cash used in investing activities ( 51,009 ) ( 32,169 ) ( 31,964 ) +FINANCING ACTIVITIES +Proceeds from short-term borrowings — 9,100 69,336 +Repayments of short-term borrowings — ( 9,478 ) ( 69,197 ) +Proceeds from issuance of stock 1,991 1,502 1,288 +Proceeds from exercise of stock options 1,204 6,775 3,615 +Repurchases of common stock ( 356,653 ) ( 99,147 ) ( 190,405 ) +Cash paid for shares withheld for taxes ( 14,024 ) ( 7,432 ) ( 6,148 ) +Repayments of mortgage principal — ( 30,901 ) ( 603 ) +Net cash used in financing activities ( 367,482 ) ( 129,581 ) ( 192,114 ) +Effect of foreign currency exchange rates on cash and cash equivalents 304 5,458 ( 2,512 ) +Net change in cash and cash equivalents ( 245,834 ) 439,925 59,744 +Cash and cash equivalents at beginning of period 1,089,361 649,436 589,692 +Cash and cash equivalents at end of period $ 843,527 $ 1,089,361 $ 649,436 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2022 2021 2020 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes, net of refunds of $ 77 , $ 1,564 , and $ 5,389 , as of March 31, 2022, 2021, and 2020, respectively +$ 192,013 $ 104,068 $ 74,573 +Interest 1,842 2,931 2,466 +Operating leases 55,588 57,376 61,120 +Non-cash investing activities +Change in accounts payable and other accrued expenses for purchases of property and equipment 2,797 2,721 ( 618 ) +Accrued for asset retirement obligation assets related to leasehold improvements 3,900 1,842 224 +Leasehold improvements acquired through tenant allowances 4,061 — — +Non-cash financing activities +Accrued for shares withheld for taxes 8,435 11,679 — +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Note 1. General +The Company . Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company’s proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands. +The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company’s products. A significant part of the Company’s business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements) as of March 31, 2022, and 2021 and for the years ended March 31, 2022 , 2021, and 2020 are prepared in accordance with generally accepted accounting principles in the United States (US GAAP). +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of the COVID-19 global pandemic (pandemic) on its business and operations. Although the full impact of the pandemic is unknown and cannot be reasonably estimated, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company's financial condition, results of operations, and liquidity. To the extent there are differences between these estimates and actual results, the Company’s consolidated financial statements may be materially affected. +Significant areas requiring the use of management estimates and assumptions relate to inventory write-downs; trade accounts receivable allowances, including variable consideration for net sales provided to customers; contract assets and liabilities; stock-based compensation; impairment assessments, including for goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company's incremental borrowing rate utilized to discount its unpaid lease payments to measure its operating lease assets and lease liabilities. +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in selling, general, and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI). +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Reportable Operating Segments. The Company’s six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, the Company’s reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +Recent Accounting Pronouncements. The Financial Accounting Standards Board has issued Accounting Standards Updates (ASU) that have been adopted and not yet adopted by the Company for its annual and interim reporting periods as stated below. +Recently Adopted. The following is a summary of each ASU adopted by and its impact on the Company: +Standard Description Impact on Adoption +ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes +Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods, and reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The Company adopted this ASU on a retrospective basis beginning April 1, 2021, and concluded that this ASU did not have a material impact on its consolidated financial statements. +Not Yet Adopted. The following is a summary of each ASU issued that is applicable to and has not yet been adopted, as well as the planned period of adoption, and the expected impact on the Company upon its adoption: +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU No. 2020-04, +Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (as amended by ASU 2021-01) +London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of calendar year 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. +This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022. Q3 FY 2023 The Company is currently evaluating the impact of the adoption of this ASU on its revolving credit facilities, lease agreements, and other transactions; however, the Company does not expect that the adoption will have a material impact on its consolidated financial statements. +Summary of Significant Accounting Policies. The following are a summary of the Company’s significant accounting policies applied to its consolidated financial statements: +Cash Equivalents . The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of money-market funds. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Inventories . Inventories, principally finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes shipping, duty, and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements (CCAs) that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets. Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to three years . +As of March 31, 2022, net capitalized costs for CCAs is $ 2,402 , with $ 1,429 recorded in prepaid expenses and $ 973 in other assets in the consolidated balance sheets. As of March 31, 2021, net capitalized costs for CCAs is $ 2,983 , with $ 1,308 recorded in prepaid expenses and $ 1,675 in other assets in the consolidated balance sheets. +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset and are recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Property and equipment, net, are summarized as follows: +As of March 31, +Useful life (years) 2022 2021 +Land Indefinite $ 32,864 $ 32,865 +Building 39.5 36,112 35,094 +Machinery and equipment +1 - 10 +177,397 149,494 +Furniture and fixtures +3 - 7 +35,600 36,497 +Computer software +3 - 10 +104,114 94,365 +Leasehold improvements +1 - 11 +108,526 110,538 +Construction in progress 10,407 14,262 +Gross property and equipment 505,020 473,115 +Less accumulated depreciation and amortization ( 282,571 ) ( 266,905 ) +Total $ 222,449 $ 206,210 +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by the Company's options to extend (or not to terminate) the leases that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, “Leases and Other Commitments,” for further information on discount rate methodology used to measure operating lease assets and lease liabilities. +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income. Lease payments recorded in the operating lease liabilities are (1) fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, “Leases and Other Commitments,” for further information on the nature of variable lease payments and timing of recognition in rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income. +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and lease liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liabilities, a corresponding adjustment is made to the carrying amount of the operating lease assets. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the paragraph titled “Definite-Lived Intangible and Other Long-Lived Assets” below for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements (asset group) for indicators of impairment. +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The Company’s asset retirement obligations (AROs) are recorded in other long-term liabilities in the consolidated balance sheets and activity was as follows: +Amounts +Balance, March 31, 2020 $ 11,505 +Additions and changes in estimate 3,571 +Liabilities settled during the period ( 3,495 ) +Accretion expenses 1,458 +Foreign currency translation gains ( 56 ) +Balance, March 31, 2021 12,983 +Additions and changes in estimate 4,622 +Liabilities settled during the period ( 898 ) +Accretion expenses 327 +Foreign currency translation gains ( 232 ) +Balance, March 31, 2022 $ 16,802 +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Indefinite-lived intangible assets consist primarily of trademarks, customer and distributor relationships, patents, lease rights and non-compete agreements arising from the application of purchase accounting. +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting the industry. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income. +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset group, which is based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income. +During the years ended March 31, 2022 , 2021, and 2020, the Company recorded impairment losses for other long-lived assets, primarily for retail store operating lease assets and related leasehold improvements due to performance or store closures, as well as computer software, of $ 3,186 , $ 14,084 , and $ 1,365 , respectively, within its DTC reportable operating segment and unallocated overhead costs in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s definite-lived intangible asset impairment assessment results. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company may enter into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage this risk and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of forward spot rates at the end of the applicable periods, recorded in other current assets or other accrued expenses in the consolidated balance sheets. The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of AOCL and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in accumulated other comprehensive loss (AOCL) related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Stock Repurchase Programs. Repurchased shares of the Company’s common stock are retired. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is allocated to retained earnings in the consolidated balance sheets. Refer to Note 10, “Stockholders' Equity,” for further information on the Company’s stock repurchase programs. +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 to 60 days. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, “Revenue Recognition,” for further information regarding the Company’s components of variable consideration, including allowances for sales discounts, chargebacks and sales return contract assets and liabilities. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods, which includes the purchase costs and related overhead. Overhead includes all costs for planning, purchasing, quality control, freight, duties, royalties paid to third parties and shrinkage. Cost includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $ 33,344 , $ 28,626 , and $ 27,555 for the years ended March 31, 2022, 2021, and 2020, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Advertising, Marketing, and Promotion Expenses . Advertising, marketing and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, with $ 255,881 , $ 188,345 , and $ 144,948 for the years ended March 31, 2022, 2021. and 2020, respectively, recorded in SG&A expenses in the consolidated statements of comprehensive income. Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2022, and 2021 are $ 2,759 and $ 1,762 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards that management deems probable of achieving the performance criteria and service conditions. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria, as well as the Company’s reliance on the closing price of its stock on the New York Stock Exchange at or near the time of grant. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 8, “Stock-Based Compensation,” for further information on grant activity and additional disclosure for stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 3,953 , $ 3,339 , and $ 3,251 during the years ended March 31, 2022, 2021, and 2020, respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income. In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, there were no Company profit-sharing contributions for the years ended March 31, 2022, 2021, and 2020. +Non-qualified Deferred Compensation . In 2010, the Company began sponsoring an unfunded, non-qualified deferred compensation plan (NQDC Plan) that permits certain members of its management team the opportunity to defer compensation into the NQDC Plan. The NQDC Plan year is from January 1st to December 31st. Participants may defer up to 50 % of their annual base salary and up to 85 % of any cash incentive bonus under the NQDC Plan. The Company holds all its non-qualified deferred compensation plan investments in mutual funds. In March 2015, the Board of Directors approved a Company contribution feature to allow the option, but not the obligation, for the Company to make discretionary or matching cash contributions to NQDC Plan participants. A rabbi trust was established as a reserve for benefits payable under the NQDC Plan, with the assets invested in Company-owned life insurance policies. +As of March 31, 2022, and 2021, no material payments are made or pending under the plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current liabilities in the consolidated balance sheets. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income. Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements. +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders' Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Basic and Diluted Shares,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +Note 2. Revenue Recognition +Variable Consideration . Components of variable consideration include estimated sales discounts, markdowns or chargebacks, and sales returns. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets. This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for sales discounts. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks for our wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, the Company records an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income and write-offs are recorded against the allowance for trade accounts receivable in the consolidated balance sheets. This is consistent with the presentation of such amounts during the prior period. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” for further information regarding the Company’s allowance for chargebacks. +Sales Return Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers between 30 to 90 days from the point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the refund asset for the right to recover the inventory are recorded against cost of sales in the consolidated statements of comprehensive income. The refund liability is recorded in other accrued expenses and the related asset for the right to recover the inventory is recorded in other current assets in the consolidated balance sheets. +Activity during the years ended March 31, 2022, and 2021 related to estimated sales returns were as follows: +Recovery Asset Refund Liability +Balance, March 31, 2020 $ 9,663 $ ( 25,667 ) +Net additions to sales return liability* 39,939 ( 153,742 ) +Actual returns ( 38,898 ) 141,692 +Balance, March 31, 2021 10,704 ( 37,717 ) +Net additions to sales return liability* 43,555 ( 178,722 ) +Actual returns ( 42,768 ) 176,572 +Balance, March 31, 2022 $ 11,491 $ ( 39,867 ) +* Net additions to the sales return liability include a provision for anticipated sales returns, which consists of both contractual return rights and discretionary authorized returns. +Contract Liabilities . Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract liabilities are recorded in other accrued expenses in the consolidated balance sheets. +Loyalty Programs . The Company has a loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns. The Company’s contract liability for loyalty programs is recorded in other accrued expenses in the consolidated balance sheets. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Activity during the years ended March 31, 2022, and 2021 was as follows: +Amounts +Balance, March 31, 2020 $ ( 6,950 ) +Loyalty certificates and points redeemed, expired, and adjustments to net sales 44,445 +Deferred revenue for loyalty points and certificated issued ( 49,726 ) +Balance, March 31, 2021 ( 12,231 ) +Loyalty certificates and points redeemed, expired, and adjustments to net sales 56,930 +Deferred revenue for loyalty points and certificated issued ( 55,582 ) +Balance, March 31, 2022 $ ( 10,883 ) +Deferred Revenue . Revenue is deferred for certain wholesale channel transactions as the contract terms indicate control transfers upon product delivery or sell-through. As of March 31, 2022, and 2021, the Company’s contract liability for deferred revenue is $ 15,804 and $ 5,425 , respectively, which is recorded in other accrued expenses in the consolidated balance sheets. The increase in deferred revenue during the year ended March 31, 2022, compared to the prior period, was due to net additions of $ 9,700 related to customer prepayments and $ 679 related to other deferred revenue. +Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue by reportable operating segment. +Note 3. Goodwill and Other Intangible Assets +The Company’s goodwill and other intangible assets are recorded in the consolidated balance sheets as follows: +As of March 31, +2022 2021 +Goodwill +UGG brand $ 6,101 $ 6,101 +HOKA brand 7,889 7,889 +Total goodwill 13,990 13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks 15,454 15,454 +Definite-lived intangible assets +Trademarks 51,723 51,723 +Other 51,572 52,241 +Total gross carrying amount 103,295 103,964 +Accumulated amortization ( 79,061 ) ( 77,473 ) +Net definite-lived intangible assets 24,234 26,491 +Total other intangible assets, net 39,688 41,945 +Total $ 53,678 $ 55,935 +The weighted-average amortization period for definite-lived intangible assets was 15 years for the years ended March 31, 2022, and 2021, respectively. Intangible assets consist primarily of indefinite-lived and definite-lived trademarks, customer relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Annual Impairment Assessment . During the years ended March 31, 2022, 2021, and 2020, the Company evaluated goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segment as of December 31st and evaluated its Teva indefinite-lived trademarks as of October 31st, and based on the evaluation performed, no impairment loss was recorded for the goodwill and indefinite-lived intangible assets. As of March 31, 2022, and 2021, the gross carrying amount of goodwill is $ 143,765 and the accumulated impairment losses are $ 129,775 . +The Company did no t identify any definite-lived intangible asset impairments during the years ended March 31, 2022, and 2020. During the year ended March 31, 2021, the Company recorded an impairment loss of $ 3,522 for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within our Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. +Amortization Expense . A reconciliation of the changes in total other intangible assets, net, recorded in the consolidated balance sheets are as follows: +Amounts +Balance, March 31, 2019 $ 51,494 +Amortization expense ( 3,470 ) +Foreign currency translation net loss ( 8 ) +Balance, March 31, 2020 48,016 +Impairment charges ( 3,522 ) +Amortization expense ( 2,565 ) +Foreign currency translation net gain 16 +Balance, March 31, 2021 41,945 +Amortization expense ( 2,248 ) +Foreign currency translation net loss ( 9 ) +Balance, March 31, 2022 $ 39,688 +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2022, is as follows: +Years Ending March 31, Amounts +2023 $ 2,220 +2024 2,208 +2025 2,053 +2026 1,551 +2027 1,519 +Thereafter 14,683 +Total $ 24,234 +Note 4. Fair Value Measurements +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The following summarizes the three levels of inputs required: +• Level 1: Quoted prices in active markets for identical assets and liabilities. +• Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. The Company does not currently have any Level 3 assets or liabilities. +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets are as follows: +As of Measured Using +March 31, 2022 Level 1 Level 2 Level 3 +Money-market funds $ 524,063 $ 524,063 $ — $ — +Non-qualified deferred compensation asset 8,933 8,933 — — +Non-qualified deferred compensation liability ( 9,573 ) ( 9,573 ) — — +As of Measured Using +March 31, 2021 Level 1 Level 2 Level 3 +Money-market funds $ 773,092 $ 773,092 $ — $ — +Non-qualified deferred compensation asset 9,107 9,107 — — +Non-qualified deferred compensation liability ( 6,692 ) ( 6,692 ) — — +As of March 31, 2022, the non-qualified deferred compensation asset of $ 8,933 is recorded in other assets in the consolidated balance sheets. As of March 31, 2022, the non-qualified deferred compensation liability of $ 9,573 is recorded in the consolidated balance sheets, with $ 936 in other accrued expenses and $ 8,637 in other long-term liabilities. As of March 31, 2021, the non-qualified deferred compensation asset of $ 9,107 is recorded in other assets in the consolidated balance sheets. Further, the non-qualified deferred compensation liability of $ 6,692 is recorded in the consolidated balance sheets, with $ 906 in other accrued expenses and $ 5,786 in other long-term liabilities. +Note 5. Income Taxes +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2022 2021 2020 +Domestic* $ 396,368 $ 368,328 $ 206,111 +Foreign 168,270 133,186 134,755 +Total $ 564,638 $ 501,514 $ 340,866 +*Domestic income before income taxes for the years ended March 31, 2022, 2021, and 2020 is presented net of intercompany dividends of $ 120,000 , $ 175,000 , and $ 150,000 , respectively. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2022 2021 2020 +Current +Federal $ 95,012 $ 93,562 $ 47,087 +State 22,544 15,595 635 +Foreign 22,929 17,953 14,068 +Total 140,485 127,110 61,790 +Deferred +Federal ( 17,316 ) ( 6,717 ) 4,626 +State ( 4,827 ) ( 633 ) ( 462 ) +Foreign ( 5,653 ) ( 821 ) ( 1,230 ) +Total ( 27,796 ) ( 8,171 ) 2,934 +Total $ 112,689 $ 118,939 $ 64,724 +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended March 31, +2022 2021 2020 +Computed expected income taxes $ 118,574 $ 105,318 $ 71,582 +State income taxes, net of federal income tax benefit 16,899 16,479 11,042 +Foreign rate differential ( 22,188 ) ( 15,507 ) ( 17,966 ) +Unrecognized tax benefits ( 494 ) 7,632 6,695 +Return to provision adjustments ( 3,736 ) — — +Dividends from previously taxed earnings ( 4,240 ) ( 5,313 ) ( 4,584 ) +Nondeductible executive compensation 11,059 11,070 4,162 +US tax on foreign earnings 4,325 4,252 2,343 +Tax audit settlements 795 1,147 ( 3,956 ) +Employee stock-based compensation excess tax benefits ( 10,916 ) ( 6,846 ) ( 2,477 ) +Other 2,611 707 ( 2,117 ) +Total $ 112,689 $ 118,939 $ 64,724 +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2022 2021 +Deferred tax assets +Amortization and impairment of intangible assets $ 4,828 $ 7,302 +Nonvested stock-based compensation 7,695 7,138 +Operating lease liabilities 37,020 37,707 +Uniform capitalization adjustment to inventory 11,996 5,256 +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +As of March 31, +2022 2021 +Bad debt allowance and other reserves 26,627 19,321 +Accrued bonuses 7,572 8,491 +Foreign currency translation 649 646 +Net operating loss carry-forwards, net of valuation allowances 1,802 1,663 +Deferred revenue 22,074 817 +Other 1,375 2,231 +Gross deferred tax assets 121,638 90,572 +Valuation allowances ( 1,206 ) ( 1,197 ) +Total 120,432 89,375 +Deferred tax liabilities +Prepaid expenses ( 5,460 ) ( 3,829 ) +Operating lease assets ( 28,831 ) ( 30,754 ) +Depreciation of property and equipment ( 21,924 ) ( 17,598 ) +Total ( 56,215 ) ( 52,181 ) +Deferred tax assets, net $ 64,217 $ 37,194 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $ 243,217 . The deferred tax assets are primarily related to the Company’s domestic operations and are currently expected to be realized between fiscal years 2023 and 2031. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. +US Taxation of Foreign Earnings . The Company is subject to US taxation of its foreign subsidiary earnings considered global intangible low-taxed income, as well as limitations on the deductions of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. Beginning with the tax year ended March 31, 2018, pursuant to the Tax Reform Act, an installment election was made to pay the transition tax on the deemed repatriation of foreign subsidiaries’ earnings over eight years. The cumulative remaining balance as of March 31, 2022, is $ 38,263 , with $ 4,502 recorded in income tax payable and $ 33,761 in long-term income tax liability in the consolidated balance sheets. +As of March 31, 2022, the Company has $ 336,582 of undistributed earnings from its non-US subsidiaries, of which $ 133,053 relates to cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2022, the Company has $ 15,381 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been provided. The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. During the year ended March 31, 2022, the Company declared a dividend of $ 120,000 from a foreign subsidiary, for which no foreign withholding taxes were required. +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets. +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits are as follows: +Balance, March 31, 2019 $ 10,942 +Gross increase related to current fiscal year tax positions 1,153 +Gross increase related to prior fiscal year tax positions 8,152 +Settlements ( 246 ) +Lapse of statute of limitations ( 2,363 ) +Balance, March 31, 2020 17,638 +Gross increase related to current fiscal year tax positions 2,242 +Gross increase related to prior fiscal year tax positions 8,566 +Settlements ( 1,215 ) +Lapse of statute of limitations ( 1,961 ) +Balance, March 31, 2021 25,270 +Gross increase related to current fiscal year tax positions 2,520 +Gross increase related to prior fiscal year tax positions 2,750 +Gross decrease related to prior fiscal year tax positions ( 243 ) +Settlements ( 795 ) +Lapse of statute of limitations ( 4,723 ) +Balance, March 31, 2022 $ 24,779 +Total gross unrecognized tax benefits recorded in the consolidated balance sheets are as follows: +As of March 31, +2022 2021 +Current liability +Income tax payable $ — $ 1,038 +Long-term liability +Income tax liability 24,779 24,232 +Total $ 24,779 $ 25,270 +As of March 31, 2022, and 2021, the Company has accrued $ 4,722 and $ 4,782 for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets. During the years ended March 31, 2022, 2021, and 2020, the Company recorded $( 60 ), $ 1,151 , and $ 1,176 , respectively, of interest and penalties as an increase or (decrease) to interest expense in the consolidated statements of comprehensive income. +Management believes it is reasonably possible that the amount of unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 1,351 , which includes amounts relating to expirations of statute of limitations on liabilities of $ 2,531 , partially offset by $ 1,180 for additional unrecognized tax benefits relating to current fiscal year tax return positions. Of this amount, $ 1,197 would result in an income tax benefit for the Company and $ 154 would result in a decrease to interest expense in the consolidated statements of comprehensive income. +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in the Company’s income tax return that would impact the Company’s effective tax rate, if recognized. Net unrecognized tax benefits of $ 23,433 , $ 23,883 , and $ 16,685 for the years ended March 31, 2022, 2021, and 2020, respectively, would reduce the annual effective tax rate recorded in the consolidated statements of comprehensive income. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2018. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, it is the opinion of management that the Company does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements. +Note 6. Revolving Credit Facilities and Mortgage Payable +Primary Credit Facility . In September 2018, the Company entered into a credit agreement (Credit Agreement) with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and US Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint book runners. The Credit Agreement provides for a five-year , $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023. +I n addition to allowing borrowings in US dollars, the Credit Agreement provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars and any other foreign currency that is subsequently approved by JPMorgan, each lender and each bank issuing letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $ 200,000 , resulting in a maximum available principal amount of $ 600,000 . However, none of the lenders has committed at this time to provide any such increase in the commitments. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries (other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries). All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured. Amounts borrowed under the Primary Credit Facility may be prepaid at any time. In addition, the Company has the right to permanently reduce or terminate the lenders’ commitments provided under the Credit Agreement, subject to customary conditions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions and notice periods, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow under the Primary Credit Facility, subject to the foreign currency sublimit noted above. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Interest Rate Terms. At the Company’s election, interest under the Credit Agreement is tied to the adjusted LIBOR or the alternate base rate (ABR). Initial interest for the revolving loans is variable and fluctuates between adjusted LIBOR plus 1.125 % per annum and adjusted LIBOR plus 1.625 % per annum (or between ABR plus 0.125 % per annum and ABR plus 0.625 % per annum), based on the Company’s total adjusted leverage ratio. Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate if made in Canadian dollars. As of March 31, 2022, the effective interest rates for US dollar LIBOR and ABR rates, with relevant spreads for borrowings made during the reporting period, are 1.58 % and 3.38 %, respectively. +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum, based upon the Company’s total adjusted leverage ratio. +Borrowing Activity. During the year ended March 31, 2022, the Company made no borrowings or repayments under the Primary Credit Facility. As of March 31, 2022, the Company has no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $ 549 . As of March 31, 2022, available borrowings under the Primary Credit Facility are $ 399,451 . +Debt Issuance Costs. In connection with entering into the Primary Credit Facility, the Company paid certain commitment, arrangement and other fees to JPMorgan, Comerica and other parties to the Primary Credit Facility, and reimbursed certain of the parties’ expenses, which totaled $ 1,297 , and were recorded in prepaid expenses and other assets. These costs are amortized on a straight-line basis over the term of the Credit Agreement. +China Credit Facility . In October 2021, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 47,286 , with an overdraft facility sublimit of CNY 100,000 , or $ 15,762 . The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. Interest is based on the People’s Bank of China market rate multiplied by a variable liquidity factor. As of March 31, 2022, the effective interest rate is 4.00 %. +During the year ended March 31, 2022, the Company made no borrowings or repayments under the China Credit Facility. As of March 31, 2022, the Company has no outstanding balance, outstanding bank guarantees of $ 32 , and available borrowings of $ 47,254 under the China Credit Facility. +Japan Credit Facility . In March 2016, Deckers Japan, G.K., a wholly owned subsidiary of the Company, entered into a credit agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 3,000,000 , or $ 24,623 , for a maximum term of six months for each draw on the facility. The Japan Credit Facility can be renewed annually and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2023, substantially under the terms of the original credit agreement. Interest is based on the Tokyo Interbank Offered Rate plus 0.40 % . As of March 31, 2022, the effective interest rate is 0.49 %. +During the year ended March 31, 2022, the Company made no borrowings or repayments under the Japan Credit Facility. As of March 31, 2022, the Company has no outstanding balance under the Japan Credit Facility and available borrowings of $ 24,623 . +Debt Covenants. As of March 31, 2022, the Company is in compliance with all financial covenants under the revolving credit facilities. +Primary Credit Facility. Under the Primary Credit Facility, the Company is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments and transactions with affiliates. Financial covenants (as defined in the Credit Agreement), include the following: +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +• The total adjusted leverage ratio must not be greater than 3.75 to 1.00. +• The sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00. +• No limits on shares repurchases if the total adjusted leverage ratio does not exceed 3.50 to 1.00. +Under the Primary Credit Facility, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include: non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material ERISA liabilities; and a change of control of the Company (as defined in the Credit Agreement). +China Credit Facility. Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +Japan Credit Facility. Under the Japan Credit Facility, Deckers Japan, G.K., is subject to usual and customary provisions including a restriction against having losses for two years consecutively, maintaining an interest coverage ratio greater than 1.00 , and maintaining higher assets than liabilities. +Note 7. Leases and Other Commitments +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease agreements which continue in effect through calendar year 2031. Some of the Company's operating leases contain extension options of anywhere from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and lease liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its non-collateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Rent Expense . The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2022 2021 2020 +Operating $ 51,126 $ 52,849 $ 57,966 +Variable 24,265 24,033 26,996 +Short-term 3,428 3,015 3,332 +Total $ 78,819 $ 79,897 $ 88,294 +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2022, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets, are as follows: +Years Ending March 31, Amount* +2023 $ 53,886 +2024 47,021 +2025 36,646 +2026 31,594 +2027 27,057 +Thereafter 42,550 +Total undiscounted future lease payments 238,754 +Less: Imputed interest ( 16,684 ) +Total $ 222,070 +In April 2022, the Company signed a lease for additional space at the Company’s US warehouse and distribution center (DC) in Mooresville, Indiana with an initial lease term of ten years for a minimum commitment of approximately $ 46,000 , which the Company expects to be operational in the third quarter of the fiscal year ending March 31, 2024. +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and lease liabilities that are outstanding and presented in the consolidated balance sheets are as follows: +As of March 31, +2022 2021 +Weighted-average remaining lease term in years 5.6 6.0 +Weighted-average discount rate 2.6 % 3.1 % +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases were as follows: +Years Ended March 31, +2022 2021 2020 +Non-cash operating activities +Operating lease assets obtained in exchange for lease liabilities* $ 50,190 $ 9,861 $ 71,097 +Reductions to operating lease assets for reductions to lease liabilities* ( 5,293 ) ( 12,051 ) ( 7,055 ) +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements. +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . The Company has $ 809,812 of outstanding purchase orders or other obligations with its manufacturers as of March 31, 2022. The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements many months before consumers decide to purchase its products. The Company generally orders product three to nine months in advance of the anticipated shipment dates based primarily on a combination of product lead time and orders received from customers and consumers. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. However, a significant portion of the purchase commitments can be cancelled by the Company under certain circumstances. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase commitments, and instead reflects an estimate of its future payment commitments based on information currently available. +Commodities . The Company has an aggregate of $ 206,979 remaining purchase commitments, primarily for sheepskin, as well as UGGpure and leather, as of March 31, 2022. These commitments generally arise under two-year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company enters into contracts requiring these purchase commitments that its affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments. The contracts do not permit net settlement. There are $ 33,120 of deposits, included in the amount above, that have not been fully consumed as of March 31, 2022, which are recorded in other assets in the consolidated balance sheets, which represent remaining minimum commitments under certain expired sheepskin supply agreements that the Company currently expects will be consumed in future periods. +Total future minimum commitments for commodities contracts as of March 31, 2022, are as follows: +Contract Effective Date Final Target Date Contract Value Remaining +Commitment +July 2017 September 2019 $ 7,200 $ 5,223 +October 2018 September 2020 3,600 1,586 +October 2018 September 2021 41,210 34,272 +March 2021 June 2022 6,104 2,033 +November 2021 June 2022 19,635 8,508 +August 2021 September 2022 60,200 44,994 +November 2021 December 2022 2,450 2,450 +November 2021 June 2023 4,900 4,900 +August 2021 September 2023 72,000 72,000 +December 2021 September 2024 32,920 31,013 +$ 250,219 $ 206,979 +The Company expects that purchases made under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels, and that any deposits will become fully refundable or will be reflected as a credit against purchases. The amounts above do not necessarily reflect the dollar amount of the +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Company’s binding commitments or minimum purchase obligations, and instead reflect an estimate of its future payment obligations based on information currently available. +Othe r. The Company has an aggregate of $ 207,651 of other purchase commitments as of March 31, 2022, which consisted of minimum commitments for logistics arrangements, sales management services, supply chain services, information technology (IT) services, requirements to pay promotional expenses, and other commitments under service contracts. +Litigation . From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, results of operations, financial condition or cash flows. However, regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +Note 8. Stock-Based Compensation +In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), for which the primary purpose is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors and advisors. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . From time to time, the Company grants various types of stock-based compensation under the 2015 SIP, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs and PSUs, as well as long-term incentive plan (LTIP) awards, to key personnel, including employees and directors. +Annual Awards. The Company has granted RSUs and PSUs under the 2015 SIP, which entitle the recipients to receive shares of the Company’s common stock upon vesting. The RSUs are subject to time-based vesting criteria and vest in equal annual installments over three years following the date of grant. The vesting of PSUs are subject to the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted, and, to the extent the performance criteria has been met, vest in equal annual installments over three years thereafter. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The Company granted the following annual awards under the 2015 SIP, as recorded in the consolidated statements of comprehensive income: +Years Ended March 31, +2022 2021 2020 +Shares Granted Weighted-average grant date fair value per share Shares Granted Weighted-average grant date fair value per share Shares Granted Weighted-average grant date fair value per share +RSUs 52,256 $ 363.89 47,015 $ 220.31 47,577 $ 171.50 +PSUs — — — — 19,938 174.36 +Total 52,256 $ 363.89 47,015 $ 220.31 67,515 $ 172.34 +Annual award activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2019 231,399 $ 84.75 +Granted 67,515 172.34 +Vested ( 121,572 ) ( 76.81 ) +Forfeited ( 14,993 ) ( 113.49 ) +Nonvested, March 31, 2020 162,349 124.47 +Granted 47,015 220.31 +Vested* ( 92,614 ) ( 104.92 ) +Forfeited ( 3,664 ) ( 147.34 ) +Nonvested, March 31, 2021 113,086 179.58 +Granted 52,256 363.89 +Vested* ( 60,034 ) ( 162.37 ) +Forfeited ( 7,441 ) ( 239.39 ) +Nonvested, March 31, 2022 97,867 $ 284.00 +* The amounts vested include shares withheld for taxes that are not formally issued to the market. +Long-Term Incentive Plan Awards. The Company grants LTIP awards under the 2015 SIP for the issuance of PSUs (LTIP PSUs) and a Monte-Carlo simulation model is used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the performance periods (further defined for each individual grant below). For each grant of LTIP PSUs, the Monte-Carlo simulation model factors in key assumptions, such as the market price of the underlying common stock at the beginning and end of the reporting period, risk free interest rate, expected dividend yield when simulating total stockholder return (TSR), expected dividend yield when simulating the Company’s stock price, stock price volatility, and correlation coefficients. The Company evaluates at least quarterly the probability of achieving performance criteria included in its LTIP PSUs against its most current forecast. LTIP awards recorded in the consolidated statements of comprehensive income, were as follows: +2022 LTIP PSUs . During fiscal year 2022, the Company approved LTIP awards under the 2015 SIP (2022 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2022 LTIP PSUs are subject to vesting based on service conditions over three years . +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the year ended March 31, 2022, and for the fiscal years ending March 31, 2023, and 2024 (collectively, the 2024 Measurement Periods) and incorporates a relative TSR modifier for 36 -month performance period (commencing on April 1, 2021) ending March 31, 2024 (collectively, the 2024 Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2022 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2022 LTIP PSUs will occur if the Company fails to achieve the minimum revenue and pre-tax income amounts for each reporting period equal to at least 100 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2024 Measurement Periods, the vesting of each 2022 LTIP PSU will be subject to adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2024 Performance Periods. +The Company granted awards at the target performance level of 34,822 2022 LTIP PSUs during the year ended March 31, 2022. The weighted-average grant date fair value per share of these 2022 LTIP PSUs was $ 407.37 . Based on the Company's current long-range forecast, the Company determined that the achievement of at least the target performance criteria for each of the Measurement Periods for these awards was probable as of the grant date. +2021 LTIP PSUs . During fiscal year 2021, the Company approved LTIP awards under the 2015 SIP (2021 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2021 LTIP PSUs are subject to vesting based on service conditions over either two or three years . +The Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the years ended March 31, 2021 and March 31, 2022, and for the fiscal year ending March 31, 2023 (collectively, the 2023 Measurement Periods) and incorporates a relative TSR modifier for both the 24 -month performance period (commencing on April 1, 2021) and 36 -month performance period (commencing on April 1, 2020) ending March 31, 2023 (collectively, 2023 the Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2021 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2021 LTIP PSUs will occur if the Company fails to achieve the minimum revenue and pre-tax income amounts for each reporting period equal to at least 100 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2023 Measurement Periods, the vesting of each 2021 LTIP PSU will be subject to adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2023 Performance Periods. +The Company granted awards at the target performance level of 19,890 2021 LTIP PSUs during the year ended March 31, 2021. The weighted-average grant date fair value of these 2021 LTIP PSUs was $ 376.45 per share. The Company currently expects to exceed the financial performance threshold levels as defined above for each of the performance criteria, and therefore the number of 2021 LTIP PSUs that is expected to vest is above 190 % of the targeted amount for the awards. +2020 LTIP PSUs. During fiscal year 2020, the Company approved LTIP awards under the 2015 SIP (2020 LTIP PSUs), which were awarded to certain members of the Company's senior management team, including the Company's named executive officers. The 2020 LTIP PSUs are subject to vesting based on service conditions over three years . +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +The Company must meet certain revenue and pre-tax income performance targets for the fiscal year ending March 31, 2022 (2022 Measurement Period) and incorporates a relative TSR modifier for the 36 -month performance period commencing on April 1, 2019, and ending March 31, 2022 (collectively, the 2022 Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2020 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2020 LTIP PSUs will occur if the Company fails to achieve revenue and pre-tax income amounts equal to at least 90 % of the threshold amounts for these criteria. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2022 Measurement Period, the vesting of each 2020 LTIP PSU will be subject to adjustment based on the application of a relative TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2022 Performance Periods. +The Company granted awards at the target performance level of 38,174 2020 LTIP PSUs during the year ended March 31, 2020. The weighted-average grant date fair value of these 2020 LTIP PSUs was $ 146.96 per share. The Company exceeded the financial performance threshold levels as defined above for each of the performance criteria, and therefore the maximum number of 2020 LTIP PSUs that vested is 200 % of the targeted amount for that award. +LTIP award activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2019 77,098 $ 120.24 +Granted* 76,348 146.96 +Nonvested, March 31, 2020 153,446 133.53 +Granted* 39,780 376.45 +Vested** ( 77,098 ) ( 106.37 ) +Nonvested, March 31, 2021 116,128 215.30 +Granted* 69,644 358.75 +Vested** ( 69,816 ) ( 131.33 ) +Forfeited ( 12,924 ) ( 239.81 ) +Nonvested, March 31, 2022 103,032 $ 344.25 +*The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +** The amounts vested include shares withheld for taxes that are not formally issued to the market. +Long-Term Incentive Plan Options. Previously, the Company approved the issuance of LTIP NQSOs under the 2015 SIP, including in June 2017 (2018 LTIP NQSOs), which were awarded to certain members of the Company’s management team, with a maximum contractual term of seven years from the grant date. If the recipient provided continuous service, the LTIP NQSOs would vest after the Company had determined it achieved the target performance criteria by the date specified in the award. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. As of March 31, 2020, the Company determined that the target performance criteria related to the 2018 LTIP NQSOs for the year ended March 31, 2020, were achieved. During the years ended March 31, 2022, 2021, and 2020, no LTIP NQSOs were granted. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +LTIP option activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value Weighted- +Average +Remaining +Contractual +Term +(Years) Aggregate +Intrinsic +Value +Vested, March 31, 2019 361,383 $ 65.35 6.2 $ 29,504 +Exercised ( 58,444 ) ( 61.86 ) +Vested, March 31, 2020 302,939 66.02 5.0 20,594 +Exercised ( 107,197 ) ( 63.20 ) +Vested, March 31, 2021 195,742 67.56 3.6 51,452 +Exercised* ( 45,810 ) ( 67.11 ) +Vested, March 31, 2022 149,932 $ 67.70 2.6 $ 30,896 +*The amounts exercised include shares withheld for taxes that are not formally issued to the market. +Grants to Directors. Each of the Company’s nonemployee directors is entitled to receive common stock with a total value of $ 150 for annual service on the Board of Directors. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the 15 th day of the last month of each quarterly period. Each of these shares is fully vested on the date of issuance. +Stock-Based Compensation . Components of stock-based compensation recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2022 2021 2020 +RSUs $ 12,093 $ 7,820 $ 6,509 +PSUs — 1,900 2,851 +LTIP PSUs 12,865 11,555 2,203 +LTIP NQSOs — — 1,641 +Grants to Directors 1,507 1,195 1,045 +Employee Stock Purchase Plan 351 231 228 +Total stock-based compensation, pre-tax 26,816 22,701 14,477 +Income tax benefit ( 6,496 ) ( 5,441 ) ( 3,308 ) +Total stock-based compensation, net of tax $ 20,320 $ 17,260 $ 11,169 +Employee Stock Purchase Plan. The 2015 Employee Stock Purchase Plan (ESPP) authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. ESPP shares are excluded from basic earnings per share until purchases are made, while included in diluted earnings per share computations as after-tax payroll deductions are made. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period (no look-back provision) for a fixed amount at a 15 % discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred and remeasured during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Unrecognized Stock-Based Compensation. Total remaining unrecognized stock-based compensation as of March 31, 2022, related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, are as follows: +Unrecognized +Stock-based Compensation Weighted-Average +Remaining +Vesting Period (Years) +RSUs $ 14,839 1.1 +PSUs 130 0.4 +LTIP PSUs 21,324 1.7 +Total $ 36,293 +Note 9. Derivative Instruments +As of March 31, 2022, and 2021, the Company has no outstanding derivative contracts, however, settled derivative contracts with notional values are as follows: +Years Ended March 31, +2022 2021 +Designated Derivative Contracts $ 110,430 $ 68,241 +Non-Designated Derivative Contracts 38,659 18,909 +Total $ 149,089 $ 87,150 +The following table summarizes the effect of Designated Derivative Contracts and the related income tax effects of unrealized gains or losses recorded in the consolidated statements of comprehensive income for changes in AOCL: +Years Ended March 31, +2022 2021 2020 +Gain (loss) recorded in Other comprehensive income $ 4,161 $ ( 1,223 ) $ 1,516 +Reclassifications from Accumulated other comprehensive loss into net sales ( 4,161 ) 1,223 ( 1,516 ) +Total $ — $ — $ — +The following table summarizes the effect of Non-Designated Derivative Contracts recorded in the consolidated statements of comprehensive income: +Years Ended March 31, +2022 2021 2020 +Gain recorded in SG&A expenses $ 611 $ 267 $ 328 +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Note 10. Stockholders’ Equity +Stock Repurchase Programs. In January 2019, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase a total of up to $ 261,000 of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The Company’s Board of Directors approved an additional authorization of $ 750,000 during April 2021 for the Company to repurchase its common stock under the same conditions as the prior stock repurchase program (collectively, the stock repurchase programs). The Company’s stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. As of March 31, 2022, the aggregate remaining approved amount under the Company’s stock repurchase programs is $ 454,007 . +Stock repurchase activity under the Company’s stock repurchase program was as follows: +Years Ended March 31, +2022 2021 2020 +Total number of shares repurchased* 1,043,554 307,080 1,296,201 +Average price paid per share $ 341.77 $ 322.87 $ 146.89 +Dollar value of shares repurchased** $ 356,653 $ 99,147 $ 190,405 +*Any stock repurchases are made as part of publicly announced programs in open-market transactions. +** May not calculate on rounded dollars. +Subsequent to March 31, 2022, through May 5, 2022, the Company repurchased 176,046 shares for $ 47,997 at an average price of $ 272.64 per share and had $ 406,010 remaining authorized under the stock repurchase program. The Company’s stock repurchase program does not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion. +Accumulated Other Comprehensive Loss . The components within AOCL recorded in the consolidated balance sheets are as follows: +As of March 31, +2022 2021 +Cumulative foreign currency translation loss $ ( 24,955 ) $ ( 16,743 ) +Total $ ( 24,955 ) $ ( 16,743 ) +Note 11. Basic and Diluted Shares +The reconciliation of basic to diluted weighted-average common shares outstanding was as follows: +Years Ended March 31, +2022 2021 2020 +Basic 27,508,000 28,055,000 28,385,000 +Dilutive effect of equity awards 281,000 351,000 309,000 +Diluted 27,789,000 28,406,000 28,694,000 +Excluded +RSUs and PSUs 2,000 4,000 3,000 +LTIP PSUs 66,000 116,000 153,000 +Deferred Non-Employee Director Equity Awards 1,000 1,000 — +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Excluded Awards. The equity awards excluded from the calculation of the dilutive effect have been excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be deemed issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented (such that inclusion of these equity awards in the calculation would have been antidilutive). The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards subject to the achievement of performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower than the number of shares presented, which could result in a lower dilutive effect, respectively. Refer to Note 8, “Stock-Based Compensation,” for further information on the Company's equity incentive plans. +Note 12. Reportable Operating Segments +Information reported to the Chief Operating Decision Maker (CODM), who is the Company’s Principal Executive Officer, is organized into the Company’s six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments. +Segment Net Sales and Income from Operations. The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with the Company’s warehouse and distribution centers, certain executive and stock-based compensation, accounting, finance, legal, IT, human resources, and facilities, among others. +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2022 2021 2020 +Net sales +UGG brand wholesale $ 1,088,082 $ 871,799 $ 892,990 +HOKA brand wholesale 628,674 405,243 277,097 +Teva brand wholesale 129,094 105,928 119,108 +Sanuk brand wholesale 30,316 26,566 39,463 +Other brands wholesale 60,573 69,375 67,175 +Direct-to-Consumer 1,213,600 1,066,730 736,856 +Total $ 3,150,339 $ 2,545,641 $ 2,132,689 +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2022 2021 2020 +Income (loss) from operations +UGG brand wholesale $ 315,240 $ 292,718 $ 303,908 +HOKA brand wholesale 155,344 111,208 61,860 +Teva brand wholesale 33,294 27,120 30,736 +Sanuk brand wholesale 6,463 ( 162 ) 3,212 +Other brands wholesale 14,028 21,573 16,087 +Direct-to-Consumer 435,414 349,465 182,548 +Unallocated overhead costs ( 395,076 ) ( 297,717 ) ( 260,216 ) +Total $ 564,707 $ 504,205 $ 338,135 +Depreciation, amortization, and accretion +UGG brand wholesale $ 416 $ 532 $ 611 +HOKA brand wholesale 701 611 612 +Teva brand wholesale — — 1 +Sanuk brand wholesale 1,490 1,727 2,361 +Other brands wholesale 382 382 382 +Direct-to-Consumer 9,771 11,121 10,586 +Unallocated overhead costs 30,118 26,157 24,359 +Total $ 42,878 $ 40,530 $ 38,912 +Capital expenditures +UGG brand wholesale $ 109 $ ( 31 ) $ 404 +HOKA brand wholesale 1,191 56 331 +Sanuk brand wholesale — 8 — +Other brands wholesale — 40 64 +Direct-to-Consumer 11,872 11,175 7,886 +Unallocated overhead costs 44,542 25,533 23,376 +Total $ 57,714 $ 36,781 $ 32,061 +Segment Assets. Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments. Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets are as follows: +As of March 31, +2022 2021 +Assets +UGG brand wholesale $ 382,837 $ 212,277 +HOKA brand wholesale 293,025 168,365 +Teva brand wholesale 91,140 87,284 +Sanuk brand wholesale 40,766 38,311 +Other brands wholesale 32,429 18,732 +Direct-to-Consumer 191,193 196,091 +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +As of March 31, +2022 2021 +Total assets from reportable operating segments 1,031,390 721,060 +Unallocated cash and cash equivalents 843,527 1,089,361 +Unallocated deferred tax assets, net 64,217 37,194 +Unallocated other corporate assets 393,116 320,090 +Total $ 2,332,250 $ 2,167,705 +Note 13. Concentration of Business +Regions and Customers . The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations that were as follows: +Years Ended March 31, +2022 2021 2020 +International net sales $ 982,546 $ 784,164 $ 730,997 +% of net sales 31.2 % 30.8 % 34.3 % +Net sales in foreign currencies $ 744,213 $ 611,897 $ 587,233 +% of net sales 23.6 % 24.0 % 27.5 % +Ten largest customers as % of net sales 27.4 % 27.8 % 28.0 % +For the years ended March 31, 2022, 2021, and 2020, no single foreign country comprised 10.0% or more of the Company’s total net sales. No single customer accounted for 10.0% or more of the Company’s net sales during the years ended March 31, 2022, 2021, and 2020. +The Company sells its products to customers for trade accounts receivables and, as of March 31, 2022, has one customer that represents 11.2 % of trade accounts receivable, net, compared to one customer that represents 12.8 % of trade accounts receivable, net, as of March 31, 2021. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +Suppliers. The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company's sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. The Company believes significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for the Company's products and the products of its competitors, the use of substitute products or components, and global economic conditions. +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets are as follows: +As of March 31, +2022 2021 +US $ 208,078 $ 194,833 +Foreign* 14,371 11,377 +Total $ 222,449 $ 206,210 +*No single foreign country’s property and equipment, net, represents 10.0% or more of the Company’s total property and equipment, net, as of March 31, 2022, and 2021. +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2022, 2021, and 2020 +(dollar amounts in thousands, except per share or share data) +Note 14. Quarterly Summary of Information (Unaudited) +The Company’s business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded the Company’s aggregate net sales in the quarter ending March 31st and June 30th. However, as the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of the Company’s aggregate net sales, the Company expects the impact from seasonality to continue to decrease over time and the Company has begun to experience shifts during fiscal year 2022 for higher sales in the quarter ending March 31st. However, the Company’s seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. +The following is summarized unaudited quarterly financial data for the last two fiscal years: +Fiscal Year 2022 +Quarter Ended +6/30/2021 9/30/2021 12/31/2021 3/31/2022 +Net sales $ 504,678 $ 721,902 $ 1,187,752 $ 736,007 +Gross profit 260,503 367,088 621,221 358,739 +Income from operations 61,832 128,181 293,396 81,298 +Net income 48,124 102,063 232,943 68,819 +Net income per share +Basic $ 1.73 $ 3.69 $ 8.49 $ 2.54 +Diluted $ 1.71 $ 3.66 $ 8.42 $ 2.51 +Fiscal Year 2021 +Quarter Ended +6/30/2020 9/30/2020 12/31/2020 3/31/2021 +Net sales $ 283,169 $ 623,525 $ 1,077,759 $ 561,188 +Gross profit 142,566 318,977 613,897 298,650 +(Loss) income from operations ( 7,699 ) 128,604 328,655 54,645 +Net (loss) income ( 7,973 ) 101,554 255,536 33,458 +Net (loss) income per share +Basic $ ( 0.28 ) $ 3.62 $ 9.09 $ 1.19 +Diluted $ ( 0.28 ) $ 3.58 $ 8.99 $ 1.18 +F-41 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(amounts in thousands) +Allowances for doubtful accounts, sales discounts, and chargebacks against gross trade accounts receivable related to wholesale channel sales recorded in the consolidated balance sheets are as follows: +As of March 31, +2022 2021 2020 +Allowance for doubtful accounts (1) +Balance at Beginning of Year $ ( 9,730 ) $ ( 6,989 ) $ ( 5,073 ) +Additions — ( 3,052 ) ( 3,498 ) +Deductions 686 311 1,582 +Balance at End of Year $ ( 9,044 ) $ ( 9,730 ) $ ( 6,989 ) +Allowance for sales discounts (2) +Balance at Beginning of Year $ ( 3,016 ) $ ( 1,030 ) $ ( 710 ) +Additions ( 20,713 ) ( 16,414 ) ( 14,845 ) +Deductions 20,898 14,428 14,525 +Balance at End of Year $ ( 2,831 ) $ ( 3,016 ) $ ( 1,030 ) +Allowance for chargebacks (3) +Balance at Beginning of Year $ ( 13,770 ) $ ( 13,127 ) $ ( 13,041 ) +Additions ( 32,062 ) ( 23,214 ) ( 13,399 ) +Deductions 27,116 22,571 13,313 +Balance at End of Year $ ( 18,716 ) $ ( 13,770 ) $ ( 13,127 ) +Total $ ( 30,591 ) $ ( 26,516 ) $ ( 21,146 ) +(1) The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense or recovery based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(2) The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting certain order, shipment, and prompt payments terms. Deductions are for the actual discounts taken by the Company’s customers against outstanding trade accounts receivables. +(3) The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +F-42 \ No newline at end of file diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/filing_metadata.csv b/raw/filings/0000910521/2021/0000910521-22-000017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1d4690be4cd14564dce4dbfcb1fccdde14232b62 --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2022-05-27,2022-03-31,2022-05-27T16:43:59.000Z,0000910521-22-000017,deck-20220331.htm,10-K,13586999,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052122000017/deck-20220331.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052122000017/,2021,2021,1 diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/item1.txt b/raw/filings/0000910521/2021/0000910521-22-000017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a5e10fdd1210ebc1c2a2b2b97f69b672d6d7fc73 --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/item1.txt @@ -0,0 +1,114 @@ +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Products and Brands +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of Women’s spring and summer footwear, Men’s products, and apparel, accessories, and home goods. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth for the HOKA brand, which has quickly become a leading brand within our run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +3 +Table of Contents +Other Brands. O ther brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. Our Other brands are primarily sold in the US and Canada. +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. +Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of all of our brands. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana, as well as through a 3PL in Pennsylvania. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. Further, we intend to expand our DCs in the US. +Refer to Part I, Item 2, “Properties,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers such as Urban Outfitters and ASOS, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, streetwear and sports style partners such as Footlocker and Journey’s, as well as online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sports style partners. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers such as Fleet Feet, JackRabbit, Road Runner Sports, REI, select online retailers such as Zappos.com, and other strategic partners, such as DICK’s Sporting Goods, Running Warehouse, and Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, United Arrows, ABC Mart, Aeon Sports, Urban Outfitters, DICK’s Sporting Goods, DSW, and Nordstrom, and online retailers such as Amazon.com and Zappos.com. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, as well as larger national retail chains, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com. +Other Brands Wholesale. We sell our Other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include larger national retail chains, including Kohl’s, DSW, Macy’s, QVC, Shoe Carnival, and Famous Footwear, as well as online retailers such as Amazon.com and Zappos.com. +4 +Table of Contents +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross profit as a percentage of net sales (gross margin). Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, though also include recent openings in our retail store fleet for the HOKA brand. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores and recently opened a HOKA brand flagship store, which are lead concept stores in key markets designed to showcase the UGG and HOKA brand products, respectively. We continue to evaluate future locations for a curated fleet of mono branded retail stores for the UGG and HOKA brands to continue interacting with our consumers and enhancing brand loyalty. +As of March 31, 2022, we operate our e-commerce business through Company-owned websites and mobile platforms in 59 different countries, and have a total of 149 global retail stores, which includes 75 concept stores and 74 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +5 +Table of Contents +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts and other pricing arrangements with certain sheepskin, leather, and UGGpure suppliers to manage price volatility. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Leases and Other Commitments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, and environmental compliance, including animal welfare and conflicts minerals, before we are willing to conduct business with them. +We use a proprietary raw material, UGGpure, which is almost entirely repurposed wool woven into a durable backing, and UGGplush, which is almost entirely repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. As part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the sheepskin we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin. Excluding sheepskin, UGGpure, and UGGplush, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +6 +Table of Contents +Similar to other companies in our industry, we continue to experience supply chain challenges across each of the geographies in which we operate. The most significant macro-level supply chain impacts continue to be extended transit lead times and cost pressures due primarily to container shortages, port congestion, and trucking and labor scarcity. As we manage product availability, we are focused on mitigating the impacts of ongoing supply chain disruptions in both the wholesale and DTC channels, including through the early procurement of inventory in the country of sale, which will likely result in higher levels of inventory, to allow us to maintain expected service levels into our next fiscal year ending March 31, 2023 (next fiscal year). +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further information on the associated risks and impacts on our business for supply chain disruptions. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Trends and Uncertainties Impacting Our Business and Industry,” “Liquidity,” and “Contractual Obligations” for further information on the impact of supply chain disruptions on our results of operations, our working capital and operating requirements, as well as our purchase obligations for product, respectively. +Environmental, Social, and Governance (ESG) +As a global leader in designing, marketing and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact by employing socially conscious operations. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and our customers, as well as other brands and non-governmental organizations. Through our holistic environmental, social and governance program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized by Newsweek as one of America’s Most Responsible Companies and included on the Bloomberg Gender Equality Index during fiscal year 2022. +ESG Oversight. Our Board of Directors, through its Corporate Governance Committee, which is comprised of four independent directors, oversees our ESG efforts. The Corporate Governance Committee and full Board of Directors regularly receives updates on the status of our ESG program. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs) and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit & Risk Management Committee. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, suppliers, industry groups, communities and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe will make the most significant impact for our business, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our efforts to address environmental and social challenges. Our SDGs are currently focused on categories where we believe we can make substantial impacts. +7 +Table of Contents +The following is a brief overview of our SDGs and related achievements during fiscal year 2022: +• Materials. We strive to maximize the amount of environmentally preferred materials in our products (including recycled, renewable, regenerated, and natural materials). During fiscal year 2022, we sourced the vast majority of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We continued to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +Our goal through calendar year 2022 is for any virgin market wool to be certified by the Responsible Wool Standard, which addresses the welfare of sheep and the land they graze on. We require our supply chain partners to comply with our Ethical Sourcing and Animal Welfare Policy and have amplified our requirements for leathers sourced from South America by implementing detailed traceability standards to address deforestation. In addition, we do not believe in the exploitation or killing of animals solely for the purpose of their fur. We only use hides that are the byproduct of the meat industry and, with our innovative UGGpure and UGGplush technologies, the wool used in our UGG brand footwear is almost entirely repurposed from sheepskin we are already using. +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DC in Moreno Valley, California has undertaken efforts to become a zero-waste facility by calendar year 2023. We have taken steps to remove most single-use plastic from our packaging at our corporate headquarters, and have eliminated single-use plastic bags from our retail stores. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods and we continue to monitor all supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries we operate in by reducing water consumption and improving water quality throughout our operations. We have reduced water consumption among our monitored manufacturing partners and have set reduction targets for our suppliers. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. Since fiscal year 2021, our Restricted Substances team manages and controls over 1,600 restricted substances and are constantly exploring cleaner chemistries where possible. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We set ambitious Scope 1, 2, and 3 carbon reduction targets with the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and have collaborated with them to establish our carbon reduction targets. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. During fiscal year 2022, we established a long-term grant with Savory Institute to support regenerative farming practices on sheep farms in Australia, influencing over 200,000 acres and 40 farms. +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. In fiscal year 2022, we debuted on the Bloomberg Gender-Equality Index, which helps bring transparency to gender-related practices and policies at publicly-listed companies around the world. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +8 +Table of Contents +• Human Rights. We are committed to positively impacting the communities in which we operate, including assuring industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct, based on International Labour Organization standards, which outlines our expectations of our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards which are regularly reviewed by our leadership team. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a list that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our brands are each fully committed to sustainability, fully embrace our targets, and continue to launch sustainable collections. For example, the UGG brand’s Plant Power Collection features carbon-neutral, plant-based materials, and the brand’s Icon Impact Collection leverages environmentally preferred materials, such as lyocell, renewable sugarcane EVA, cotton, hemp, repurposed wool and recycled polyester made from recycled plastic bottles. The HOKA brand continues to focus on integrating more environmentally preferred materials in its footwear and launched a sustainable apparel collection. Further, the Teva brand partnered with TerraCycle® to give well-worn Teva sandals new life as downcycled materials. The Sanuk brand continues to offer the SustainaSole™ Collection featuring styles comprised of 55% total recycled material by weight and undyed uppers. +Our Creating Change Report for the year ended March 31, 2022, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2022 ESG achievements with a focus on the above SDGs. We believe that the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB, and now part of the Value Reporting Foundation) Consumer Goods Sector Apparel, Accessories and Footwear Index. The content of our historical Corporate Responsibility and Sustainability Reports is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2022, we employ approximately 4,000 employees in North America, Europe, and Asia. This includes approximately 1,400 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, we believe that our relationship with our employees is generally favorable. +Culture . Our purpose is to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around it, help hold us accountable to deliver on this purpose: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +9 +Table of Contents +Our values define our Company and serve as the driving force behind how we work together and work with customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that instill a commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +Promoting Diversity, Equity and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and can bring their authentic selves to work each day. We believe the inclusion of diverse perspectives, and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. To that end, our Board of Directors is currently comprised of a total of ten directors, 40% of whom are female, and 60% of whom are from underrepresented communities. As of March 31, 2022, 21% of our director-level and above employees in the US are from BIPOC communities. This represents an increase of 6% compared to fiscal year 2021 and an overall increase of more than 9% since fiscal year 2020. Further, during fiscal year 2022, 44% of all new hires reporting into the US corporate office were BIPOC. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We have implemented a comprehensive, global strategy for DEI, including the following: +• Our brands have committed to having at least 60% of individuals in our marketing campaigns who represent the BIPOC and LGBTQIA+ communities and diverse body types and abilities. +• We have created a framework for the creation of Employee Resource Groups (ERGs), which are formed around common interests, background or characteristics including gender, race, ethnicity, and other affinities. We have nine ERGs with approximately 300 employee members as of March 31, 2022. +• All director-level and above positions are interviewed by a panel that includes individuals from underrepresented communities. +• We are continuing to utilize software that optimizes job descriptions to help ensure a more diverse applicant pool, as well as redacting certain resume information that may lead to unconscious bias. +• We are expanding the pool from which we source our talent, including partnering with Historically Black Colleges and Universities, as well as local and national professional organizations. +• We have joined The Valuable 500, which is a business-to-business initiative comprised of companies committed to disability inclusion, the Civic Alliance, which is a nonpartisan business coalition that champions democracy and civic participation, and we are part of the Bloomberg Gender-Equality Index. +• We have deployed mandatory anti-racism and implicit bias training, as well as a suite of additional learning and development resources available to employees, including Inclusive Interviewing and Selection for managers, Disability Awareness & Inclusion , and Applying DEI Practices to Product Lifecycle , among others aimed at increasing employee acumen about DEI-focused topics. +• We host Coffee & Conversations, monthly small-group facilitated discussions on DEI-related topics. +• We have a global mentorship program to help provide our existing talent with networking and engagement opportunities. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. Each fiscal year, we contribute to our local communities through monetary donations, volunteer efforts and in-kind donations. During fiscal year 2022, we donated approximately $3,000 to various non-profit organizations, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our ‘Art of Kindness’ events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered over 14,000 hours in fiscal year 2022. Further, our supply chain partners followed our lead and volunteered in their local communities during fiscal year 2022. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. We also encourage our employees to volunteer by compensating each employee for up to 24 hours of volunteer time each calendar year and offer incentives for payments to employees’ charity of choice when meeting 100 hours of volunteer time per calendar year. +10 +Table of Contents +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, and opportunities for development. For example, our leadership team mentors rising talent on a formal and informal basis, which we believe accelerates the development of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commits substantial time to evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. We were also one of the first companies to increase the minimum wage in all retail stores across the US to $15 dollars per hour, since November 2020. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including maternity and paternity leave, mental health benefits and other voluntary benefits such as health savings accounts or our recent solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model (FWM), including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs that ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We operate in modern, efficient, and safe facilities. +In an effort to protect the health and safety of our employees during the pandemic, as part of our new FWM, we continue to allow those employees who could perform their jobs remotely to have a virtual work environment, and we are limiting the number of employees on-site relative to our typical personnel office capacity. We have also implemented enhanced safety measures and protocols at our facilities where on-site work is necessary, including enhanced cleaning protocols and mask requirements where locally mandated. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business. Refer to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate +11 +Table of Contents +net sales, we expect the impact from seasonality to continue to decrease over time and we have begun to experience shifts during fiscal year 2022 for higher sales in the quarter ending March 31st. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations. +Competition +The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts and disruptions caused by the pandemic, among others. In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2022, we hold 193 designs and inventions with corresponding design or utility patent registrations, plus 40 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following corporate governance and responsibility documents available through our website: Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Governance Committee Charter, Corporate Disclosure Policy, Code of Ethics, 2021 Corporate Responsibility Report, Restricted Substance Packet, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Ethics, Corporate Governance Guidelines, Environmental Policy, Ethical Sourcing and Animal Welfare Policy, Paper and Forest Procurement Policy, Water Policy, and Conflict Minerals Policy. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +12 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/item13.txt b/raw/filings/0000910521/2021/0000910521-22-000017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3abc767b07ec136a3bc27aaf56d1565871bb91ed --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/item9a.txt b/raw/filings/0000910521/2021/0000910521-22-000017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a3cbded874b1f2156b15efd3f7f02a07b17994b0 --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +a) Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2022. +b) Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +49 +Table of Contents +As of March 31, 2022, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +c) Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the year ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on the design and operating effectiveness of our internal control over financial reporting. +d) Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, within this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +PART III \ No newline at end of file diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/rp_note.txt b/raw/filings/0000910521/2021/0000910521-22-000017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2021/0000910521-22-000017/rpt_disclosure.txt b/raw/filings/0000910521/2021/0000910521-22-000017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..dbde290add74842540db95f8ee9013bc2b8a5354 --- /dev/null +++ b/raw/filings/0000910521/2021/0000910521-22-000017/rpt_disclosure.txt @@ -0,0 +1,5 @@ +RELATED-PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related-person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related-person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit & Risk Management Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit & Risk Management Committee, the Chairman of our Board and our highest ranking manager of internal audit. +If a related-person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit & Risk Management Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit & Risk Management Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules during fiscal year 2022, and no such transactions are currently proposed. +69 \ No newline at end of file diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/filing.txt b/raw/filings/0000910521/2022/0000910521-23-000016/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..90dab07767b116b1b11841d9322aa09cd1a6ca02 --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/filing.txt @@ -0,0 +1,2125 @@ +deck-20230331 +0000910521 false 2023 FY P1Y P1Y P3M P1Y P2Y P3Y P3Y P2Y P3Y P10D 0000910521 2022-04-01 2023-03-31 0000910521 2022-09-30 iso4217:USD 0000910521 2023-05-11 xbrli:shares 0000910521 2023-03-31 0000910521 2022-03-31 iso4217:USD 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deck:AllowanceForSalesDiscountsMember 2020-04-01 2021-03-31 0000910521 deck:AllowanceForSalesDiscountsMember 2023-03-31 0000910521 deck:ChargebackAllowanceMember 2022-03-31 0000910521 deck:ChargebackAllowanceMember 2021-03-31 0000910521 deck:ChargebackAllowanceMember 2020-03-31 0000910521 deck:ChargebackAllowanceMember 2022-04-01 2023-03-31 0000910521 deck:ChargebackAllowanceMember 2021-04-01 2022-03-31 0000910521 deck:ChargebackAllowanceMember 2020-04-01 2021-03-31 0000910521 deck:ChargebackAllowanceMember 2023-03-31 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the Fiscal Year Ended March 31 , 2023 +☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the transition period from to +Commission File Number: 001-36436 +DECKERS OUTDOOR CORP ORATION +(Exact name of registrant as specified in its charter) +Delaware 95-3015862 +(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, par value $0.01 per share DECK New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ +Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 8,242,483,771 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $312.61. This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 11, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 26,159,846 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2023 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2023 +TABLE OF CONTENTS +Page +Cautionary Note Regarding Forward-Looking Statements +2 +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +13 +Item 1B. Unresolved Staff Comments * +Item 2. +Properties +29 +Item 3. +Legal Proceedings +29 +Item 4. Mine Safety Disclosures * +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +30 +Item 6. +[Reserved] * +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +32 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +47 +Item 8. +Financial Statements and Supplementary Data +48 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * +Item 9A. +Controls and Procedures +49 +Item 9B. Other Information * +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +* +PART III +Item 10. +Directors, Executive Officers , and Corporate Governance +50 +Item 11. +Executive Compensation +50 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +50 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +50 +Item 14. +Principal Accounting Fees and Services +50 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +51 +Signatures +54 +Index to Consolidated Financial Statements and Financial Statement Schedule +F- 1 +Item 16. Form 10-K Summary * +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2023 (Annual Report), and the information and documents incorporated by reference within this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference within this Annual Report, contain forward-looking statements relating to, among other things: +• the operational challenges faced by our warehouses and distribution centers (DCs), wholesale partners, global third-party logistics providers (3PLs), and third-party carriers, including as a result of global supply chain disruptions and labor shortages; +• availability of materials and manufacturing capacity, and reliability of overseas production and storage; +• global geopolitical tensions, including the impact of economic sanctions on our transportation and energy costs; +• global economic trends, including foreign currency exchange rate fluctuations, changes in interest rates, inflationary pressures, changes in commodity pricing, and recessionary concerns; +• the expansion of our brands and product offerings; +• changes to the geographic and seasonal mix of our brands and products; +• changes to our product distribution strategies, including product allocation and segmentation strategies; +• trends impacting the purchasing behavior of wholesale partners and consumers; +• changes in consumer preferences impacting our brands and products, and the footwear and fashion industries; +• the impact of seasonality and weather on consumer behavior and the demand for our products; +• our business, operating, investing, capital allocation, marketing, and financing plans and strategies; +• expansion of and investments in our Direct-to-Consumer (DTC) capabilities, including our distribution facilities and e-commerce platforms; +• the impacts of the COVID-19 global pandemic (pandemic) and other incidence of disease on our business and the businesses of our customers, consumers, suppliers, and business partners; +• the effects of climate change, including changes in the regulatory environment and consumer demand to mitigate these effects, and the resulting impact on our business; +• the impact of our efforts to continue to advance sustainable and socially conscious business operations, and the expectations and standards that our investors and other stakeholders have with respect to our environmental, social and governance practices; +• our interpretation of global tax regulations and changes in tax laws that may impact our tax liability and effective tax rates; +• our cash repatriation strategy regarding earnings of non-United States (US) subsidiaries and the resulting tax impacts; +• the outcomes of legal proceedings, including the impact they may have on our business and intellectual property rights; and +• the value of goodwill and other intangible assets, and potential write-downs or impairment charges. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed, or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge occasionally, and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” “management,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra by UGG® brand (Koolaburra), UGGpure® (UGGpure), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere within this Annual Report are the property of their respective owners. T he trademarks and trade names within this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights to the fullest extent under applicable law. +Unless otherwise specifically indicated, all figures included within this Annual Report are expressed in thousands, except for per share or share data. The defined periods for the fiscal years ended March 31, 2023, 2022, and 2021 are stated herein as “year ended” or “years ended.” We also refer to these fiscal years as “fiscal year 2023,” “fiscal year 2022,” and “fiscal year 2021,” respectively. +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Products and Brands +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth for the HOKA brand, which has quickly become a leading brand within our run and outdoor specialty wholesale accounts and is growing within selective key accounts. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +Other Brands. Other brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. Our Other brands are primarily sold in the US and Canada. +3 +Table of Contents +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana, as well as through a 3PL in Pennsylvania. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. We are further expanding our DCs and are in the early stages of building out a third US DC located in Mooresville, Indiana. +Refer to Part I, Item 2, “Properties,” and Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business (reportable operating segments). +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers such as Urban Outfitters, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, streetwear and sports style partners, such as Footlocker and Journey’s, and online retailers, such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sports style partners. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers such as Fleet Feet and Road Runner Sports, outdoor retailers, such as REI, select online retailers such as Zappos.com, other strategic partners, such as DICK’s Sporting Goods and Running Warehouse, streetwear and sports style partners, such as Footlocker, and higher-end department stores, such as Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through outdoor retailers, such as REI, fashion lifestyle retailers, such as Urban Outfitters, other strategic partners, such as DICK’s Sporting Goods, large national retail chains, such as Famous Footwear and DSW, higher-end department stores such as Nordstrom, and online retailers such as Amazon.com and Zappos.com. We continue to expand our Teva brand wholesale distribution in international markets, including through strategic partners such as United Arrows and ABC Mart in Japan. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic sports style partners, such as Journey’s, higher-end department stores, such as Dillard’s, larger national retail chains, such as DSW, and online retailers such as Amazon.com and Zappos.com. +4 +Table of Contents +Other Brands Wholesale. Other brands is primarily made up of the Koolaburra brand. We sell our Koolaburra brand footwear primarily through larger national retail chains, including Kohl’s, DSW, Shoe Carnival, and Famous Footwear, certain higher-end department stores, such as Macy’s, and online retailers such as Amazon.com and Zappos.com. +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross profit as a percentage of net sales (gross margin). Our Company-owned mono branded retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings of HOKA brand retail stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores and a HOKA brand flagship store, which are Company-owned premium mono branded concept stores in key markets designed to showcase the UGG and HOKA brand products. +As of March 31, 2023, we operate our e-commerce business through Company-owned websites and mobile platforms in 57 different countries and have a total of 164 global retail stores (including 18 HOKA brand retail stores), which includes 81 concept stores and 83 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Refer to Note 12, "Reportable Operating Segments," of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, "Concentration of Business," of our consolidated financial statements in Part IV within this Annual Report for further information about geographic areas and concentration of related business risks. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance +5 +Table of Contents +with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts and other pricing arrangements with certain suppliers of sheepskin, wool (primarily for UGGpure, further discussed below), leather, and sugarcane derived ethylene vinyl acetate (EVA) to manage price volatility. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We use a proprietary material, UGGpure, which is almost entirely repurposed wool woven into a durable backing, and UGGplush, which is almost entirely repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. In an effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the sheepskin we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will further reduce our dependence on sheepskin. +Excluding sheepskin, UGGpure, UGGplush, and sugarcane derived resin or EVA, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they must comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the “Environmental, Social, and Governance” section below for further information. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +6 +Table of Contents +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Similar to other companies in our industry, we continue to monitor pressures on the global supply chain, which have shifted the timing of shipments across our brands compared to the fiscal year ended March 31, 2022 (the prior period). However, we have seen improvements in transit lead times and related freight costs, compared to the prior period. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further information on the impacts on our business of supply chain disruptions and the associated risks. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Trends and Uncertainties Impacting Our Business and Industry,” “Liquidity,” and “Contractual Obligations” for further information on the impact of supply chain disruptions on our results of operations, our working capital and operating requirements, as well as our purchase obligations for product, respectively. +Environmental, Social, and Governance (ESG) +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. Through our holistic ESG program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized by Investor’s Business Daily as one of the Best ESG Companies, by Sustainalytics as one of the Top-Rated ESG Companies, by Newsweek as one of America’s Most Responsible Companies, and included on the Bloomberg Gender Equality Index during fiscal year 2023. +ESG Oversight. Our Board of Directors, through its Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee), which is comprised of four independent directors. Our Board of Directors oversees our ESG strategy and has ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board of Directors regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies to ensure a consistent corporate strategy. The Board of Directors considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), detailed below, and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +ESG Education . During fiscal year 2023, our Corporate Governance Committee, together with our CAO, enrolled in the Diligent ESG and Climate Leadership Certificate Program. Additionally, as set forth in our Corporate Governance Guidelines, our Board of Directors is required to complete annual training on our Code of Ethics. Together, we believe these efforts further evidence our ongoing commitment to sustainable business practices and strong ESG performance. +7 +Table of Contents +ESG Performance Metrics . Our pay-for-performance philosophy demands that we offer performance-based compensation that is directly linked to factors that the Talent & Compensation Committee of our Board of Directors believes will lead to the creation of stockholder value. During fiscal year 2023, for our executive leadership team, our annual cash incentive award program included a 10% modifier tied to specific ESG initiatives. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +The following is a brief overview of our SDGs and related achievements during fiscal year 2023: +Environment Indicators +Many of our facilities were designed with sustainability in mind. Our corporate headquarters and our Moreno Valley, California, DC are Leadership in Energy and Environmental Design (LEED)-certified silver and our first Mooresville, Indiana, DC is LEED-certified gold. To further our commitment to monitoring the environmental performance of our supply chain partners, in fiscal year 2023 we began utilizing the HIGG Facility Environmental Module, a sustainability assessment tool used by our factory partners to collect detailed and standardized information about a partner’s waste, water, and energy consumption and identify and prioritize opportunities for sustainability performance improvements. +• Materials. We strive to maximize the amount of environmentally preferred materials (which we define as recycled, renewable, regenerated, and natural materials) in our products. Where possible, we utilize third-party certifications to assess our environmentally preferred materials, such as the Leather Working Group, Forest Stewardship Council, Responsible Wool Standard, and the Global Recycling Standard. During fiscal year 2023, we sourced all of our leather supplies used in our footwear from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We also continue to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +During fiscal year 2023, all wool used in our footwear products was sourced from preferred sources, including Responsible Wool Standard certified or upcycled from certain sheepskin product. We require our supply chain partners to comply with our Ethical Sourcing and Animal Welfare Policy and have amplified our requirements for leathers sourced from South America by implementing detailed traceability standards to address deforestation. In addition, we do not believe in the exploitation or killing of animals solely for the purpose of their fur. Our strict policy requires that we only use hides that are the byproduct of the meat industry and, in fiscal year 2023, we continued our evolution moving away from virgin wool by transitioning from UGGpure in support of UGGplush which utilizes TENCEL™ Lyocell rather than virgin wool. +Additionally, our brands continue to seek more preferred sources (either recycled or sugarcane) of EVA, and, during fiscal year 2023, we saw a significant increase in the use of preferred sources of EVA, largely influenced by the UGG brand’s decision to transition away from petroleum-based ethylene to sugarcane-based ethylene in certain high volume, classic silhouette styles. +8 +Table of Contents +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DCs in Moreno Valley, California, and Mooresville, Indiana, have undertaken efforts to become zero-waste facilities by calendar year 2023. Further, we have taken steps to remove most single-use plastic from our packaging at our corporate headquarters, strive to use minimal plastic in our product packaging, and have eliminated single-use plastic bags from our retail stores. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods, and we continue to monitor and engage with our supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries in which we operate by reducing water consumption and improving water quality throughout our operations. We monitor certain manufacturing and supply chain partners and have set water use reduction targets for each of them. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. Since fiscal year 2021, our Restricted Substances team manages and controls over 1,600 restricted substances and continues to explore cleaner chemistries where possible. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We set ambitious Scope 1, 2, and 3 carbon reduction targets filed with and approved by the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and have collaborated with them to establish our carbon reduction targets. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. During fiscal year 2023, we established a long-term grant with Savory Institute to support regenerative farming practices on sheep farms in Australia, influencing over 300,000 acres and 80 farms. +Our brands are committed to sustainable business practices, embrace our sustainability targets, and work to launch sustainable collections. For example, the UGG brand’s Classic Mini Regenerate and Tasman Regenerate are crafted with raw materials from ranches that practice regenerative agriculture, a conservation and rehabilitation approach focused on topsoil regeneration, encouraging wildlife diversity, and supporting carbon capture in the ground. UGG also offers a consumer-facing repair service, UGGrenew, to extend the life of Classic Boots. The HOKA brand continues to focus on integrating more environmentally preferred materials in its footwear and apparel collections. Teva continues to work with TerraCycle® to give well-worn Teva sandals new life as downcycled materials. The Sanuk brand’s Veg Out Collection features 100% plant-based sneakers crafted using plant-based and recycled materials. +Social Indicators +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. During fiscal year 2023, we once again appeared on the Bloomberg Gender-Equality Index, which helps bring transparency to gender-related practices and policies at publicly-listed companies around the world. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. We also partner with Better Work to provide anti-harassment training to key supply chain partners and the International Labour Organization (ILO) training program covering topics such as international labour standards, social protection, social dialogue, innovation, gender equality and diversity, sustainable development, and the future of work. Our current goal is to empower 100,000 women through workplace-based education and training. Since setting our target in fiscal year 2020, we have empowered approximately 87,000 women through our engagement efforts and working with valued third-party programs, including HERproject, Better Work and the ILO. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +9 +Table of Contents +• Human Rights. We are committed to operating responsibly in the communities in which we operate, including encouraging industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), based on ILO standards, which outlines our expectations for our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards for our business partners, which are regularly reviewed by our leadership team. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a list that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our annual Creating Change Report for the year ended March 31, 2023, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2023 ESG achievements with a focus on the SDGs discussed above. We believe the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2023, we employ approximately 4,200 employees (an increase of 11.2% compared to the prior period) in North America, Europe, and Asia. This includes approximately 1,500 employees in our retail stores worldwide, which excludes temporary and seasonal employees. +Culture . We strive to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around it, help hold us accountable to deliver on this purpose: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and work with customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employee’s experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2023 had a participation rate of 88%. Of those employees who completed the survey, 87% noted they were proud to work for Deckers. +10 +Table of Contents +Promoting Diversity, Equity, and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and bring their authentic selves to work each day. We believe the inclusion of diverse perspectives, and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. To that end, as of March 31, 2023, our Board of Directors is comprised of a total of ten directors, 60% of whom are from underrepresented communities. Further, as of March 31, 2023, over 24% of our director-level and above employees in the US are from BIPOC communities, which represents an increase of over 3% compared to fiscal year 2022 and an overall increase of more than 12% since fiscal year 2020. Further, during fiscal year 2023, 45% of all new hires reporting into the US corporate office and call center were from BIPOC communities. At Deckers, we strive to have gender parity in leadership positions and our Board of Directors. As of March 31, 2023, over 49% of our director-level and above employees are female and 40% of the members of our Board of Directors are female. +. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We have implemented a comprehensive, global strategy for DEI, including the following: +• Our brands have committed to having at least 60% of individuals in our marketing campaigns represent the BIPOC and LGBTQIA+ communities and diverse body types and abilities. +• We have created a framework for the creation of Employee Resource Groups (ERGs), which are formed around common interests, backgrounds, or characteristics, including gender, race, ethnicity, and other affinities. We have ten ERGs as of March 31, 2023. +• We have deployed mandatory annual anti-racism and implicit bias training, as well as a suite of additional learning and development resources available to employees, including Inclusive Interviewing and Selection for managers, Disability Awareness & Inclusion , and Applying DEI Practices to Product Lifecycle , among others aimed at increasing employee acumen about DEI-focused topics. +• We have a global mentorship program to help provide our existing talent with networking and engagement opportunities. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2023, we donated over $4,000 to various non-profit organizations around the globe, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our ‘Art of Kindness’ events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 15,000 hours in fiscal year 2023. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. We also encourage our employees to volunteer by compensating each employee for up to 24 hours of volunteer time each calendar year and offer incentives for payments to employees’ charity of choice when achieving 100 hours of volunteer time in a calendar year. +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), a monthly global employee gathering dedicated to peer sharing and learning about different parts of the organization and careers in each space (Biz Breaks), and a global leadership development program for new leaders (Trailblazers). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commits substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while seeking to improve organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, +11 +Table of Contents +time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid, and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts or our recently adopted solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model, including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we have seen and expect to continue to see the impact from seasonality decrease over time. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +Competition +The industry and markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +12 +Table of Contents +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2023, we hold 190 designs and inventions with corresponding design or utility patent registrations, plus 62 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following material corporate governance and responsibility documents available through our website: Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, and Corporate Governance Guidelines. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +Item 1A. Risk Factors +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +13 +Table of Contents +Risks Related to Our Business and Industry +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand and spending patterns, including by successfully introducing new products, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and fashion tastes, which make it difficult to anticipate demand for our products and forecast our financial results. Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand, and promptly respond to the rapidly changing preferences and fashion tastes, as well as consumer spending patterns, with appealing merchandise. As our brands and product offerings evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. Many of our products, particularly from our UGG brand, include a fashion element and could go out of style at any time. New footwear models that we introduce may not be successful with consumers or our brands may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brands’ image may suffer, our operating performance may decline, and we may not be able to execute our growth plans. Even if we develop and manufacture new footwear products that consumers find appealing, the ultimate success of a new style may depend on our pricing, and we may set the prices of new styles too high for the market to bear. +Further, the value of our brands is largely based on evolving consumer perceptions, including as a result of shifting ethical, political or social standards, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, including the sustainability of products or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. These concerns may be exacerbated by legislation restricting our ability to use certain materials in our products, as well as negative publicity regarding us or our products, brands, marketing campaigns, partners, or celebrity endorsers, which could adversely affect our reputation and sales regardless of the accuracy of such claims. Social media and digital marketing campaigns, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brands, erode our competitive position, and result in long-term harm to our business and financial results. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG and HOKA brands, are premium retail products. The purchase of these products by consumers is largely discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as worsening economic conditions, consumer confidence in future economic conditions, changes to fuel and other energy costs, labor, and healthcare costs, declines in income or asset values, and increases in consumer debt levels, inflation and interest rates, and unemployment rates. Uncertainty in global economic conditions continues, particularly in light of an anticipated economic downturn, causing unpredictability in consumer discretionary spending trends. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and profitability, which could have a material adverse effect on our financial condition and results of operations. +We sell a large portion of our products through higher-end specialty and department store retailers, as well as through online marketplaces such as Amazon.com. The businesses of these customers may be affected by factors +14 +Table of Contents +such as changes in economic conditions, recent failures in the US banking system, reduced consumer demand for premium products, decreases in available credit, and increased competition. If our customers face financial difficulties, it could have an adverse effect on our estimated allowances and reserves, and potentially result in us losing key customers. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive and subject to changing consumer preferences and tastes. Our inability to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. Our competitors include both established companies and newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG and HOKA brands, certain competitors have entered the marketplace specifically in response to the success of our brands, and other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers. Further, these competitors may have relationships with our key retail customers that are potentially more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly or with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, increase their market share, withstand the effects of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us. +As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. Efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from their competitors, which could negatively affect the financial stability of their businesses and their ability to conduct business with us. +If we are unsuccessful at managing product manufacturing decisions to offset the inherent seasonality of our business, especially given our evolving product offerings, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse effect on our financial condition and results of operations. +Like other companies in our industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing, and marketing of our products in advance of the realization of revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because this cycle involves long lead times, which require us to make manufacturing decisions months in advance of an anticipated purchasing decision by the consumer, it is challenging to estimate and manage our inventory and working capital requirements. This may be exacerbated by supply chain disruptions that may drive higher inventory procurement positions that could negatively affect our gross margins resulting from a need to sell excess quantities though close out channels. Further, once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses, accurately forecast our financial results, and meet the expectations of analysts and investors, in reaction to various factors, including the following: +• the effects of unfavorable or unexpected weather patterns on consumer spending and demand for our products, as the sales of a majority of our UGG brand products are inherently seasonal and the further effects of climate change may pronounce these conditions; +• changes in consumer preferences, tastes, discretionary spending, and prevailing fashion trends; +• market acceptance of our current products and new products, and of competitive products; +15 +Table of Contents +• future sales demand from our customers; +• the competitive environment, including pricing pressure from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• delays in resource or product availability due to effects from the pandemic; and +• uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margin, and we may not be able to recover our investment in the development of new styles and product lines. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our financial condition and results of operations. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse effect on our business. +We rely upon a broad network of warehouse and distribution facilities to store, sort, package and distribute our products. In the US, we distribute products primarily through self-managed US DCs, including in Moreno Valley, California, and in Mooresville, Indiana, which feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to our customers. Further, as part of our strategy to expand our DCs in the US, in February 2023, we began the build-out of a third US DC located in Mooresville, Indiana, and expect it to be operational during our next fiscal year ending March 31, 2024 (next fiscal year). We expect our domestic DC expansion to create long-term capacity for the domestic growth of the UGG and HOKA brands. We could face a significant disruption in our domestic DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. In addition, if our domestic DC operations and scaling efforts are impeded or delayed for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse effect on our business. +We depend on 3PLs to manage the operation of their DCs as necessary to meet our business needs in certain markets. Internationally, we distribute our products through DCs managed by 3PLs in certain international locations. We also distribute our products through a domestic 3PL located in Pennsylvania. If our 3PLs fail to manage these responsibilities, our distribution operations could face significant disruptions. The loss of or disruption to the operations of any one or more of these facilities could materially adversely affect our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential effect of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +We rely upon independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us from filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely on independent manufacturers and their respective material suppliers for most of our production needs, the majority of which are located in China and Vietnam, and we do not have direct control over these manufacturers or their suppliers. We expect these manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, including our Supplier Code of Conduct and restricted substances policy, and store finished goods in a safe location pending shipment. If these manufacturers fail to manage these responsibilities, or if they experience significant disruption to their business, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, or products may fail to meet our quality standards. Further, because most of our independent manufacturers are concentrated in Asia, we may be subject to an increased risk of supply chain disruption, particularly in the event of a natural disaster, epidemic, geopolitical tensions, or other event affecting the region outside of our control. If any of these were to occur, we may not be able to timely source raw and other materials, manufacture product, or fill customer orders, or +16 +Table of Contents +product delivered may not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +We do not currently have long-term contracts with our independent manufacturers, and there can be no assurance of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us, and we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively affect our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and other materials, under the custody of our independent manufacturers. If these independent manufacturers were to lose or damage these proprietary materials, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a partner fails to satisfy contractual obligations or otherwise meet our expectations, or experiences a closure or other operational issues, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement partner will generate results that are more favorable than the terminated party. +We currently do not have long-term contracts with our customers. As a result, we face the risk that key customers may not increase their business with us as we expect or may significantly decrease their business with us or terminate our relationship. Although no single customer accounted for 10.0% or more of our net sales during fiscal year 2023, the failure to increase or maintain our sales with our key customers as much as we anticipate would have a negative effect on our growth prospects and any decrease or loss of these customers’ business could result in a material decrease in our net sales and net income or loss if we are unable to capture these sales through our DTC channel. Further, as of March 31, 2023, we have no customers that represent 10.0% of trade accounts receivable, net. Trade accounts receivable, net are typically unsecured and are thus subject to the increased risk of us being unable to collect on overdue amounts, or us doing so in a timely manner, which could affect our revenue and liquidity. Further, while we have distributor contracts with terms of up to five years, these contracts may have annual purchase minimums which must be met to retain the distribution rights, and these distributors are not otherwise obligated to purchase our products. Sales to our customers are generally on an order-by-order basis and may be cancelled or rescheduled by our customers. We rely on purchase order delivery dates as a key factor to forecast our sales and earnings for future periods, and if our customers postpone, reduce, or discontinue purchases from us, we could fail to meet our forecasted results. These risks have been exacerbated as key customers operate within a retail industry that continues to undergo significant structural changes fueled by technology, changes in consumer purchasing behavior, a shrinking retail footprint and recent changes in economic conditions, such as an anticipated economic downturn and bank failures. These trends have been further intensified by the pandemic. We may lose key customers if they fail to manage the effect of this rapidly changing retail environment. Any loss of one of these key customers, or a significant reduction in purchases from one of these customers, could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations. Further, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce our prices to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +17 +Table of Contents +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees, and skilled personnel, we may not be able to achieve our strategic objectives and our results of operations may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring and retaining personnel in highly skilled footwear, apparel and accessories design, marketing, merchandising, sourcing, technology, operations, including our DCs and retail stores, and support functions. Competition for executive officers, key employees, and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Changes to our current and future office environments, adoption of new work models, and our business requirements or expectations about when or how often employees work either on-site or remotely may not meet the expectations of our employees. As certain jobs and employers increasingly operate remotely, traditional geographic competition for talent may change in ways that cannot be fully predicted at this time. If our employment proposition is not perceived as favorable compared to other companies’ policies, it could negatively affect our ability to attract, hire and retain our employees. We are committed to offering competitive compensation and benefits to employees across our business to positively affect attrition, which affects our selling, general, and administrative (SG&A) expenses. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. Further, our domestic headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our location. If we hire employees from competitors or other companies, their former employers may assert that we or these employees have breached legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel and we may be unable to execute our growth plan or achieve our long-term strategic objectives, our results of operations may suffer, and it may damage our reputation as a preferred employer, which would challenge our ability to effectively compete across the global labor market. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus, and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and key employees are generally employed on an at-will basis, which means that they can terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel to fill those key positions, could have a material adverse effect on our business. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse effect on our business. +We purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are limited suppliers that are able to provide the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may be found only in certain geographies. We presently rely on only two tanneries in China to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we produce do not conform to our quality or sustainability specifications or fail to meet consumer expectations, we could experience reduced demand for our products, a higher rate of customer returns and negative effects on the image of our brands, any of which could have a material adverse effect on our business. Similarly, if these tanneries are not able to deliver sheepskin in the quantities required, or were to cease operations, we may not be able to timely obtain suitable substitute materials, which would limit our ability to meet demand for our products, lead to inventory shortages, +18 +Table of Contents +result in a loss of sales, strain our customer relationships, and harm our reputation. In addition, any factors that negatively affect the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability, loss or destruction of property, work stoppages, political instability, or acts of terrorism or catastrophic events, could result in shortages in our supply of sheepskin. +While we have experienced fairly stable pricing in recent years, fluctuations in the price of sheepskin could occur as a result of weather patterns, supply conditions, transportation costs, energy prices, work stoppages, government regulation, sanctions and policy, economic climates, market speculation, compliance with our working condition, environmental protection and other standards, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Any and all of these factors may be exacerbated by global climate change. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margin. While we use purchasing contracts and other pricing arrangements to reduce the effect of sheepskin price fluctuations on our results of operations, these strategies may not be sufficient to offset the negative effect of a prolonged increase in such prices on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the effect on our gross margin and our financial results may suffer. +In addition, our industry is characterized by rapidly changing fashion trends and consumer preferences, and we believe there is a growing trend to eliminate the use of certain animal products, most notably fur, in footwear, apparel, and accessories. For example, the sale of fur is banned in certain US cities, and similar legislation is being considered in other geographies. While the use of leather and sheepskin has typically not been subject to these restrictions, it is possible that future legislation could restrict our ability to use sheepskin in the products we sell in certain geographies. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of sheepskin products, especially within our large target markets, could have a material adverse effect on our business, financial condition, and results of operations. +We rely on technical innovation, as well as increased use of environmentally preferred materials, to compete in the market for our products. +Our success relies in part on our continued innovation in both the materials we use and the design of our footwear. We continue to invest in research and development to drive our efforts to increasingly incorporate environmentally preferred materials in our products. For example, we continue to leverage our proprietary UGGpure and UGGplush materials, which incorporate repurposed wool to reduce our use of virgin wool. We also increasingly use preferred synthetics, such as recycled polyester, recycled nylon, recycled polyethylene, and bio-based ethylene, preferred regenerated or synthetic cellulosic fibers, such as TENCEL™ Lyocell and TENCEL™ Modal, and preferred plant fibers, such as cotton sourced through responsible cotton schemes, hemp, linen, ramie, and jute, as well as preferred wool, including UGGpure repurposed wool, and the responsible-down certified standard. Although we continue to invest in research and development to refine our materials and develop new properties for specific applications, if we fail to introduce technical innovation in our products or experience issues with the quality of our products or materials, consumer demand for our products could decline and we may experience reputational damage. Further, as our brands transition to suppliers with preferred materials, we may be subject to increased costs or supply constraints, which could reduce our sales and profitability and have a material adverse effect on our financial condition and results of operations. +We may not succeed in implementing our growth strategies, including through identifying new retail store locations that meet our requirements, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. Our future growth depends in part on our expansion efforts outside of North America (international growth strategy). For example, we have opened and continue to explore future retail opportunities for the HOKA brand, including through third-party partners in international markets. However, if we are unable to identify new retail locations with consumer traffic sufficient to support a profitable sales level, our retail growth may be limited. Global store openings involve substantial investments, including those relating to leasehold +19 +Table of Contents +improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to generate profitable store sales volumes, and if we have insufficient sales at a new store location, we may be unable to avoid losses or negative cash flows. Furthermore, we license the right to operate our brand retail stores to third parties through our partner retail program. We currently plan for most of the partner retail stores to be operated in international markets, with the largest number anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our brand image to suffer. +Additionally, we expanded our 3PL presence in Asia during fiscal year 2023. As part of our international growth strategy, we may transition certain brands in certain geographies from a third-party distribution model to a direct distribution model or vice versa. Failure to effectively implement our growth strategies and develop our business in new international markets, or disappointing growth outside of existing markets, could negatively affect our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth strategies could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +Natural disasters, the effects of climate change, health epidemics, including the pandemic, and other events beyond our control, as well as related regulations, have adversely affected, and could in the future adversely affect, our business. +Natural disasters or other catastrophic events, including the pandemic and the effects of climate change, may damage or disrupt our operations, international markets, and the global economy. Our operations are subject to interruption from extreme weather events, power shortages, pandemics, terrorism, political instability, telecommunications failure, cyber-attacks, war, and other events beyond our control. Although we maintain disaster recovery plans, such events could disrupt our operations or those of our independent manufacturers, suppliers and customers, including through the inability of personnel to work, destruction of facilities, loss of life, and adverse effects on supply chains, power, infrastructure and the integrity of information technology (IT) systems, all of which could materially increase our costs and expenses, delay or decrease sales and disrupt our ability to maintain business continuity. We could incur significant costs to improve the climate-related resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate the effects of climate change. We could also experience increased costs for energy, production, transportation, and raw and other materials, which could adversely affect our operations. Our insurance may not be sufficient to cover losses that we may sustain. A significant natural disaster or other event that disrupts our operations or those of our partners or customers could have a material adverse effect on our business, results of operations and financial condition. +These events could also adversely affect the supply of raw materials, including sheepskin and leather, which are key resources in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our production costs, impose capacity restraints, and affect the types of products that consumers purchase. It is possible consumers increasingly adopt plant-based diets to minimize their carbon footprint, which could reduce the supply of sheep for the meat industry, and in turn, hinder our ability to source sufficient sheepskin for our products. Further, health epidemics, including the pandemic, may reduce demand for certain products, deteriorate our ability, or the ability of our customers, to operate in affected regions, and result in the failure of key business partners to provide services for our efficient operations, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us, any of which would adversely affect our business, results of operations and financial condition. +Increasing expectations from investors and other key stakeholders with respect to our ESG practices may impose additional costs on us or expose us to new or additional risks. +Investor advocacy groups, certain institutional investors, investment funds, stockholders, customers, and consumers are increasingly focused on corporate responsibility, specifically on the ESG practices of companies and the implications of the social and environmental costs of their investments. From time to time we communicate certain ESG initiatives and goals to market participants and our customers and business partners, including through our annual Creating Change Report. Any ESG disclosure we make may include our policies, practices, initiatives, and goals on a variety of human rights, corporate governance, environmental compliance, sustainability, employee +20 +Table of Contents +health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. Although we have undertaken expansive efforts to improve and implement our ESG initiatives, it is possible that stakeholders may not be satisfied with such disclosures, our ESG practices or the speed of their adoption. Moreover, the preparation of sustainability metrics requires management to establish criteria, make determinations as to the relevancy of information to be included, and make assumptions that affect reported information. The selection by management of different but acceptable measurement techniques could result in materially different amounts or metrics being reported. If our ESG practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, or if we are perceived to have not appropriately responded to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, it may negatively affect our employee retention and recruitment, or we may suffer from reputational damage and our business and financial condition could be materially and adversely affected. We may also incur additional costs or require additional resources to monitor such stakeholder expectations and standards and to meet our targets and commitments. Further, we could fail, or be perceived to fail, to achieve our ESG initiatives or goals, or we could fail to report our progress fully and accurately on such initiatives and goals, which could negatively affect our reputation, employee retention and recruitment, and the willingness of our customers and suppliers to do business with us. +Increasing focus on ESG matters has resulted in, and is expected to continue to result in, the adoption of legal and regulatory requirements designed to mitigate the effects of climate change on the environment, as well as legal and regulatory requirements requiring climate-related disclosures. If new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet such obligations. Our processes and controls for reporting ESG matters across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures that may be required by the SEC, European, and other regulators, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. +We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or product could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Such acquisitions involve numerous risks, challenges, and uncertainties, including the potential to: +• expose us to risks inherent in entering into a new market or geographic region; +• lose significant customers or key personnel of the acquired business; +• encounter difficulties managing and implementing acquired assets; +• encounter difficulties marketing to new consumers or managing geographically remote operations; +• divert management’s time and attention away from other aspects of our business operations; and +• incur costs relating to a potential acquisition that we fail to consummate, which we may not recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it will result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +21 +Table of Contents +Risks Related to Our Global Business Strategy, Operations, and International Commerce +Supply chain disruptions could interrupt product manufacturing and global logistics and increase product costs. +Our business depends on our ability to source and distribute products in a timely manner. The pandemic and related governmental and port facility actions in recent years have caused delays in product shipments. For example, port congestion, temporary closures, and worker shortages, have disrupted the operations of our independent manufacturers and 3PLs, as well as the DCs where we manage our inventory, have experienced disruptions that have increased the global lead-time for our products. Due to the pandemic, reductions in the number of ocean carrier voyages and capacity have delayed the arrival of imports and increased ocean transport costs globally and the conflict between Russia and Ukraine continues to result in higher energy and transportation costs. Ongoing ocean carrier consolidation, reduced capacity, congestion at major international gateways and other economic factors are challenging ocean transportation, and labor disputes at US shipping ports have historically affected the delivery of our products. In addition, trucking costs in the US have risen dramatically due to driver shortages, increased labor costs, and safety, environmental, and labor regulations. In addition, global inflation has contributed to already higher incremental freight costs, and such inflation may continue to fuel these costs. +Elevated inventory levels, combined with the uneven flow of receipts and shipments, could cause further capacity pressures within our US DCs and 3PLs, resulting in higher costs and limiting our ability to efficiently fulfill orders for our wholesale partners and consumers. These pressures may be exacerbated by labor disputes that affect the operations of our partners, which creates significant risk for our business, particularly if these disputes result in work slowdowns, strikes, or similar disruptions. As supply chain disruptions continue and we manage product availability, the timing of sales to our wholesale partners and consumers may continue to be affected, and we face increased risk of order cancellations. We continue to actively manage our inventory positions, including by investing in supply chain and related tools, and transit lead times and related freight costs during fiscal year 2023 have improved compared to fiscal year 2022. However, these disruptions remain elevated compared to pre-pandemic levels and we expect supply chain constraints to continue into our next fiscal year. Our short-term priority remains meeting customer demand and expectations on service levels, which may result in inventory levels outpacing sales growth in the near term. +In addition to logistical supply chain pressures, our network of strategic sourcing partners, which includes material vendors and manufacturers, has navigated delays and disruptions due to the lingering impacts of the pandemic. We have mitigated the effects of production disruptions through expanding and reallocating production capacity with our existing sourcing partners and onboarding new long-term partners to diversify our country-level manufacturing and sourcing lines. We plan to continue growing our distribution network to support our long-term strategic objectives but have experienced and expect to continue to experience headwinds in connection with these efforts, including new sourcing partner capacity constraints and long production lead times to ensure the rigorous quality standards of our brands are met. +Further, we have historically used more expensive air freight to ship our products to meet demand, as needed. While we experienced significant increases in ocean shipping rates resulting in reductions to our gross margin during fiscal year 2022, we began to see improvement during fiscal year 2023 and reduced our use of air freight. However, if we experience such fluctuations in costs in future periods, we may be required to leverage air freight in future periods to maintain service levels. Failure to adequately produce and timely ship our products to customers could lead to lost potential revenue, failure to meet consumer demand, strained relationships with customers and diminished brand loyalty. +Most of our independent manufacturers are located outside of the US and subject us to various risks associated with international regulations, trade agreements, and geopolitical relations. +Most of our independent manufacturers are located in Asia, and products manufactured overseas and imported into the US and other countries are subject to numerous risks and uncertainties. For example, while we require our independent manufacturers and suppliers to adhere to environmental, labor, ethical, health, safety, and other business practices and laws, and while we periodically visit and audit their operations, we do not control their business practices. If non-compliant manufacturers or suppliers cannot or will not become compliant, we will cease conducting business with them, which could increase our costs and interrupt our supply chain. Our manufacturers’ violations of laws and business standards could also result in negative publicity, which could damage our reputation and brand value. Further, if our manufacturers or suppliers violate US or foreign trade laws or regulations, we may +22 +Table of Contents +be subject to extra duties, significant monetary penalties, the seizure and forfeiture of products we are attempting to import, or the loss of our import privileges, which could have a negative effect on our results of operations. +Our international manufacturing operations are subject to numerous other risks and uncertainties, including the following: +• tariffs, import and export controls, and other non-tariff barriers; +• poor infrastructure and equipment shortages, which can disrupt transportation and utilities; +• restrictions on the transfer of funds from foreign jurisdictions; +• changes in governmental regulations, including with respect to intellectual property, labor, safety, and the environment; +• refusal to adopt or comply with our manufacturing policies; +• customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• decreased scrutiny by custom officials for counterfeit products; +• practices involving corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• use of unauthorized or prohibited materials or reclassification of materials; +• health-related concerns that could result in a reduced workforce or scarcity of raw and other materials; and +• adverse changes in consumer perception of goods sourced from certain countries. +While we have implemented measures to comply with applicable customs regulations and to properly calculate import duties, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margin. In addition, we cannot predict whether future laws, regulations, trade remedy actions, or international agreements may impose additional duties or other restrictions on our ability to manufacture sufficient inventory or import products from one or more of our sourcing venues. Trade relations between our sourcing venues, particularly those in China, and the US have created uncertainty and there exists the potential for import duties or other restrictions on exports from China, which could increase our sourcing costs. We have transitioned most of our footwear sourcing from China to Vietnam as part of our supplier optimization strategy, but if we are unable to source our products from the countries where we wish to purchase them, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition, and results of operations. Further, because most of our products are manufactured in China and Vietnam, the possibility of adverse changes in trade or political relations with China or Vietnam, or other pressures in the region, including political instability, increased labor costs, adverse weather conditions, a natural disaster or incidence of disease could severely interfere with the manufacturing or shipment of our products and would have a material adverse effect on our operations. +Moreover, international trade policy is undergoing revision, introducing significant uncertainty with respect to future trade regulations and existing trade agreements. The continued negotiation of free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers, which may seek to export footwear, apparel, and accessories to our target markets at preferred rates of duty which may negatively affect our results of operations. +Transportation and distribution costs may be adversely affected by new regulations, increased demand, increased fuel and labor costs, inflation, and political and economic instability. For example, the Russian invasion of Ukraine during fiscal year 2022 and the resulting financial and economic sanctions imposed by various countries and organizations has affected transportation and energy costs. Further disruption in this region, or additional sanctions imposed in response to the conflict, could increase distribution costs in Europe and adversely affect our results of operations. Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and caused delays in bringing imported goods to market. Any tightening of security procedures could worsen these delays and increase our costs. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural, and economic risks that may adversely affect our results of operations in certain regions. +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +23 +Table of Contents +• foreign currency exchange rates fluctuations, which affect the prices at which products are sold to international consumers; +• limitations on our ability to move currency out of international markets; +• burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• legal costs related to defending allegations of non-compliance with foreign laws; +• inability to import products into a foreign country; +• difficulties associated with promoting and marketing products in unfamiliar cultures; +• political or economic uncertainty or instability, including the war in Ukraine, which has disrupted European businesses and has the potential to reduce levels of consumer spending, which could have a material adverse effect on our business, particularly our UGG and HOKA brands’ net sales; +• changes in unemployment rates and consumer spending; +• anti-American sentiment in international markets in which we operate; +• changes in diplomatic and trade relationships between the US and other countries; and +• general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative effect on our financial results. +We operate on a global basis, with 32.4% of our net sales for the year ended March 31, 2023, from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies and our foreign distributors typically sell our products in local currency, which affects the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, gross margin, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. When the US dollar strengthens relative to foreign currencies, the Company's revenues and profits denominated in foreign currencies are reduced when converted into US. dollars and the Company's margins may be negatively affected. We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, remeasurements, or translations could materially affect our consolidated financial statements. For example, during fiscal year 2023, unfavorable changes in foreign currency exchange rates against the US dollar negatively affected our gross margin. +Risks Related to Technology, Data Security and Privacy +A security breach or other disruption to our IT systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive Company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition, or results of operations. +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers and employees, credit card information, and our proprietary financial, operational, and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputation or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial losses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this information, and to respond quickly and effectively if data security incidents occur. We are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend +24 +Table of Contents +significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +Our success also depends in part on the continued operation of our key business processes, including our IT and global communications systems. We rely on third-party IT service providers worldwide for many of our IT functions, including network, hardware, and software configuration. Additionally, we rely on internal networks and information systems and other technologies, including the internet and third-party hosted services, to support a variety of business processes and activities. Any disruption to these systems or networks could result in product fulfillment delays, key personnel being unable to perform duties or communicate throughout the organization, loss of sales, significant costs for data restoration, the inability to interpret data timely to enhance operations, and other adverse effects on our business and reputation. Further, if key operational systems and processes are not properly supporting our business, it could result in information silos and inefficiencies across our organization. If we are unable to modify our systems and processes to respond to changes in our business needs, or if we or our third-party providers experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents have significantly increased in recent years. Like other businesses, we have experienced, and are continually at risk of, attacks and incidents. Additionally, external events, such as the Russia-Ukraine conflict, can increase the likelihood of such incidents, and our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale, and the interconnectivity and interdependence of third parties to our systems. We expend significant resources on IT and data security tools, measures, and processes designed to protect our IT systems, as well as the personal, confidential, or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any attack or incident. Whether these measures are ultimately successful, these expenditures could have an adverse effect on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives. +Although we take the security of our IT systems seriously, there can be no assurance that the measures we employ will prevent unauthorized persons from obtaining access to our systems and information, as well as those held by our third-party IT service providers. Despite our implementation of reasonable security measures, our systems and information may be susceptible to cyber-attacks or data security incidents. These risks may be exacerbated in a remote work environment. Because the techniques used to obtain unauthorized access to IT systems are constantly evolving, we may be unable to anticipate these techniques or implement adequate protective measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches. A cyber-attack or other data security incident could result in significant disruption of our business such that: +• critical business systems become inoperable or require significant time or cost to restore; +• personnel are unable to perform their duties or communicate with third-party partners; +• it results in the loss, theft, misuse, or unauthorized disclosure of confidential information; +• we are prevented from accessing information necessary to conduct our business; +• we are required to make unanticipated investments in equipment, technology, or security measures; +• customers cannot place or receive orders, and we are unable to timely ship orders or at all; or +• we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers, or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with us or impose onerous contractual provisions, and subject us to litigation, liability, fines, and penalties. We could be subject to regulatory or other actions pursuant to domestic and international privacy laws, which could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +25 +Table of Contents +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include US state laws such as the California Consumer Privacy Act and the California Privacy Rights Act, as well as the General Data Protection Regulation in the EU, EU member state directives, the Personal Information Protection and Electronic Documents Acts in Canada, the Personal Information Protection Law in China, or similar applicable laws. These laws place limits on how we may collect, use, share and store personal information, and they impose obligations to protect that information. Further, we may be subject to new data privacy and security laws and regulations. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +If the technology-based systems that give our customers the ability to shop or interact with us online do not function effectively, our results of operations, as well as our ability to grow our e-commerce business globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our e-commerce platforms or through third party digital marketplaces on which we operate. Consumer expectations and related competitive pressures have increased and are expected to continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges, and other evolving expectations. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We are increasingly using social media to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with consumers, have an adverse effect on the growth of our e-commerce business globally and have an adverse effect on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers' needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. Risks specific to our e-commerce business also include diversion of sales from our and our retailers' brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks could adversely affect sales in our e-commerce business, as well as damage our reputation and brands. +If we are unsuccessful at improving our operational and IT systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve, automate, and streamline our operational and IT systems, processes, and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. Transitioning to these new or upgraded processes and systems requires significant capital investments and personnel resources. Implementation is also highly dependent on the coordination of numerous employees, contractors and software and system providers. While these efforts have resulted in improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been and may continue to be incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. We may also experience difficulties in implementing or operating our new or upgraded operational or IT systems, including, but not limited to, ineffective or inefficient operations, significant system failures, system outages, delayed implementation and loss of system availability, which could lead to increased implementation and/or operational costs, loss or corruption of +26 +Table of Contents +data, delayed shipments, excess inventory and interruptions of operations resulting in lost sales and/or profits. If our operational or IT system upgrades, improvements and associated change management efforts are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +Risks Related to Our Legal, Compliance, and Regulatory Environment +Failure to adequately protect our intellectual property rights to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales, and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. An unfortunate reaction to the success of our brands is that we have become a target of counterfeiting and product imitation strategies. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect these rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it will allow our competitors to sell products that are similar to and directly competitive with our products, or we could otherwise lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product, which could reduce sales of our products and adversely affect the value of our brands. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively affect our business and results of operations. In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey, and the Netherlands. Any court decision or settlement that invalidates or limits trademark protection of our brands, which allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributor to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales, and could have a material adverse effect on the value of our brands. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material effect on our business. Failure to comply with any of the covenants could result in a default, allowing our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. Certain of our revolving credit facility agreements bear interest at a rate that varies by currency. Any increases in interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. +The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate, or audits by various taxing authorities may subject us to additional tax liabilities, and materially affect our financial position and results of operations . +We are subject to changes in tax laws, regulations, and treaties in and between the jurisdictions in which we operate. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. Future changes in these tax laws, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, global tax authorities may take differing positions in interpreting the Organization for Economic Co-operation and Development’s guidance, including with respect to base erosion and profit shifting, which could modify existing tax principles. These changes and potential other tax law changes could increase our +27 +Table of Contents +income tax liability or adversely affect our long-term effective tax rates and net income. +Many countries in the EU and around the globe have adopted or proposed changes to current tax laws. Certain provisions of the recently enacted Inflation Reduction Act, including a 15% corporate alternative minimum tax, as well as the similar 15% global minimum tax under the Organization for Economic Cooperation and Development's Pillar Two Global Anti-Base Erosion Rules, may affect our income tax expense, profitability, and capital allocation decisions. We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our results of operations or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports. +Risks Related to Our Common Stock +Our common stock price has been volatile, which could result in substantial losses for stockholders. +The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• changes in expectations of our future financial performance and results of operations; +• changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• changes in our stockholder base or public actions taken by investors; +• market research and opinions published by securities analysts and other market participants, and the response to such publications; +• quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• the financial stability of our customers, manufacturers, and suppliers; +• legal proceedings, regulatory actions, and legislative changes; +• our stock repurchase activity or announcements regarding the same; +• the declaration of stock or cash dividends; +• consumer confidence and discretionary spending levels; +• broad market fluctuations in volume and price; +• general market, political, and economic conditions, including recessionary conditions; and +• a variety of risk factors, including the ones described herein and in our other SEC filings. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation (Certificate) and Amended and Restated Bylaws (Bylaws), as well as provisions of Delaware law, could impair a takeover attempt. +Our Certificate and Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board of Directors or management. +As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Any provision of Delaware law, our Certificate, or our Bylaws, which has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for stockholders to receive a premium for their shares of our common stock, and could affect the price that investors are willing to pay for our common stock. +28 +Table of Contents +Item 2. Properties +We have owned our 14-acre corporate headquarters located in Goleta, California since 2014. +We have a warehouse and DC located in Moreno Valley, California, which began operations during the fourth quarter of fiscal year 2015 and have since continued optimizing and expanding our operations at this location. In October 2021, we began operations in a second US warehouse and DC located in Mooresville, Indiana. In February 2023, we took possession of a third US warehouse and DC in Mooresville, Indiana with up to approximately 1,015,902 square feet over the lease term, which we expect to be operational during our next fiscal year. +We also have offices in Belgium, Canada, China, France, Germany, Hong Kong, Indonesia, Italy, Japan, the Netherlands, Switzerland, the UK, and Vietnam, to perform a variety of functions, which include overseeing the quality and manufacturing standards of our products, coordinating regional sales, operations, marketing, and administration; as well as offices in Macau and Hong Kong to coordinate logistics. +As of March 31, 2023, we have 52 retail stores in the US ranging from approximately 1,000 to 13,000 square feet. Internationally, we have 112 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments. +We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +The following table provides details regarding our significant physical properties that are operational as of March 31, 2023: +Facility Location Description Lease or Own Facility Size (Square Footage) +Moreno Valley, California Warehouse and Distribution Center Lease 1,530,944 +Mooresville, Indiana (1st location) Warehouse and Distribution Center Lease 507,600 +Goleta, California Corporate Headquarters Own 185,094 +Item 3. Legal Proceedings +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG brand and HOKA brand trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products, and we are also investigating various markets for indications of counterfeit HOKA brand manufacturing. +From time to time, we are involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these ordinary course matters cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the merit of the claims raised or the outcome, these ordinary course matters can have an adverse impact on us as a result of legal costs, diversion of management's time and resources, and other factors. +29 +Table of Contents +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Our common stock has traded under the symbol DECK on the New York Stock Exchange (NYSE) since May 2014 and was previously traded on the Nasdaq Global Select Market. +As of May 11, 2023, we had 37 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies. +We did not sell any equity securities during the year ended March 31, 2023, that were not registered under the Securities Act. +Stock Performance Graph +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index, and the NYSE Composite Index for the five fiscal-year periods commencing March 31, 2018, and ended March 31, 2023. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index, and the NYSE Composite Index on March 31, 2018. +30 +Table of Contents +Years Ended March 31, +2018 2019 2020 2021 2022 2023 +Deckers Outdoor Corporation $ 100.0 $ 163.3 $ 148.8 $ 367.0 $ 304.1 $ 499.3 +S&P 500 Apparel, Accessories & Luxury Goods Index 100.0 96.9 48.2 98.3 77.7 53.9 +The NYSE Composite Index 100.0 104.8 87.4 135.5 147.9 139.8 +The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference into this Annual Report any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. +Dividend Policy +We have not declared or paid any cash dividends on our common stock since our inception. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. However, we currently do not anticipate declaring or paying any cash dividends. +Stock Repurchase Programs +Our Board of Directors has approved various authorizations under our stock repurchase program to repurchase shares of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. Our Board of Directors approved an additional authorization of $1,200,000 on July 27, 2022, to repurchase our common stock under the same conditions as the prior stock repurchase programs (collectively, the stock repurchase program). +Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Our current revolving credit agreements allow us to make stock repurchases under this program, so long as we do not exceed certain leverage ratios. As of March 31, 2023, no defaults have occurred under our credit agreements. +Below is a summary of stock repurchasing activity under our stock repurchase program during the fourth fiscal quarter ended March 31, 2023: +Total number of shares repurchased (3) Weighted average price paid per share Dollar value of shares repurchased (1) (2) Dollar value of shares remaining for repurchase (3) (2) +January 1 - January 31, 2023 — $ — $ — $ 1,459,145 +February 1 - February 28, 2023 101,722 412.86 41,997 1,417,148 +March 1 - March 31, 2023 141,465 427.76 60,513 1,356,635 +(1) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs associated with our program. +(2) May not calculate on rounded dollars. +(3) All share repurchases were made pursuant to our publicly announced stock repurchase program in open-market transactions. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity” and Note 10, "Stockholders' Equity," of our consolidated financial statements and accompanying notes thereto (referred to herein as the consolidated financial statements) in Part IV within this Annual Report for further information on repurchases of our common stock. +31 +Table of Contents +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended March 31, 2023, and 2022 and year-over-year comparisons between those periods. For year-over-year comparisons between the years ended March 31, 2022, and 2021, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the SEC on May 27, 2022. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A, "Risk Factors," within this Annual Report for additional information. +Unless otherwise specifically indicated, all figures included within this Annual Report are expressed in thousands, except for per share or share data. +Overview +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Financial Highlights +Consolidated financial performance highlights for fiscal year 2023 compared to fiscal year 2022, are as follows: +• Net sales increased 15.1% to $3,627,286. +◦ Channel +▪ Wholesale channel net sales increased 11.6% to $2,160,675. +▪ DTC channel net sales increased 20.8% to $1,466,611. +◦ Geography +▪ Domestic net sales increased 13.1% to $2,451,497. +▪ International net sales increased 19.7% to $1,175,789. +• Gross margin decreased 70 basis points to 50.3%. +• Income from operations increased 15.6% to $652,751. +• Diluted earnings per share increased 19.1% to $19.37 per share. +Trends and Uncertainties Impacting Our Business and Industry +We expect our business and industry will continue to be impacted by several important trends and uncertainties, including the following: +Supply Chain +• Similar to other companies in our industry, we continue to monitor pressures on the global supply chain, which have shifted the timing of shipments across our brands compared to the prior period, resulting in inventory levels outpacing sales growth. However, we have seen improvements in transit lead times and related freight costs compared to the prior period, which has had a positive impact on results of operations through fiscal year 2023. +32 +Table of Contents +• We continue to be flexible in adapting to the fluid logistics environment by implementing additional measures to mitigate the effects of supply chain disruptions, which has resulted in and may continue to result in higher costs. Our efforts include expanding our global warehouses and DCs, as well as our 3PL arrangements, and diversifying and increasing the number of our third-party manufacturers. +Brand and Omni-Channel Strategy +• We remain focused on increasing consumer adoption of the HOKA brand with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our financial results and seasonality trends. Our efforts to drive HOKA brand performance are primarily focused on distribution management, launching innovative product offerings and global marketing campaigns to drive brand awareness, and further expanding the HOKA brand presence through our DTC channel. +• Our marketplace strategies in Europe and Asia (international reset strategies) have continued to drive UGG brand awareness and consumer acquisition by building brand acceptance through localized marketing investments. However, unfavorable foreign currency exchange rates have partially offset international growth of the UGG brand during fiscal year 2023. +• Our long-term growth strategy remains focused on building our DTC channel to represent an increased portion of our total net sales, and prioritizing consumer acquisition and experience to sustain strong demand and market positions for our brands. +• We continue to adopt selective price increases as appropriate by brand and product, which we believe can help mitigate increased costs. +Reportable Operating Segment Overview +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Chief Executive Officer (CEO), President, and Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. +We believe demand for UGG brand products will continue to be driven by the following: +• Successful acquisition of a diverse consumer base that resonates globally and with key markets, including for a younger, fashionable consumer, through strategic marketing activations and collaborations. +• High consumer brand loyalty due to consistent delivery of crafted; purposefully built and luxuriously comfortable footwear, apparel, and accessories. +• Diversification of our footwear product offerings, such as our spring and summer lines, as well as expanded category offerings for Men's products, and more iconic fashion product for our Classics line. +• Thoughtful expansion of our apparel and accessories businesses. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear that offers enhanced cushioning and inherent stability with minimal weight, apparel, and accessories. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing within selective key accounts. As a result, the HOKA brand is bolstering its net sales, which continue to increase as a percentage of our aggregate net sales. +33 +Table of Contents +We believe demand for HOKA brand products will continue to be driven by the following: +• Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes. +• Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship. +• Thoughtful and strategic wholesale distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base. +• Category extensions in authentic performance footwear offerings such as lifestyle, trail, and hiking categories. +Teva Brand . The Teva brand created the very first sport sandal when it was founded in the Grand Canyon in 1984. Since then, the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet. +We believe demand for Teva brand products will continue to be driven by the following: +• Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. +• Increasing brand awareness in key major global markets due to outdoor lifestyle participation among younger consumers. +• Category extensions in performance hike footwear, including key franchises, as well as year-round product. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. +We believe demand for Sanuk brand products will continue to be driven by the following: +• Introducing a broader and more premium range of comfortable and easy slip-on product, including through category extensions in comfort casual footwear for the younger consumer and establishing a year-round product offering, from sandals to slippers to winterized casual comfort. +Other Brands. Other brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. +We believe demand for Koolaburra brand products will continue to be driven by the following: +• Increasing brand awareness with fashion focused consumers. +• Evolution of key franchises and purpose-built expansion in fashion casual boots, slippers, and sandals. +Direct-to-Consumer . Our DTC business encompasses all our brands and is comprised of our e-commerce business and retail stores that are intertwined and interdependent in an omni-channel marketplace. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions in store and online. +E-Commerce Business. Our global e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands’ promises, promotes awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2023, we operate our e-commerce business through Company-owned websites and mobile platforms in 57 different countries. +34 +Table of Contents +Retail Business. Our global Company-owned mono branded retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings of HOKA brand stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. +As of March 31, 2023, we have a total of 164 global retail stores (including 18 HOKA brand stores), which includes 81 concept stores and 83 outlet stores. While we generally open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter, the timing of such openings and closures may vary. We will continue to evaluate our retail store fleet strategy in response to brand strategy changes in consumer demand and retail store traffic patterns. +Flagship Stores. Included in the total count of global concept stores are seven flagship stores, which are primarily located in major tourist locations. These are premium mono branded stores in key markets designed to showcase UGG and HOKA brand products. Flagship stores provide broader product offerings and generate greater traffic that enhance our interaction with consumers and increase brand loyalty. We anticipate opening four additional flagship stores in Europe and Asia during our next fiscal year. +Shop-in-Shop Stores. Included in the total count of global concept stores are 29 shop-in-shop (SIS) stores, for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. +Partner Retail Stores. Represent UGG and HOKA mono branded stores which are wholly owned and operated by third parties and not included in the total count of our global Company-owned retail stores. +Our net sales related to the e-commerce business and retail stores discussed above are recorded in our DTC reportable operating segment, except for net sales generated by partner retail stores, which are recorded in each respective brand's wholesale reportable operating segment, as applicable. +Use of Non-GAAP Financial Measures +Throughout this Annual Report we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to certain financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance. However, the information presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing our performance relative to other companies. For example, in order to calculate our constant cur rency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements . Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. +These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial or operating measures presented in accordance with US GAAP . We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. +35 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we have seen and expect to continue to see the impact from seasonality decrease over time. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Note 14, "Quarterly Summary of Information (Unaudited)," of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +Result of Operations +Year Ended March 31, 2023, Compared to Year Ended March 31, 2022. Results of operations were as follows: +Years Ended March 31, +2023 2022 Change +Amount % Amount % Amount % +Net sales $ 3,627,286 100.0 % $ 3,150,339 100.0 % $ 476,947 15.1 % +Cost of sales 1,801,916 49.7 1,542,788 49.0 (259,128) (16.8) +Gross profit 1,825,370 50.3 1,607,551 51.0 217,819 13.5 +Selling, general, and administrative expenses 1,172,619 32.3 1,042,844 33.1 (129,775) (12.4) +Income from operations 652,751 18.0 564,707 17.9 88,044 15.6 +Total other (income) expense, net (13,331) (0.4) 69 — 13,400 19,420.3 +Income before income taxes 666,082 18.4 564,638 17.9 101,444 18.0 +Income tax expense 149,260 4.1 112,689 3.6 (36,571) (32.5) +Net income 516,822 14.3 451,949 14.3 64,873 14.4 +Total other comprehensive loss, net of tax (14,080) (0.4) (8,212) (0.2) (5,868) (71.5) +Comprehensive income $ 502,742 13.9 % $ 443,737 14.1 % $ 59,005 13.3 % +Net income per share +Basic $ 19.50 $ 16.43 $ 3.07 18.7 % +Diluted $ 19.37 $ 16.26 $ 3.11 19.1 % +Net Sales. Net sales by geographic location, and by brand and distribution channel were as follows: +Years Ended March 31, +2023 2022 Change +Amount Amount Amount % +Net sales by location +Domestic $ 2,451,497 $ 2,167,793 $ 283,704 13.1 % +International 1,175,789 982,546 193,243 19.7 +Total $ 3,627,286 $ 3,150,339 $ 476,947 15.1 % +36 +Table of Contents +Years Ended March 31, +2023 2022 Change +Amount Amount Amount % +Net sales by brand and channel +UGG brand +Wholesale $ 1,004,356 $ 1,088,082 $ (83,726) (7.7) % +Direct-to-Consumer 924,855 893,887 30,968 3.5 +Total 1,929,211 1,981,969 (52,758) (2.7) +HOKA brand +Wholesale 925,877 628,674 297,203 47.3 +Direct-to-Consumer 487,039 262,920 224,119 85.2 +Total 1,412,916 891,594 521,322 58.5 +Teva brand +Wholesale 149,111 129,094 20,017 15.5 +Direct-to-Consumer 33,950 33,643 307 0.9 +Total 183,061 162,737 20,324 12.5 +Sanuk brand +Wholesale 27,678 30,316 (2,638) (8.7) +Direct-to-Consumer 10,288 12,779 (2,491) (19.5) +Total 37,966 43,095 (5,129) (11.9) +Other brands +Wholesale 53,653 60,573 (6,920) (11.4) +Direct-to-Consumer 10,479 10,371 108 1.0 +Total 64,132 70,944 (6,812) (9.6) +Total $ 3,627,286 $ 3,150,339 $ 476,947 15.1 % +Total Wholesale $ 2,160,675 $ 1,936,739 $ 223,936 11.6 % +Total Direct-to-Consumer 1,466,611 1,213,600 253,011 20.8 +Total $ 3,627,286 $ 3,150,339 $ 476,947 15.1 % +Total net sales increased primarily due to higher DTC channel net sales for the HOKA and UGG brands, as well as higher wholesale channel net sales for the HOKA and Teva brands, partially offset by lower UGG brand domestic wholesale net sales. Further, we experienced an increase of 15.4% in the total volume of pairs sold to 59,100 from 51,200 compared to the prior period. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales. On a constant currency basis, net sales increased by 18.4% compared to the prior period. Drivers of significant changes in net sales, compared to the prior period, were as follows: +• DTC net sales increased primarily due to higher global net sales for the HOKA and UGG brands, primarily driven by consumer acquisition and retention online through higher demand across an assortment of franchise road running updates as well as trail, hiking, and fitness categories for the HOKA brand, and across our Classics franchise derivatives and multi-use hybrid products for the UGG brand. Comparable DTC net sales for the 52 weeks ended April 2, 2023, increased by 23.1% compared to the prior year period. +• Wholesale net sales of the HOKA brand increased globally from gaining market share with existing customer accounts along with increasing volume shipped for select incremental door expansion within strategic accounts, driven by higher demand across an assortment of franchise road running updates, as well as trail and hiking categories. +• Wholesale net sales of the UGG brand decreased due to lower domestic net sales, primarily driven by lapping the benefit of managing and refilling existing marketplace inventory levels caused by supply chain and pandemic related disruptions in the prior period. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales. +37 +Table of Contents +• Wholesale net sales of the Teva brand increased globally primarily driven by higher international distributor shipments, as well as higher domestic demand for the sport sandal category. These results include lapping benefits from supply chain disruptions in the prior period. +• International net sales, which are included in the reportable operating segment net sales presented above, increased by 19.7% and represented 32.4% and 31.2% of total net sales for the years ended March 31, 2023, and 2022, respectively. These changes were primarily driven by higher net sales for the HOKA and UGG brands, across international regions and channels, and higher net sales for the Teva brand in the wholesale channel. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales, primarily for the UGG HOKA, and Teva brands. +Gross Profit. Gross margin decreased to 50.3% from 51.0%, compared to the prior period, primarily due to unfavorable changes in foreign currency exchange rates, domestic promotional and closeout activity, and higher ocean freight rates embedded in inventory sold. These unfavorable margin pressures were partially offset by a decrease in air freight usage relative to the prior period, favorable HOKA brand mix shift that reflects domestic price increases, and favorable channel mix shift to DTC. +Selling, General, and Administrative Expenses. While we had lower SG&A expenses as a percentage of net sales, the net dollar increase in SG&A expenses, compared to the prior period, was primarily the result of the following: +• Increased payroll and related costs of approximately $52,000, including for outside services, partially offset by lower performance-based compensation. +• Increased other variable net selling expenses of approximately $38,100, primarily due to higher rent and occupancy expenses, materials and supplies costs, credit card fees, sales commissions, and warehousing fees. +• Increased other operating expenses of approximately $20,100, primarily due to higher travel expenses, IT expenses for programming and software costs, depreciation expenses, and sample expenses, partially offset by lower legal fees and net insurance premiums. +• Increased variable advertising and promotion expenses of approximately $15,700, primarily due to higher marketing expenses for the HOKA brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing, partially offset by lower advertising and promotion expenses for the UGG brand. +• Increased allowances for trade accounts receivable of approximately $2,800, primarily due to an increase in bad debt expense to account for higher open accounts receivable balances. +• Increased net foreign currency-related losses of $1,400, primarily driven by remeasurements with unfavorable changes in Canadian and Asian exchange rates against the US dollar. +Income from Operations. Income (loss) from operations by reportable operating segment was as follows: +Years Ended March 31, +2023 2022 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand wholesale $ 267,013 $ 315,240 $ (48,227) (15.3) % +HOKA brand wholesale 285,257 155,344 129,913 83.6 +Teva brand wholesale 32,595 33,294 (699) (2.1) +Sanuk brand wholesale 2,891 6,463 (3,572) (55.3) +Other brands wholesale (1,678) 14,028 (15,706) (112.0) +Direct-to-Consumer 508,948 435,414 73,534 16.9 +38 +Table of Contents +Years Ended March 31, +2023 2022 Change +Amount Amount Amount % +Unallocated overhead costs (442,275) (395,076) (47,199) (11.9) +Total $ 652,751 $ 564,707 $ 88,044 15.6 % +The increase in total income from operations, compared to the prior period, was primarily due to higher net sales and lower SG&A expenses as a percentage of net sales, partially offset by lower gross margins. Drivers of significant net changes in total income from operations, compared to the prior period, were as follows: +• The increase in income from operations of HOKA brand wholesale was due to higher global net sales at higher gross margins, combined with lower SG&A expenses as a percentage of net sales. +• The increase in income from operations of the DTC channel was due to higher global net sales, primarily for the HOKA and UGG brands, at lower gross margins, as well as lower DTC SG&A expenses as a percentage of net sales. +• The decrease in income from operations of UGG brand wholesale was due to lower domestic and European net sales at lower gross margins, combined with higher SG&A expenses as a percentage of net sales. +• The decrease in income from operations of Other brands wholesale was due to lower Koolaburra brand domestic net sales at lower gross margins, combined with higher SG&A expenses as a percentage of net sales. These effects were further impacted by a write-off of inventory for other brands. +• The increase in unallocated overhead costs was due to higher payroll costs, higher other variable net selling expenses, including materials and supplies costs and warehousing fees, and higher other operating expenses, including depreciation, IT, and travel expenses. +Total Other (Income) Expense, Net. Total other income, net, compared to the prior period, increased due to higher interest income on invested cash balances driven by higher average interest rates. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2023 2022 +Income tax expense $ 149,260 $ 112,689 +Effective income tax rate 22.4 % 20.0 % +The net increase in our effective income tax rate compared to the prior period was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as higher reserves for uncertain tax positions for foreign audits, partially offset by higher net discrete tax benefits. +Foreign income before income taxes was $198,851 and $168,270 and worldwide income before income taxes was $666,082 and $564,638 during the years ended March 31, 2023, and 2022, respectively. The slight net increase in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to lower foreign operating expenses as a percentage of worldwide sales, partially offset by lower foreign gross profit as a percentage of foreign net sales. +For the years ended March 31, 2023, and 2022, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the section titled “Liquidity” below for further information. +39 +Table of Contents +Net Income. The increase in net income, compared to the prior period, was primarily due to higher net sales and lower SG&A expense as a percentage of net sales, partially offset by lower gross margins. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by stock repurchases. +Total Other Comprehensive Loss, Net of Tax. The increase in total other comprehensive loss, net of tax, compared to the prior period, was primarily due to higher foreign currency translation losses relating to changes to our net asset position for unfavorable Asian foreign currency exchange rates, partially offset by favorable European foreign currency exchange rates. +Liquidity +We finance our working capital and operating requirements using a combination of cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw and other materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period. +As of March 31, 2023, our cash and cash equivalents are $981,795. We believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months. +Our liquidity may be impacted by a number of factors, including our results of operations, the strength of our brands and market acceptance of our products, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, our ability to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to macroeconomic, political and legislative developments. We may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. +If there are unexpected material impacts on our business in future periods and we need to raise or conserve additional cash to fund our operations, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, factors such as a prolonged or severe economic recession, inflationary pressure, or significant supply chain disruptions could adversely affect our business and liquidity. +Repatriation of Cash . Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include future changes to or interpretations of global tax law and regulations, and our actual earnings in future periods. During the year ended March 31, 2023, no cash and cash equivalents were repatriated, however, during the year ended March 31, 2022, $120,000 of cash was repatriated. As of March 31, 2023, and 2022, we have $299,114 and $133,053, respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries only to the extent they have already been subject to US tax, if such cash is not required to fund ongoing foreign operations. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information. +40 +Table of Contents +Stock Repurchase Program . We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives, and drive stockholder value, including by potentially repurchasing additional shares of our common stock. On July 27, 2022, our Board of Directors approved an increase of $1,200,000 to our stock repurchase authorization. As of March 31, 2023, the aggregate remaining approved amount under our stock repurchase program is $1,356,635. The stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Refer to Note 10, "Stockholders' Equity," of our consolidated financial statements in Part IV within this Annual Report for further information. +Capital Resources +Primary Credit Facility. We maintain bank credit facilities for working capital and general corporate purposes. In December 2022, we refinanced in full and terminated our prior credit agreement originally entered into in September 2018. The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank), as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement ) .The Credit Agreement provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility ) , contains a $25,000 sublimit for the issuance of letters of credit, and matures on December 19, 2027, subject to extension on early termination as described in the Credit Agreement. As of March 31, 2023, we have no outstanding balance, outstanding letters of credit of $958, and available borrowings of $399,042 under our Primary Credit Facility. +China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY300,000, or $43,672. As of March 31, 2023, we have no outstanding balance, outstanding bank guarantees of $29, and available borrowings of $43,643 under our China Credit Facility. +Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) expired on January 31, 2023, and we cancelled the parent guarantee. If borrowing needs arise, Deckers Japan is able to borrow from one or more of our subsidiaries through intercompany loans as permitted under the Primary Credit Facility. +Debt Covenants. As of March 31, 2023, we are in compliance with all financial covenants under our Primary Credit Facility and China Credit Facility. +Refer to Note 6, "Revolving Credit Facilities," of our consolidated financial statements in Part IV within this Annual Report for further information on our capital resources. +Cash Flows +The following table summarizes the major components our consolidated statements of cash flows for the periods presented: +Years Ended March 31, +2023 2022 Change +Amount Amount Amount % +Net cash provided by operating activities $ 537,422 $ 172,353 $ 365,069 211.8 % +Net cash used in investing activities (81,013) (51,009) (30,004) (58.8) +Net cash used in financing activities (309,031) (367,482) 58,451 15.9 +Effect of foreign currency exchange rates on cash and cash equivalents (9,110) 304 (9,414) (3,096.7) +Net change in cash and cash equivalents $ 138,268 $ (245,834) $ 384,102 156.2 % +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income after non-cash adjustments and changes in working capital. The increase in net cash provided by operating activities during the year ended March 31, 2023, compared to the prior period, was primarily due to $271,694 of favorable changes in operating assets and liabilities as well as $93,375 of favorable net income after non-cash adjustments, including from favorable changes in deferred tax expense, and depreciation, amortization, and accretion. The favorable changes in operating assets and liabilities were primarily due to net favorable changes in inventories, trade accounts receivable, net, other accrued expenses, income tax payable, and income tax receivable, partially offset by net unfavorable changes in trade accounts payable and other assets. +41 +Table of Contents +Significant impacts to working capital compared to the prior period were primarily due to changes in the following: +(1) timing of purchases of inventories to support higher demand for the HOKA brand and maintain global service levels to mitigate the impacts of supply chain disruption; +(2) a higher rate of collections for trade accounts receivable, net, on higher net sales, partially offset by higher trade accounts receivable allowances; and +(3) lower net trade accounts payable due to timing of payments and lower freight costs. +Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2023, compared to the prior period, was primarily due to higher leasehold improvements for our warehouses and DCs, capital expenditures for IT infrastructure and other technology costs, and refreshes of existing and new retail stores. +Financing Activities. The decrease in net cash used in financing activities during the year ended March 31, 2023, compared to the prior period, was primarily due to lower stock repurchases at a lower price per share. +Contractual Obligations +The following table summarizes our significant contractual obligations as of March 31, 2023, and the effects of such obligations in future periods: +Payments Due by Period +Total Less than +1 Year 1-3 Years 3-5 Years More than +5 Years +Operating lease obligations (1) $ 277,175 $ 54,948 $ 87,251 $ 72,617 $ 62,359 +Purchase obligations for product (2) 668,388 668,388 — — — +Purchase obligations for commodities (3) 175,099 80,462 94,637 — — +Other purchase obligations (4) 234,837 83,760 140,426 10,651 — +Net unrecognized tax benefits (5) 24,663 1,829 22,834 — — +Total $ 1,380,162 $ 889,387 $ 345,148 $ 83,268 $ 62,359 +(1) Our operating lease commitments consist primarily of building leases for our retail locations, warehouse and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In addition to the above operating lease commitments outstanding, there is $19,506 of legally binding minimum lease payments due pursuant to various retail store leases signed but not yet commenced which are not recorded in our consolidated financial statements as of March 31, 2023. +(2) Our purchase obligations for product consist mostly of open purchase orders issued that we expect to fulfill in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and are expected to be paid in less than a year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment commitments based on information currently available. During fiscal year 2023, we experienced lower logistics lead times and transit times from origin to destination for our inventory, which resulted in reduced reliance on advance purchase commitments for product, compared to the prior period. +42 +Table of Contents +(3) Our purchase obligations for commodities include sheepskin, wool (primarily for UGGpure), leather, and sugarcane derived resin or EVA, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments (collectively, commodity contracts). We expect purchases under commodity contracts in the ordinary course of business will eventually exceed the minimum commitment levels. There are $16,243 of deposits included in the amount above that have not been fully consumed as of March 31, 2023, which are recorded in other assets in the consolidated balance sheets. This amount reflects remaining minimum commitments we expect will be consumed in future periods in the ordinary course of business, and that any remaining deposits are expected to become fully refundable or will be reflected as a credit against purchases. +(4) Our other purchase obligations consist of non-cancellable minimum commitments for 3PL provider arrangements, e-commerce supply chain services, IT services, promotional expenses, sales management services, and other commitments under service contracts, which are required to be paid during our fiscal years ending March 31, 2024, through 2028. Amounts excluded from these other purchase obligations include any capital expenditures that will be made before the end of our next fiscal year, which we estimate will range from approximately $110,000 to $120,000. We anticipate these expenditures will primarily relate to the build-out of a third US DC as well as upgrades to our existing warehouse and DCs, expanding our global retail store fleet (including for the HOKA brand), IT infrastructure and system upgrades, and upgrades to our existing global office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace or refresh existing assets. +(5) Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2023, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations of $18,856 and, since we are unable to make a reasonable estimate of the period of cash settlement, it is excluded from the table above. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments. +Critical Accounting Policies and Estimates +Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements, based on historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that we believe to be reasonable, but actual results could differ materially from these estimates. The full impact of macroeconomic factors on our business and operations, including inflationary pressures, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, and recessionary concerns, is unknown and cannot be reasonably estimated. However, management believes it has made appropriate accounting estimates in accordance with US GAAP based on the facts and circumstances available as of the reporting date, and actual results could differ materially from these estimates and assumptions, which may result in material effects on our financial condition, results of operations and liquidity. +Refer to Note 1, "General," of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +43 +Table of Contents +Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2023 2022 +Amount % of Gross +Trade Accounts +Receivable Amount % of Gross +Trade Accounts +Receivable +Gross trade accounts receivable $ 334,015 100.0 % $ 333,279 100.0 % +Allowance for doubtful accounts (10,576) (3.2) (9,044) (2.7) +Allowance for sales discounts (5,656) (1.7) (2,831) (0.9) +Allowance for chargebacks (16,272) (4.8) (18,716) (5.6) +Trade accounts receivable, net $ 301,511 90.3 % $ 302,688 90.8 % +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks and markdowns for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income. +Refer to Note 2, "Revenue Recognition," of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for doubtful accounts, sales discounts, and chargebacks. +44 +Table of Contents +Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2023 2022 +Amount % of Net Sales Amount % of Net Sales +Net Sales +Wholesale $ 448,425 56.7 % $ 448,848 61.0 % +Direct-to-Consumer 343,146 43.3 287,159 39.0 +Total $ 791,571 100.0 % $ 736,007 100.0 % +As of March 31, +2023 2022 +Amount % of Net Sales Amount % of Net Sales +Sales Return Liability +Wholesale $ (33,764) (7.5) % $ (31,082) (6.9) % +Direct-to-Consumer (11,558) (3.4) (8,785) (3.1) +Total $ (45,322) (5.7) % $ (39,867) (5.4) % +Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes to the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets. +The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. +Inventories. The following tables summarize estimates for our inventories: +As of March 31, +2023 2022 +Amount % of Gross Inventory Amount % of Gross Inventory +Gross Inventories $ 566,778 100.0 % $ 527,531 100.0 % +Write-down of inventories (33,926) (6.0) (20,735) (3.9) +Inventories $ 532,852 94.0 % $ 506,796 96.1 % +Inventories, which are principally comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes sourcing as well as inventory procurement costs, including freight, duty, and handling fees which are subsequently expensed to cost of sales. We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. +45 +Table of Contents +Operating Lease Assets and Lease Liabilities. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by an option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, our incremental borrowing rate (IBR). We cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and disclosures. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +We did not identify any definite-lived intangible asset triggering events during the years ended March 31, 2023, and 2022. +During the years ended March 31, 2023, and 2022, we recorded impairment charges of $2,817 and $3,186, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for retail store-related operating lease and other long-lived assets. These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value, which is determined based on an estimate of future discounted cash flows. +Refer to Note 1, "General," and Note 3, "Goodwill and Other Intangible Assets," of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets. +46 +Table of Contents +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion of foreign earnings other than previously taxed earnings and profits. +Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. +Item 7A. Quantitative and Qualitative Disclosures About Market Risk +Commodity Price Risk +For the manufacturing of our products, we purchase from suppliers certain raw materials that are affected by commodity prices, which include sheepskin, wool (primarily for UGGpure), leather, and sugarcane derived resin or EVA. +The supply of sheepskin, which is used to manufacture a significant portion of the UGG brand products, is in high demand and there are a limited number of suppliers that can meet our expectations for the quantity and quality of sheepskin that we require. Most of our sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the UK. While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, use of substitute products or components, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin. +We typically fix prices for all of our raw and other materials with firm pricing agreements on a seasonal basis. For sheepskin, leather, and repurposed wool (or UGGpure), we use purchasing contracts (and refundable deposits for certain sheepskin supply agreements) to attempt to manage price volatility as an alternative to hedging commodity prices. Recently, we have begun to enter into purchasing contracts for sugarcane derived resin or EVA, which is used to manufacture a significant portion of UGG brand products. While EVA purchasing contracts do not typically require deposits when minimum volumes are not fully consumed; they are typically non-cancellable and subject to fees. The purchasing contracts and other pricing arrangements we use for our commodities typically result in purchase obligations which are not recorded in our consolidated balance sheets. In the event of significant price increases for these commodities, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our profitability. We continue to evaluate our pricing agreement strategy for our commodities, including alternative bio-based materials. +47 +Table of Contents +Refer to the section titled “Contractual Obligations” above within Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase obligations for commodities. +Foreign Currency Exchange Rate Risk +Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America, may affect our results of operations, financial position, and cash flows. We face market risk to the extent foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although most of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies. We translate all assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recorded in other comprehensive income. +Foreign currency exchange rate fluctuations affect our results of operations and can make comparisons from year to year more difficult. Foreign currency exchange rate fluctuations had an incremental negative impact on our results of operations for the year ended March 31, 2023, when compared to the year ended March 31, 2022. +We hedge certain foreign currency exchange rate risks from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. +As of March 31, 2023, a hypothetical 10.0% foreign currency exchange rate fluctuation would have resulted in an immaterial aggregate change to our consolidated statements of comprehensive income during the year ended March 31, 2023, due to no outstanding balances for derivative instruments. As of March 31, 2023, there are no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure. +Refer to Note 9, "Derivative Instruments," of our consolidated financial statements in Part IV within this Annual Report for further information on our use of derivative contracts. +Interest Rate Risk +Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including the adjusted Alternate Base Rate, the Secured Overnight Financing Rate, the adjusted Euro InterBank Offered Rate, the Sterling Overnight Index Average, and the Canadian Dollar Offered Rate for our Primary Credit Facility, and the People’s Bank of China market rate for our China Credit Facility. +A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an immaterial aggregate change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2023, due to no outstanding balances under our revolving credit facilities. +Refer to Note 6, "Revolving Credit Facilities," of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities. +Item 8. Financial Statements and Supplementary Data +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed in a separate section following Part IV, as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +48 +Table of Contents +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2023. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2023. +Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2023, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on the design and operating effectiveness of our internal control over financial reporting. +Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +49 +Table of Contents +PART III +Item 10. Directors, Executive Officers, and Corporate Governance +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2023 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2023, pursuant to Regulation 14A under the Exchange Act. +Item 11. Executive Compensation +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +50 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010, and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as amended through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018, and incorporated by reference herein) +4.1 +Description of the Capital Stock of Deckers Outdoor Corporation (Exhibit 4.1 to the Registrant ’ s Form 10-K filed on May 27, 2022, and inco rporated by reference herein) +10.1 +Credit Agreement, dated December 19, 2022, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC, Deckers Outdoor International Limited, Deckers Coromar, LLC, DBrands SGP Pte. Ltd., Citibank, N.A., as administrative agent, joint lead arranger and joint bookrunner, Comerica Bank, as sole syndication agent, joint lead arranger and joint bookrunner, HSBC Bank USA, National Association, as joint lead arranger and joint bookrunner, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on December 2 1 , 2022 , and incorporated by reference herein) +†10.2 +First Amendment to Standard Industrial Lease (Net), dated June 6, 2017, by and between Moreno Knox, LLC , and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +10.3 +Second Amendment to Standard Industrial Lease (Net), dated July 17, 2017, by and between Moreno Knox, LLC , and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +†10.4 +Standard Industrial Lease (Net), dated February 10, 2021, by and between Westpoint Building II, LLC and Deckers Outdoor Corporation for distribution center at 2633 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.4 to the Registrant’s Form 10-K filed on May 28, 2021, and incorporated by reference herein) +†10.5 +Standard Industrial Lease (Net), dated April 20, 2022, by and between Westpoint Building V, LLC , and Deckers Outdoor Corporation for distribution center at 2723 Westpoint Blvd . , Mooresville, IN 46158 (Exhibit 10. 5 to the Registrant’s Form 10-K filed on May 27, 2022 , and incorporated by reference he rein ) +†10.6 +Standard Industrial Lease (Net), dated December 5, 2013, by and between Moreno Knox, LLC , and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014, and incorporated by reference herein) +#10.7 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on June 2, 2008, and incorporated by reference herein) +#10.8 +Form of Change in Control and Severance Agreement (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 6, 2020, and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006, and incorporated by reference herein) +#10.10 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan, as amended through May 9, 2007 (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007, and incorporated by reference herein) +#10.11 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +#10.12 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +51 +Table of Contents +Exhibit +Number Description of Exhibit +#10.13 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015, and incorporated by reference herein) +#10.14 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015, and incorporated by reference herein) +#10.15 +Deckers Outdoor Corporation Management Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 10, 2015, and incorporated by reference herein) +#10.16 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 28, 2016, and incorporated by reference herein) +†#10.17 +Form of Performance Stock Option Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017, and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement (2020 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 8, 2019, and incorporated by referenced herein) +†#10.19 +Form of Stock Unit Award Agreement (2020 Performance-Based PSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 8, 2019, and incorporated by reference herein) +†#10.20 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2020 LTIP Financial Performance Award (Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2019, and incorporated by reference herein) +#10.21 +Form of Stock Unit Award Agreement (2021 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 6, 2020, and incorporated by reference herein) +†#10.22 +Form of Restricted Stock Unit Award Agreement under Decker s Outdoor Corporation 2015 Stock Incentive Plan FY 2021 LTIP Financial Performance Award (Exhibit 10.26 to the Registrant’s Form 10-K filed on May 28, 2021 , and incorporated by reference herein ) +†#10.23 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2021 LTIP Financial Performance Award , 2-year term (Exhibit 10.29 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +#10.24 +Form of Stock Unit Award Agreement (2022 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +†#10.25 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2022 LTIP Financial Performance Award (Exhibit 10.2 8 to the Registrant’s Form 10-K filed on May 27, 2022 , and inc orporated by reference herein ) +*#10.26 +Form of Stock Unit Award Agreement (202 3 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan +†*#10.27 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 202 3 LTIP Financial Performance Award +†*#10.28 +Form of Restricted Stock Unit Award Agreement under Decker s Outdoor Corporation 2015 Stock Incentive Plan FY 202 3 LTIP Financial Performance Award, 2-year term +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32.1 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +52 +Table of Contents +Exhibit +Number Description of Exhibit +*101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) +*101.SCH Inline XBRL Taxonomy Extension Schema Document +*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document +*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +† Certain of the exhibits and schedules to this Exhibit Index have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request. +53 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 26, 2023 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +/s/ DAVE POWERS Chief Executive Officer, President, and Director +(Principal Executive Officer) May 26, 2023 +Dave Powers +/s/ STEVEN J. FASCHING Chief Financial Officer +(Principal Financial and Accounting Officer) May 26, 2023 +Steven J. Fasching +/s/ MICHAEL F. DEVINE, III Chairman of the Board May 26, 2023 +Michael F. Devine, III +/s/ DAVID A. BURWICK Director May 26, 2023 +David A. Burwick +/s/ NELSON C. CHAN Director May 26, 2023 +Nelson C. Chan +/s/ CYNTHIA (CINDY) L. DAVIS Director May 26, 2023 +Cynthia (Cindy) L. Davis +/s/ JUAN R. FIGUEREO Director May 26, 2023 +Juan R. Figuereo +/s/ MAHA S. IBRAHIM Director May 26, 2023 +Maha S. Ibrahim +/s/ VICTOR LUIS Director May 26, 2023 +Victor Luis +/s/ LAURI M. SHANAHAN Director May 26, 2023 +Lauri M. Shanahan +/s/ BONITA C. STEWART Director May 26, 2023 +Bonita C. Stewart +54 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Comprehensive Income +F- 6 +Consolidated Statements of Stockholders' Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to Consolidated Financial Statements +F- 10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F- 43 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2023, and 2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023, and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2023, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 26, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit and risk management committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has recorded a sales return liability as of March 31, 2023, of $45,322, of which $33,764 is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to estimate the wholesale sales return liability. +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating the wholesale sales return liability, including controls related to the development of estimated return rates. We evaluated the wholesale sales return liability using a combination of Company internal data, known recent trends, and actual and historical known information. We analyzed the Company’s internal data and external correspondence to assess adjustments made by management, if any, to historical return rates based on consideration of recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 26, 2023 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2023 and 2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated May 26, 2023 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 26, 2023 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2023 2022 +ASSETS +Cash and cash equivalents $ 981,795 $ 843,527 +Trade accounts receivable, net of allowances ($ 32,504 and $ 30,591 as of March 31, 2023, and March 31, 2022, respectively) ( Note 2 and Schedule II) +301,511 302,688 +Inventories 532,852 506,796 +Prepaid expenses 33,788 25,610 +Other current assets 55,523 55,264 +Income tax receivable 4,784 18,243 +Total current assets 1,910,253 1,752,128 +Property and equipment, net of accumulated depreciation ($ 317,508 and $ 282,571 as of March 31, 2023, and March 31, 2022, respectively) ( Note 1 and Note 13) +266,679 222,449 +Operating lease assets 213,302 182,459 +Goodwill ( Note 3) +13,990 13,990 +Other intangible assets, net of accumulated amortization ($ 81,033 and $ 79,061 as of March 31, 2023, and March 31, 2022, respectively) ( Note 3) +37,457 39,688 +Deferred tax assets, net ( Note 5) +72,592 64,217 +Other assets 41,930 57,319 +Total assets $ 2,556,203 $ 2,332,250 +LIABILITIES AND STOCKHOLDERS' EQUITY +Trade accounts payable $ 265,605 $ 327,487 +Accrued payroll 63,781 67,553 +Operating lease liabilities ( Note 7) +50,765 50,098 +Other accrued expenses 86,753 81,400 +Income tax payable 17,322 12,426 +Value added tax payable 13,154 2,720 +Total current liabilities 497,380 541,684 +Long-term operating lease liabilities ( Note 7) +195,723 171,972 +Income tax liability 62,032 54,259 +Other long-term liabilities 35,335 25,510 +Total long-term liabilities 293,090 251,741 +Commitments and contingencies ( Note 7) +Stockholders' equity +Common stock ($ 0.01 par value; 125,000 shares authorized; shares issued and outstanding of 26,176 and 26,982 as of March 31, 2023, and March 31, 2022, respectively) +262 270 +Additional paid-in capital 232,932 210,825 +Retained earnings 1,571,574 1,352,685 +Accumulated other comprehensive loss ( Note 10) +( 39,035 ) ( 24,955 ) +Total stockholders' equity 1,765,733 1,538,825 +Total liabilities and stockholders' equity $ 2,556,203 $ 2,332,250 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2023 2022 2021 +Net sales ( Note 12 and Note 13) +$ 3,627,286 $ 3,150,339 $ 2,545,641 +Cost of sales 1,801,916 1,542,788 1,171,551 +Gross profit 1,825,370 1,607,551 1,374,090 +Selling, general, and administrative expenses 1,172,619 1,042,844 869,885 +Income from operations ( Note 12) +652,751 564,707 504,205 +Interest income ( 15,563 ) ( 1,901 ) ( 2,637 ) +Interest expense 3,442 2,083 6,028 +Other income, net ( 1,210 ) ( 113 ) ( 700 ) +Total other (income) expense, net ( 13,331 ) 69 2,691 +Income before income taxes 666,082 564,638 501,514 +Income tax expense ( Note 5) +149,260 112,689 118,939 +Net income 516,822 451,949 382,575 +Foreign currency translation (loss) gain ( 14,080 ) ( 8,212 ) 8,816 +Total other comprehensive (loss) income, net of tax ( 14,080 ) ( 8,212 ) 8,816 +Comprehensive income $ 502,742 $ 443,737 $ 391,391 +Net income per share +Basic $ 19.50 $ 16.43 $ 13.64 +Diluted $ 19.37 $ 16.26 $ 13.47 +Weighted-average common shares outstanding ( Note 11) +Basic 26,504 27,508 28,055 +Diluted 26,686 27,789 28,406 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' +Equity +Shares Amount +Balance, March 31, 2020 27,999 $ 280 $ 191,451 $ 973,948 $ ( 25,559 ) $ 1,140,120 +Stock-based compensation 4 — 22,695 — — 22,695 +Shares issued upon vesting 107 1 1,501 — — 1,502 +Exercise of stock options 107 1 6,774 — — 6,775 +Shares withheld for taxes — — ( 19,111 ) — — ( 19,111 ) +Repurchases of common stock ( Note 10) +( 307 ) ( 3 ) — ( 99,144 ) — ( 99,147 ) +Net income — — — 382,575 — 382,575 +Total other comprehensive income — — — — 8,816 8,816 +Balance, March 31, 2021 27,910 279 203,310 1,257,379 ( 16,743 ) 1,444,225 +Stock-based compensation 4 — 26,780 — — 26,780 +Shares issued upon vesting 83 1 1,990 — — 1,991 +Exercise of stock options 29 — 1,204 — — 1,204 +Shares withheld for taxes — — ( 22,459 ) — — ( 22,459 ) +Repurchases of common stock ( Note 10) +( 1,044 ) ( 10 ) — ( 356,643 ) — ( 356,653 ) +Net income — — — 451,949 — 451,949 +Total other comprehensive loss — — — — ( 8,212 ) ( 8,212 ) +Balance, March 31, 2022 26,982 270 210,825 1,352,685 ( 24,955 ) 1,538,825 +Stock-based compensation 5 — 26,858 — — 26,858 +Shares issued upon vesting 53 — 2,170 — — 2,170 +Exercise of stock options 64 — 4,396 — — 4,396 +Shares withheld for taxes — — ( 11,317 ) — — ( 11,317 ) +Repurchases of common stock ( Note 10) +( 928 ) ( 8 ) — ( 297,364 ) — ( 297,372 ) +Excise taxes related to repurchases of common stock — — — ( 569 ) — ( 569 ) +Net income — — — 516,822 — 516,822 +Total other comprehensive loss — — — — ( 14,080 ) ( 14,080 ) +Balance, March 31, 2023 26,176 $ 262 $ 232,932 $ 1,571,574 $ ( 39,035 ) $ 1,765,733 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2023 2022 2021 +OPERATING ACTIVITIES +Net income $ 516,822 $ 451,949 $ 382,575 +Reconciliation of net income to net cash provided by (used in) operating activities: +Depreciation, amortization, and accretion 47,858 42,878 40,530 +Amortization on cloud computing arrangements 2,149 1,552 737 +Loss on extinguishment of debt 226 — — +Bad debt expense (benefit) 1,983 ( 342 ) 3,053 +Deferred tax benefit ( 9,719 ) ( 27,796 ) ( 8,171 ) +Stock-based compensation 26,897 26,816 22,701 +Loss on disposal of long-lived assets 2,691 107 1,019 +Impairment of intangible assets — — 3,522 +Impairment of operating lease and other long-lived assets 2,817 3,186 14,084 +Gain on settlement of asset retirement obligations — — ( 207 ) +Changes in operating assets and liabilities: +Trade accounts receivable, net ( 806 ) ( 86,627 ) ( 33,173 ) +Inventories ( 26,056 ) ( 228,554 ) 33,378 +Prepaid expenses and other current assets ( 5,609 ) ( 19,095 ) ( 22,128 ) +Income tax receivable 13,459 ( 11,933 ) 1,842 +Net operating lease assets and lease liabilities ( 8,308 ) 3,189 250 +Other assets 13,240 ( 28,296 ) ( 3,103 ) +Trade accounts payable ( 74,247 ) 89,184 79,176 +Other accrued expenses 11,528 ( 20,370 ) 53,785 +Income tax payable 4,897 ( 24,494 ) 25,817 +Other long-term liabilities 17,600 999 530 +Net cash provided by operating activities 537,422 172,353 596,217 +INVESTING ACTIVITIES +Purchases of property and equipment ( 81,025 ) ( 51,017 ) ( 32,218 ) +Proceeds from sales of property and equipment 12 8 49 +Net cash used in investing activities ( 81,013 ) ( 51,009 ) ( 32,169 ) +FINANCING ACTIVITIES +Proceeds from short-term borrowings — — 9,100 +Repayments of short-term borrowings — — ( 9,478 ) +Loan origination costs on revolving credit facilities ( 1,537 ) — — +Proceeds from issuance of stock 2,170 1,991 1,502 +Proceeds from exercise of stock options 4,396 1,204 6,775 +Repurchases of common stock ( 297,372 ) ( 356,653 ) ( 99,147 ) +Cash paid for shares withheld for taxes ( 16,688 ) ( 14,024 ) ( 7,432 ) +Repayments of mortgage principal — — ( 30,901 ) +Net cash used in financing activities ( 309,031 ) ( 367,482 ) ( 129,581 ) +Effect of foreign currency exchange rates on cash and cash equivalents ( 9,110 ) 304 5,458 +Net change in cash and cash equivalents 138,268 ( 245,834 ) 439,925 +Cash and cash equivalents at beginning of period 843,527 1,089,361 649,436 +Cash and cash equivalents at end of period $ 981,795 $ 843,527 $ 1,089,361 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2023 2022 2021 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes, net of refunds of $ 1,421 , $ 77 , and $ 1,564 , as of March 31, 2023, 2022, and 2021, respectively +$ 134,565 $ 192,013 $ 104,068 +Interest 1,880 1,842 2,931 +Operating leases 60,353 55,588 57,376 +Non-cash investing activities +Change in accounts payable and other accrued expenses for purchases of property and equipment 5,325 2,797 2,721 +Accrued for asset retirement obligation assets related to leasehold improvements 8,203 3,900 1,842 +Leasehold improvements acquired through tenant allowances — 4,061 — +Non-cash financing activities +Accrued for shares withheld for taxes 5,371 8,435 11,679 +Accrued excise taxes related to repurchases of common stock 569 — — +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 1. General +The Company . Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company’s proprietary brands are aligned across its fashion lifestyle groups, including the UGG® (UGG) and Koolaburra by UGG® brand (Koolaburra) brands, and performance lifestyle group, including the HOKA® (HOKA), Teva® (Teva), and Sanuk® (Sanuk) brands. +The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company’s products. A significant part of the UGG brand’s business has historically been seasonal, requiring the Company to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which has contributed to the variation in its results from quarter to quarter. However, as the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of the Company’s aggregate net sales, the Company expects the impact from seasonality to continue to decrease over time. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements) as of March 31, 2023, and 2022 and for the years ended March 31, 2023 , 2022, and 2021 (referred to herein as “year ended” or “years ended”, or as “fiscal year 2023,” “fiscal year 2022,” and “fiscal year 2021,” respectively) are prepared in accordance with generally accepted accounting principles in the United States (US GAAP). +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. In addition, the Company has considered macroeconomic factors, including inflation, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, and recessionary concerns, on its business and operations. Although the full impact of these factors are unknown and cannot be reasonably estimated, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company's financial condition, results of operations, and liquidity. To the extent there are differences between these estimates and actual results, the Company’s consolidated financial statements may be materially affected. +Significant areas requiring the use of management estimates and assumptions relate to inventory write-downs; trade accounts receivable allowances, including variable consideration for net sales provided to customers, including the sales return asset and liability; contract assets and liabilities; stock-based compensation; impairment assessments, including goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company's incremental borrowing rate (IBR) utilized to measure its operating lease assets and lease liabilities. +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +gains and losses that are recorded in selling, general, and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI). +Reportable Operating Segments. The Company’s six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, the Company’s reportable operating segments). Refer to Note 12, "Reportable Operating Segments," for further information on the Company’s reportable operating segments. +Recent Accounting Pronouncements. The Financial Accounting Standards Board has issued Accounting Standards Updates (ASU) that have been adopted and not yet adopted by the Company for its annual and interim reporting periods as stated below. +Recently Adopted. The following is a summary of an ASU adopted by and its impact on the Company: +Standard Description Impact Upon Adoption +ASU No. 2020-04, +Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting +(as amended by ASUs 2021-01 and 2022-06) +London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of calendar year 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. +This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022; however, this was deferred to December 31, 2024, to provide relief and allow flexibility until the cessation of USD LIBOR. +While the sunset date was deferred with a recent amendment to this ASU, the Company elected to adopt this ASU as of January 1, 2023. +The Company has evaluated the impact of the adoption of this ASU on its revolving credit facilities, lease agreements, cash flow hedges and other relevant agreements; however, the adoption did not have a material impact on its consolidated financial statements. +During December 2022, the Company entered into a new credit agreement with Secured Overnight Financing Rate (SOFR) interest terms and the previous credit agreement with LIBOR interest terms was terminated. Refer to Note 6, "Revolving Credit Facilities," for further information on the Company's Revolving Credit Facilities. +Not Yet Adopted. The following is a summary of each ASU that has been issued and is applicable to the Company, but which has not yet been adopted, as well as the planned period of adoption, and the expected impact on the Company upon its adoption: +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU 2022-04 - Supplier Finance Program (SFP) +The ASU requires that a buyer in an SFP disclose qualitative and quantitative information about its program, including the nature and potential magnitude. Interim and annual requirements include disclosure of outstanding amounts under the SFP . Annual requirements include an activity roll forward of outstanding amounts under the SFP . +This ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, except for the disclosure of roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, except for the disclosure of roll forward information. +Q1 FY 2024 +and +Q1 FY 2025 +The Company currently has an SFP program with a third-party financial institution that allows certain participating suppliers to finance payment obligations of the Company, prior to their scheduled due dates, at a discounted price to the third-party financial institution. The Company evaluated this ASU and its implications on the presentation of its SFP program on its consolidated balance sheets and determined no reclassification on adoption in Q1 FY 2024 is required from trade accounts payable to short-term debt as the payment terms under the SFP program are less than 90 days. +The Company is continuing to evaluate the impact of this ASU for the new disclosure requirements. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU 2023-01 - Common Control Arrangements +A lessee is generally required to amortize leasehold improvements over the shorter of the useful life or the lease term. The ASU amends the amortization period for leasehold improvements in common control lease arrangements to the useful life of the common control group, as long as the lessee continues to control the use of the underlying asset throughout the lease term. +This ASU is effective on a retrospective basis for the fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. +Q1 FY 2025 +The Company is currently evaluating the impact of this ASU on the Company. +Summary of Significant Accounting Policies. The following is a summary of the Company’s significant accounting policies applied to its consolidated financial statements: +Cash and Cash Equivalents . Cash and cash equivalents include cash on hand, demand deposits, and all highly liquid investments, such as money-market funds, with an original maturity of three months or less. The carrying value of money-market funds approximates the fair value as it is considered a highly liquid investment when purchased. Money-market funds are recorded in cash and cash equivalents in the consolidated balance sheets. Refer to Note 4, "Fair Value Measurements," for further information on the fair value of money-market funds. Refer to Note 13, "Concentration of Business," for further information on credit risks in cash. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Inventories . Inventories, which are principally comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes sourcing as well as inventory procurement costs, including freight, duty, and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. The Company regularly reviews inventory for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or realizable value. +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements (CCAs) that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets. Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to three years . +As of March 31, 2023, net capitalized costs for CCAs are $ 5,161 , with $ 1,880 recorded in prepaid expenses and $ 3,281 recorded in other assets in the consolidated balance sheets. As of March 31, 2022, net capitalized costs for CCAs are $ 2,402 , with $ 1,429 recorded in prepaid expenses and $ 973 recorded in other assets in the consolidated balance sheets. The increase in net capitalized costs for CCAs during the year ended March 31, 2023, are primarily due to gross additions of $ 4,909 . +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset, which would be recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Property and equipment, net, are summarized as follows: +As of March 31, +Useful life (years) 2023 2022 +Land Indefinite $ 32,864 $ 32,864 +Building 39.5 36,191 36,112 +Machinery and equipment +1 - 10 +187,754 177,397 +Furniture and fixtures +3 - 7 +39,538 35,600 +Computer software +3 - 10 +115,349 104,114 +Leasehold improvements +1 - 11 +118,351 108,526 +Construction in progress 54,140 10,407 +Gross property and equipment 584,187 505,020 +Less accumulated depreciation and amortization ( 317,508 ) ( 282,571 ) +Total $ 266,679 $ 222,449 +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional period covered by the Company's option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, "Commitments and Contingencies," for further information on the discount rate methodology used to measure operating lease assets and lease liabilities. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income. Lease payments recorded in the operating lease liabilities (1) are fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, "Commitments and Contingencies," for further information on the nature of variable lease payments and the timing of recognition of rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income. +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and lease liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liabilities, a corresponding adjustment is made to the carrying amount of the operating lease assets. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the paragraph titled “Definite-Lived Intangible and Other Long-Lived Assets” below for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements for indicators of impairment. +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. +The Company’s asset retirement obligations (AROs) are recorded in other long-term liabilities in the consolidated balance sheets and activity was as follows: +Amounts +Balance, March 31, 2021 $ 12,983 +Additions and changes in estimate 4,622 +Liabilities settled during the period ( 898 ) +Accretion expenses 327 +Foreign currency translation gains ( 232 ) +Balance, March 31, 2022 16,802 +Additions and changes in estimate 9,724 +Liabilities settled during the period ( 2,284 ) +Accretion expenses 513 +Foreign currency translation gains ( 199 ) +Balance, March 31, 2023 $ 24,556 +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Indefinite-lived intangible assets consist primarily of trademarks, customer and distributor relationships, patents, lease rights and non-compete agreements arising from the application of purchase accounting. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting the industry. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. Refer to Note 3, "Goodwill and Other Intangible Assets," for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income. +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset group, which is based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income. +During the years ended March 31, 2023 , 2022, and 2021, the Company recorded impairment charges of $ 2,817 , $ 3,186 , and $ 14,084 , within its DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for retail store-related operating lease and other long-lived assets. These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value, which is determined based on an estimate of the future discounted cash flows. Refer to Note 3, "Goodwill and Other Intangible Assets," for further information on the Company’s definite-lived intangible asset impairment assessment results. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company enters into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage this risk and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of forward spot rates at the end of the applicable periods from counterparties, which are corroborated by market-based pricing, and are recorded in other current assets or other accrued expenses in the consolidated balance sheets. The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of accumulated other comprehensive loss (AOCL) and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. Refer to Note 9, "Derivative Instruments," for further information on the impact of derivative instruments and hedging activities. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Stock Repurchase Program. Repurchased shares of the Company’s common stock are retired. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value as well as the portion due for excise taxes, is allocated to retained earnings in the consolidated balance sheets. Refer to Note 10, "Stockholders' Equity," for further information on the Company’s stock repurchase program. +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of and obtain substantially all the remaining benefits from the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 to 60 days. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, "Revenue Recognition," for further information regarding the Company’s components of variable consideration. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods, which includes purchase costs as well as related overhead. Overhead includes certain costs for planning, purchasing, quality control, freight, and duties. Purchase costs includes allocation of initial molds and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income. Purchase costs exclude depreciation and amortization costs of leasehold improvements, equipment and other assets in the Company’s retail locations, outlets, and distribution centers (DCs), as well as warehousing and distribution and sourcing costs, as these are collectively expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $ 38,657 , $ 33,344 , and $ 28,626 for the years ended March 31, 2023, 2022, and 2021, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Advertising, Marketing, and Promotion Expenses . Advertising, marketing, and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, and amounted to $ 271,140 , $ 255,881 , and $ 188,345 for the years ended March 31, 2023, 2022 and 2021, respectively, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2023, and 2022 are $ 4,930 and $ 2,759 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is expensed ratably over the service period. The Company recognizes expense only for those awards for which management deems achievement of the performance criteria and service conditions to be probable. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria, as well as the Company’s reliance on the closing price of its stock on the New York Stock Exchange at or near the time of +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +grant. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 8, "Stock-Based Compensation," for further information on grant activity and additional disclosure related to stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 4,433 , $ 3,953 , and $ 3,339 during the years ended March 31, 2023, 2022, and 2021, respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income. In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, there were no Company profit-sharing contributions for the years ended March 31, 2023, 2022, and 2021. +Non-qualified Deferred Compensation . In 2010, the Company began sponsoring an unfunded, non-qualified deferred compensation plan (NQDC Plan) that permits certain members of its management team the opportunity to defer compensation into the NQDC Plan. The NQDC Plan year is from January 1st to December 31st. Participants may defer up to 50 % of their annual base salary and up to 85 % of any cash incentive bonus under the NQDC Plan. The Company holds all its non-qualified deferred compensation plan investments in mutual funds. In March 2015, the Board of Directors approved a Company contribution feature to allow the option, but not the obligation, for the Company to make discretionary or matching cash contributions to NQDC Plan participants. +As of March 31, 2023, and 2022, no material payments are made or pending under the plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. Refer to Note 4, "Fair Value Measurements," for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in current liabilities in the consolidated balance sheets. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income. Refer to Note 5, "Income Taxes," for further information on tax impacts and components of tax balances in the consolidated financial statements. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, "Stockholders' Equity," for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, "Basic and Diluted Shares," for a reconciliation of basic to diluted weighted-average common shares outstanding. +Note 2. Revenue Recognition +Variable Consideration . Components of variable consideration include estimated allowance for sales discounts, allowance for chargebacks, and sales return asset and liability. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, the Company records an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income. +Sales Return Asset and Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. +Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes in the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets. The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +Activity during the years ended March 31, 2023, and 2022, related to estimated sales returns was as follows: +Recovery Asset Refund Liability +Balance, March 31, 2021 $ 10,704 $ ( 37,717 ) +Net additions to sales return liability* 43,555 ( 178,722 ) +Actual returns ( 42,768 ) 176,572 +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Balance, March 31, 2022 11,491 ( 39,867 ) +Net additions to sales return liability* 67,249 ( 229,864 ) +Actual returns ( 63,055 ) 224,409 +Balance, March 31, 2023 $ 15,685 $ ( 45,322 ) +* Net additions to the sales return liability include a provision for anticipated sales returns, which consists of both contractual return rights and discretionary authorized returns. +Contract Liabilities . Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract liabilities are recorded in other accrued expenses in the consolidated balance sheets and include loyalty programs and other deferred revenue. +Loyalty Programs . The Company has a loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until one of the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption and expiration patterns. The Company’s contract liability for loyalty programs is recorded in other accrued expenses in the consolidated balance sheets. +Activity during the years ended March 31, 2023, and 2022, related to loyalty programs were as follows: +Amounts +Balance, March 31, 2021 $ ( 12,231 ) +Redemptions and expirations for loyalty certificates and points recognized in net sales 56,930 +Deferred revenue for loyalty points and certificates issued ( 55,582 ) +Balance, March 31, 2022 $ ( 10,883 ) +Redemptions and expirations for loyalty certificates and points recognized in net sales 49,123 +Deferred revenue for loyalty points and certificates issued ( 51,384 ) +Balance, March 31, 2023 $ ( 13,144 ) +Deferred Revenue . Revenue is deferred for wholesale channel transactions when certain conditions outlined within the contract terms, including the transfer of control or delivery of product, has not occurred, such as when a wholesale channel customer prepays for ordered product. The contract liability for deferred revenue is recorded in other accrued expenses in the consolidated balance sheets. +Activity during the years ended March 31, 2023, and 2022, related to deferred revenue were as follows: +Amounts +Balance, March 31, 2021 $ ( 5,425 ) +Additions of customer cash payments ( 51,770 ) +Revenue recognized 41,391 +Balance, March 31, 2022 $ ( 15,804 ) +Additions of customer cash payments ( 53,797 ) +Revenue recognized 56,153 +Balance, March 31, 2023 $ ( 13,448 ) +Refer to Note 12, "Reportable Operating Segments," for further information on the Company's disaggregation of revenue by reportable operating segment. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 3. Goodwill and Other Intangible Assets +The Company’s goodwill and other intangible assets are recorded in the consolidated balance sheets as follows: +As of March 31, +2023 2022 +Goodwill +UGG brand $ 6,101 $ 6,101 +HOKA brand 7,889 7,889 +Total goodwill 13,990 13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks 15,454 15,454 +Definite-lived intangible assets +Trademarks 51,723 51,723 +Other 51,313 51,572 +Total gross carrying amount 103,036 103,295 +Accumulated amortization ( 81,033 ) ( 79,061 ) +Net definite-lived intangible assets 22,003 24,234 +Total other intangible assets, net 37,457 39,688 +Total $ 51,447 $ 53,678 +The weighted-average amortization period for definite-lived intangible assets was 15 years for the years ended March 31, 2023, and 2022. Intangible assets consist primarily of indefinite-lived and definite-lived trademarks, customer relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +Annual Impairment Assessment . During the years ended March 31, 2023, 2022, and 2021, the Company evaluated goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segment as of December 31st and evaluated the Teva indefinite-lived trademarks as of October 31st. Based on the evaluation of qualitative and quantitative factors, including the asset carrying amounts recorded in the consolidated balance sheets against each of the brands’ actual results of operations and long-term forecasts of net sales and operating income, no impairment loss was recorded for goodwill and indefinite-lived intangible assets. As of March 31, 2023, and 2022, the gross carrying amount of goodwill is $ 143,765 and the accumulated impairment losses are $ 129,775 . +The Company did no t identify any definite-lived intangible asset triggering events during the years ended March 31, 2023, and 2022. During the year ended March 31, 2021, the Company recorded an impairment loss of $ 3,522 for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within the Company’s Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. +Amortization Expense . A reconciliation of the changes in total other intangible assets, net, recorded in the consolidated balance sheets are as follows: +Amounts +Balance, March 31, 2020 $ 48,016 +Impairment charges ( 3,522 ) +Amortization expense ( 2,565 ) +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Amounts +Foreign currency translation net gain 16 +Balance, March 31, 2021 41,945 +Amortization expense ( 2,248 ) +Foreign currency translation net loss ( 9 ) +Balance, March 31, 2022 39,688 +Amortization expense ( 2,228 ) +Foreign currency translation net loss ( 3 ) +Balance, March 31, 2023 $ 37,457 +Expected amortization expense for amortizable intangible assets subsequent to March 31, 2023, is as follows: +Years Ending March 31, Amounts +2024 $ 2,198 +2025 2,053 +2026 1,551 +2027 1,519 +2028 1,519 +Thereafter 13,163 +Total $ 22,003 +Note 4. Fair Value Measurements +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. +The following summarizes the three levels of inputs required: +• Level 1: Quoted prices in active markets for identical assets and liabilities. +• Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. When the Company makes short-term borrowings, the carrying amounts, which are considered Level 2 liabilities, approximate fair value based upon current rates and terms available to the Company for similar debt. The Company does not currently have any Level 3 assets or liabilities. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets are as follows: +As of Measured Using +March 31, 2023 Level 1 Level 2 Level 3 +Money-market funds $ 675,468 $ 675,468 $ — $ — +Non-qualified deferred compensation asset 8,399 8,399 — — +Non-qualified deferred compensation liability ( 11,326 ) ( 11,326 ) — — +As of Measured Using +March 31, 2022 Level 1 Level 2 Level 3 +Money-market funds $ 524,063 $ 524,063 $ — $ — +Non-qualified deferred compensation asset 8,933 8,933 — — +Non-qualified deferred compensation liability ( 9,573 ) ( 9,573 ) — — +As of March 31, 2023, the non-qualified deferred compensation asset of $ 8,399 is recorded in other assets in the consolidated balance sheets. As of March 31, 2023, the non-qualified deferred compensation liability of $ 11,326 is recorded in the consolidated balance sheets, with $ 737 recorded in other accrued expenses and $ 10,589 recorded in other long-term liabilities. As of March 31, 2022, the non-qualified deferred compensation asset of $ 8,933 is recorded in other assets in the consolidated balance sheets. As of March 31, 2022, the non-qualified deferred compensation liability of $ 9,573 is recorded in the consolidated balance sheets, with $ 936 recorded in other accrued expenses and $ 8,637 recorded in other long-term liabilities. +The Company's non-financial assets, such as other long-lived assets and definite-lived intangible assets, which include operating lease assets, machinery and equipment, leasehold improvements, definite-lived trademarks; as well as indefinite-lived intangible assets and goodwill, are not required to be carried at fair value on a recurring basis and are reported at carrying value. Instead, these assets are tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. When determining fair value, Level 3 measurements are used for the estimates and assumptions, including undiscounted future cash flows expected to be generated by the asset groups based upon historical experience, expected market conditions, as well and management's plans. +Note 5. Income Taxes +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2023 2022 2021 +Domestic* $ 467,231 $ 396,368 $ 368,328 +Foreign 198,851 168,270 133,186 +Total $ 666,082 $ 564,638 $ 501,514 +*Domestic income before income taxes for the years ended March 31, 2023, 2022, and 2021 is presented net of intercompany dividends (or repatriated cash) of $ 0 , $ 120,000 , and $ 175,000 , respectively. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2023 2022 2021 +Current +Federal $ 115,708 $ 95,012 $ 93,562 +State 18,418 22,544 15,595 +Foreign 24,853 22,929 17,953 +Total 158,979 140,485 127,110 +Deferred +Federal 4,830 ( 17,316 ) ( 6,717 ) +State 382 ( 4,827 ) ( 633 ) +Foreign ( 14,931 ) ( 5,653 ) ( 821 ) +Total ( 9,719 ) ( 27,796 ) ( 8,171 ) +Total $ 149,260 $ 112,689 $ 118,939 +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended March 31, +2023 2022 2021 +Computed expected income taxes $ 139,882 $ 118,574 $ 105,318 +State income taxes, net of federal income tax benefit (1) 15,881 16,896 16,479 +Foreign rate differential ( 21,420 ) ( 22,188 ) ( 15,507 ) +Gross unrecognized tax benefits 20,122 ( 491 ) 7,632 +Intercompany transfers of assets (1) ( 13,072 ) ( 219 ) ( 27 ) +US tax on foreign earnings 7,672 4,325 4,252 +Other (1) 195 ( 4,208 ) 792 +Total $ 149,260 $ 112,689 $ 118,939 +(1) Certain reclassifications have been made in the prior periods presented to conform with the current period presentation. +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2023 2022 +Deferred tax assets +Amortization of intangible assets $ 16,788 $ 4,828 +Operating lease liabilities 38,673 37,020 +Uniform capitalization adjustment to inventory 13,823 11,996 +Reserves and accruals (1) 48,949 41,894 +Net operating loss carry-forwards 3,477 1,802 +Deferred revenue 7,924 22,074 +Other (1) 1,070 2,024 +Gross deferred tax assets 130,704 121,638 +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +As of March 31, +2023 2022 +Valuation allowances ( 1,224 ) ( 1,206 ) +Total 129,480 120,432 +Deferred tax liabilities +Prepaid expenses ( 6,930 ) ( 5,460 ) +Operating lease assets ( 31,250 ) ( 28,831 ) +Depreciation of property and equipment ( 18,708 ) ( 21,924 ) +Total ( 56,888 ) ( 56,215 ) +Deferred tax assets, net $ 72,592 $ 64,217 +(1) Certain reclassifications have been made in the prior periods presented to conform with the current period presentation. +The deferred tax assets are currently expected to be realized between fiscal years 2024 and 2031. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. +US Taxation of Foreign Earnings . The Company is subject to US taxation of its foreign subsidiary earnings, which is considered global intangible low-taxed income, as well as limitations on the deductions of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. +As of March 31, 2023, the Company has $ 523,957 of undistributed earnings from its non-US subsidiaries, of which $ 299,114 is held as cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2023, the Company has $ 13,477 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been paid. +The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. No intercompany dividends were declared by the Company from a foreign subsidiary with related foreign withholding tax requirements during the year ended March 31, 2023. +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets. +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits are as follows: +Balance, March 31, 2020 $ 17,638 +Gross increase related to current year tax positions 2,242 +Gross increase related to prior year tax positions 8,566 +Settlements ( 1,215 ) +Lapse of statute of limitations ( 1,961 ) +Balance, March 31, 2021 25,270 +Gross increase related to current year tax positions 2,520 +Gross increase related to prior year tax positions 2,750 +Gross decrease related to prior year tax positions ( 243 ) +Settlements ( 795 ) +Lapse of statute of limitations ( 4,723 ) +Balance, March 31, 2022 24,779 +Gross increase related to current year tax positions 6,865 +Gross increase related to prior year tax positions 16,243 +Gross decrease related to prior year tax positions ( 456 ) +Lapse of statute of limitations ( 2,530 ) +Balance, March 31, 2023 $ 44,901 +Total gross unrecognized tax benefits recorded in the consolidated balance sheets are as follows: +As of March 31, +2023 2022 +Long-term asset +Deferred tax assets, net $ 3,145 $ — +Current liability +Income tax payable 1,829 — +Long-term liability +Income tax liability 39,927 24,779 +Total $ 44,901 $ 24,779 +As of March 31, 2023, and 2022, the Company has accrued $ 5,828 and $ 4,722 for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets. During the years ended March 31, 2023, 2022, and 2021, the Company recorded $ 1,106 , $( 60 ), and $ 1,151 , respectively, of interest and penalties as an increase or (decrease) to interest expense in the consolidated statements of comprehensive income. +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in the Company’s income tax return that would impact the Company’s effective tax rate, if recognized. Management believes it is reasonably possible that the amount of net unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 7,917 , which includes amounts relating to expirations of statute of limitations and settlements of various tax matters. Of this amount, $ 6,929 would result in an income tax benefit for the Company and $ 988 would result in a decrease to interest expense in the consolidated statements of comprehensive income. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2019. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, management does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements. +Note 6. Revolving Credit Facilities +Primary Credit Facility . In December 2022, the Company refinanced in full and terminated its prior credit agreement originally entered into in September 2018 (Prior Credit Agreement). The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank), as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement). The Credit Agreement provides for a five-year , $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on December 19, 2027, subject to extension on early termination as described in the Credit Agreement. +In addition to allowing borrowings in US dollars, the Primary Credit Facility provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars, and any other foreign currency that is subsequently approved by Citibank, each lender, and each bank issuing letters of credit. Subject to customary conditions, the Company has the option to increase the maximum principal amount available up to an additional $ 300,000 , resulting in a maximum available principal amount of $ 700,000 . However, none of the lenders have committed at this time to provide any such increase in the commitment. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries that meet certain materiality thresholds, subject to limited exceptions. All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured, and amounts borrowed may be prepaid at any time without a premium or penalty, subject to limited exceptions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +Interest Rate Terms. At the Company’s election, revolving loans issued under the Primary Credit Facility will bear interest at the adjusted term SOFR, the adjusted Euro InterBank Offered Rate (EURIBOR), the Sterling Overnight Index Average (SONIA), the Canadian Dollar Offered Rate (CDOR), or the adjusted Alternate Base Rate (ABR), in each case plus the applicable interest rate margin. +Interest for borrowings in US dollars will fluctuate between SOFR, plus 1.00 % and 0.10 % based on the Company's total net leverage ratio, and ABR, plus 0 % per annum. The applicable interest rate margin is based on a pricing grid based on the Company’s total net leverage ratio and ranges from 1.00 % to 1.625 % per annum in the case of loans based on the SOFR, EURIBOR, SONIA, or CDOR, and from 0.00 % to 0.625 % per annum in the case of loans based on ABR. As of March 31, 2023, the effective interest rates for SOFR and ABR are 5.90 % and 8.00 %, respectively. +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum on the daily unused amount of the Primary Credit Facility, with the exact commitment fee based on the Company’s total net leverage ratio. +Borrowing Activity. During the year ended March 31, 2023, the Company made no borrowings or repayments under the Primary Credit Facility. As of March 31, 2023, the Company has no outstanding balance, $ 958 of outstanding letters of credit, and available borrowings of $ 399,042 under the Primary Credit Facility. +Deferred Financing Costs. The Company paid various commitment, arrangement, and other fees to certain parties to the Credit Agreement, and reimbursed certain of the parties’ expenses, which totaled $ 1,537 , with $ 313 recorded in other current assets and $ 1,224 recorded in other assets in the consolidated balance sheets. These costs will be amortized on a straight-line basis over the term of the Credit Agreement. Deferred financing costs associated with the Prior Credit Agreement had a remaining unamortized balance previously recorded in other current assets in the consolidated balance sheets of $ 226 , which was written off to interest expense during the quarter ended December 31, 2022. +China Credit Facility . In October 2021, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 43,672 , with an overdraft facility sublimit of CNY 100,000 , or $ 14,557 . The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate multiplied by a variable liquidity factor. As of March 31, 2023, the effective interest rate is 3.95 %. During the year ended March 31, 2023, the Company made no borrowings or repayments under the China Credit Facility. As of March 31, 2023, the Company has no outstanding balance, outstanding bank guarantees of $ 29 , and available borrowings of $ 43,643 under the China Credit Facility. +Japan Credit Facility . On January 31, 2023, Deckers Japan, G.K. (Deckers Japan), a wholly owned subsidiary of the Company, allowed a credit agreement in Japan (Japan Credit Facility) to expire and the Company cancelled the associated parent guarantee. If borrowing needs arise, Deckers Japan is able to borrow from one or more of the Company's subsidiaries through intercompany loans as permitted under the Primary Credit Facility. +During year ended March 31, 2023, the Company made no borrowings or repayments and had no outstanding balance prior to the expiration of the Japan Credit Facility. +Debt Covenants. Under the Credit Agreement, the Company is subject to usual and customary representations and warranties, and contains usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments, indemnification provisions in favor of the lenders and transactions with affiliates. The financial covenant requires the total net leverage ratio to be not greater than 3.75 to 1.00 . +Under the Credit Agreement, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material Employee Retirement Income Security Act of 1974 (ERISA) liabilities; and a change of control of the Company. +Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +As of March 31, 2023, the Company is in compliance with all financial covenants under the Primary Credit Facility and China Credit Facility. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 7. Commitments and Contingencies +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts which vary in lease terms but, in the aggregate, continue in effect through calendar year 2033. Some of the Company's operating leases contain extension options between one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and lease liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM, and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its IBR. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. The Company has a centralized treasury function, which enables the Company to use a portfolio approach to discount lease obligations. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its non-collateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Rent Expense . The components of rent expense for operating leases recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2023 2022 2021 +Operating $ 52,961 $ 51,126 $ 52,849 +Variable 30,309 24,265 24,033 +Short-term 5,729 3,428 3,015 +Total $ 88,999 $ 78,819 $ 79,897 +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2023, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets, are as follows: +Years Ending March 31, Amount +2024 $ 54,948 +2025 42,694 +2026 44,557 +2027 39,779 +2028 32,838 +Thereafter 62,359 +Total undiscounted future lease payments 277,175 +Less: Imputed interest ( 30,687 ) +Total $ 246,488 +Operating lease liabilities recorded in the consolidated balance sheets exclude an aggregate of $ 19,506 of undiscounted minimum lease payments due pursuant to leases signed but not yet commenced. These leases are primarily for the following: +• a new international UGG brand flagship retail store in London, England with an initial term of six years , which the Company expects to commence in the first quarter of its next fiscal year ending March 31, 2024 (next fiscal year); +• a new international UGG brand flagship retail store in Munich, Germany with an initial term of five years , which the Company expects to commence in the first quarter of its next fiscal year; and, +• a new HOKA brand retail store in Nagoya, Japan with an initial lease term of six years , which the Company expects to commence in the second quarter of its next fiscal year. +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and lease liabilities that are outstanding and presented in the consolidated balance sheets are as follows: +As of March 31, +2023 2022 +Weighted-average remaining lease term in years 6.0 5.6 +Weighted-average discount rate 3.2 % 2.6 % +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases were as follows: +Years Ended March 31, +2023 2022 2021 +Non-cash operating activities +Operating lease assets obtained in exchange for lease liabilities* $ 84,988 $ 50,190 $ 9,861 +Reductions to operating lease assets for reductions to lease liabilities* ( 1,903 ) ( 5,293 ) ( 12,051 ) +*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . The Company has $ 668,388 of outstanding purchase orders or other obligations with its manufacturers as of March 31, 2023. The Company has an extended design and manufacturing process, which requires it to forecast production volumes and estimate inventory requirements several months before consumers decide to purchase its products. The Company generally orders product three to nine months in advance of the anticipated shipment dates based primarily on a combination of required product lead time and the timing of orders received from customers and consumers. Accordingly, the aggregate amount reflects purchase commitments for products that the Company reasonably expects to fulfill in the ordinary course of business. A significant portion of the purchase commitments can be cancelled by the Company under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations for products, and instead reflects an estimate of its future payment commitments based on information currently available. +Commodities . The Company has an aggregate of $ 175,099 remaining for commodity purchase commitments, primarily for sheepskin, wool (primarily for UGGpure® (UGGpure)), leather, and sugarcane derived resin or ethylene vinyl acetate (EVA), as of March 31, 2023 (collectively, commodity contracts). These commitments generally arise under one to two-year supply agreements. The aggregate amount reflects the remaining commitments under these purchase orders. The Company typically enters into contracts requiring these purchase commitments that its affiliates, manufacturers, factories, and other agents (each, a Buyer) must make on or before a specified target date. These agreements may result in unconditional purchase commitments if a Buyer does not meet the minimum purchase requirements. +In the event a Buyer does not purchase such minimum commitments by the original target dates, the Company would be responsible for compliance with any and all minimum purchase commitments under these contracts, either through deposits or non-cancellable fees. For certain sheepskin supply agreements, the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyer purchases the remaining minimum commitments, as these sheepskin supply agreements do not permit net settlement. There are $ 16,243 of certain sheepskin supply agreement related deposits, included in the aggregate commodity purchase commitment amount above, that have not been fully consumed as of March 31, 2023, which are recorded in other assets in the consolidated balance sheets. This amount reflects remaining minimum commitments the Company expects will be consumed in future periods in the ordinary course of business, and that any remaining deposits are expected to become fully refundable or will be reflected as a credit against purchases. During the year ended March 31, 2023, the Company received refunds of deposits of $ 16,877 reflecting the return of funds previously advanced to sheepskin suppliers under certain expired supply agreements. +Recently, the Company began to enter into purchasing contracts for sugarcane derived resin or EVA, which is used to manufacture a significant portion of UGG brand products. While EVA purchasing contracts do not require deposits when minimum volumes are not fully consumed; they are non-cancellable and are subject to fees. +Total future minimum commitments for commodity contracts as of March 31, 2023, are as follows: +Contract Effective Date Original Target Date Contract Value Remaining +Commitment +October 2018* September 2020 $ 3,600 $ 1,586 +October 2018 September 2021 2,560 2,560 +August 2021* September 2022 25,200 14,657 +August 2021 September 2022 35,000 10,372 +November 2021 December 2022 2,450 2,185 +August 2021 September 2023 72,000 49,102 +December 2021 September 2024 32,920 21,326 +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Contract Effective Date Original Target Date Contract Value Remaining +Commitment +December 2022 September 2024 45,800 43,945 +April 2022 December 2024 21,561 18,266 +December 2022 September 2025 11,100 11,100 +$ 252,191 $ 175,099 +*Expired sheepskin supply agreements with minimum purchase obligation deposits outstanding reflected in the remaining commitment balance, as disclosed above. +The amounts in the table above do not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations, and instead reflect an estimate of its future payment obligations based on information currently available. +Othe r. The Company has an aggregate of $ 234,837 of other purchase commitments as of March 31, 2023. Included within these purchase commitments are third-party logistics provider (3PL) arrangements, sales management services, supply chain services, information technology (IT) services, promotional expenses, and other commitments under service contracts, which are required to be paid during the fiscal years ending March 31, 2024, through 2028. +Litigation . From time to time, the Company is involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these matters cannot be predicted with certainty, the Company believes it is not currently a party to any legal proceedings, disputes, or other claims for which a material loss is considered probable and for which the amount (or range) of loss is reasonably estimable. However, regardless of the merit of the claims raised or the outcome, these ordinary course matters can have an adverse impact on the Company as a result of legal costs, diversion of management time and resources, and other factors. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +Note 8. Stock-Based Compensation +In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), the primary purpose of which is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors, and advisors. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . From time to time, the Company grants various types of stock-based compensation under the 2015 SIP, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs and long-term incentive plan PSUs (LTIP PSUs), to key personnel, including employees and directors. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Annual Awards. The Company grants annual awards under the 2015 SIP, which entitle the recipients to receive shares of the Company’s common stock upon vesting, RSUs are subject to time-based vesting criteria and typically vest in equal annual installments over three years following the date of grant. +Annual award activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2020 162,349 $ 124.47 +Granted 47,015 220.31 +Vested* ( 92,614 ) ( 104.92 ) +Forfeited ( 3,664 ) ( 147.34 ) +Nonvested, March 31, 2021 113,086 179.58 +Granted 52,256 363.89 +Vested* ( 60,034 ) ( 162.37 ) +Forfeited ( 7,441 ) ( 239.39 ) +Nonvested, March 31, 2022 97,867 284.00 +Granted 51,955 338.99 +Vested* ( 45,092 ) ( 249.67 ) +Forfeited ( 15,439 ) ( 299.96 ) +Nonvested, March 31, 2023 89,291 $ 330.57 +* The amounts vested include shares withheld to cover taxes that are not issued to the recipient. +Long-Term Incentive Plan Awards. The Company grants LTIP PSUs under the 2015 SIP that are subject to the achievement of Company performance targets. A Monte-Carlo simulation model is used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the performance periods (further defined for each individual grant below). For each grant of LTIP PSUs, the Monte-Carlo simulation model factors in key assumptions, such as the market price of the underlying common stock at the beginning and end of the reporting period, risk free interest rate, expected dividend yield when simulating total stockholder return (TSR), expected dividend yield when simulating the Company’s stock price, stock price volatility, and correlation coefficients. +The Company evaluates the probability of achieving performance criteria included in its LTIP PSUs against its most current forecast at least quarterly. LTIP PSUs recorded in the consolidated statements of comprehensive income, were as follows: +2023 LTIP PSUs. During fiscal year 2023, the Company approved LTIP PSUs under the 2015 SIP (2023 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2023 LTIP PSUs are subject to vesting based on service conditions over either two or three years . In addition, the Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the fiscal year ended March 31, 2023, and the fiscal years ending March 31, 2024, and 2025 (collectively, the 2025 Measurement Periods). The 2023 LTIP PSUs also incorporate a relative TSR modifier for both the 24 -month performance period ending March 31, 2024, and the 36 -month performance period ending March 31, 2025 (collectively, the 2025 Performance Periods). +To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2023 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2023 LTIP PSUs will occur if the Company fails to achieve the pre-established minimum revenue and pre-tax income amounts for each reporting period. Following the determination of +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2025 Measurement Periods, the vesting of each 2023 LTIP PSU will be subject to adjustment based on the application of the TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2025 Performance Periods. +The Company granted 2023 LTIP PSU awards of 32,735 at the target performance level during the fiscal year ended March 31, 2023. The weighted-average grant date fair value per share of the 2023 LTIP PSUs was $ 387.44 . Based on the Company’s current long-range forecast, it determined that the achievement of at least the minimum threshold target performance criteria for each of the Measurement Periods for these awards was probable as of the grant date. +2022 LTIP PSUs . During fiscal year 2022, the Company approved LTIP PSUs under the 2015 SIP (2022 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2022 LTIP PSUs are subject to vesting based on service conditions over three years . In addition, the Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the fiscal years ended March 31, 2022, and 2023, and for the fiscal year ending March 31, 2024 (collectively, the 2024 Measurement Periods). The 2022 LTIP PSUs also incorporate a relative TSR modifier for 36 -month performance period ending March 31, 2024 (the 2024 Performance Periods). +To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2022 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2022 LTIP PSUs will occur if the Company fails to achieve the pre- established minimum revenue and pre-tax income amounts for each reporting period. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2024 Measurement Periods, the vesting of each 2022 LTIP PSU will be subject to adjustment based on the application of the TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2024 Performance Periods. +The Company granted 2022 LTIP PSU awards of 34,822 at the target performance level during the fiscal year ended March 31, 2022. The weighted-average grant date fair value of the 2022 LTIP PSUs was $ 407.37 per share. The Company currently expects to exceed the threshold financial performance levels for each of the performance criteria, and therefore the number of 2022 LTIP PSUs that is expected to vest is above 100 % of the targeted amount for the awards. +2021 LTIP PSUs . During fiscal year 2021, the Company approved LTIP PSUs under the 2015 SIP (2021 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2021 LTIP PSUs are subject to vesting based on service conditions over either two or three years . +In addition, the Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the fiscal years ended March 31, 2021, 2022 and 2023 collectively, the 2023 Measurement Periods) and incorporates a relative TSR modifier for both the 24 -month performance period and 36 -month performance period ending March 31, 2023 (collectively, the 2023 Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2021 LTIP PSUs that will vest will increase up to a maximum of 200 % of the targeted amount for that award. No vesting of any portion of the 2021 LTIP PSUs will occur if the Company fails to achieve the pre-established minimum revenue and pre-tax income amounts for each reporting period. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the 2023 Measurement Periods, the vesting of each 2021 LTIP PSU will be subject to adjustment based on the application of the TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the 2023 Performance Periods. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +The Company granted 2021 LTIP PSU awards of 19,890 at the target performance level during the year ended March 31, 2021. The weighted-average grant date fair value of the 2021 LTIP PSUs was $ 376.45 per share. The Company currently expects to exceed the target financial performance levels for each of the performance criteria, and the number of 2021 LTIP PSUs that is expected to vest will be at 200 % of the maximum amount for the awards. +LTIP PSUs activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2020 153,446 $ 133.53 +Granted* 39,780 376.45 +Vested** ( 77,098 ) ( 106.37 ) +Nonvested, March 31, 2021 116,128 215.30 +Granted* 69,644 358.75 +Vested** ( 69,816 ) ( 131.33 ) +Forfeited ( 12,924 ) ( 239.81 ) +Nonvested, March 31, 2022 103,032 344.25 +Granted* 65,470 330.70 +Vested** ( 30,104 ) ( 319.81 ) +Forfeited ( 27,194 ) ( 323.92 ) +Nonvested, March 31, 2023 111,204 $ 347.86 +*The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +** The amounts vested include shares withheld to cover taxes that are not issued to the recipient. +Long-Term Incentive Plan Options. The Company approved the issuance of LTIP NQSOs under the 2015 SIP, including the November 2016 (2017 LTIP NQSOs) and June 2017 (2018 LTIP NQSOs) grants, which were awarded to certain members of the Company’s management team, with a maximum contractual term of seven years from the grant date. If the recipient provided continuous service, the LTIP NQSOs would vest after the Company had determined it achieved the target performance criteria by the date specified in the award. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. As of March 31, 2020, the Company determined that the target performance criteria related to the 2018 LTIP NQSOs for the fiscal year ended March 31, 2020, were achieved. During the years ended March 31, 2023, 2022, and 2021, no LTIP NQSOs were granted, but options previously granted remain exercisable for both the 2017 LTIP NQSOs and the 2018 LTIP NQSOs. +LTIP option activity recorded in the consolidated statements of comprehensive income were as follows: +Number of +Shares Weighted- +Average +Grant-Date +Fair Value Weighted- +Average +Remaining +Contractual +Term +(Years) Aggregate +Intrinsic +Value +Vested, March 31, 2020 302,939 $ 66.02 5.0 $ 20,594 +Exercised ( 107,197 ) ( 63.20 ) +Vested, March 31, 2021 195,742 67.56 3.6 51,452 +Exercised ( 45,810 ) ( 67.11 ) +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Number of +Shares Weighted- +Average +Grant-Date +Fair Value Weighted- +Average +Remaining +Contractual +Term +(Years) Aggregate +Intrinsic +Value +Vested, March 31, 2022 149,932 67.70 2.6 30,896 +Exercised* ( 64,043 ) ( 68.66 ) +Vested, March 31, 2023 85,889 $ 66.99 1.8 $ 33,037 +*The amounts exercised include shares withheld to cover taxes that are not issued to the recipient. +Grants to Directors. Each of the Company’s nonemployee directors was entitled to receive common stock with a total value of $ 170 for annual service on the Board of Directors during the year ended March 31, 2023. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the grant date, which is in alignment with the Company’s equity grant guidelines. Each of these shares is fully vested on the date of issuance. +Employee Stock Purchase Plan. The 2015 Employee Stock Purchase Plan (ESPP) authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. ESPP shares are excluded from basic earnings per share until purchases are made but are included in diluted earnings per share as after-tax payroll deductions are made. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period (no look-back provision) at a 15 % discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred and remeasured during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets. +Stock-Based Compensation . Components of stock-based compensation recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2023 2022 2021 +Stock-based compensation +RSUs $ 13,249 $ 12,093 $ 7,820 +PSUs — — 1,900 +LTIP PSUs 11,275 12,865 11,555 +Grants to Directors 1,863 1,507 1,195 +Subtotal 26,387 26,465 22,470 +Other stock-based compensation +Employee Stock Purchase Plan 510 351 231 +Total stock-based compensation, pre-tax 26,897 26,816 22,701 +Income tax benefit ( 6,557 ) ( 6,496 ) ( 5,441 ) +Total stock-based compensation, net of tax $ 20,340 $ 20,320 $ 17,260 +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Unrecognized Stock-Based Compensation. Total remaining unrecognized stock-based compensation as of March 31, 2023, related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, are as follows: +Unrecognized +Stock-based Compensation Weighted-Average +Remaining +Vesting Period (Years) +RSUs $ 14,829 1.1 +LTIP PSUs 15,891 1.6 +Total $ 30,720 +Note 9. Derivative Instruments +As of March 31, 2023, and 2022, the Company has no outstanding derivative contracts, however, settled derivative contracts with notional values are as follows: +Years Ended March 31, +2023 2022 +Designated Derivative Contracts +$ 96,345 $ 110,430 +Non-Designated Derivative Contracts +31,044 38,659 +Total $ 127,389 $ 149,089 +The following table summarizes the effect of Designated Derivative Contracts and the related income tax effects of unrealized gains or losses recorded in the consolidated statements of comprehensive income for changes in AOCL: +Years Ended March 31, +2023 2022 2021 +Gain (Loss) recorded in Other comprehensive income $ 1,504 $ 4,161 $ ( 1,223 ) +Reclassifications from Accumulated other comprehensive loss into net sales ( 1,504 ) ( 4,161 ) 1,223 +Total $ — $ — $ — +The following table summarizes the effect of Non-Designated Derivative Contracts recorded in the consolidated statements of comprehensive income: +Years Ended March 31, +2023 2022 2021 +Gain recorded in SG&A expenses $ 1,518 $ 611 $ 267 +Subsequent to March 31, 2023, through May 11, 2023, the Company entered into no Non-Designated Derivative Contracts, but did enter into Designated Derivative Contracts with notional values totaling $ 127,512 , respectively, which are expected to mature over the next 12 months. As of May 11, 2023, the Company’s outstanding hedging contracts were held by an aggregate of three counterparties. +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 10. Stockholders' Equity +Stock Repurchase Program. The Company’s Board of Directors has approved various authorizations under the Company’s stock repurchase program to repurchase shares of its common stock, including an approval on July 27, 2022, to increase its stock repurchase authorization by $ 1,200,000 (collectively, the stock repurchase program). As of March 31, 2023, the aggregate remaining approved amount under the stock repurchase program is $ 1,356,635 . The stock repurchase program does not obligate the Company to acquire any amount of common stock and may be suspended at any time at the Company’s discretion. Stock repurchase activity under the Company’s stock repurchase program was as follows: +Years Ended March 31, +2023 2022 2021 +Dollar value of shares repurchased (1) (2) $ 297,372 $ 356,653 $ 99,147 +Total number of shares repurchased (3) 928,262 1,043,554 307,080 +Weighted average price paid per share $ 320.35 $ 341.77 $ 322.87 +(1) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs associated with the program. +(2) May not calculate on rounded dollars. +(3) All share repurchases were made pursuant to the Company's publicly announced stock repurchase program in open-market transactions. +Accumulated Other Comprehensive Loss . The components within AOCL, net of tax, recorded in the consolidated balance sheets are as follows: +As of March 31, +2023 2022 +Cumulative foreign currency translation loss $ ( 39,035 ) $ ( 24,955 ) +Note 11. Basic and Diluted Shares +The reconciliation of basic to diluted weighted-average common shares outstanding was as follows: +Years Ended March 31, +2023 2022 2021 +Basic 26,504,000 27,508,000 28,055,000 +Dilutive effect of equity awards 182,000 281,000 351,000 +Diluted 26,686,000 27,789,000 28,406,000 +Excluded +RSUs and PSUs 3,000 2,000 4,000 +LTIP PSUs 76,000 66,000 116,000 +Deferred Non-Employee Director Equity Awards 2,000 1,000 1,000 +Excluded Awards. The equity awards excluded from the calculation of the dilutive effect have been excluded due to one of the following: (1) the shares were antidilutive; (2) the necessary conditions had not been satisfied for the shares to be deemed issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented (such that inclusion of these equity awards in the calculation would have been antidilutive). The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards subject to the achievement of performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower than the number of shares presented, which could result in a lower dilutive effect, respectively. Refer to Note 8, "Stock-Based Compensation," for further information on the Company's equity incentive plans. +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 12. Reportable Operating Segments +Information reported to the Chief Operating Decision Maker (CODM), who is the Company’s Principal Executive Officer, is organized into the Company’s six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments. +Segment Net Sales and Income from Operations. The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with the Company’s warehouse and DCs, certain executive and stock-based compensation, accounting, finance, legal, IT, human resources, and facilities, among others. +Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments as these transactions are eliminated in consolidation. +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income, was as follows: +Years Ended March 31, +2023 2022 2021 +Net sales +UGG brand wholesale $ 1,004,356 $ 1,088,082 $ 871,799 +HOKA brand wholesale 925,877 628,674 405,243 +Teva brand wholesale 149,111 129,094 105,928 +Sanuk brand wholesale 27,678 30,316 26,566 +Other brands wholesale 53,653 60,573 69,375 +Direct-to-Consumer 1,466,611 1,213,600 1,066,730 +Total $ 3,627,286 $ 3,150,339 $ 2,545,641 +Income (loss) from operations +UGG brand wholesale $ 267,013 $ 315,240 $ 292,718 +HOKA brand wholesale 285,257 155,344 111,208 +Teva brand wholesale 32,595 33,294 27,120 +Sanuk brand wholesale 2,891 6,463 ( 162 ) +Other brands wholesale ( 1,678 ) 14,028 21,573 +Direct-to-Consumer 508,948 435,414 349,465 +Unallocated overhead costs ( 442,275 ) ( 395,076 ) ( 297,717 ) +Total $ 652,751 $ 564,707 $ 504,205 +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2023 2022 2021 +Depreciation, amortization, and accretion +UGG brand wholesale $ 611 $ 416 $ 532 +HOKA brand wholesale 945 701 611 +Teva brand wholesale — — — +Sanuk brand wholesale 1,490 1,490 1,727 +Other brands wholesale 382 382 382 +Direct-to-Consumer 10,276 9,771 11,121 +Unallocated overhead costs 34,154 30,118 26,157 +Total $ 47,858 $ 42,878 $ 40,530 +Capital expenditures +UGG brand wholesale $ 826 $ 109 $ ( 31 ) +HOKA brand wholesale 1,229 1,191 56 +Teva brand wholesale — — — +Sanuk brand wholesale — — 8 +Other brands wholesale — — 40 +Direct-to-Consumer 19,789 11,872 11,175 +Unallocated overhead costs 72,709 44,542 25,533 +Total $ 94,553 $ 57,714 $ 36,781 +Segment Assets. Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments. +Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets, are as follows: +As of March 31, +2023 2022 +Assets +UGG brand wholesale $ 261,683 $ 382,837 +HOKA brand wholesale 446,450 293,025 +Teva brand wholesale 94,735 91,140 +Sanuk brand wholesale 41,405 40,766 +Other brands wholesale 24,448 32,429 +Direct-to-Consumer 219,194 191,193 +Total assets from reportable operating segments +1,087,915 1,031,390 +Unallocated cash and cash equivalents 981,795 843,527 +Unallocated deferred tax assets, net 72,592 64,217 +Unallocated other corporate assets 413,901 393,116 +Total $ 2,556,203 $ 2,332,250 +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 13. Concentration of Business +Regions and Customers . The Company sells its products globally to customers and end consumers in various countries, with net sales concentrations as follows: +Years Ended March 31, +2023 2022 2021 +International net sales $ 1,175,789 $ 982,546 $ 784,164 +% of net sales 32.4 % 31.2 % 30.8 % +Net sales in foreign currencies $ 832,632 $ 744,213 $ 611,897 +% of net sales 23.0 % 23.6 % 24.0 % +Ten largest customers as % of net sales 25.2 % 27.4 % 27.8 % +For the years ended March 31, 2023, 2022, and 2021, no single foreign country comprised 10.0% or more of the Company’s total net sales. No single global customer accounted for 10.0% or more of the Company’s net sales during the years ended March 31, 2023, 2022, and 2021. +As of March 31, 2023, the Company has no customers that represent 10.0% of trade accounts receivable, net, compared to one customer that represents 11.2 % of trade accounts receivable, net, as of March 31, 2022. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +Cash and Cash Equivalents. The Company maintains a portion of its cash in Federal Deposit Insurance Corporation (FDIC) insured bank deposit accounts which, at times, may exceed federally insured limits. To date, the Company has not experienced any losses in such accounts. The Company does not believe, based on the size and strength of the banking institutions used, it is exposed to any significant credit risks in cash. +Suppliers. The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company's sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom (UK). +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets, are as follows: +As of March 31, +2023 2022 +United States $ 244,529 $ 208,078 +Foreign* 22,150 14,371 +Total $ 266,679 $ 222,449 +*No single foreign country’s property and equipment, net, represents 10.0% or more of the Company’s total property and equipment, net, as of March 31, 2023, and 2022. +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2023, 2022, and 2021 +(dollar amounts in thousands, except per share or share data) +Note 14. Quarterly Summary of Information (Unaudited) +The Company’s business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded the Company’s aggregate net sales in the quarters ending March 31st and June 30th. However, as the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of the Company’s aggregate net sales, the Company has seen and expects to continue to see the impact from seasonality decrease over time. However, the Company’s seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. +The following is summarized unaudited quarterly financial data for the last two fiscal years: +Fiscal Year 2023 +Quarter Ended +6/30/2022 9/30/2022 12/31/2022 3/31/2023 +Net sales $ 614,461 $ 875,614 $ 1,345,640 $ 791,571 +Gross profit 294,752 421,921 712,529 396,168 +Income from operations 56,341 127,831 362,660 105,919 +Net income 44,849 101,524 278,662 91,787 +Net income per share +Basic $ 1.67 $ 3.83 $ 10.55 $ 3.49 +Diluted $ 1.66 $ 3.80 $ 10.48 $ 3.46 +Fiscal Year 2022 +Quarter Ended +6/30/2021 9/30/2021 12/31/2021 3/31/2022 +Net sales $ 504,678 $ 721,902 $ 1,187,752 $ 736,007 +Gross profit 260,503 367,088 621,221 358,739 +Income from operations 61,832 128,181 293,396 81,298 +Net income 48,124 102,063 232,943 68,819 +Net income per share +Basic $ 1.73 $ 3.69 $ 8.49 $ 2.54 +Diluted $ 1.71 $ 3.66 $ 8.42 $ 2.51 +F-42 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(dollar amounts in thousands) +Allowances for doubtful accounts, sales discounts, and chargebacks against gross trade accounts receivable related to wholesale channel sales recorded in the consolidated balance sheets, are as follows: +As of March 31, +2023 2022 2021 +Allowance for doubtful accounts (1) +Balance at Beginning of Year $ ( 9,044 ) $ ( 9,730 ) $ ( 6,989 ) +Additions ( 1,983 ) — ( 3,052 ) +Deductions 451 686 311 +Balance at End of Year $ ( 10,576 ) $ ( 9,044 ) $ ( 9,730 ) +Allowance for sales discounts (2) +Balance at Beginning of Year $ ( 2,831 ) $ ( 3,016 ) $ ( 1,030 ) +Additions ( 19,745 ) ( 20,713 ) ( 16,414 ) +Deductions 16,920 20,898 14,428 +Balance at End of Year $ ( 5,656 ) $ ( 2,831 ) $ ( 3,016 ) +Allowance for chargebacks (3) +Balance at Beginning of Year $ ( 18,716 ) $ ( 13,770 ) $ ( 13,127 ) +Additions ( 27,400 ) ( 32,062 ) ( 23,214 ) +Deductions 29,844 27,116 22,571 +Balance at End of Year $ ( 16,272 ) $ ( 18,716 ) $ ( 13,770 ) +Total $ ( 32,504 ) $ ( 30,591 ) $ ( 26,516 ) +(1) The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense or recovery based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(2) The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting certain order, shipment, and prompt payments terms. Deductions are for the actual discounts taken by the Company’s customers against outstanding trade accounts receivables. +(3) The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +F-43 \ No newline at end of file diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/filing_metadata.csv b/raw/filings/0000910521/2022/0000910521-23-000016/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5eb9caa3bdab88276f4839bb3032978e38ab872b --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2023-05-26,2023-03-31,2023-05-26T17:38:57.000Z,0000910521-23-000016,deck-20230331.htm,10-K,13018613,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052123000016/deck-20230331.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052123000016/,2022,2022,1 diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/item1.txt b/raw/filings/0000910521/2022/0000910521-23-000016/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..767726561f55dc9283d4a7956d466029b4c6d9c2 --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/item1.txt @@ -0,0 +1,119 @@ +Item 1. Business +General +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers. +Products and Brands +UGG. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth for the HOKA brand, which has quickly become a leading brand within our run and outdoor specialty wholesale accounts and is growing within selective key accounts. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Teva. The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +Other Brands. Other brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. Our Other brands are primarily sold in the US and Canada. +3 +Table of Contents +Sales and Distribution +US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. Our sales force is separated by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana, as well as through a 3PL in Pennsylvania. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. We are further expanding our DCs and are in the early stages of building out a third US DC located in Mooresville, Indiana. +Refer to Part I, Item 2, “Properties,” and Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly owned subsidiaries in many regions and countries, including Canada, Europe, Asia-Pacific, and Latin America, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +Reportable Operating Segments and Geographic Areas +Our six reportable operating segments include the five strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), plus our DTC business (reportable operating segments). +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers such as Urban Outfitters, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, streetwear and sports style partners, such as Footlocker and Journey’s, and online retailers, such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience with younger consumers, our distribution to these consumers is expanding faster through our lifestyle and sports style partners. +HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers such as Fleet Feet and Road Runner Sports, outdoor retailers, such as REI, select online retailers such as Zappos.com, other strategic partners, such as DICK’s Sporting Goods and Running Warehouse, streetwear and sports style partners, such as Footlocker, and higher-end department stores, such as Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through outdoor retailers, such as REI, fashion lifestyle retailers, such as Urban Outfitters, other strategic partners, such as DICK’s Sporting Goods, large national retail chains, such as Famous Footwear and DSW, higher-end department stores such as Nordstrom, and online retailers such as Amazon.com and Zappos.com. We continue to expand our Teva brand wholesale distribution in international markets, including through strategic partners such as United Arrows and ABC Mart in Japan. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic sports style partners, such as Journey’s, higher-end department stores, such as Dillard’s, larger national retail chains, such as DSW, and online retailers such as Amazon.com and Zappos.com. +4 +Table of Contents +Other Brands Wholesale. Other brands is primarily made up of the Koolaburra brand. We sell our Koolaburra brand footwear primarily through larger national retail chains, including Kohl’s, DSW, Shoe Carnival, and Famous Footwear, certain higher-end department stores, such as Macy’s, and online retailers such as Amazon.com and Zappos.com. +Direct-to-Consumer. Our DTC business is comprised of our e-commerce business, which we operate through various websites and platforms, and retail stores. Our websites and retail stores are largely intertwined and interdependent. In an omni-channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. Further, our domestic and international consumer loyalty programs allow our consumers to earn points and awards across the DTC business, which has contributed to higher brand demand. +Our retail stores enable us to expose consumers to a more curated selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross profit as a percentage of net sales (gross margin). Our Company-owned mono branded retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings of HOKA brand retail stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base. We also have several UGG brand flagship stores and a HOKA brand flagship store, which are Company-owned premium mono branded concept stores in key markets designed to showcase the UGG and HOKA brand products. +As of March 31, 2023, we operate our e-commerce business through Company-owned websites and mobile platforms in 57 different countries and have a total of 164 global retail stores (including 18 HOKA brand retail stores), which includes 81 concept stores and 83 outlet stores. +Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion of our DTC business. +Refer to Note 12, "Reportable Operating Segments," of our consolidated financial statements in Part IV within this Annual Report for further information regarding our reportable operating segments. Additionally, refer to Note 13, "Concentration of Business," of our consolidated financial statements in Part IV within this Annual Report for further information about geographic areas and concentration of related business risks. +Product Design and Development +The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles and product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products. +Manufacturing and Supply Chain +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance +5 +Table of Contents +with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring compliance with laws and regulations, and adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts and other pricing arrangements with certain suppliers of sheepskin, wool (primarily for UGGpure, further discussed below), leather, and sugarcane derived ethylene vinyl acetate (EVA) to manage price volatility. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We use a proprietary material, UGGpure, which is almost entirely repurposed wool woven into a durable backing, and UGGplush, which is almost entirely repurposed wool and lyocell woven into a durable backing, in some of our UGG brand products. In an effort to eliminate waste as part of our corporate sustainability efforts, at this time, all of the wool in UGGpure and UGGplush is sheared from the sheepskin we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will further reduce our dependence on sheepskin. +Excluding sheepskin, UGGpure, UGGplush, and sugarcane derived resin or EVA, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they must comply with all local laws and regulations governing human rights, working conditions, anti-corruption laws, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the “Environmental, Social, and Governance” section below for further information. +Inventory Management and Product Returns +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities and we are making investments in a new end-to-end planning system to further support our scaling business, including our e-commerce business. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance. +6 +Table of Contents +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Similar to other companies in our industry, we continue to monitor pressures on the global supply chain, which have shifted the timing of shipments across our brands compared to the fiscal year ended March 31, 2022 (the prior period). However, we have seen improvements in transit lead times and related freight costs, compared to the prior period. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further information on the impacts on our business of supply chain disruptions and the associated risks. Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report under the sections entitled “Trends and Uncertainties Impacting Our Business and Industry,” “Liquidity,” and “Contractual Obligations” for further information on the impact of supply chain disruptions on our results of operations, our working capital and operating requirements, as well as our purchase obligations for product, respectively. +Environmental, Social, and Governance (ESG) +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. Through our holistic ESG program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, we have been recognized by Investor’s Business Daily as one of the Best ESG Companies, by Sustainalytics as one of the Top-Rated ESG Companies, by Newsweek as one of America’s Most Responsible Companies, and included on the Bloomberg Gender Equality Index during fiscal year 2023. +ESG Oversight. Our Board of Directors, through its Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee), which is comprised of four independent directors. Our Board of Directors oversees our ESG strategy and has ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board of Directors regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies to ensure a consistent corporate strategy. The Board of Directors considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), detailed below, and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +ESG Education . During fiscal year 2023, our Corporate Governance Committee, together with our CAO, enrolled in the Diligent ESG and Climate Leadership Certificate Program. Additionally, as set forth in our Corporate Governance Guidelines, our Board of Directors is required to complete annual training on our Code of Ethics. Together, we believe these efforts further evidence our ongoing commitment to sustainable business practices and strong ESG performance. +7 +Table of Contents +ESG Performance Metrics . Our pay-for-performance philosophy demands that we offer performance-based compensation that is directly linked to factors that the Talent & Compensation Committee of our Board of Directors believes will lead to the creation of stockholder value. During fiscal year 2023, for our executive leadership team, our annual cash incentive award program included a 10% modifier tied to specific ESG initiatives. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +The following is a brief overview of our SDGs and related achievements during fiscal year 2023: +Environment Indicators +Many of our facilities were designed with sustainability in mind. Our corporate headquarters and our Moreno Valley, California, DC are Leadership in Energy and Environmental Design (LEED)-certified silver and our first Mooresville, Indiana, DC is LEED-certified gold. To further our commitment to monitoring the environmental performance of our supply chain partners, in fiscal year 2023 we began utilizing the HIGG Facility Environmental Module, a sustainability assessment tool used by our factory partners to collect detailed and standardized information about a partner’s waste, water, and energy consumption and identify and prioritize opportunities for sustainability performance improvements. +• Materials. We strive to maximize the amount of environmentally preferred materials (which we define as recycled, renewable, regenerated, and natural materials) in our products. Where possible, we utilize third-party certifications to assess our environmentally preferred materials, such as the Leather Working Group, Forest Stewardship Council, Responsible Wool Standard, and the Global Recycling Standard. During fiscal year 2023, we sourced all of our leather supplies used in our footwear from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry. We also continue to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +During fiscal year 2023, all wool used in our footwear products was sourced from preferred sources, including Responsible Wool Standard certified or upcycled from certain sheepskin product. We require our supply chain partners to comply with our Ethical Sourcing and Animal Welfare Policy and have amplified our requirements for leathers sourced from South America by implementing detailed traceability standards to address deforestation. In addition, we do not believe in the exploitation or killing of animals solely for the purpose of their fur. Our strict policy requires that we only use hides that are the byproduct of the meat industry and, in fiscal year 2023, we continued our evolution moving away from virgin wool by transitioning from UGGpure in support of UGGplush which utilizes TENCEL™ Lyocell rather than virgin wool. +Additionally, our brands continue to seek more preferred sources (either recycled or sugarcane) of EVA, and, during fiscal year 2023, we saw a significant increase in the use of preferred sources of EVA, largely influenced by the UGG brand’s decision to transition away from petroleum-based ethylene to sugarcane-based ethylene in certain high volume, classic silhouette styles. +8 +Table of Contents +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. Our DCs in Moreno Valley, California, and Mooresville, Indiana, have undertaken efforts to become zero-waste facilities by calendar year 2023. Further, we have taken steps to remove most single-use plastic from our packaging at our corporate headquarters, strive to use minimal plastic in our product packaging, and have eliminated single-use plastic bags from our retail stores. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and waste diversion methods, and we continue to monitor and engage with our supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries in which we operate by reducing water consumption and improving water quality throughout our operations. We monitor certain manufacturing and supply chain partners and have set water use reduction targets for each of them. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. Since fiscal year 2021, our Restricted Substances team manages and controls over 1,600 restricted substances and continues to explore cleaner chemistries where possible. +• Climate and Clean Energy. We aim to reduce energy consumption and carbon emissions throughout our operations. We set ambitious Scope 1, 2, and 3 carbon reduction targets filed with and approved by the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and have collaborated with them to establish our carbon reduction targets. We are founders of the Savory Institute's Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. During fiscal year 2023, we established a long-term grant with Savory Institute to support regenerative farming practices on sheep farms in Australia, influencing over 300,000 acres and 80 farms. +Our brands are committed to sustainable business practices, embrace our sustainability targets, and work to launch sustainable collections. For example, the UGG brand’s Classic Mini Regenerate and Tasman Regenerate are crafted with raw materials from ranches that practice regenerative agriculture, a conservation and rehabilitation approach focused on topsoil regeneration, encouraging wildlife diversity, and supporting carbon capture in the ground. UGG also offers a consumer-facing repair service, UGGrenew, to extend the life of Classic Boots. The HOKA brand continues to focus on integrating more environmentally preferred materials in its footwear and apparel collections. Teva continues to work with TerraCycle® to give well-worn Teva sandals new life as downcycled materials. The Sanuk brand’s Veg Out Collection features 100% plant-based sneakers crafted using plant-based and recycled materials. +Social Indicators +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. During fiscal year 2023, we once again appeared on the Bloomberg Gender-Equality Index, which helps bring transparency to gender-related practices and policies at publicly-listed companies around the world. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s HERproject, which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality and financial inclusion. We also partner with Better Work to provide anti-harassment training to key supply chain partners and the International Labour Organization (ILO) training program covering topics such as international labour standards, social protection, social dialogue, innovation, gender equality and diversity, sustainable development, and the future of work. Our current goal is to empower 100,000 women through workplace-based education and training. Since setting our target in fiscal year 2020, we have empowered approximately 87,000 women through our engagement efforts and working with valued third-party programs, including HERproject, Better Work and the ILO. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +9 +Table of Contents +• Human Rights. We are committed to operating responsibly in the communities in which we operate, including encouraging industry leading human rights practices within our supply chain. We have established robust criteria in our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), based on ILO standards, which outlines our expectations for our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards for our business partners, which are regularly reviewed by our leadership team. Partners who underperform are placed on corrective action plans and monitored more frequently. We are members of the Transparency Pledge to promote a standard for supply chain disclosure in the garment and footwear industry. We publish a list that includes all of our Tier 1 and Tier 2 supply chain partners and ensure it is regularly updated to include key details like number of employees at each site, location, and types of products made. We are also members of The Social & Labor Convergence Program, a multi-stakeholder initiative whose goal is to increase the effectiveness of factory audits. +Our annual Creating Change Report for the year ended March 31, 2023, which will be published under the “Responsibility” tab of our website located at www.deckers.com , will provide more information regarding our fiscal year 2023 ESG achievements with a focus on the SDGs discussed above. We believe the progress of our corporate responsibility efforts is served by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Human Capital - Our People and Our Culture +Employees . As of March 31, 2023, we employ approximately 4,200 employees (an increase of 11.2% compared to the prior period) in North America, Europe, and Asia. This includes approximately 1,500 employees in our retail stores worldwide, which excludes temporary and seasonal employees. +Culture . We strive to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around it, help hold us accountable to deliver on this purpose: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and work with customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employee’s experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2023 had a participation rate of 88%. Of those employees who completed the survey, 87% noted they were proud to work for Deckers. +10 +Table of Contents +Promoting Diversity, Equity, and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and bring their authentic selves to work each day. We believe the inclusion of diverse perspectives, and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. To that end, as of March 31, 2023, our Board of Directors is comprised of a total of ten directors, 60% of whom are from underrepresented communities. Further, as of March 31, 2023, over 24% of our director-level and above employees in the US are from BIPOC communities, which represents an increase of over 3% compared to fiscal year 2022 and an overall increase of more than 12% since fiscal year 2020. Further, during fiscal year 2023, 45% of all new hires reporting into the US corporate office and call center were from BIPOC communities. At Deckers, we strive to have gender parity in leadership positions and our Board of Directors. As of March 31, 2023, over 49% of our director-level and above employees are female and 40% of the members of our Board of Directors are female. +. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. We have implemented a comprehensive, global strategy for DEI, including the following: +• Our brands have committed to having at least 60% of individuals in our marketing campaigns represent the BIPOC and LGBTQIA+ communities and diverse body types and abilities. +• We have created a framework for the creation of Employee Resource Groups (ERGs), which are formed around common interests, backgrounds, or characteristics, including gender, race, ethnicity, and other affinities. We have ten ERGs as of March 31, 2023. +• We have deployed mandatory annual anti-racism and implicit bias training, as well as a suite of additional learning and development resources available to employees, including Inclusive Interviewing and Selection for managers, Disability Awareness & Inclusion , and Applying DEI Practices to Product Lifecycle , among others aimed at increasing employee acumen about DEI-focused topics. +• We have a global mentorship program to help provide our existing talent with networking and engagement opportunities. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2023, we donated over $4,000 to various non-profit organizations around the globe, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our ‘Art of Kindness’ events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 15,000 hours in fiscal year 2023. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. We also encourage our employees to volunteer by compensating each employee for up to 24 hours of volunteer time each calendar year and offer incentives for payments to employees’ charity of choice when achieving 100 hours of volunteer time in a calendar year. +Talent Development and Retention . The ability to attract, develop and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), a monthly global employee gathering dedicated to peer sharing and learning about different parts of the organization and careers in each space (Biz Breaks), and a global leadership development program for new leaders (Trailblazers). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commits substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while seeking to improve organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, +11 +Table of Contents +time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have specific individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid, and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts or our recently adopted solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model, including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +Seasonality +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we have seen and expect to continue to see the impact from seasonality decrease over time. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +Competition +The industry and markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +12 +Table of Contents +Patents and Trademarks +We utilize trademarks for virtually all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union (EU), Japan, and Korea. As of March 31, 2023, we hold 190 designs and inventions with corresponding design or utility patent registrations, plus 62 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +Government Regulation +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +Available Information +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following material corporate governance and responsibility documents available through our website: Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, and Corporate Governance Guidelines. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/item13.txt b/raw/filings/0000910521/2022/0000910521-23-000016/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3abc767b07ec136a3bc27aaf56d1565871bb91ed --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/item9a.txt b/raw/filings/0000910521/2022/0000910521-23-000016/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..d780b56be47535f411aae52b9b318529d0694d55 --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2023. Based on that evaluation, our Principal Executive Officer (PEO) and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2023. +Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2023, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +Internal Control Over Financial Reporting +There were no changes in our internal control over financial reporting during the year ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in most of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on the design and operating effectiveness of our internal control over financial reporting. +Principal Executive Officer and Principal Financial and Accounting Officer Certifications +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +49 +Table of Contents +PART III \ No newline at end of file diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/rp_note.txt b/raw/filings/0000910521/2022/0000910521-23-000016/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2022/0000910521-23-000016/rpt_disclosure.txt b/raw/filings/0000910521/2022/0000910521-23-000016/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d7c696743f3ad4289a3bba6aae03ef283e79c3b --- /dev/null +++ b/raw/filings/0000910521/2022/0000910521-23-000016/rpt_disclosure.txt @@ -0,0 +1,5 @@ +RELATED-PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related-person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related-person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit & Risk Management Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit & Risk Management Committee, the Chair of our Board and our highest ranking manager of internal audit. +If a related-person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit & Risk Management Committee is responsible for reviewing and approving or ratifying any such transaction. 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2021-04-01 2022-03-31 0000910521 deck:ChargebackAllowanceMember 2024-03-31 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the Fiscal Year Ended March 31 , 2024 +☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the transition period from to +Commission File Number: 001-36436 +DECKERS OUTDOOR CORP ORATION +(Exact name of registrant as specified in its charter) +Delaware 95-3015862 +(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, par value $0.01 per share DECK New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ +Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 13,217,047,750 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $514.09. This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 9, 2024, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 25,442,495 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2024 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +For the Fiscal Year Ended March 31, 2024 +TABLE OF CONTENTS +Page +Cautionary Note Regarding Forward-Looking Statements +2 +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +13 +Item 1B. Unresolved Staff Comments * +I tem 1C. +C yber security +29 +Item 2. +Properties +30 +Item 3. +Legal Proceedings +31 +Item 4. Mine Safety Disclosures * +PART II +Item 5. +Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +31 +Item 6. +[Reserved] * +Item 7. +Management ’ s Discussion and Analysis of Financial Condition and Results of Operations +34 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +49 +Item 8. +Financial Statements and Supplementary Data +50 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * +Item 9A. +Controls and Procedures +51 +Item 9B. +Other Information +52 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +* +PART III +Item 10. +Directors, Executive Officers, and Corporate Governance +53 +Item 11. +Executive Compensation +53 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +53 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +53 +Item 14. +Principal Accountant Fees and Services +53 +PART IV +Item 15. +Exhibits and Financial Statement Schedule +53 +Signatures +56 +Index to Consolidated Financial Statements and Financial Statement Schedule +F- 1 +Item 16. Form 10-K Summary * +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2024 (Annual Report), and the information and documents incorporated by reference within this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference within this Annual Report, contain forward-looking statements relating to, among other things: +• changes in consumer preferences impacting our brands and products, and the footwear and fashion industries; +• global economic trends, including foreign currency exchange rate fluctuations, changes in interest rates, inflationary pressures, changes in commodity pricing, and recessionary concerns; +• the ability to effectively compete in a highly competitive footwear, apparel, and accessories industry; +• our business, operating, investing, capital allocation, marketing, and financing plans and strategies; +• the operational challenges faced by our warehouses and distribution centers (DCs), wholesale partners, global third-party logistics providers (3PLs), and third-party carriers, including as a result of global supply chain disruptions and labor shortages; +• trends, seasonality, and weather impacting the demand for our products and the purchasing behavior of wholesale partners and consumers; +• changes to the geographic and seasonal mix of our brands and products; +• availability of materials and manufacturing capacity, and reliability of overseas production and storage; +• changes to our product distribution strategies, including product allocation and segmentation strategies; +• the impact of our efforts to continue to advance sustainable and socially conscious business operations, and to meet the expectations that our investors and other stakeholders have with respect to our environmental, social and governance practices; +• the effects of climate change, natural disasters, and the impacts of public health issues, and the related changes in the regulatory environment and consumer demand to mitigate these effects, and the resulting impact on our business and the businesses of our customers, consumers, suppliers, and business partners; +• expansion of our brands, product offerings, and investments in our Direct-to-Consumer (DTC) capabilities, including our distribution facilities, e-commerce websites, and our retail store footprint; +• our plans to divest the Sanuk brand and the related terms and timing; +• global geopolitical tensions, including the impact of economic sanctions on our transportation and energy costs; +• security breach or other disruption to our information technology (IT) systems, or those of our vendors; +• our interpretation of applicable global tax regulations and changes in tax laws and audits that may impact our tax liability and effective tax rates; +• our cash repatriation strategy regarding earnings of non-United States (US) subsidiaries and the resulting tax impacts; +• the outcomes of legal proceedings, including the impact they may have on our business and intellectual property rights; and +• the value of goodwill and other intangible assets, and potential write-downs or impairment charges. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed, or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC), which are available free of charge on the SEC’s website at www.sec.gov and our website at ir.deckers.com . You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge occasionally, and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” “management,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra by UGG® (Koolaburra), AHNU® (AHNU), UGGpure® (UGGpure), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere within this Annual Report are the property of their respective owners. The trademarks and trade names within this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indication that their respective owners will not assert their rights to the fullest extent under applicable law. +Unless otherwise indicated, all figures herein are expressed in thousands, except for per share and share data. The defined periods for the fiscal years ended March 31, 2024, 2023, and 2022 are stated herein as “year ended” or “years ended.” We also refer to these fiscal years as “fiscal year 2024,” “fiscal year 2023,” and “fiscal year 2022,” respectively. +ITEM 1. BUSINESS +GENERAL +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under six proprietary brands: UGG, HOKA, Teva, Sanuk, Koolaburra, and AHNU. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our Company-owned e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products (independent manufacturers). +RECENT DEVELOPMENTS +On February 1, 2024, Dave Powers announced his intention to retire from his position as Chief Executive Officer (CEO) and President of the Company, effective August 1, 2024. Following this date, we expect Mr. Powers will continue to serve as a member of our Board of Directors. Also on February 1, 2024, we announced that Stefano Caroti, our Chief Commercial Officer, will be appointed as CEO and President, effective August 1, 2024. +BRANDS +UGG. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings that appeal to a growing global audience and a broad demographic. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its ecosystem of access points. The HOKA brand’s product line includes running, trail, hiking, fitness and lifestyle footwear offerings, as well as select apparel and accessories. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +3 +Table of Contents +Teva. The Teva brand, born in the depths of the Grand Canyon, has long been a favored brand among outdoor adventurers across the globe. Today, building on its foundation as a leader in sport sandals and its authentic outdoor heritage, the Teva brand’s thoughtfully designed, and accessible products are built for a range of outdoor pursuits, connecting with a vibrant, diverse audience passionate about exploration. The Teva brand’s collection now includes a variety of footwear options, from classic sandals and shoes to boots; all crafted for the demands of the outdoors. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged as a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional construction, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +In alignment with effective resource allocation and the execution of our long-term objectives, we intend to divest the Sanuk brand. +Other Brands. Other brands consist primarily of the Koolaburra brand, as well as the AHNU brand we launched in March 2024. The Koolaburra brand is a casual footwear fashion line that uses plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. Our Other brands are primarily sold in the US and Canada. +SALES AND DISTRIBUTION +US Distribution. In our wholesale channel, we sell our products in the US through sales representatives, who are organized by account type or geographically and by brand. Our sales force is organized by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers and consumers. +International Distribution. We sell our products internationally in our wholesale channel through independent distributors and our wholly owned subsidiaries, including in Canada, Europe, Asia-Pacific, and Latin America. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +Refer to Part I, Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC AREAS +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, our reportable operating segments). +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers, higher-end department stores, streetwear and sports style partners, and online retailers. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience within key consumer segments, our distribution to consumers in these segments is expanding faster through our lifestyle and sports style partners. +4 +Table of Contents +HOKA Wholesale. We sell HOKA brand products primarily through full-service specialty retailers, outdoor and sporting goods retailers, select online retailers, fashion lifestyle retailers, sports style partners, and higher-end department stores. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners in Europe and Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through outdoor and sporting goods retailers, fashion lifestyle retailers, large national retail chains, higher-end department stores, and online retailers. We continue to expand our Teva brand wholesale distribution in international markets, including through strategic partners in Japan. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic streetwear partners, higher-end department stores, large national retail chains, and online retailers. +Other Brands Wholesale. Other brands is primarily made up of the Koolaburra brand, as well as the recently launched AHNU brand. We sell our Koolaburra brand footwear primarily through large national retail chains, higher-end department stores, and online retailers. Currently, we sell our AHNU brand footwear through domestic streetwear and lifestyle boutiques and retailers. +Direct-to-Consumer. Our DTC business encompasses all of our brands and is comprised of our Company-owned e-commerce websites and retail stores, which are intertwined and interdependent in an omni-channel marketplace as we believe many of our consumers interact with both before making purchasing decisions in store and online. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. +Our retail stores enable us to expose consumers to a curated selection of products, directly influence our consumers’ experience with our brands, and sell our products at retail prices; thereby generating larger gross profit as a percentage of net sales (gross margin). We continue to open retail stores in key markets to further grow our brand presence and appeal to a broader consumer base. Our Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to launch in strategic locations. We also have several flagship stores, which are Company-owned premium mono-branded concept stores in key global markets designed to showcase the UGG and HOKA brand products. Flagship stores provide broader product offerings and generate greater traffic that enhance our interaction with consumers and increase brand loyalty. Through our outlet stores, we sell certain discontinued styles from prior seasons, full price in-line products, and products made specifically for the outlet stores. +As of March 31, 2024, we operate Company-owned e-commerce websites in 56 different countries and have a total of 164 global retail stores (including 26 HOKA brand retail stores), which includes 83 concept stores and 81 outlet stores. +Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of our DTC business, including the various retail store types and definitions. Refer to Note 12, “Reportable Operating Segments,” and Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding our reportable operating segments, as well as our geographic areas and concentration of related business risks, respectively. +5 +Table of Contents +PRODUCT DESIGN AND DEVELOPMENT +Our design and development teams work closely with each brand’s product management teams to create seasonal product lines designed to meet and exceed consumer expectations. Each brand follows a similar product creation path starting with consumer insights, including color, trend, material research, and in-depth market analysis. Throughout the creation process there are multiple concept and design reviews to develop prototypes which are assembled through our independent manufacturers. Depending on the brand and product application, there may be multiple rounds of samples for fit, dynamic or athlete testing, and on occasion, we may contract with external laboratories for additional research needs. Our diverse product offering enables us to leverage learnings across each of our brands, enabling innovation and economies of scale. Throughout the entire design and development process we evaluate the availability and costs of raw materials, the capabilities and capacities of our independent manufacturers, and the target pricing of our products. +MANUFACTURING AND SUPPLY CHAIN +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China, Indonesia, and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by our independent manufacturers are purchased from independent suppliers that we designate (designated suppliers). Key materials and components include sheepskin, UGGplush, and sugarcane-derived ethylene vinyl acetate (sugarcane-derived EVA). Sheepskin is used to manufacture a significant portion of our UGG brand products, and, at our direction, our independent manufacturers purchase the majority of this sheepskin from designated suppliers, mainly two tanneries in China, which source their sheepskin primarily from Australia. We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. For wool, we currently use a proprietary material, UGGplush, which is almost entirely repurposed wool and TENCEL™ Lyocell woven into a durable backing, within certain UGG brand products. Sugarcane-derived EVA is utilized within certain UGG brand products. Sugarcane-derived EVA is predominately purchased from a Brazilian company by our independent manufacturers for the production of soles. Leveraging sugarcane-derived EVA, as opposed to petroleum-derived EVA, is part of our on-going commitment to sustainability. +To ensure an adequate supply of sheepskin and UGGplush, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts with designated suppliers of sheepskin and sugarcane-derived EVA, as well as other pricing arrangements for UGGplush, to manage price volatility and ensure availability. We believe current supplies are sufficient to meet our current and anticipated demand for the next 12 months, but we continually monitor our supply chain and explore options to accommodate our expected growth and mitigate the impacts of any unexpected supply chain issues. Excluding sheepskin, UGGplush, sugarcane-derived EVA, and certain branded materials for materials like outsoles, we believe that substantially all raw materials and components used to manufacture our products, including virgin wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Refer to the subsection titled “Contractual Obligations” under the section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +6 +Table of Contents +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), which specifies that they must comply with all local laws and regulations governing human rights, working conditions, anti-corruption, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the “Environmental, Social, and Governance” section below for further information. +INVENTORY MANAGEMENT AND PRODUCT RETURNS +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities, and we are making investments in a new end-to-end planning system to further support our scaling business, including our Company-owned e-commerce websites. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that have enhanced inventory performance, including higher inventory turnover, and partially mitigated product cost increases. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, and also provide customers the ability to place in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to the sections titled “Trends and Uncertainties Impacting Our Business and Industry” and “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our supply chain infrastructure capabilities, working capital and operating requirements, and purchase obligations for product. +ENVIRONMENTAL, SOCIAL, AND GOVERNANCE +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. +Through our holistic Environmental, Social, and Governance (ESG) program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, during fiscal year 2024, we have been recognized as one of Barron’s 100 Most Sustainable Companies, by Investor’s Business Daily as one of the Best ESG Companies, by U.S. News and World Report as one of the Best Companies to Work For, by Newsweek as one of America’s Most Responsible Companies and as one of America’s Greenest Companies. +7 +Table of Contents +ESG Oversight. Our Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee) is comprised of four independent members of our Board of Directors who oversee our ESG strategy and have ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board of Directors regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies, to ensure a consistent corporate strategy. The Board of Directors considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), detailed below, and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +ESG Education . Each member of our Corporate Governance Committee, together with our CAO and certain other members of the Board of Directors, previously completed the Diligent ESG and Climate Leadership Certificate Program. Additionally, as set forth in our Corporate Governance Guidelines, our Board of Directors is required to complete annual training on our Code of Ethics. Together, we believe these efforts further evidence our ongoing commitment to sustainable business practices and strong ESG performance. +ESG Performance Metrics . Our pay-for-performance philosophy demands that we offer performance-based compensation that is directly linked to factors that the Talent & Compensation Committee of our Board of Directors believes will lead to the creation of stockholder value. During fiscal year 2024, for our executive leadership team, our annual cash incentive award program included a 10% modifier tied to the achievement of specific ESG initiatives. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +Our annual Creating Change Report for the year ended March 31, 2024, which will be published under the “Responsibility” tab of our website located at ir.deckers.com , will provide more information regarding our fiscal year 2024 ESG achievements with a focus on the SDGs discussed below. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +8 +Table of Contents +The following is a brief overview of our SDGs and related achievements during fiscal year 2024 ( sustainability metrics below are presented in ones, except amounts presented in dollars ): +Environment Indicators +Many of our facilities were designed with sustainability in mind. Our corporate headquarters and our Moreno Valley, California, DC locations are Leadership in Energy and Environmental Design (LEED)-certified silver and our Mooresville, Indiana, DC locations are LEED-certified gold. To further our commitment to monitoring the environmental performance of our supply chain partners, during fiscal year 2024 we continued utilizing the Worldly (formally known as HIGG) Facility Environmental Module, a sustainability assessment tool used by our factory partners and strategic supplier partners to collect detailed and standardized information about a partner’s waste, water, chemistry, and energy consumption to identify and prioritize opportunities for sustainability performance improvements. +• Materials. We strive to maximize the amount of recycled, renewable, regenerated, and certified/natural materials (preferred materials) in our products. Where possible, we utilize third-party certifications to assess our preferred materials, such as the Leather Working Group, Forest Stewardship Council, Responsible Wool Standard, and the Global Recycling Standard. We also continue to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. We anticipate our DCs located in Moreno Valley, California, and Mooresville, Indiana, will become zero-waste facilities by calendar year 2025. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and diversion methods, and we continue to monitor and engage with our supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries in which we operate by reducing water consumption and improving water quality throughout our operations. We monitor certain manufacturing and supply chain partners and have set water use reduction targets for each of them. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• Climate and Clean Energy. We set ambitious Scope 1, 2, and 3 carbon reduction targets filed with and approved by the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. Specifically, we strive to reduce absolute GHG emissions (Scope 1 and 2) and Scope 3 emissions per million dollars of gross profit. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and are collaborating with them to establish our carbon reduction targets. We are founders of the Savory Institute’s Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. +Our brands are committed to sustainable business practices, embrace our sustainability targets, and work to launch sustainable collections. +Social Indicators +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s Reimagining Industry to Support Equality (RISE) initiative (formerly known as HERproject), which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality, and financial inclusion. We also partner with Better Work to provide anti-harassment training to key supply chain partners and the International Labour Organization (ILO) training program covering topics such as international labor standards, social +9 +Table of Contents +protection, social dialogue, innovation, gender equality and diversity, sustainable development, and the future of work. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +• Human Rights. We are committed to operating responsibly in the communities in which we operate, including encouraging industry leading human rights practices within our supply chain. We have established robust criteria in our Supplier Code of Conduct, based on ILO standards, which outlines our expectations for our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards for our business partners, which are regularly reviewed by our leadership team. +We believe the progress of our corporate responsibility efforts is evidenced by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. +HUMAN CAPITAL - OUR PEOPLE AND OUR CULTURE +Employees . As of March 31, 2024, we employed approximately 4,800 employees, reflecting an increase of 14.3% compared to the fiscal year ended March 31, 2023 (the prior period) in North America, Europe, and Asia. This includes approximately 1,700 employees in our retail stores, which excludes temporary and seasonal employees. +Culture . We strive to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around us, help hold us accountable to deliver on this purpose, are as follows: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and with our customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employee’s experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2024 had a participation rate of 89%. Of those employees who completed the survey, 88% noted they were proud to work for Deckers. +Promoting Diversity, Equity, and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and bring their authentic selves to work each day. We believe including diverse perspectives and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. As of March 31, 2024, our Board of Directors is comprised of a total of ten directors, 60% of whom are from underrepresented communities. As of March 31, 2024, more than 27% of our director-level and above employees in the US are from BIPOC communities, which represents an increase of over +10 +Table of Contents +3% compared to the prior period, and an increase of nearly 16% since fiscal year 2020. During fiscal year 2024, 46% of all new hires reporting into the US corporate office and call center were from BIPOC communities. At Deckers, we strive to have gender parity in leadership positions and our Board of Directors. As of March 31, 2024, nearly 48% of our director-level and above employees are female and 40% of the members of our Board of Directors are female. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. +We publish additional DEI metrics in our annual Equal Employment Opportunity filing (EEO-1) which is publicly available at deckers.com/responsibility/policies . The content of our website, including our annual EEO-1 filing, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2024, we donated over $4,600 to various non-profit organizations around the globe, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our Art of Kindness events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 19,000 hours during fiscal year 2024. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. +Talent Development and Retention . The ability to attract, develop, and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), quarterly global employee gatherings dedicated to peer sharing and learning about different parts of the organization and careers in each space (Biz Breaks), and two global leadership development programs for leaders at varying levels (Trailblazers and Ascent). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commit substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts and our recently adopted solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model, including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +11 +Table of Contents +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +SEASONALITY +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand’s year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect to continue to see the impact from seasonality decrease over time. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +COMPETITION +The industry and markets in which we operate are highly competitive. Our competitors include athletic footwear companies, branded apparel companies, and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +TRADEMARKS AND PATENTS +We utilize trademarks for virtually all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “AHNU,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the United Kingdom (UK), various countries in the European Union (EU), Japan, and Korea. As of March 31, 2024, we hold 210 designs and inventions with corresponding design or utility patent registrations, plus 51 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +12 +Table of Contents +GOVERNMENT REGULATION +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +AVAILABLE INFORMATION +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to the Exchange Act are available free of charge on our website at ir.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following material corporate governance and responsibility documents available through our website: Ethical Supply Chain Supplier Code of Conduct, Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, EEO-1 Report, Corporate Governance Guidelines, and Insider Trading Policy. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +ITEM 1A. RISK FACTORS +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +RISKS RELATED TO OUR BUSINESS AND INDUSTRY +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand and spending patterns, including by successfully introducing new products, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and fashion tastes, which make it difficult to anticipate demand for our products and forecast our financial results. Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand, and promptly respond to the rapidly changing preferences and fashion tastes, as well as consumer spending patterns, with appealing merchandise. As our brands and product offerings evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. New footwear models that we introduce may not be successful with consumers or our brands may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brands’ image may suffer, our operating performance may decline, and we may not be able to execute our growth plans. Even if we develop and manufacture new footwear products that consumers find appealing, their ultimate success may depend on our pricing, and we may set the prices of new styles too high for the market to bear. +13 +Table of Contents +Further, the value of our brands is based on evolving consumer perceptions, including as a result of shifting ethical, political or social standards, and concerns with respect product quality, design, technical performance, components or materials (including their sustainability), or customer service could result in negative perceptions and the loss of brand loyalty and value. These concerns may be exacerbated by negative publicity regarding us or our products, brands, marketing campaigns, partners, or endorsers, which could adversely affect our reputation and sales regardless of the accuracy of such claims. Social media and digital marketing campaigns, which accelerate the dissemination of information, can increase the challenges of containing negative claims. If consumers perceive our brands negatively, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brands, erode our competitive position, and result in long-term harm to our business and financial results. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and changes in the market have affected, and may continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG and HOKA brands, are premium retail products. The purchase of these products is discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending. Sales of these products may be adversely affected by variable economic factors, including worsening economic conditions, consumer confidence in future economic conditions, changes to fuel, energy, labor, and healthcare costs, declines in income or asset values, and increases in consumer debt levels, inflation and interest rates, and unemployment rates. Uncertainty in global economic conditions may result in unpredictable consumer discretionary spending trends. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do may limit the amount of their purchases or seek less costly substitutes for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and profitability, which could have a material adverse effect on our financial condition and results of operations. +We sell a significant portion of our products through higher-end specialty and department store retailers, as well as through online marketplaces. The businesses of these customers may be affected by factors such as changes in economic conditions, ongoing geopolitical conflicts and uncertainties, fluctuations in foreign currency exchange rates, failures or instability in the US banking system, reduced consumer demand for premium products, decreases in available credit, and increased competition. If our customers face financial difficulties, it could have an adverse effect on our estimated allowances and reserves, and potentially result in us losing key customers. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive and subject to changing consumer preferences and tastes. Our inability to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. Our competitors include both established companies and newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG and HOKA brands, certain competitors have entered the marketplace specifically in response to the success of our brands, and other competitors may do so in the future, particularly as access to offshore manufacturing and changes in technology make it easier and more cost effective to compete. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers. As a result, we have faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. These competitors may have relationships with our key retail customers that are more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. Our competitors’ greater resources may enable them to more effectively compete on the basis of price and production, develop new products more quickly or with superior technical capabilities, adapt to changes in technology, including the successful utilization of +14 +Table of Contents +data analytics, artificial intelligence, and machine learning, market their products and brands more successfully, identify or influence consumer preferences, increase their market share, withstand the effects of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions. As a result of these pressures, we have faced, and expect to continue to face, intense pricing pressure. Efforts by our competitors to dispose of excess inventories may significantly reduce prices of competitive products, which may pressure us to reduce the pricing of our products to compete, or cause consumers to shift their purchasing decisions away from our products entirely. Further, we believe that our key customers face intense competition from their competitors, which could negatively affect the financial stability of their businesses and their ability to conduct business with us. +If we are unsuccessful at managing product manufacturing decisions to offset the inherent seasonality of our business, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse effect on our financial condition and results of operations. +Like other companies in our industry, we have an extended design and manufacturing process, which involves product design, material purchases, inventory accumulation and the subsequent sale of the inventories, and accounts receivable collection. This cycle requires us to incur significant expense relating to the design, manufacturing, and marketing of our products in advance of the realization of revenue from sales, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because this cycle involves long lead times, which require us to make manufacturing decisions months in advance of an anticipated purchasing decision by the consumer, it is challenging to manage our inventory and working capital requirements. Further, supply chain disruptions may drive higher inventory procurement positions that could negatively affect our gross margins as a result of selling excess quantities though close out channels. Further, once manufacturing decisions are made, it is difficult to predict and timely adjust expenses, accurately forecast our financial results, and meet the expectations of analysts and investors, including as a result of: +• the effects of unfavorable or unexpected weather patterns on consumer spending and demand for our products, as the sales of a majority of our UGG brand products are inherently seasonal and the effects of climate change may pronounce these conditions; +• changes in consumer preferences, tastes, discretionary spending, and prevailing fashion trends; +• market acceptance of our current products and new products, and of competitive products; +• the competitive environment, including pricing pressure from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• delays in resource or product availability from supply chain disruptions; and +• uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings have made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margin, and we may not be able to recover our investment in the development of new styles and product lines. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our financial condition and results of operations. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse effect on our business. +We rely upon a broad network of warehouse and distribution facilities to store, sort, package and distribute our products. In the US, we distribute products primarily through self-managed US DCs in Moreno Valley, California, and in Mooresville, Indiana (including the recent expansion to a second location that became operational in October 2023), which feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to our customers and consumers. We expect our recent domestic DC expansion to create long-term capacity for the domestic growth of the UGG and HOKA brands. We could face a significant disruption in our domestic DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. In addition, if our domestic DC operations +15 +Table of Contents +and scaling efforts are impeded or delayed for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers and consumers, and cause harm to our reputation, any of which could have a material adverse effect on our business. +We depend on 3PLs to manage the operation of their DCs as necessary to meet our business needs in certain markets. Internationally, we distribute our products through DCs managed by 3PLs in certain international locations. If our 3PLs fail to manage these responsibilities, or if their operations are disrupted as a result of factors outside of their control, such as sanctions that could in the future be imposed on China by the US government, our distribution operations could face significant disruption. The loss of or disruption to the operations of any one or more of these facilities could materially adversely affect our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential effect of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +We rely upon independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us from filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely upon independent manufacturers and their respective material suppliers for most of our production needs, the majority of which are located in China and Vietnam, and we do not have direct control over these manufacturers or their suppliers. We expect these manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, and store finished goods in a safe location pending shipment. Further, because most of our independent manufacturers are concentrated in Asia, we may be subject to an increased risk of supply chain disruption, particularly in the event of a natural disaster, epidemic, geopolitical tensions, or other event outside of our control affecting the region. If any of these were to occur, we may not be able to timely source raw and other materials, manufacture product, or fill customer orders, or product delivered may not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +There can be no assurance of a long-term, uninterrupted supply of products from our independent manufacturers. While we have long-standing relationships with most of these manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us, and we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience manufacturing delays, increased manufacturing costs, and substantial disruption to our business, any of which could negatively affect our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair our manufacturers’ operations. For example, we keep proprietary materials necessary to produce our products, such as shoe molds and other materials, in the custody of our independent manufacturers. If these independent manufacturers were to lose or damage these proprietary materials, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is related to the ability of our customers, which include our retailer and distributor partners, to successfully market and sell our brands to consumers. If a customer fails to satisfy contractual obligations or otherwise meet our expectations, or experiences operational issues, it may be difficult to locate an acceptable alternative. Any disruption to these relationships may result in increased costs or loss of customers. In addition, there is no guarantee that a new customer will generate results that are more favorable than the terminated party. +We face a risk that key customers may not increase their business with us as we expect or may significantly decrease their business with us or terminate our relationship. Although no single customer accounted for 10.0% or more of our total net sales during fiscal year 2024, our top ten customers made up 24.2% of total net sales. The failure to increase sales with our key customers would have a negative effect on our growth prospects, and any decrease or loss of these customers’ business could result in a material decrease in our net sales and net income if we are unable to capture these sales through our DTC channel. Further, as of March 31, 2024, we have two customers that represent 31.2% of trade accounts receivable, net. Trade accounts receivable, net are typically +16 +Table of Contents +unsecured and thus subject us to a risk that we will be unable to timely collect on amounts owed, which could affect our revenue and liquidity. Sales to our customers are on an order-by-order basis and may be cancelled or rescheduled by our customers. We rely on purchase order delivery dates as a key factor to forecast our sales and earnings, and if our customers postpone, reduce, or discontinue purchases from us, we could fail to meet our forecasted results. These risks have been exacerbated as our key customers are impacted by significant structural changes to the retail industry fueled by changing technology, consumer purchasing behavior, and economic conditions, as well as a shrinking retail footprint. These trends have been, and may in the future be, intensified by a pandemic or other public health emergency. We may lose key customers if they fail to manage the effect of this rapidly changing retail environment. Any loss of one of these key customers, or a significant reduction in purchases from one of these customers, could result in a significant decline in sales, write-downs of excess inventory, or pressure to discount our products, any of which could have a material adverse effect on our financial condition or results of operations. Further, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce our prices to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees, and skilled personnel, we may not be able to achieve our strategic objectives and our results of operations may suffer. +To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring and retaining personnel in highly skilled footwear, apparel and accessories design, marketing, merchandising, sourcing, technology, operations, including our DCs and retail stores, and support functions. Competition for executive officers, key employees, and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Changes to our office environment, adoption of new work models, and our expectations about when or how often employees work on-site or remotely may not meet our employees’ expectations. As certain jobs and employers operate remotely, traditional geographic competition for talent may change in ways that cannot be fully predicted. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. Further, the recent strength of our results of operations and growing market capitalization may result in other companies and competitors perceiving our employees as more desirable. If our employment proposition is not perceived as favorable compared to other companies’ policies, it could negatively affect our ability to attract, hire, and retain our employees. While we are committed to offering competitive compensation and benefits to employees across our business to positively affect attrition, which affects our selling, general, and administrative (SG&A) expenses, our domestic headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our location. If we hire employees from competitors or other companies, their former employers may assert that we or these employees have breached legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation when deciding whether to take a job. If our stock price experiences volatility, it may adversely affect our ability to recruit, retain, and motivate qualified personnel and we may be unable to execute our growth plan or achieve our long-term strategic objectives, our results of operations may suffer, and it may damage our reputation as a preferred employer, which would challenge our ability to effectively compete across the global labor market. +We believe that our culture has been and will continue to be a key contributor to our success. If we do not maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus, and innovation that have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to achieve our strategic objectives. +The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and key employees are employed on an at-will basis, which means that they can terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel to fill those key positions, could have a material adverse effect on our business. +17 +Table of Contents +As discussed in the section titled “Recent Developments” under Part I, Item 1, “Business” within this Annual Report, we announced that Stefano Caroti will be replacing Dave Powers as CEO and President upon Mr. Powers’ retirement, effective August 1, 2024. While we have confidence in Mr. Caroti and the rest of our team, the uncertainty inherent in this leadership transition could adversely disrupt our business. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse effect on our business. +We purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are limited suppliers that are able to provide the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may be found only in certain geographies. We presently rely on only two tanneries in China to provide the majority of our sheepskin, which they source primarily from Australia. If the sheepskin provided by these tanneries and the resulting products we produce do not conform to our quality or sustainability specifications or fail to meet consumer expectations, we could experience reduced demand for our products, a higher rate of customer returns, and negative effects on the image of our brands, any of which could have a material adverse effect on our business. Similarly, if these tanneries are not able to deliver sheepskin in the quantities required, or were to cease operations, we may not be able to timely obtain suitable substitute materials, which would limit our ability to meet demand for our products, lead to inventory shortages, result in a loss of sales, strain our customer relationships, and harm our reputation. In addition, any factors that negatively affect the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability, loss or destruction of property, work stoppages, political instability, or acts of terrorism or catastrophic events, could result in shortages in our supply of sheepskin. +While we have experienced stable pricing in recent years, fluctuations in the price of sheepskin could occur as a result of any factors that increase the demand for, or decrease the supply of, sheepskin, including weather patterns, supply conditions, energy prices, work stoppages, increased logistics costs, government regulation, sanctions and policy, economic climates, market speculation, compliance with our standards, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions, any of which would increase our manufacturing costs and reduce our gross margin. The impacts of any of these factors may be exacerbated by global climate change. While we use purchasing contracts and other pricing arrangements to reduce the effect of sheepskin price fluctuations on our results of operations, we may be unable to offset the negative effect of a prolonged increase in such prices on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the effect on our gross margin and our financial results may suffer. +In addition, our industry is characterized by rapidly changing fashion trends and consumer preferences, and we believe there is a growing trend to eliminate the use of certain animal products, most notably fur, in footwear, apparel, and accessories. For example, the sale of fur is banned in certain US cities, and similar legislation is being considered in other geographies. While the use of leather and sheepskin has typically not been subject to these restrictions, it is possible that future legislation could restrict our ability to use sheepskin in the products we sell in certain geographies. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of sheepskin products, especially within our large target markets, could have a material adverse effect on our business, financial condition, and results of operations. +We rely on technical innovation, as well as increased use of preferred materials, to compete in the market for our products. +Our success relies in part on our continued innovation in both the materials we use and the design of our footwear. In particular, our HOKA brand maintains its competitiveness through continuous product innovation and timely introduction of new features and technologies that align with current and emerging consumer expectations. Also, we continue to invest in research and development to drive our efforts to increasingly incorporate preferred materials in our products as part of our sustainability efforts. For example, we leverage our proprietary UGGplush material, which incorporates repurposed wool to reduce our use of virgin wool, and we utilize sugarcane-derived +18 +Table of Contents +EVA, as opposed to petroleum-derived EVA, within certain UGG brand products. We also increasingly use preferred synthetics, such as recycled polyester, recycled nylon, recycled polyethylene, and bio-based ethylene, preferred regenerated or synthetic cellulosic fibers, such as TENCEL™ Lyocell and TENCEL™ Modal, and preferred plant fibers, such as cotton sourced through responsible cotton schemes, hemp, linen, ramie, and jute, and the responsible-down certified standard. Although we continue to invest in research and development to refine our materials and develop new properties for specific applications, if we fail to introduce technical innovation in our products or experience issues with the quality of our products or materials, consumer demand for our products could decline and we may experience reputational damage. Further, as our brands transition to suppliers with preferred materials, we may be subject to increased costs or supply constraints, which could reduce our sales and profitability and have a material adverse effect on our financial condition and results of operations. +We may not succeed in implementing our growth strategies, including through identifying new retail store locations that meet our requirements, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. Our future growth depends in part on our expansion efforts outside of North America (international growth strategy). For example, we have opened HOKA brand retail locations in international markets through Company-owned stores and through third-party partners, and we have expanded our international flagship store presence for the UGG and HOKA brands. Flagship stores play a crucial role in brand market positioning, and are operated to have neutral operating profitability, are typically greater in size, and involve more extensive leasehold improvements and furniture and fixtures compared to our other concept retail stores. If we are unable to identify new retail locations with consumer traffic sufficient to support a profitable sales level or elevate our brand market positioning, our retail growth may be limited. Global store openings involve substantial investments, including leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to generate profitable store sales volumes, and if we have insufficient sales at a new store location, we may be unable to avoid losses or negative cash flows. Furthermore, our future growth also depends in part on our ability to effectively manage the profitability of our existing retail locations. For example, our failure to successfully identify and close underperforming stores in a timely manner could have a number of material adverse effects, such as impairments and a negative impact on our financial condition and results of operations. +We also license the right to operate our brand retail stores to third parties through our partner retail program. Most of the partner retail stores are operated in international markets. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our brand image to suffer. +As part of our international growth strategy, we may transition certain brands in certain geographies from a third-party distribution model to a direct distribution model or vice versa. Failure to effectively implement our growth strategies and develop our business in new international markets, or disappointing growth within existing markets, could negatively affect our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth strategies could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +Global climate change, including extreme weather conditions, natural disasters, public health issues, or other events beyond our control, as well as related regulations, have adversely affected, and could in the future adversely affect, our business. +Natural disasters or other catastrophic events, including the effects of global climate change and a pandemic, may damage or disrupt our operations, international markets, and the global economy. Our operations are subject to interruption from extreme weather events, power shortages, pandemics, terrorism, political instability, telecommunications failure, cyber-attacks, war, and other events beyond our control. Although we maintain disaster recovery plans, such events could disrupt our operations or those of our independent manufacturers, suppliers and customers, including through the inability of personnel to work, destruction of facilities, loss of life, and adverse effects on supply chains, power, infrastructure and the integrity of IT systems, all of which could materially increase +19 +Table of Contents +our costs and expenses, delay or decrease sales, and disrupt our ability to maintain business continuity. We could incur significant capital expenditures and other costs to improve the climate-related resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate the effects of climate change, including compliance with evolving, and at times inconsistent, country specific laws and regulations. We could also experience increased costs for energy, production, transportation, raw and other materials, as well as higher insurance premiums and deductibles, which could adversely affect our operations. Our insurance may not be sufficient to cover losses that we may sustain. A significant natural disaster or other event that disrupts our operations or those of our partners or customers could have a material adverse effect on our business, results of operations and financial condition. Any assessment of the potential impact of future climate change legislation, regulations, or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate. +These events could also adversely affect the supply of raw materials, including sheepskin and leather, which are key resources in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our production costs, impose capacity restraints, and affect the types of products that consumers purchase. If consumers increasingly adopt plant-based diets for personal reasons, this could reduce the supply of sheep for the meat industry, and in turn, hinder our ability to source sufficient sheepskin for our products. Further, public health issues and related regulatory responses, including a pandemic, may reduce demand for certain products, deteriorate our ability, or the ability of our customers, to operate in affected regions, and result in the failure of key business partners to provide services for our efficient operations, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us, any of which would adversely affect our business, results of operations and financial condition. +Increasing expectations from investors, regulators, and other key stakeholders with respect to our ESG practices may impose additional costs on us or expose us to new or additional risks. +Investor advocacy groups, certain institutional investors, investment funds, stockholders, customers, consumers, non-governmental organizations, and regulators, such as the SEC, are increasingly focused on corporate responsibility, specifically on the ESG practices of companies and the implications of the social and environmental costs of their investments. From time to time, we communicate certain ESG initiatives and goals to market participants and our customers and business partners, including through our annual Creating Change Report. Any ESG disclosure we make may include our policies, practices, initiatives, and goals on a variety of human rights, corporate governance, environmental compliance, sustainability, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. Although we have undertaken expansive efforts to improve and implement our ESG initiatives, it is possible that stakeholders may not be satisfied with such disclosures, our ESG practices or the speed of their adoption. The establishment of ESG criteria and key metrics, as well as the collection of relevant ESG data subject to developing internal controls and processes, can be costly, challenging, and time consuming, and is subject to evolving ESG reporting standards and regulations. If our ESG practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, or if we are perceived to have not appropriately responded to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, it may negatively affect our employee retention and recruitment, or we may suffer from reputational damage and our business and financial condition could be materially and adversely affected. We may also incur additional costs or require additional resources to monitor such stakeholder expectations and standards and to meet our targets and commitments. Further, we could fail, or be perceived to fail, to achieve our ESG initiatives or goals, or we could fail to report our progress fully and accurately on such initiatives and goals, which could negatively affect our reputation, employee retention and recruitment, and the willingness of our customers and suppliers to do business with us. +Increasing focus on ESG matters has resulted in, and is expected to continue to result in, the adoption of legal and regulatory requirements designed to mitigate the effects of climate change on the environment and requiring climate-related disclosures. If new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet such obligations. Our processes and controls for reporting ESG matters and related data across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures required by the SEC, European, and other regulators, such as California, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. +20 +Table of Contents +We face risks associated with pursuing strategic acquisitions and divestitures, and our failure to successfully integrate any acquired business or product could have a material adverse effect on our results of operations and financial position. +As part of our overall strategy, we may periodically consider strategic acquisitions to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Such acquisitions involve numerous risks, challenges, and uncertainties, including the potential to: +• expose us to risks inherent in entering into a new market or geographic region; +• lose significant customers or key personnel of the acquired business; +• encounter difficulties managing and implementing acquired assets; +• encounter difficulties marketing to new consumers or managing geographically remote operations; +• divert management’s time and attention away from other aspects of our business operations; and +• incur costs relating to a potential acquisition that we fail to consummate, which we may not recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it will result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +As part of our overall strategy to allocate resources that best align with our long-term objectives, we may seek to sell one or more brands. For example, during October 2023, we announced that we intend to divest the Sanuk brand. These transactions involve financial and operational risks, including diverting management and employee time and attention away from other aspects of our business, separating personnel and financial and other systems, impairments, and adversely affecting relationships with existing suppliers and customers. Further, during the fourth fiscal quarter for the year ended March 31, 2024, we recorded an impairment loss of $8,164 in SG&A expenses in the consolidated statements of comprehensive income for the Sanuk brand definite-lived trademark, driven by lower-than-expected results of operations for the wholesale channel. Refer to the subsection “Definite-Lived Intangible and Other Long-Lived Assets” in the “Critical Accounting Policies” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information. +The process of completing any acquisitions or divestitures may be time-consuming, involve significant costs and expenses, and may not yield a benefit if the transactions are not completed successfully. In situations where acquisitions or divestitures are not successfully implemented or completed, or the expected benefits of such acquisitions or divestitures are not otherwise realized, our business or financial results could be negatively impacted. +RISKS RELATED TO OUR GLOBAL BUSINESS STRATEGY AND OPERATIONS, AND INTERNATIONAL COMMERCE +Supply chain disruptions could interrupt product manufacturing and global logistics and increase product and transportation costs. +Our business depends on our ability to source and distribute products in a timely manner. We continue to proactively mitigate any effects of future disruptions by expanding and reallocating production capacity with our existing sourcing partners and onboarding new long-term partners to diversify our country-level manufacturing and sourcing lines. We plan to continue growing our distribution network to support our long-term strategic objectives but have experienced and may continue to experience headwinds in connection with these efforts. Failure to adequately +21 +Table of Contents +produce and timely ship our products to customers could lead to lost potential revenue, failure to meet consumer demand, strained relationships with customers and diminished brand loyalty. +Port congestion, temporary closures, and worker shortages may disrupt the operations of our independent manufacturers and 3PLs, as well as those of our DCs, and may increase the global lead-time for shipments of our products. In addition, in recent years, global ocean transportation costs, as well as freight costs in the US, have risen dramatically due to labor shortages and disputes, increased labor costs, congestion at ports of entry, increased safety, environmental, labor regulations, and global inflation. Further, while our operations in the regions are not significant, the Russia-Ukraine and Israel-Hamas conflicts are sources of uncertainty. These conflicts could grow and bring about disruption, instability, and volatility in global markets, supply chains, and logistics, and have contributed to shipping disruptions in the Red Sea and surrounding waterways, which could in turn adversely affect our business operations and financial performance. +Elevated inventory levels, combined with the uneven flow of receipts and shipments, could cause further capacity pressures within our US DCs and 3PLs. For example, we are in the process of expanding our distribution network for HOKA brand wholesale operations to our DC in Mooresville, Indiana. If we are unsuccessful in achieving our transition timelines, we may be limiting our ability to efficiently fulfill orders for our wholesale partners and consumers. These pressures may be exacerbated by labor disputes that affect the operations of our partners, which creates significant risk for our business, particularly if these disputes result in work slowdowns, strikes, or similar disruptions. As we manage product availability from supply chain or other disruptions, the timing of sales to our wholesale partners and consumers may be affected, which may result in increased risk of order cancellations. +While we have historically used more expensive air freight to ship our products to meet demand in the past, we continued to reduce our use of air freight into fiscal year 2024. However, if we experience such fluctuations in product demand and costs in future periods, we may be required to leverage air freight in future periods to maintain service levels. +Most of our independent manufacturers are located outside of the US and subject us to various risks associated with international regulations, trade agreements, and geopolitical relations. +Most of our independent manufacturers are located in Asia, and products manufactured overseas and imported into the US and other countries are subject to numerous risks and uncertainties. For example, while we require our independent manufacturers and suppliers to adhere to environmental, labor, ethical, health, safety, and other business practices and laws, and while we periodically visit and audit their operations, we do not control their business practices. If non-compliant manufacturers or suppliers cannot or will not become compliant, we will cease conducting business with them, which could increase our costs and interrupt our supply chain. Our manufacturers’ violations of laws and business standards could also result in negative publicity or product recall, which could damage our reputation, brand value, and cause us to incur additional costs. Further, if our manufacturers or suppliers violate US or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure, and forfeiture of products we are attempting to import, or the loss of our import privileges, which could have a negative effect on our results of operations. +Our international manufacturing operations are subject to numerous other risks and uncertainties, including the following: +• tariffs, import and export controls, and other non-tariff barriers; +• poor infrastructure and equipment shortages, which can disrupt transportation and utilities; +• restrictions on the transfer of funds from foreign jurisdictions; +• changes in governmental regulations, including with respect to intellectual property, labor, safety, and the environment; +• the refusal of our partners to adopt or comply with our manufacturing policies; +• customary business traditions in certain countries such as local holidays, which are traditionally accompanied by elevated levels of turnover in the factories; +• decreased scrutiny by custom officials for counterfeit products; +• practices involving corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• use of unauthorized or prohibited materials or reclassification of materials; +• health-related concerns that could result in a reduced workforce or scarcity of raw and other materials; and +• adverse changes in consumer perception of goods sourced from certain countries. +22 +Table of Contents +While we have implemented measures to comply with applicable customs regulations and to properly calculate import duties, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margin. In addition, we cannot predict whether future laws, regulations, trade remedy actions, or international agreements may impose additional duties or other restrictions on our ability to manufacture sufficient inventory or import products from one or more of our sourcing venues. Trade relations between our sourcing venues, particularly those in China, and the US have created uncertainty and there exists the potential for import duties or other restrictions on exports from China, which could increase our sourcing costs. We have transitioned most of our footwear sourcing from China to Vietnam as part of our supplier optimization strategy, and are beginning to diversify with footwear sourcing in Indonesia, but if we are unable to source our products from the countries where we wish to purchase them, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition, and results of operations. Further, because most of our products are manufactured in China and Vietnam, the possibility of adverse changes in trade or political relations with China or Vietnam, or other pressures in the region, including political instability, increased labor costs, adverse weather conditions, a natural disaster or incidence of disease could severely interfere with the manufacturing or shipment of our products and would have a material adverse effect on our operations. +Moreover, international trade policy is undergoing revision, introducing significant uncertainty with respect to future trade regulations and existing trade agreements. The negotiation of free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers, which may seek to export footwear, apparel, and accessories to our target markets at preferred rates of duty which may negatively affect our results of operations. +Transportation and distribution costs may be adversely affected by new regulations, increased demand, increased fuel costs, labor disputes and higher costs, inflation, and political and economic instability. For example, labor disputes are escalating in Canada as well as the US East Coast. If a labor strike occurs in the future, we may experience trucking capacity constraints and potentially higher related costs, as well as port congestion on the US West Coast. The Panama Canal is experiencing capacity constraints as well due to drought. This combined with the ongoing Russia-Ukraine and Israel-Hamas conflicts have impacted timeliness of shipments to Europe, and the resulting financial and economic sanctions imposed by various countries and organizations have affected transportation and energy costs. Further rising labor tensions, drought conditions, or additional sanctions imposed, could increase distribution costs, and create further capacity constraints in Europe and adversely affect our results of operations. Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and caused delays in bringing imported goods to market. Any tightening of security procedures could worsen these delays and increase our costs. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural, and economic risks that may adversely affect our results of operations in certain regions. +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +• foreign currency exchange rates fluctuations, most significantly, but not limited to, the Chinese Yuan, Great British Pound, and Euro, which affect the prices at which products are sold to international consumers; +• limitations on our ability to move currency out of international markets; +• burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• legal costs related to defending allegations of non-compliance with foreign laws; +• inability to import products into a foreign country; +• difficulties associated with promoting and marketing products in unfamiliar cultures; +• political or economic uncertainty or instability, including the Russia-Ukraine and Israel-Hamas conflicts, which has disrupted the global economy and has the potential to reduce levels of consumer spending, which could have a material adverse effect on our business, particularly our UGG and HOKA brands’ net sales; +• changes in unemployment rates and consumer spending; +• anti-American sentiment in international markets in which we operate; +• changes in diplomatic and trade relationships between the US and other countries; and +23 +Table of Contents +• general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative effect on our financial results. +We operate on a global basis, with 33.2% of our total net sales for the year ended March 31, 2024, from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies and our foreign distributors typically sell our products in local currency, which affects the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, gross margin, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. When the US dollar strengthens relative to foreign currencies, our revenues and profits denominated in foreign currencies are reduced when converted into US dollars and our margins may be negatively affected. We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, remeasurements, or translations could materially affect our consolidated financial statements. +RISKS RELATED TO TECHNOLOGY, DATA SECURITY AND PRIVACY +A security breach or other disruption to our IT systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive Company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition, or results of operations. +Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers and employees, credit card information, and our proprietary financial, operational, and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, or unauthorized disclosure or access of such information could lead to significant reputation or competitive harm, result in litigation, expose us to regulatory proceedings, and cause us to incur substantial losses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, including those utilizing artificial intelligence (AI) such as generative AI, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this information, and to respond quickly and effectively if data security incidents occur. We are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +Our success also depends in part on the continued operation of our key business processes, including our IT and global communications systems. We rely on third-party IT service providers worldwide for many of our IT functions, including network, hardware, and software configuration. Additionally, we rely on internal networks and information systems and other technologies, including the internet and third-party hosted services, to support a variety of business processes and activities. Any disruption to these systems or networks could result in product fulfillment delays, key personnel being unable to perform duties or communicate throughout the organization, loss of sales, significant costs for data restoration, the inability to interpret data timely to enhance operations, and other adverse effects on our business and reputation. Further, we could experience information silos and inefficiencies across our organization if we do not invest in appropriate operational systems and processes. If we are unable to structure our systems and processes to respond to changing business needs, or if we or our third-party providers experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +24 +Table of Contents +The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents have significantly increased in recent years. Like other businesses, we have experienced, and are continually at risk of, attacks and incidents. Additionally, external events, such as the Russia-Ukraine and Israel-Hamas conflicts, can increase the likelihood of such incidents, and our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale, the advances in computer capabilities and AI, and the interconnectivity and interdependence of third parties to our systems. We expend significant resources on IT and data security tools, measures, and processes designed to protect our IT systems, as well as the information stored on or transmitted through those systems, and to ensure an effective response to any attack or incident. Whether these measures are successful, these expenditures could adversely effect on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives. +Although we take the security of our IT systems seriously, there can be no assurance that the measures we employ will prevent unauthorized persons from obtaining access to our systems and information, as well as those held by our third-party IT service providers. Despite our implementation of reasonable security measures, our systems and information may be susceptible to cyber-attacks or data security incidents. These risks may be exacerbated in a remote work environment. Because the techniques used to obtain unauthorized access to IT systems are constantly evolving, we may be unable to anticipate these techniques or implement adequate protective measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches. A cyber-attack or other data security incident could result in significant disruption of our business such that: +• critical business systems become inoperable or require considerable time or cost to restore; +• personnel are unable to perform their duties or communicate with third-party partners; +• it results in the loss, theft, misuse, or unauthorized disclosure of confidential information; +• we are prevented from accessing information necessary to conduct our business; +• we are required to make unanticipated investments in equipment, technology, or security measures; +• customers cannot place or receive orders, and we are unable to timely ship orders or at all; or +• we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers, or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with us or impose onerous contractual provisions, and subject us to litigation, liability, fines, and penalties. We could be subject to regulatory or other actions pursuant to domestic and international privacy laws, which could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include US state laws such as the California Consumer Privacy Act and the California Privacy Rights Act, as well as the General Data Protection Regulation in the EU, EU member state directives, the Personal Information Protection and Electronic Documents Acts in Canada, the Personal Information Protection Law in China, or similar applicable laws. These laws place limits on how we may collect, use, share and store personal information, and they impose obligations to protect that information. Further, we may be subject to new data privacy and security laws and regulations. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +25 +Table of Contents +If the technology-based systems that give our customers the ability to shop or interact with us online do not function effectively, our results of operations, as well as our ability to grow our e-commerce operations globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our Company-owned e-commerce websites or through third party digital marketplaces on which we operate. Consumer expectations and related competitive pressures have increased and are expected to continue to increase relative to various aspects of our e-commerce operations, including speed of product delivery, shipping charges, return privileges, and other evolving expectations. Increasingly, consumers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping, as well as to engage with us and our competitors through digital services and experiences that are offered on mobile platforms. We are increasingly using social media to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, secure, user-friendly e-commerce websites that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers or any failure to provide attractive digital experiences to our customers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with consumers, have an adverse effect on the growth of our e-commerce operations globally and have an adverse effect on our business and results of operations. In addition, as use of our digital platforms continues to grow, we will need an increasing amount of technical infrastructure to continue to satisfy our consumers’ needs. If we fail to continue to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. Risks specific to our Company-owned e-commerce websites also include diversion of sales from our Company-owned retail stores and our retailers’ brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks could adversely affect e-commerce sales, as well as damage our reputation and brands. +If we are unsuccessful at improving our operational and IT systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve and automate our operational and IT systems and processes as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. Transitioning to these new or upgraded processes and systems requires significant capital investments and personnel resources. Implementation is also highly dependent on the coordination of numerous employees, contractors and software and system providers. While these efforts have resulted in improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been and may continue to be incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, adapting to changes in technology, including the successful utilization of data analytics, AI, and machine learning, or that our efforts will result in the anticipated benefits to us. We may also experience difficulties in implementing or operating our new or upgraded operational or IT systems, including, but not limited to, ineffective or inefficient operations, significant system failures, system outages, delayed implementation and loss of system availability, which could lead to increased implementation and/or operational costs, loss or corruption of data, delayed shipments, excess inventory and interruptions of operations resulting in lost sales and/or profits. If our operational or IT system upgrades, improvements and associated implementation efforts are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +RISKS RELATED TO OUR LEGAL, COMPLIANCE, AND REGULATORY ENVIRONMENT +Failure to adequately protect our intellectual property rights to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales, and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. An unfortunate reaction to the success of our brands is that we have become a target of counterfeiting and product imitation strategies. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that +26 +Table of Contents +the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect these rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it will allow our competitors to sell products that are similar to and directly competitive with our products, or we could otherwise lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product, which could reduce sales of our products and adversely affect the value of our brands. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively affect our business and results of operations. In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Republic of Türkiye, and the Netherlands. Any court decision or settlement that invalidates or limits trademark protection of our brands, which allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributor to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales, and could have a material adverse effect on the value of our brands. +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material effect on our business. Failure to comply with any of the covenants could result in a default, allowing our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. Certain of our revolving credit facility agreements bear interest at a rate that varies by currency. Any increases in interest rates applicable to our borrowings would increase our cost of borrowing, which would result in a decline in our net income and liquidity. +The tax laws applicable to our business are complex, and changes in tax laws as well as audits by various taxing authorities could increase our worldwide tax rate and may subject us to additional tax liabilities which may materially affect our financial position and results of operations . +Changes in US and foreign tax laws, regulations, and treaties in and between the jurisdictions in which we operate could materially affect our business. These tax laws are complex, where significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. Future changes in these tax laws, or in their interpretations, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, global tax authorities may take differing positions in interpreting the Organization for Economic Co-operation and Development’s (commonly known as OECD) guidance, including with respect to Base Erosion and Profit Shifting, which could modify existing tax principles. These changes and potential other tax law changes could increase our income tax liability or adversely affect our long-term effective tax rates and net income. +Many countries in the EU and around the globe have proposed changes or adopted current tax laws that could impact our financial position and results of operations beyond calendar year 2024. Certain provisions of the recently enacted Inflation Reduction Act, including a 15% corporate alternative minimum tax, as well as the similar 15% global minimum tax under the Organization for Economic Cooperation and Development’s Pillar Two Global Anti-Base Erosion Rules, which as of March 31, 2024, are either live or in draft in various countries, may affect our income tax expense, profitability, and capital allocation decisions. +Additionally, we are also subject to tax audits in each of the various jurisdictions where we conduct business, whereas any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable as our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audits, and related litigation, could be materially different from our estimates or from our historical tax provisions and accruals, especially as there is continued economic and political pressures to increase tax revenues in jurisdictions in which we operate. The results of a tax audit or other tax proceeding could have a material adverse effect on our results of operations or cash flows during the periods for which that determination is made and may require a restatement of prior financial reports. +27 +Table of Contents +RISKS RELATED TO OUR COMMON STOCK +Our common stock price has been volatile, which could result in substantial losses for stockholders. +The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• changes in expectations of our future financial performance and results of operations; +• changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• changes in our stockholder base or public actions taken by investors; +• market research and opinions published by securities analysts and other market participants, and the response to such publications; +• quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• the financial stability of our customers, manufacturers, and suppliers; +• legal proceedings, regulatory actions, and legislative changes; +• the declaration of stock or cash dividends, share repurchases, or stock or reverse stock splits; +• consumer confidence and discretionary spending levels; +• broad market fluctuations in volume and price; +• general market, political, and economic conditions, including recessionary conditions; and +• a variety of risk factors, including the ones described herein and in our other SEC filings. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation (Certificate) and Amended and Restated Bylaws (Bylaws), as well as provisions of Delaware law, could impair a takeover attempt. +Our Certificate and Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board of Directors or management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Any provision of Delaware law, our Certificate, or our Bylaws, which has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for stockholders to receive a premium for their shares of our common stock, and could affect the price that investors are willing to pay for our common stock. +28 +Table of Contents +ITEM 1C. CYBERSECURITY +CYBERSECURITY RISK MANAGEMENT AND STRATEGY +We maintain a comprehensive cybersecurity program, recognizing the critical importance of safeguarding our operations, employees, customers, and other business partners from the constantly evolving risks associated with cybersecurity threats. These risks include, among other things, operational risks, reputational risks, financial risks, and litigation and legal risks. +As a part of our comprehensive cybersecurity program, we have developed an incident response plan (IRP) designed to quickly respond to, mitigate, and recover from cybersecurity incidents. The IRP includes procedures for incident detection and reporting, initial assessment, containment, eradication, recovery, post-incident activities, and continuous improvement. +We also integrated cybersecurity risk management into our overall risk management framework to ensure that cybersecurity risks are considered in all aspects of our business. The integration ensures that cybersecurity considerations are integral to our strategic and operational decision-making. Our management team works closely with our Chief Technology Officer (CTO) and Chief Information Security Officer (CISO), ensuring that our cybersecurity efforts align with our business objectives and operational needs. Key components of our cybersecurity approach include, among other things: +• establishing a dedicated action team, led by our CTO and CISO, to oversee and manage cybersecurity risks; +• implementing a comprehensive cybersecurity risk assessment process and strategy based on industry standards and established frameworks such as the National Institute of Standards and Technology (NIST) Special Publication 800-61; +• implementing a vendor risk management program, which includes cybersecurity and data privacy audits, evaluating vendor risk level, and monitoring risk mitigation efforts; +• conducting penetration tests and security maturity assessments throughout the year; +• periodically engaging independent third-party assessors to audit our cybersecurity and information system programs to evaluate their effectiveness; +• implementing industry-standard technologies and processes to protect our system and data and to help detect potential suspicious activity; +• maintaining access controls to safeguard data and systems; +• providing annual trainings to employees on responsible information security, data security and cybersecurity practices including appropriate action to take against cybersecurity threats; +• conducting periodic phishing simulations to our employees; +• engaging in cybersecurity incident tabletop exercises and scenario planning exercises; +• maintaining a cybersecurity and information security risk insurance policy, which insures for data incidents or breaches and other technology related exposures; and +• periodically reviewing and updating our IRP, privacy policy, and other relevant policies/procedures. +These approaches are not exhaustive, and we plan to continuously improve our approaches to cybersecurity risk management. +In the three-year period ended March 31, 2024, our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats or incidents, but we cannot provide assurance that they will not be materially affected in the future by such risks and any future material threats or incidents. Refer to Part I, Item 1A, “Risk Factors - Risks Related to Technology, Data Security and Privacy” within this Annual Report for further information. +CYBERSECURITY GOVERNANCE +Our Board of Directors has delegated to the Audit Committee primary responsibility for oversight of risk assessment and risk management, including risks related to cybersecurity and information security issues. Our CTO and CISO, who head our cybersecurity and information security initiatives, provide quarterly updates to the Audit Committee, and annual updates to the full Board of Directors. These updates cover various topics, such as efforts to +29 +Table of Contents +enhance our cybersecurity posture, operational and incident metrics, mitigation actions, and key performance indicators like cybersecurity maturity, program health, and audit and compliance activities. In addition to these regular updates, significant cybersecurity incidents and updates are escalated on an as-needed basis in accordance with our IRP. +Our CTO and CISO have extensive experience in cybersecurity. Our CTO has served in his role since 2014. He has also served in various roles in Information Technology for over 25 years, including the oversight of Information Security for 15 years. Our CISO has served in various roles in Information Technology for over 25 years, including 15 years in Information Security. He holds a B.S. in Cybersecurity and Information Assurance, along with industry certifications that include the Information Systems Audit and Control Association Certified in Risk and Information Systems Control, Certified Information Security Manager, and International Information System Security Certification Consortium Certified Information Systems Security Professional certifications. +ITEM 2. PROPERTIES +Corporate Headquarters. We have owned our 14-acre corporate headquarters located in Goleta, California since 2014. +Warehouses and DCs. We have a warehouse and DC located in Moreno Valley, California, which began operations during the fourth quarter of fiscal year 2015 and have since continued optimizing and expanding our operations at this location. In October 2021, we began operations in a second US warehouse and DC located in Mooresville, Indiana. In October 2023, we began operations in a third US warehouse and DC in Mooresville, Indiana. +Regional Offices. We have offices in Belgium, Canada, China, France, Germany, Hong Kong, Indonesia, Italy, Japan, the Netherlands, Switzerland, the UK, the US, and Vietnam, to perform a variety of functions, which include overseeing the quality and manufacturing standards of our products, design, product development, distribution, customer service, coordinating regional sales, operations, marketing, IT , and administration. We also have offices in Macau and Hong Kong to coordinate logistics. +Retail Stores. As of March 31, 2024, we have 49 US retail stores and 115 international retail stores, including in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of certain retail stores in our DTC business, cost associated with our facilities, flagship retail stores, and other office spaces are attributable to multiple reportable operating segments and are not allocated to them; but instead reflected in unallocated overhead costs in our results of operations. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion and results of operations for our reportable operating segments. +We believe our properties are adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +Significant Properties. The following table provides details regarding our significant physical properties that are operational as of March 31, 2024: +Facility Location Description Lease or Own Facility Size (Square Footage) +Moreno Valley, California Warehouse and Distribution Center Lease 1,530,944 +Mooresville, Indiana (1st location) Warehouse and Distribution Center Lease 507,600 +Mooresville, Indiana (2nd location) Warehouse and Distribution Center Lease 1,015,902 +Goleta, California Corporate Headquarters Own 185,094 +30 +Table of Contents +ITEM 3. LEGAL PROCEEDINGS +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out-of-court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG brand and HOKA brand trademarks within its internet domain name. We are investigating several manufacturers and distributors of counterfeit UGG and HOKA brand products, as well as various markets for indications of counterfeit UGG and HOKA brand products. +From time to time, we are involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these ordinary course matters cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the merit of the claims raised or the outcome, these ordinary course matters can have an adverse impact on us as a result of legal costs, diversion of management’s time and resources, and other factors. +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Our common stock has traded under the symbol DECK on the New York Stock Exchange (NYSE) since May 2014 and was previously traded on the Nasdaq Global Select Market. +As of May 9, 2024, we had 31 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies. +We did not sell any equity securities that were not registered under the Securities Act during the year ended March 31, 2024. +STOCK PERFORMANCE GRAPH +On March 18, 2024, we were added to the Standard & Poor’s 500 Stock Index (S&P 500 Index). We replaced the NYSE Composite Index (NYSE Composite Index) with the S&P 500 Index for the purposes of our stock performance graph, as we believe this index is a more relevant benchmark to measure our performance. We have continued to present the NYSE Composite Index within this Annual Report as a transitional measure. +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Index, the S&P 500 Apparel, Accessories & Luxury Goods Index, and the NYSE Composite Index for the five fiscal-year periods commencing March 31, 2019, and ended March 31, 2024. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph assumes one hundred dollars invested in our common stock and in each of the referenced indices on March 31, 2019. The stock performance shown on the below graph is not necessarily indicative of future performance. We will not make or endorse any prediction as to future stock performance. +31 +Table of Contents +Years Ended March 31, +2019 2020 2021 2022 2023 2024 +Deckers Outdoor Corporation $ 100.0 $ 91.2 $ 224.8 $ 186.3 $ 305.8 $ 640.2 +S&P 500 Index 100.0 93.0 145.4 168.2 155.2 201.6 +S&P 500 Apparel, Accessories & Luxury Goods Index 100.0 49.8 101.5 80.3 55.6 47.3 +The NYSE Composite Index 100.0 83.4 129.3 141.0 133.3 162.7 +The stock performance graph above is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section. Such information shall not be deemed incorporated by reference into any filing of the Company under the Securities Act , or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing, except as otherwise expressly set forth by specific reference in such filing. +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred. However, we currently do not anticipate declaring or paying any cash dividends. +32 +Table of Contents +STOCK REPURCHASE PROGRAM +Our Board of Directors has approved various authorizations under our stock repurchase program to repurchase shares of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. Our Board of Directors last approved an additional authorization of $1,200,000 on July 27, 2022, to repurchase our common stock under the same conditions as the prior stock repurchase programs (collectively, the stock repurchase program). +Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. The agreements under our revolving credit facilities allow us to make stock repurchases under this program, so long as we do not exceed certain leverage ratios. As of March 31, 2024, we have not exceeded the stated leverage ratios and no defaults have occurred under our credit agreements. +Stock repurchase activity under our stock repurchase program during the three months ended March 31, 2024, was as follows: +Total number of shares repurchased (1) +Weighted average price per share paid +Dollar value of shares repurchased (2) (3) +Dollar value of shares remaining for repurchase (3) +January 1 - January 31, 2024 — $ — $ — $ 1,046,000 +February 1 - February 29, 2024 87,196 859.94 74,983 971,017 +March 1 - March 31, 2024 31,998 916.10 29,313 941,704 +(1) All share repurchases were made pursuant to our stock repurchase program in open-market transactions. +(2) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs. +(3) May not calculate on rounded dollars. +Subsequent to March 31, 2024, through May 9, 2024, we repurchased 130,927 shares at a weighted average price of $836.20 per share for $109,481, and had $832,223 remaining authorized under the stock repurchase program. +Refer to the section titled “Liquidity” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 10, “Stockholders’ Equity,” of our consolidated financial statements in Part IV within this Annual Report for further information on repurchases of our common stock. +33 +Table of Contents +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended March 31, 2024, and 2023 and year-over-year comparisons between those periods. For year-over-year comparisons between the years ended March 31, 2023, and 2022, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the SEC on May 26, 2023, which is available free of charge on the SEC’s website at www.sec.gov and our website at ir.deckers.com . +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties. Our actual results of operations may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section titled “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” within this Annual Report. +Unless otherwise indicated, all figures herein are expressed in thousands, except for per share and share data. +OVERVIEW +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under six proprietary brands: UGG, HOKA, Teva, Sanuk, Koolaburra, and AHNU. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our Company-owned e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products. +FINANCIAL HIGHLIGHTS +Consolidated financial performance highlights for fiscal year 2024 compared to fiscal year 2023, were as follows: +• Net sales increased 18.2% to $4,287,763. +◦ Channel +▪ Wholesale channel net sales increased 12.6% to $2,432,307. +▪ DTC channel net sales increased 26.5% to $1,855,456. +◦ Geography +▪ Domestic net sales increased 16.8% to $2,863,674. +▪ International net sales increased 21.1% to $1,424,089. +• Gross margin increased 530 basis points to 55.6%. +• Income from operations increased 42.1% to $927,514. +• Diluted earnings per share increased 50.5% to $29.16 per share. +RECENT DEVELOPMENTS +On February 1, 2024, Dave Powers announced his intention to retire from his position as CEO and President of the Company, effective August 1, 2024. Following this date, we expect Mr. Powers will continue to serve as a member of our Board of Directors. Also on February 1, 2024, we announced that Stefano Caroti, our Chief Commercial Officer, will be appointed as CEO and President, effective August 1, 2024. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion on executive officer leadership transition risks. +34 +Table of Contents +TRENDS AND UNCERTAINTIES IMPACTING OUR BUSINESS AND INDUSTRY +We expect our business and industry will continue to be impacted by several important trends and uncertainties, including the following: +Brand and Omni-Channel Strategy +• We remain focused on increasing global consumer awareness and adoption of our brands, which has continued to positively impact our financial results. Our efforts to drive brand adoption is focused on building brand acceptance and heat through continued launches of innovative product offerings, coupled with marketing investments across multiple geographic markets and channels of distribution. +• We remain focused on our marketplace inventory management strategy for our brands through segmentation and differentiation. During fiscal year 2024, we experienced alignment on product assortments that resulted in higher full-price sell through. This, combined with selective price increases, has benefited our gross margins during fiscal year 2024 across all channels of distribution. While gross margins continue to be an area of strategic focus, we expect a more normalized promotional environment for our results of operations during our next fiscal year ending March 31, 2025 (next fiscal year). +• Our long-term strategy remains focused on building our DTC channel to represent an increased portion of our total net sales, which includes differentiating the consumer experience from the wholesale channel to drive increases in acquisition and retention to sustain strong market positions and a high level of demand for our brands. We expect increased sales in the DTC channel will continue to positively impact our gross margins. +• We continue to implement our international growth strategies for the HOKA and UGG brands. We have expanded our HOKA brand presence within our DTC channel through targeted investments in certain regions that provide influential market presence to drive brand awareness, and we expect to continue making these investments, including in our next fiscal year. We continue to emphasize elevating the customer experience for the UGG brand through localized marketing investments. +• In alignment with effective resource allocation and the execution of our long-term objectives, we intend to divest the Sanuk brand. During the fourth quarter of fiscal year 2024, we recorded an impairment on the Sanuk definite-lived intangible asset. Please refer to the section “Critical Accounting Policies” below for further information. +Supply Chain +• To support our growing business, we continue to expand our network of global warehouses, DCs, and 3PLs. We also are diversifying the number of third-party manufacturers with whom we engage and the regions in which they operate. We expect to continue to invest in and build upon these infrastructure capabilities to continue meeting customer and consumer demand, which may result in higher costs in future periods. +Macroeconomic and Geopolitical Factors +• Macroeconomic factors, including inflationary pressures, increased interest rates, fluctuations in foreign currency exchange rates, the lapsing of government stimulus, increased consumer debt levels, decreased savings rates, resumption of student loan repayments, geopolitical unrest, escalating global conflicts and their potential impact on logistic lead times and freight costs, and increased risks of a recession, continue to create a complex and challenging environment for our business. While these macroeconomic factors did not materially impact our business or results of operations during fiscal year 2024, the impact of these macroeconomic factors is difficult to quantify and could negatively impact our business and results of operations during our next fiscal year. +35 +Table of Contents +REPORTABLE OPERATING SEGMENT OVERVIEW +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our CEO, President, and Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +UGG Brand. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings that appeal to a growing global audience and a broad demographic. +We believe demand for UGG brand products will continue to be driven by the following: +• Successful acquisition of a diverse global consumer base, and in particular focusing on key markets, through strategic marketing activations and collaborations that resonate with a fashionable consumer. +• High consumer brand loyalty due to elevated brand experiences and consistent delivery of crafted; purposefully built and luxuriously comfortable footwear, apparel, and accessories. +• Diversification of our footwear product offerings, such as our spring and summer lines, as well as expanded category offerings for Men’s products such as the slip on shoe and sneaker category, and more iconic fashion product for our Classics line, including reimagining existing iconic styles into new categories. +• Thoughtful expansion of our apparel and accessories businesses. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its ecosystem of access points. The HOKA brand’s product line includes running, trail, hiking, fitness and lifestyle footwear offerings, as well as select apparel and accessories. +We believe demand for HOKA brand products will continue to be driven by the following: +• Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes. +• Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship. +• Thoughtful and strategic wholesale distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base. +• Category extensions in authentic performance footwear offerings such as lifestyle, trail, and hiking categories. +Teva Brand . The Teva brand, born in the depths of the Grand Canyon, has long been a favored brand among outdoor adventurers across the globe. Today, building on its foundation as a leader in sport sandals and its authentic outdoor heritage, the Teva brand’s thoughtfully designed, and accessible products are built for a range of outdoor pursuits, connecting with a vibrant, diverse audience passionate about exploration. The Teva brand’s collection includes a variety of footwear options, from classic sandals and shoes to boots; all crafted for the demands of the outdoors. +We believe demand for Teva brand products will continue to be driven by the following: +• Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. +36 +Table of Contents +• Increasing brand awareness in key major global markets due to outdoor lifestyle participation among younger consumers. +• Category extensions in performance hike footwear, including key franchises, as well as year-round product. +Sanuk Brand . The Sanuk brand originated in Southern California surf culture and has emerged as a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional construction, combined with its fun and playful branding, are key elements of the brand’s identity. +Other Brands. Other brands consist primarily of the Koolaburra brand, as well as the AHNU brand we launched in March 2024. The Koolaburra brand is a casual footwear fashion line that uses plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. +Direct-to-Consumer . Our DTC business encompasses all of our brands and is comprised of our Company-owned e-commerce websites and retail stores, which are intertwined and interdependent in an omni-channel marketplace as we believe many of our consumers interact with both before making purchasing decisions in store and online. +Our net sales related to the businesses and stores outlined below are recorded in our DTC reportable operating segment, except for net sales from our partner retail stores, which are recorded in our brands’ respective wholesale reportable operating segments. +E-Commerce Websites. Our global e-commerce operations provides us with an opportunity to directly engage and connect with our consumers and communicate a consistent message that promotes awareness of our brands’ promises and key initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2024, we operate Company-owned e-commerce websites in 56 different countries. +Retail Stores. Our global Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to launch in strategic locations. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. As of March 31, 2024, we have a total of 164 global retail stores (including 26 HOKA brand retail stores), which includes 83 concept stores and 81 outlet stores. We will continue to evaluate our retail store fleet strategy in response to changes in brand strategy, consumer behavior, and retail store traffic patterns. +Flagship Stores. Global concept stores include nine flagship stores, which are primarily located in major tourist locations. These are premium mono-branded stores in key global markets designed to showcase UGG and HOKA brand products. Flagship stores provide broader product offerings and generate greater traffic that enhance our interaction with consumers and increase brand loyalty. +Shop-in-Shop (SIS) Stores. Included in the total count of global concept stores are 23 SIS stores that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of store sales and for which we own the inventory. +Partner Retail Stores. Represent UGG and HOKA mono-branded stores which are wholly owned and operated by third parties and not included in the total count of our global Company-owned retail stores. +37 +Table of Contents +USE OF NON-GAAP FINANCIAL MEASURES +We disclose financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP); however, throughout this Annual Report we provide certain financial information on a non-GAAP basis (non-GAAP financial measures). We provide non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance, which consist of constant currency measures. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. However, o ur non-GAAP financial measures are not intended to represent and should not be considered more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP. +We calculate our constant cur rency non-GAAP financial measures for current period financial information, such as total net sales using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements . We also report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. T he information presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing our performance relative to other companies. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial or operating measures presented in accordance with US GAAP . +SEASONALITY +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand’s year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect to continue to see the impact from seasonality decrease over time. +Refer to Note 15, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. +38 +Table of Contents +RESULTS OF OPERATIONS +Year Ended March 31, 2024, Compared to Year Ended March 31, 2023. Results of operations were as follows: +Years Ended March 31, +2024 2023 Change +Amount % Amount % Amount % +Net sales $ 4,287,763 100.0 % $ 3,627,286 100.0 % $ 660,477 18.2 % +Cost of sales 1,902,275 44.4 1,801,916 49.7 (100,359) (5.6) +Gross profit 2,385,488 55.6 1,825,370 50.3 560,118 30.7 +Selling, general, and administrative expenses 1,457,974 34.0 1,172,619 32.3 (285,355) (24.3) +Income from operations 927,514 21.6 652,751 18.0 274,763 42.1 +Total other income, net (51,427) (1.2) (13,331) (0.4) 38,096 285.8 +Income before income taxes 978,941 22.8 666,082 18.4 312,859 47.0 +Income tax expense 219,378 5.1 149,260 4.1 (70,118) (47.0) +Net income 759,563 17.7 516,822 14.3 242,741 47.0 +Total other comprehensive loss, net of tax (11,698) (0.3) (14,080) (0.4) 2,382 16.9 +Comprehensive income $ 747,865 17.4 % $ 502,742 13.9 % $ 245,123 48.8 % +Net income per share +Basic $ 29.36 $ 19.50 $ 9.86 50.6 % +Diluted $ 29.16 $ 19.37 $ 9.79 50.5 % +Net Sales. Net sales by location, and by brand and channel were as follows: +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Net sales by location +Domestic $ 2,863,674 $ 2,451,497 $ 412,177 16.8 % +International 1,424,089 1,175,789 248,300 21.1 +Total $ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +Net sales by brand and channel +UGG brand +Wholesale $ 1,115,241 $ 1,004,356 $ 110,885 11.0 % +Direct-to-Consumer 1,123,891 924,855 199,036 21.5 +Total 2,239,132 1,929,211 309,921 16.1 +HOKA brand +Wholesale 1,126,126 925,877 200,249 21.6 +Direct-to-Consumer 680,614 487,039 193,575 39.7 +Total 1,806,740 1,412,916 393,824 27.9 +Teva brand +Wholesale 113,739 149,111 (35,372) (23.7) +Direct-to-Consumer 34,780 33,950 830 2.4 +Total 148,519 183,061 (34,542) (18.9) +39 +Table of Contents +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Sanuk brand +Wholesale 17,175 27,678 (10,503) (37.9) +Direct-to-Consumer 8,274 10,288 (2,014) (19.6) +Total 25,449 37,966 (12,517) (33.0) +Other brands +Wholesale 60,026 53,653 6,373 11.9 +Direct-to-Consumer 7,897 10,479 (2,582) (24.6) +Total 67,923 64,132 3,791 5.9 +Total $ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +Total Wholesale $ 2,432,307 $ 2,160,675 $ 271,632 12.6 % +Total Direct-to-Consumer 1,855,456 1,466,611 388,845 26.5 +Total $ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +Total net sales increased primarily due to higher DTC and wholesale channel sales for the HOKA and UGG brands, partially offset by lower Teva brand and Sanuk brand wholesale channel sales. +On a constant currency basis, net sales increased by 17.9%, compared to the prior period. Further, we experienced an increase of 2.8% in the total volume of units sold to 65,300 from 63,500, compared to the prior period. Units sold represents all units related to the total net sales presented, inclusive of all categories such as footwear, apparel, accessories, home goods, and care kits. The prior period total volume of units sold for only footwear has been modified to conform to the current period presentation. +Drivers of significant changes in net sales, compared to the prior period, were as follows: +• DTC net sales increased primarily due to higher global net sales for the UGG and HOKA brands, driven primarily by consumer acquisition and retention online as we experienced increased demand for both brands, as well as the UGG brand net sales benefiting from a higher level of full-price selling and selective price increases on popular styles. Comparable DTC channel net sales for the 52 weeks ended March 31, 2024, increased by 25.4% compared to the prior period. +• Wholesale net sales of the HOKA brand increased domestically and in Asia driven by higher consumer demand across an assortment of performance products. These effects were partially offset by lower net sales in Europe, primarily due to the timing of certain distributor shipments. +• Wholesale net sales of the UGG brand increased globally resulting from strong brand heat and strong adoption of key product franchises driving a higher level of full-price selling and benefits from selective price increases on popular styles. +• Wholesale net sales of the Teva brand decreased globally primarily by lower demand in the value-oriented consumer channel for the sandal category, partially related to macroeconomic factors, as well as shipping timing differences, compared to the prior period. +• Wholesale net sales of the Sanuk brand decreased domestically driven primarily by lower consumer demand, partially related to macroeconomic factors, and elevated marketplace inventory levels. +• International net sales, which are included in the reportable operating segment net sales presented above, increased by 21.1% and represented 33.2% and 32.4% of total net sales for the years ended March 31, 2024, and 2023, respectively. These changes were primarily driven by higher net sales for the DTC and wholesale channels for the UGG and HOKA brands, partially offset by lower wholesale channel net sales for the Teva brand. +40 +Table of Contents +Gross Profit. Gross margin increased to 55.6% from 50.3%, compared to the prior period, primarily due to favorable full-price selling for the UGG brand, favorable changes in freight costs, favorable HOKA brand mix and UGG brand product mix shifts, including benefits from selective price increases, and favorable mix of sales into the DTC channel. +Selling, General, and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of the following: +• Increased payroll and related costs of approximately $107,500, primarily due to higher employee headcount and performance-based compensation. +• Increased variable advertising and promotion expenses of approximately $78,900, primarily due to higher promotional marketing expenses for the HOKA and UGG brands to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing. +• Increased other variable net selling expenses of approximately $46,300, primarily due to higher rent and occupancy expenses and credit card fees. +• Increased other operating expenses of approximately $55,500, primarily due to higher infrastructure investments and related depreciation, including for IT expenses for programming and software costs, as well as higher travel costs, impairments, and contract and legal expenses. +Income from Operations. Income (loss) from operations by reportable operating segment were as follows: +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand wholesale $ 349,509 $ 267,013 $ 82,496 30.9 % +HOKA brand wholesale 376,286 285,257 91,029 31.9 +Teva brand wholesale 18,685 32,595 (13,910) (42.7) +Sanuk brand wholesale (12,836) 2,891 (15,727) (544.0) +Other brands wholesale 4,722 (1,678) 6,400 381.4 +Direct-to-Consumer 748,656 508,948 239,708 47.1 +Unallocated overhead costs (557,508) (442,275) (115,233) (26.1) +Total $ 927,514 $ 652,751 $ 274,763 42.1 % +The increase in total income from operations, compared to the prior period, was primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. +Drivers of significant net changes in total income from operations, compared to the prior period, were as follows: +• The increase in income from operations of the DTC channel was due to higher net sales for the UGG and HOKA brands at higher gross margins, as well as lower SG&A expenses as a percentage of net sales. +• The increase in income from operations of HOKA brand wholesale was due to higher net sales at higher gross margins, slightly offset by higher SG&A expenses as a percentage of net sales. +• The increase in income from operations of UGG brand wholesale was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. +• The decrease in income from operations of Teva brand wholesale was due to lower net sales at lower gross margins, as well as higher SG&A expenses as a percentage of net sales. +41 +Table of Contents +• The decrease in income from operations of Sanuk brand wholesale was due to lower net sales at lower gross margins, as well as higher SG&A expenses as a percentage of net sales, primarily due to the Sanuk brand definite-lived intangible asset impairment. +• The increase in unallocated overhead costs was due to higher payroll costs related to higher headcount and performance-based compensation, as well as higher IT programming and software costs, depreciation, legal, rent and occupancy, and warehouse expenses. +Total Other Income, Net. The increase in total other income, net, compared to the prior period, was due to higher interest income from higher invested cash balances and average interest rates. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2024 2023 +Income tax expense $ 219,378 $ 149,260 +Effective income tax rate 22.4 % 22.4 % +Our effective income tax rate was flat compared to the prior period. The current year income tax rate is primarily driven by US domestic taxes resulting from an increase in US domestic pre-tax income, offset by the foreign rate differential. The prior year rate was primarily driven by the impact on the foreign rate differential of nonrecurring income tax benefits related to foreign tax-exempt income, offset by an increase in income tax expense for lower unrealized tax benefits related to foreign tax authority assessments. +For the years ended March 31, 2024, and 2023, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the subsection titled “Repatriation of Cash” under the “Liquidity” section below for further information. +Net Income. The increase in net income, compared to the prior period, was primarily due to higher net sales, operating margins, and interest income. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by stock repurchases. +Total Other Comprehensive Loss, Net of Tax. The decrease in total other comprehensive loss, net of tax, compared to the prior period, was primarily due to lower foreign currency translation losses relating to changes in the net asset position against European foreign currency exchange rates. +LIQUIDITY +Our liquidity may be impacted by a number of factors, including our results of operations, the strength of our brands and market acceptance of our products, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, our ability to manage supply chain constraints, our ability to respond to macroeconomic, political and legislative developments, and various other risks and uncertainties described in Part I, Item 1A, “Risk Factors,” within this Annual Report. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. +If there are unexpected material impacts on our business in future periods and we need to raise or conserve additional cash to fund our operations or pursue our business strategy, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our +42 +Table of Contents +operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, factors such as changes in consumer preferences or tastes, prolonged or severe economic recession or inflationary pressure could adversely affect our business and liquidity. +Sources of Liquidity. We finance our working capital and operating requirements using a combination of cash and cash equivalents balances, including cash from our repatriation strategy, cash provided from ongoing operating activities and, to a lesser extent, available borrowing capacity under our revolving credit facilities. Refer to the “Cash Flows” section below for further discussion on cash flows from ongoing operating activities. +Cash and cash equivalents. As of March 31, 2024, our cash and cash equivalents are $1,502,051, the majority of which is held in highly rated money market funds and interest-bearing bank deposit accounts with established national financial institutions. We believe our cash and cash equivalents balances, cash provided by operating activities, and available borrowing capacity under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months and will be sufficient to meet the requirements of our business strategies and plans. However, there can be no assurance that sufficient capital will continue to be available or that it will be available on terms acceptable to us. +Repatriation of Cash. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include future changes to or interpretations of global tax law and regulations, and our actual earnings in future periods. During the year ended March 31, 2024, we repatriated $250,000 of cash and cash equivalents, compared to no cash and cash equivalents repatriated during the year ended March 31, 2023. As of March 31, 2024, and 2023, we have $263,820 and $299,114, respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries to the extent they have been subject to US income tax, if such cash is not required to fund ongoing foreign operations. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our cash repatriation strategy. +Revolving Credit Facilities. Information about the revolving credit facilities available as of March 31, 2024, is as follows: +• Primary Credit Facility. We have a five-year unsecured revolving credit facility, which provides for borrowings up to $400,000, of which $399,046 remains available and contains a $25,000 sublimit for the issuance of letters of credit, of which $954 is outstanding (Primary Credit Facility). +• China Credit Facility. We have an uncommitted revolving line of credit of up to CNY300,000, or $41,522, with an overdraft facility sublimit of CNY100,000, or $13,841 (China Credit Facility). As of March 31, 2024, there is no outstanding balance, available borrowings are $41,494, and outstanding bank guarantees are $28 under the China Credit Facility. +• Debt Covenants. As of March 31, 2024, we are in compliance with all financial covenants under our Primary Credit Facility and China Credit Facility. +Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on terms of our revolving credit facilities. +Material Cash Requirements . Our material cash requirements include uses for working capital, payments to fulfill contractual obligations, capital expenditures, and stock repurchases. Our working capital requirements begin when we purchase raw and other materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout our fiscal year, and we utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period. +43 +Table of Contents +Contractual Obligations. The following table summarizes our significant contractual obligations as of March 31, 2024, in future periods: +Payments Due by Period +Total Less than +1 Year 1-3 Years 3-5 Years More than +5 Years +Operating lease obligations (1) +$ 303,914 $ 59,556 $ 108,904 $ 71,318 $ 64,136 +Purchase obligations for product (2) +868,282 868,282 — — — +Purchase obligations for commodities (3) +119,332 56,384 62,948 — — +Other purchase obligations (4) +222,412 106,163 106,248 10,001 — +Net unrecognized tax benefits (5) +24,460 3,158 21,302 — — +Total $ 1,538,400 $ 1,093,543 $ 299,402 $ 81,319 $ 64,136 +(1) Our operating lease commitments consist primarily of building leases for our retail locations, warehouse and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of the lease agreements. In addition to the above operating lease commitments outstanding and excluded from operating lease liabilities recorded in our consolidated financial statements as of March 31, 2024, there is an aggregate of $12,696 of undiscounted minimum lease payments due pursuant to leases signed but not yet commenced, primarily for the expansion of an existing office that we expect will open in the fourth quarter of our next fiscal year. +(2) Our purchase obligations for product consist mostly of open purchase orders that we expect to fulfill in the ordinary course of business. Outstanding purchase orders are primarily issued to our independent manufacturers and are expected to be paid in less than a year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment commitments based on information currently available. +(3) Our purchase obligations for commodities include sheepskin, UGGplush, and sugarcane-derived EVA, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments (collectively, commodity contracts). We expect purchases under commodity contracts in the ordinary course of business will eventually exceed the minimum commitment levels. There are $16,243 of deposits included in the amount above that have not been fully consumed as of March 31, 2024, which are recorded in other assets in the consolidated balance sheets. This amount reflects remaining minimum commitments we expect will be consumed in future periods in the ordinary course of business, and any remaining deposits are expected to become fully refundable or to be reflected as a credit against purchases. +(4) Our other purchase obligations consist of non-cancellable minimum commitments for 3PL provider arrangements, sales management services, supply chain services, IT services, promotional expenses, and other commitments under service contracts. These amounts exclude capital expenditures expected to be made in the next fiscal year, which are further discussed below. +(5) Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2024, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations of $19,885 and, since we are unable to make a reasonable estimate of the period of cash settlement, it is excluded from the table above. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, and other contractual obligations and commitments. +Capital Expenditures. We estimate capital expenditures that will be made before the end of our next fiscal year will range from approximately $115,000 to $125,000. We anticipate these expenditures will primarily relate to the upgrades to our existing warehouse and DCs, opening HOKA brand retail stores and refreshing our retail store fleet, IT infrastructure and system improvements, and upgrades to our existing office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility and retail store openings, as well as unforeseen needs to replace or refresh existing assets. +44 +Table of Contents +Stock Repurchase Program . We continue to evaluate our capital allocation strategy, and consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives, and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of March 31, 2024, the aggregate remaining approved amount under our stock repurchase program is $941,704. Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. +Refer to Note 10, “Stockholders’ Equity,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our stock repurchase program and capital allocation strategy. +CASH FLOWS +The following table summarizes the major components of our consolidated statements of cash flows for the periods presented: +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Net cash provided by operating activities $ 1,033,184 $ 537,422 $ 495,762 92.2 % +Net cash used in investing activities (89,331) (81,013) (8,318) (10.3) +Net cash used in financing activities (417,675) (309,031) (108,644) (35.2) +Effect of foreign currency exchange rates on cash and cash equivalents (5,922) (9,110) 3,188 35.0 +Net change in cash and cash equivalents $ 520,256 $ 138,268 $ 381,988 276.3 % +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is driven by our net income after non-cash adjustments and changes in working capital. The increase in net cash provided by operating activities during the year ended March 31, 2024, compared to the prior period, was due to $273,654 of favorable net income after non-cash adjustments and $222,108 of favorable changes in operating assets and liabilities. The favorable changes in operating assets and liabilities were primarily due to timing of receipt of goods and services and payments on trade accounts payable, as well as more tightly managed brand inventories and higher sell-through of products, partially offset by unfavorable changes in income tax receivables. +Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2024, compared to the prior period, was primarily due to higher capital expenditures for refreshes of existing and new retail stores and leasehold improvements for our warehouses and DCs, partially offset by reductions in IT infrastructure and other technology costs. +Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2024, compared to the prior period, was primarily due to a higher dollar value of stock repurchases. +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Preparation of our consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that we believe to be reasonable, but actual results could differ materially from these estimates. In addition, management has considered the potential impact of macroeconomic factors, including inflation, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, changes in consumer discretionary spending, and recessionary concerns, on our business and operations. Although the full impact of these factors is unknown, management believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on our financial condition, results of operations and liquidity. +45 +Table of Contents +Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. +Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves: +As of March 31, +2024 2023 +Amount % of Gross +Trade Accounts +Receivable Amount % of Gross +Trade Accounts +Receivable +Gross trade accounts receivable $ 323,896 100.0 % $ 334,015 100.0 % +Allowance for doubtful accounts (9,109) (2.8) (10,576) (3.2) +Allowance for sales discounts (3,840) (1.2) (5,656) (1.7) +Allowance for chargebacks (14,382) (4.4) (16,272) (4.8) +Trade accounts receivable, net $ 296,565 91.6 % $ 301,511 90.3 % +Allowance for Doubtful Accounts . We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Allowance for Sales Discounts . We provide a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income. +Allowance for Chargebacks . We provide a trade accounts receivable allowance for chargebacks and markdowns for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income. +46 +Table of Contents +Refer to Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for doubtful accounts, sales discounts, and chargebacks. +Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: +Three Months Ended March 31, +2024 2023 +Amount % of Net Sales Amount % of Net Sales +Net Sales +Wholesale $ 544,551 56.7 % $ 448,425 56.7 % +Direct-to-Consumer 415,207 43.3 343,146 43.3 +Total $ 959,758 100.0 % $ 791,571 100.0 % +As of March 31, +2024 2023 +Amount % of Net Sales Amount % of Net Sales +Sales Return Liability +Wholesale $ (37,458) (6.9) % $ (33,764) (7.5) % +Direct-to-Consumer (17,869) (4.3) (11,558) (3.4) +Total $ (55,327) (5.8) % $ (45,322) (5.7) % +Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes to the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets. +The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. +Inventories. The following tables summarize estimates for our inventories: +As of March 31, +2024 2023 +Amount % of Gross Inventory Amount % of Gross Inventory +Gross Inventories $ 518,585 100.0 % $ 566,778 100.0 % +Write-down of inventories (44,274) (8.5) (33,926) (6.0) +Inventories $ 474,311 91.5 % $ 532,852 94.0 % +Inventories, which are principally comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes sourcing as well as inventory procurement costs, including freight, duty, and handling fees which are subsequently expensed to cost of sales. We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. +47 +Table of Contents +Operating Lease Assets and Lease Liabilities. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by an option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, our incremental borrowing rate (IBR). We cannot determine the interest rate implicit in the lease because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and disclosures and remaining minimum operating lease commitments. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. +When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. +During the fourth fiscal quarter for the year ended March 31, 2024, we recorded an impairment loss of $8,164 in SG&A expenses in the consolidated statements of comprehensive income for the Sanuk brand definite-lived trademark, driven by lower-than-expected results of operations for the wholesale channel that resulted in the carrying value exceeding the estimated fair value, which was determined based on an estimate of the future discounted cash flows. We did not identify any definite-lived intangible asset triggering events during the year ended March 31, 2023. +During the years ended March 31, 2024, and 2023, we recorded impairment charges of $1,015 and $2,817, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for retail store-related operating lease and other long-lived assets. These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value, which is determined based on an estimate of future discounted cash flows. +Refer to Note 1, “General,” and Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets, including our accounting policies and carrying values. +48 +Table of Contents +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion of foreign earnings other than previously taxed earnings and profits. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business, our financial position and results of operations are subject to a variety of risks, including risks associated with commodity pricing, foreign currency exchange rates and, to a lesser extent, interest rates. We regularly assess these risks and have established policies and business practices designed to mitigate their effects. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of risks to our business and results of operations. +COMMODITY PRICE RISK +We are exposed to commodity price fluctuations from the cost of raw materials used in our manufacturing process that includes sheepskin, UGGplush, and sugarcane-derived EVA (collectively, commodities). +To manage price volatility and ensure availability for our commodities, we typically enter into fixed purchasing contracts with designated suppliers of sheepskin and sugarcane-derived EVA, as well as other pricing agreements for UGGplush. Our fixed pricing agreements are non-cancellable and may be subject to fees, including certain sheepskin purchasing contracts requiring deposits when minimum volumes are not fully consumed. In the event of significant price increases for our commodities, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our profitability. We continue to evaluate our firm pricing agreement strategy for our commodities, including other preferred materials. +Refer to the subsection titled “Contractual Obligations” under section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase obligations for commodities. +49 +Table of Contents +FOREIGN CURRENCY EXCHANGE RATE RISK +Although most of our sales and inventory purchases are denominated in US dollars, our global operations in the international markets where our products are sold and manufactured expose us to risk of foreign currency exchange rate fluctuations between the US dollar and primarily the currencies of Europe, Asia, Canada, and Latin America. +We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies. We hedge certain foreign currency exchange rate risks from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. +Foreign currency exchange rate fluctuations affect our results of operations and can make comparisons from year to year more difficult. Foreign currency exchange rate fluctuations had a net positive impact on our results of operations for the year ended March 31, 2024, when compared to the year ended March 31, 2023. +As there are no outstanding balances for our derivative instruments as of March 31, 2024, a hypothetical 10.0% change in foreign currency exchange rates would result in an immaterial aggregate change to our consolidated statements of comprehensive income during the year ended March 31, 2024. As of March 31, 2024, there are no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure. +Refer to Note 1, “General,” and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our use of derivative contracts and related accounting policies. +INTEREST RATE RISK +Our exposure to market risk for interest rates relates to our cash and cash equivalents, including cash from highly rated money market funds, and our revolving credit facilities. +Cash and cash equivalents held by us are affected by variable, short-term interest rates. Using our average invested cash equivalents balance as of March 31, 2024, the hypothetical effect of a 100 basis point change in short-term interest rates would be impactful to the interest income recorded in our consolidated statements of comprehensive income, along with our operating cash flows, but would not impact the fair market value of the related underlying instruments. However, the impact on interest income would not be material to our results of operations. Refer to Note 1, “General,” and Note 4, “Fair Value Measurements,” of our consolidated financial statements in Part IV within this Annual Report for further information on our cash and cash equivalents. +Our revolving credit facilities bear interest at variable rates. As a result, we are exposed to changes in market interest rates that could impact the cost of servicing debt. As there were no outstanding balances under our revolving credit facilities as of March 31, 2024, the hypothetical effect of a 100 basis point change in interest rates for borrowings made under our revolving credit facilities would have resulted in no change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2024. Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities and types of interest rates. +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed in a separate section following Part IV, as shown on the index under Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report. +50 +Table of Contents +ITEM 9A. CONTROLS AND PROCEDURES +DISCLOSURE CONTROLS AND PROCEDURES +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024. Based on that evaluation, our PEO and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2024. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2024, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +INTERNAL CONTROL OVER FINANCIAL REPORTING +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATIONS +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +51 +Table of Contents +ITEM 9B. OTHER INFORMATION +DIRECTOR AND OFFICER TRADING PLANS AND ARRANGEMENTS +Our directors and officers may enter into trading plans or other arrangements with financial institutions to purchase or sell shares of our common stock, which plans or arrangements are intended to comply with the affirmative defense provisions of Rule 10b5-1 of the Exchange Act or which may represent a non-Rule 10b5-1 trading arrangement as defined under Item 408(a) of Regulation S-K. Set forth below is a summary of the adoption , modification, and termination activity of our directors and officers in respect of their Rule 10b5-1 trading plans during the three months ended March 31, 2024: +Name & Title Adoption Date Termination Date Contract End Date Aggregate Shares Covered +(in ones) +Stefano Caroti , +Chief Commercial Officer +March 7, 2024 +* +August 31, 2024 10,000 +Steven Fasching , +Chief Financial Officer +November 6, 2023 +February 9, 2024 (1) +May 31, 2024 5,000 +(1) This trading plan was terminated automatically prior to the contract end date upon the sale of all shares covered by the plan. +*Not applicable. +During the three months ended March 31, 2024, no non-Rule 10b5-1 trading arrangements were adopted , modified, or terminated by our directors or officers. +52 +Table of Contents +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2024 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2024, pursuant to Regulation 14A under the Exchange Act. +ITEM 11. EXECUTIVE COMPENSATION +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedule,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q filed on August 9, 2010, and incorporated by reference herein) +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as amended through June 5, 2018 (Exhibit 3.1 to the Registrant’s Form 8-K filed on June 5, 2018, and incorporated by reference herein) +4.1 +Description of the Capital Stock of Deckers Outdoor Corporation (Exhibit 4.1 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +53 +Table of Contents +Exhibit +Number Description of Exhibit +10.1 +Credit Agreement, dated December 19, 2022, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC, Deckers Outdoor International Limited, Deckers Coromar, LLC, DBrands SGP Pte. Ltd., Citibank, N.A., as administrative agent, joint lead arranger and joint bookrunner, Comerica Bank, as sole syndication agent, joint lead arranger and joint bookrunner, HSBC Bank USA, National Association, as joint lead arranger and joint bookrunner, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on December 21, 2022, and incorporated by reference herein) +†10.2 +Standard Industrial Lease (Net), dated December 5, 2013, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014, and incorporated by reference herein) +†10.3 +First Amendment to Standard Industrial Lease (Net), dated June 6, 2017, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +10.4 +Second Amendment to Standard Industrial Lease (Net), dated July 17, 2017, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +†10.5 +Standard Industrial Lease (Net), dated February 10, 2021, by and between Westpoint Building II, LLC and Deckers Outdoor Corporation for distribution center at 2633 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.4 to the Registrant’s Form 10-K filed on May 28, 2021, and incorporated by reference herein) +†10.6 +Standard Industrial Lease (Net), dated April 20, 2022, by and between Westpoint Building V, LLC, and Deckers Outdoor Corporation for distribution center at 2723 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.5 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +#10.7 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on June 2, 2008, and incorporated by reference herein) +#10.8 +Form of Change in Control and Severance Agreement (Exhibit 10.2 to the Registrant’s Form 10-Q filed on August 6, 2020, and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on April 21, 2006, and incorporated by reference herein) +#10.10 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan, as amended through May 9, 2007 (Appendix A to the Registrant's Definitive Proxy Statement filed on April 9, 2007, and incorporated by reference herein) +#10.11 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective December 16, 2015 (Exhibit 10.1 to the Registrant's Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +#10.12 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +#10.13 +Deckers Outdoor Corporation Management Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 10, 2015, and incorporated by reference herein) +#10.14 +Deckers Outdoor Corporation 2015 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 29, 2015, and incorporated by reference herein) +#10.15 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015, and incorporated by reference herein) +#10.16 +Form of Performance Stock Option Agreement under 2015 Stock Incentive Plan (Exhibit 10.1 to the Registrant’s Form 8-K filed on November 28, 2016, and incorporated by reference herein) +†#10.17 +Form of Performance Stock Option Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.3 to the Registrant’s Form 10-Q filed on August 9, 2017, and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement (2022 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.2 7 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +54 +Table of Contents +Exhibit +Number Description of Exhibit +†#10.19 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2022 LTIP Financial Performance Award (Exhibit 10.28 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +#10.20 +Form of Stock Unit Award Agreement (2023 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.2 6 to the Registrant’s Form 10-K filed on May 2 6 , 202 3 , and incorporated by reference herein) +†#10.21 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2023 LTIP Financial Performance Award (Exhibit 10.2 7 to the Registrant’s Form 10-K filed on May 2 6 , 202 3 , and incorporated by reference herein) +†#10.22 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2023 LTIP Financial Performance Award, 2-year term (Exhibit 10.28 to the Registrant’s Form 10-K filed on May 2 6 , 20 23 , and incorporated by reference herein) +*#10.23 +Form of Stock Unit Award Agreement (202 4 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan +†*#10.24 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 202 4 LTIP Financial Performance Award +*19.1 +I nsider Trading Pol icy +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32.1 +Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +*97.1 +C lawback and Forfeiture Policy +*101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) +*101.SCH Inline XBRL Taxonomy Extension Schema Document +*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document +*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +† Certain of the exhibits and schedules to this Exhibit Index have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request. +55 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 24, 2024 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +/s/ DAVE POWERS Chief Executive Officer, President, and Director +(Principal Executive Officer) May 24, 2024 +Dave Powers +/s/ STEVEN J. FASCHING Chief Financial Officer +(Principal Financial and Accounting Officer) May 24, 2024 +Steven J. Fasching +/s/ MICHAEL F. DEVINE, III +Chair of the Board +May 24, 2024 +Michael F. Devine, III +/s/ DAVID A. BURWICK Director May 24, 2024 +David A. Burwick +/s/ NELSON C. CHAN Director May 24, 2024 +Nelson C. Chan +/s/ CYNTHIA (CINDY) L. DAVIS Director May 24, 2024 +Cynthia (Cindy) L. Davis +/s/ JUAN R. FIGUEREO Director May 24, 2024 +Juan R. Figuereo +/s/ MAHA S. IBRAHIM Director May 24, 2024 +Maha S. Ibrahim +/s/ VICTOR LUIS Director May 24, 2024 +Victor Luis +/s/ LAURI M. SHANAHAN Director May 24, 2024 +Lauri M. Shanahan +/s/ BONITA C. STEWART Director May 24, 2024 +Bonita C. Stewart +56 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Comprehensive Income +F- 6 +Consolidated Statements of Stockholders ’ Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to Consolidated Financial Statements +F- 10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F- 43 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2024, and 2023, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2024, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024, and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2024, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 24, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit and risk management committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has recorded a sales return liability as of March 31, 2024, of $55,327, of which $37,458 is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to estimate the wholesale sales return liability. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating the wholesale sales return liability, including controls related to the development of estimated return rates. We evaluated the wholesale sales return liability using a combination of Company internal data, known +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +recent trends, and actual and historical known information. We analyzed the Company’s internal data and external correspondence to assess adjustments made by management, if any, to historical return rates based on consideration of recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 24, 2024 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2024 and 2023, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2024, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated May 24, 2024 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 24, 2024 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2024 2023 +ASSETS +Cash and cash equivalents $ 1,502,051 $ 981,795 +Trade accounts receivable, net of allowances ($ 27,331 and $ 32,504 as of March 31, 2024, and March 31, 2023, respectively) ( Note 2 and Schedule II) +296,565 301,511 +Inventories 474,311 532,852 +Prepaid expenses 34,284 33,788 +Other current assets 92,713 55,523 +Income tax receivable 43,559 4,784 +Total current assets 2,443,483 1,910,253 +Property and equipment, net of accumulated depreciation ($ 349,138 and $ 317,508 as of March 31, 2024, and March 31, 2023, respectively) ( Note 1 and Note 13) +302,122 266,679 +Operating lease assets 225,669 213,302 +Goodwill ( Note 3) +13,990 13,990 +Other intangible assets, net of accumulated amortization ($ 91,314 and $ 81,033 as of March 31, 2024, and March 31, 2023, respectively) ( Note 3) +27,083 37,457 +Deferred tax assets, net ( Note 5) +72,584 72,592 +Other assets 50,648 41,930 +Total assets $ 3,135,579 $ 2,556,203 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Trade accounts payable $ 378,503 $ 265,605 +Accrued payroll 123,653 63,781 +Operating lease liabilities ( Note 7) +53,581 50,765 +Other accrued expenses 106,785 86,753 +Income tax payable 52,338 17,322 +Value added tax payable 5,133 13,154 +Total current liabilities 719,993 497,380 +Long-term operating lease liabilities ( Note 7) +213,298 195,723 +Income tax liability 52,470 62,032 +Other long-term liabilities 42,350 35,335 +Total long-term liabilities 308,118 293,090 +Commitments and contingencies ( Note 7) +Stockholders’ equity +Common stock ($ 0.01 par value; 125,000 shares authorized; shares issued and outstanding of 25,593 and 26,176 as of March 31, 2024, and March 31, 2023, respectively) +255 262 +Additional paid-in capital 245,149 232,932 +Retained earnings 1,912,797 1,571,574 +Accumulated other comprehensive loss ( Note 10) +( 50,733 ) ( 39,035 ) +Total stockholders’ equity 2,107,468 1,765,733 +Total liabilities and stockholders’ equity $ 3,135,579 $ 2,556,203 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2024 2023 2022 +Net sales ( Note 12 and Note 13) +$ 4,287,763 $ 3,627,286 $ 3,150,339 +Cost of sales 1,902,275 1,801,916 1,542,788 +Gross profit 2,385,488 1,825,370 1,607,551 +Selling, general, and administrative expenses 1,457,974 1,172,619 1,042,844 +Income from operations ( Note 12) +927,514 652,751 564,707 +Interest income ( 52,208 ) ( 15,563 ) ( 1,901 ) +Interest expense 2,564 3,442 2,083 +Other income, net ( 1,783 ) ( 1,210 ) ( 113 ) +Total other (income) expense, net ( 51,427 ) ( 13,331 ) 69 +Income before income taxes 978,941 666,082 564,638 +Income tax expense ( Note 5) +219,378 149,260 112,689 +Net income 759,563 516,822 451,949 +Foreign currency translation loss ( 11,698 ) ( 14,080 ) ( 8,212 ) +Total other comprehensive loss, net of tax ( 11,698 ) ( 14,080 ) ( 8,212 ) +Comprehensive income $ 747,865 $ 502,742 $ 443,737 +Net income per share +Basic $ 29.36 $ 19.50 $ 16.43 +Diluted $ 29.16 $ 19.37 $ 16.26 +Weighted-average common shares outstanding ( Note 11) +Basic 25,871 26,504 27,508 +Diluted 26,048 26,686 27,789 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(amounts in thousands) +Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ +Equity +Shares Amount +Balance, March 31, 2021 27,910 $ 279 $ 203,310 $ 1,257,379 $ ( 16,743 ) $ 1,444,225 +Stock-based compensation 4 — 26,780 — — 26,780 +Shares issued upon vesting 83 1 1,990 — — 1,991 +Exercise of stock options 29 — 1,204 — — 1,204 +Shares withheld for taxes — — ( 22,459 ) — — ( 22,459 ) +Repurchases of common stock ( Note 10) +( 1,044 ) ( 10 ) — ( 356,643 ) — ( 356,653 ) +Net income — — — 451,949 — 451,949 +Total other comprehensive loss — — — — ( 8,212 ) ( 8,212 ) +Balance, March 31, 2022 26,982 270 210,825 1,352,685 ( 24,955 ) 1,538,825 +Stock-based compensation 5 — 26,858 — — 26,858 +Shares issued upon vesting 53 — 2,170 — — 2,170 +Exercise of stock options 64 — 4,396 — — 4,396 +Shares withheld for taxes — — ( 11,317 ) — — ( 11,317 ) +Repurchases of common stock ( Note 10) +( 928 ) ( 8 ) — ( 297,364 ) — ( 297,372 ) +Excise taxes related to repurchases of common stock — — — ( 569 ) — ( 569 ) +Net income — — — 516,822 — 516,822 +Total other comprehensive loss — — — — ( 14,080 ) ( 14,080 ) +Balance, March 31, 2023 26,176 262 232,932 1,571,574 ( 39,035 ) 1,765,733 +Stock-based compensation 2 — 37,248 — — 37,248 +Shares issued upon vesting 59 — 2,444 — — 2,444 +Exercise of stock options 71 — 4,786 — — 4,786 +Shares withheld for taxes — — ( 32,261 ) — — ( 32,261 ) +Repurchases of common stock ( Note 10) +( 715 ) ( 7 ) — ( 414,924 ) — ( 414,931 ) +Excise taxes related to repurchases of common stock — — — ( 3,416 ) — ( 3,416 ) +Net income — — — 759,563 — 759,563 +Total other comprehensive loss — — — — ( 11,698 ) ( 11,698 ) +Balance, March 31, 2024 25,593 $ 255 $ 245,149 $ 1,912,797 $ ( 50,733 ) $ 2,107,468 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2024 2023 2022 +OPERATING ACTIVITIES +Net income $ 759,563 $ 516,822 $ 451,949 +Reconciliation of net income to net cash provided by (used in) operating activities: +Depreciation, amortization, and accretion 57,587 47,858 42,878 +Amortization on cloud computing arrangements 2,075 2,149 1,552 +Loss on extinguishment of debt — 226 — +Bad debt expense (benefit) 789 1,983 ( 342 ) +Deferred tax benefit ( 1,510 ) ( 9,719 ) ( 27,796 ) +Stock-based compensation 37,288 26,897 26,816 +Loss on disposal of long-lived assets 407 2,691 107 +Impairment of intangible assets 8,164 — — +Impairment of operating lease and other long-lived assets 1,015 2,817 3,186 +Changes in operating assets and liabilities: +Trade accounts receivable, net 4,157 ( 806 ) ( 86,627 ) +Inventories 58,541 ( 26,056 ) ( 228,554 ) +Prepaid expenses and other current assets ( 38,490 ) ( 5,609 ) ( 19,095 ) +Income tax receivable ( 38,775 ) 13,459 ( 11,933 ) +Net operating lease assets and lease liabilities ( 567 ) ( 8,308 ) 3,189 +Other assets ( 9,989 ) 13,240 ( 28,296 ) +Trade accounts payable 119,601 ( 74,247 ) 89,184 +Other accrued expenses 43,534 11,528 ( 20,370 ) +Income tax payable 35,016 4,897 ( 24,494 ) +Other long-term liabilities ( 5,222 ) 17,600 999 +Net cash provided by operating activities 1,033,184 537,422 172,353 +INVESTING ACTIVITIES +Purchases of property and equipment ( 89,365 ) ( 81,025 ) ( 51,017 ) +Proceeds from sales of property and equipment 34 12 8 +Net cash used in investing activities ( 89,331 ) ( 81,013 ) ( 51,009 ) +FINANCING ACTIVITIES +Loan origination costs on revolving credit facilities — ( 1,537 ) — +Proceeds from issuance of stock 2,444 2,170 1,991 +Proceeds from exercise of stock options 4,786 4,396 1,204 +Repurchases of common stock ( 414,931 ) ( 297,372 ) ( 356,653 ) +Cash paid for shares withheld for taxes ( 9,974 ) ( 16,688 ) ( 14,024 ) +Net cash used in financing activities ( 417,675 ) ( 309,031 ) ( 367,482 ) +Effect of foreign currency exchange rates on cash and cash equivalents ( 5,922 ) ( 9,110 ) 304 +Net change in cash and cash equivalents 520,256 138,268 ( 245,834 ) +Cash and cash equivalents at beginning of period 981,795 843,527 1,089,361 +Cash and cash equivalents at end of period $ 1,502,051 $ 981,795 $ 843,527 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2024 2023 2022 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes $ 234,062 $ 135,986 $ 192,090 +Interest 1,783 1,880 1,842 +Operating leases 65,672 60,353 55,588 +Non-cash investing activities +Changes in accounts payable and other accrued expenses for purchases of property and equipment ( 6,705 ) 5,325 2,797 +Accrued for asset retirement obligation assets related to leasehold improvements 2,278 8,203 3,900 +Leasehold improvements acquired through tenant allowances 8,127 — 4,061 +Non-cash financing activities +Accrued for shares withheld for taxes 22,287 5,371 8,435 +Accrued excise taxes related to repurchases of common stock 3,416 569 — +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 1. GENERAL +The Company . Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. The Company’s six proprietary brands include the UGG® (UGG), HOKA® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra by UGG® brand (Koolaburra), and AHNU® (AHNU) brands. +The Company sells its products through quality domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its-e‑commerce business and retail stores. Independent third-party contractors manufacture all of the Company’s products. +A significant part of the UGG brand’s business has historically been seasonal, requiring the Company to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which has contributed to variation in its results from quarter to quarter. However, as the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles, and as net sales of the HOKA brand, which generally occur more evenly throughout the year, continue to increase as a percentage of the Company’s aggregate net sales, the Company expects to continue to see the impact from seasonality decrease over time. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements) as of March 31, 2024, and 2023 and for the years ended March 31, 2024 , 2023, and 2022 (referred to herein as “year ended” or “years ended,” or as “fiscal year 2024,” “fiscal year 2023,” and “fiscal year 2022,” respectively) are prepared in accordance with generally accepted accounting principles in the United States (US GAAP). +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of macroeconomic factors, including inflation, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, changes in discretionary spending and recessionary concerns, on its business and operations. Although the full impact of these factors is unknown, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company’s financial condition, results of operations, and liquidity. To the extent there are differences between these estimates and actual results, the Company’s consolidated financial statements may be materially affected. +Significant areas requiring the use of management estimates and assumptions relate to inventory write-downs; trade accounts receivable allowances, including variable consideration for net sales provided to customers, such as the sales return asset and liability; contract assets and liabilities; stock-based compensation; impairment assessments, including goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company’s incremental borrowing rate (IBR) utilized to measure its operating lease assets and lease liabilities. +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than its functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in selling, general, and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI) in the consolidated statements of comprehensive income. +Reportable Operating Segments. The Company’s six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands (primarily consisting of the Koolaburra brand, as well as the recently launched AHNU brand in March 2024), as well as DTC (collectively, the Company’s reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +During October 2023, the Company announced that it intends to divest the Sanuk brand as it focuses on allocating resources that best align with its long-term objectives. Refer to Note 3, “Goodwill and Other Intangible Assets,” for discussion on the Sanuk brand definite-lived intangible asset impairment charge recorded during the year ended March 31, 2024. +Recent Accounting Pronouncements. The Financial Accounting Standards Board has issued Accounting Standards Updates (ASU) that have been adopted and not yet adopted by the Company for its annual and interim reporting periods as stated below. +Recently Adopted. The following is a summary of an ASU adopted by and its impact on the Company: +Standard Description Impact Upon Adoption +ASU 2022-04 - Supplier Finance Program (SFP) +The ASU requires that a buyer in a SFP disclose qualitative and quantitative information about its program on an interim basis, including the nature of the SFP and key terms, outstanding amounts as of the end of the reporting period, and presentation in its financial statements. +The interim portion of this ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. +The annual requirement that requires a buyer in a SFP disclose an activity roll forward of outstanding balances as of the end of the reporting period has not yet been adopted. +This annual portion of this ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2023. Early adoption is not permitted. +This ASU did not have a material impact on the recognition, measurement, or presentation of supplier finance programs in the Company’s annual and interim consolidated financial statements. However, it did result in additional disclosure. +The Company retrospectively adopted this ASU beginning on April 1, 2023, except for the roll forward requirements. Refer to Note 14, “Supplier Finance Program,” for further information on the Company’s SFP. key terms and outstanding balances recorded in the consolidated balance sheets. +The Company plans to adopt the annual roll forward requirement beginning with its fiscal year (FY) ending March 31, 2025, and does not expect the adoption to have a material impact on its annual and interim consolidated financial statements. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Not Yet Adopted. The following is a summary of each ASU that has been issued and is applicable to the Company, but which has not yet been adopted, as well as the planned period of adoption, and the expected impact on the Company upon its adoption: +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU 2023-07 - Improvements to Reportable Segment Disclosures +The ASU requires annual and interim disclosures of significant segment expenses, including an amount and composition description for other segment items, and how reported measures of profit or loss are used by the chief operating decision maker (CODM) in assessing segment performance and deciding how to allocate resources. The ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. +Q4 FY 2025 +and +Q1 FY 2026 +The Company is currently evaluating the impact of the adoption of this ASU on its annual and interim consolidated financial statements. +ASU 2023-09 - Improvements to Income Tax Disclosures +The ASU requires annual disclosures of prescribed standard categories for the components of the effective tax rate reconciliation, disclosure of income taxes paid disaggregated by jurisdiction, and other income-tax related disclosures. The ASU is effective on a prospective basis, with retrospective application permitted, for fiscal years beginning after December 15, 2024. Early adoption is permitted. +Q4 FY 2026 +The Company is currently evaluating the impact of the adoption of this ASU on its annual and interim consolidated financial statements. +Summary of Significant Accounting Policies. The following is a summary of the Company’s significant accounting policies applied to its consolidated financial statements: +Cash and Cash Equivalents . Cash and cash equivalents include cash on hand, demand deposits, and all highly liquid investments, such as money-market funds, with an original maturity of three months or less. The carrying value of money-market funds approximates the fair value as it is considered a highly liquid investment when purchased. Money-market funds are recorded in cash and cash equivalents in the consolidated balance sheets. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of money-market funds. Refer to Note 13, “Concentration of Business,” for further information on credit risks in cash. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Inventories . Inventories, which are principally comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes sourcing as well as inventory procurement costs, including freight, duty, and handling fees which are subsequently expensed to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. The Company regularly reviews inventory for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or realizable value. +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Cloud Computing Arrangements . The Company enters into various cloud computing arrangements (CCAs) that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets. Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to three years . +As of March 31, 2024, net capitalized costs for CCAs are $ 4,537 , with $ 1,534 recorded in prepaid expenses and $ 3,003 recorded in other assets in the consolidated balance sheets. As of March 31, 2023, net capitalized costs for CCAs are $ 5,161 , with $ 1,880 recorded in prepaid expenses and $ 3,281 recorded in other assets in the consolidated balance sheets. +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset, which would be recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Property and equipment, net, are summarized as follows: +As of March 31, +Useful life (years) 2024 2023 +Land Indefinite $ 32,864 $ 32,864 +Building 39.5 40,058 36,191 +Machinery and equipment +1 - 10 +263,200 187,754 +Furniture and fixtures +3 - 7 +41,336 39,538 +Computer software +3 - 10 +130,688 115,349 +Leasehold improvements +1 - 11 +128,356 118,351 +Construction in progress 14,758 54,140 +Gross property and equipment 651,260 584,187 +Less accumulated depreciation and amortization ( 349,138 ) ( 317,508 ) +Total $ 302,122 $ 266,679 +Depreciation was $ 54,958 , $ 45,117 , and $ 40,303 during the years ended March 31, 2024, 2023, and 2022, respectively. +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional period covered by the Company’s option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, “Commitments and Contingencies,” for further information on the discount rate methodology used to measure operating lease assets and lease liabilities. +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income. Lease payments recorded in the operating lease liabilities (1) are fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, “Commitments and Contingencies,” for further information on the nature of variable lease payments and the timing of recognition of rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income. +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and lease liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liabilities, a corresponding adjustment is made to the carrying amount of the operating lease assets. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the paragraph titled “Definite-Lived Intangible and Other Long-Lived Assets” below for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements for indicators of impairment. +Asset Retirement Obligations . The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +The Company’s asset retirement obligations (AROs) are recorded in other long-term liabilities in the consolidated balance sheets and activity was as follows: +Years Ended March 31, +2024 2023 +Beginning balance +$ 24,556 $ 16,802 +Additions and changes in estimate 2,730 9,724 +Liabilities settled during the period ( 1,724 ) ( 2,284 ) +Accretion expenses 421 513 +Foreign currency translation gains ( 297 ) ( 199 ) +Ending balance +$ 25,686 $ 24,556 +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination and consists of the UGG brand and HOKA brand goodwill balances. Indefinite-lived intangible assets consist of the Teva brand trademark. +Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates the goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments annually as of December 31st of each year and evaluates the Teva brand indefinite-lived trademarks for impairment annually as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of operating margins and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill, which are currently the same as the Company’s reportable operating segments. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting the industry. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset group, which is based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 3, “Goodwill and Other Intangible Assets,” for discussion on the Sanuk brand impairment charge recorded during the year ended March 31, 2024, and for further information on remaining amortization expense for definite-lived intangible assets. +During the years ended March 31, 2024 , 2023, and 2022, the Company recorded impairment charges of $ 1,015 , $ 2,817 , and $ 3,186 , respectively, within its DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for retail store-related operating lease and other long-lived assets. These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value, which is determined based on an estimate of the future discounted cash flows. Refer to Note 7, “Commitments and Contingencies,” for further information on the Company’s operating lease assets and liabilities. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company enters into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less to manage foreign currency risk and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of forward spot rates at the end of the applicable periods from counterparties, which are corroborated by market-based pricing, and are recorded in other current assets or other accrued expenses in the consolidated balance sheets. The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of accumulated other comprehensive loss (AOCL) in the consolidated balance sheets and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Stock Repurchase Program. Repurchased shares of the Company’s common stock are retired. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value as well as the portion due for excise taxes, is allocated to retained earnings in the consolidated balance sheets. Refer to Note 10, “Stockholders’ Equity,” for further information on the Company’s stock repurchase program. +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of and obtain substantially all the remaining benefits from the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. The Company’s customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 to 60 days. +Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, “Revenue Recognition,” for further information regarding the Company’s components of variable consideration. +Cost of Sales . Cost of sales for the Company’s goods are for finished goods and related overhead. Finished goods includes material costs, including commodities, for our products, allocation of initial molds, and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales when the product is sold in the consolidated statements of comprehensive income. Overhead includes certain costs for planning, purchasing, quality control, freight, and duties. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Distribution Costs. Distribution expenses include costs for warehousing, third-party logistic provider service fees, receiving, inspecting, allocating, and packaging product, which are expensed as incurred. Such costs amounted to $ 238,312 , $ 206,191 , and $ 172,385 for the years ended March 31, 2024, 2023, and 2022, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Research and Development Costs . All research and development costs are expensed as incurred. Such costs amounted to $ 49,171 , $ 38,657 , and $ 33,344 for the years ended March 31, 2024, 2023, and 2022, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Advertising, Marketing, and Promotion Expenses . Advertising, marketing, and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs, and amounted to $ 348,852 , $ 271,140 , and $ 255,881 for the years ended March 31, 2024, 2023 and 2022, respectively, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2024, and 2023 are $ 1,130 and $ 4,930 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is expensed to the consolidated statements of comprehensive income ratably over the vesting period. Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria, as well as the Company’s reliance on the closing price of its stock on the New York Stock Exchange at or near the time of grant. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Stock-based compensation expense, net of forfeitures, is recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 8, “Stock-Based Compensation,” for further information on grant activity, types of awards, and additional disclosure related to stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 5,129 , $ 4,433 , and $ 3,953 during the years ended March 31, 2024, 2023, and 2022, respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income. In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, there were no Company profit-sharing contributions for the years ended March 31, 2024, 2023, and 2022. +Non-qualified Deferred Compensation . In 2010, the Company began sponsoring an unfunded, non-qualified deferred compensation plan (NQDC Plan) that permits certain members of its management team the opportunity to defer compensation into the NQDC Plan. The NQDC Plan year is from January 1st to December 31st. Participants may defer up to 50 % of their annual base salary and up to 85 % of any cash incentive bonus under the NQDC Plan. The Company holds all its non-qualified deferred compensation plan investments in mutual funds. In March 2015, the Board of Directors approved a Company contribution feature to allow the option, but not the obligation, for the Company to make discretionary or matching cash contributions to NQDC Plan participants. +As of March 31, 2024, and 2023, no material payments are made or pending under the plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in accrued payroll in the consolidated balance sheets. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income. Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements. +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders’ Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Basic and Diluted Shares,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 2. REVENUE RECOGNITION +Disaggregated Revenue . Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s disaggregation of revenue by reportable operating segment. +Variable Consideration . Components of variable consideration include estimated allowance for sales discounts, allowance for chargebacks, and sales return asset and liability. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, the Company records an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income. +Sales Return Asset and Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. +Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes in the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets. The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +The following table summarizes changes in the estimated sales returns for the periods presented: +Recovery Asset Refund Liability +Balance, March 31, 2022 $ 11,491 $ ( 39,867 ) +Net additions to sales return liability (1) +67,249 ( 229,864 ) +Actual returns ( 63,055 ) 224,409 +Balance, March 31, 2023 15,685 ( 45,322 ) +Net additions to sales return liability (1) +60,789 ( 276,086 ) +Actual returns ( 62,608 ) 266,081 +Balance, March 31, 2024 $ 13,866 $ ( 55,327 ) +(1) Net additions to the sales return liability include a provision for anticipated sales returns, which consists of both contractual return rights and discretionary authorized returns. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Contract Liabilities . Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract liabilities are recorded in other accrued expenses in the consolidated balance sheets and include loyalty programs and other deferred revenue. +Loyalty Programs . The Company has a loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until one of the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption and expiration patterns. The Company’s contract liability for loyalty programs is recorded in other accrued expenses in the consolidated balance sheets. Activity related to loyalty programs was as follows: +Years Ended March 31, +2024 2023 +Beginning balance +$ ( 13,144 ) $ ( 10,883 ) +Redemptions and expirations for loyalty certificates and points recognized in net sales 52,884 49,123 +Deferred revenue for loyalty points and certificates issued ( 57,326 ) ( 51,384 ) +Ending balance +$ ( 17,586 ) $ ( 13,144 ) +Deferred Revenue . Revenue is deferred for wholesale channel transactions when certain conditions outlined within the contract terms, including the transfer of control or delivery of product, has not occurred, such as when a wholesale channel customer prepays for ordered product. The contract liability for deferred revenue is recorded in other accrued expenses in the consolidated balance sheets. Activity related to deferred revenue was as follows: +Years Ended March 31, +2024 2023 +Beginning balance $ ( 13,448 ) $ ( 15,804 ) +Additions of customer cash payments ( 61,844 ) ( 53,797 ) +Revenue recognized 65,701 56,153 +Ending balance $ ( 9,591 ) $ ( 13,448 ) +NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS +The Company’s goodwill and other intangible assets are recorded in the consolidated balance sheets as follows: +As of March 31, +2024 2023 +Goodwill +UGG brand $ 6,101 $ 6,101 +HOKA brand 7,889 7,889 +Total goodwill 13,990 13,990 +Other intangible assets +Indefinite-lived intangible assets +Trademarks 15,454 15,454 +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +As of March 31, +2024 2023 +Definite-lived intangible assets +Trademarks 51,723 51,723 +Other 51,220 51,313 +Total gross carrying amount 102,943 103,036 +Accumulated amortization and impairments +( 91,314 ) ( 81,033 ) +Net definite-lived intangible assets 11,629 22,003 +Total other intangible assets, net 27,083 37,457 +Total $ 41,073 $ 51,447 +The weighted-average amortization period for definite-lived intangible assets was 15 years for the years ended March 31, 2024, and 2023. Intangible assets consist primarily of indefinite-lived and definite-lived trademarks, customer relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Goodwill is allocated to the wholesale reportable operating segments of the brands described above. +Annual Impairment Assessment . During the years ended March 31, 2024, 2023, and 2022, the Company evaluated goodwill for impairment at the reporting unit level for the UGG and HOKA brands wholesale reportable operating segments as of December 31st and evaluated the Teva indefinite-lived trademarks as of October 31st. Based on the evaluation of qualitative and quantitative factors, including the asset carrying amounts recorded in the consolidated balance sheets against each of the brands’ actual results of operations and long-term forecasts of net sales and operating income, no impairment loss was recorded for goodwill and indefinite-lived intangible assets. As of March 31, 2024, and 2023, the gross carrying amount of goodwill is $ 143,765 and the accumulated impairment losses are $ 129,775 . +During the fourth fiscal quarter for the year ended March 31, 2024, the Company recorded an impairment loss of $ 8,164 in SG&A expenses in the consolidated statements of comprehensive income for the Sanuk brand definite-lived trademark, driven by lower-than-expected results of operations for the wholesale channel that resulted in the carrying value exceeding the estimated fair value, which was determined based on an estimate of the future discounted cash flows. The Company did not identify any definite-lived intangible asset triggering events during the years ended March 31, 2023, and 2022. +Other Intangible Assets, net . A reconciliation of the changes in total other intangible assets, net, recorded in the consolidated balance sheets is as follows: +Years Ended March 31, +2024 2023 2022 +Beginning balance +$ 37,457 $ 39,688 $ 41,945 +Impairment charges ( 8,164 ) — — +Amortization expense ( 2,208 ) ( 2,228 ) ( 2,248 ) +Foreign currency translation net loss ( 2 ) ( 3 ) ( 9 ) +Ending balance +$ 27,083 $ 37,457 $ 39,688 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Expected amortization expense for definite-lived intangible assets subsequent to March 31, 2024, is as follows: +Years Ending March 31, Amounts +2025 $ 1,402 +2026 911 +2027 879 +2028 879 +2029 879 +Thereafter 6,679 +Total $ 11,629 +NOTE 4. FAIR VALUE MEASUREMENTS +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. +The following summarizes the three levels of inputs required: +• Level 1: Quoted prices in active markets for identical assets and liabilities. +• Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. When the Company makes short-term borrowings, the carrying amounts, which are considered Level 2 liabilities, approximate fair value based upon current rates and terms available to the Company for similar debt. The Company does not currently have any Level 3 assets or liabilities. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets are as follows: +As of Measured Using +March 31, 2024 Level 1 Level 2 Level 3 +Assets: +Cash equivalents: +Money-market funds $ 1,152,083 $ 1,152,083 $ — $ — +Other assets: +Non-qualified deferred compensation asset 13,553 13,553 — — +Total assets measured at fair value $ 1,165,636 $ 1,165,636 $ — $ — +Liabilities: +Other accrued expenses: +Non-qualified deferred compensation liability $ ( 408 ) $ ( 408 ) $ — $ — +Other long-term liabilities: +Non-qualified deferred compensation liability ( 16,229 ) ( 16,229 ) — — +Total liabilities measured at fair value $ ( 16,637 ) $ ( 16,637 ) $ — $ — +As of Measured Using +March 31, 2023 Level 1 Level 2 Level 3 +Assets: +Cash equivalents: +Money-market funds $ 675,468 $ 675,468 $ — $ — +Other assets: +Non-qualified deferred compensation asset 8,399 8,399 — — +Total assets measured at fair value $ 683,867 $ 683,867 $ — $ — +Liabilities: +Other accrued expenses: +Non-qualified deferred compensation liability $ ( 737 ) $ ( 737 ) $ — $ — +Other long-term liabilities: +Non-qualified deferred compensation liability ( 10,589 ) ( 10,589 ) — — +Total liabilities measured at fair value $ ( 11,326 ) $ ( 11,326 ) $ — $ — +The Company’s non-financial assets, such as other long-lived assets and definite-lived intangible assets, which include operating lease assets, machinery and equipment, leasehold improvements, definite-lived trademarks; as well as indefinite-lived intangible assets and goodwill, are not required to be carried at fair value on a recurring basis and are reported at carrying value. Instead, these assets are tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. When determining fair value, Level 3 measurements are used for the estimates and assumptions, including undiscounted future cash flows expected to be generated by the asset groups based upon historical experience, expected market conditions, as well and management’s plans. +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 5. INCOME TAXES +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2024 2023 2022 +Domestic (1) +$ 688,981 $ 467,231 $ 396,368 +Foreign 289,960 198,851 168,270 +Total $ 978,941 $ 666,082 $ 564,638 +(1) Domestic income before income taxes for the years ended March 31, 2024, 2023, and 2022 is presented net of intercompany dividends (or repatriated cash) of $ 250,000 , $ 0 , and $ 120,000 , respectively. +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2024 2023 2022 +Current +Federal $ 146,939 $ 115,708 $ 95,012 +State 32,065 18,418 22,544 +Foreign 41,884 24,853 22,929 +Total 220,888 158,979 140,485 +Deferred +Federal ( 3,113 ) 4,830 ( 17,316 ) +State ( 2,336 ) 382 ( 4,827 ) +Foreign 3,939 ( 14,931 ) ( 5,653 ) +Total ( 1,510 ) ( 9,719 ) ( 27,796 ) +Total $ 219,378 $ 149,260 $ 112,689 +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended March 31, +2024 2023 2022 +Computed expected income taxes $ 205,578 $ 139,882 $ 118,574 +State income taxes, net of federal income tax benefit +32,023 15,881 16,896 +Foreign rate differential ( 15,976 ) ( 21,420 ) ( 22,188 ) +Gross unrecognized tax benefits 1,301 20,122 ( 491 ) +Intercompany transfers of assets +( 1,817 ) ( 13,072 ) ( 219 ) +US tax on foreign earnings 4,750 7,672 4,325 +Other +( 6,481 ) 195 ( 4,208 ) +Total $ 219,378 $ 149,260 $ 112,689 +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2024 2023 +Deferred tax assets +Amortization of intangible assets $ 11,416 $ 16,788 +Operating lease liabilities 38,890 38,673 +Uniform capitalization adjustment to inventory 11,822 13,823 +State related taxes and credit carryforwards +1,834 — +Reserves and accruals 65,817 48,949 +Net operating loss carry-forwards 5,981 3,477 +Deferred revenue 880 7,924 +Other +2,284 1,070 +Gross deferred tax assets 138,924 130,704 +Valuation allowances ( 1,259 ) ( 1,224 ) +Total 137,665 129,480 +Deferred tax liabilities +Prepaid expenses ( 7,060 ) ( 6,930 ) +Operating lease assets ( 29,667 ) ( 31,250 ) +Depreciation of property and equipment ( 28,354 ) ( 18,708 ) +Total ( 65,081 ) ( 56,888 ) +Deferred tax assets, net $ 72,584 $ 72,592 +The deferred tax assets are currently expected to be realized between fiscal years 2025 and 2031. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of foreign losses in jurisdictions with limited future profitability. +US Taxation of Foreign Earnings . The Company is subject to US taxation of its foreign subsidiary earnings, which is considered global intangible low-taxed income (commonly known as GILTI), as well as limitations on the deductions of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. +The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. During the year ended March 31, 2024, the Company declared an intercompany dividend of $ 250,000 from a foreign subsidiary, for which no foreign withholding taxes were required. +As of March 31, 2024, the Company has $ 267,926 of undistributed earnings from its non-US subsidiaries, of which $ 263,820 is held as cash and cash equivalents, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2024, the Company has $ 15,906 of accumulated earnings from its non-US subsidiaries for which no US federal or state income taxes have been paid. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Recent Tax Law Changes. The Organization for Economic Co-operation and Development (OECD), supported by 140 of their member countries, have agreed to implement a minimum 15% tax rate on certain multinational enterprises and have released model guidance. This global minimum tax, known as the Pillar Two framework, will become effective across various countries starting in calendar year 2024, as each country works to enact legislation influenced by the OECD Pillar Two rules. The Company continues to evaluate the impact of additional guidance released by the OECD, along with the pending and adopted legislation in each of the countries in which we operate, on future periods. +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements during the period in which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets. +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits are as follows: +Years Ended March 31, +2024 2023 2022 +Beginning balance $ 44,901 $ 24,779 $ 25,270 +Gross increase related to current year tax positions 4,318 6,865 2,520 +Gross increase related to prior year tax positions 4,629 16,243 2,750 +Gross decrease related to prior year tax positions ( 4,698 ) ( 456 ) ( 243 ) +Settlements ( 582 ) — ( 795 ) +Lapse of statute of limitations ( 2,948 ) ( 2,530 ) ( 4,723 ) +Ending balance $ 45,620 $ 44,901 $ 24,779 +Total gross unrecognized tax benefits recorded in the consolidated balance sheets are as follows: +As of March 31, +2024 2023 +Long-term asset +Deferred tax assets, net $ — $ 3,145 +Current liability +Income tax payable 3,998 1,829 +Long-term liability +Income tax liability 41,622 39,927 +Total $ 45,620 $ 44,901 +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in the Company’s income tax return that would impact the Company’s effective tax rate, if recognized. Management believes it is reasonably possible that the amount of net unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 9,088 , which includes amounts relating to expirations of statute of limitations and settlements of various tax matters. Of this amount, $ 8,046 would result in an income tax benefit for the Company and $ 1,042 would result in a decrease to interest expense in the consolidated statements of comprehensive income. +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +As of March 31, 2024, and 2023, the Company has accrued $ 6,314 and $ 5,828 for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets. During the years ended March 31, 2024, 2023, and 2022, the Company recorded $ 486 , $ 1,106 , and $( 60 ), respectively, of interest and penalties as an increase or (decrease) to interest expense in the consolidated statements of comprehensive income. +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken in years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2020. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, management does not currently expect these audits and inquiries to have a material impact on the Company’s consolidated financial statements. +NOTE 6. REVOLVING CREDIT FACILITIES +Primary Credit Facility . In December 2022, the Company refinanced in full and terminated its prior credit agreement originally entered into in September 2018 (Prior Credit Agreement). The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank), as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement). The Credit Agreement provides for a five-year , $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on December 19, 2027, subject to extension on early termination as described in the Credit Agreement. +In addition to allowing borrowings in US dollars, the Primary Credit Facility provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars, and any other foreign currency that is subsequently approved by Citibank, each lender, and each bank issuing letters of credit. Subject to customary conditions, the Company has the option to increase the maximum principal amount available up to an additional $ 300,000 , resulting in a maximum available principal amount of $ 700,000 . However, none of the lenders have committed at this time to provide any such increase in the commitment. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries that meet certain materiality thresholds, subject to limited exceptions. All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured, and amounts borrowed may be prepaid at any time without a premium or penalty, subject to limited exceptions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +Interest Rate Terms. At the Company’s election, revolving loans issued under the Primary Credit Facility will bear interest at the adjusted term SOFR, the adjusted Euro InterBank Offered Rate (EURIBOR), the Sterling Overnight Index Average (SONIA), the Canadian Dollar Offered Rate (CDOR), or the adjusted Alternate Base Rate (ABR), in each case plus the applicable interest rate margin. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Interest for borrowings in US dollars will fluctuate between SOFR, plus 1.00 % and 0.10 % based on the Company’s total net leverage ratio, and ABR, plus 0 % per annum. The applicable interest rate margin is based on a pricing grid based on the Company’s total net leverage ratio and ranges from 1.00 % to 1.625 % per annum in the case of loans based on the SOFR, EURIBOR, SONIA, or CDOR, and from 0.00 % to 0.625 % per annum in the case of loans based on ABR. As of March 31, 2024, the effective interest rates for SOFR and ABR are 6.43 % and 8.50 %, respectively. +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum on the daily unused amount of the Primary Credit Facility, with the exact commitment fee based on the Company’s total net leverage ratio. +Borrowing Activity. During the year ended March 31, 2024, the Company made no borrowings or repayments under the Primary Credit Facility. As of March 31, 2024, the Company has no outstanding balance, $ 954 of outstanding letters of credit, and available borrowings of $ 399,046 under the Primary Credit Facility. +Deferred Financing Costs. During the year ended March 31, 2023, the Company paid $ 1,537 for various commitment, arrangement, other fees, and expense reimbursements to certain parties to the Credit Agreement. These costs are being amortized on a straight-line basis over the term of the Credit Agreement and are primarily included in other assets in the consolidated balance sheets. Deferred financing costs associated with the Prior Credit Agreement had a remaining unamortized balance previously recorded in other current assets in the consolidated balance sheets of $ 226 , which was written off to interest expense during the year ended March 31, 2023. +China Credit Facility . In October 2021, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 41,522 , with an overdraft facility sublimit of CNY 100,000 , or $ 13,841 . The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 24 months, which was amended to increase from 12 months in November 2023. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate multiplied by a variable liquidity factor. As of March 31, 2024, the effective interest rate is 3.75 %. During the year ended March 31, 2024, the Company made no borrowings or repayments under the China Credit Facility. As of March 31, 2024, the Company has no outstanding balance, outstanding bank guarantees of $ 28 , and available borrowings of $ 41,494 under the China Credit Facility. +Debt Covenants. Under the Credit Agreement, the Company is subject to usual and customary representations and warranties, and contains usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments, indemnification provisions in favor of the lenders and transactions with affiliates. The financial covenant requires the total net leverage ratio to be no greater than 3.75 to 1.00 . +Under the Credit Agreement, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material Employee Retirement Income Security Act of 1974 (ERISA) liabilities; and a change of control of the Company. +Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +As of March 31, 2024, the Company is in compliance with all financial covenants under the Primary Credit Facility and China Credit Facility. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 7. COMMITMENTS AND CONTINGENCIES +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts which vary in lease terms but, in the aggregate, continue in effect through calendar year 2035. Some of the Company’s operating leases contain extension options between one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and lease liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM, and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its IBR. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor's deferred initial direct costs. The Company has a centralized treasury function, which enables the Company to use a portfolio approach to discount lease obligations. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its non-collateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Rent Expense . The components of rent expense for operating leases recorded in SG&A expenses in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2024 2023 2022 +Operating $ 64,006 $ 52,961 $ 51,126 +Variable 40,615 30,309 24,265 +Short-term 6,931 5,729 3,428 +Total $ 111,552 $ 88,999 $ 78,819 +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2024, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets, are as follows: +Years Ending March 31, Amount +2025 $ 59,556 +2026 58,013 +2027 50,891 +2028 42,563 +2029 28,755 +Thereafter 64,136 +Total undiscounted future lease payments 303,914 +Less: Imputed interest ( 37,035 ) +Total $ 266,879 +Operating lease liabilities recorded in the consolidated balance sheets exclude an aggregate of $ 12,696 of undiscounted minimum lease payments due pursuant to leases signed but not yet commenced, primarily for the expansion of an existing office with an initial term of seven years , which the Company expects to open in the fourth quarter of its fiscal year ending March 31, 2025 (next fiscal year). +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and lease liabilities that are outstanding and presented in the consolidated balance sheets are as follows: +As of March 31, +2024 2023 +Weighted-average remaining lease term in years 5.9 6.0 +Weighted-average discount rate 3.9 % 3.2 % +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases, were as follows: +Years Ended March 31, +2024 2023 2022 +Non-cash operating activities (1) +Operating lease assets obtained in exchange for lease liabilities +$ 78,255 $ 84,988 $ 50,190 +Reductions to operating lease assets for reductions to lease liabilities +( 8,418 ) ( 1,903 ) ( 5,293 ) +(1) Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements. +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . As of March 31, 2024 , the Company has $ 868,282 of outstanding purchase orders or other obligations with independent third-party contractors that manufacturer all of its products. These obligations consist mostly of open purchase orders that are expected to be fulfilled in the ordinary course of business and to be paid in less than one year. A significant portion of the purchase commitments can be cancelled by the Company under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations for products, and instead reflects an estimate of its future payment commitments based on information currently available. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Commodities . The Company has entered into fixed purchasing contracts with affiliates, manufacturers, factories, and other agents (designated suppliers) of sheepskin and sugarcane-derived ethylene vinyl acetate (sugarcane-derived EVA), as well as other pricing agreements for UGGplush TM (UGGplush) requiring its designated suppliers to purchase commodities on or before a specified target date, generally within one to two years (collectively, commodity contracts). The Company’s fixed pricing agreements are non-cancellable and may be subject to fees, including certain sheepskin purchasing contracts requiring deposits when minimum volumes are not fully consumed. Sugarcane-derived EVA is used to manufacture certain UGG brand products. Sugarcane-derived EVA purchasing contracts do not require deposits, but they contain minimum purchase commitments. +Based on information available as of March 31, 2024, the Company’s aggregated estimated future payment obligations are $ 119,332 for commitments under these commodity contracts, of which $ 56,384 is due in less than one year and the remainder $ 62,948 is due in one to three years. Included in the aggregate commodity purchase commitment amount above are deposits the Company made for certain sheepskin supply agreements that are expected to be consumed in the ordinary course of business. These deposits will be returned as the designated suppliers purchase the remaining minimum commitments as these sheepskin supply agreements do not permit net settlement. As of March 31, 2024 and 2023 , there are $ 16,243 of certain sheepskin supply agreement deposits that have not been fully consumed and are recorded in other assets in the consolidated balance sheets. During the year ended March 31, 2024, the Company did not receive refunds of deposits reflecting the return of funds previously advanced to sheepskin suppliers under certain expired supply agreements. During the year ended March 31, 2023, the Company received refunds of deposits of $ 16,877 reflecting the return of funds previously advanced to sheepskin suppliers under certain expired supply agreements. During the years ended March 31, 2024 and 2023, no additional deposits were made. +Othe r. Other purchase commitments include third-party logistics provider (3PL) arrangements, sales management services, supply chain services, information technology (IT) services, promotional expenses, and other commitments under service contracts. As of March 31, 2024, the Company has an aggregate of $ 222,412 of other purchase commitments, of which $ 106,163 is due in less than one year, $ 106,248 is due in one to three years, and the remainder of $ 10,001 is due in three to five years. +Litigation . From time to time, the Company is involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these matters cannot be predicted with certainty, the Company believes it is not currently a party to any legal proceedings, disputes, or other claims for which a material loss is considered probable and for which the amount (or range) of loss is reasonably estimable. However, regardless of the merit of the claims raised or the outcome, these matters can have an adverse impact on the Company as a result of legal costs, diversion of management’s time and resources, and other factors. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. There are currently no pending claims relating to indemnification matters involving the Company’s intellectual property. +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 8. STOCK-BASED COMPENSATION +In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), the primary purpose of which is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. Under the 2015 SIP, the Company grants various types of stock-based compensation, including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), long-term incentive plan PSUs (LTIP PSUs), stock appreciation rights, and non-qualified stock options (NQSOs), to key personnel, including employees and directors. +The 2015 SIP reserves 1,275,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors, and advisors. The maximum aggregate number of shares that may be issued to employees under the 2015 SIP through the exercise of incentive stock options is 750,000 . As of March 31, 2024, 1,197,408 shares of common stock remained available for future issuance under the 2015 SIP, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization. +Annual Stock Awards. During the years ended March 31, 2024, 2023, and 2022, the Company granted RSU and LTIP PSU awards under the 2015 SIP to certain members of the Company’s management team, which entitle the recipients to receive shares of the Company’s common stock upon vesting. No dividends are paid or accumulated on any RSU or LTIP PSU awards. +A summary of the status and changes of the Company’s nonvested shares related to the 2015 SIP is as follows: +RSUs +LTIP PSUs +Number of +Shares Weighted- +Average +Grant-Date +Fair Value Number of +Shares Weighted- +Average +Grant-Date +Fair Value +Nonvested, March 31, 2021 113,086 $ 179.58 116,128 $ 215.30 +Granted (1) +52,256 363.89 69,644 358.75 +Vested (2) +( 60,034 ) ( 162.37 ) ( 69,816 ) ( 131.33 ) +Forfeited ( 7,441 ) ( 239.39 ) ( 12,924 ) ( 239.81 ) +Nonvested, March 31, 2022 97,867 284.00 103,032 344.25 +Granted (1) +51,955 338.99 65,470 330.70 +Vested (2) +( 45,092 ) ( 249.67 ) ( 30,104 ) ( 319.81 ) +Forfeited ( 15,439 ) ( 299.96 ) ( 27,194 ) ( 323.92 ) +Nonvested, March 31, 2023 89,291 330.57 111,204 347.86 +Granted (1) +39,298 573.25 46,282 570.81 +Vested (2) +( 44,148 ) ( 313.11 ) ( 50,228 ) ( 368.33 ) +Forfeited ( 6,644 ) ( 462.41 ) ( 18,734 ) ( 522.88 ) +Nonvested, March 31, 2024 77,797 $ 451.81 88,524 $ 415.77 +(1) The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +(2) The amounts vested include shares withheld to cover taxes that are not issued to the recipient. +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Restricted Stock Units. RSUs are subject to a time-based vesting condition and typically vest in equal annual installments over three years following the date of grant. The grant date fair value of RSUs is determined based on the closing market price of the Company’s common stock on the date of grant. +Long-Term Incentive Plan Awards. LTIP PSU awards are subject to market, performance, and time-based vesting conditions. The term of LTIP PSU awards is over a multi-fiscal year performance period with metrics established at the beginning of the performance period, which is generally two or three years (Measurement Period). The LTIP PSU awards include a market condition tied to the Company’s relative total stockholder return (TSR) in relation to its peer companies (peer market condition), as well as financial performance conditions tied to certain revenue and pre-tax income performance targets (financial performance conditions). Following the determination of the Company’s achievement with respect to the financial performance conditions for the applicable Measurement Period, the vesting of each LTIP PSU award will be subject to adjustment for the peer market condition based on the application of the TSR modifier. The amount of the adjustment is determined based on a comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the Measurement Period. +The grant date fair value of LTIP PSUs is determined using a Monte-Carlo model that simulates a range of possible future stock prices for the Company and each member of the peer group over the Measurement Period. For each grant of LTIP PSUs, the Monte-Carlo simulation model factors in key assumptions, such as the market price of the underlying common stock at the beginning and end of the Measurement Period, risk free interest rate, expected dividend yield when simulating a TSR, expected dividend yield when simulating the Company’s stock price, stock price volatility, and correlation coefficients. The Company evaluates the probability of achieving the financial performance conditions against its most current long-range forecast at least quarterly and may adjust stock-based compensation expense for its LTIP PSUs up or down based on its estimated probability outcome over the Measurement Period. The peer market condition is measured as part of the grant date fair value. +The actual number of LTIP PSU awards that vest may increase up to a maximum of 200 % of the targeted amount for the award based on achievement of the financial performance conditions and the peer market condition. No vesting of any portion of the LTIP PSU awards will occur if the Company fails to achieve the financial performance conditions for each reporting period within the Measurement Period. The Company determined that the achievement of at least the minimum threshold target performance criteria for the LTIP PSU awards granted during the fiscal year 2024, was probable as of March 31, 2024, based on the Company’s current long-range forecast. As of March 31, 2024, the Company expects to exceed the targeted amount for the fiscal year 2023 and 2022 awards based on its current estimates for the financial performance conditions for the grants. +Long-Term Incentive Plan Options. The Company approved the issuance of LTIP NQSOs under the 2015 SIP, including the November 2016 (2017 LTIP NQSOs) and June 2017 (2018 LTIP NQSOs) grants, which were awarded to certain members of the Company’s management team, with a maximum contractual term ending March 31, 2026. As of March 31, 2019, and 2020, the target performance criteria were achieved and all LTIP NQSOs under the 2017 LTIP NQSOs and 2018 LTIP NQSOs, respectively, were fully vested. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. During the years ended March 31, 2024, 2023, and 2022, no LTIP NQSOs were granted. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +LTIP NQSO activity was as follows: +Number of +Shares +Weighted- +Average +Exercise Price +Weighted- +Average +Remaining +Contractual +Term +(Years) Aggregate +Intrinsic +Value +Exercisable, March 31, 2023 85,889 $ 66.99 +Exercised +( 70,980 ) ( 67.43 ) +Exercisable, March 31, 2024 14,909 $ 64.85 1.3 $ 13,066 +Grants to Directors. Each of the Company’s nonemployee directors was entitled to receive common stock with a total value of $ 170 for annual service on the Board of Directors during the year ended March 31, 2024. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the grant date, which is in alignment with the Company’s equity grant guidelines. Each of these shares is fully vested and recorded as compensation expense in the consolidated statements of comprehensive income on the date of issuance. +Employee Stock Purchase Plan . The 2015 Employee Stock Purchase Plan (ESPP) authorizes 1,000,000 shares of the Company’s common stock for sale to eligible employees using their after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. ESPP shares are excluded from basic earnings per share until purchases are made but are included in diluted earnings per share as after-tax payroll deductions are made. Each consecutive purchase period is six months (purchase period) in duration and shares are purchased on the last trading day of the purchase period (no look-back provision) at a 15 % discount to the closing price on that date. Purchase windows take place in February and August of each fiscal year. The net difference between the timing of compensation expense incurred and remeasured during the purchase period and purchase windows are recorded in other accrued expenses in the consolidated balance sheets. +Stock-Based Compensation . Components of stock-based compensation recorded, net of estimated forfeitures, in SG&A expenses in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2024 2023 2022 +Stock-based compensation +RSUs $ 15,935 $ 13,249 $ 12,093 +LTIP PSUs 18,941 11,275 12,865 +Grants to Directors 1,907 1,863 1,507 +Subtotal 36,783 26,387 26,465 +Other stock-based compensation +Employee Stock Purchase Plan 505 510 351 +Total stock-based compensation, pre-tax 37,288 26,897 26,816 +Income tax benefit ( 9,097 ) ( 6,557 ) ( 6,496 ) +Total stock-based compensation, net of tax $ 28,191 $ 20,340 $ 20,320 +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Unrecognized Stock-Based Compensation. Total remaining unrecognized stock-based compensation as of March 31, 2024, related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, are as follows: +Unrecognized +Stock-based Compensation Weighted-Average +Remaining +Vesting Period (Years) +RSUs $ 18,350 1.1 +LTIP PSUs 21,095 1.4 +Total $ 39,445 +NOTE 9. DERIVATIVE INSTRUMENTS +As of March 31, 2024, and 2023, the Company had no outstanding derivative contracts. The Company settled derivative contracts with notional values as follows: +Years Ended March 31, +2024 2023 2022 +Designated Derivative Contracts +$ 179,528 $ 96,345 $ 110,430 +Non-Designated Derivative Contracts +— 31,044 38,659 +Total $ 179,528 $ 127,389 $ 149,089 +The following table summarizes the effect of Designated Derivative Contracts on unrealized gains or losses recorded in the consolidated statements of comprehensive income for changes in AOCL, net of tax: +Years Ended March 31, +2024 2023 2022 +Gain recorded in OCI $ 4,090 $ 1,504 $ 4,161 +Reclassifications from AOCL into net sales ( 4,090 ) ( 1,504 ) ( 4,161 ) +Total $ — $ — $ — +Refer to Note 10, “Stockholders’ Equity,” for further information on the components of AOCL. +Subsequent to March 31, 2024, through May 9, 2024, the Company entered into no Non-Designated Derivative Contracts, but did enter into Designated Derivative Contracts with notional values totaling $ 27,759 , which are expected to mature over the next 11 months. As of May 9, 2024, the Company’s outstanding hedging contracts were held by an aggregate of two counterparties. +NOTE 10. STOCKHOLDERS’ EQUITY +Stock Repurchase Program. The Company’s Board of Directors has approved various authorizations under the Company’s stock repurchase program to repurchase shares of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The Company’s Board of Directors last approved an additional authorization of $ 1,200,000 on July 27, 2022, to repurchase its common stock under the same conditions as the prior stock repurchase programs (collectively, the stock repurchase program). +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +As of March 31, 2024, the aggregate remaining approved amount under the stock repurchase program is $ 941,704 . The stock repurchase program does not obligate the Company to acquire any amount of common stock and may be suspended at any time at the Company’s discretion. +Stock repurchase activity under the Company’s stock repurchase program was as follows: +Years Ended March 31, +2024 2023 2022 +Total number of shares repurchased (1) +714,854 928,262 1,043,554 +Weighted average price per share paid $ 580.44 $ 320.35 $ 341.77 +Dollar value of shares repurchased (2) (3) +$ 414,931 $ 297,372 $ 356,653 +(1) All share repurchases were made pursuant to the Company’s stock repurchase program in open-market transactions. +(2) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs. +(3) May not calculate on rounded dollars. +Subsequent to March 31, 2024, through May 9, 2024, the Company repurchased 130,927 shares at a weighted average price of $ 836.20 per share for $ 109,481 , and had $ 832,223 remaining authorized under the stock repurchase program. The Company’s stock repurchase program does not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion. +Accumulated Other Comprehensive Loss . The components within AOCL, net of tax, recorded in the consolidated balance sheets are as follows: +As of March 31, +2024 2023 +Cumulative foreign currency translation loss $ ( 50,733 ) $ ( 39,035 ) +NOTE 11. BASIC AND DILUTED SHARES +The reconciliation of basic to diluted weighted-average common shares outstanding was as follows: +Years Ended March 31, +2024 2023 2022 +Basic 25,871,000 26,504,000 27,508,000 +Dilutive effect of equity awards 177,000 182,000 281,000 +Diluted 26,048,000 26,686,000 27,789,000 +Excluded +RSUs 3,000 3,000 2,000 +LTIP PSUs 48,000 76,000 66,000 +Deferred Non-Employee Director Equity Awards — 2,000 1,000 +Excluded Awards. The equity awards excluded from the calculation of the dilutive effect have been excluded due to one of the following: (1) the shares were antidilutive; (2) the necessary conditions had not been satisfied for the shares to be deemed issuable based on the Company’s performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented (such that inclusion of these equity awards in the calculation would have been antidilutive). The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards subject to the achievement of performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower than the number of shares presented, which could result in a lower dilutive effect. Refer to Note 8, “Stock-Based Compensation,” for further information on the Company’s equity incentive plans. +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 12. REPORTABLE OPERATING SEGMENTS +Information reported to the CODM, who is the Company’s Chief Executive Officer (CEO), President, and Principal Executive Officer (PEO), is organized into the Company’s six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments. +Segment Net Sales and Income from Operations. The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. +The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with the Company’s warehouses and DCs, certain executive and stock-based compensation, accounting, finance, legal, IT, human resources, and facilities, among others. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments as these transactions are eliminated in consolidation. +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income, was as follows: +Years Ended March 31, +2024 2023 2022 +Net sales +UGG brand wholesale $ 1,115,241 $ 1,004,356 $ 1,088,082 +HOKA brand wholesale 1,126,126 925,877 628,674 +Teva brand wholesale 113,739 149,111 129,094 +Sanuk brand wholesale 17,175 27,678 30,316 +Other brands wholesale 60,026 53,653 60,573 +Direct-to-Consumer 1,855,456 1,466,611 1,213,600 +Total $ 4,287,763 $ 3,627,286 $ 3,150,339 +Income (loss) from operations +UGG brand wholesale $ 349,509 $ 267,013 $ 315,240 +HOKA brand wholesale 376,286 285,257 155,344 +Teva brand wholesale 18,685 32,595 33,294 +Sanuk brand wholesale ( 12,836 ) 2,891 6,463 +Other brands wholesale 4,722 ( 1,678 ) 14,028 +Direct-to-Consumer 748,656 508,948 435,414 +Unallocated overhead costs ( 557,508 ) ( 442,275 ) ( 395,076 ) +Total $ 927,514 $ 652,751 $ 564,707 +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +Years Ended March 31, +2024 2023 2022 +Depreciation, amortization, and accretion +UGG brand wholesale $ 526 $ 611 $ 416 +HOKA brand wholesale 856 945 701 +Sanuk brand wholesale 1,490 1,490 1,490 +Other brands wholesale 380 382 382 +Direct-to-Consumer 12,504 10,276 9,771 +Unallocated overhead costs 41,831 34,154 30,118 +Total $ 57,587 $ 47,858 $ 42,878 +Capital expenditures +UGG brand wholesale $ 334 $ 826 $ 109 +HOKA brand wholesale 315 1,229 1,191 +Direct-to-Consumer 28,068 19,789 11,872 +Unallocated overhead costs 64,348 72,709 44,542 +Total $ 93,065 $ 94,553 $ 57,714 +Segment Assets. Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company’s reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company’s reportable operating segments. +Assets allocated to each reportable operating segment, with a reconciliation to the consolidated balance sheets, are as follows: +As of March 31, +2024 2023 +Assets +UGG brand wholesale $ 247,136 $ 261,683 +HOKA brand wholesale 436,147 446,450 +Teva brand wholesale 81,703 94,735 +Sanuk brand wholesale 18,526 41,405 +Other brands wholesale 9,379 24,448 +Direct-to-Consumer 263,840 219,194 +Total assets from reportable operating segments +1,056,731 1,087,915 +Unallocated cash and cash equivalents 1,502,051 981,795 +Unallocated deferred tax assets, net 72,584 72,592 +Unallocated other corporate assets 504,213 413,901 +Total $ 3,135,579 $ 2,556,203 +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 13. CONCENTRATION OF BUSINESS +Regions and Customers . The Company sells its products globally to customers and consumers in various countries, with net sales concentrations as follows: +Years Ended March 31, +2024 2023 2022 +International net sales $ 1,424,089 $ 1,175,789 $ 982,546 +% of net sales 33.2 % 32.4 % 31.2 % +Net sales in foreign currencies $ 1,105,057 $ 832,632 $ 744,213 +% of net sales 25.8 % 23.0 % 23.6 % +Ten largest global customers as % of net sales +24.2 % 25.2 % 27.4 % +For the years ended March 31, 2024, 2023, and 2022, no single foreign country comprised 10.0% or more of the Company’s total net sales. No single global customer accounted for 10.0% or more of the Company’s total net sales during the years ended March 31, 2024, 2023, and 2022. +As of March 31, 2024, the Company has two customers that represent 31.2 % of trade accounts receivable, net, compared to no customers that represent 10.0% of trade accounts receivable, net, as of March 31, 2023. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +Cash and Cash Equivalents. The Company maintains a portion of its cash in Federal Deposit Insurance Corporation insured bank deposit accounts which, at times, may exceed federally insured limits. To date, the Company has not experienced any losses in such accounts. Based on the size and strength of the banking institutions used, the Company does not believe it is exposed to any significant credit risks in cash. +Designated Suppliers. The Company outsources the production of its products to independent manufacturers, which are primarily located in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company’s sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia, and is also the source of the repurposed wool in UGGplush. Sugarcane-derived EVA is also utilized within certain UGG brand products and is predominately purchased by our designated suppliers from one company in Brazil for the production of soles. Excluding sheepskin, UGGplush, sugarcane-derived EVA, and certain branded materials for materials like outsoles, the Company believes substantially all raw materials and components used to manufacture its products, including virgin wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets, are as follows: +As of March 31, +2024 2023 +United States $ 270,561 $ 244,529 +Foreign (1) +31,561 22,150 +Total $ 302,122 $ 266,679 +(1) No single foreign country’s property and equipment, net, represents 10.0% or more of the Company’s total property and equipment, net, as of March 31, 2024, and 2023. +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 14. SUPPLIER FINANCE PROGRAM +Supplier Finance Program. The Company has a voluntary SFP administered through a third-party platform that provides the Company’s independent manufacturers that supply its inventory (inventory suppliers) the opportunity to sell their receivables due from the Company to participating financial institutions in advance of the invoice due date, at the sole discretion of both inventory suppliers and the financial institutions The Company is not party to the agreements between these third parties and has no economic interest in an inventory suppliers’ decision to sell a receivable. +The Company’s payment obligations, including the amounts due and payment terms, which generally do not exceed 90 days, are not impacted by the inventory suppliers’ election to participate in the SFP, and the Company provides no guarantees to any third parties under the SFP. Accordingly, amounts due to inventory suppliers that elected to participate in the SFP are presented in trade accounts payable in the consolidated balance sheets. +As of March 31, 2024, and 2023, the Company had $ 3,483 and $ 7,740 , respectively, of balances outstanding related to the SFP recorded in trade accounts payable in the consolidated balance sheets. Payments made in connection with the SFP are reported as cash used in operating activities in the trade accounts payable line item of the consolidated statements of cash flows. +F-41 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2024, 2023, and 2022 +(dollar amounts in thousands, except per share or share data) +NOTE 15. QUARTERLY SUMMARY OF INFORMATION (UNAUDITED) +The Company’s business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand’s year-round performance product offerings. Due to the magnitude of the UGG brand relative to the Company’s other brands, the Company’s aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded the Company’s aggregate net sales in the quarters ending March 31st and June 30th. However, as net sales of the HOKA brand continue to increase as a percentage of the Company’s aggregate net sales, the Company expects to continue to see the impact from seasonality decrease over time. +The following is summarized unaudited quarterly financial data for the last two fiscal years: +Fiscal Year 2024 +Quarter Ended +6/30/2023 9/30/2023 12/31/2023 3/31/2024 +Net sales $ 675,791 $ 1,091,907 $ 1,560,307 $ 959,758 +Gross profit 346,424 583,019 916,569 539,476 +Income from operations 70,736 224,617 487,899 144,262 +Net income 63,552 178,547 389,919 127,545 +Net income per share +Basic $ 2.43 $ 6.86 $ 15.19 $ 4.98 +Diluted $ 2.41 $ 6.82 $ 15.11 $ 4.95 +Fiscal Year 2023 +Quarter Ended +6/30/2022 9/30/2022 12/31/2022 3/31/2023 +Net sales $ 614,461 $ 875,614 $ 1,345,640 $ 791,571 +Gross profit 294,752 421,921 712,529 396,168 +Income from operations 56,341 127,831 362,660 105,919 +Net income 44,849 101,524 278,662 91,787 +Net income per share +Basic $ 1.67 $ 3.83 $ 10.55 $ 3.49 +Diluted $ 1.66 $ 3.80 $ 10.48 $ 3.46 +F-42 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(dollar amounts in thousands) +Allowances for doubtful accounts, sales discounts, and chargebacks against gross trade accounts receivable related to wholesale channel sales recorded in the consolidated balance sheets, are as follows: +Years Ended March 31, +2024 2023 2022 +Allowance for doubtful accounts (1) +Beginning balance $ ( 10,576 ) $ ( 9,044 ) $ ( 9,730 ) +Additions ( 658 ) ( 1,983 ) — +Deductions 2,125 451 686 +Ending balance $ ( 9,109 ) $ ( 10,576 ) $ ( 9,044 ) +Allowance for sales discounts (2) +Beginning balance $ ( 5,656 ) $ ( 2,831 ) $ ( 3,016 ) +Additions ( 17,060 ) ( 19,745 ) ( 20,713 ) +Deductions 18,876 16,920 20,898 +Ending balance $ ( 3,840 ) $ ( 5,656 ) $ ( 2,831 ) +Allowance for chargebacks (3) +Beginning balance $ ( 16,272 ) $ ( 18,716 ) $ ( 13,770 ) +Additions ( 28,845 ) ( 27,400 ) ( 32,062 ) +Deductions 30,735 29,844 27,116 +Ending balance $ ( 14,382 ) $ ( 16,272 ) $ ( 18,716 ) +Total $ ( 27,331 ) $ ( 32,504 ) $ ( 30,591 ) +(1) The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense or recovery based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +(2) The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting certain order, shipment, and prompt payments terms. Deductions are for the actual discounts taken by the Company’s customers against outstanding trade accounts receivables. +(3) The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivables. +F-43 \ No newline at end of file diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/filing_metadata.csv b/raw/filings/0000910521/2023/0000910521-24-000017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..faf8c38fbba4de191ea0ba12cc77aa000c955a19 --- /dev/null +++ b/raw/filings/0000910521/2023/0000910521-24-000017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2024-05-24,2024-03-31,2024-05-24T18:32:03.000Z,0000910521-24-000017,deck-20240331.htm,10-K,12036638,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052124000017/deck-20240331.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052124000017/,2023,2023,1 diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/item1.txt b/raw/filings/0000910521/2023/0000910521-24-000017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9267cba28bdfd3fd1c3953acc9493e9d338251b --- /dev/null +++ b/raw/filings/0000910521/2023/0000910521-24-000017/item1.txt @@ -0,0 +1,117 @@ +ITEM 1. BUSINESS +GENERAL +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under six proprietary brands: UGG, HOKA, Teva, Sanuk, Koolaburra, and AHNU. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our Company-owned e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products (independent manufacturers). +RECENT DEVELOPMENTS +On February 1, 2024, Dave Powers announced his intention to retire from his position as Chief Executive Officer (CEO) and President of the Company, effective August 1, 2024. Following this date, we expect Mr. Powers will continue to serve as a member of our Board of Directors. Also on February 1, 2024, we announced that Stefano Caroti, our Chief Commercial Officer, will be appointed as CEO and President, effective August 1, 2024. +BRANDS +UGG. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings that appeal to a growing global audience and a broad demographic. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +HOKA . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its ecosystem of access points. The HOKA brand’s product line includes running, trail, hiking, fitness and lifestyle footwear offerings, as well as select apparel and accessories. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +3 +Table of Contents +Teva. The Teva brand, born in the depths of the Grand Canyon, has long been a favored brand among outdoor adventurers across the globe. Today, building on its foundation as a leader in sport sandals and its authentic outdoor heritage, the Teva brand’s thoughtfully designed, and accessible products are built for a range of outdoor pursuits, connecting with a vibrant, diverse audience passionate about exploration. The Teva brand’s collection now includes a variety of footwear options, from classic sandals and shoes to boots; all crafted for the demands of the outdoors. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America. +Sanuk. The Sanuk brand originated in Southern California surf culture and has emerged as a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional construction, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US. +In alignment with effective resource allocation and the execution of our long-term objectives, we intend to divest the Sanuk brand. +Other Brands. Other brands consist primarily of the Koolaburra brand, as well as the AHNU brand we launched in March 2024. The Koolaburra brand is a casual footwear fashion line that uses plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. Our Other brands are primarily sold in the US and Canada. +SALES AND DISTRIBUTION +US Distribution. In our wholesale channel, we sell our products in the US through sales representatives, who are organized by account type or geographically and by brand. Our sales force is organized by brand, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. In addition to our wholesale channel, we sell products directly to consumers through our DTC business and fulfill online orders through our DCs and retail stores. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana. Our DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers and consumers. +International Distribution. We sell our products internationally in our wholesale channel through independent distributors and our wholly owned subsidiaries, including in Canada, Europe, Asia-Pacific, and Latin America. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of DCs managed by 3PLs in certain international locations. +Refer to Part I, Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. +REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC AREAS +Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (collectively, our reportable operating segments). +UGG Wholesale. We sell our UGG brand products primarily through fashion lifestyle retailers, higher-end department stores, streetwear and sports style partners, and online retailers. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. For example, as the UGG brand continues to amplify its audience within key consumer segments, our distribution to consumers in these segments is expanding faster through our lifestyle and sports style partners. +4 +Table of Contents +HOKA Wholesale. We sell HOKA brand products primarily through full-service specialty retailers, outdoor and sporting goods retailers, select online retailers, fashion lifestyle retailers, sports style partners, and higher-end department stores. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners in Europe and Japan. +Teva Wholesale. We sell our Teva brand footwear primarily through outdoor and sporting goods retailers, fashion lifestyle retailers, large national retail chains, higher-end department stores, and online retailers. We continue to expand our Teva brand wholesale distribution in international markets, including through strategic partners in Japan. +Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic streetwear partners, higher-end department stores, large national retail chains, and online retailers. +Other Brands Wholesale. Other brands is primarily made up of the Koolaburra brand, as well as the recently launched AHNU brand. We sell our Koolaburra brand footwear primarily through large national retail chains, higher-end department stores, and online retailers. Currently, we sell our AHNU brand footwear through domestic streetwear and lifestyle boutiques and retailers. +Direct-to-Consumer. Our DTC business encompasses all of our brands and is comprised of our Company-owned e-commerce websites and retail stores, which are intertwined and interdependent in an omni-channel marketplace as we believe many of our consumers interact with both before making purchasing decisions in store and online. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. We have observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerate their migration to online shopping. We have optimized our digital marketing strategy to capitalize on these trends, which has accelerated global online consumer acquisition and retention rates. Although we continue to see consumers migrate to online shopping, our DTC online and retail sales channels interact with each other and largely overlap to provide a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. +Our retail stores enable us to expose consumers to a curated selection of products, directly influence our consumers’ experience with our brands, and sell our products at retail prices; thereby generating larger gross profit as a percentage of net sales (gross margin). We continue to open retail stores in key markets to further grow our brand presence and appeal to a broader consumer base. Our Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to launch in strategic locations. We also have several flagship stores, which are Company-owned premium mono-branded concept stores in key global markets designed to showcase the UGG and HOKA brand products. Flagship stores provide broader product offerings and generate greater traffic that enhance our interaction with consumers and increase brand loyalty. Through our outlet stores, we sell certain discontinued styles from prior seasons, full price in-line products, and products made specifically for the outlet stores. +As of March 31, 2024, we operate Company-owned e-commerce websites in 56 different countries and have a total of 164 global retail stores (including 26 HOKA brand retail stores), which includes 83 concept stores and 81 outlet stores. +Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of our DTC business, including the various retail store types and definitions. Refer to Note 12, “Reportable Operating Segments,” and Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding our reportable operating segments, as well as our geographic areas and concentration of related business risks, respectively. +5 +Table of Contents +PRODUCT DESIGN AND DEVELOPMENT +Our design and development teams work closely with each brand’s product management teams to create seasonal product lines designed to meet and exceed consumer expectations. Each brand follows a similar product creation path starting with consumer insights, including color, trend, material research, and in-depth market analysis. Throughout the creation process there are multiple concept and design reviews to develop prototypes which are assembled through our independent manufacturers. Depending on the brand and product application, there may be multiple rounds of samples for fit, dynamic or athlete testing, and on occasion, we may contract with external laboratories for additional research needs. Our diverse product offering enables us to leverage learnings across each of our brands, enabling innovation and economies of scale. Throughout the entire design and development process we evaluate the availability and costs of raw materials, the capabilities and capacities of our independent manufacturers, and the target pricing of our products. +MANUFACTURING AND SUPPLY CHAIN +We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China, Indonesia, and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring adherence to quality control standards and final design specifications. +The majority of the materials and components used in the production of our products by our independent manufacturers are purchased from independent suppliers that we designate (designated suppliers). Key materials and components include sheepskin, UGGplush, and sugarcane-derived ethylene vinyl acetate (sugarcane-derived EVA). Sheepskin is used to manufacture a significant portion of our UGG brand products, and, at our direction, our independent manufacturers purchase the majority of this sheepskin from designated suppliers, mainly two tanneries in China, which source their sheepskin primarily from Australia. We maintain routine communication with the tanneries to closely monitor the supply of high-quality sheepskin for our projected UGG brand production. For wool, we currently use a proprietary material, UGGplush, which is almost entirely repurposed wool and TENCEL™ Lyocell woven into a durable backing, within certain UGG brand products. Sugarcane-derived EVA is utilized within certain UGG brand products. Sugarcane-derived EVA is predominately purchased from a Brazilian company by our independent manufacturers for the production of soles. Leveraging sugarcane-derived EVA, as opposed to petroleum-derived EVA, is part of our on-going commitment to sustainability. +To ensure an adequate supply of sheepskin and UGGplush, we forecast our expected usage in advance at a forward price. We also enter into fixed purchasing contracts with designated suppliers of sheepskin and sugarcane-derived EVA, as well as other pricing arrangements for UGGplush, to manage price volatility and ensure availability. We believe current supplies are sufficient to meet our current and anticipated demand for the next 12 months, but we continually monitor our supply chain and explore options to accommodate our expected growth and mitigate the impacts of any unexpected supply chain issues. Excluding sheepskin, UGGplush, sugarcane-derived EVA, and certain branded materials for materials like outsoles, we believe that substantially all raw materials and components used to manufacture our products, including virgin wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices. +Refer to the subsection titled “Contractual Obligations” under the section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +6 +Table of Contents +We require our independent manufacturers and designated suppliers, including our partners and licensees, to adopt our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), which specifies that they must comply with all local laws and regulations governing human rights, working conditions, anti-corruption, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the “Environmental, Social, and Governance” section below for further information. +INVENTORY MANAGEMENT AND PRODUCT RETURNS +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing orders, forecasted sales and budgets for both our wholesale and DTC channels, and the delivery requirements of our customers. Our systems and processes are designed to improve our product forecasting, inventory control and supply chain management capabilities, and we are making investments in a new end-to-end planning system to further support our scaling business, including our Company-owned e-commerce websites. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that have enhanced inventory performance, including higher inventory turnover, and partially mitigated product cost increases. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, and also provide customers the ability to place in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to the sections titled “Trends and Uncertainties Impacting Our Business and Industry” and “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our supply chain infrastructure capabilities, working capital and operating requirements, and purchase obligations for product. +ENVIRONMENTAL, SOCIAL, AND GOVERNANCE +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. +Through our holistic Environmental, Social, and Governance (ESG) program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, during fiscal year 2024, we have been recognized as one of Barron’s 100 Most Sustainable Companies, by Investor’s Business Daily as one of the Best ESG Companies, by U.S. News and World Report as one of the Best Companies to Work For, by Newsweek as one of America’s Most Responsible Companies and as one of America’s Greenest Companies. +7 +Table of Contents +ESG Oversight. Our Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee) is comprised of four independent members of our Board of Directors who oversee our ESG strategy and have ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board of Directors regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies, to ensure a consistent corporate strategy. The Board of Directors considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), detailed below, and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +ESG Education . Each member of our Corporate Governance Committee, together with our CAO and certain other members of the Board of Directors, previously completed the Diligent ESG and Climate Leadership Certificate Program. Additionally, as set forth in our Corporate Governance Guidelines, our Board of Directors is required to complete annual training on our Code of Ethics. Together, we believe these efforts further evidence our ongoing commitment to sustainable business practices and strong ESG performance. +ESG Performance Metrics . Our pay-for-performance philosophy demands that we offer performance-based compensation that is directly linked to factors that the Talent & Compensation Committee of our Board of Directors believes will lead to the creation of stockholder value. During fiscal year 2024, for our executive leadership team, our annual cash incentive award program included a 10% modifier tied to the achievement of specific ESG initiatives. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, diversity, equity, and inclusion (DEI), and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. Achieving measurable sustainability success is critical to our future economic and business growth, and we work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +Our annual Creating Change Report for the year ended March 31, 2024, which will be published under the “Responsibility” tab of our website located at ir.deckers.com , will provide more information regarding our fiscal year 2024 ESG achievements with a focus on the SDGs discussed below. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +8 +Table of Contents +The following is a brief overview of our SDGs and related achievements during fiscal year 2024 ( sustainability metrics below are presented in ones, except amounts presented in dollars ): +Environment Indicators +Many of our facilities were designed with sustainability in mind. Our corporate headquarters and our Moreno Valley, California, DC locations are Leadership in Energy and Environmental Design (LEED)-certified silver and our Mooresville, Indiana, DC locations are LEED-certified gold. To further our commitment to monitoring the environmental performance of our supply chain partners, during fiscal year 2024 we continued utilizing the Worldly (formally known as HIGG) Facility Environmental Module, a sustainability assessment tool used by our factory partners and strategic supplier partners to collect detailed and standardized information about a partner’s waste, water, chemistry, and energy consumption to identify and prioritize opportunities for sustainability performance improvements. +• Materials. We strive to maximize the amount of recycled, renewable, regenerated, and certified/natural materials (preferred materials) in our products. Where possible, we utilize third-party certifications to assess our preferred materials, such as the Leather Working Group, Forest Stewardship Council, Responsible Wool Standard, and the Global Recycling Standard. We also continue to utilize our third-party, science-based Lifecycle Assessment (LCA) tool to guide our brands toward leveraging preferred materials. +• Waste . We aim to sustainably reduce waste generated at our facilities and partner facilities through reduction, recycling, and reuse. We anticipate our DCs located in Moreno Valley, California, and Mooresville, Indiana, will become zero-waste facilities by calendar year 2025. We have also implemented tracking programs with the majority of our manufacturing partners to monitor waste generation and diversion methods, and we continue to monitor and engage with our supplier partners through our ongoing LCA outreach efforts. +• Water. We strive to mitigate water scarcity in the countries in which we operate by reducing water consumption and improving water quality throughout our operations. We monitor certain manufacturing and supply chain partners and have set water use reduction targets for each of them. We expect our partners to adhere to the highest standards of water efficiency and discharge. +• Chemistry. We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. +• Climate and Clean Energy. We set ambitious Scope 1, 2, and 3 carbon reduction targets filed with and approved by the Science-Based Targets initiative, which provides guidance to companies to set targets in line with the latest climate science. Specifically, we strive to reduce absolute GHG emissions (Scope 1 and 2) and Scope 3 emissions per million dollars of gross profit. We have also engaged a third-party expert, Carbon Trust, to oversee our carbon accounting, and are collaborating with them to establish our carbon reduction targets. We are founders of the Savory Institute’s Land to Market program, working to protect and reverse environmental degradation through regenerative farming practices. +Our brands are committed to sustainable business practices, embrace our sustainability targets, and work to launch sustainable collections. +Social Indicators +• Gender Equality and Quality Education. We are committed to accelerating our DEI efforts to make a meaningful difference for our employees, our customers, and the communities in which we operate. In addition to our own corporate DEI efforts, we promote gender equality and quality education at our supply chain partners through our partnership with the Business for Social Responsibility’s Reimagining Industry to Support Equality (RISE) initiative (formerly known as HERproject), which positively impacts the well-being of women through workplace-based education and training to promote health, gender equality, and financial inclusion. We also partner with Better Work to provide anti-harassment training to key supply chain partners and the International Labour Organization (ILO) training program covering topics such as international labor standards, social +9 +Table of Contents +protection, social dialogue, innovation, gender equality and diversity, sustainable development, and the future of work. Further, each of our brands has committed to represent Black, Indigenous, and people of color (BIPOC), Lesbian, Gay, Bisexual, Transgender, Queer, Intersex, and Allies (LGBTQIA+), and diverse body types and abilities in their marketing campaigns. +• Human Rights. We are committed to operating responsibly in the communities in which we operate, including encouraging industry leading human rights practices within our supply chain. We have established robust criteria in our Supplier Code of Conduct, based on ILO standards, which outlines our expectations for our partners on various topics including child labor, forced labor, slavery and human trafficking, harassment, discrimination, health and safety, compensation, working hours, freedom of association, and environment. Topics covered in our Supplier Code of Conduct, health and safety ratings, and environmental performance are included in our performance scorecards for our business partners, which are regularly reviewed by our leadership team. +We believe the progress of our corporate responsibility efforts is evidenced by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. +HUMAN CAPITAL - OUR PEOPLE AND OUR CULTURE +Employees . As of March 31, 2024, we employed approximately 4,800 employees, reflecting an increase of 14.3% compared to the fiscal year ended March 31, 2023 (the prior period) in North America, Europe, and Asia. This includes approximately 1,700 employees in our retail stores, which excludes temporary and seasonal employees. +Culture . We strive to positively impact the world by uniting purposeful brands with diverse people driven to succeed and create change. Our key values, which guide our journey onward together to improve our business and create a better world around us, help hold us accountable to deliver on this purpose, are as follows: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and with our customers, consumers, partners, suppliers, and communities. We also have detailed ethics and compliance policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are also able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employee’s experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2024 had a participation rate of 89%. Of those employees who completed the survey, 88% noted they were proud to work for Deckers. +Promoting Diversity, Equity, and Inclusion . We promote DEI and believe that creating a diverse and inclusive workplace is critical to ensuring all of our employees can come as they are and bring their authentic selves to work each day. We believe including diverse perspectives and amplifying voices of underrepresented communities brings a unique set of experiences, opinions, and thoughts on critical issues that help enhance our business and drive better outcomes. As of March 31, 2024, our Board of Directors is comprised of a total of ten directors, 60% of whom are from underrepresented communities. As of March 31, 2024, more than 27% of our director-level and above employees in the US are from BIPOC communities, which represents an increase of over +10 +Table of Contents +3% compared to the prior period, and an increase of nearly 16% since fiscal year 2020. During fiscal year 2024, 46% of all new hires reporting into the US corporate office and call center were from BIPOC communities. At Deckers, we strive to have gender parity in leadership positions and our Board of Directors. As of March 31, 2024, nearly 48% of our director-level and above employees are female and 40% of the members of our Board of Directors are female. +Our Code of Ethics, on which we train our employees biennially, as well as our annual Creating Change Report, codifies these values and our commitment to DEI. We have a robust collection of programs designed to support creating a more inclusive workplace, as well as policies and practices aimed at increasing diversity. +We publish additional DEI metrics in our annual Equal Employment Opportunity filing (EEO-1) which is publicly available at deckers.com/responsibility/policies . The content of our website, including our annual EEO-1 filing, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2024, we donated over $4,600 to various non-profit organizations around the globe, primarily to organizations focused on DEI initiatives, environmental impact mitigation, and community support. We also continued our Art of Kindness events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 19,000 hours during fiscal year 2024. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs, including DEI, the environment, uplifting youth, education, and community support. +Talent Development and Retention . The ability to attract, develop, and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), quarterly global employee gatherings dedicated to peer sharing and learning about different parts of the organization and careers in each space (Biz Breaks), and two global leadership development programs for leaders at varying levels (Trailblazers and Ascent). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board of Directors commit substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, as well as the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts and our recently adopted solar and electric car reimbursement program. We also provide resources to support our many employees who work from home as part of our new flexible work model, including equipment and furniture for their home office setup and workshops and tools for leading remote teams. +11 +Table of Contents +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +SEASONALITY +Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand’s year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect to continue to see the impact from seasonality decrease over time. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +COMPETITION +The industry and markets in which we operate are highly competitive. Our competitors include athletic footwear companies, branded apparel companies, and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +TRADEMARKS AND PATENTS +We utilize trademarks for virtually all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA,” “Koolaburra by UGG,” “AHNU,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the United Kingdom (UK), various countries in the European Union (EU), Japan, and Korea. As of March 31, 2024, we hold 210 designs and inventions with corresponding design or utility patent registrations, plus 51 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +12 +Table of Contents +GOVERNMENT REGULATION +Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time. +AVAILABLE INFORMATION +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to the Exchange Act are available free of charge on our website at ir.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make the following material corporate governance and responsibility documents available through our website: Ethical Supply Chain Supplier Code of Conduct, Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, EEO-1 Report, Corporate Governance Guidelines, and Insider Trading Policy. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. \ No newline at end of file diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/item13.txt b/raw/filings/0000910521/2023/0000910521-24-000017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..52d1ce4004e698e3113b672d0dfcb8158ba75e3e --- /dev/null +++ b/raw/filings/0000910521/2023/0000910521-24-000017/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/item9a.txt b/raw/filings/0000910521/2023/0000910521-24-000017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d018057704944385cdd624d33b074718d02ceb8 --- /dev/null +++ b/raw/filings/0000910521/2023/0000910521-24-000017/item9a.txt @@ -0,0 +1,13 @@ +ITEM 9A. CONTROLS AND PROCEDURES +DISCLOSURE CONTROLS AND PROCEDURES +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024. Based on that evaluation, our PEO and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2024. +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2024, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on those criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +INTERNAL CONTROL OVER FINANCIAL REPORTING +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATIONS +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +51 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/rp_note.txt b/raw/filings/0000910521/2023/0000910521-24-000017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2023/0000910521-24-000017/rpt_disclosure.txt b/raw/filings/0000910521/2023/0000910521-24-000017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d7c696743f3ad4289a3bba6aae03ef283e79c3b --- /dev/null +++ b/raw/filings/0000910521/2023/0000910521-24-000017/rpt_disclosure.txt @@ -0,0 +1,5 @@ +RELATED-PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related-person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related-person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit & Risk Management Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit & Risk Management Committee, the Chair of our Board and our highest ranking manager of internal audit. +If a related-person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit & Risk Management Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit & Risk Management Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +There were no transactions with related persons that required disclosure under applicable SEC rules since the beginning of fiscal year 2024, and no such transactions are currently proposed. +75 \ No newline at end of file diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/filing.txt b/raw/filings/0000910521/2024/0000910521-25-000017/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ef7b3f1a22e2ed02da501b5addc23380ab5f5e7 --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/filing.txt @@ -0,0 +1,2224 @@ +deck-20250331 +0000910521 false 2025 FY 307 471 P1Y P1Y P1Y P2Y P10D http://fasb.org/us-gaap/2024#OtherAssetsCurrent http://fasb.org/us-gaap/2024#OtherAssetsCurrent 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20549 +FORM 10-K +(Mark One) +☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the Fiscal Year Ended March 31 , 2025 +☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the transition period from to +Commission File Number: 001-36436 +DECKERS OUTDOOR CORP ORATION +(Exact name of registrant as specified in its charter) +Delaware 95-3015862 +(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) +250 Coromar Drive , Goleta , California 93117 +(Address of principal executive offices) +( 805 ) 967-7611 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock, par value $0.01 per share DECK New York Stock Exchange +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ☒ Accelerated filer ☐ +Non-accelerated filer ☐ Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +Yes ☐ No ☒ +At September 30, 2024, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $ 24,144,731,557 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock, par value $0.01 per share, on the New York Stock Exchange on that date, which was $159.45. This calculation does not reflect a determination that persons are affiliates for any other purposes. +As of the close of business on May 9, 2025, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 149,435,875 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2025 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TABLE OF CONTENTS +Page +Cautionary Note Regarding Forward-Looking Statements +2 +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +12 +Item 1B. +Unresolved Staff Comments +26 +Item 1C. +Cybersecurity +27 +Item 2. +Properties +28 +Item 3. +Legal Proceedings +29 +Item 4. Mine Safety Disclosures * +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +29 +Item 6. +[Reserved] * +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +31 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +49 +Item 8. +Financial Statements and Supplementary Data +50 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * +Item 9A. +Controls and Procedures +50 +Item 9B. +Other Information +51 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +* +PART III +Item 10. +Directors, Executive Officers, and Corporate Governance +52 +Item 11. +Executive Compensation +52 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +52 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +52 +Item 14. +Principal Accountant Fees and Services +52 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +52 +Signatures +55 +Index to Consolidated Financial Statements and Financial Statement Schedul es +F- 1 +Item 16. Form 10-K Summary * +*Not applicable. +1 +Table of Contents +CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K for our fiscal year ended March 31, 2025 (Annual Report), and the information and documents incorporated by reference within this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference within this Annual Report, contain forward-looking statements relating to, among other things: +• global geopolitical tensions and conflicts, including the impact of economic sanctions on our supply chain costs, such as those related to United States (US) and foreign trade policies and the enactment of tariffs and retaliatory tariffs; +• changes in consumer preferences and the purchasing behavior of wholesale partners and consumers impacting our brands and products, and the footwear and fashion industries; +• global economic trends, including foreign currency exchange rate fluctuations, changes in interest rates, inflationary pressures, changes in commodity pricing, and recessionary concerns; +• the ability to effectively compete in a highly competitive footwear, apparel, and accessories industry; +• the operational challenges faced by our warehouses and distribution centers (DCs), wholesale partners, global third-party logistics providers (3PLs), and third-party carriers, including as a result of global supply chain disruptions and labor shortages; +• availability of materials and manufacturing capacity, and reliability of overseas production and storage; +• expansion of our brands, product offerings, and investments in our distribution facilities, e-commerce websites, and our retail store footprint; +• our business, operating, investing, capital allocation, marketing, and financing plans and strategies; +• changes to our product distribution strategies, including product allocation and segmentation strategies; +• trends, seasonality, and weather impacting the demand for our products; +• changes to the geographic and seasonal mix of our brands and products; +• the impact of our efforts to continue to advance sustainable and socially conscious business operations, and to meet the expectations that our investors and other stakeholders have with respect to our environmental, social, and governance (ESG) practices; +• the effects of climate change, natural disasters, and the impacts of public health issues, and the related changes in the regulatory environment and consumer demand to mitigate these effects, and the resulting impact on our business and the businesses of our customers, consumers, suppliers, and business partners; +• security breach or other disruption to our information technology (IT) systems, or those of our vendors, and our effective utilization of technological advancements, including artificial intelligence; +• the outcomes of legal proceedings, including the impact they may have on our business and intellectual property rights; +• our interpretation of applicable global tax regulations and changes in tax laws and audits that may impact our tax liability and effective tax rates; +• our cash repatriation strategy regarding earnings of non-US subsidiaries and the resulting tax impacts; and +• the value of long-lived assets and potential write-downs or impairment charges. +Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed, or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC), which are available free of charge on the SEC’s website at www.sec.gov and our website at ir.deckers.com . You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge occasionally, and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements. +2 +Table of Contents +PART I +References within this Annual Report to “Deckers,” “we,” “our,” “us,” “management,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA® (HOKA), Teva® (Teva), AHNU® (AHNU), Koolaburra by UGG® (Koolaburra), and UGGplush TM (UGGplush) are some of our trademarks. Other trademarks or trade names appearing elsewhere within this Annual Report are the property of their respective owners. The trademarks and trade names within this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indication that their respective owners will not assert their rights to the fullest extent under applicable law. +Unless otherwise indicated, all figures herein are expressed in thousands, except for per share and share data. The defined periods for the fiscal years ended March 31, 2025, 2024, and 2023 are stated herein as “year ended” or “years ended.” We also refer to these fiscal years as “fiscal year 2025,” “fiscal year 2024,” and “fiscal year 2023,” respectively. +During the fourth quarter of fiscal year 2025, we updated our reportable operating segments to better reflect changes in the way our Chief Operating Decision Maker (CODM) evaluates performance, makes operating decisions, and allocates resources. In connection with executive leadership alignment, and the recent divestiture and phase out of certain brands, the CODM shifted resource allocation decisions and performance assessment to a brand focus, rather than a distribution channel focus. Our reportable operating segments include the worldwide operations of the UGG brand, HOKA brand, and Other brands. Refer to the section titled “Reportable Operating Segment Overview,” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and section titled “Basis of Presentation,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +On September 13, 2024, we effected a six-for-one forward stock split of our common stock and preferred stock (the stock split) and a proportional increase in our authorized shares of common stock, without changing the par value of $0.01 per share. The common stock commenced t rading on a post-stock split adjusted basis on September 17, 2024. Prior period results included in this Annual Report, including per share and share data, as well as stockholders’ equity balances, have been retroactively adjusted, as applicable, to reflect the effectiveness of the stock split. Refer to the section titled “Basis of Presentation,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding the stock split. +ITEM 1. BUSINESS +GENERAL +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, AHNU, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. Our brands sell our products through quality domestic and international retailers, international distributors, and directly to global consumers through our Direct-to-Consumer (DTC) channel, which is comprised of an e‑commerce and retail store presence. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products (independent manufacturers). +RECENT DEVELOPMENTS +Koolaburra Brand. During the third quarter of fiscal year 2025, we began taking steps to phase out our standalone operations for the Koolaburra brand in order to maintain focus on our most significant organic opportunities. We closed Koolaburra.com as of March 31, 2025, and plan to wind down the Koolaburra brand in the wholesale channel by the end of calendar year 2025. Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +3 +Table of Contents +Sanuk Brand Asset Sale. We completed the sale of our Sanuk brand and certain related assets on August 15, 2024 (Sanuk Brand Sale Date). Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information on the sale of Sanuk brand. +Forward Stock Split and Authorized Share Increase. On September 13, 2024, we effected a stock split and an authorized share increase. Our financial results included within this Annual Report have been retroactively adjusted to reflect the effectiveness of the stock split and the authorized share increase. Refer to the section titled “Basis of Presentation,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +BRANDS +UGG. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient consumer-focused line of premium footwear, apparel, and accessories with year-round product offerings that appeal to a growing global audience and a broad demographic. +HOKA . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its global marketplace. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle footwear offerings, as well as select apparel and accessories. +Other Brands. Other brands consist primarily of the Teva brand, AHNU brand, and Koolaburra brand. The Teva brand’s products are built for a range of outdoor pursuits and include a variety of footwear options, from classic sandals and shoes to boots. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. The Koolaburra brand, for which we are phasing out standalone operations by the end of calendar year 2025, is a casual footwear brand that uses plush materials to target value-oriented consumers. +As discussed under the section titled “Recent Developments” above, the sale of the Sanuk brand was completed during fiscal year 2025. The financial results for our reportable operating segments present the former Sanuk brand within the Other brands reportable operating segment through the Sanuk Brand Sale Date for the year ended March 31, 2025, and full financial results for the years ended March 31, 2024, and 2023. Refer to the section titled “Reportable Operating Segments” below for further details about our reportable operating segments. +CHANNEL DISTRIBUTION +Wholesale. Our wholesale channel sells products to a network of third-party retailers, including partner retailers, and distributors. This approach enables us to expand market reach and leverage the scale and operational capabilities of its wholesale partners to serve a broad base of end consumers. +We sell our UGG brand products primarily through fashion lifestyle retailers, higher-end department stores, streetwear and sports style partners, online retailers and partner retailers. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +We sell our HOKA brand products primarily through full-service specialty retailers, outdoor and sporting goods retailers, select online retailers, fashion lifestyle retailers, sports style partners, and higher-end department stores. We continue to expand our HOKA brand wholesale distribution globally, including through additional mono-branded locations operated by partner retailers. +4 +Table of Contents +We sell our Teva brand products primarily through outdoor and sporting goods retailers, fashion lifestyle retailers, large national retail chains, higher-end department stores, and online retailers. We sell our AHNU brand footwear through domestic streetwear and lifestyle boutiques and retailers. +Direct-to-Consumer. Our DTC channel is comprised of our Company-owned e-commerce websites and retail stores where products are sold at retail prices. Our e-commerce websites and retail stores are intertwined and interdependent in an omni-channel marketplace, providing a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. In addition, we believe many of our consumers interact with both before making purchasing decisions in store and online. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online and then view inventory availability by store location and make a purchase in store. +E-Commerce Websites. Our global e-commerce websites provide us with an opportunity to directly engage and connect with our consumers and communicate a consistent message that promotes awareness of our brands’ promises and key initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2025, we operate Company-owned e-commerce websites in 56 different countries. +Retail Stores. Retail stores enable us to expose consumers to a curated selection of products and directly influence our consumers’ experience with our brands. Our Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to open in key markets to further grow our brand presence and appeal to a broader consumer base. As of March 31, 2025, we have a total of 179 global Company-owned retail stores (including 137 UGG brand retail stores and 42 HOKA brand retail stores), which include 92 concept stores and 87 outlet stores. +Retail store definitions are as follows: +• Concept Stores. Concept stores are Company-owned mono-branded stores launched in strategic locations, designed to offer a curated, themed experience and a unique selection of products, aiming to evoke a specific lifestyle for our brands. Concept stores include the following: +◦ Flagship Stores. Premium mono-branded stores in key global markets, such as major tourist locations typically with above average square footage, designed to provide broader product offerings and generate greater traffic that enhances the consumer experience and increases brand loyalty. +◦ Shop-in-shop (SIS) Stores. SIS stores are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of store sales and for which we own the inventory. +• Outlet Stores. Outlet stores are Company-owned stores designed to sell certain discontinued styles from prior seasons, full price in-line products, and products made specifically for the outlet stores. +GEOGRAPHIC DISTRIBUTION +US Distribution. In our wholesale channel, we sell our products in the US through sales representatives, organized by brand and either geography or account type, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. In addition to our wholesale channel, we sell products directly to consumers through our DTC channel and fulfill online orders through our warehouses, DCs, and retail stores. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana. We also distribute products to our wholesale channel customers through a DC bypass program. Our warehouses and DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers and consumers. +5 +Table of Contents +International Distribution. Collectively, our brands are sold internationally in Canada, Europe, Asia, and Latin America. We sell our products internationally in our wholesale channel through wholly owned subsidiaries and independent distributors, some of which operate partner retail stores. In addition, in certain countries we sell products through our DTC channel. For our wholesale and DTC channels, we distribute our products through a number of warehouses and DCs managed by 3PLs in certain international locations. +Refer to Part I, Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. Refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding geographic areas and concentration of related business risks. +REPORTABLE OPERATING SEGMENTS +During the fourth quarter of fiscal year 2025, we updated our reportable operating segments to better reflect changes in the way our CODM makes resource allocation decisions and assesses performance. In connection with executive leadership alignment, and the recent divestiture and phase out of certain brands, the CODM shifted resource allocation decisions and performance assessment to a brand focus, rather than a distribution channel focus. As of March 31, 2025, our three reportable operating segments include the worldwide operations of the UGG brand, HOKA brand, and Other brands (collectively, our reportable operating segments). +Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the section titled “Basis of Presentation,” in Note 1, “General,” and to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding the recent change in our reportable operating segments and our results of operations. +PRODUCT DESIGN AND DEVELOPMENT +Our design and development teams work closely with each brand’s product management teams to create seasonal product lines designed to meet and exceed consumer expectations. Each brand follows a similar product creation path starting with consumer insights, including engagement with key consumer segments, color, trend, material research, and in-depth market analysis. Throughout the creation process there are multiple concept and design reviews to develop prototypes which are assembled through our independent manufacturers. Depending on the brand and product application, there may be multiple rounds of samples for fit, dynamic or athlete testing, and on occasion, we may contract with external laboratories for additional research needs. Our diverse product offering enables us to leverage learnings across each of our brands, enabling innovation and economies of scale. Throughout the entire design and development process we evaluate the availability and costs of raw materials, the capabilities and capacities of our independent manufacturers, and the target pricing of our products. +MANUFACTURING AND SUPPLY CHAIN +The production of our finished goods is outsourced to independent manufacturers, which are primarily located in Southeast Asia, predominately in Vietnam. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in Vietnam, China, and Indonesia, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring adherence to quality control standards and final design specifications. +We generally purchase products from independent manufacturers on the basis of individual purchase orders, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. From a sourcing perspective, less than 5% of our finished goods for footwear comes from China while the remainder comes from Southeast Asia, predominately from Vietnam. +6 +Table of Contents +The majority of the raw materials and components used in the production of our products by our independent manufacturers are purchased from independent suppliers that we designate (designated suppliers), who work with subcontractors that extract, process, or convert these raw materials. +Sheepskin used to manufacture a significant portion of our UGG brand products and is sourced primarily from designated suppliers in Australia and processed by two tanneries in China. We enter into fixed purchasing contracts with designated suppliers of sheepskin and, at times, sugarcane-derived ethylene-vinyl acetate (sugarcane-derived EVA) to manage price volatility and ensure availability. Excluding sheepskin, UGGplush, and sugarcane-derived EVA, we believe that substantially all raw materials and components used to manufacture our products are generally available from multiple sources at competitive prices. We believe current supplies are sufficient to meet our anticipated demand for the next 12 months. +Refer to the subsection titled “Contractual Obligations” under the section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), which requires them to comply with all local laws and regulations governing human rights, working conditions, anti-corruption, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the section titled “Environmental, Social, and Governance” below for further information. +INVENTORY MANAGEMENT AND PRODUCT RETURNS +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing orders, as well as forecasted sales and budgets by brand for both the wholesale and DTC channels, including consideration of the delivery requirements of our customers. Our systems and processes are designed to improve our product planning and forecasting, inventory control and supply chain management capabilities, including our Company-owned e-commerce websites. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that have enhanced inventory performance, including higher inventory turnover, and partially mitigated product cost increases. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, and also provide customers the ability to place in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to the sections titled “Trends and Uncertainties Impacting Our Business and Industry” and “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our supply chain infrastructure capabilities, working capital and operating requirements, and purchase obligations for product. +7 +Table of Contents +ENVIRONMENTAL, SOCIAL, AND GOVERNANCE +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. +Through our holistic ESG program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, during fiscal year 2025, we have been recognized as one of Barron’s 100 Most Sustainable Companies, by TIME as one of the Most Sustainable Companies, by Forbes as one of America’s Best Companies, by Newsweek as one of America’s Most Responsible Companies and as one of America’s Greenest Companies. +ESG Oversight. Our Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee) is comprised of four independent members of our Board of Directors (Board) who oversee our ESG strategy and have ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies, to ensure a consistent corporate strategy. The Board considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, warehouses and DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. We work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +Our annual Creating Change Report for the year ended March 31, 2025, which will be published in calendar year 2025 under the “Responsibility” tab of our website located at ir.deckers.com , will provide more information regarding our fiscal year 2025 ESG achievements with a focus on the SDGs discussed below. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +8 +Table of Contents +We believe the progress of our corporate responsibility efforts is evidenced by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. +HUMAN CAPITAL - OUR PEOPLE AND OUR CULTURE +Employees . As of March 31, 2025, we employed approximately 5,500 employees, reflecting an increase of 14.6%, compared to March 31, 2024, in North America, Europe, and Asia. This includes approximately 2,000 employees in our retail stores but excludes temporary and seasonal employees. +Culture . Our key values, which guide our journey onward together to improve our business and create a better world around us, and help hold us accountable to deliver on this purpose, are as follows: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and with our customers, consumers, partners, suppliers, and communities. We also have detailed policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employees’ experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2025 had a participation rate of 91.5%. Of those employees who completed the survey, 89% noted they were proud to work for Deckers. +We believe an inclusive workplace that promotes belonging for everyone brings together those with a unique set of experiences, opinions, and thoughts on critical issues. In turn, these varied perspectives enhance our business and drive better outcomes. Our people are at the center of everything we do. Their perspectives and passion for innovation enable us to build brands and create products that people around the world love. We strive to create an environment where employees can come as they are and are free to bring their authentic selves to work every day. +We publish workforce metrics in our annual Equal Employment Opportunity filing (EEO-1) which is publicly available at deckers.com/responsibility/policies. The content of our website, including our annual EEO-1 filing, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2025, we donated over $6,000 to various non-profit organizations around the globe, primarily to organizations focused on uplifting youth, community, belonging, education, and the environment. We also continued our Art of Kindness events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 24,000 hours during fiscal year 2025. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs. +9 +Table of Contents +Talent Development and Retention . The ability to attract, develop, and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), and three global leadership development programs for leaders at varying levels (Trailblazers, Navigator, and Ascent). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board commit substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, and the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts and our recently adopted solar and electric car reimbursement program. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +SEASONALITY +A significant part of the UGG brand’s business has historically been seasonal, with the highest percentage of net sales occurring in the third fiscal quarter, which has contributed to variation in results of operations from quarter to quarter. However, we have mitigated the impacts of seasonality by diversifying and expanding product offerings with additional year-round styles. In addition, as the HOKA brand’s net sales, which generally occur more evenly throughout the fiscal year, continue to increase as a percentage of our aggregate net sales, we expect to reduce the impacts of seasonality in future periods. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +COMPETITION +The industry and markets in which we operate are highly competitive. Our competitors include athletic footwear companies, branded apparel companies, and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international +10 +Table of Contents +competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +TRADEMARKS AND PATENTS +We utilize trademarks for virtually all our products, and we believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “HOKA,” “Teva,” “AHNU,” “Koolaburra by UGG,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the United Kingdom (UK), various countries in the European Union (EU), Japan, and Korea. As of March 31, 2025, we hold 232 designs and inventions with corresponding design or utility patent registrations, plus 64 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +GOVERNMENT REGULATION +We are subject to a wide range of laws and regulations, including US federal, state, and local laws; the laws of jurisdictions where we operate or plan to operate; and the laws of jurisdictions from which we source our products. Based on the information and circumstances known to us at this time, compliance with such applicable laws and regulations is not expected to have any material effect on our business, results of operations, financial condition, or competitive position. +AVAILABLE INFORMATION +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to the Exchange Act are available free of charge on our website at ir.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make certain corporate governance and responsibility documents available through our website at ir.deckers.com/governance and ir.deckers.com/responsibility/policies , respectively, including Ethical Supply Chain Supplier Code of Conduct, Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, EEO-1 Report, and Corporate Governance Guidelines. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +11 +Table of Contents +ITEM 1A. RISK FACTORS +Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information. +RISKS RELATED TO OUR BUSINESS AND INDUSTRY +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand and spending patterns, including by successfully introducing new products, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. +The footwear, apparel, and accessories industry is subject to rapid changes in consumer preferences and fashion tastes, which make it difficult to anticipate demand for our products and forecast our financial results. Our success is driven to some extent by brand loyalty, and there can be no assurance consumers will continue to prefer our brands. Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand, and promptly respond to the rapidly changing preferences and fashion tastes, as well as consumer spending patterns, with appealing merchandise. As our brands and product offerings evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. New footwear models that we introduce may not be successful with consumers or our brands may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brands’ image may suffer, our operating performance may decline, and we may not be able to execute our growth plans. Even if we develop and manufacture new footwear products and collaborations that consumers find appealing, their ultimate success may depend on our pricing, and we may set the prices of new styles too high for the market to bear. +Further, the value of our brands is based on evolving consumer perceptions, including as a result of shifting ethical, political or social standards, and concerns with respect to product pricing, quality, design, technical performance, components or materials (including their sustainability), or customer service could result in negative perceptions and the loss of brand loyalty and value. These concerns may be exacerbated by negative publicity regarding us or our products, brands, marketing campaigns, partners, or endorsers, which could adversely affect our reputation and sales regardless of the accuracy of such claims. Social media and digital marketing campaigns, which accelerate the dissemination of information, can increase the challenges of containing negative claims. If consumers perceive our brands negatively, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business. +Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brands, erode our competitive position, and result in long-term harm to our business and financial results. +Changes to economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and changes in the market have affected, and may continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG and HOKA brands, are premium retail products. The purchase of these +12 +Table of Contents +products is discretionary and is therefore highly dependent upon the level of consumer confidence and discretionary spending. Sales of these products may be adversely affected by variable economic factors, including worsening economic conditions, consumer confidence in future economic conditions, including recessionary concerns, changes to fuel, energy, labor, and healthcare costs, declines in income or asset values, and increases in consumer debt levels, inflation and interest rates, tariffs, and unemployment rates. Uncertainty in global economic conditions may result in unpredictable consumer discretionary spending trends. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do may limit the amount of their purchases or seek less costly substitutes for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and profitability, which could have a material adverse effect on our financial condition and results of operations. +We sell a significant portion of our products through higher-end specialty and department store retailers, as well as through online marketplaces. The businesses of these customers may be affected by factors such as changes in economic conditions, ongoing geopolitical conflicts and uncertainties, fluctuations in foreign currency exchange rates, failures or instability in the US banking system, reduced consumer demand for premium products, decreases in available credit, and increased competition. If our customers face financial difficulties, it could have an adverse effect on our estimated allowances and reserves, and potentially result in us losing key customers. +We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. +The footwear, apparel, and accessories industry is highly competitive and subject to changing consumer preferences and tastes. Our inability to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse effect on our financial condition and results of operations. Our competitors include both established companies and newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG and HOKA brands, competitors have entered the marketplace specifically in response to the success of our brands, and other competitors may do so in the future, particularly as access to offshore manufacturing and changes in technology make it easier and more cost effective to compete. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel, and accessories markets among consumers. As a result, we have faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. These competitors may have relationships with our key retail customers that are more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. Our competitors’ greater resources may enable them to more effectively compete on the basis of price and production, develop new products more quickly or with superior technical capabilities, adapt to changes in technology, including the successful utilization of data analytics, artificial intelligence, and machine learning, market their products and brands more successfully, identify or influence consumer preferences, increase their market share, withstand the effects of seasonality, and manage periodic downturns in the footwear, apparel, and accessories industry or in economic conditions. As a result of these pressures, we have faced, and expect to continue to face, intense pricing pressure. Efforts by our competitors to dispose of excess inventories may significantly reduce prices of competitive products, which may pressure us to reduce the pricing of our products to compete, or cause consumers to shift their purchasing decisions away from our products entirely. Further, we believe that our key customers face intense competition from their competitors, which could negatively affect the financial stability of their businesses and their ability to conduct business with us. +If we are unsuccessful at managing product manufacturing decisions to offset the inherent seasonality of our business, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse effect on our financial condition and results of operations. +Like other companies in our industry, we have an extended design and manufacturing process, which involves product design, material purchases, inventory accumulation and the subsequent sale of the inventories, and accounts receivable collection. This cycle requires us to incur significant expenses relating to the design, manufacturing, and marketing of our products in advance of the realization of revenue from sales, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because this cycle involves long lead times, which require us to make manufacturing decisions months in advance of an anticipated purchasing decision by the consumer, it is challenging to manage our inventory and working capital requirements. Further, supply chain disruptions may drive higher inventory procurement positions that could negatively affect our +13 +Table of Contents +gross profit as a percentage of net sales (gross margin) as a result of selling excess quantities though close out channels. Further, once manufacturing decisions are made, it is difficult to predict and timely adjust expenses, accurately forecast our financial results, and meet the expectations of analysts and investors, including as a result of: +• the effects of unfavorable or unexpected weather patterns on consumer spending and demand for our products, as the sales of a majority of our UGG brand products are inherently seasonal and the effects of climate change may pronounce these conditions; +• changes in consumer preferences, tastes, discretionary spending, and prevailing fashion trends; +• market acceptance of our current products and new products, and of competitive products; +• the competitive environment, including pricing pressure from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; +• delays in resource or product availability from supply chain disruptions; and +• uncertain macroeconomic and political conditions. +The evolution and expansion of our brands and product offerings have made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margin, and we may not be able to recover our investment in the development of new styles and product lines. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our financial condition and results of operations. +We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse effect on our business. +We rely upon a broad network of warehouses and distribution facilities to store, sort, package and distribute our products. In the US, we distribute products primarily through self-managed warehouses and DCs in Moreno Valley, California, and in Mooresville, Indiana, which feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to our customers and consumers. We expect our recent domestic warehouse and DC expansion to create long-term capacity for the domestic growth of the UGG and HOKA brands. We could face a significant disruption in our domestic warehouse and DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. In addition, if our domestic warehouse and DC operations and scaling efforts are impeded or delayed for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers and consumers, and cause harm to our reputation, any of which could have a material adverse effect on our business. +Internationally, we distribute our products through warehouses and DCs managed by 3PLs in certain international locations. For example, we are currently in the process of transitioning one of our international 3PLs to a new partner with an upgraded warehouse management system beginning in October 2025. We depend on 3PLs to manage the operation of their warehouses and DCs to meet our business needs, performance standards, and expectations, including with respect to data security, compliance with data protection and privacy laws, and provision of quality services on a timely basis at the prices we expect. While we believe we conduct appropriate diligence before entering into service agreements with 3PLs, if our 3PLs fail to manage these responsibilities, or if their operations are disrupted as a result of factors outside of their control, such as sanctions that could in the future be imposed on other countries by the US government, our distribution operations could face significant disruption. The loss of or disruption to the operations of any one or more of these facilities could materially adversely affect our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential effect of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. +14 +Table of Contents +We rely upon independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us from filling customer orders, which would result in loss of sales and harm our relationships with customers. +We rely upon independent manufacturers and their respective material suppliers for most of our production needs, the majority of which are located in Southeast Asia, predominately in Vietnam, and we do not have direct control over these manufacturers or their suppliers. We expect our independent manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, and store finished goods in a safe location pending shipment. Further, because most of our independent manufacturers are in Southeast Asia, we are subject to risks associated with natural disasters, epidemics, geopolitical tensions, or other events outside of our control affecting the region. If any of these were to occur, we may not be able to timely source raw and other materials, manufacture products, or fill customer orders, or products delivered may not meet our quality standards, which would result in lost sales and harm to our relationships with customers. +There can be no assurance of a long-term, uninterrupted supply of products from our independent manufacturers. While we have long-standing relationships with most of these manufacturers, they could terminate our engagement, seek to increase their prices, or extract other concessions from us, and we may not be able to timely engage a suitable alternative. If we are required to find alternative manufacturers, we could experience manufacturing delays, increased manufacturing costs, and substantial disruption to our business, any of which could negatively affect our results of operations. +Interruptions in the supply of our products can also result from adverse events that impair our manufacturers’ operations. For example, we keep proprietary materials necessary to produce our products, such as shoe molds and other materials, in the custody of our independent manufacturers. If these independent manufacturers were to lose or damage these proprietary materials, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings. +Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations. +Much of our financial success is related to the ability of our customers, which include our retailer and distributor partners, to successfully market and sell our brands to consumers. If a customer fails to satisfy contractual obligations or meet our expectations, or experiences operational issues, it may be difficult to locate an acceptable alternative. Any disruption to these relationships may result in increased costs or loss of customers. In addition, there is no guarantee a new customer will generate results that are more favorable than the terminated party. +We face a risk that key customers may not increase their business with us as we expect or may significantly decrease their business with us or terminate our relationship. Although no single customer accounted for 10.0% or more of our total net sales during fiscal year 2025, our top ten customers made up 23.7% of total net sales. The failure to increase sales with our key customers would have a negative effect on our growth prospects, and any decrease or loss of these customers’ business could result in a material decrease in our net sales and net income if we are unable to capture these sales through our DTC channel. Further, as of March 31, 2025, we have one customer that represents 13.6% of trade accounts receivable, net. Trade accounts receivable, net are typically unsecured and thus subject us to a risk that we will be unable to timely collect on amounts owed, which could affect our revenue and liquidity. Sales to our customers are on an order-by-order basis and may be cancelled or rescheduled by our customers. We rely on purchase order delivery dates as a key factor in forecasting our sales and earnings, and if our customers postpone, reduce, or discontinue purchases from us, we could fail to meet our forecasted results. These risks have been exacerbated as our key customers are impacted by significant structural changes to the retail industry fueled by changing technology, consumer and wholesale partner purchasing behavior, and economic conditions, as well as a shrinking retail footprint. These trends have been, and may in the future be, intensified by a pandemic or other public health emergency. We may lose key customers if they fail to manage the effect of this rapidly changing retail environment. Any loss of one of these key customers, or a significant reduction in purchases from one of these customers, could result in a significant decline in sales, write-downs of excess inventory, or pressure to discount our products, any of which could have a material adverse effect on our financial condition or results of operations. Further, a key customer may dispose of their excess inventories to consumers or unauthorized sellers at significantly reduced prices, which may put pressure on us to reduce our prices to compete, or cause consumers to shift their purchasing decisions away from our authorized sellers entirely. +15 +Table of Contents +We depend on qualified talent and, if we are unable to retain or hire executive officers, key employees, and skilled talent, we may not be able to achieve our strategic objectives, and our results of operations may be adversely impacted. +To execute our growth plan, we must continue to attract and retain highly qualified talent, including executive officers and key employees. Further, to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring and retaining talent in highly skilled footwear, apparel and accessories design, marketing, merchandising, sourcing, technology, operations, and support functions. Competition for executive officers, key employees, and skilled talent is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Changes to our office environment or work models may not meet our employees’ expectations. Many of the companies with which we compete for experienced talent have greater name recognition and financial resources than we have. Further, continued strength of our results may result in other companies and competitors perceiving our employees as more desirable. If our employment proposition is not perceived as favorable compared to other companies’, it could negatively affect our ability to attract, hire, and retain our employees. We are committed to offering competitive compensation and benefits to employees across our business to positively affect attrition, which impacts our selling, general, and administrative (SG&A) expenses. Our domestic headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our location. If we hire employees from competitors, their former employers may assert that we or these employees have breached legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation when deciding whether to take a job. If our stock price is volatile, it may adversely affect our ability to recruit and retain qualified talent and we may be unable to achieve our long-term strategic objectives, our results of operations may suffer, and it may damage our reputation as a preferred employer, which would challenge our ability to effectively compete across the global labor market. +We believe our culture has been and will continue to be a key contributor to our success. If we do not maintain our culture and core values, the growth and success of our business may be harmed. Any failure to preserve our culture could negatively affect our ability to recruit and retain talent and to achieve our strategic objectives. +The continued service of our executive officers and key employees is particularly important, and the departure of such talent may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and key employees are employed on an at-will basis, which means that they can terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other talent to fill those key positions, could have a material adverse effect on our business. +We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain sufficient sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse effect on our business. +We purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are limited suppliers that are able to provide the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may be found only in certain geographies. Sheepskin used in our UGG brand products is sourced primarily from designated suppliers in Australia and processed by two tanneries in China. If this sheepskin and the resulting products we produce do not conform to our quality or sustainability specifications or fail to meet consumer expectations, we could experience reduced demand for our products, a higher rate of customer returns, and negative effects on the image of our brands, any of which could have a material adverse effect on our business. Similarly, if these tanneries are not able to deliver sheepskin in the quantities required, or were to cease operations, we may not be able to timely obtain suitable substitute materials, which would limit our ability to meet demand for our products, lead to inventory shortages, result in a loss of sales, strain our customer relationships, and harm our reputation. In addition, any factors that negatively affect the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability, loss or destruction of property, work stoppages, political instability, or acts of terrorism or catastrophic events, could result in shortages in our supply of sheepskin. +While we have experienced stable pricing in recent years, fluctuations in the price of sheepskin could occur as a result of any factors that increase the demand for, or decrease the supply of, sheepskin, including weather +16 +Table of Contents +patterns, supply conditions, energy prices, work stoppages, increased logistics costs, government regulation, sanctions and policy, market speculation, compliance with our standards, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions, any of which would increase our manufacturing costs and reduce our gross margin. The impacts of any of these factors may be exacerbated by global climate change. While we use purchasing contracts and other pricing arrangements to reduce the effect of sheepskin price fluctuations on our results of operations, we may be unable to offset the negative effect of a prolonged increase in such prices on our results of operations. In that event, it is unlikely we will be able to adjust our product prices sufficiently to eliminate the effect on our gross margin and our financial results may suffer. +In addition, our industry is characterized by rapidly changing fashion trends and consumer preferences, and we believe there is a growing trend to eliminate the use of certain animal products, most notably fur, in footwear, apparel, and accessories. For example, the sale of fur is banned in certain US cities, and similar legislation is being considered in other geographies. While the use of leather and sheepskin has typically not been subject to these restrictions, it is possible that future legislation could restrict our ability to use sheepskin in the products we sell in certain geographies. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of sheepskin products, especially within our large target markets, could have a material adverse effect on our business, financial condition, and results of operations. +We rely on technical innovation to compete in the market for our products. +Our success relies in part on our continued innovation in both the materials we use and the design of our footwear. In particular, our HOKA brand maintains its competitiveness through continuous product innovation and timely introduction of new features and technologies that align with current and emerging consumer expectations. Also, we continue to invest in research and development to increasingly incorporate preferred materials in our products as part of our sustainability efforts. We also increasingly use preferred synthetics, preferred regenerated or synthetic cellulosic fibers, and preferred plant fibers. Although we continue to refine our materials and develop new properties for specific applications, if we fail to introduce technical innovation in our products or experience issues with the quality of our products or materials, consumer demand for our products could decline and we may experience reputational damage. Further, as our brands transition to suppliers with recycled, renewable, regenerated, and certified/natural materials (preferred materials), we may be subject to increased costs or supply constraints, which could reduce our sales and profitability and have a material adverse effect on our financial condition and results of operations. +We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive. +As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. Our future growth depends in part on our expansion efforts outside of North America (international growth strategy). For example, we have opened UGG and HOKA brand retail locations in international markets through Company-owned stores and through third-party retailers. Flagship stores play a crucial role in brand market positioning, are operated to have neutral operating profitability, are typically greater in size, and involve more extensive leasehold improvements and furniture and fixtures compared to our other concept retail stores. If we are unable to identify new retail locations with consumer traffic sufficient to support a profitable sales level or elevate our brand market positioning, our retail growth may be limited, and we may be unable to avoid losses or negative cash flows. Furthermore, our future growth depends in part on our ability to effectively manage the profitability of our existing retail locations. For example, our failure to successfully identify and close underperforming stores in a timely manner could have a number of material adverse effects, such as impairments and a negative impact on our financial condition and results of operations. +We also license the right to operate our brand retail stores to third parties through our partner retail program. All of the partner retail stores are operated in international markets. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our brand image to suffer. +17 +Table of Contents +As part of our international growth strategy, we may transition certain brands in certain geographies from a third-party distribution model to a direct distribution model or vice versa. Failure to effectively implement our growth strategies and develop our business in new international markets, or disappointing growth within existing markets, could negatively affect our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth strategies could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business. +Increasing expectations from investors, regulators, and other key stakeholders with respect to our ESG practices may impose additional costs on us or expose us to new or additional risks. +Investor advocacy groups, certain institutional investors, investment funds, stockholders, customers, consumers, employees, non-governmental organizations, the media, including social media, and regulators, such as the SEC, are increasingly scrutinizing corporate responsibility, specifically related to ESG practices and disclosures of companies and the implications of the social and environmental costs of their investments. From time to time, we communicate certain ESG initiatives to market participants and our customers and business partners, including through our annual Creating Change Report. Any ESG disclosure we make may include our policies, practices, initiatives, and goals on a variety of human rights, corporate governance, environmental compliance, sustainability, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. Although we have undertaken expansive efforts to improve and implement our ESG initiatives, it is possible stakeholders may not be satisfied with such disclosures, or our ESG practices or the speed of their adoption. In addition, negative perception of diversity, equity, and inclusion initiatives, whether due to perceived over or under pursuit of such initiatives, could result in reduced customer demand, stockholder activism, regulatory inquiries, and litigation or other adverse impacts. The establishment of ESG criteria and key metrics, as well as the collection of relevant data subject to evolving internal controls and processes, can be costly, complex, and time consuming, and is subject to evolving reporting standards and regulations. If our ESG practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, or if we are perceived to have not appropriately responded to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, it may negatively affect our employee retention and recruitment, or we may suffer from reputational damage and our business and financial condition could be materially and adversely affected. We may also incur additional costs or require additional resources to monitor such stakeholder expectations and standards and to meet our targets and commitments. Further, we could fail, or be perceived to fail, to achieve our ESG initiatives or goals, or we could fail to report our progress fully and accurately on such initiatives and goals, which could negatively affect our reputation, employee retention and recruitment, and the willingness of our customers and suppliers to do business with us. +Increasing focus on ESG matters has resulted in, and is expected to continue to result in, the adoption of legal and regulatory requirements designed to mitigate the effects of climate change on the environment and requiring climate-related disclosures. If new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet such obligations. Our processes and controls for reporting ESG matters and related data across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures required by the SEC, European, and other regulators, such as those in California, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. +Climate change, natural disasters, public health issues, or other events beyond our control, as well as related regulations, have adversely affected, and could in the future adversely affect, our business. +Natural disasters or other catastrophic events, including the effects of climate change or a pandemic, may damage or disrupt our operations, international markets, and the global economy. Our operations are subject to interruption from extreme weather events, power shortages, pandemics, terrorism, political instability, telecommunications failures, cyber-attacks, war, and other events beyond our control. Although we maintain disaster recovery plans, such events could disrupt our operations, including through the inability of talent to work, loss of life, and adverse effects on supply chains, power, infrastructure and the integrity of IT systems, any of which could materially increase our costs and expenses, decrease sales, and disrupt our business continuity. We could incur significant capital expenditures and other costs to improve the climate-related resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate the effects of climate change, including compliance with evolving, and at times inconsistent, laws and regulations. We could also experience increased costs for energy, +18 +Table of Contents +production, transportation, raw and other materials, as well as higher insurance premiums and deductibles, which could adversely affect our operations. Our insurance may not be sufficient to cover losses that we may sustain. Any event that disrupts our operations or those of our partners or customers could have a material adverse effect on our business, results of operations and financial condition. Any assessment of the potential impact of future climate change legislation, regulations, or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate. +These events could also adversely affect the supply of raw materials, including sheepskin and leather, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our production costs, impose capacity restraints, and affect the types of products consumers purchase. Further, public health issues and related regulatory responses may reduce demand for certain products, deteriorate our ability, or the ability of our customers, to operate in affected regions, and result in the failure of key business partners to provide services for our efficient operations, including the inability of our manufacturers or third-party distributors to timely fulfill their obligations to us, any of which would adversely affect our business, results of operations and financial condition. +We face risks associated with strategic acquisitions and divestitures, and our failure to successfully integrate any acquired business could have a material adverse effect on our results of operations and financial condition. +As part of our overall strategy, we may periodically consider strategic acquisitions to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property, or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Such acquisitions involve numerous risks, challenges, and uncertainties, including the potential to: +• expose us to risks inherent in entering into a new market or geographic region; +• lose significant customers or key personnel of the acquired business; +• encounter difficulties managing and implementing acquired assets; +• encounter difficulties marketing to new consumers or managing geographically remote operations; +• divert management’s time and attention away from other aspects of our business operations; and +• incur costs relating to a potential acquisition that we fail to consummate, which we may not recover. +Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. We may also face cannibalization of existing product sales by newly acquired products unless we aggressively target different consumers for products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position. +Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it will result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets. +As part of our overall strategy to allocate resources that best align with our long-term objectives, we may seek to sell one or more brands. For example, during fiscal year 2025, we completed the sale of the Sanuk brand and began phasing out the standalone operations of the Koolaburra brand. These transactions involve financial and operational risks, including diverting management and employee time and attention away from other aspects of our business, separating personnel and financial and other systems, impairments, and adversely affecting relationships with existing suppliers and customers. +The process of completing any acquisitions or divestitures may be time-consuming, involve significant costs and expenses, and the expected benefits of such acquisitions or divestitures may not be realized, and our business or financial results could be negatively impacted. +19 +Table of Contents +RISKS RELATED TO OUR GLOBAL BUSINESS STRATEGY AND OPERATIONS, AND INTERNATIONAL COMMERCE +Our reliance on independent manufacturers and suppliers located primarily in Southeast Asia subjects us to risks associated with complex and evolving international trade policies, regulatory environments, and geopolitical relations that could materially increase our costs, disrupt our global supply chain, and adversely affect our financial performance. +The production of finished goods is outsourced to independent manufacturers, which are primarily located in Southeast Asia, predominately in Vietnam. The majority of our raw materials and components used in the production of our products by our independent manufacturers are sourced from designated suppliers. As a result, our operations are exposed to risks arising from evolving international trade dynamics, including tariffs, import restrictions, customs disputes, retaliatory measures, shifting trade agreements and cross-border partnerships, and broader geopolitical instability. US administrations have enacted tariffs on imports, renegotiated or withdrawn from trade agreements, and implemented other restrictive measures. These changes can adversely affect sourcing costs, product pricing, inventory flow, and product demand, which could materially increase our cost of sales, adversely affect our gross margins, and reduce our competitiveness in the US and other markets. Customs authorities may also disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may negatively impact our gross margin. We cannot predict the outcome of ongoing or future trade negotiations, and any escalation of trade tensions could materially and adversely impact our business, financial condition, and results of operations, and those of our wholesale channel customers. +In addition to trade-related risks, our international operations and independent manufacturers are subject to a range of regulatory, operational, and reputational risks. While we require our independent manufacturers and suppliers to adhere to environmental, labor, ethical, health, safety, and other business standards and conduct periodic audits of their operations, we do not directly control their practices. Noncompliance with applicable laws or standards could lead to product recalls, regulatory penalties, the seizure or forfeiture of our products, or reputational harm. If any of our suppliers are unable or unwilling to comply with our standards, we may be forced to terminate those relationships, which could increase our costs and disrupt our supply chain. Further, if our independent manufacturers or suppliers violate US or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure, and forfeiture of products we are attempting to import, or the loss of our import privileges, which could have a negative effect on our results of operations. +Our international operations and independent manufacturers are also subject to other risks and uncertainties, including: +• poor infrastructure and equipment shortages, which can disrupt transportation and utilities; +• restrictions on the transfer of funds from foreign jurisdictions or volatile foreign exchange rates; +• customary business traditions in certain countries such as local holidays, which are traditionally accompanied by elevated levels of turnover in the factories; +• decreased scrutiny by custom officials for counterfeit products; +• social instability and corruption, extortion, bribery, pay-offs, theft, and other fraudulent activity; +• use of unauthorized or prohibited materials or reclassification of materials; +• health-related disruptions, such as disease outbreaks or raw material shortages, which could impact our workforce or scarcity of raw and other materials; and +• adverse changes in consumer perception of goods sourced from certain countries. +Transportation and distribution costs may also be adversely affected by fluctuating demand, fuel cost volatility, labor disputes, inflation, and political, social, and economic instability. For example, we continue to experience port congestion, increased lead times, and rising freight and energy costs. Continued global geopolitical uncertainty, rising labor tensions, or climate-related disruptions further add to the complexity of global supply chain planning and resilience, and could increase distribution costs, create further capacity constraints in Europe and adversely affect our results of operations. Additionally, the increased threat of terrorist activity and heightened customs inspections have created delays in bringing imported goods to market and increased our logistics expenses. +While we pursue mitigation strategies, including selective, staggered, and strategic price increases on our products in the US and by negotiating cost-sharing arrangements with our independent manufacturers, we may be unable to offset all resulting increases to our cost of goods sold, which could have a material adverse effect on our +20 +Table of Contents +business, operations, and financial condition. Further, these risks may have a material adverse impact on demand for our products. +Supply chain disruptions could interrupt product manufacturing and global logistics and increase product and transportation costs. +Our business depends on our ability to source and distribute products in a timely manner. We continue to proactively mitigate any effects of future disruptions by expanding and reallocating production capacity with our existing sourcing partners and onboarding new long-term partners to diversify our country-level manufacturing and sourcing lines. We plan to continue growing our distribution network to support our long-term strategic objectives but have experienced and may continue to experience headwinds in connection with these efforts. Failure to adequately produce and timely ship our products to customers could lead to lost potential revenue, failure to meet consumer demand, strained relationships with customers and diminished brand loyalty. +Port congestion, temporary closures, vessel availability and reliability, worker shortages, government-imposed restrictions, such as border closures and shipment restrictions, as well as trade policy changes, may disrupt the operations of our independent manufacturers and 3PLs, as well as those of our warehouses and DCs, and may increase the global lead-time for shipments of our products. For example, certain tariffs from Canada could change shipment routing of product to our Mooresville, Indiana warehouses and DCs, which would increase lead times and impact our ability to timely fulfill orders from that facility. In addition, geopolitical conflicts have and could in the future bring about disruption, and volatility in global markets, supply chains, and logistics, which could in turn adversely affect our business operations and financial performance. +Elevated inventory levels, combined with the uneven flow of receipts and shipments, could cause further capacity pressures within our US warehouses and DCs and international 3PLs. These pressures may be exacerbated by labor disputes that affect our partners, which create significant risk for our business, particularly if such disputes result in work slowdowns, strikes, or other disruptions. As we manage product availability from disruptions, the timing of sales to our wholesale partners and consumers may be affected, which may result in an increased risk of order cancellations. +In addition, while we have historically used more expensive air freight to ship our products to meet demand, we continued to reduce our use of air freight into fiscal year 2025. However, if we experience fluctuations in consumer demand or product availability and costs in future periods, we may be required to leverage air freight to maintain service levels. +Our sales in international markets are subject to a variety of legal, regulatory, political, cultural, and economic risks that may adversely affect our results of operations in certain regions. +Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These risks include: +• foreign currency exchange rate fluctuations between the US dollar and primarily the currencies of Europe, Asia, Canada, and Latin America affect the prices at which products are sold to international consumers; +• limitations on our ability to move currency out of international markets; +• burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations; +• legal costs related to defending allegations of non-compliance with foreign laws; +• inability to import products into a foreign country; +• supply chain logistics disruptions, such as shipping disruptions in the Red Sea; +• heightened cybersecurity threats; +• difficulties associated with promoting and marketing products in unfamiliar cultures; +• political or economic uncertainty or instability, which has disrupted the global economy and has the potential to reduce levels of consumer spending, which could have a material adverse effect on our business, particularly our UGG and HOKA brands’ net sales; +• changes in unemployment rates and consumer spending; +• anti-American sentiment in international markets in which we operate; +• changes in diplomatic and trade relationships between the US and other countries; and +21 +Table of Contents +• general economic fluctuations in specific countries or markets. +We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative effect on our financial results. +We operate on a global basis, with 36.1% of our total net sales for the year ended March 31, 2025, generated from operations outside the US. As we continue to expand our international operations, our sales and expenditures in foreign currencies are expected to become increasingly material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies and our foreign distributors typically sell our products in local currency, which affects the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, gross margin, and results of operations, when converted to US dollars. Changes in the value of the US dollar, relative to other currencies, could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected. When the US dollar strengthens relative to foreign currencies, our revenues and profits denominated in foreign currencies are reduced when converted into US dollars and our margins may be negatively affected. We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Foreign currency exchange rate hedges, transactions, remeasurements, or translations could materially affect our consolidated financial statements. +RISKS RELATED TO TECHNOLOGY, DATA SECURITY AND PRIVACY +A security breach or disruption to our IT systems could materially harm our business, disrupt our operations, or result in unauthorized disclosure of sensitive information, which could damage our relationships, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business and results of operations. +We store and transmit a significant amount of sensitive information, including the personal information of our customers and employees, credit card information, and our proprietary financial, operational, and strategic information. The loss, theft, misuse, or unauthorized disclosure or access to such information could lead to significant reputation or competitive harm, result in litigation, expose us to regulatory proceedings, and cause us to incur substantial losses. As a result, we believe our future success and growth depends, in part, on the ability of our systems, including those utilizing artificial intelligence (AI) such as generative AI, to prevent the theft, loss, misuse, or unauthorized access of this information, and to respond quickly and effectively if data security incidents occur. Data privacy and security incidents may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources to secure such information and respond to incidents, any of which could materially adversely affect our business, financial condition, or results of operations. +Our success also depends in part on the continued operation of our key business processes, including our IT and global communications systems. We rely on third-party IT service providers for many of our worldwide IT functions, including network, hardware, and software configuration, and on internal networks to support business processes. Any disruption to these systems or networks could, among other things, delay product fulfillment, impede personnel from performing their duties, adversely impact sales, and expose us to significant costs. Further, we could experience information silos and inefficiencies across our organization if we do not invest in appropriate operational systems and processes. If we are unable to structure our systems and processes to respond to changing business needs, or if we or our third-party providers experience a failure in these systems, our ability to accurately forecast sales, report our financial position and results of operations, or otherwise manage and operate our business could be adversely affected. +The frequency, intensity, and sophistication of cyber and data security incidents have significantly increased in recent years. Like other businesses, we have experienced, and are continually at risk of, attacks and incidents. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the current global economic and political environment, our prominent size and scale, the advances in computer capabilities and AI, and the interconnectivity and interdependence of third parties to our systems. We +22 +Table of Contents +expend significant resources on IT and data security tools, and processes designed to protect our IT systems and information, and to ensure an effective response to any attack or incident. Whether these measures are successful, these expenditures could adversely affect on our financial condition and results of operations. +Although we take the security of our IT systems seriously, there can be no assurance the measures we employ will prevent unauthorized access to our systems and information. Because the techniques used to obtain unauthorized access to IT systems are constantly evolving, we may be unable to anticipate these techniques or implement adequate protective measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. A cyber-attack or other data security incident could result in significant disruption of our business such that: +• critical business systems become inoperable or require considerable time or cost to restore; +• personnel are unable to perform their duties or communicate with third-party partners; +• it results in the loss, theft, misuse, or unauthorized disclosure of confidential information; +• we are prevented from accessing information necessary to conduct our business; +• we are required to make unanticipated investments in equipment, technology, or security measures; +• customers cannot place or receive orders, and we are unable to timely ship orders or at all; or +• we become subject to other unanticipated liabilities, costs, or claims. +If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations and result in harm to our reputation. In addition, a cyber-attack or other data incident could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with us or impose onerous contractual provisions, and subject us to litigation, liability, fines, and penalties. We could be subject to regulatory or other actions pursuant to domestic and international privacy laws, which could result in costly investigations and litigation, civil or criminal penalties, operational changes, and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition. +If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business. +There are a number of laws protecting the privacy and security of personal information and increased scrutiny by regulators, such as the Federal Trade Commission, and state attorneys general focused on our industry. Such laws include the California Consumer Privacy Act and California Privacy Rights Act, the EU’s General Data Protection Regulation and member state directives, Canada’s Personal Information Protection and Electronic Documents Acts, and China’s Personal Information Protection Law, and limit how we may collect, use, share and store personal information, and they impose obligations to protect that information. Further, we may be subject to new data privacy and security laws and regulations. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. +If the technology-based systems that give our customers the ability to shop or interact with us online do not function effectively, our results of operations, as well as our ability to grow our e-commerce websites globally or to retain our customer base, could be materially adversely affected. +Many of our consumers shop with us through our Company-owned e-commerce websites or through third-party digital marketplaces. Consumer expectations and competitive pressures, including speed of product delivery, shipping charges, return privileges, and other evolving expectations, have increased and are expected to continue to increase. Consumers are increasingly using mobile platforms to shop with us and with our competitors, to do comparison shopping, and to engage with us and our competitors. We are increasingly using social media to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide effective, reliable, secure, user-friendly e-commerce websites that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of consumers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation, have an adverse +23 +Table of Contents +effect on the growth of our e-commerce websites and have an adverse effect on our business and results of operations. In addition, as use of our digital platforms grows, we will need an increasing amount of technical infrastructure. If we fail to effectively scale and adapt our digital platforms to accommodate increased consumer demand, our business may be subject to interruptions, delays or failures and consumer demand for our products and digital experiences could decline. Risks specific to our Company-owned e-commerce websites also include diversion of sales from our Company-owned retail stores and our retailers’ brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks could adversely affect e-commerce sales, as well as damage our reputation and brands. +If we are unsuccessful at improving our operational and IT systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +We continually strive to improve and automate our operational and IT systems and processes as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. Transitioning to these new or upgraded processes and systems requires significant capital investments and personnel resources. Implementation is also highly dependent on the coordination of numerous employees, contractors and software and system providers. While these efforts have resulted in improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been and may continue to be incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, adapting to changes in technology, including the successful utilization of data analytics, AI, and machine learning, or that our efforts will result in the anticipated benefits to us. In addition, the integration of emerging technologies, including data analytics, AI, and machine learning, into our systems and processes may require us to address rapidly developing laws and regulations governing AI. We may also experience difficulties in implementing or operating our new or upgraded operational or IT systems, including, but not limited to, ineffective or inefficient operations, significant system failures, system outages, delayed implementation and loss of system availability, which could lead to increased implementation and/or operational costs, loss or corruption of data, delayed shipments, excess inventory and interruptions of operations resulting in lost sales and/or profits. If our operational or IT system upgrades, improvements and associated implementation efforts are not successful, our financial condition and results of operations could be adversely affected, and our business may become less competitive. +RISKS RELATED TO OUR LEGAL, COMPLIANCE, AND REGULATORY ENVIRONMENT +Failure to adequately protect our intellectual property rights could reduce sales and adversely affect the value of our brands. +Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights, and other intellectual property rights. An unfortunate reaction to the success of our brands is that we have become a target of counterfeiting and product imitation strategies. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect these rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it will allow our competitors to sell products that are similar to and directly competitive with our products, or we could otherwise lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product, which could reduce sales of our products and adversely affect the value of our brands. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively affect our business and results of operations. In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Republic of Türkiye, and the Netherlands. Any court decision or settlement that invalidates or limits trademark protection of our brands, which allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributor to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales, and could have a material adverse effect on the value of our brands. +24 +Table of Contents +Our revolving credit facility agreements expose us to certain risks. +From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our ability to borrow under our revolving credit facilities may be limited if the lenders believe there has been a material adverse change to our business. In addition, our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests, or otherwise respond to changing business and economic conditions, and may therefore have a material effect on our business. Failure to comply with any of the covenants could result in a default, allowing our lenders to accelerate the timing of payments, which could have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, in some cases, a default under one revolving credit facility could result in a cross-default under other revolving credit facilities. Certain of our revolving credit facility agreements bear interest at a rate that varies by currency. Any increases in interest rates applicable to our borrowings would increase our cost of borrowing, which would result in a decline in our net income and liquidity. +The tax laws applicable to our business are complex, and changes in tax laws or audits by taxing authorities could increase our worldwide tax rate and may subject us to additional tax liabilities, which may materially affect our financial position and results of operations . +Changes in US and foreign tax laws, regulations, and treaties could materially affect our business. These tax laws require significant judgment and specialized expertise to evaluate and estimate our worldwide provision for income taxes. Changes in these tax laws, or to their interpretations, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, global tax authorities may take differing positions in interpreting the Organization for Economic Co-operation and Development’s guidance, including with respect to Base Erosion and Profit Shifting, which could modify existing tax principles. These changes and potential other tax law changes could increase our income tax liability or adversely affect our long-term effective tax rates and net income. +Many countries in which we operate have adopted tax laws that could impact our financial position and results of operations beyond fiscal year 2025, including the 15% global minimum tax under the Organization for Economic Cooperation and Development’s Pillar Two Global Anti-Base Erosion Rules. As of March 31, 2025, these rules are either effective or have been adopted in draft form in various countries, and may adversely affect our income tax expense, profitability, and capital allocation decisions going forward. Based on our current analysis, the enacted global minimum tax does not have a material impact on our consolidated financial statements for the fiscal year ended March 31, 2025. We continue to evaluate the impact of Pillar Two as additional guidance becomes available; however, uncertainty remains regarding the timing and interpretation of the rules by the jurisdictions in which we operate. +Additionally, we are subject to tax audits, which may result in the assessment of additional taxes. Although we believe our tax estimates are reasonable and our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audits, and related litigation, could be materially different from our estimates or from our historical tax provisions and accruals, especially as there is continued economic and political pressures to increase tax revenues in jurisdictions in which we operate. The results of a tax audit or other tax proceeding could have a material adverse effect on our results of operations or cash flows during the periods for which that determination is made and may require a restatement of prior financial reports. +RISKS RELATED TO OUR COMMON STOCK +Our common stock price has been volatile, which could result in substantial losses for stockholders. +The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following: +• changes in expectations regarding our future financial performance and results of operations; +• changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates; +• changes in our stockholder base or public actions taken by investors; +• market research and opinions published by securities analysts and other market participants, and the response to such publications; +25 +Table of Contents +• third-party data sources estimating our intra-quarter financial performance; +• quarterly fluctuations in our sales, margins, expenses, financial position, and results of operations; +• the financial stability of our customers, manufacturers, and suppliers; +• legal proceedings, regulatory actions, and legislative changes; +• the declaration of stock or cash dividends, share repurchases, or stock or reverse stock splits; +• consumer confidence and discretionary spending levels; +• broad market fluctuations in volume and price; +• general market, political, and economic conditions, including evolving international trade dynamics and recessionary conditions; and +• a variety of risk factors, including the ones described herein and in our other SEC filings. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation (Certificate) and Amended and Restated Bylaws (Bylaws), as well as provisions of Delaware law, could impair a takeover attempt. +Our Certificate and Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions, or changes in our Board or management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter, or prevent a change-in-control transaction. Any provision of Delaware law, our Certificate, or our Bylaws, which has the effect of rendering more difficult, delaying, deterring, or preventing a change-in-control transaction could limit the opportunity for stockholders to receive a premium for their shares of our common stock, and could affect the price that investors are willing to pay for our common stock. +ITEM 1B. UNRESOLVED COMMENT LETTERS +UNRESOLVED COMMENT LETTERS +None. +26 +Table of Contents +ITEM 1C. CYBERSECURITY +CYBERSECURITY RISK MANAGEMENT AND STRATEGY +We maintain a comprehensive cybersecurity program, recognizing the critical importance of safeguarding our operations, employees, customers, and other business partners from the constantly evolving risks associated with cybersecurity threats. These risks include, among other things, operational risks, reputational risks, financial risks, and litigation and legal risks. +As a part of our comprehensive cybersecurity program, we have developed an incident response plan (IRP) designed to quickly respond to, mitigate, and recover from cybersecurity incidents. The IRP includes procedures for incident detection and reporting, initial assessment, containment, eradication, recovery, post-incident activities, and continuous improvement. +We also integrated cybersecurity risk management into our overall risk management framework to ensure that cybersecurity risks are considered in all aspects of our business. The integration ensures that cybersecurity considerations are integral to our strategic and operational decision-making. Our management team works closely with our Chief Digital & Data Officer (CDDO) and Chief Information Security Officer (CISO) , ensuring that our cybersecurity efforts align with our business objectives and operational needs. Key components of our cybersecurity approach include, among other things: +• establishing a dedicated action team, led by our CDDO and CISO, to oversee and manage cybersecurity risks; +• implementing a comprehensive cybersecurity risk assessment process and strategy based on industry standards and established frameworks such as the National Institute of Standards and Technology (NIST) Special Publication 800-61; +• implementing a vendor risk management program, which includes cybersecurity and data privacy audits, evaluating vendor risk level, and monitoring risk mitigation efforts; +• conducting penetration tests and security maturity assessments throughout the year; +• periodically engaging independent third-party assessors to audit our cybersecurity and information system programs to evaluate their effectiveness; +• implementing industry-standard technologies and processes to protect our system and data and to help detect potential suspicious activity; +• maintaining access controls to safeguard data and systems; +• providing annual trainings to employees on responsible information security, data security and cybersecurity practices including appropriate action to take against cybersecurity threats; +• conducting periodic phishing simulations to our employees; +• engaging in cybersecurity incident tabletop exercises and scenario planning exercises; +• maintaining a cybersecurity and information security risk insurance policy, which insures for data incidents or breaches and other technology related exposures; and +• periodically reviewing and updating our IRP, privacy policy, and other relevant policies/procedures. +These approaches are not exhaustive, and we plan to continuously improve our approaches to cybersecurity risk management. +In the three-year period ended March 31, 2025, our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats, including as a result of any prior cybersecurity incidents experienced by either us or third parties, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. Refer to Part I, Item 1A, “Risk Factors - Risks Related to Technology, Data Security and Privacy” within this Annual Report for further information. +27 +Table of Contents +CYBERSECURITY GOVERNANCE +Our Board has delegated to the Audit Committee primary responsibility for oversight of risk assessment and risk management, including risks related to cybersecurity and information security issues. Our CDDO and CISO, who head our cybersecurity and information security initiatives, provide quarterly updates to the Audit Committee, and annual updates to the full Board . These updates cover various topics, such as efforts to enhance our cybersecurity posture, operational and incident metrics, mitigation actions, and key performance indicators like cybersecurity maturity, program health, and audit and compliance activities. In addition to these regular updates, significant cybersecurity incidents and updates are escalated on an as-needed basis in accordance with our IRP. +Our CDDO and CISO have extensive experience in cybersecurity. Our CDDO has served in his role since September 2024. He has over 15 years of experience in digital transformations, enterprise technology, artificial intelligence, and data management. Our CISO has served in various roles in Information Technology for over 25 years, including 15 years in Information Security. He holds a B.S. in Cybersecurity and Information Assurance, along with industry certifications that include the Information Systems Audit and Control Association Certified in Risk and Information Systems Control, Certified Information Security Manager, and International Information System Security Certification Consortium Certified Information Systems Security Professional certifications. +ITEM 2. PROPERTIES +Corporate Headquarters. We own our 14-acre corporate headquarters located in Goleta, California. +Warehouses and DCs. We have a warehouse and DC located in Moreno Valley, California, which began operations during the fourth quarter of fiscal year 2015. In October 2021, we began operations in a second US warehouse and DC located in Mooresville, Indiana. In October 2023, we began operations in a third US warehouse and DC located in Mooresville, Indiana. We continue to optimize and invest in our operations at these locations. +Regional Offices. We have offices in Austria, Belgium, Canada, China, France, Germany, Hong Kong, Indonesia, Italy, Japan, the Netherlands, Switzerland, the UK, the US, and Vietnam, to perform a variety of functions, which include supervising and overseeing the quality and manufacturing standards of our products, design, product development, distribution, customer service, coordinating regional sales, operations, marketing, IT, and administration. We also have offices in Macau and Hong Kong to coordinate logistics. +Retail Stores. As of March 31, 2025, we have 50 US retail stores and 129 international retail stores, including in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland, and the UK. +Other than our corporate headquarters, we lease our warehouses and DCs, retail stores and regional offices from unrelated parties. With the exception of retail stores in our DTC channel, costs associated with our warehouses and DCs and regional offices are attributable to multiple reportable operating segments and are not allocated; but instead reflected in unallocated enterprise and shared brand expenses in our results of operations. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion and results of operations for our reportable operating segments and Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for additional information on unallocated enterprise and shared brand expenses. +We believe our properties are adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations. +Significant Properties. The following table provides details regarding our significant physical properties that are operational as of March 31, 2025: +Facility Location Description Lease or Own Facility Size (Square Footage) +Moreno Valley, California Warehouse and Distribution Center Lease 1,530,944 +Mooresville Indiana (1st location) Warehouse and Distribution Center Lease 507,600 +Mooresville Indiana (2nd location) Warehouse and Distribution Center Lease 1,015,902 +Goleta, California Corporate Headquarters Own 185,094 +28 +Table of Contents +ITEM 3. LEGAL PROCEEDINGS +As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out-of-court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG brand and HOKA brand trademarks within its internet domain name. Finally, we are investigating several manufacturers and distributors of counterfeit UGG and HOKA brand products, as well as various markets for indications of counterfeit products. +From time to time, we are involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these ordinary course matters cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the merit of the claims raised or the outcome, these ordinary course matters can have an adverse impact on us as a result of legal costs, diversion of management’s time and resources, and other factors. +PART II +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information . Our common stock has traded under the symbol DECK on the New York Stock Exchange (NYSE) since May 2014 and was previously traded on the Nasdaq Global Select Market. +Holders of Record. As of May 9, 2025, we had 28 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies. +Unregistered Sales of Equity Securities. We did not sell any equity securities that were not registered under the Securities Act during the year ended March 31, 2025. +STOCK PERFORMANCE GRAPH +Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five fiscal-year periods commencing March 31, 2020, and ended March 31, 2025. We use the S&P 500 Index as we believe it is the benchmark most relevant to measure our performance. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph assumes one hundred dollars invested in our common stock and in each of the referenced indices on March 31, 2020. The stock performance shown on the below graph is not necessarily indicative of future performance. We will not make or endorse any prediction as to future stock performance. +29 +Table of Contents +Years Ended March 31, +2020 2021 2022 2023 2024 2025 +Deckers Outdoor Corporation $ 100.00 $ 246.58 $ 204.31 $ 335.44 $ 702.26 $ 500.46 +S&P 500 Index 100.00 156.35 180.81 166.84 216.69 234.57 +S&P 500 Apparel, Accessories & Luxury Goods Index 100.00 204.01 161.34 111.79 95.06 86.86 +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios, and no event of default has occurred. However, we currently do not anticipate declaring or paying any cash dividends. +STOCK REPURCHASE PROGRAM +Our Board has approved various authorizations under our stock repurchase program to repurchase shares of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (collectively, the stock repurchase program). As of March 31, 2025, our Board last approved an authorization of $1,200,000 on July 27, 2022. +Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. The credit agreements governing our revolving credit facilities allow us to make stock repurchases under this program, so long as we do not exceed certain leverage ratios. As of March 31, 2025, we have not exceeded the stated leverage ratios, and no defaults have occurred under these credit agreements. +30 +Table of Contents +Stock repurchase activity under our stock repurchase program during the three months ended March 31, 2025, was as follows: +Total Number of Shares Repurchased (1) +Weighted Average Price per Share +Dollar Value of Shares Repurchased (2) (3) +Dollar Value of Shares Remaining for Repurchase (3) +January 1 - January 31, 2025 8,087 $ 185.46 $ 1,500 $ 639,192 +February 1 - February 28, 2025 1,252,130 160.92 201,492 437,700 +March 1 - March 31, 2025 517,524 121.73 62,999 374,701 +Total 1,777,741 149.62 $ 265,991 374,701 +(1) All share repurchases were made pursuant to our stock repurchase program in open-market transactions. +(2) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs. +(3) May not calculate on rounded dollars. +Subsequent to March 31, 2025, through May 9, 2025, we repurchased 765,321 shares of our common stock at a weighted average price of $109.75 per share for $83,998. As of May 9, 2025, we had $290,704 remaining authorized under the stock repurchase program. Amounts may not calculate on rounded dollars. +On May 21, 2025, our Board approved an additional authorization of $2,250,000 to repurchase shares of our common stock under the same conditions as the prior stock repurchase program. +Refer to the section titled “Liquidity” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 10, “Stockholders’ Equity,” of our consolidated financial statements in Part IV, within this Annual Report, for further information on repurchases of our common stock. +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended March 31, 2025, 2024, and 2023 and year-over-year comparisons between those periods. +Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties. Our actual results of operations may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section titled “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” within this Annual Report. +Unless otherwise indicated, all figures herein are expressed in thousands, except for per share and share data. +OVERVIEW +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, AHNU, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. Our brands sell our products through quality domestic and international retailers, international distributors, and directly to global consumers through our DTC channel, which is comprised of an e‑commerce and retail store presence. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products. +31 +Table of Contents +FINANCIAL HIGHLIGHTS +Consolidated financial performance highlights for fiscal year 2025, compared to fiscal year 2024 (the prior period), were as follows: +• Net sales increased 16.3% to $4,985,612. +◦ Brand +▪ UGG brand net sales increased 13.1% to $2,531,351. +▪ HOKA brand net sales increased 23.6% to $2,233,090. +▪ Other brands net sales decreased 8.6% to $221,171. +◦ Channel +▪ Wholesale channel net sales increased 17.4% to $2,855,865. +▪ DTC channel net sales increased 14.8% to $2,129,747. +◦ Geography +▪ Domestic net sales increased 11.3% to $3,186,709. +▪ International net sales increased 26.3% to $1,798,903. +• Gross margin increased 230 basis points to 57.9%. +• SG&A expenses increased 17.1% to $1,706,571. +• Income from operations increased 27.1% to $1,179,092. +• Income from operations as a percentage of net sales (operating margin) increased 200 basis points to 23.6%. +• Diluted earnings per share increased 30.2% to $6.33 per share. +RECENT DEVELOPMENTS +Koolaburra Brand. During the third quarter of fiscal year 2025, we began taking steps to phase out our standalone operations for the Koolaburra brand in order to maintain focus on our most significant organic opportunities. We closed Koolaburra.com as of March 31, 2025, and plan to wind down the Koolaburra brand in the wholesale channel by the end of calendar year 2025. Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +Sanuk Brand Asset Sale. During the second quarter of fiscal year 2025, we completed the sale of the Sanuk brand and certain related assets. Refer to the section below titled “Reportable Operating Segment Overview” for further information on our results of operations. Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information on the sale of the Sanuk brand. +Forward Stock Split and Authorized Share Increase. On September 13, 2024, we effected a stock split and an authorized share increase. Our financial results included within this Annual Report have been retroactively adjusted to reflect the effectiveness of the stock split and the authorized share increase. Refer to the section titled “Basis of Presentation,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +TRENDS AND UNCERTAINTIES IMPACTING OUR BUSINESS AND INDUSTRY +We expect our business and industry will continue to be impacted by several important trends and uncertainties, including the following: +Macroeconomic and Geopolitical Factors +• We are exposed to risks resulting from evolving US trade policy that has introduced uncertainty and volatility in global trade relations, including higher tariffs and greater restrictions on goods imported from certain regions. While we pursue mitigation strategies, including through selective, staggered, and strategic price increases on our products sold in the US and by negotiating cost-sharing arrangements with our independent manufacturers, we may be unable to offset all resulting +32 +Table of Contents +increases to our cost of goods sold. These risks may have a material adverse impact on demand for our products. +• Macroeconomic factors, including inflationary pressures, increased tariffs, geopolitical unrest, and escalating global conflicts, are creating a complex and challenging environment for our business and industry. While these factors did not materially impact our business or results of operations during fiscal year 2025, the full impact of these factors is difficult to quantify and could negatively impact us in future periods. +Brand and Omni-Channel Strategy +• We remain focused on increasing global consumer awareness and adoption of our brands, which has continued to positively impact our financial results. Our efforts to drive brand adoption are focused on building brand acceptance and heat through launches of innovative product offerings, coupled with marketing investments across multiple geographic markets and channels of distribution, including strategic expansion of the global marketplace. +• We continue to implement a marketplace inventory management strategy for our brands through segmentation and differentiation. During fiscal year 2025, we continued to experience alignment on product assortments that resulted in higher full-price sell-through, which benefited our gross margins across all channels of distribution. While gross margins continue to be an area of strategic focus, we may not experience these benefits to our gross margins in our fiscal year ending March 31, 2026 (next fiscal year) due to various factors, including impacts from macroeconomic and geopolitical factors, discussed above, as well as potential impacts from our pricing strategies. +• Our long-term strategy remains focused on building our DTC channel to represent an increased proportion of our total net sales, which includes differentiating the consumer experience from the wholesale channel to drive increases in acquisition and retention to sustain strong market positions and a high level of demand for our brands. We expect increased sales in the DTC channel will continue to positively impact our gross margins. However, as we expand doors with wholesale partners to drive brand awareness and market share in the near-term, our wholesale channel may represent a higher portion of our total net sales in certain periods, which could pressure our margins in those periods. +• We continue to implement our international growth strategies for the HOKA and UGG brands to represent an increased proportion of our total net sales. We continue to selectively expand our HOKA brand presence through additional locations with our wholesale partners and targeted retail store expansion within our DTC channel. We also continue to invest in certain regions that provide influential market presence to build HOKA brand awareness, and we expect to continue making these investments, including in our next fiscal year. We continue to emphasize elevating the customer experience for our brands through category expansion and collaborations. +Supply Chain +• To support our growing business, we continue to invest in our network of global warehouses, DCs, and 3PLs, which have fixed and variable costs, with variable costs changing relative to changes in net sales. We continue to diversify our third-party manufacturers and the regions in which they operate. We are currently negotiating the transition of one of our international 3PLs to a new partner with an upgraded warehouse management system during our next fiscal year. We expect to continue to invest in and build upon these infrastructure capabilities to continue meeting customer and consumer demand. +REPORTABLE OPERATING SEGMENTS OVERVIEW +As of March 31, 2025, our three reportable operating segments include the worldwide operations of the UGG brand, HOKA brand, and Other brands. Information reported to the CODM, who is our Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. +33 +Table of Contents +Change in Reportable Operating Segments. During the fourth quarter of fiscal year 2025, the financial information regularly used by the CODM to evaluate performance, make operating decisions, and allocate resources was revised. In connection with executive leadership alignment, and the recent divestiture and phase out of certain brands, the CODM shifted resource allocation decisions and performance assessment to a brand focus, rather than a distribution channel focus. This resulted in a change in our reportable operating segments. The change in reportable operating segments had an impact on segment income from operations, a measure of segment profitability, and we clarified unallocated overhead costs excluded from this measure as unallocated enterprise and shared brand expenses. Unallocated enterprise and shared brand expenses are costs that are managed centrally and not specific to any one brand. These costs are primarily comprised of certain payroll and related expenses, including stock-based compensation; global IT expenses; 3PL service fees; depreciation, rent, and occupancy for owned warehouses and offices; and other SG&A expenses, such as costs for contract services, materials, supplies, and travel. These costs span multiple functions including owned warehouses and 3PL service fees, along with enterprise costs which include centralized commercial operations, IT, finance, human resources, legal, supply chain, and corporate executives. +Previously, our six reportable operating segments included the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands (primarily the AHNU brand and Koolaburra brand), and DTC. Reportable operating segment results for all prior periods presented in this Annual Report have been recast to reflect the change in reportable operating segments. +As discussed under the section titled “Recent Developments” above, the sale of the Sanuk brand was completed during fiscal year 2025. The financial results for our reportable operating segments present the former Sanuk brand within the Other brands reportable operating segment through the Sanuk Brand Sale Date for the year ended March 31, 2025, and full financial results for the years ended March 31, 2024, and 2023. +Refer to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for further information on reportable operating segments. +UGG Brand. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient consumer-focused line of premium footwear, apparel, and accessories with year-round product offerings that appeal to a growing global audience and a broad demographic. +We believe demand for UGG brand products will continue to be driven by the following: +• Successful acquisition of a diverse global consumer base, and in particular focusing on key markets, through strategic marketing activations and collaborations that resonate with a fashionable consumer. +• High consumer brand loyalty due to elevated brand experiences and consistent delivery of crafted; purposefully built and luxuriously comfortable footwear, apparel, and accessories. +• Diversification of our footwear product offerings, such as our spring and summer lines, as well as expanded category offerings for Men’s products such as the slip-on shoe and sneaker category, and more iconic fashion product for our Classics line, including reimagining existing iconic styles into new categories. +• Thoughtful expansion of our apparel and accessories businesses. +HOKA Brand . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its global marketplace. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle footwear offerings, as well as select apparel and accessories. +34 +Table of Contents +We believe demand for HOKA brand products will continue to be driven by the following: +• Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes. +• Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship. +• Thoughtful and strategic distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base. +• Category extensions in authentic performance footwear offerings such as lifestyle, trail, and fitness categories. +Other Brands. Other brands consist primarily of the Teva brand, AHNU brand, and Koolaburra brand. The Teva brand’s products are built for a range of outdoor pursuits and include a variety of footwear options, from classic sandals and shoes to boots. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. The Koolaburra brand, for which we are phasing out standalone operations by the end of calendar year 2025, is a casual footwear brand that uses plush materials to target value-oriented consumers. +USE OF NON-GAAP FINANCIAL MEASURES +We disclose supplemental financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP); however, throughout this Annual Report we provide certain financial information on a non-GAAP basis (non-GAAP financial measures). We provide non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance, which consist of constant currency measures. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control. However, o ur non-GAAP financial measures are not intended to represent and should not be considered more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP. +We calculate our constant cur rency non-GAAP financial measures for current period financial information, such as total net sales using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements . We also report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. T he information presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing our performance relative to other companies. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial or operating measures presented in accordance with US GAAP . +SEASONALITY +A significant part of the UGG brand’s business has historically been seasonal, with the highest percentage of net sales occurring in the third fiscal quarter, which has contributed to variation in results of operations from quarter to quarter. However, we have mitigated the impacts of seasonality by diversifying and expanding product offerings with additional year-round styles. In addition, as the HOKA brand’s net sales, which generally occur more evenly throughout the fiscal year, continue to increase as a percentage of our aggregate net sales, we expect to reduce the impacts of seasonality in future periods. +35 +Table of Contents +RESULTS OF OPERATIONS +Year Ended March 31, 2025, Compared to Year Ended March 31, 2024. Results of operations were as follows: +Years Ended March 31, +2025 2024 Change +Amount % Amount % Amount % +Net sales $ 4,985,612 100.0 % $ 4,287,763 100.0 % $ 697,849 16.3 % +Cost of sales 2,099,949 42.1 1,902,275 44.4 (197,674) (10.4) +Gross profit 2,885,663 57.9 2,385,488 55.6 500,175 21.0 +Selling, general, and administrative expenses 1,706,571 34.3 1,457,974 34.0 (248,597) (17.1) +Income from operations 1,179,092 23.6 927,514 21.6 251,578 27.1 +Total other income, net (64,207) (1.3) (51,427) (1.2) 12,780 24.9 +Income before income taxes 1,243,299 24.9 978,941 22.8 264,358 27.0 +Income tax expense 277,208 5.5 219,378 5.1 (57,830) (26.4) +Net income 966,091 19.4 759,563 17.7 206,528 27.2 +Total other comprehensive income (loss), net of tax 1,079 — (11,698) (0.3) 12,777 109.2 +Comprehensive income $ 967,170 19.4 % $ 747,865 17.4 % $ 219,305 29.3 % +Net income per share +Basic $ 6.36 $ 4.89 $ 1.47 30.1 % +Diluted $ 6.33 $ 4.86 $ 1.47 30.2 % +Net Sales. Net sales by brand, channel, and geography were as follows: +Years Ended March 31, +2025 2024 Change +Amount Amount Amount % +Net sales by brand +UGG brand +Wholesale $ 1,282,319 $ 1,115,241 $ 167,078 15.0 % +Direct-to-Consumer 1,249,032 1,123,891 125,141 11.1 +Total 2,531,351 2,239,132 292,219 13.1 +HOKA brand +Wholesale 1,397,776 1,126,126 271,650 24.1 +Direct-to-Consumer 835,314 680,614 154,700 22.7 +Total 2,233,090 1,806,740 426,350 23.6 +Other brands (1) (2) +Wholesale 175,770 190,940 (15,170) (7.9) +Direct-to-Consumer 45,401 50,951 (5,550) (10.9) +Total 221,171 241,891 (20,720) (8.6) +Total (1) +$ 4,985,612 $ 4,287,763 $ 697,849 16.3 % +Net sales by channel +Total Wholesale $ 2,855,865 $ 2,432,307 $ 423,558 17.4 % +Total Direct-to-Consumer 2,129,747 1,855,456 274,291 14.8 +Total (1) +$ 4,985,612 $ 4,287,763 $ 697,849 16.3 % +36 +Table of Contents +Years Ended March 31, +2025 2024 Change +Amount Amount Amount % +Net sales by geography +Domestic $ 3,186,709 $ 2,863,674 $ 323,035 11.3 % +International 1,798,903 1,424,089 374,814 26.3 +Total (1) +$ 4,985,612 $ 4,287,763 $ 697,849 16.3 % +(1) Includes Sanuk brand partial financial results through the Sanuk Brand Sale Date of August 15, 2024, for the year ended March 31, 2025, and full financial results for the prior period, which are presented in the Other brands reportable operating segment. Refer to the section titled “Recent Developments” above for further information on the sale of the Sanuk brand. Refer to the section titled “Reportable Operating Segments Overview,” above for further information on the recent change in our reportable operating segments. +(2) Includes Teva brand full financial results for the year ended March 31, 2025, and the prior period, which are presented in the Other brands reportable operating segment. Refer to the section titled “Reportable Operating Segments Overview” above for further information on the recent change in our reportable operating segments. +Total net sales increased primarily due to higher global net sales across all channels for the HOKA and UGG brands, partially offset by lower US net sales for Other brands across all channels. Drivers of significant changes in net sales, compared to the prior period, were as follows: +• Net sales of the HOKA brand increased due to higher global demand for an assortment of performance products across all channels. HOKA brand wholesale channel growth was driven primarily by global market share gains and benefits from new points of distribution with key partners. HOKA brand DTC channel growth was driven primarily by global gains in consumer acquisition and retention. +• Net sales of the UGG brand increased due to higher global demand across both channels, especially internationally. UGG brand wholesale channel growth was primarily driven by demand for year-round key product franchises and strong partnerships with brand-enhancing retailers. UGG brand DTC channel growth was primarily driven by global gains in consumer acquisition and retention. +• Net sales of the Other brands decreased primarily due to lower US net sales across all channels, including impacts from the sale of the Sanuk brand. +Supplemental Disclosure +• On a constant currency basis, net sales increased by 16.5%, compared to the prior period. +• Comparable DTC channel net sales for the 52 weeks ended March 30, 2025, increased by 13.4% compared to the prior period. +• We experienced an increase of 13.5% in the total volume of units sold to 74,100 from 65,300, compared to the prior period. Units sold include all categories such as footwear, apparel, accessories, home goods, and care kits. +Gross Profit. Gross margin increased to 57.9% from 55.6%, compared to the prior period, primarily due to favorable brand and product mix, with higher margin product driving a higher proportion of growth, and increased levels of full-price selling primarily for the UGG brand, including reduced closeouts to the wholesale channel, partially offset by unfavorable changes in freight costs. +37 +Table of Contents +Selling, General, and Administrative Expenses. Drivers of significant net changes in SG&A expenses, compared to the prior period, were as follows: +• Increased advertising, marketing, and promotion expenses of approximately $83,300, primarily due to higher promotional marketing expenses for the HOKA and UGG brands to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing. +• Increased other SG&A expenses of approximately $79,800, primarily due to higher unallocated enterprise and shared brand expenses of approximately $46,400 for 3PL service fees, contract services, IT programming and software costs, and other operating expenses; higher HOKA brand expenses of approximately $22,700 for materials and supplies, sales commissions, travel costs, bad debt expenses, credit card fees, and other operating expenses; and higher UGG brand expenses of approximately $9,700 for sales commissions, bad debt expenses, and credit card fees. +• Increased payroll and related costs of approximately $67,800, primarily due to higher headcount from investments in talent for the HOKA brand, enterprise functions, and the UGG brand, along with higher variable payroll costs to support higher sales. +• Increased depreciation and other related costs of approximately $10,800, primarily due to higher unallocated enterprise and shared brand expenses for infrastructure investments and related depreciation, partially offset by lower impairments. +• Increased rent and occupancy of approximately $8,800, primarily due to higher rent expenses resulting from retail store footprint expansion for the HOKA brand. +• Increased net foreign currency-related remeasurement gains of approximately $2,000, primarily due to favorable changes in Asian exchange rates against the US dollar. +Income from Operations. Income (loss) from operations by reportable operating segment was as follows: +Years Ended March 31, +2025 2024 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand $ 1,002,873 $ 804,827 $ 198,046 24.6 % +HOKA brand 848,505 719,047 129,458 18.0 +Other brands (1) (2) +34,578 23,721 10,857 45.8 +Unallocated enterprise and shared brand expenses (3) +(706,864) (620,081) (86,783) (14.0) +Total $ 1,179,092 $ 927,514 $ 251,578 27.1 % +(1) Includes Sanuk brand partial financial results through the Sanuk Brand Sale Date of August 15, 2024, for the year ended March 31, 2025, and full financial results for the prior period, which are presented in the Other brands reportable operating segment. Refer to the section titled “Recent Developments” above for further information on the sale of the Sanuk brand. Refer to the section titled “Reportable Operating Segments Overview,” above for further information on the recent change in our reportable operating segments. +(2) Includes Teva brand full financial results for the year ended March 31, 2025, and the prior period, which are presented in the Other brands reportable operating segment. Refer to the section titled “Reportable Operating Segments Overview” above for further information on the recent change in our reportable operating segments. +(3) To the extent that consolidated SG&A expenses exceed reportable operating segment SG&A expenses, the costs are recorded in unallocated enterprise and shared brand expenses, which are costs that are managed centrally and not specific to any one brand. The change in reportable operating segments had an impact on segment income from operations, a measure of segment profitability, and a clarification was made that certain prior unallocated overhead costs are defined as unallocated enterprise and shared brand expenses and are excluded from the measure of segment profitability. +38 +Table of Contents +The increase in total income from operations, compared to the prior period, was primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. +Drivers of significant net changes in total income from operations, compared to the prior period, were as follows: +• The increase in income from operations of the UGG brand was due to higher net sales at higher gross margins, as well as relatively flat SG&A expenses as a percentage of net sales. +• The increase in income from operations of the HOKA brand was due to higher net sales at slightly lower gross margins, partially offset by higher SG&A expenses as a percentage of net sales, primarily reflecting increased marketing and headcount to support brand growth initiatives. +• The increase in income from operations of the Other brands was due to higher gross margins on lower net sales, as well as the benefit to SG&A expenses from lower impairments compared to the prior period for the Sanuk brand definite-lived intangible assets. +• The increase in unallocated enterprise and shared brand expenses was due to higher other SG&A expenses for 3PL service fees, contract services, and IT programming and software costs; higher payroll and related costs for higher variable payroll costs along with higher headcount for enterprise functions; and higher depreciation and other related costs for infrastructure investments. +Total Other Income, Net. The increase in total other income, net, compared to the prior period, was primarily due to higher interest income from higher invested cash balances. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2025 2024 +Income tax expense $ 277,208 $ 219,378 +Effective income tax rate 22.3 % 22.4 % +The net decrease in our effective income tax rate, compared to the prior period, was primarily due to benefits related to US tax on foreign earnings (including global intangible low-tax income and foreign derived intangible income), partially offset by higher income tax expense from changes in jurisdictional mix of worldwide income before income taxes and a lower benefit from net discrete items, including from return-to-provision adjustments and a valuation allowance on tax attributes. +Net Income. The increase in net income, compared to the prior period, was due to higher net sales and higher operating margins. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by stock repurchases. +Total Other Comprehensive Income (Loss), Net of Tax. The increase in total other comprehensive income, net of tax, compared to the prior period, was primarily due to higher foreign currency translation gains relating to changes in the net asset position against Asian foreign currency exchange rates. +39 +Table of Contents +Year Ended March 31, 2024, Compared to Year Ended March 31, 2023. Results of operations were as follows: +Years Ended March 31, +2024 2023 Change +Amount % Amount % Amount % +Net sales $ 4,287,763 100.0 % $ 3,627,286 100.0 % $ 660,477 18.2 % +Cost of sales 1,902,275 44.4 1,801,916 49.7 (100,359) (5.6) +Gross profit 2,385,488 55.6 1,825,370 50.3 560,118 30.7 +Selling, general, and administrative expenses 1,457,974 34.0 1,172,619 32.3 (285,355) (24.3) +Income from operations 927,514 21.6 652,751 18.0 274,763 42.1 +Total other income, net (51,427) (1.2) (13,331) (0.4) 38,096 285.8 +Income before income taxes 978,941 22.8 666,082 18.4 312,859 47.0 +Income tax expense 219,378 5.1 149,260 4.1 (70,118) (47.0) +Net income 759,563 17.7 516,822 14.3 242,741 47.0 +Total other comprehensive loss, net of tax (11,698) (0.3) (14,080) (0.4) 2,382 16.9 +Comprehensive income $ 747,865 17.4 % $ 502,742 13.9 % $ 245,123 48.8 % +Net income per share +Basic $ 4.89 $ 3.25 $ 1.64 50.6 % +Diluted $ 4.86 $ 3.23 $ 1.63 50.5 % +Net Sales. Net sales by brand, channel, and geography were as follows: +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Net sales by brand +UGG brand +Wholesale $ 1,115,241 $ 1,004,356 $ 110,885 11.0 % +Direct-to-Consumer 1,123,891 924,855 199,036 21.5 +Total 2,239,132 1,929,211 309,921 16.1 +HOKA brand +Wholesale 1,126,126 925,877 200,249 21.6 +Direct-to-Consumer 680,614 487,039 193,575 39.7 +Total 1,806,740 1,412,916 393,824 27.9 +Other brands (1) +Wholesale 190,940 230,442 (39,502) (17.1) +Direct-to-Consumer 50,951 54,717 (3,766) (6.9) +Total $ 241,891 285,159 (43,268) (15.2) +Total (1) +$ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +Net sales by channel +Total Wholesale $ 2,432,307 $ 2,160,675 $ 271,632 12.6 % +Total Direct-to-Consumer +1,855,456 1,466,611 388,845 26.5 +Total (1) +$ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +Net sales by geography +Domestic $ 2,863,674 $ 2,451,497 $ 412,177 16.8 % +International 1,424,089 1,175,789 248,300 21.1 +Total (1) +$ 4,287,763 $ 3,627,286 $ 660,477 18.2 % +40 +Table of Contents +(1) Includes Teva and Sanuk brand’s full financial results for the years ended March 31, 2024, and 2023, which are presented in the Other brands reportable operating segment. Refer to the section titled “Reportable Operating Segments Overview,” above for further information on the recent change in our reportable operating segments. +Total net sales increased primarily due to higher global net sales across all channels for the HOKA and UGG brands, partially offset by lower net sales for Other brands across all channels. Drivers of significant changes in net sales, compared to the year ended March 31, 2023, were as follows: +• Net sales of the HOKA brand increased due to higher demand for an assortment of performance products across all channels. HOKA brand wholesale channel growth was driven primarily by market share gains in the US and Asia, partially offset by lower net sales in Europe, primarily related to the timing of certain distributor shipments. HOKA brand DTC channel growth was driven primarily by global gains in consumer acquisition and retention online. +• Net sales of the UGG brand increased due to strong global adoption of key product franchises, as well as benefits from a higher level of full price selling and selective price increases on popular styles, across all channels. +• Net sales of the Other brands decreased primarily due to lower demand in the wholesale channel globally for the Teva brand related to pressures on the value-oriented consumer in the sandal category and shipping timing differences, as well as in the US for the Sanuk brand due to lower consumer demand and elevated marketplace inventory levels. +Supplemental Disclosure +• On a constant currency basis, net sales increased by 17.9%, compared to the year ended March 31, 2023. +• Comparable DTC channel net sales for the 52 weeks ended March 31, 2024, increased by 25.4% compared to the year ended March 31, 2023. +• We experienced an increase of 2.8% in the total volume of units sold to 65,300 from 63,500, compared to the year ended March 31, 2023. Units sold include all categories such as footwear, apparel, accessories, home goods, and care kits. +Gross Profit. Gross margin increased to 55.6% from 50.3%, compared to the year ended March 31, 2023, primarily due to favorable full-price selling for the UGG brand, favorable changes in freight costs, favorable HOKA brand mix and UGG brand product mix shifts, including benefits from selective price increases, and favorable mix of sales in the DTC channel. +Selling, General, and Administrative Expenses. Drivers of significant net changes in SG&A expenses, compared to the year ended March 31, 2023, were as follows: +• Increased payroll and related costs of approximately $107,500, primarily due to higher headcount from investments in talent, including for the UGG and HOKA brands as well as enterprise functions, along with higher variable payroll costs to support higher sales, including performance-based compensation. +• Increased advertising, marketing, and promotion expenses of approximately $77,700, primarily due to higher promotional marketing expenses for the HOKA and UGG brands to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing. +• Increased other SG&A expenses of approximately $65,500, primarily due to higher unallocated enterprise and shared brand expenses of approximately $46,700 for IT expenses for programming and software costs, 3PL service fees, legal fees, contract services, travel costs, and other operating expenses, and higher HOKA brand expenses of approximately $14,400 for credit card fees and travel costs. +41 +Table of Contents +• Increased rent and occupancy of approximately $21,400, primarily due to higher rent expenses resulting from retail store footprint expansion for the HOKA brand, as well as from UGG brand retail stores and enterprise offices. +• Increased depreciation and other related costs of approximately $16,100, primarily due to higher unallocated enterprise and shared brand expenses for infrastructure investments and related depreciation, as well as an impairment for Sanuk brand definite-lived intangible assets. +• Decreased net foreign currency-related remeasurement losses of approximately $2,900, primarily due to favorable changes in Canadian and Asian exchange rates against the US dollar. +Income from Operations. Income (loss) from operations by reportable operating segment was as follows: +Years Ended March 31, +2024 2023 Change +Amount Amount Amount % +Income (loss) from operations +UGG brand $ 804,827 $ 572,469 $ 232,358 40.6 % +HOKA brand 719,047 528,458 190,589 36.1 +Other brands (1) +23,721 49,502 (25,781) (52.1) +Unallocated enterprise and shared brand expenses (2) +(620,081) (497,678) (122,403) (24.6) +Total $ 927,514 $ 652,751 $ 274,763 42.1 % +(1) Includes Teva and Sanuk brand’s full financial results for the years ended March 31, 2024, and 2023, which are presented in the Other brands reportable operating segment. Refer to the section titled “Reportable Operating Segments Overview,” above for further information on the recent change in our reportable operating segments. +(2) To the extent that consolidated SG&A expenses exceed reportable operating segment SG&A expenses, the costs are recorded in unallocated enterprise and shared brand expenses, which are costs that are managed centrally and not specific to any one brand. The change in reportable operating segments had an impact on segment income from operations, a measure of segment profitability, and a clarification was made that certain prior unallocated overhead costs are defined as unallocated enterprise and shared brand expenses and are excluded from the measure of segment profitability. +The increase in total income from operations, compared to the year ended March 31, 2023, was primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. +Drivers of significant net changes in total income from operations, compared to the year ended March 31, 2023, were as follows: +• The increase in income from operations of the UGG brand was due to higher net sales at higher gross margins, partially offset by slightly higher SG&A expenses as a percentage of net sales. +• The increase in income from operations of the HOKA brand was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. +• The decrease in income from operations of the Other brands was primarily due to lower net sales at higher gross margins, as well as higher SG&A expenses as a percentage of net sales, primarily due to the Sanuk brand definite-lived intangible asset impairment. +• The increase in unallocated enterprise and shared brand expenses was primarily due to higher payroll and related costs for higher headcount for enterprise functions along with higher variable payroll costs to support higher sales, including performance-based compensation; higher other SG&A expenses for IT programming and software costs, 3PL service fees, legal fees, contract services, and travel costs; higher depreciation and other related costs for infrastructure investments; and higher rent and occupancy for enterprise offices. +42 +Table of Contents +Total Other Income, Net. The increase in total other income, net, compared to the year ended March 31, 2023, was due to higher interest income from higher invested cash balances and average interest rates. +Income Tax Expense. Income tax expense and our effective income tax rate were as follows: +Years Ended March 31, +2024 2023 +Income tax expense $ 219,378 $ 149,260 +Effective income tax rate 22.4 % 22.4 % +Our effective income tax rate was flat compared to the year ended March 31, 2023. The current year income tax rate is primarily driven by US domestic taxes resulting from an increase in US domestic pre-tax income, offset by the foreign rate differential. The rate for the year ended March 31, 2023, was primarily driven by the impact on the foreign rate differential of nonrecurring income tax benefits related to foreign tax-exempt income, offset by an increase in income tax expense for lower unrealized tax benefits related to foreign tax authority assessments. +Net Income. The increase in net income, compared to the year ended March 31, 2023, was primarily due to higher net sales, operating margins, and interest income. Net income per share increased, compared to the year ended March 31, 2023, due to higher net income and lower weighted-average common shares outstanding driven by stock repurchases. +Total Other Comprehensive Loss, Net of Tax. The decrease in total other comprehensive loss, net of tax, compared to the year ended March 31, 2023, was primarily due to lower foreign currency translation losses relating to changes in the net asset position against European foreign currency exchange rates. +LIQUIDITY +Our liquidity may be impacted by a number of factors, including our results of operations, the strength of our brands and market acceptance of our products, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivable in a timely manner and effectively manage our inventories, our ability to manage supply chain constraints, our ability to respond to macroeconomic, geopolitical and international trade developments, and various other risks and uncertainties described in the section titled “Trends and Uncertainties Impacting our Business and Industry” above and in Part I, Item 1A, “Risk Factors,” within this Annual Report. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or capital allocation strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue. +If there are unexpected material impacts on our business in future periods, we may need to raise additional cash to fund our operations or pursue our business strategy, in which case we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, factors such as changes in consumer preferences or tastes, prolonged or severe economic recession or inflationary pressure could adversely affect our business and liquidity. +Sources of Liquidity. We finance our working capital and operating requirements using a combination of cash and cash equivalents balances, including cash from our repatriation strategy, and cash provided from ongoing operating activities. We also have available borrowing capacity under our revolving credit facilities. Refer to the section titled “Cash Flows” below for further discussion on cash flows from ongoing operating activities. +Cash and Cash Equivalents. As of March 31, 2025, our cash and cash equivalents balance is $1,889,188, the majority of which is held in highly rated money market funds and interest-bearing bank deposit accounts with established national and global financial institutions. We believe our cash and cash equivalents balances, cash provided by operating activities, and available borrowing capacity under our revolving credit facilities, will provide +43 +Table of Contents +sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months and will be sufficient to allow us to pursue our business strategies and plans. However, there can be no assurance that sufficient capital will continue to be available or that it will be available on terms acceptable to us. +Repatriation of Cash. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include future changes to or interpretations of global tax law and regulations, and our actual earnings in future periods. During the year ended March 31, 2025, no cash and cash equivalents were repatriated from a foreign subsidiary that were subject to income taxes, compared to $250,000 of cash and cash equivalents repatriated during the year ended March 31, 2024. As of March 31, 2025, and 2024, we have $481,836 and $263,820, respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries to the extent they have been subject to US income tax, if such cash is not required to fund ongoing foreign operations. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our cash repatriation strategy. +For the years ended March 31, 2025, 2024, and 2023, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been paid, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. +Revolving Credit Facilities. Information about our revolving credit facilities available as of March 31, 2025, is as follows: +• Primary Credit Facility. We have a five-year unsecured revolving credit facility, which provides for borrowings up to $400,000 (Primary Credit Facility) and contains a $25,000 sublimit for the issuance of letters of credit. Under the Primary Credit Facility, there is no outstanding balance, $399,045 of available borrowings, and $955 of outstanding letters of credit. +• China Credit Facility. We have an uncommitted revolving line of credit of up to CNY300,000, or $41,338, with an overdraft facility sublimit of CNY100,000, or $13,779 (China Credit Facility). There is no outstanding balance, outstanding bank guarantees of $455, and available borrowings of $40,883 under the China Credit Facility. +• Debt Covenants. We are in compliance with all financial covenants under our Primary Credit Facility and China Credit Facility. +Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on the terms of our revolving credit facilities. +Material Cash Requirements . Our material cash requirements include working capital, payments to fulfill contractual obligations, capital expenditures, and stock repurchases. Our working capital requirements begin when we purchase raw and other materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of the UGG brand, our working capital requirements fluctuate significantly throughout our fiscal year, and we utilize available cash to build inventory levels during certain quarters to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period. +44 +Table of Contents +Contractual Obligations. The following table summarizes our significant contractual obligations as of March 31, 2025, in future periods: +Payments Due by Period +Total Less than +1 Year 1-3 Years 3-5 Years More than +5 Years +Operating lease obligations (1) +$ 317,823 $ 62,445 $ 123,491 $ 71,557 $ 60,330 +Purchase obligations for product (2) +956,911 956,911 — — — +Purchase obligations for commodities (3) +231,323 7,412 223,911 — — +Other purchase obligations (4) +200,744 118,336 70,274 12,134 — +Net unrecognized tax benefits (5) +4,904 1,955 2,949 — — +Total $ 1,711,705 $ 1,147,059 $ 420,625 $ 83,691 $ 60,330 +(1) Our operating lease obligations consist primarily of building leases for our retail locations, warehouses and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of the lease agreements. In addition to the above operating lease obligations recorded on a discounted basis in our consolidated financial statements as of March 31, 2025, there is an aggregate of $10,096 of undiscounted minimum lease payments due pursuant to leases signed, but not yet commenced, primarily for new HOKA brand retail stores and a regional office, for which the leases are expected to commence in the first quarter of our next fiscal year. +(2) Our purchase obligations for product consist mostly of open purchase orders that we expect to fulfill in the ordinary course of business. Outstanding purchase orders are primarily issued to our independent manufacturers and are typically expected to be paid in less than one fiscal year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the reported amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations and instead reflects an estimate of our future payment commitments based on information currently available. +(3) Our purchase obligations for commodities represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments (collectively, commodity contracts). We typically enter into commodity contracts for sheepskin and sugarcane-derived EVA. We expect purchases under commodity contracts in the ordinary course of business will eventually exceed the minimum commitment levels. The reported amount generally reflects remaining minimum commitments we expect will be consumed in future periods in the ordinary course of business, and any remaining deposits expected to become fully refundable or to be reflected as a credit against future purchases which are recorded in other assets in the consolidated balance sheets. There are no deposits included in the amount above that have not been fully consumed as of March 31, 2025. +(4) Our other purchase obligations consist of non-cancellable minimum commitments for IT services, 3PL service fees and other supply chain services, promotional expenses, and other commitments under service contracts. These amounts exclude capital expenditures expected to be made in the next fiscal year, which are further discussed below. +(5) Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2025, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations of $15,288 and, since we are unable to make a reasonable estimate of the period of cash settlement, it is excluded from the table above. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. +Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, and other contractual obligations and commitments. +Capital Expenditures. We estimate capital expenditures that will be made before the end of our next fiscal year will range from approximately $120,000 to $130,000. We anticipate these expenditures will primarily relate to expanding our HOKA brand retail store fleet, refreshes to our existing retail store fleet, IT infrastructure and system improvements, as well as upgrading our existing warehouses and DCs, and office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility and retail store openings, as well as unforeseen needs to replace or refresh existing assets. +45 +Table of Contents +Stock Repurchase Program . We continue to evaluate our capital allocation strategy and consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives, and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of March 31, 2025, the aggregate remaining approved amount under our stock repurchase program is $374,701. Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. +On May 21, 2025, our Board approved an additional authorization of $2,250,000 to repurchase shares of our common stock under the same conditions as the prior stock repurchase program. +Refer to Note 10, “Stockholders’ Equity,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our stock repurchase program and capital allocation strategy. +CASH FLOWS +The following table summarizes the major components of our consolidated statements of cash flows for the periods presented: +Years Ended March 31, +2025 2024 Change +Amount Amount Amount % +Net cash provided by operating activities $ 1,044,523 $ 1,033,184 $ 11,339 1.1 % +Net cash used in investing activities (75,003) (89,331) 14,328 16.0 +Net cash used in financing activities (581,334) (417,675) (163,659) (39.2) +Effect of foreign currency exchange rates on cash and cash equivalents (1,049) (5,922) 4,873 82.3 +Net change in cash and cash equivalents $ 387,137 $ 520,256 $ (133,119) (25.6) % +Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is driven by our net income after non-cash adjustments and changes in operating assets and liabilities. +The increase in net cash provided by operating activities during the year ended March 31, 2025, compared to the prior period, was due to $217,349 of favorable net income after non-cash adjustments, partially offset by $206,010 of unfavorable changes in operating assets and liabilities. Changes in operating assets and liabilities were primarily due to (1) the impact on net trade accounts payable from timing of receipts of goods and services and respective disbursements, (2) higher purchases of inventory to support higher demand for our brands, (3) higher net trade accounts receivable on higher net sales, (4) timing of tax payments and receipts, and (5) favorable changes due to timing of derivative cash settlements. +Investing Activities. The decrease in net cash used in investing activities during the year ended March 31, 2025, compared to the prior period, was primarily due to an increase in cash proceeds from the sale of assets. +Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2025, compared to the prior period, was primarily due to a higher dollar value of stock repurchases, inclusive of excise taxes. +46 +Table of Contents +CRITICAL ACCOUNTING POLICIES AND ESTIMATES +Preparation of our consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that it believes to be reasonable. In addition, management has considered the potential impact of macroeconomic factors, including changes in tariff rates, inflation, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, changes in consumer discretionary spending, and recessionary concerns, on our business and operations. Although the full impact of these factors is unknown, management believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on our financial condition, results of operations and liquidity. +We believe the following critical accounting estimates involve a significant level of estimation uncertainty and the balances have had or are reasonably likely to have a material impact on our financial condition or results of operations. Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements. +Sales Returns and Chargebacks. Revenue is recognized net of estimates for sales returns, chargebacks, and sales discounts in the period in which the related sale is recorded. Estimates for sales returns and chargebacks are based on various factors as follows: +Sales Return Liability. The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. +Allowance for Chargebacks . We record an allowance based primarily on known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. +The determination of these sales liabilities and allowances is considered a critical accounting estimate because significant judgment is required to estimate adjustments to historical return rates and trends. Actual allowances may differ from estimates due to changes in customer, consumer, or product-specific circumstances. +Refer to Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding the sales return liability, allowances for chargebacks, and allowances for sales discounts. Refer to Schedule II, “Total Valuation and Qualifying Accounts,” in Part IV within this Annual Report for an analysis of the activity in our allowances for chargebacks and sales discounts. +47 +Table of Contents +Allowance for Doubtful Accounts. We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Changes in the characteristics of our trade accounts receivable and the aforementioned factors, among others, are reviewed quarterly and may lead to adjustments in our allowance for doubtful accounts. The calculation of the required allowance involves judgment by our management as to the impact of these and other factors on the ultimate realization of our trade accounts receivable. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required in the future. +Refer to Schedule II, “Total Valuation and Qualifying Accounts,” in Part IV within this Annual Report for an analysis of the activity in our allowances for doubtful accounts. +Inventories. Inventories, which are primarily comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted moving average) or net realizable value at each financial statement date. We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. While we believe that adequate write-downs for inventory obsolescence have been provided in the consolidated financial statements, consumer tastes and preferences may change, and we could experience additional inventory write-downs in the future. +Income Taxes . Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. +We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. If we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. +We make estimates to determine income tax expense, deferred tax assets and liabilities, and uncertain tax positions. Our estimates, relative to income tax expense, consider current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in, or our interpretation of, tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for income tax expense in our results of operations. +Our estimates related to tax benefits from uncertain tax positions consider whether a tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position and the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Resolution of these uncertainties may result in the recognition of a tax benefit or an additional tax charge in the period our assessment changes. +We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion of foreign earnings other than previously taxed earnings and profits. +Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. +48 +Table of Contents +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business, our financial position and results of operations are subject to a variety of risks, including risks associated with commodity pricing, foreign currency exchange rates and, to a lesser extent, interest rates. There have been no material changes in our primary risk exposures or management of market risks since the prior year. We regularly assess these risks and have established policies and business practices designed to mitigate their effects. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of risks to our business and results of operations. +COMMODITY PRICE RISK +We are exposed to commodity price fluctuations associated with the cost of raw materials used in our manufacturing process, including sheepskin and sugarcane-derived EVA (collectively, commodities). +To manage price volatility and ensure availability for our commodities, we currently enter into fixed purchasing contracts with designated suppliers of sheepskin and, at times, sugarcane-derived EVA. Our fixed pricing agreements are non-cancellable and may be subject to fees, including certain sheepskin purchasing contracts requiring deposits when minimum volumes are not fully consumed. In the event of significant price increases for our commodities, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our profitability. We continue to evaluate our firm pricing agreement strategy for our commodities, including other preferred materials. +Refer to the subsection titled “Contractual Obligations” under the section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase obligations for commodities. +FOREIGN CURRENCY EXCHANGE RATE RISK +Although most of our sales and inventory purchases are denominated in US dollars, our global operations in the international markets where our products are sold and manufactured expose us to risk of foreign currency exchange rate fluctuations between the US dollar and primarily the currencies of Europe, Asia, Canada, and Latin America. +We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies. We hedge certain foreign currency exchange rate risks from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for speculative trading purposes. +Foreign currency exchange rate fluctuations affect our results of operations and can make comparisons from year to year more difficult. Foreign currency exchange rates, excluding the effect from derivative instruments, to remeasure monetary assets and liabilities using the exchange rate at the end of the reporting period, had a negative impact on our income from operations for the year ended March 31, 2025. +We use forward foreign exchange contracts to hedge material exposure to adverse changes in foreign currency exchange rates. A sensitivity analysis technique has been used to evaluate the effect that changes in the market value of foreign exchange currencies will have on our forward foreign exchange contracts. As of March 31, 2025, a hypothetical 10% foreign currency exchange rate fluctuation would have caused the fair value of our financial instruments to change by approximately $34,000. As of March 31, 2025, there are no known factors that we would expect to result in a material change in the near-term in the general nature of our primary foreign currency exchange rate risk exposure. Refer to the section titled “Summary of Significant Accounting Policies” in Note 1, “General,” and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on our use of derivative contracts and related accounting policies. +49 +Table of Contents +INTEREST RATE RISK +Our exposure to market risk for interest rates relates to our cash and cash equivalents, including cash invested in highly rated money market funds, and our revolving credit facilities. +Cash and cash equivalents held by us are affected by variable, short-term interest rates. Using our average invested cash equivalents balance as of March 31, 2025, the hypothetical effect of a 100 basis point change in short-term interest rates would result in a change of approximately $14,700 to interest income recorded in our consolidated statements of comprehensive income, along with our operating cash flows, but would not impact the fair market value of the related underlying instruments. Refer to the section titled “Summary of Significant Accounting Policies” in Note 1, “General,” and Note 4, “Fair Value Measurements,” of our consolidated financial statements in Part IV within this Annual Report for further information on our cash and cash equivalents. +Our revolving credit facilities bear interest at variable rates. As a result, we are exposed to changes in market interest rates that could impact the cost of servicing debt. As there were no outstanding balances under our revolving credit facilities as of March 31, 2025, the hypothetical effect of a 100 basis point change in interest rates for borrowings made under our revolving credit facilities would have resulted in no change to interest expense recorded in our consolidated statements of comprehensive income during the year ended March 31, 2025. Refer to Note 6, “Revolving Credit Facilities,” of our consolidated financial statements in Part IV within this Annual Report for further information on our revolving credit facilities. +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The Consolidated Financial Statements, the Financial Statement Schedule, and the Reports of Independent Registered Public Accounting Firm, are filed in a separate section following Part IV, as shown on the index under Item 15, “Exhibits and Financial Statement Schedules,” within this Annual Report. +ITEM 9A. CONTROLS AND PROCEDURES +DISCLOSURE CONTROLS AND PROCEDURES +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2025. Based on that evaluation, our PEO and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2025. +50 +Table of Contents +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2025, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on this criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +PEO AND PFAO CERTIFICATIONS +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32.1, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. +ITEM 9B. OTHER INFORMATION +DIRECTOR AND OFFICER TRADING PLANS AND ARRANGEMENTS +Our directors and officers may enter into trading plans or other arrangements with financial institutions to purchase or sell shares of our common stock. These plans or arrangements may constitute Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements, in each case as defined under Item 408(a) of Regulation S-K. +Set forth below is a summary of the adoption, modification, and termination activity of our directors and executive officers with respect to Rule 10b5-1 trading plans during the three months ended March 31, 2025: +Name & Title Adoption Date Termination Date Contract End Date +Aggregate Shares Covered +(in ones) (1) +Angela Ogbechie , +Chief Supply Chain Officer +February 27, 2025 +* +December 31, 2025 +12,570 +Bonita Stewart , +Director +February 10, 2025 +* +May 27, 2026 +9,000 +*Not applicable. +51 +Table of Contents +(1) The actual number of shares sold under the plan may depend on the vesting of certain performance-based equity awards and the number of shares withheld by us to satisfy our income tax withholding obligations and may vary from the number provided herein. +During the three months ended March 31, 2025, no non-Rule 10b5-1 trading arrangements were adopted , modified, or terminated by our directors or executive officers. +PART III +ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE +The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2025 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the year ended March 31, 2025, pursuant to Regulation 14A under the Exchange Act. +ITEM 11. EXECUTIVE COMPENSATION +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. +PART IV +ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +Refer to Part IV, “Index to Consolidated Financial Statements and Financial Statement Schedules,” on page F-1 within this Annual Report for our Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm. +EXHIBIT INDEX +Exhibit +Number Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation, as amended through September 13, 202 4 (Exhibit 3.1 to the Registrant ’ s Form 10-Q filed on October 31, 2024 , and incorporated by reference herein) +52 +Table of Contents +Exhibit +Number Description of Exhibit +3.2 +Amended and Restated Bylaws of Deckers Outdoor Corporation, as amended through September 9, 202 4 (Exhibit 3. 2 to the Registrant’s Form 10-Q filed on October 31 , 2024 , and incorporated by reference herein) +*4.1 +Description of the Capital Stock of Deckers Outdoor Corporation +10.1 +Credit Agreement, dated December 19, 2022, by and among Deckers Outdoor Corporation, Deckers Europe Limited, Deckers UK Ltd., Deckers Benelux B.V., Deckers Outdoor Canada ULC, Deckers Outdoor International Limited, Deckers Coromar, LLC, DBrands SGP Pte. Ltd., Citibank, N.A., as administrative agent, joint lead arranger and joint bookrunner, Comerica Bank, as sole syndication agent, joint lead arranger and joint bookrunner, HSBC Bank USA, National Association, as joint lead arranger and joint bookrunner, and the lenders party thereto (Exhibit 10.1 to the Registrant’s Form 8-K filed on December 21, 2022, and incorporated by reference herein) +†10.2 +Standard Industrial Lease (Net), dated December 5, 2013, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on March 3, 2014, and incorporated by reference herein) +†10.3 +First Amendment to Standard Industrial Lease (Net), dated June 6, 2017, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.6 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +10.4 +Second Amendment to Standard Industrial Lease (Net), dated July 17, 2017, by and between Moreno Knox, LLC, and Deckers Outdoor Corporation for distribution center at 17791 Perris Blvd., Moreno Valley, CA 92551 (Exhibit 10.7 to the Registrant’s Form 10-K filed on May 30, 2018, and incorporated by reference herein) +†10.5 +Standard Industrial Lease (Net), dated February 10, 2021, by and between Westpoint Building II, LLC and Deckers Outdoor Corporation for distribution center at 2633 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.4 to the Registrant’s Form 10-K filed on May 28, 2021, and incorporated by reference herein) +†10.6 +Standard Industrial Lease (Net), dated April 20, 2022, by and between Westpoint Building V, LLC, and Deckers Outdoor Corporation for distribution center at 2723 Westpoint Blvd., Mooresville, IN 46158 (Exhibit 10.5 to the Registrant’s Form 10-K filed on May 27, 2022, and incorporated by reference herein) +#10.7 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant’s Form 8-K filed on June 2, 2008, and incorporated by reference herein) +#10.8 +Form of Change in Control and Severance Agreement (Exhibit 10. 1 to the Registrant’s Form 10-Q filed on August 1 , 202 4 , and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (Appendix A to the Registrant ’ s Definitive Proxy Statement filed on April 21, 2006, and incorporated by reference herein) +#10.10 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan, as amended through May 9, 2007 (Appendix A to the Registrant ’ s Definitive Proxy Statement filed on April 9, 2007, and incorporated by reference herein) +#10.11 +Deckers Outdoor Corporation Second Amended and Restated Deferred Stock Unit Compensation Plan, effective December 16, 2015 (Exhibit 10.1 to the Registrant ’ s Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +*#10.12 +Deckers Outdoor Corporation Deferred Stock Unit Compensation Plan, effective September 9, 2024 +#10.13 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan, effective July 1, 2016 (Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 9, 2017, and incorporated by reference herein) +#10.14 +Deckers Outdoor Corporation Management Incentive Plan (Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 10, 2015, and incorporated by reference herein) +#10.15 +Deckers Outdoor Corporation 2024 Employee Stock Purchase Plan (Appendix A to the Registrant's Definitive Proxy Statement filed on July 23, 2024, and incorporated by reference herein) +#10.16 +Deckers Outdoor Corporation 2015 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 29, 2015, and incorporated by reference herein) +#10.17 +Deckers Outdoor Corporation 2024 Stock Incentive Plan (Appendix B to the Registrant's Definitive Proxy Statement filed on July 23, 2024, and incorporated by reference herein) +#10.18 +Form of Stock Unit Award Agreement (2023 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.26 to the Registrant’s Form 10-K filed on May 26, 2023, and incorporated by reference herein) +53 +Table of Contents +Exhibit +Number Description of Exhibit +†#10.19 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2023 LTIP Financial Performance Award (Exhibit 10.27 to the Registrant’s Form 10-K filed on May 26, 2023, and incorporated by reference herein) +#10.20 +Form of Stock Unit Award Agreement (202 4 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan (Exhibit 10.23 to the Registrant’s Form 10-K filed on May 24, 2024, and incorporated by reference herein) +†#10.21 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2024 LTIP Financial Performance Award (Exhibit 10.24 to the Registrant’s Form 10-K filed on May 24, 2024, and incorporated by reference herein) +*#10.22 +Form of Stock Unit Award Agreement (2025 Time-Based RSU) under Deckers Outdoor Corporation 2015 Stock Incentive Plan +†*#10.23 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2015 Stock Incentive Plan FY 2025 LTIP Financial Performance Award +*#10.24 +Form of Stock Unit Award Agreement (Time-Based RSU) under Deckers Outdoor Corporation 2024 Stock Incentive Plan +†*#10.25 +Form of Restricted Stock Unit Award Agreement under Deckers Outdoor Corporation 2024 Stock Incentive Plan - LTIP Financial Performance Award +19.1 +Insider Trading Policy (Exhibit 19.1 to the Registrant’s Form 10-K filed on May 24, 2024, and incorporated by reference herein) +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +*31.1 +Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +*31.2 +Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended +**32.1 +Certification of the Principal Executive Officer and the Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended +97.1 +Clawback and Forfeiture Policy (Exhibit 97.1 to the Registrant’s Form 10-K filed on May 24, 2024, and incorporated by reference herein) +*101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) +*101.SCH Inline XBRL Taxonomy Extension Schema Document +*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +*101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +*101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document +*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +* Filed herewith. +** Furnished herewith. +# Management contract or compensatory plan or arrangement. +† Certain of the schedules (and similar attachments) to this exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule (or similar attachment) will be furnished to the Securities and Exchange Commission upon request. +54 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ STEVEN J. FASCHING +Steven J. Fasching +Chief Financial Officer +(Principal Financial and Accounting Officer) +Date: May 23, 2025 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +/s/ STEFANO CAROTI +Chief Executive Officer, President, and Director +(Principal Executive Officer) May 23, 2025 +Stefano Caroti +/s/ STEVEN J. FASCHING Chief Financial Officer +(Principal Financial and Accounting Officer) May 23, 2025 +Steven J. Fasching +/s/ CYNTHIA (CINDY) L. DAVIS +Chair of the Board +May 23, 2025 +Cynthia (Cindy) L. Davis +/s/ DAVID A. BURWICK Director May 23, 2025 +David A. Burwick +/s/ NELSON C. CHAN Director May 23, 2025 +Nelson C. Chan +/s/ JUAN R. FIGUEREO Director May 23, 2025 +Juan R. Figuereo +/s/ MAHA S. IBRAHIM Director May 23, 2025 +Maha S. Ibrahim +/s/ VICTOR LUIS Director May 23, 2025 +Victor Luis +/s/ DAVE POWERS +Director +May 23, 2025 +Dave Powers +/s/ LAURI M. SHANAHAN Director May 23, 2025 +Lauri M. Shanahan +/s/ BONITA C. STEWART Director May 23, 2025 +Bonita C. Stewart +55 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULES +Page +Consolidated Financial Statements: +Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 2 +Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting +( KPMG LLP , Los Angeles, CA , Auditor Firm ID: 185 ) +F- 4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Comprehensive Income +F- 6 +Consolidated Statements of Stockholders’ Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to Consolidated Financial Statements +F- 10 +Consolidated Financial Statement Schedule: +Schedule II - Total Valuation and Qualifying Accounts +F- 42 +All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or accompanying notes thereto. +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries (the Company) as of March 31, 2025, and 2024, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2025, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2025, and 2024, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2025, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2025, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 23, 2025 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit and risk management committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Wholesale sales return liability +As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company has recorded a sales return liability as of March 31, 2025, of $63,462, of which $47,216 is related to the wholesale channel. The Company records an allowance for anticipated future returns of goods shipped prior to the end of the reporting period. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +We identified the evaluation of the wholesale sales return liability as a critical audit matter. There was a high degree of auditor judgment required to evaluate recent events that could result in a change from historical return rates used to estimate the wholesale sales return liability. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating the wholesale sales return liability, including controls related to the development of estimated return rates. We evaluated the wholesale sales return liability using a combination of Company internal data, known +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +recent trends, and actual and historical known information. We analyzed the Company’s internal data and external correspondence to assess adjustments made by management, if any, to historical return rates based on consideration of recent events. We assessed the Company’s ability to accurately estimate the wholesale sales return liability by comparing the historically recorded sales return liability to actual subsequent product returns. We also analyzed actual product returns received after year-end but prior to the issuance of the consolidated financial statements. +/s/ KPMG LLP +We have served as the Company’s auditor since 1992. +Los Angeles, California +May 23, 2025 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Deckers Outdoor Corporation: +Opinion on Internal Control Over Financial Reporting +We have audited Deckers Outdoor Corporation and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2025, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2025, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2025 and 2024, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2025, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated May 23, 2025 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Los Angeles, California +May 23, 2025 +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(dollar and share data amounts in thousands, except par value) +As of March 31, +2025 2024 +ASSETS +Cash and cash equivalents $ 1,889,188 $ 1,502,051 +Trade accounts receivable, net of allowances ($ 32,883 and $ 27,331 as of March 31, 2025, and March 31, 2024, respectively) ( Note 2 and Schedule II) +332,872 296,565 +Inventories 495,226 474,311 +Prepaid expenses 39,294 34,284 +Other current assets 67,282 92,713 +Income tax receivable 36,613 43,559 +Total current assets 2,860,475 2,443,483 +Property and equipment, net of accumulated depreciation ($ 402,964 and $ 349,138 as of March 31, 2025, and March 31, 2024, respectively) ( Note 1 and Note 13) +325,599 302,122 +Operating lease assets 237,352 225,669 +Goodwill ( Note 3) +13,990 13,990 +Other intangible assets, net of accumulated amortization ($ 25,014 and $ 91,314 as of March 31, 2025, and March 31, 2024, respectively) ( Note 3) +15,699 27,083 +Deferred tax assets, net ( Note 5) +77,591 72,584 +Other assets 39,546 50,648 +Total assets $ 3,570,252 $ 3,135,579 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Trade accounts payable $ 417,955 $ 378,503 +Accrued payroll 125,417 123,653 +Operating lease liabilities ( Note 7) +54,453 53,581 +Other accrued expenses 142,120 106,785 +Income tax payable 23,299 52,338 +Value added tax payable 6,697 5,133 +Total current liabilities 769,941 719,993 +Long-term operating lease liabilities ( Note 7) +222,522 213,298 +Income tax liability 13,587 52,470 +Other long-term liabilities 51,189 42,350 +Total long-term liabilities 287,298 308,118 +Commitments and contingencies ( Note 7) +Stockholders’ equity +Common stock ($ 0.01 par value per share; 750,000 shares authorized; 150,201 and 153,554 shares issued and outstanding as of March 31, 2025, and March 31, 2024, respectively) +1,502 1,536 +Additional paid-in capital 253,466 243,050 +Retained earnings 2,307,699 1,913,615 +Accumulated other comprehensive loss ( Note 10) +( 49,654 ) ( 50,733 ) +Total stockholders’ equity 2,513,013 2,107,468 +Total liabilities and stockholders’ equity $ 3,570,252 $ 3,135,579 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(dollar and share data amounts in thousands, except per share data) +Years Ended March 31, +2025 2024 2023 +Net sales ( Note 2, Note 12, and Note 13) +$ 4,985,612 $ 4,287,763 $ 3,627,286 +Cost of sales 2,099,949 1,902,275 1,801,916 +Gross profit 2,885,663 2,385,488 1,825,370 +Selling, general, and administrative expenses ( Note 12) +1,706,571 1,457,974 1,172,619 +Income from operations ( Note 12) +1,179,092 927,514 652,751 +Interest income ( 68,389 ) ( 52,208 ) ( 15,563 ) +Interest expense 3,517 2,564 3,442 +Other expense (income), net 665 ( 1,783 ) ( 1,210 ) +Total other income, net ( 64,207 ) ( 51,427 ) ( 13,331 ) +Income before income taxes 1,243,299 978,941 666,082 +Income tax expense ( Note 5) +277,208 219,378 149,260 +Net income 966,091 759,563 516,822 +Other comprehensive income (loss), net of tax +Unrealized gain on cash flow hedges 1,584 — — +Foreign currency translation loss ( 505 ) ( 11,698 ) ( 14,080 ) +Total other comprehensive income (loss), net of tax 1,079 ( 11,698 ) ( 14,080 ) +Comprehensive income $ 967,170 $ 747,865 $ 502,742 +Net income per share +Basic $ 6.36 $ 4.89 $ 3.25 +Diluted $ 6.33 $ 4.86 $ 3.23 +Weighted-average common shares outstanding ( Note 11) +Basic 151,992 155,225 159,023 +Diluted 152,670 156,285 160,111 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +(amounts in thousands) +Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity +Shares Amount +Balance, March 31, 2022 161,895 $ 1,619 $ 208,741 $ 1,353,420 $ ( 24,955 ) $ 1,538,825 +Stock-based compensation 33 — 26,858 — — 26,858 +Shares issued upon vesting 312 3 2,167 — — 2,170 +Exercise of stock options 384 4 4,392 — — 4,396 +Shares withheld for taxes — — ( 11,317 ) — — ( 11,317 ) +Repurchases of common stock ( Note 10) +( 5,570 ) ( 55 ) — ( 297,317 ) — ( 297,372 ) +Excise taxes related to repurchases of common stock — — — ( 569 ) — ( 569 ) +Net income — — — 516,822 — 516,822 +Total other comprehensive loss — — — — ( 14,080 ) ( 14,080 ) +Balance, March 31, 2023 157,054 1,571 230,841 1,572,356 ( 39,035 ) 1,765,733 +Stock-based compensation 12 — 37,248 — — 37,248 +Shares issued upon vesting 351 4 2,440 — — 2,444 +Exercise of stock options 426 4 4,782 — — 4,786 +Shares withheld for taxes — — ( 32,261 ) — — ( 32,261 ) +Repurchases of common stock ( Note 10) +( 4,289 ) ( 43 ) — ( 414,888 ) — ( 414,931 ) +Excise taxes related to repurchases of common stock — — — ( 3,416 ) — ( 3,416 ) +Net income — — — 759,563 — 759,563 +Total other comprehensive loss — — — — ( 11,698 ) ( 11,698 ) +Balance, March 31, 2024 153,554 1,536 243,050 1,913,615 ( 50,733 ) 2,107,468 +Stock-based compensation 11 — 37,915 — — 37,915 +Shares issued upon vesting 347 3 3,801 — — 3,804 +Exercise of stock options 89 1 967 — — 968 +Shares withheld for taxes — — ( 32,267 ) — — ( 32,267 ) +Repurchases of common stock ( Note 10) +( 3,800 ) ( 38 ) — ( 566,964 ) — ( 567,002 ) +Excise taxes related to repurchases of common stock — — — ( 5,043 ) — ( 5,043 ) +Net income — — — 966,091 — 966,091 +Total other comprehensive income — — — — 1,079 1,079 +Balance, March 31, 2025 150,201 $ 1,502 $ 253,466 $ 2,307,699 $ ( 49,654 ) $ 2,513,013 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended March 31, +2025 2024 2023 +OPERATING ACTIVITIES +Net income $ 966,091 $ 759,563 $ 516,822 +Reconciliation of net income to net cash provided by (used in) operating activities: +Depreciation, amortization, and accretion 69,353 57,587 47,858 +Amortization on cloud computing arrangements 2,380 2,075 2,149 +Loss on extinguishment of debt — — 226 +Bad debt expense 5,032 789 1,983 +Deferred tax benefit ( 5,545 ) ( 1,510 ) ( 9,719 ) +Stock-based compensation 37,943 37,288 26,897 +Loss on disposal of assets 3,183 407 2,691 +Impairment of intangible assets — 8,164 — +Impairment of cloud computing arrangements, operating lease, and other long-lived assets 4,290 1,015 2,817 +Changes in operating assets and liabilities: +Trade accounts receivable, net ( 41,339 ) 4,157 ( 806 ) +Inventories ( 24,344 ) 58,541 ( 26,056 ) +Prepaid expenses and other current assets 20,946 ( 38,490 ) ( 5,609 ) +Income tax receivable 6,945 ( 38,775 ) 13,459 +Net operating lease assets and lease liabilities ( 2,583 ) ( 567 ) ( 8,308 ) +Other assets 6,566 ( 9,989 ) 13,240 +Trade accounts payable 35,636 119,601 ( 74,247 ) +Other accrued expenses 22,222 43,534 11,528 +Income tax payable ( 29,039 ) 35,016 4,897 +Other long-term liabilities ( 33,214 ) ( 5,222 ) 17,600 +Net cash provided by operating activities 1,044,523 1,033,184 537,422 +INVESTING ACTIVITIES +Purchases of property and equipment ( 86,171 ) ( 89,365 ) ( 81,025 ) +Proceeds from sale of assets 11,168 34 12 +Net cash used in investing activities ( 75,003 ) ( 89,331 ) ( 81,013 ) +FINANCING ACTIVITIES +Loan origination costs on revolving credit facilities — — ( 1,537 ) +Proceeds from issuance of stock 3,804 2,444 2,170 +Proceeds from exercise of stock options 968 4,786 4,396 +Repurchases of common stock ( 567,002 ) ( 414,931 ) ( 297,372 ) +Cash paid for excise taxes related to repurchases of common stock ( 3,985 ) — — +Cash paid for shares withheld for taxes ( 15,119 ) ( 9,974 ) ( 16,688 ) +Net cash used in financing activities ( 581,334 ) ( 417,675 ) ( 309,031 ) +Effect of foreign currency exchange rates on cash and cash equivalents ( 1,049 ) ( 5,922 ) ( 9,110 ) +Net change in cash and cash equivalents 387,137 520,256 138,268 +Cash and cash equivalents at beginning of period 1,502,051 981,795 843,527 +Cash and cash equivalents at end of period $ 1,889,188 $ 1,502,051 $ 981,795 +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +(continued) +Years Ended March 31, +2025 2024 2023 +SUPPLEMENTAL CASH FLOW DISCLOSURE +Cash paid during the period +Income taxes $ 345,397 $ 234,062 $ 135,986 +Interest 1,789 1,783 1,880 +Operating leases 70,326 65,672 60,353 +Non-cash investing activities +Changes in trade accounts payable and other accrued expenses for purchases of property and equipment 3,819 ( 6,705 ) 5,325 +Accrued for asset retirement obligation assets related to leasehold improvements 2,233 2,278 8,203 +Leasehold improvements acquired through tenant allowances — 8,127 — +Non-cash financing activities +Accrued for shares withheld for taxes 17,148 22,287 5,371 +Accrued excise taxes related to repurchases of common stock 5,043 3,416 569 +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +NOTE 1. GENERAL +The Company . Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. The Company’s five proprietary brands include UGG® (UGG), HOKA® (HOKA), Teva® (Teva), AHNU® (AHNU), and Koolaburra by UGG® (Koolaburra). +The Company sells its products through quality domestic and international retailers, international distributors, and directly to global consumers through its Direct-to-Consumer (DTC) channel, which is comprised of an e‑commerce and retail store presence. Independent third-party contractors manufacture all of the Company’s products. +Recent Developments . During the third quarter of fiscal year 2025, the Company began taking steps to phase out its standalone operations for the Koolaburra brand in order to maintain focus on the Company’s most significant organic opportunities. The Company closed Koolaburra.com as of March 31, 2025, and plans to wind down the Koolaburra brand in the wholesale channel by the end of calendar year 2025. As of March 31, 2025, the Company has not incurred, and does not expect to incur, material exit costs or obligations associated with this plan. +During the second quarter of fiscal year 2025, the Company entered into an agreement pursuant to which the buyer purchased the Sanuk brand and certain related assets, which was completed on August 15, 2024 (Sanuk Brand Sale Date). The Company determined that the divestiture of the Sanuk brand did not represent a strategic shift that had or will have a major effect on the consolidated results of operations, and therefore results of this business were not classified as discontinued operations. The Company’s financial results for its reportable operating segments present the former Sanuk brand within the Other brands reportable operating segment through the Sanuk Brand Sale Date for the year ended March 31, 2025, and full financial results for the years ended March 31, 2024, and 2023. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on Sanuk brand assets. +Basis of Presentation. The consolidated financial statements and accompanying notes thereto (referred to herein as consolidated financial statements) as of March 31, 2025, and 2024, and for the years ended March 31, 2025, 2024, and 2023 (referred to herein as “year ended” or “years ended,” or as “fiscal year 2025,” “fiscal year 2024,” and “fiscal year 2023,” respectively) are prepared in accordance with generally accepted accounting principles in the United States (US GAAP). +Reportable Operating Segments. As of March 31, 2025, the Company’s three reportable operating segments include the worldwide operations of the UGG brand, HOKA brand, and Other brands (primarily consisting of the Teva brand, AHNU brand, and Koolaburra brand) (collectively, the Company’s reportable operating segments). The various brands within Other brands are aggregated within one reportable operating segment as each brand shares similar economic and qualitative characteristics. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s reportable operating segments. +During the fourth quarter of fiscal year 2025, the financial information regularly used by the chief operating decision maker (CODM), who is the Principal Executive Offic er, to evaluate performance, make operating decisions, and allocate resources was revised. In connection with executive leadership alignment, and the recent divestiture and phase out of certain brands, the CODM shifted resource allocation decisions and performance assessment to a brand focus, rather than a distribution channel focus. This resulted in a change in the Company’s reportable operating segments. The change in reportable operating segments had an impact on segment income from operations, a measure of segment profitability, and the Company clarified unallocated overhead costs excluded from this measure as unallocated enterprise and shared brand expenses. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s unallocated enterprise and shared brand expenses. +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Previously, the Company’s six reportable operating segments included the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands (primarily the AHNU brand and the Koolaburra brand), and DTC. Reportable operating segment results for all prior periods presented in this Annual Report have been recast to reflect the change in reportable operating segments. +Forward Stock Split and Authorized Share Increase. On September 13, 2024, the Company (1) effected a six -for-one forward stock split of its common stock and preferred stock (the stock split), and (2) increased the number of authorized shares of its common stock from 125,000,000 to 750,000,000 , and the number of authorized shares of its capital stock from 130,000,000 to 755,000,000 (the authorized share increase). The stock split and the authorized share increase were effected through the filing of an amendment to the Company’s Amended and Restated Certificate of Incorporation (Charter Amendment) with the Secretary of State of the State of Delaware, which was approved by the Company’s stockholders at the Annual Meeting of Stockholders held on September 9, 2024 (Annual Meeting). The Charter Amendment did not provide for any increase in the number of authorized shares of preferred stock, which remains at 5,000,000 shares. There are no shares of preferred stock outstanding as of March 31, 2025, and 2024. As a result of the stock split, every one share of common stock outstanding on September 6, 2024, the record date for the stock split, was automatically split into six shares of common stock. The common stock commenced t rading on a post-stock split adjusted basis on September 17, 2024. +All prior period results included in the consolidated financial statements and the related notes within this Annual Report have been retroactively adjusted to reflect the effectiveness of the stock split and the authorized share increase. Specifically, all share and per share amounts have been adjusted, including: (1) the number of shares authorized and outstanding on the consolidated balance sheets; (2) the weighted-average common shares outstanding and the associated earnings per share amounts in the consolidated statements of comprehensive income, as well as the weighted average common shares outstanding disaggregated in Note 11, “Basic and Diluted Shares;” (3) the number of shares underlying stock awards and the weighted-average grant date fair value of annual stock awards in Note 8, “Stock-Based Compensation;” and (4) the total number of shares repurchased and the average price per share paid in Note 10, “Stockholders’ Equity.” Further, as there was no change to par value, an amount equal to the par value of the increased shares resulting from the stock split for shares issued was reclassified to common stock from additional paid-in capital, and for share repurchases was reclassified to retained earnings from common stock, in the consolidated balance sheets and the consolidated statements of stockholders’ equity. +Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Use of Estimates. The preparation of the Company’s consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of macroeconomic factors, including inflation, changes in tariff rates, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, changes in discretionary spending, and recessionary concerns, on its business and operations. Although the full impact of these factors is unknown, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company’s financial condition, results of operations, and liquidity. +Significant areas requiring the use of management estimates and assumptions relate to variable consideration for net sales provided to customers, including the sales return liability, and related sales return asset, as well as trade accounts receivable allowances; inventory write-downs; contract assets and liabilities; stock-based compensation; impairment assessments, including goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company’s incremental borrowing rate (IBR) utilized to measure its operating lease assets and lease liabilities. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Foreign Currency Translation . The Company considers the United States (US) dollar as its functional currency. The Company’s wholly owned foreign subsidiaries have various assets and liabilities, primarily cash, receivables, and payables, which are denominated in currencies other than its functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate at the end of the reporting period, which results in gains and losses that are recorded in selling, general, and administrative (SG&A) expenses in the consolidated statements of comprehensive income as incurred. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at the end of the reporting period, which results in financial statement translation gains and losses recorded in other comprehensive income or loss (OCI), net of tax, in the consolidated statements of comprehensive income. +Seasonality . A significant part of the UGG brand’s business has historically been seasonal, with the highest percentage of net sales occurring in the third fiscal quarter, which has contributed to variation in results of operations from quarter to quarter. However, the Company has mitigated the impacts of seasonality by diversifying and expanding product offerings with additional year-round styles. In addition, as the HOKA brand’s net sales, which generally occur more evenly throughout the fiscal year, continue to increase as a percentage of the Company’s aggregate net sales, the Company expects to reduce the impacts of seasonality in future periods. +Recent Accounting Pronouncements. The Financial Accounting Standards Board has issued Accounting Standards Updates (ASUs) that have been adopted and not yet adopted by the Company as stated below. +Recently Adopted. The following is a summary of each ASU adopted by and its impact on the Company upon adoption: +Standard Description +Impact upon Adoption +ASU 2022-04 - Supplier Finance Program (SFP) +The ASU requires that a buyer in a SFP disclose qualitative and quantitative information about its program on an interim basis, including the nature of the SFP and key terms, outstanding amounts as of the end of the reporting period, and presentation in its financial statements. +The interim portion of this ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. +The annual requirement that requires a buyer in a SFP disclose an activity roll forward of outstanding balances as of the end of the reporting period is effective on a retrospective basis for fiscal years beginning after December 15, 2023. Early adoption is not permitted. +The Company prospectively adopted the annual rollforward requirement of this ASU beginning with this Annual Report and retrospectively adopted the interim requirements of this ASU on April 1, 2023. This ASU did not have a material impact on the recognition, measurement, or presentation of SFPs in the Company’s annual and interim consolidated financial statements. However, it did result in additional disclosures. +Refer to Note 14, “Supplier Finance Program,” for further information on the Company’s SFPs , key terms, activity rollforward, and outstanding balances recorded in the consolidated balance sheets. +ASU 2023-07 - Improvements to Reportable Segment Disclosures +The ASU requires annual and interim disclosures of significant segment expenses, including an amount and composition description for other segment items, and how reported measures of profit or loss are used by the CODM in assessing segment performance and deciding how to allocate resources. +The ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. +The Company retrospectively adopted this ASU beginning with this Annual Report. This ASU did not have a material impact on the Company’s consolidated financial statements other than additional disclosures under Note 12, “Reportable Operating Segments.” +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Not Yet Adopted. The following is a summary of each ASU that has been issued and is applicable to the Company, but which has not yet been adopted, as well as the planned period of adoption, and the expected impact on the Company upon adoption: +Standard Description Planned Period of Adoption Expected Impact on Adoption +ASU 2023-09 - Improvements to Income Tax Disclosures +The ASU requires annual disclosures of prescribed standard categories for the components of the effective tax rate reconciliation, disclosure of income taxes paid disaggregated by jurisdiction, and other income-tax related disclosures. The ASU is effective on a prospective basis, with retrospective application permitted, for fiscal years beginning after December 15, 2024. Early adoption is permitted. +Q4 FY 2026 +The Company is currently evaluating the impact of the adoption of this ASU on its disclosures in its annual and interim consolidated financial statements. +ASU 2024-03 - Disaggregation of Income Statement Expenses (as amended by ASU 2025-01) +The ASU requires disaggregated disclosure of relevant statement of comprehensive income expense captions including tabular presentation of prescribed expense categories such as purchases of inventory, employee compensation, depreciation, intangible asset amortization, and other specific expense, gains, and losses required by existing US GAAP. The ASU is effective on a prospective basis, with retrospective application permitted, for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. +Q4 FY 2028 +and +Q1 FY 2029 +The Company is currently evaluating the impact of the adoption of this ASU on its disclosures in its annual and interim consolidated financial statements. +Summary of Significant Accounting Policies. The following is a summary of the Company’s significant accounting policies applied to its consolidated financial statements: +Cash and Cash Equivalents . Cash and cash equivalents include cash on hand, demand deposits, and all highly liquid investments, such as money-market funds, with an original maturity of three months or less. The carrying value of money-market funds approximates the fair value as it is considered a highly liquid investment when purchased. Money-market funds are recorded in cash and cash equivalents in the consolidated balance sheets. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of money-market funds. Refer to Note 13, “Concentration of Business,” for further information on credit risks with respect to the cash and cash equivalents balance. +Allowances for Doubtful Accounts . The Company provides an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, for which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Inventories . Inventories, which are primarily comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted moving average) or net realizable value at each financial statement date. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. The Company regularly reviews inventory for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or realizable value. +Cloud Computing Arrangements (CCAs) . The Company enters into various CCAs that are governed by service contracts (hosting arrangements) to support operations. Application development stage implementation costs (implementation costs) of a hosting arrangement are deferred and recorded to prepaid expenses and other assets in the consolidated balance sheets. Implementation costs are expensed on a straight-line basis and recorded in SG&A expenses in the consolidated statements of comprehensive income over the term of the hosting arrangement, including reasonably certain renewals, which are generally one to three years . +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +As of March 31, 2025, net capitalized costs for CCAs are $ 6,031 , with $ 2,167 recorded in prepaid expenses and $ 3,864 recorded in other assets in the consolidated balance sheets. As of March 31, 2024, net capitalized costs for CCAs are $ 4,537 , with $ 1,534 recorded in prepaid expenses and $ 3,003 recorded in other assets in the consolidated balance sheets. Refer to the section titled “Recoverability of Definite-Lived Intangible and Other Long-Lived Assets” below, within this footnote, for detail on an impairment of a CCA recorded during the year ended March 31, 2025. +Property and Equipment, Depreciation and Amortization . Property and equipment are stated at cost less accumulated depreciation and amortization, and generally have a useful life of at least one year . Property and equipment include tangible, non-consumable items owned by the Company. Software implementation costs are capitalized if they are incurred during the application development stage and relate to costs to obtain computer software from third parties, including related consulting expenses, or costs incurred to modify existing software that results in additional upgrades or enhancements that provide additional functionality. +Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful life. Leasehold improvements are amortized to their residual value, if any, on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Changes in the estimate of the useful life of an asset may occur after an asset is placed in service. For example, this may occur as a result of the Company incurring costs that prolong the useful life of an asset, which would be recorded as an adjustment to depreciation over the revised remaining useful life. Depreciation and amortization are recorded in SG&A expenses in the consolidated statements of comprehensive income. +Property and equipment, net, are summarized as follows: +As of March 31, +Useful Life (Years) 2025 2024 +Land Indefinite $ 32,864 $ 32,864 +Building 39.5 41,099 40,058 +Machinery and equipment +1 - 10 +282,838 263,200 +Furniture and fixtures +3 - 7 +47,464 41,336 +Computer software +3 - 10 +139,412 130,688 +Leasehold improvements +1 - 11 +137,806 128,356 +Construction in progress 47,080 14,758 +Gross property and equipment 728,563 651,260 +Less accumulated depreciation and amortization ( 402,964 ) ( 349,138 ) +Total $ 325,599 $ 302,122 +Depreciation was $ 67,579 , $ 54,958 , and $ 45,117 during the years ended March 31, 2025, 2024, and 2023, respectively. +Operating Lease Assets and Lease Liabilities . The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional period covered by the Company’s option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. +Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances. Operating lease assets are subsequently +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Operating lease assets and lease liabilities are presented separately in the consolidated balance sheets on a discounted basis. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities. Refer to Note 7, “Commitments and Contingencies,” for further information on the discount rate methodology used to measure operating lease assets and lease liabilities. +Rent expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in SG&A expenses in the consolidated statements of comprehensive income. Lease payments recorded in the operating lease liabilities (1) are fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented. Refer to Note 7, “Commitments and Contingencies,” for further information on the nature of variable lease payments and the timing of recognition of rent expense. +The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the consolidated statements of comprehensive income. +The Company monitors for events that require a change in estimates for its operating lease assets and lease liabilities, such as modifications to the terms of the contract, including the lease term, economic events that may trigger a contractual term contingency, such as minimum lease payments or termination rights, and related changes in discount rates used to measure the operating lease assets and lease liabilities, as well as events or circumstances that result in lease abandonment or operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liabilities, a corresponding adjustment is made to the carrying amount of the operating lease assets. The operating lease assets are remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities. Refer to the section titled “Recoverability of Definite-Lived Intangible and Other Long-Lived Assets” below, within this footnote, for further information on the Company’s accounting policy for evaluating the carrying amount of its operating lease assets and related leasehold improvements for indicators of impairment. +Asset Retirement Obligations (AROs). The Company is contractually obligated under certain of its lease agreements to restore certain retail, office, and warehouse facilities back to their original conditions. At lease inception, the present value of the estimated fair value of these liabilities is recorded along with the related asset. The liability is estimated based on assumptions requiring management’s judgment, including facility closing costs and discount rates, and is accreted to its projected future value over the life of the asset. +The Company’s AROs are recorded in other long-term liabilities in the consolidated balance sheets and activity was as follows: +Years Ended March 31, +2025 2024 +Beginning balance +$ 25,686 $ 24,556 +Additions and changes in estimate 2,192 2,730 +Liabilities settled during the period ( 732 ) ( 1,724 ) +Accretion expenses 927 421 +Foreign currency translation gains 45 ( 297 ) +Ending balance +$ 28,118 $ 25,686 +Goodwill and Indefinite-Lived Intangible Assets . Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill and indefinite-lived intangible assets are not amortized but are instead tested for impairment annually, or when an event occurs or +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates goodwill for impairment annually at the reporting unit level, which is the wholesale channel of each of the UGG and HOKA brands as of December 31st of each year. The Company evaluates the Teva brand indefinite-lived trademark for impairment as of October 31st of each year. +The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of goodwill or indefinite-lived intangible assets. In general, conditions that may indicate impairment include, but are not limited to the following: (1) a significant adverse change in customer demand or business climate that could affect the value of an asset; (2) change in market share, budget-to-actual performance, and consistency of income from operations as a percentage of net sales (operating margins) and capital expenditures; (3) changes in management or key personnel; or (4) changes in general economic conditions. The Company does not calculate the fair value of the assets unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company prepares a quantitative assessment. +The quantitative assessment requires an analysis of several estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. The goodwill impairment assessment involves valuing the Company’s various reporting units that carry goodwill. This includes considering the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting the industry. Upon completion of the quantitative assessment, the Company compares the fair value of the asset to its carrying amount, and if the fair value exceeds its carrying amount, no impairment charge is recognized. If the fair value is less than its carrying amount, the Company will record an impairment charge to write down the asset to its fair value. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the Company’s goodwill and indefinite-lived intangible assets and annual impairment assessment results. +Recoverability of Definite-Lived Intangible and Other Long-Lived Assets . Definite-lived intangible and other long-lived assets, which include definite-lived trademarks; machinery and equipment; internal-use software, including CCAs; and operating lease assets and related leasehold improvements are amortized to their estimated residual values, if any, on a straight-line basis over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Amortization or depreciation are recorded in SG&A expenses in the consolidated statements of comprehensive income. +At least quarterly, the Company evaluates factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset group is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group or a significant decline in the observable market value of the asset group, among others. When an impairment-triggering event has occurred, the Company tests for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. +Recoverability of definite-lived intangible and other long-lived assets is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset group, which is based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of the long-lived assets in the asset group based on its fair value limitation and is allocated to +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +individual assets in the asset group, unless doing so would reduce the carrying amount of a long-lived asset in the asset group to an amount less than zero. Impairment charges are recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 3, “Goodwill and Other Intangible Assets,” for discussion on the Sanuk brand impairment charge recorded during the year ended March 31, 2024. +During the year ended March 31, 2025, the Company recorded impairment charges of $ 4,290 within unallocated enterprise and shared brand expenses in SG&A expenses in the consolidated statements of comprehensive income, primarily for a CCA that was underperforming against the Company’s expectations. During the years ended March 31, 2024, and 2023, the Company recorded impairment charges of $ 1,015 and $ 2,817 , respectively, within its UGG and HOKA brand reportable operating segments in SG&A expenses in the consolidated statements of comprehensive income for the underperformance of certain retail store-related operating lease and related leasehold improvements. +Derivative Instruments and Hedging Activities . The Company may use derivative instruments to partially offset its business exposure to foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. To reduce the volatility in earnings from fluctuations in foreign currency exchange rates, the Company may hedge a portion of forecasted sales denominated in foreign currencies. The Company enters into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less to manage foreign currency risk and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The Company does not use derivative contracts for trading purposes. +The notional amounts of outstanding Designated and Non-Designated Derivative Contracts are recorded at fair value measured using Level 2 fair value inputs, consisting of quoted forward spot rates from counterparties at the end of the applicable periods, which are corroborated by market-based pricing, with related assets and liabilities recorded in other current assets and other accrued expenses, respectively, in the consolidated balance sheets. The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts are recorded as a component of accumulated other comprehensive loss (AOCL) in the consolidated balance sheets and are reclassified to net sales in the consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in OCI in the consolidated statements of comprehensive income. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of derivative instruments. +Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. +The Company generally enters into over-the-counter derivative contracts with high-credit-quality counterparties, and therefore, considers the risk that counterparties fail to perform according to the terms of the contract as low. The Company factors the nonperformance risk of the counterparties into the fair value measurements of its derivative contracts. Refer to Note 9, “Derivative Instruments,” for further information on the impact of derivative instruments and hedging activities. +Stock Repurchase Program. Repurchased shares of the Company’s common stock are retired. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value as well as the portion due for excise taxes, is allocated to retained earnings in the consolidated balance sheets. Refer to Note 10, “Stockholders’ Equity,” for further information on the Company’s stock repurchase program. +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Revenue Recognition . Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of and obtain substantially all the remaining benefits from the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. The Company recognizes revenue and measures the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. The Company’s customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30 to 60 days. +Wholesale and international distributor revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue transactions are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, “Revenue Recognition,” for further information regarding the Company’s components of variable consideration. +Cost of Sales . Cost of sales for the Company’s goods are primarily for finished goods, as well as related overhead. Finished goods includes material costs, including commodities, for products; allocation of initial molds; and tooling cost that are amortized based on minimum contractual quantities of related product and recorded in cost of sales in the consolidated statements of comprehensive income when the product is sold. +Distribution Costs. Distribution costs include payroll and related costs, rent and occupancy, depreciation and other related costs, and other miscellaneous expenses for owned warehousing, third-party logistics provider (3PL) service fees, and receiving, inspecting, allocating, and packaging product. Distribution costs are expensed as incurred, and primarily included in unallocated enterprise and shared brand expenses. Such costs amounted to $ 279,090 , $ 238,312 , and $ 206,191 for the years ended March 31, 2025, 2024, and 2023, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s unallocated enterprise and shared brand expenses. +Research and Development Costs . Research and development costs include payroll and related costs, and other segment items, which are expensed as incurred, and included within each reportable operating segment, as well as unallocated enterprise and shared brand expenses. Such costs amounted to $ 56,676 , $ 49,171 , and $ 38,657 for the years ended March 31, 2025, 2024, and 2023, respectively, and are recorded in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company’s unallocated enterprise and shared brand expenses. +Advertising, Marketing, and Promotion Expenses . Advertising, marketing, and promotion expenses include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and other promotional costs specific to the Company’s brands, and amounted to $ 432,198 , $ 348,852 , and $ 271,140 for the years ended March 31, 2025, 2024 and 2023, respectively, which are recorded in SG&A expenses in the consolidated statements of comprehensive income. Advertising costs are expensed the first time the advertisement is run or communicated. All other costs of advertising, marketing, and promotion are expensed as incurred. Included in prepaid expenses as of March 31, 2025, and 2024 are $ 4,045 and $ 1,130 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs expected to take place after such dates. +Stock-Based Compensation . All of the Company’s stock-based compensation is classified within stockholders’ equity. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recorded, net of forfeitures, in SG&A expenses in the consolidated statements of comprehensive income ratably over the vesting period. The grant date fair value of time-based restricted stock units (RSUs) and of employees’ +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +purchase rights under the employee stock purchase plans is determined based on the closing market price of the Company’s common stock on the date of grant. The grant date fair value of long-term incentive plan performance-based stock units (LTIP PSUs) is estimated as of the grant date using a Monte Carlo simulation. +Determining the fair value and related expense of stock-based compensation requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards’ performance criteria, as well as the Company’s reliance on the closing price of its stock on the New York Stock Exchange at or near the time of grant. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock-based compensation expense and the Company’s results of operations could be materially impacted. Refer to Note 8, “Stock-Based Compensation,” for further information on grant activity, types of awards, and additional disclosure related to stock-based compensation. +Retirement Plan . The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions or other deferrals. The Company matches 50 % of each eligible participant’s deferrals on up to 6 % of eligible compensation. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. US 401(k) matching contributions totaled $ 6,528 , $ 5,129 , and $ 4,433 during the years ended March 31, 2025, 2024, and 2023, respectively, and were recorded in SG&A expenses in the consolidated statements of comprehensive income. In addition, the Company may also make discretionary profit-sharing contributions to the plan. However, there were no Company profit-sharing contributions for the years ended March 31, 2025, 2024, and 2023. +Non-qualified Deferred Compensation . The Company sponsors an unfunded, non-qualified deferred compensation plan (NQDC Plan) that provides certain members of its management team the opportunity to defer compensation into the NQDC Plan. The NQDC Plan year is from January 1st to December 31st. Participants may defer up to 50 % of their annual base salary and up to 85 % of any cash incentive bonus under the NQDC Plan. The Company has established a rabbi trust as a reserve for the benefits payable under the NQDC Plan. Deferred compensation is recognized based on the fair value of the participants’ accounts. Refer to Note 4, “Fair Value Measurements,” for further information on the fair value of deferred compensation assets and liabilities. +Self-Insurance . The Company is self-insured for a significant portion of its employee medical, including pharmacy, and dental liability exposures. Liabilities for self-insured exposures are accrued for the amounts expected to be paid based on historical claims experience and actuarial data for forecasted settlements of claims filed and for incurred but not yet reported claims. Accruals for self-insured exposures are included in accrued payroll in the consolidated balance sheets. Excess liability insurance has been purchased to limit the amount of self-insured risk on claims. +Income Taxes . Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income during the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recorded in the consolidated statements of comprehensive income in the period that includes the enactment date. +The Company recognizes the effect of income tax positions in the consolidated financial statements only if those positions are more likely than not to be sustained upon examination. Recognized income tax positions are measured at the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. Changes in recognition or measurement are recorded in the period in which the change in judgment occurs. The Company records interest and penalties accrued for income tax contingencies as interest expense in the consolidated statements of comprehensive income. Refer to Note 5, “Income Taxes,” for further information on tax impacts and components of tax balances in the consolidated financial statements. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Comprehensive Income . Comprehensive income or loss is the total of net earnings and all other non-owner changes in equity. Comprehensive income or loss includes net income or loss, foreign currency translation adjustments, and unrealized gains and losses on cash flow hedges. Refer to Note 10, “Stockholders’ Equity,” for further information on components of OCI. +Net Income per Share . Basic net income or loss per share represents net income or loss divided by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share represents net income or loss divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock. Refer to Note 11, “Basic and Diluted Shares,” for a reconciliation of basic to diluted weighted-average common shares outstanding. +NOTE 2. REVENUE RECOGNITION +Disaggregated Revenue . Refer to Note 12, “Reportable Operating Segments,” and to Note 13, “Concentration of Business,” for further information on the Company’s disaggregation of revenue by reportable operating segment and by geographic location, respectively. +Net sales by channel was as follows: +Years Ended March 31, +2025 2024 2023 +Wholesale +$ 2,855,865 $ 2,432,307 $ 2,160,675 +Direct-to-Consumer +2,129,747 1,855,456 1,466,611 +Total $ 4,985,612 $ 4,287,763 $ 3,627,286 +Variable Consideration . Components of variable consideration include estimated allowance for sales discounts, allowance for chargebacks, and sales return asset and liability. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. +Allowance for Sales Discounts. The Company provides a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. The Company uses the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income. +Allowance for Chargebacks. The Company provides a trade accounts receivable allowance for chargebacks for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, the Company records an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income. +Sales Return Asset and Liability . Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes in the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets. The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. +The following table summarizes changes in the estimated sales returns for the periods presented: +Sales Return Asset +Sales Return Liability +Balance, March 31, 2023 $ 15,685 $ ( 45,322 ) +Net additions to sales return liability (1) +60,789 ( 276,086 ) +Actual returns ( 62,608 ) 266,081 +Balance, March 31, 2024 (2) +13,866 ( 55,327 ) +Net additions to sales return liability (1) +74,150 ( 306,968 ) +Actual returns ( 66,896 ) 298,833 +Balance, March 31, 2025 (2) +$ 21,120 $ ( 63,462 ) +(1) Net additions to the sales return liability include a provision for anticipated sales returns, which consists of both contractual return rights and discretionary authorized returns. +(2) As of March 31, 2025, and 2024, the sales return liability includes $ 47,216 and $ 37,458 , respectively, for the wholesale channel and $ 16,246 and $ 17,869 , respectively, for the DTC channel. +Contract Liabilities . Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract liabilities are recorded in other accrued expenses in the consolidated balance sheets and include loyalty programs and other deferred revenue. +Loyalty Programs . The Company has a loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until one of the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption and expiration patterns. The Company’s contract liability for loyalty programs is recorded in other accrued expenses in the consolidated balance sheets. +Activity related to loyalty programs was as follows: +Years Ended March 31, +2025 2024 +Beginning balance +$ ( 17,586 ) $ ( 13,144 ) +Redemptions and expirations for loyalty certificates and points recognized in net sales 68,080 52,884 +Deferred revenue for loyalty points and certificates issued ( 69,060 ) ( 57,326 ) +Ending balance +$ ( 18,566 ) $ ( 17,586 ) +Deferred Revenue . Revenue is deferred for wholesale channel transactions when certain conditions outlined within the contract terms, including the transfer of control or delivery of product, has not occurred, such as when a wholesale channel customer prepays for ordered product. The contract liability for deferred revenue is recorded in other accrued expenses in the consolidated balance sheets. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Activity related to deferred revenue was as follows: +Years Ended March 31, +2025 2024 +Beginning balance $ ( 9,591 ) $ ( 13,448 ) +Additions of customer cash payments ( 80,732 ) ( 61,844 ) +Revenue recognized 63,018 65,701 +Ending balance $ ( 27,305 ) $ ( 9,591 ) +NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS +Goodwill as well as other intangible assets by major intangible class recorded in the consolidated balance sheets are as follows: +As of March 31, +2025 2024 +Goodwill +Gross carrying amount (1) +$ 29,821 $ 143,765 +Accumulated impairment losses (1) +( 15,831 ) ( 129,775 ) +Total goodwill (2) +$ 13,990 $ 13,990 +As of March 31, +2025 2024 +Other intangible assets +Indefinite-lived intangible assets +Teva brand trademark +$ 15,454 $ 15,454 +Definite-lived intangible assets +Trademarks (1) +8,014 51,723 +Other (1) +17,245 51,220 +Total gross carrying amount +25,259 102,943 +Trademarks accumulated amortization and impairments (1) +( 7,982 ) ( 40,326 ) +Other accumulated amortization (1) +( 17,032 ) ( 50,988 ) +Total accumulated amortization and impairments +( 25,014 ) ( 91,314 ) +Definite-lived intangible assets, net +245 11,629 +Total other intangible assets, net $ 15,699 $ 27,083 +(1) The change in the March 31, 2025, balances, when compared to March 31, 2024, is primarily due to the sale of the Sanuk brand during fiscal year 2025. +(2) As of March 31, 2025, and 2024, total goodwill is made up of $ 6,101 and 7,889 of UGG brand and HOKA brand reportable operating segments goodwill, respectively. +Definite-lived amortization expense was $ 847 , $ 2,208 , and $ 2,228 for the years ended March 31, 2025, 2024, and 2023, respectively. +Based on the evaluation of qualitative and quantitative factors, including the asset carrying amounts recorded in the consolidated balance sheets against actual results of operations and long-term forecasts of net sales and operating income, no impairment loss was recorded for goodwill and indefinite-lived intangible assets during the years ended March 31, 2025, 2024, and 2023. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +No definite-lived intangible asset triggering events were identified during the years ended March 31, 2025, and 2023. During the year ended March 31, 2024, an impairment loss of $ 8,164 was recorded within the Other brands reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for the Sanuk brand definite-lived trademark, driven by lower-than-expected results of operations for the wholesale channel that resulted in the carrying value exceeding the estimated fair value, which was determined based on an estimate of the future discounted cash flows. +NOTE 4. FAIR VALUE MEASUREMENTS +The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. +The following summarizes the three levels of inputs required: +• Level 1: Quoted prices in active markets for identical assets and liabilities. +• Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. +The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. When the Company makes short-term borrowings, the carrying amounts, which are considered Level 2 liabilities, approximate fair value based upon current rates and terms available to the Company for similar debt. The Company does not currently have any Level 3 assets or liabilities. +Assets and liabilities that are measured on a recurring basis at fair value in the consolidated balance sheets are as follows: +As of Measured Using +March 31, 2025 Level 1 Level 2 Level 3 +Assets: +Cash equivalents: +Money-market funds $ 1,485,555 $ 1,485,555 $ — $ — +Other current assets: +Designated Derivative Contracts asset +2,163 — 2,163 — +Non-Designated Derivative Contracts asset 75 — 75 — +Other assets: +Non-qualified deferred compensation asset 16,967 16,967 — — +Total assets measured at fair value $ 1,504,760 $ 1,502,522 $ 2,238 $ — +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +As of Measured Using +March 31, 2025 Level 1 Level 2 Level 3 +Liabilities: +Other accrued expenses: +Non-qualified deferred compensation liability $ ( 2,345 ) $ ( 2,345 ) $ — $ — +Designated Derivative Contracts liability +( 64 ) — ( 64 ) — +Other long-term liabilities: +Non-qualified deferred compensation liability ( 22,793 ) ( 22,793 ) — — +Total liabilities measured at fair value $ ( 25,202 ) $ ( 25,138 ) $ ( 64 ) $ — +As of Measured Using +March 31, 2024 Level 1 Level 2 Level 3 +Assets: +Cash equivalents: +Money-market funds $ 1,152,083 $ 1,152,083 $ — $ — +Other assets: +Non-qualified deferred compensation asset 13,553 13,553 — — +Total assets measured at fair value $ 1,165,636 $ 1,165,636 $ — $ — +Liabilities: +Other accrued expenses: +Non-qualified deferred compensation liability $ ( 408 ) $ ( 408 ) $ — $ — +Other long-term liabilities: +Non-qualified deferred compensation liability ( 16,229 ) ( 16,229 ) — — +Total liabilities measured at fair value $ ( 16,637 ) $ ( 16,637 ) $ — $ — +The Company’s non-financial assets, such as other long-lived assets and definite-lived intangible assets, which include operating lease assets, machinery and equipment, leasehold improvements, definite-lived trademarks; as well as indefinite-lived intangible assets and goodwill, are not required to be carried at fair value on a recurring basis and are reported at carrying value. Instead, these assets are tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. When determining fair value, Level 3 measurements are used for the estimates and assumptions, including undiscounted future cash flows expected to be generated by the asset groups based upon historical experience, expected market conditions, as well and management’s plans. +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +NOTE 5. INCOME TAXES +Income Before Income Taxes . Components of income before income taxes recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2025 2024 2023 +Domestic (1) +$ 1,033,428 $ 688,981 $ 467,231 +Foreign 209,871 289,960 198,851 +Total $ 1,243,299 $ 978,941 $ 666,082 +(1) Domestic income before income taxes for the year ended March 31, 2024 is presented net of intercompany dividends (or repatriated cash) of $ 250,000 . No intercompany dividends (or repatriated cash) that were subject to income taxes from a foreign subsidiary were declared during years ended March 31, 2025 and 2023. +Income Tax Expense . Components of income tax expense (benefit) recorded in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2025 2024 2023 +Current +Federal $ 177,652 $ 146,939 $ 115,708 +State 43,847 32,065 18,418 +Foreign 61,254 41,884 24,853 +Total 282,753 220,888 158,979 +Deferred +Federal ( 1,134 ) ( 3,113 ) 4,830 +State 219 ( 2,336 ) 382 +Foreign ( 4,630 ) 3,939 ( 14,931 ) +Total ( 5,545 ) ( 1,510 ) ( 9,719 ) +Total $ 277,208 $ 219,378 $ 149,260 +Income Tax Expense Reconciliation. Income tax expense (benefit) differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended March 31, +2025 2024 2023 +Computed expected income taxes $ 261,093 $ 205,578 $ 139,882 +State income taxes, net of federal income tax benefit 45,991 32,023 15,881 +Foreign rate differential ( 13,078 ) ( 15,976 ) ( 21,420 ) +Gross unrecognized tax benefits ( 1,594 ) 1,301 20,122 +Intercompany transfers of assets +10,430 ( 1,817 ) ( 13,072 ) +US tax on foreign earnings ( 14,548 ) 4,750 7,672 +Other ( 11,086 ) ( 6,481 ) 195 +Total $ 277,208 $ 219,378 $ 149,260 +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Deferred Taxes . The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: +As of March 31, +2025 2024 +Deferred tax assets +Amortization of intangible assets $ 12,413 $ 11,416 +Operating lease liabilities 38,051 38,890 +Uniform capitalization adjustment to inventory 10,723 11,822 +State related taxes and credit carryforwards +3,107 1,834 +Reserves and accruals 69,803 65,817 +Net operating loss carry-forwards 10,421 5,981 +Other +1,188 3,164 +Gross deferred tax assets 145,706 138,924 +Valuation allowances ( 5,138 ) ( 1,259 ) +Total 140,568 137,665 +Deferred tax liabilities +Prepaid expenses ( 8,727 ) ( 7,060 ) +Operating lease assets ( 29,189 ) ( 29,667 ) +Depreciation of property and equipment ( 23,359 ) ( 28,354 ) +Other ( 1,702 ) — +Total ( 62,977 ) ( 65,081 ) +Deferred tax assets, net $ 77,591 $ 72,584 +The deferred tax assets are currently expected to be realized between fiscal years 2026 and 2031. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company’s deferred tax valuation allowances are primarily the result of a valuation allowance on tax attributes and foreign losses in jurisdictions in which the Company expects it will have limited future profitability. The changes to the Company’s deferred tax valuation allowances are primarily the result of a valuation allowance on domestic tax attributes. +US Taxation of Foreign Earnings . The Company is subject to US taxation of its foreign subsidiary earnings, which is considered global intangible low-taxed income (commonly known as GILTI), as well as limitations on the deductions of executive compensation, which are included in income tax expense in the consolidated statements of comprehensive income for the periods presented above. +The Company currently anticipates repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US income tax, as long as such cash is not required to fund ongoing foreign operations. Due to the complexities in the laws of foreign jurisdictions, it is not practicable to estimate the amount of foreign withholding taxes associated with such unremitted earnings. No intercompany dividends were declared by the Company from a foreign subsidiary with related foreign withholding tax requirements during the year ended March 31, 2025. +As of March 31, 2025, the Company has $ 16,346 of undistributed earnings and $ 481,836 of cash and cash equivalents from its non-US subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. As of March 31, 2025, the Company has $ 1,839 of accumulated deficit from its non-US subsidiaries for which no US federal or state income taxes have been paid. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Recent Tax Law Changes. The Organization for Economic Co-operation and Development (commonly known as OECD) has released Pillar Two model rules introducing a 15% global minimum tax rate for large multinational corporations to be effective starting with tax periods ending in 2024. Various jurisdictions in which the Company operates have enacted or plan to enact legislation beginning in calendar year 2024 or in subsequent years. The enactment of Pillar Two legislation did not have a material effect on the Company’s consolidated statements of comprehensive income during the current period. The Company will continue to monitor and reflect the impact of such legislative changes in future periods, as each of the respective jurisdictions enact the legislation and the legislation becomes effective. +Unrecognized Tax Benefits . When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained upon examination. The benefit of a tax position is recorded in the consolidated financial statements during the period in which the Company believes it is more likely than not that the position will be sustained upon examination by taxing authorities. The recognition threshold is measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement. The portion of the benefit that exceeds the amount measured, as described above, is recorded as a liability for unrecognized tax benefits, along with any associated interest and penalties, in the consolidated balance sheets. +A reconciliation of the beginning and ending amounts of total gross unrecognized tax benefits are as follows: +Years Ended March 31, +2025 2024 2023 +Beginning balance $ 45,620 $ 44,901 $ 24,779 +Gross increase related to current year tax positions 4,499 4,318 6,865 +Gross increase related to prior year tax positions 4,662 4,629 16,243 +Gross decrease related to prior year tax positions ( 4,309 ) ( 4,698 ) ( 456 ) +Settlements with taxing authorities ( 22,793 ) ( 582 ) — +Lapse of statute of limitations ( 6,446 ) ( 2,948 ) ( 2,530 ) +Ending balance $ 21,233 $ 45,620 $ 44,901 +Total gross unrecognized tax benefits recorded in the consolidated balance sheets are as follows: +As of March 31, +2025 2024 +Current liability +Income tax payable $ 5,688 $ 3,998 +Long-term liability +Income tax liability 15,545 41,622 +Total $ 21,233 $ 45,620 +Net unrecognized tax benefits are defined as gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in the Company’s income tax return that would impact the Company’s effective tax rate, if recognized. Management believes it is reasonably possible that the amount of net unrecognized tax benefits, as well as associated interest and penalties, may decrease during the next 12 months by $ 2,858 , which includes amounts relating to expirations of statute of limitations and settlements of various tax matters. Of this amount, $ 2,649 would result in an income tax benefit for the Company and $ 209 would result in a decrease to interest expense in the consolidated statements of comprehensive income. +As of March 31, 2025, and 2024, the Company has accrued $ 3,424 and $ 6,314 for the payment of interest and penalties, respectively, in income tax liability in the consolidated balance sheets. During the years ended March 31, 2025, 2024, and 2023, the Company recorded $( 2,890 ), $ 486 , and $ 1,106 , respectively, of interest and penalties as a (decrease) or increase to interest expense in the consolidated statements of comprehensive income. +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +The Company has on-going income tax examinations in various state and foreign tax jurisdictions and regularly assesses tax positions taken during years open to examination. The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or foreign income tax examinations by tax authorities before fiscal year 2021. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material impact on results of operations or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. However, management does not currently expect any such audits and inquiries to have a material impact on the Company’s consolidated financial statements. +NOTE 6. REVOLVING CREDIT FACILITIES +Primary Credit Facility . In December 2022, the Company refinanced in full and terminated its prior credit agreement originally entered into in September 2018. The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank), as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement). The Credit Agreement provides for a five-year , $ 400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $ 25,000 sublimit for the issuance of letters of credit, and matures on December 19, 2027, subject to extension on early termination as described in the Credit Agreement. +In addition to allowing borrowings in US dollars, the Primary Credit Facility provides a $ 175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars, and any other foreign currency that is subsequently approved by Citibank, each lender, and each bank issuing letters of credit. Subject to customary conditions, the Company has the option to increase the maximum principal amount available up to an additional $ 300,000 , resulting in a maximum available principal amount of $ 700,000 . However, none of the lenders have committed at this time to provide any such increase in the commitment. +The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries that meet certain materiality thresholds, subject to limited exceptions. All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured, and amounts borrowed may be prepaid at any time without a premium or penalty, subject to limited exceptions. +Certain of the Company’s foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature. +Interest Rate Terms. At the Company’s election, revolving loans issued under the Primary Credit Facility will bear interest at the adjusted term SOFR, the adjusted Euro InterBank Offered Rate (EURIBOR), the Sterling Overnight Index Average (SONIA), the Canadian Dollar Offered Rate (CDOR), or the adjusted Alternate Base Rate (ABR), in each case plus the applicable interest rate margin. +Interest for borrowings in US dollars will fluctuate between SOFR, plus 1.00 % and 0.10 % based on the Company’s total net leverage ratio, and ABR, plus 0 % per annum. The applicable interest rate margin is based on a pricing grid based on the Company’s total net leverage ratio and ranges from 1.00 % to 1.625 % per annum in the case of loans based on the SOFR, EURIBOR, SONIA, or CDOR, and from 0.00 % to 0.625 % per annum in the case of loans based on ABR. As of March 31, 2025, the effective interest rates for SOFR and ABR are 5.40 % and 7.50 %, respectively. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Commitment Fees. The Company is required to pay a fee rate that fluctuates between 0.125 % and 0.20 % per annum on the daily unused amount of the Primary Credit Facility, with the exact commitment fee based on the Company’s total net leverage ratio. +Borrowing Activity. During the year ended March 31, 2025, the Company made no borrowings or repayments under the Primary Credit Facility. As of March 31, 2025, the Company has no outstanding balance, $ 955 of outstanding letters of credit, and available borrowings of $ 399,045 under the Primary Credit Facility. +China Credit Facility . In October 2021, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000 , or $ 41,338 , with an overdraft facility sublimit of CNY 100,000 , or $ 13,779 . The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 24 months, which was amended to increase from 12 months in November 2023. The obligations under the China Credit Facility are guaranteed by the Company for 108.5 % of the facility amount in US dollars. +Interest Rate Terms. Interest is based on the People’s Bank of China market rate multiplied by a variable liquidity factor. As of March 31, 2025, the effective interest rate is 3.40 %. +Borrowing Activity. During the year ended March 31, 2025, the Company made no borrowings or repayments under the China Credit Facility. As of March 31, 2025, the Company has no outstanding balance, outstanding bank guarantees of $ 455 , and available borrowings of $ 40,883 under the China Credit Facility. +Debt Covenants. Under the Credit Agreement, the Company is subject to usual and customary representations and warranties, and contains usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments, indemnification provisions in favor of the lenders and transactions with affiliates. The financial covenant requires the total net leverage ratio to be no greater than 3.75 to 1.00 . +Under the Credit Agreement, the Company is also subject to other customary limitations, as well as usual and customary events of default, which include non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material Employee Retirement Income Security Act of 1974 (ERISA) liabilities; and a change of control of the Company. +Under the China Credit Facility, DBTC is subject to usual and customary representations and warranties, and usual and customary affirmative and negative covenants, which include limitations on liens and additional indebtedness. +As of March 31, 2025, the Company is in compliance with all financial covenants under the Primary Credit Facility and China Credit Facility. +NOTE 7. COMMITMENTS AND CONTINGENCIES +Leases . The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts which vary in lease terms but, in the aggregate, continue in effect through calendar year 2035. Some of the Company’s operating leases contain extension options between one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants. +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Variable Lease Payments. Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and lease liabilities and are recorded in rent expense as a component of SG&A expenses in the consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM, and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities. +Discount Rate . The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its IBR. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. The Company has a centralized treasury function, which enables the Company to use a portfolio approach to discount lease obligations. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its non-collateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. +Rent Expense . The components of rent expense for operating leases recorded in SG&A expenses in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2025 2024 2023 +Operating $ 68,020 $ 64,006 $ 52,961 +Variable 39,284 40,615 30,309 +Short-term 9,912 6,931 5,729 +Total $ 117,216 $ 111,552 $ 88,999 +Operating Lease Liabilities . Maturities of undiscounted operating lease liabilities remaining as of March 31, 2025, with a reconciliation to the present value of operating lease liabilities recorded in the consolidated balance sheets, are as follows: +Years Ending March 31, Amount +2026 $ 62,445 +2027 67,077 +2028 56,414 +2029 42,019 +2030 29,538 +Thereafter 60,330 +Total undiscounted future lease payments 317,823 +Less: Imputed interest ( 40,848 ) +Total $ 276,975 +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Operating lease liabilities recorded in the consolidated balance sheets as of March 31, 2025, exclude an aggregate of $ 10,096 of undiscounted minimum lease payments due pursuant to leases signed, but not yet commenced, primarily for new HOKA brand retail stores and a regional office, for which the leases are expected to commence in the first quarter of fiscal year ending March 31, 2026 (next fiscal year). +Supplemental Disclosure . Key estimates and judgments related to operating lease assets and lease liabilities that are outstanding and presented in the consolidated balance sheets are as follows: +As of March 31, +2025 2024 +Weighted-average remaining lease term in years 5.5 5.9 +Weighted-average discount rate 4.5 % 3.9 % +Supplemental information for amounts presented in the consolidated statements of cash flows related to operating leases, were as follows: +Years Ended March 31, +2025 2024 2023 +Non-cash operating activities (1) +Operating lease assets obtained in exchange for lease liabilities +$ 70,179 $ 78,255 $ 84,988 +Reductions to operating lease assets for reductions to lease liabilities +( 2,096 ) ( 8,418 ) ( 1,903 ) +(1) Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements, as well as reductions for tenant improvement allowances. +Purchase Obligations. The Company has various types of purchase obligations, as follows: +Product . As of March 31, 2025, the Company has $ 956,911 of outstanding purchase orders or other obligations with independent third-party contractors that manufacture all of its products (independent manufacturers). These obligations consist mostly of open purchase orders that are expected to be fulfilled in the ordinary course of business and to be paid in less than one fiscal year. A significant portion of the purchase commitments can be cancelled by the Company under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of the Company’s binding commitments or minimum purchase obligations for products, and instead reflects an estimate of its future payment commitments based on information currently available. +Commodities . The Company has entered into fixed purchasing contracts with affiliates, manufacturers, factories, and other agents (designated suppliers) of sheepskin and sugarcane-derived ethylene-vinyl acetate (EVA), requiring its designated suppliers to purchase commodities on or before a specified target date, generally within one to two years (collectively, commodity contracts). The Company’s fixed pricing agreements are non-cancellable and may be subject to fees, including certain sheepskin purchasing contracts requiring deposits when minimum volumes are not fully consumed. +As of March 31, 2025, the Company’s aggregated estimated future payment obligations are $ 231,323 for commitments under these commodity contracts, of which $ 7,412 is due in less than one fiscal year and the remainder $ 223,911 is due in one to three fiscal years. As of March 31, 2025, the Company had no outstanding deposits on supply agreements. As of March 31, 2024, the Company had $ 16,243 in outstanding deposits on supply agreements, which were refunded and received by the Company during the year ended March 31, 2025. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Othe r. Other purchase commitments include contracts for information technology (IT) services, 3PL service fees and other supply chain services, promotional expenses, and other commitments under service contracts. As of March 31, 2025, the Company has an aggregate of $ 200,744 of other purchase commitments, of which $ 118,336 is due in less than one fiscal year, $ 70,274 is due in one to three fiscal years, and the remainder of $ 12,134 is due in three to five fiscal years. +Litigation . From time to time, the Company is involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these matters cannot be predicted with certainty, the Company believes it is not currently a party to any legal proceedings, disputes, or other claims for which a material loss is considered probable and for which the amount (or range) of loss is reasonably estimable. However, regardless of the merit of the claims raised or the outcome, these matters can have an adverse impact on the Company as a result of legal costs, diversion of management’s time and resources, and other factors. +Indemnification. The Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements generally do not provide for a limitation on the maximum potential future payments. From time to time, the Company also agrees to indemnify its licensees, distributors, and promotional partners in connection with claims that the Company’s products infringe on the intellectual property rights of third parties. These agreements may or may not be made pursuant to a written contract. In addition, from time to time, the Company also agrees to standard indemnification provisions in commercial agreements in the ordinary course of business. Management believes the likelihood of any payments under any of these arrangements is remote and would be immaterial. This determination is made based on a prior history of insignificant claims and related payments. +NOTE 8. STOCK-BASED COMPENSATION +Stock Incentive Plans. In September 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (2015 SIP), which initially reserved 7,650,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors, and advisors. The 2015 SIP provided for the issuance of a variety of stock-based compensation awards, including RSUs, performance-based restricted stock units (PSUs), LTIP PSUs, stock appreciation rights, stock bonuses, incentive stock options (ISOs), and non-qualified stock options (NQSOs). +In September 2024, the Company’s stockholders approved the 2024 Stock Incentive Plan (2024 SIP), which is intended to replace the 2015 SIP. Like the 2015 SIP, the primary purpose of the 2024 SIP is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success. As a result of the stock split , the number of shares of common stock reserved for issuance under the 2024 SIP and the number of shares underlying outstanding equity awards and the exercise price of stock options were adjusted proportionately. +The 2024 SIP initially reserves 7,800,000 shares of the Company’s common stock for issuance to employees, directors, consultants, independent contractors, and advisors, less one share for every one share granted under the 2015 SIP after March 31, 2024 and prior to September 9, 2024, the effective date of the 2024 SIP, subject to an increase from the return of shares under the 2015 SIP as described below. The terms of the 2024 SIP are substantially similar to the terms of the 2015 SIP. The 2024 SIP provides for the issuance of a variety of stock-based compensation awards, including RSUs, PSUs, LTIP PSUs, stock appreciation rights, stock bonuses, ISOs, and NQSOs. The maximum aggregate number of shares that may be issued to employees under the 2024 SIP through the exercise of ISOs is 4,500,000 . +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +The Company will not grant any further equity awards under the 2015 SIP. Outstanding awards under the 2015 SIP will remain outstanding, unchanged and subject to the terms of the 2015 SIP and their respective award agreements. Shares subject to awards that are forfeited, expire or are otherwise terminated without shares being issued, or shares withheld to pay the exercise price of an award or to satisfy tax withholding obligations, including shares subject to awards granted under the 2015 SIP that are outstanding after March 31, 2024, will be returned to the pool of shares available for grant and issuance under the 2024 SIP. As of March 31, 2025, 7,793,719 shares of common stock remained available for future issuance under the 2024 SIP, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization. +Annual Stock Awards. During the years ended March 31, 2025, 2024, and 2023, the Company granted RSU and LTIP PSU awards to certain members of the Company’s management team, which entitle the recipients to receive shares of the Company’s common stock upon vesting. No dividends are paid or accumulated on any RSU or LTIP PSU awards. +A summary of the status and changes of the Company’s nonvested shares is as follows: +RSUs +LTIP PSUs +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value (3) +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value (3) +Nonvested, March 31, 2022 587,202 $ 47.34 618,192 $ 57.37 +Granted (1) +311,730 56.50 392,820 55.12 +Vested (2) +( 270,552 ) ( 41.61 ) ( 180,624 ) ( 53.30 ) +Forfeited ( 92,634 ) ( 50.00 ) ( 163,164 ) ( 53.99 ) +Nonvested, March 31, 2023 535,746 55.10 667,224 57.98 +Granted (1) +235,788 95.55 277,692 95.13 +Vested (2) +( 264,888 ) ( 52.19 ) ( 301,368 ) ( 61.39 ) +Forfeited ( 39,864 ) ( 77.07 ) ( 112,404 ) ( 87.15 ) +Nonvested, March 31, 2024 466,782 75.31 531,144 69.29 +Granted (1) +165,988 158.78 148,770 151.19 +Vested (2) +( 235,872 ) ( 70.69 ) ( 327,868 ) ( 55.07 ) +Forfeited ( 31,026 ) ( 96.52 ) ( 51,708 ) ( 80.76 ) +Nonvested, March 31, 2025 365,872 $ 114.34 300,338 $ 123.42 +(1) The amounts granted are the maximum amounts under the terms of the applicable LTIP PSUs. +(2) The amounts vested include shares withheld to cover taxes that are not issued to the recipient. +(3) Impact from the stock split may not calculate on rounded numbers disclosed in prior periods. +Restricted Stock Units. RSUs are subject to a time-based vesting condition and typically vest in equal annual installments over three years following the date of grant. +Long-Term Incentive Plan Awards. LTIP PSU awards are subject to market, performance, and time-based vesting conditions. The term of LTIP PSU awards is over a multi-fiscal year performance period with metrics established at the beginning of the performance period, which is generally two or three years (Measurement Period). The LTIP PSU awards include a market condition tied to the Company’s relative total stockholder return (TSR) in relation to its peer companies (peer market condition), as well as financial performance conditions tied to certain revenue and pre-tax income performance targets (financial performance conditions). Following a determination of the Company’s achievement with respect to the financial performance conditions for the applicable Measurement Period, the vesting of each LTIP PSU award will be subject to adjustment for the peer market condition based on the application of the TSR modifier. The amount of the adjustment is determined based on a +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +comparison of the Company’s TSR relative to the TSR of a pre-determined set of peer group companies for the Measurement Period. +The grant date fair value of LTIP PSUs is determined using a Monte-Carlo model that simulates a range of possible future stock prices for the Company and each member of the peer group over the Measurement Period. For each grant of LTIP PSUs, the Monte-Carlo simulation model factors in key assumptions, such as the market price of the underlying common stock at the beginning and end of the Measurement Period, risk free interest rate, expected dividend yield when simulating a TSR, expected dividend yield when simulating the Company’s stock price, stock price volatility, and correlation coefficients. The Company evaluates the probability of achieving the financial performance conditions against its most current long-range forecast at least quarterly and may adjust stock-based compensation expense for its LTIP PSUs up or down based on its estimated probability outcome over the Measurement Period. The peer market condition is measured as part of the grant date fair value. +The actual number of LTIP PSU awards that vest may increase up to a maximum of 200 % of the targeted amount for the award based on achievement of the financial performance conditions and the TSR modifier for the peer market condition. No vesting of any portion of the LTIP PSU awards will occur if the Company fails to achieve the minimum threshold financial performance conditions for each reporting period within the Measurement Period. For the LTIP PSUs granted during the fiscal years 2025, 2024, and 2023, the Company expects to exceed the minimum threshold target performance criteria based on the Company’s long-range forecast as of March 31, 2025. +Long-Term Incentive Plan Options. The Company approved the issuance of LTIP NQSOs under the 2015 SIP, including the November 2016 (2017 LTIP NQSOs) and June 2017 (2018 LTIP NQSOs) grants, which were awarded to certain members of the Company’s management team, with a maximum contractual term ending March 31, 2026. As of March 31, 2019, and 2020, the target performance criteria were achieved and all LTIP NQSOs under the 2017 LTIP NQSOs and 2018 LTIP NQSOs, respectively, were fully vested. Each vested LTIP NQSO provides the recipient the right to purchase a specified number of shares of the Company’s common stock at a fixed exercise price per share based on the closing price of the common stock on the date of grant. During the years ended March 31, 2025, 2024, and 2023, no LTIP NQSOs were granted. During the year ended March 31, 2025, 89,454 shares were exercised pursuant to LTIP NQSOs at a weighted-average exercise price of $ 10.80 . As of March 31, 2025, no LTIP NQSOs were exercisable and as of March 31, 2024, 89,454 LTIP NQSOs were exercisable at a weighted average exercise price of $ 10.80 . +Grants to Directors. Each of the Company’s nonemployee directors was entitled to receive common stock with a total value of $ 170 for annual service on the Board of Directors (Board) during the year ended March 31, 2025. The shares are issued in equal quarterly installments with the number of shares being determined using the rolling average of the closing price of the Company’s common stock during the last ten trading days leading up to, and including, the grant date, which is in alignment with the Company’s equity grant guidelines. Each of these shares is fully vested and recorded as compensation expense in the consolidated statements of comprehensive income on the date of issuance. +Employee Stock Purchase Plans . In September 2015, the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (2015 ESPP), which authorized 6,000,000 shares of the Company’s common stock for sale to eligible employees using after-tax payroll deductions, which are refundable until purchases are made, and are liability-classified. Following the issuance of shares under the 2015 ESPP to employees who participated in the offering period ended February 28, 2025, the 2015 ESPP was terminated, and no new offering periods under the 2015 ESPP will commence. +In September 2024, the Company’s stockholders approved the 2024 Employee Stock Purchase Plan (2024 ESPP), which replaced the 2015 ESPP. The 2024 ESPP reserves 6,000,000 shares of the Company’s common stock for sale to eligible employees. The terms of the 2024 ESPP are substantially similar to the terms of the 2015 ESPP. Each offering period under the 2024 ESPP is anticipated to run for approximately six months with purchases occurring on the last day of each offering period (no look-back provision) at a 15 % discount to the closing price on that date. The first offering period commenced on March 1, 2025. As a result of the stock split , the number of shares of common stock reserved for issuance under the 2024 ESPP were adjusted proportionately. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Stock-Based Compensation . Components of stock-based compensation recorded, net of estimated forfeitures, in SG&A expenses in the consolidated statements of comprehensive income were as follows: +Years Ended March 31, +2025 2024 2023 +Stock-based compensation +RSUs $ 19,758 $ 15,935 $ 13,249 +LTIP PSUs 15,676 18,941 11,275 +Grants to Directors 1,858 1,907 1,863 +Subtotal 37,292 36,783 26,387 +Other stock-based compensation +Employee Stock Purchase Plan 651 505 510 +Total stock-based compensation, pre-tax 37,943 37,288 26,897 +Income tax benefit ( 9,304 ) ( 9,097 ) ( 6,557 ) +Total stock-based compensation, net of tax $ 28,639 $ 28,191 $ 20,340 +Unrecognized Stock-Based Compensation. Total remaining unrecognized stock-based compensation as of March 31, 2025, related to non-vested awards that the Company considers probable to vest and the weighted-average period over which the cost is expected to be recognized in future periods, is as follows: +Unrecognized +Stock-Based Compensation +Weighted-Average +Remaining +Vesting Period (Years) +RSUs $ 21,951 1.0 +LTIP PSUs 21,225 1.5 +Total $ 43,176 +NOTE 9. DERIVATIVE INSTRUMENTS +As of March 31, 2025, the Company has the following derivative contracts recorded at fair value in the consolidated balance sheets: +Designated Derivative Contracts +Non-Designated Derivative Contracts +Total +Notional value $ 367,695 $ 14,018 $ 381,713 +Fair value recorded in other current assets 2,163 75 2,238 +Fair value recorded in other accrued expenses ( 64 ) — ( 64 ) +As of March 31, 2025, five counterparties hold the Company’s outstanding derivative contracts, all of which are expected to mature in the next twelve months . As of March 31, 2024, the Company had no outstanding derivative contracts. +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +The Company settled derivative contracts with notional values as follows: +Years Ended March 31, +2025 2024 2023 +Designated Derivative Contracts +$ 258,040 $ 179,528 $ 96,345 +Non-Designated Derivative Contracts +18,565 — 31,044 +Total $ 276,605 $ 179,528 $ 127,389 +The following table summarizes the effect of Designated Derivative Contracts on unrealized gains or losses recorded in the consolidated statements of comprehensive income for changes in AOCL, net of tax: +Years Ended March 31, +2025 2024 2023 +Gain recorded in OCI $ 4,387 $ 4,090 $ 1,504 +Reclassifications from AOCL into net sales ( 2,288 ) ( 4,090 ) ( 1,504 ) +Income tax expense in OCI ( 515 ) — — +Total $ 1,584 $ — $ — +The non-performance risk of the Company and its counterparties did not have a material impact on the fair value of its derivative contracts. As of March 31, 2025, the amount of unrealized gains on derivative contracts recorded in AOCL is expected to be reclassified into net sales within the next twelve months . Refer to Note 10, “Stockholders’ Equity,” for further information on the components of AOCL. +NOTE 10. STOCKHOLDERS’ EQUITY +Stock Repurchase Program. The Board has approved various authorizations under the Company’s stock repurchase program to repurchase shares of its common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (collectively, the stock repurchase program). As of March 31, 2025, the Board last approved an authorization of $ 1,200,000 on July 27, 2022, to repurchase its common stock under the same conditions as the prior stock repurchase program. As of March 31, 2025, the aggregate remaining approved amount under the stock repurchase program is $ 374,701 . The stock repurchase program does not obligate the Company to acquire any amount of common stock and may be suspended at any time at the Company’s discretion. +Stock repurchase activity under the Company’s stock repurchase program was as follows: +Years Ended March 31, +2025 2024 2023 +Total number of shares repurchased (1) +3,800,040 4,289,124 5,569,572 +Weighted average price per share +$ 149.21 $ 96.74 $ 53.39 +Dollar value of shares repurchased (2) (3) +$ 567,002 $ 414,931 $ 297,372 +(1) All share repurchases were made pursuant to the Company’s stock repurchase program in open-market transactions. +(2) The dollar value of shares repurchased excludes the cost of broker commissions, excise taxes, and other costs. +(3) May not calculate on rounded dollars. +Subsequent to March 31, 2025, through May 9, 2025, the Company repurchased 765,321 shares of its common stock at a weighted average price of $ 109.75 per share for $ 83,998 . As of May 9, 2025, the Company had $ 290,704 remaining authorized under the stock repurchase program. Amounts may not calculate on rounded dollars. +On May 21, 2025, the Board approved an additional authorization of $ 2,250,000 , for the Company to repurchase its common stock under the same conditions as the prior stock repurchase program. +F-36 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Accumulated Other Comprehensive Loss . The components within AOCL, net of tax, recorded in the consolidated balance sheets, are as follows: +As of March 31, +2025 2024 +Unrealized gain on cash flow hedges $ 1,584 $ — +Cumulative foreign currency translation loss ( 51,238 ) ( 50,733 ) +Total $ ( 49,654 ) $ ( 50,733 ) +NOTE 11. BASIC AND DILUTED SHARES +The reconciliation of basic to diluted weighted-average common shares outstanding was as follows: +Years Ended March 31, +2025 2024 2023 +Basic 151,992,000 155,225,000 159,023,000 +Dilutive effect of equity awards 678,000 1,060,000 1,088,000 +Diluted 152,670,000 156,285,000 160,111,000 +Excluded +RSUs 9,000 16,000 20,000 +LTIP PSUs 155,000 291,000 453,000 +Deferred Non-Employee Director Equity Awards 2,000 3,000 11,000 +Excluded Awards. The equity awards excluded from the calculation of the dilutive effect may be excluded due to one of the following: (1) the shares were antidilutive or (2) the necessary conditions had not been satisfied for the shares to be deemed issuable based on the Company’s performance for the relevant performance period. The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards subject to the achievement of performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower than the number of shares presented, which could result in a lower dilutive effect. Refer to Note 8, “Stock-Based Compensation,” for further information on the Company’s equity incentive plans. +NOTE 12. REPORTABLE OPERATING SEGMENTS +Information reported to the CODM is organized into the Company’s three reportable operating segments, which include the brand operations for the UGG brand, HOKA brand, and Other brands. The operations of each brand within these reportable operating segments are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. +The Company does not regularly provide total assets or capital expenditures information by reportable operating segment to the CODM because that information is not used to evaluate performance or allocate resources to each reportable operating segment. +Segment Net Sales, Gross Margin, and Income from Operations. The CODM regularly evaluates the performance of each reportable operating segment based on net sales, gross profit as a percentage of net sales (gross margin), and income from operations when making decisions about resource allocations to each reportable operating segment. Income from operations of each reportable operating segment includes certain costs which are specifically related to each reportable operating segment and that are regularly provided to the CODM. These costs consist of cost of sales; payroll and related expenses, including stock-based compensation; advertising, marketing, and promotion expenses; rent and occupancy; depreciation and other related costs; and other segment items. +F-37 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +There are no inter-segment sales for any period presented. The accounting policies of the Company's reportable operating segments are consistent with those described in Note 1, “General.” +Income from operations of each reportable operating segment exclude enterprise and shared brand expenses as well as total other income, net, which are not used to assess reportable operating segment performance. Unallocated enterprise and shared brand expenses are costs that are managed centrally and not specific to any one brand. These costs are primarily comprised of certain payroll and related expenses, including stock-based compensation; global IT expenses; 3PL service fees; depreciation, rent, and occupancy for owned warehouses and offices; and other SG&A expenses, such as costs for contract services, materials, supplies, and travel. These costs span multiple functions including owned warehouses and 3PL service fees, along with enterprise costs which include centralized commercial operations, IT, finance, human resources, legal, supply chain, and corporate executives. +Reportable operating segment information, with a reconciliation to the consolidated statements of comprehensive income, was as follows: +Year Ended March 31, 2025 UGG HOKA +Other Brands +Total +Net sales $ 2,531,351 $ 2,233,090 $ 221,171 $ 4,985,612 +Less: Cost of sales (1) +1,023,495 949,824 126,630 2,099,949 +Segment gross profit 1,507,856 1,283,266 94,541 2,885,663 +Segment gross margin 59.6 % 57.5 % 42.7 % 57.9 % +Less: (1) +Payroll and related costs 146,093 101,056 18,179 265,328 +Advertising, marketing, and promotion expenses 180,889 226,238 25,071 432,198 +Rent and occupancy 75,724 26,467 424 102,615 +Depreciation and other related costs (2) +10,026 5,007 4,412 19,445 +Other segment items (3) +92,251 75,993 11,877 180,121 +Segment SG&A expenses +504,983 434,761 59,963 999,707 +Segment income from operations $ 1,002,873 $ 848,505 $ 34,578 $ 1,885,956 +Segment operating margin +39.6 % 38.0 % 15.6 % 37.8 % +Year Ended March 31, 2024 UGG HOKA +Other Brands +Total +Net sales $ 2,239,132 $ 1,806,740 $ 241,891 $ 4,287,763 +Less: Cost of sales (1) +983,636 763,673 154,966 1,902,275 +Segment gross profit 1,255,496 1,043,067 86,925 2,385,488 +Segment gross margin 56.1 % 57.7 % 35.9 % 55.6 % +Less: (1) +Payroll and related costs 134,307 74,991 17,628 226,926 +Advertising, marketing, and promotion expenses 148,809 175,756 24,287 348,852 +Rent and occupancy 75,724 16,589 348 92,661 +Depreciation and other related costs (2) +9,295 3,389 10,034 22,718 +Other segment items (3) +82,534 53,295 10,907 146,736 +Segment SG&A expenses +450,669 324,020 63,204 837,893 +Segment income from operations $ 804,827 $ 719,047 $ 23,721 $ 1,547,595 +Segment operating margin +35.9 % 39.8 % 9.8 % 36.1 % +F-38 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +Year Ended March 31, 2023 UGG HOKA +Other Brands +Total +Net sales $ 1,929,211 $ 1,412,916 $ 285,159 $ 3,627,286 +Less: Cost of sales (1) +975,585 641,240 185,091 1,801,916 +Segment gross profit 953,626 771,676 100,068 1,825,370 +Segment gross margin 49.4 % 54.6 % 35.1 % 50.3 % +Less: (1) +Payroll and related costs 109,576 57,446 15,266 182,288 +Advertising, marketing, and promotion expenses 114,652 135,590 20,898 271,140 +Rent and occupancy 69,302 9,033 453 78,788 +Depreciation and other related costs (2) +10,623 2,272 1,866 14,761 +Other segment items (3) +77,004 38,877 12,083 127,964 +Segment SG&A expenses +381,157 243,218 50,566 674,941 +Segment income from operations $ 572,469 $ 528,458 $ 49,502 $ 1,150,429 +Segment operating margin +29.7 % 37.4 % 17.4 % 31.7 % +(1) The significant expense categories and amounts align with the segment-level information that is regularly provided to the CODM. +(2) Depreciation and other related costs generally includes depreciation of property and equipment, amortization and impairment of intangible assets or other-long lived assets, accretion, loss on disposal of assets, and other miscellaneous costs. During the year ended March 31, 2024, the Company recorded an impairment to intangible assets of $ 8,164 for the Sanuk brand definite-lived trademark. Refer to Note 3, “Goodwill and Other Intangible Assets,” for further information on the impairment loss. +(3) Other segment items are comprised of other SG&A expenses, which primarily includes credit card fees, commissions, materials and supplies, travel, and certain 3PL service fees. +A reconciliation of reportable segment income from operations to consolidated statements of comprehensive income was as follows: +Years Ended March 31, +2025 2024 2023 +Segment income from operations +$ 1,885,956 $ 1,547,595 $ 1,150,429 +Unallocated enterprise and shared brand expenses (1) +( 706,864 ) ( 620,081 ) ( 497,678 ) +Total other income, net 64,207 51,427 13,331 +Consolidated income before income taxes +$ 1,243,299 $ 978,941 $ 666,082 +(1) To the extent that consolidated SG&A expenses exceed reportable operating segment SG&A expenses, the costs are recorded in unallocated enterprise and shared brand expenses, which are costs that are managed centrally and not specific to any one brand. The change in reportable operating segments had an impact on segment income from operations, a measure of segment profitability, and a clarification was made that certain prior unallocated overhead costs are defined as unallocated enterprise and shared brand expenses and are excluded from the measure of segment profitability. +F-39 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +NOTE 13. CONCENTRATION OF BUSINESS +Regions and Customers . The Company sells its products globally to customers and consumers, with net sales concentrations as follows: +Years Ended March 31, +2025 2024 2023 +International net sales $ 1,798,903 $ 1,424,089 $ 1,175,789 +% of net sales 36.1 % 33.2 % 32.4 % +Net sales in foreign currencies $ 1,376,782 $ 1,105,057 $ 832,632 +% of net sales 27.6 % 25.8 % 23.0 % +Ten largest global customers as % of net sales +23.7 % 24.2 % 25.2 % +For the years ended March 31, 2025, 2024, and 2023, no single foreign country and no single global customer comprised 10.0% or more of the Company’s total net sales. +As of March 31, 2025, the Company has one customer that represents 13.6 % of trade accounts receivable, net, compared to two customers that in total represented 31.2 % of trade accounts receivable, net, as of March 31, 2024. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations. +Cash and Cash Equivalents. The Company maintains a portion of its cash in Federal Deposit Insurance Corporation insured bank deposit accounts which, at times, may exceed federally insured limits. To date, the Company has not experienced any losses in such accounts. Based on the size and strength of the banking institutions used, the Company does not believe it is exposed to any significant credit risks in cash. +Designated Suppliers. The Company outsources the production of its finished goods to independent manufacturers, which are primarily located in Southeast Asia, predominately in Vietnam. The majority of the raw materials and components used in the production of the Company’s products by its independent manufacturers are purchased from designated suppliers, who work with other subcontractors that extract, process, or convert these raw materials. Sheepskin used to manufacture a significant portion of the Company’s UGG brand products and is sourced primarily from designated suppliers in Australia and processed by two tanneries in China. +Long-Lived Assets . Long-lived assets, which consist of property and equipment, net, recorded in the consolidated balance sheets, are as follows: +As of March 31, +2025 2024 +United States $ 289,672 $ 270,561 +Foreign (1) +35,927 31,561 +Total $ 325,599 $ 302,122 +(1) As of March 31, 2025, and 2024, no property and equipment, net, associated with any single foreign country represented 10.0% or more of the Company’s total property and equipment, net. +F-40 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +For the Fiscal Years Ended March 31, 2025, 2024, and 2023 +(amounts in thousands, except per share and share data) +NOTE 14. SUPPLIER FINANCE PROGRAM +The Company has a voluntary SFP administered through a third-party platform that provides the Company’s independent manufacturers that supply its inventory (inventory suppliers) the opportunity to sell their receivables due from the Company to participating financial institutions in advance of the invoice due date, at the sole discretion of both inventory suppliers and the financial institutions The Company is not party to the agreements between these third parties and has no economic interest in an inventory suppliers’ decision to sell a receivable. +The Company’s payment obligations, including the amounts due and payment terms, which generally do not exceed 90 days, are not impacted by the inventory suppliers’ election to participate in the SFP, and the Company provides no guarantees to any third parties under the SFP. Accordingly, amounts due to inventory suppliers that elect to participate in the SFP are recorded in trade accounts payable in the consolidated balance sheets. +Activity for the Company’s SFP program is as follows: +Year Ended March 31, 2025 +Beginning balance +$ 3,483 +Obligations added +29,373 +Obligations settled +( 31,960 ) +Ending balance +$ 896 +Payments made in connection with the SFP are reported as cash used in operating activities in the trade accounts payable line item of the consolidated statements of cash flows. +F-41 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +TOTAL VALUATION AND QUALIFYING ACCOUNTS +(dollar amounts in thousands) +Allowances for doubtful accounts, sales discounts, and chargebacks against gross trade accounts receivable related to wholesale channel sales recorded in the consolidated balance sheets, are as follows: +Years Ended March 31, +2025 2024 2023 +Allowance for doubtful accounts (1) +Beginning balance $ ( 9,109 ) $ ( 10,576 ) $ ( 9,044 ) +Additions ( 4,869 ) ( 658 ) ( 1,983 ) +Deductions 444 2,125 451 +Ending balance $ ( 13,534 ) $ ( 9,109 ) $ ( 10,576 ) +Allowance for sales discounts (2) +Beginning balance $ ( 3,840 ) $ ( 5,656 ) $ ( 2,831 ) +Additions ( 19,028 ) ( 17,060 ) ( 19,745 ) +Deductions 21,502 18,876 16,920 +Ending balance $ ( 1,366 ) $ ( 3,840 ) $ ( 5,656 ) +Allowance for chargebacks (3) +Beginning balance $ ( 14,382 ) $ ( 16,272 ) $ ( 18,716 ) +Additions ( 31,701 ) ( 28,845 ) ( 27,400 ) +Deductions 28,100 30,735 29,844 +Ending balance $ ( 17,983 ) $ ( 14,382 ) $ ( 16,272 ) +Total $ ( 32,883 ) $ ( 27,331 ) $ ( 32,504 ) +(1) The additions to the allowance for doubtful accounts represent estimates of the Company’s bad debt expense or recovery based on the factors on which the Company evaluates the collectability of its accounts receivable, with actual recoveries netted into additions. Deductions are for the actual amounts written off against outstanding trade accounts receivable. +(2) The additions to the allowance for sales discounts represent estimates of discounts to be taken by the Company’s customers based on the amount of outstanding discounts for meeting shipment or prompt payments terms. Deductions are for the actual discounts taken by the Company’s customers against outstanding trade accounts receivable. +(3) The additions to the allowance for chargebacks represent chargebacks and markdowns taken in the respective year, as well as an estimate of amounts that will be taken in the future related to sales in the current reporting period. Deductions are for the actual amounts written off against outstanding trade accounts receivable. +F-42 \ No newline at end of file diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/filing_metadata.csv b/raw/filings/0000910521/2024/0000910521-25-000017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..0fbd72b2a26f41f63aa76b7a311186315ec27b41 --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2025-05-23,2025-03-31,2025-05-23T16:55:21.000Z,0000910521-25-000017,deck-20250331.htm,10-K,11993204,1,1,https://www.sec.gov/Archives/edgar/data/910521/000091052125000017/deck-20250331.htm,https://www.sec.gov/Archives/edgar/data/910521/000091052125000017/,2024,2024,1 diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/item1.txt b/raw/filings/0000910521/2024/0000910521-25-000017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..48c0333024671208538702f01cabe938e7d982d7 --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/item1.txt @@ -0,0 +1,106 @@ +ITEM 1. BUSINESS +GENERAL +We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, AHNU, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets. We believe our products are distinctive and appeal to a broad demographic. Our brands sell our products through quality domestic and international retailers, international distributors, and directly to global consumers through our Direct-to-Consumer (DTC) channel, which is comprised of an e‑commerce and retail store presence. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products (independent manufacturers). +RECENT DEVELOPMENTS +Koolaburra Brand. During the third quarter of fiscal year 2025, we began taking steps to phase out our standalone operations for the Koolaburra brand in order to maintain focus on our most significant organic opportunities. We closed Koolaburra.com as of March 31, 2025, and plan to wind down the Koolaburra brand in the wholesale channel by the end of calendar year 2025. Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +3 +Table of Contents +Sanuk Brand Asset Sale. We completed the sale of our Sanuk brand and certain related assets on August 15, 2024 (Sanuk Brand Sale Date). Refer to the section titled “The Company,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information on the sale of Sanuk brand. +Forward Stock Split and Authorized Share Increase. On September 13, 2024, we effected a stock split and an authorized share increase. Our financial results included within this Annual Report have been retroactively adjusted to reflect the effectiveness of the stock split and the authorized share increase. Refer to the section titled “Basis of Presentation,” in Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for further information. +BRANDS +UGG. The UGG brand is one of the most iconic and recognized footwear brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient consumer-focused line of premium footwear, apparel, and accessories with year-round product offerings that appeal to a growing global audience and a broad demographic. +HOKA . The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing across its global marketplace. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle footwear offerings, as well as select apparel and accessories. +Other Brands. Other brands consist primarily of the Teva brand, AHNU brand, and Koolaburra brand. The Teva brand’s products are built for a range of outdoor pursuits and include a variety of footwear options, from classic sandals and shoes to boots. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear. The Koolaburra brand, for which we are phasing out standalone operations by the end of calendar year 2025, is a casual footwear brand that uses plush materials to target value-oriented consumers. +As discussed under the section titled “Recent Developments” above, the sale of the Sanuk brand was completed during fiscal year 2025. The financial results for our reportable operating segments present the former Sanuk brand within the Other brands reportable operating segment through the Sanuk Brand Sale Date for the year ended March 31, 2025, and full financial results for the years ended March 31, 2024, and 2023. Refer to the section titled “Reportable Operating Segments” below for further details about our reportable operating segments. +CHANNEL DISTRIBUTION +Wholesale. Our wholesale channel sells products to a network of third-party retailers, including partner retailers, and distributors. This approach enables us to expand market reach and leverage the scale and operational capabilities of its wholesale partners to serve a broad base of end consumers. +We sell our UGG brand products primarily through fashion lifestyle retailers, higher-end department stores, streetwear and sports style partners, online retailers and partner retailers. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach. +We sell our HOKA brand products primarily through full-service specialty retailers, outdoor and sporting goods retailers, select online retailers, fashion lifestyle retailers, sports style partners, and higher-end department stores. We continue to expand our HOKA brand wholesale distribution globally, including through additional mono-branded locations operated by partner retailers. +4 +Table of Contents +We sell our Teva brand products primarily through outdoor and sporting goods retailers, fashion lifestyle retailers, large national retail chains, higher-end department stores, and online retailers. We sell our AHNU brand footwear through domestic streetwear and lifestyle boutiques and retailers. +Direct-to-Consumer. Our DTC channel is comprised of our Company-owned e-commerce websites and retail stores where products are sold at retail prices. Our e-commerce websites and retail stores are intertwined and interdependent in an omni-channel marketplace, providing a fluid purchasing experience, which engenders brand loyalty while increasing product sales and improving our inventory productivity. In addition, we believe many of our consumers interact with both before making purchasing decisions in store and online. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online and then view inventory availability by store location and make a purchase in store. +E-Commerce Websites. Our global e-commerce websites provide us with an opportunity to directly engage and connect with our consumers and communicate a consistent message that promotes awareness of our brands’ promises and key initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2025, we operate Company-owned e-commerce websites in 56 different countries. +Retail Stores. Retail stores enable us to expose consumers to a curated selection of products and directly influence our consumers’ experience with our brands. Our Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to open in key markets to further grow our brand presence and appeal to a broader consumer base. As of March 31, 2025, we have a total of 179 global Company-owned retail stores (including 137 UGG brand retail stores and 42 HOKA brand retail stores), which include 92 concept stores and 87 outlet stores. +Retail store definitions are as follows: +• Concept Stores. Concept stores are Company-owned mono-branded stores launched in strategic locations, designed to offer a curated, themed experience and a unique selection of products, aiming to evoke a specific lifestyle for our brands. Concept stores include the following: +◦ Flagship Stores. Premium mono-branded stores in key global markets, such as major tourist locations typically with above average square footage, designed to provide broader product offerings and generate greater traffic that enhances the consumer experience and increases brand loyalty. +◦ Shop-in-shop (SIS) Stores. SIS stores are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of store sales and for which we own the inventory. +• Outlet Stores. Outlet stores are Company-owned stores designed to sell certain discontinued styles from prior seasons, full price in-line products, and products made specifically for the outlet stores. +GEOGRAPHIC DISTRIBUTION +US Distribution. In our wholesale channel, we sell our products in the US through sales representatives, organized by brand and either geography or account type, as each brand generally has certain specialty customers that expect a dedicated sales team with specialized knowledge of the brand’s product offerings. In addition to our wholesale channel, we sell products directly to consumers through our DTC channel and fulfill online orders through our warehouses, DCs, and retail stores. +We currently distribute products sold in the US through our DCs in Moreno Valley, California, and Mooresville, Indiana. We also distribute products to our wholesale channel customers through a DC bypass program. Our warehouses and DCs feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers and consumers. +5 +Table of Contents +International Distribution. Collectively, our brands are sold internationally in Canada, Europe, Asia, and Latin America. We sell our products internationally in our wholesale channel through wholly owned subsidiaries and independent distributors, some of which operate partner retail stores. In addition, in certain countries we sell products through our DTC channel. For our wholesale and DTC channels, we distribute our products through a number of warehouses and DCs managed by 3PLs in certain international locations. +Refer to Part I, Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our properties and related minimum lease and other commitments. Refer to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding geographic areas and concentration of related business risks. +REPORTABLE OPERATING SEGMENTS +During the fourth quarter of fiscal year 2025, we updated our reportable operating segments to better reflect changes in the way our CODM makes resource allocation decisions and assesses performance. In connection with executive leadership alignment, and the recent divestiture and phase out of certain brands, the CODM shifted resource allocation decisions and performance assessment to a brand focus, rather than a distribution channel focus. As of March 31, 2025, our three reportable operating segments include the worldwide operations of the UGG brand, HOKA brand, and Other brands (collectively, our reportable operating segments). +Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the section titled “Basis of Presentation,” in Note 1, “General,” and to Note 12, “Reportable Operating Segments,” of our consolidated financial statements in Part IV within this Annual Report for additional information regarding the recent change in our reportable operating segments and our results of operations. +PRODUCT DESIGN AND DEVELOPMENT +Our design and development teams work closely with each brand’s product management teams to create seasonal product lines designed to meet and exceed consumer expectations. Each brand follows a similar product creation path starting with consumer insights, including engagement with key consumer segments, color, trend, material research, and in-depth market analysis. Throughout the creation process there are multiple concept and design reviews to develop prototypes which are assembled through our independent manufacturers. Depending on the brand and product application, there may be multiple rounds of samples for fit, dynamic or athlete testing, and on occasion, we may contract with external laboratories for additional research needs. Our diverse product offering enables us to leverage learnings across each of our brands, enabling innovation and economies of scale. Throughout the entire design and development process we evaluate the availability and costs of raw materials, the capabilities and capacities of our independent manufacturers, and the target pricing of our products. +MANUFACTURING AND SUPPLY CHAIN +The production of our finished goods is outsourced to independent manufacturers, which are primarily located in Southeast Asia, predominately in Vietnam. +Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control and operating compliance standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in Vietnam, China, and Indonesia, which collectively serve as a strong link to our independent manufacturers. We believe our substantial regional presence enhances our manufacturing processes by providing predictability of material availability and ensuring adherence to quality control standards and final design specifications. +We generally purchase products from independent manufacturers on the basis of individual purchase orders, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and evolving inventory management requirements. From a sourcing perspective, less than 5% of our finished goods for footwear comes from China while the remainder comes from Southeast Asia, predominately from Vietnam. +6 +Table of Contents +The majority of the raw materials and components used in the production of our products by our independent manufacturers are purchased from independent suppliers that we designate (designated suppliers), who work with subcontractors that extract, process, or convert these raw materials. +Sheepskin used to manufacture a significant portion of our UGG brand products and is sourced primarily from designated suppliers in Australia and processed by two tanneries in China. We enter into fixed purchasing contracts with designated suppliers of sheepskin and, at times, sugarcane-derived ethylene-vinyl acetate (sugarcane-derived EVA) to manage price volatility and ensure availability. Excluding sheepskin, UGGplush, and sugarcane-derived EVA, we believe that substantially all raw materials and components used to manufacture our products are generally available from multiple sources at competitive prices. We believe current supplies are sufficient to meet our anticipated demand for the next 12 months. +Refer to the subsection titled “Contractual Obligations” under the section “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments. +We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct (Supplier Code of Conduct), which requires them to comply with all local laws and regulations governing human rights, working conditions, anti-corruption, restricted substances, and environmental compliance, including animal welfare and conflict minerals, before we are willing to conduct business with them. Refer to the section titled “Environmental, Social, and Governance” below for further information. +INVENTORY MANAGEMENT AND PRODUCT RETURNS +We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw and other materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the customer, it is challenging for us to estimate and manage our inventory and working capital requirements. +We seek to manage our inventory levels by considering existing orders, as well as forecasted sales and budgets by brand for both the wholesale and DTC channels, including consideration of the delivery requirements of our customers. Our systems and processes are designed to improve our product planning and forecasting, inventory control and supply chain management capabilities, including our Company-owned e-commerce websites. In addition, added discipline around SKU productivity, product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that have enhanced inventory performance, including higher inventory turnover, and partially mitigated product cost increases. +Our general practice, and the general practice in our industry, is to offer customers in our wholesale channel the right to return defective or improperly shipped merchandise, and to accept returns from our consumers in the DTC channel between 30 to 90 days from the point of sale for cash or credit. +We encourage our customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, and also provide customers the ability to place in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory, and shipping requirements. +Refer to the sections titled “Trends and Uncertainties Impacting Our Business and Industry” and “Liquidity” within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our supply chain infrastructure capabilities, working capital and operating requirements, and purchase obligations for product. +7 +Table of Contents +ENVIRONMENTAL, SOCIAL, AND GOVERNANCE +As a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, our worldwide reach and impact is significant. We believe consumers are increasingly buying brands that deliver quality products while striving for minimal environmental impact by employing sustainable business practices. Our sustainability policies and strategies are informed by our ongoing efforts with multi-stakeholder initiatives, which involve our stockholders, employees, suppliers, and customers, as well as other brands and non-governmental organizations. +Through our holistic ESG program, which has been in existence since 2010, we are committed to advancing our sustainable business initiatives. As a result of our efforts, during fiscal year 2025, we have been recognized as one of Barron’s 100 Most Sustainable Companies, by TIME as one of the Most Sustainable Companies, by Forbes as one of America’s Best Companies, by Newsweek as one of America’s Most Responsible Companies and as one of America’s Greenest Companies. +ESG Oversight. Our Corporate Responsibility, Sustainability & Governance Committee (Corporate Governance Committee) is comprised of four independent members of our Board of Directors (Board) who oversee our ESG strategy and have ultimate oversight over all sustainability initiatives, strategies, and programs, including economic, social, and environmental risks. The Corporate Governance Committee and Board regularly receive updates on the status of our ESG program. In addition, the Audit & Risk Management Committee (Audit Committee) of the Board periodically assesses risk management, including climate-related risks and policies, to ensure a consistent corporate strategy. The Board considers whether the ESG program adequately identifies material risks in a timely fashion, implements appropriate responsive risk management strategies, and transmits necessary information with respect to material risks within the organization. Our Chief Administrative Officer (CAO) is responsible for the day-to-day management of our ESG program. The program’s execution is driven by our leadership team and various cross-functional teams including our ethical sourcing, facilities, warehouses and DCs, brands, innovation, materials, and supply chain teams. +Our ESG program aligns our internal teams with our Sustainable Development Goals (SDGs), and establishes policies to encourage our partners and suppliers to employ sustainable business practices. We annually assess risks related to ESG issues as part of our overall enterprise risk management approach. In addition, our internal audit team provides periodic targeted reviews of our ESG-related policies and procedures to the Audit Committee. +Stakeholder Engagement . We highly value stakeholder input and have consistently demonstrated our commitment to maintaining open and interactive dialogue on ESG matters with our stakeholders, including non-governmental organizations, employees, stockholders, suppliers, industry groups, communities, and governments, to ensure their views are actively considered in executing our ESG program. Our stakeholder outreach program is led by a cross-functional team that includes members of our investor relations, compliance, sustainability, and legal teams. Additionally, we actively engage with our employees to obtain valuable feedback and track progress, including through regular employee engagement surveys. +Sustainable Development Goals. We work to establish SDGs that we believe are the most relevant to our business, our operations, our stockholders, and the communities in which we operate. We are a member of the United Nations Global Compact (UNGC), the world’s largest voluntary corporate sustainability initiative. This membership requires an annual statement of progress, which is reflected in our Corporate Responsibility and Sustainability Report (Creating Change Report). Our CAO identifies specific SDGs established by the UNGC, which we adopt to guide our ESG strategy. +Our annual Creating Change Report for the year ended March 31, 2025, which will be published in calendar year 2025 under the “Responsibility” tab of our website located at ir.deckers.com , will provide more information regarding our fiscal year 2025 ESG achievements with a focus on the SDGs discussed below. The content of our website, including our Creating Change Report, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +8 +Table of Contents +We believe the progress of our corporate responsibility efforts is evidenced by disclosing goals and relevant metrics and, to that end, we have aligned the reporting standards included in our Creating Change Report with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (commonly referred to as TCFD), Global Reporting Initiative’s (commonly referred to as GRI) Core Standards, and Sustainability Accounting Standards Board’s (commonly referred to as SASB), and now part of the International Finance Reporting Standard (or IFRS) Foundation Consumer Goods Sector Apparel, Accessories and Footwear Index. +HUMAN CAPITAL - OUR PEOPLE AND OUR CULTURE +Employees . As of March 31, 2025, we employed approximately 5,500 employees, reflecting an increase of 14.6%, compared to March 31, 2024, in North America, Europe, and Asia. This includes approximately 2,000 employees in our retail stores but excludes temporary and seasonal employees. +Culture . Our key values, which guide our journey onward together to improve our business and create a better world around us, and help hold us accountable to deliver on this purpose, are as follows: +• Come as you are. Authentic employees create an authentic company. +• Better together. The power of independent spirit, united for a common goal. +• Commit to create. Curiosity fuels creativity, which in turn fuels innovation. +• Own it. We set high targets and hit them and take accountability when we don’t. +• Do good and do great. We act with integrity and humility and respect each other and our communities to drive a sustainable business. +Our values define our Company and serve as the driving force behind how we work together and with our customers, consumers, partners, suppliers, and communities. We also have detailed policies that support our commitment to ethical behavior and legal compliance across our Company. Through our open-door policy and culture, employees are encouraged to approach their managers if they believe violations of standards or policies have occurred and are able to make confidential and anonymous reports using a 24/7 online or telephone hotline hosted by an independent third-party provider. +At Deckers, we believe our culture makes us unique. We regularly conduct employee surveys to understand our employees’ experiences on a variety of topics focused on employee engagement. Our latest survey completed in February 2025 had a participation rate of 91.5%. Of those employees who completed the survey, 89% noted they were proud to work for Deckers. +We believe an inclusive workplace that promotes belonging for everyone brings together those with a unique set of experiences, opinions, and thoughts on critical issues. In turn, these varied perspectives enhance our business and drive better outcomes. Our people are at the center of everything we do. Their perspectives and passion for innovation enable us to build brands and create products that people around the world love. We strive to create an environment where employees can come as they are and are free to bring their authentic selves to work every day. +We publish workforce metrics in our annual Equal Employment Opportunity filing (EEO-1) which is publicly available at deckers.com/responsibility/policies. The content of our website, including our annual EEO-1 filing, is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC. +Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. We annually contribute to our local communities through monetary donations, volunteer efforts, and in-kind donations. During fiscal year 2025, we donated over $6,000 to various non-profit organizations around the globe, primarily to organizations focused on uplifting youth, community, belonging, education, and the environment. We also continued our Art of Kindness events, where employees volunteer during a week-long event in our local communities multiple times during the fiscal year. Our employees volunteered approximately 24,000 hours during fiscal year 2025. Our strategic giving and community-engagement efforts continued to be aligned with our SDGs. +9 +Table of Contents +Talent Development and Retention . The ability to attract, develop, and retain employees is critical to our long-term success. We focus on our employees’ growth, creating experiences that align with our strategic priorities and promote inclusion, performance, connection, and opportunities for development. For example, we offer a week fully dedicated to employee learning, connection, and development across the globe (Explore Week), and three global leadership development programs for leaders at varying levels (Trailblazers, Navigator, and Ascent). Our leadership team also mentors rising talent on a formal and informal basis, which we believe accelerates the development and engagement of our top performers, increases organizational learning, and improves employee performance and retention. Further, our executive leadership team and Board commit substantial time to succession planning, evaluating the bench strength of our leadership and supporting their career development while improving organizational performance. We are proud to offer a wide range of programs intended to support global employee development and retention. +We have demonstrated a history of investing in our workforce by offering competitive salaries and wages, and annual increases based on merit, as well as annual cash bonus compensation, which is based on Company and individual performance. We provide tuition reimbursement for eligible US employees up to $5 thousand per calendar year. Further, to foster a stronger sense of ownership and align the interests of management with stockholders, time-based restricted stock units and long-term incentive plan performance stock units are granted to a substantial proportion of our leadership team under our stock-based compensation programs. In addition, employees across the US business have the opportunity to purchase stock at a discounted price through our Employee Stock Purchase Plan. Further, we engage an independent compensation consultant, FW Cook, which provides us with information to evaluate the effectiveness of our executive compensation program, including competitive pay practices and trends in our industry, the design and structure of our executive compensation program, and the formulation of and benchmarking against our peers within our industry. +Employee Wellness . We strive to be one of the best places to work and recognize our employees are at different stages of life and have individual needs. We offer affordable, innovative, comprehensive, and competitive benefits package that range from health insurance, retirement plan, life insurance, disability, accident coverage, paid time off, paid and unpaid leave including parental leave, mental health benefits, and other voluntary benefits such as health savings accounts and our recently adopted solar and electric car reimbursement program. +Employee Health and Safety . The health and safety of our employees is our highest priority. We have comprehensive safety training programs to help ensure our employees know how to do their jobs safely and in compliance with laws and regulations. We prioritize the safety of our facilities and work to ensure they are modern and efficient. +SEASONALITY +A significant part of the UGG brand’s business has historically been seasonal, with the highest percentage of net sales occurring in the third fiscal quarter, which has contributed to variation in results of operations from quarter to quarter. However, we have mitigated the impacts of seasonality by diversifying and expanding product offerings with additional year-round styles. In addition, as the HOKA brand’s net sales, which generally occur more evenly throughout the fiscal year, continue to increase as a percentage of our aggregate net sales, we expect to reduce the impacts of seasonality in future periods. +Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further discussion of the impacts of seasonality and other factors that may cause our actual results to differ materially from our expectations. +COMPETITION +The industry and markets in which we operate are highly competitive. Our competitors include athletic footwear companies, branded apparel companies, and retailers with their own private labels. Although the industry is fragmented, many of our competitors are larger and have substantially greater resources, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of e-commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel, and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international +10 +Table of Contents +competitors selling products designed to compete directly or indirectly with our products. We believe our ability to successfully compete depends on numerous factors, including our ability to predict, assess, and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and weather the impacts of supply chain disruptions, among others. In addition, we believe our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us. +Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations. +TRADEMARKS AND PATENTS +We utilize trademarks for virtually all our products, and we believe having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “HOKA,” “Teva,” “AHNU,” “Koolaburra by UGG,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the United Kingdom (UK), various countries in the European Union (EU), Japan, and Korea. As of March 31, 2025, we hold 232 designs and inventions with corresponding design or utility patent registrations, plus 64 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. +GOVERNMENT REGULATION +We are subject to a wide range of laws and regulations, including US federal, state, and local laws; the laws of jurisdictions where we operate or plan to operate; and the laws of jurisdictions from which we source our products. Based on the information and circumstances known to us at this time, compliance with such applicable laws and regulations is not expected to have any material effect on our business, results of operations, financial condition, or competitive position. +AVAILABLE INFORMATION +Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to the Exchange Act are available free of charge on our website at ir.deckers.com . Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make certain corporate governance and responsibility documents available through our website at ir.deckers.com/governance and ir.deckers.com/responsibility/policies , respectively, including Ethical Supply Chain Supplier Code of Conduct, Audit & Risk Management Committee Charter, Talent & Compensation Committee Charter, Corporate Responsibility, Sustainability, & Governance Committee Charter, Code of Ethics, Creating Change Report, Accounting and Finance Code of Ethics, EEO-1 Report, and Corporate Governance Guidelines. The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only. +11 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/item13.txt b/raw/filings/0000910521/2024/0000910521-25-000017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..52d1ce4004e698e3113b672d0dfcb8158ba75e3e --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/item9a.txt b/raw/filings/0000910521/2024/0000910521-25-000017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..31b047b365b6e96904b61839cdc8ba96e980e44e --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/item9a.txt @@ -0,0 +1,13 @@ +ITEM 9A. CONTROLS AND PROCEDURES +DISCLOSURE CONTROLS AND PROCEDURES +We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2025. Based on that evaluation, our PEO and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2025. +50 +Table of Contents +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our PEO and PFAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with US GAAP . Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +As of March 31, 2025, our management, including our PEO and PFAO, assessed the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (commonly referred to as COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective based on this criteria. The registered public accounting firm that audited our consolidated financial statements in Part IV within this Annual Report has issued an attestation report on our internal control over financial reporting. Refer to Part IV, “Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting,” on page F-4 within this Annual Report. +CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING +There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) of the Exchange Act during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +PEO AND PFAO CERTIFICATIONS +The certifications of our PEO and PFAO required by Rule 13a-14(a) of the Exchange Act are filed as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32.1, to this Annual Report. This Part II, Item 9A, should be read in conjunction with such certifications for a more complete understanding of the topics presented. \ No newline at end of file diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/rp_note.txt b/raw/filings/0000910521/2024/0000910521-25-000017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2024/0000910521-25-000017/rpt_disclosure.txt b/raw/filings/0000910521/2024/0000910521-25-000017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b70e24c2de4b5ba4f8e4f67b2ed7a51cc3b930d0 --- /dev/null +++ b/raw/filings/0000910521/2024/0000910521-25-000017/rpt_disclosure.txt @@ -0,0 +1,8 @@ +RELATED-PERSON TRANSACTIONS +Our legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, director nominees, executive officers, principal stockholders, or any of their respective immediate family members, are participants to determine whether any of these related persons had or will have a direct or indirect material interest in such transactions. In order to assist in identifying potential related-person transactions, our legal department annually prepares and distributes to all directors, director nominees and executive officers a detailed written questionnaire which includes questions intended to elicit information about any current or proposed related-person transactions. In addition, our Code of Ethics addresses conflicts of interest where an individual’s personal interests may interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair (or appear to impair) the exercise of judgment solely for the benefit of our Company and our stockholders are prohibited. In general, such conflicts must be approved by our legal department, the employee’s supervisor or, in the case of directors, the Audit & Risk Management Committee. Information regarding potential conflicts of interest in violation of our Code of Ethics may be reported to our anonymous reporting hotline, which may be accessed by the Chair of the Audit & Risk Management Committee, the Chair of our Board and our highest ranking manager of internal audit. +If a related-person transaction is identified by our legal department as one which would be required to be publicly reported pursuant to applicable SEC rules, the Audit & Risk Management Committee is responsible for reviewing and approving or ratifying any such transaction. The Audit & Risk Management Committee may approve a related person transaction when, in its good faith judgment, it determines that the transaction is in the best interests of our Company and our stockholders. +Except as set forth below, there are no family relationships between any director, director nominee, or executive officer, and there were no transactions or series of similar transactions since the beginning of fiscal year 2025, and there are no currently proposed transactions, to which we were or are a party that are required to be reported in accordance with applicable SEC rules in which: +• the amount involved exceeds $120,000; and +• any of our directors, director nominees, executive officers, any holder of more than 5% of our common stock, or any member of the immediate family of any of the foregoing, had or will have a direct or indirect material interest. +Ms. Shanahan, a member of our Board, Audit & Risk Management Committee, and Corporate Responsibility, Sustainability & Governance Committee, is the mother of one of our employees whom we have employed since March 2025. Ms. Shanahan does not serve on our Talent & Compensation Committee and is not involved in decision-making regarding this employee’s compensation. For fiscal year 2026, the estimated aggregate amount of this employee’s annual compensation is expected to be in excess of $120,000, and is commensurate with our other employees with similar titles, skills, and levels of experience. +78 \ No newline at end of file diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/filing.txt b/raw/filings/0001688476/2016/0001688476-17-000007/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..78d6363bed68b3099f04db44d07669f47ef21643 --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/filing.txt @@ -0,0 +1,5431 @@ +10-K +1 +a201610-kdoc.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, DC 20549 +FORM 10-K +(Mark One) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2016 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-37988 +Keane Group, Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware +38-4016639 +(State or other jurisdiction +of incorporation or organization) +(I.R.S. Employer +Identification No.) +2121 Sage Road, Suite 370, Houston, TX +77056 +(Address of principal executive offices) +(Zip code) +Registrant’s telephone number, including area code: (713) 960-0381 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange On Which Registered +Common Stock, $0.01, par value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +¨ +Accelerated filer +¨ +Non-accelerated filer +x (do not check if a smaller reporting company) +Smaller reporting company +¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x +As of June 30, 2016, the last business day of the registrant’s most recent second quarter, there was no public market for the registrant’s common equity. +As of March 20, 2017 , the registrant had 103,128,019 shares of common stock outstanding. +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +23 +Item 1B. +Unresolved Staff Comments +43 +Item 2. +Properties +44 +Item 3. +Legal Proceedings +45 +Item 4. +Mine Safety Disclosures +45 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities +46 +Item 6. +Selected Financial Data +49 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +51 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +70 +Item 8. +Financial Statements and Supplementary Data +71 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +130 +Item 9A. +Controls and Procedures +130 +Item 9B. +Other Information +130 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +131 +Item 11. +Executive Compensation +139 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters +145 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +147 +Item 14. +Principal Accountant Fees and Services +154 +PART IV +Item 15. +Exhibits and Financial Schedules +155 +Item 16. +Form 10-K Summary +158 +Signatures +159 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• the competitive nature of the industry in which we conduct our business; +• general business and economic conditions; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• our ability to successfully integrate the Acquired Trican Operations (as defined herein); +• our business strategy; +• pricing pressures and competitive factors; +• the effect of a loss of, or the financial distress of, one or more key customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• the market price and availability of materials or equipment; +• increased costs as a result of being a public company; +• planned acquisitions and future capital expenditures; +• technology; +• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital; +• our ability to service our debt obligations; +• our ability to obtain permits, approvals and authorizations from governmental and third parties, and the effects of government regulation; +• legal proceedings and effect of external investigations; +• our ability or intention to pay dividends; +• our future operating results; and +• our plans, objectives, expectations and intentions. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in any forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in such forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K relate only to events +1 +as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources, such as content and estimates provided by Coras Research, LLC as of December 2016. Coras Research, LLC is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment advisor. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in “Item 1A. Risk Factors” in this Annual Report on Form 10-K. +This Annual Report on Form 10-K includes references to utilization of hydraulic fracturing assets. Utilization for our own fleets, as used in this Annual Report on Form 10-K, is defined as the ratio of the number of deployed fleets to the number of total fleets. For the purposes of this Annual Report on Form 10-K, we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization. Furthermore, we define active fleets as fleets available for deployment. As a result, as additional fleets are incrementally deployed, our utilization rate increases. +We define industry utilization as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by 40,000 hydraulic horsepower. +We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +On January 25, 2017, we consummated an initial public offering (“IPO”), in which we issued and sold 15,700,000 shares of common stock of Keane and the selling stockholder (as defined below) sold 15,074,000 shares. Our business prior to the IPO was conducted through Keane Group Holdings, LLC and its consolidated subsidiaries (“Keane Group”). To effectuate the IPO, we completed a series of transactions that resulted in a reorganization of +2 +our business. Specifically, among other transactions, we effected the Organizational Transactions further described under “Item 1. Business–Initial Public Offering and Organizational Transactions.” +Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data disclosed in “Item 6. Selected Financial Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (collectively, the “Financial Statement Sections”) reflect the consolidated business and operations of Keane Group. +3 +PART I +References Within This Annual Report +As used in Part I of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; and (vi) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its respective controlled affiliates and investment funds. +Item 1. Business +Initial Public Offering and Organizational Transactions +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock at a public offering price of $19.00 per share, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. We received $260.3 million in net proceeds after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by us and $18.6 million of underwriting discounts and commissions payable by us associated with the shares sold by the selling stockholder. The net proceeds were used to (i) fully repay our existing balance of approximately $99 million under our 2016 Term Loan Facility (as defined herein), and, in addition, approximately $13.8 million of prepayment premium related to such repayment and (ii) repay $50.0 million of our Notes (as defined herein), and, in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining $97.0 million is to be used for general corporate purposes. We did not receive any of the proceeds from the sale of shares of common stock sold by the selling stockholder. +Keane is a holding company with no direct operations. In connection with the IPO, we completed a series of organizational transactions, including the following: +• +Certain entities affiliated with our Sponsor, certain members of the Keane family, Trican and certain members of our management, whom we refer to as our “Existing Owners,” contributed all of their direct and indirect equity interests in Keane Group Holdings, LLC to Keane Investor Holdings LLC (“Keane Investor”); +• +Keane Investor contributed all of its equity interests in Keane Group to Keane in exchange for common stock of Keane; and +• +our independent directors received grants of restricted stock of Keane in substitution for their interests in Keane Group. +As a result of these transactions, certain other transactions completed in connection with the IPO (collectively, the “Organizational Transactions”) and the IPO, (i) Keane is a holding company with no material assets other than its ownership of Keane Group and its subsidiaries, (ii) an aggregate of 72,354,019 shares of our common stock are owned by Keane Investor and our independent directors, and Keane Investor entered into the Stockholders’ Agreement (as defined herein) with Keane, (iii) our Existing Owners became holders of equity interests in our controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of Keane consists of (y) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (z) undesignated and unissued preferred stock. +4 +Our Company +We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. With approximately 944,250 hydraulic horsepower spread across 23 hydraulic fracturing fleets and 23 wireline trucks located in the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and other active oil and gas basins, we provide industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. Our company prides itself on our outstanding employee culture, our efficiency and our ability to meet and exceed the expectations of our customers and communities in which we operate. +We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. We believe our proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity, and multiple fracturing stages in challenging high-pressure formations. +We operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation and the Bakken Formation. We are one of the largest providers of hydraulic fracturing services in the Permian Basin, the Marcellus Shale/Utica Shale and the Bakken Formation by total hydraulic horsepower deployed. +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. We seek to deploy our assets with well-capitalized customers that have long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach increases efficiencies and provides potential cost savings for our customers, allowing us to broaden our relationships with existing customers and attract new ones. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and challenges. +We believe the demand for our services will increase over the medium and long-term as a result of a number of favorable industry trends. While drilling and completion activity has improved along with a rebound in commodity prices from their lows in early 2016 of $26.19 per barrel (based on the Cushing WTI Spot Oil Price (“WTI”)) and $1.49 per million British Thermal Units (“mmBtu”) for natural gas, we believe there are long-term fundamental demand and supply trends that will benefit our company. We believe demand for our services will grow from: +• increases in customer drilling budgets focused in our core service areas; +• increases in the percentage of rigs that are drilling horizontal wells; +• increases in the length of the typical horizontal wellbore; +• increases in the number of fracture stages in a typical horizontal wellbore; and +• increases in pad drilling and simultaneous fracturing/wireline operations. +We believe demand and pricing for our services will be further enhanced by a reduction in available hydraulic fracturing equipment as a result of: +• cannibalization of parked equipment and increased maintenance costs; +• aging of existing fleets given the limited investment since the industry downturn in late 2014; +• +increased customer focus on well-capitalized, safe and efficient service providers that can meet or exceed their requirements; and +5 +• reduced access to capital for fleet acquisition, maintenance and deployment. +Pricing levels for our industry’s services are driven primarily by asset utilization. With the downturn in commodity prices from late 2014 into 2016, per Coras Research, LLC, asset utilization across the hydraulic fracturing industry declined from 77% at the end of 2014 to 60% at the end of 2016. As of December 31, 2016, of our total 23 hydraulic fracturing fleets, 13 fleets, or 56% of our total fleets, were deployed. We believe our asset utilization rate reflects the quality of our assets and services. +In addition, due to lack of investment in maintenance and aging equipment, per Coras Research, LLC, approximately 89% of active industry equipment was deployed as of December 31, 2016. As of December 31, 2016, we had 16 active hydraulic fracturing fleets, of which 13 fleets, or 87%, were deployed. As of February 28, 2017, we had 16 active hydraulic fracturing fleets, all of which were deployed. Based on current pricing for component parts and labor, we believe our remaining seven inactive fleets can be made operational at a cost of less than $2.0 million per fleet. +Our History +Our company was founded in 1973 by the Keane family in Lewis Run, Pennsylvania. We have been well regarded as a customer-focused operator that prioritizes safety, the environment and our relationship with the communities in which we operate. We are committed to maintaining conservative financial policies and a disciplined approach to asset deployment, adding new capacity with customers with significant capital budgets and steady development programs rather than on a speculative basis. +We have developed what we believe is an industry-leading, completions-focused platform by emphasizing health, safety and environmental stewardship as our highest priority, implementing an efficient cost structure focused on disciplined cost controls, establishing a sophisticated supply chain and investing in state-of-the-art systems and leveraging technology and infrastructure to support growth. Through these initiatives, our platform has demonstrated the ability to scale with an increase in activity. For example, in 2013, we organically entered into the Bakken Formation, where we remain one of the most active service providers, and, in 2014, we successfully recruited and integrated over 450 employees into our business, resulting in a 74% increase in our employee base. +We believe that our ability to identify, execute and integrate acquisitions is a competitive advantage. We have demonstrated the ability to grow both organically and through opportunistic acquisitions. From 2010 to 2014, we organically added seven hydraulic fracturing fleets deployed across the Marcellus Shale/Utica Shale, the Bakken Formation and the Permian Basin. We have also completed three acquisitions that have diversified our geographic presence and service line capabilities. In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with wireline operations capabilities in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we completed the opportunistic acquisition of Trican’s U.S. oilfield service operations resulting in the expansion of our hydraulic fracturing operations to the current 23 fleets and establishing Keane as one of the largest pure-play providers of integrated well completion services in the U.S. with approximately 944,250 hydraulic horsepower. This acquisition added high quality equipment, provided increased scale in key operating basins, expanded our customer base and offered significant cost reduction opportunities. We implemented a plan to achieve over $80 million of annualized cost savings as a result of facility consolidations, head count rationalization and procurement savings. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide integrated services solutions. We intend to continue to evaluate potential acquisitions on an opportunistic basis that would complement our existing service offerings or expand our geographic capabilities. +Our Competitive Strengths +We believe that technical expertise, fleet capability, equipment quality and robust preventive maintenance programs, integrated solutions, experience, scale in leading basins and health, safety and environmental (“HSE”) performance are the primary differentiating factors within the industry. We specialize in providing customized completion solutions to our customers that increase efficiency, improve safety and lower their overall cost. +6 +Accordingly, we believe the following strengths differentiate us from many of our competitors and contribute to our ongoing success: +Multi-Basin Service Provider with Close Proximity to Our Customers. +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale. These regions are expected to account for approximately 87% of all new horizontal wells anticipated to be drilled between 2017 and 2020. In addition, the high-density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +In particular, we are one of the largest providers in the Permian Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the United States, respectively. According to Spears & Associates, the Permian Basin and the Marcellus Shale/Utica Shale are expected to account for the greatest crude oil and natural gas production growth in the U.S. through 2020 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, representing approximately 59% of the increase in U.S. rig count from its May 2016 low of 404 to 658 as of December 2016. +Our Houston, Texas-based headquarters, eight field offices and numerous management and sales offices are in close proximity to unconventional resource plays which allows us to take a hands-on approach to customer relationships at multiple levels within our organization, anticipate our customers’ needs and efficiently deploy our assets. +The below map represents our areas of operation: +Customer-Tailored Approach. +We seek to develop long-term partnerships with our customers by investing significant time and effort educating them on our value proposition and maintaining a continuous dialogue as we deliver ongoing service. We believe our direct line of communication with our customers at the senior management level as well as with key operational managers in the field provides us with the ability to address issues quickly and efficiently and is highly valued by our customers. In November 2016, we received Shell Global Solutions International’s annual Well Services Performance Award in recognition of our Permian Basin team’s exceptional 2016 performance and customer service in hydraulic fracturing and wireline services. +7 +In connection with the Trican transaction, we acquired our Engineered Solutions Center, which we believe provides value-added capabilities to both our new and existing customers. We believe our Engineered Solutions Center enables us to support our customers’ technical specifications with a focus on reducing costs and increasing production. As pressure pumping complexity increases and the need for comprehensive, solution-driven approaches grows, our Engineered Solutions Center is able to meet our customers’ business objectives cost-effectively by offering flexible design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (1) economical and effective fracture designs, (2) enhanced fracture stimulation methods, (3) next-generation fluids and technologically advanced diverting agents, such as MVP Frac ™ and TriVert ™ , which we received the right to use as part of the Trican transaction, (4) dust control technologies and (5) customized solutions to individual customer and reservoir requirements. +Track Record of Providing Safe and Reliable Solutions. +Safety is our highest priority and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate (“TRIR”), which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. We believe we have an industry leading behavior-based safety program to ensure each employee understands the importance of safety. Depending on job requirements, each new employee goes through a rigorous on-boarding and training program, is assigned a dedicated mentor, is routinely subject to our “Fit for Duty” verification program and periodically attends safety and technical certification programs. Our customers seek to protect their field employees, contractors and communities in which they serve as well as minimize the risk of disproportionately high costs that can result from an HSE incident. As a result, our customers demand robust HSE programs from their service providers and view safety records as a key criterion for vendor selection. We believe our safety and training record creates a competitive advantage by enhancing our ability to develop long-term relationships with our customers, allowing us to qualify to tender bids on more projects than many of our competitors and enabling us to attract and retain employees. +Modern, High-Quality Asset Base and Robust Maintenance Program. +We have invested in modern equipment, including dual-fuel fracturing pumps, Tier IV engines, stainless steel fluid ends, dry friction reducer and dry guar, to enhance our efficiency and safety. In addition, our high-quality, heavy-duty hydraulic fracturing and wireline fleets reduce operational downtime and maintenance costs while enhancing our ability to provide reliable, safe and consistent service to our customers. We have approximately 944,250 total hydraulic horsepower and can deploy up to 23 hydraulic fracturing fleets. As of December 31, 2016, we had 13 hydraulic fracturing fleets and eight wireline trucks deployed. We believe we have a robust preventative maintenance program for both our active and inactive fleets which allows us to respond to customer demand in a timely, safe and cost-efficient manner, and we continue to invest in and stock critical parts and components. From April 1, 2016 to December 31, 2016, we commissioned seven hydraulic fracturing fleets to service customers at a total cost of approximately $11.0 million, including capital expenditures. In addition, based on current pricing for component parts and labor, we believe our remaining inactive hydraulic fleets can be made operational at a cost of less than $2.0 million per fleet. Based upon our recent deployment experience, we believe it takes up to 45 days to activate and staff a single well completions fleet including hydraulic fracturing and wireline crews, allowing us to quickly and cost-effectively respond to an increase in customer demand. Our conservative financial profile and continued investment in our assets and fleets should enable us to maintain an efficient operating cost structure as we begin to redeploy assets, ensuring our operators have safe, well-maintained equipment to service our customers. +Flexible Supply Chain Management Capabilities. +Our sophisticated logistics network is comprised of strategically-located field offices, proppant storage facilities and proprietary last-mile transportation solutions. We have a dedicated supply chain team that manages sourcing and logistics to ensure flexibility and continuity of supply in a cost-effective manner across all areas of operation. We maintain multi-year relationships with industry-leading suppliers of proppant and have contracted secure supply at pricing reflecting current market conditions for the majority of our expected demand through 2020, based on existing job designs. We currently have a network of 1,046 modern railcars, which are being leased to us on a multi-year basis, and which provides us with valuable and flexible logistical support for our operations. Our logistics infrastructure also includes access to eight third-party unit train facilities, which improve railcar turn times +8 +and reduce transit costs, and approximately 50 transload facilities. In addition, we own over 120 pneumatic sand-hauling trucks for last-mile transportation to the well site, which gives us the ability to access and deliver proppant where and when needed. We believe our supply chain and logistics network provide us with a competitive advantage by allowing us to quickly respond during periods of increased demand for our services. +Strong Balance Sheet and Disciplined Use of Capital. +We believe our balance sheet strength represents a significant competitive advantage, allowing us to pro-actively maintain our fleet while also pursuing opportunistic initiatives to further grow and expand our base business with new and existing customers. Our customers seek to employ well-capitalized service providers that are in the best position to meet their service requirements and their financial obligations, and, as a result, we intend to continue to maintain a strong balance sheet. +We adjust our capital expenditures based on prevailing industry conditions, the availability of capital and other factors as needed. Throughout the industry downturn that began in 2014, we have prioritized continued investment in our robust maintenance program to ensure our fleet of equipment can be deployed efficiently as demand recovers. At December 31, 2016, we had $48.9 million on an actual basis and $146.1 million of cash on an as adjusted basis after giving effect to the IPO and the use of net proceeds received by us in connection with the IPO. Additionally, we had $40.3 million of availability under our 2016 ABL Facility (as defined herein), providing us with the means to fund deployment of inactive fleets and grow our operations. After giving effect to the ABL Refinancing Transaction (as defined herein), we would have had $50.4 million of availability under our New ABL Facility (as defined herein) as of December 31, 2016 on an as adjusted basis. As of February 28, 2017, we had $90.3 million of availability under our New ABL Facility. We intend to continue to prioritize maintenance, upgrades, refurbishments and acquisitions, in a disciplined and diligent manner, carefully evaluating these investments based on their ability to maintain or improve our competitive position and strengthen our financial profile while creating value for our shareholders. +Best-in-Class Management Team with Extensive Industry Experience. +The members of our management team are seasoned operating, financial and administrative executives with extensive experience in and knowledge of the oilfield services industry. Our management team is led by our Chairman and Chief Executive Officer, James C. Stewart, who has over 30 years of industry experience. Each member of our management team brings significant leadership and operational experience with long tenures in the industry and respective careers at highly regarded companies, including Schlumberger Limited, Halliburton, Baker Hughes, Weatherford International, Marathon Oil, Anadarko Petroleum and General Electric. The members of our executive management team provide us with valuable insight into our industry and a thorough understanding of customer requirements. +Our Strategy +Our principal business objective is to increase shareholder value by profitably growing our business while safely providing best-in-class completion services. We expect to achieve this objective through: +Efficiently Capitalizing on Industry Recovery. +Hydraulic fracturing represents the largest cost of completing a shale oil or gas well and is a mission-critical service required for the continued development of U.S. shale resources. Upon a recovery in demand for oilfield services in the U.S., the hydraulic fracturing sector is expected to have among the highest growth rates among oilfield service providers. Industry reports have forecasted that the North American onshore stimulation sector, which includes hydraulic fracturing, will increase at a compound annual growth rate, a measure of growth rate for selected points in time, of 10% from 2006 to 2020 and of 30% from 2016 through 2020. As a well-capitalized provider operating in the most active unconventional oil and natural gas basins in the U.S., we believe that our business is well positioned to capitalize efficiently on an industry recovery. We have invested significant resources and capital to develop a market leading platform with demonstrated capabilities and technical skills that is well equipped to address increased demand from our customers. We believe that our rigorous preventative maintenance program provides us with a well-maintained hydraulic fracturing fleet and the ability to deploy inactive fleets +9 +efficiently. Based upon our recent experience and current pricing for components and labor, we believe it will take approximately 45 days to activate a single hydraulic fracturing fleet, allowing us to quickly and cost-effectively respond to an increase in customer demand at a cost of less than $2.0 million per fleet. We also believe we can incrementally deploy each of our wireline trucks in less than 30 days at a nominal cost. +Developing and Expanding Relationships with Existing and New Customers. +We target well-capitalized customers that we believe will be long-term participants in the development of conventional and unconventional resources in the U.S., value safe and efficient operations, have the financial stability and flexibility to weather industry cycles and seek to develop a long-term relationship with us. We believe our high-quality fleets, diverse completion service offerings, engineering and technology solutions and geographic footprint with basin density in some of the most active basins position us well to expand and develop relationships with our existing and new customers. These qualities, combined with our past performance, have resulted in the renewal and new award of service contracts by our customers and by an expansion of the basins in which we operate for these customers. We believe these arrangements will provide us an attractive revenue stream while leaving us the ability to deploy our remaining fleets as industry demand and pricing continue to recover. We have invested in our sales organization, nearly tripling its headcount over the past two years. Together with our sales team, our Chief Executive Officer and our President and Chief Financial Officer are deeply involved with our commercial sales effort, fostering connectivity throughout a customer’s organization to further develop the relationship. We believe this level of senior management engagement differentiates us from many of our larger integrated peers. +Continuing Our Industry Leading Safety Performance and Focus on the Environment. +We are committed to maintaining and improving the safety, reliability, efficiency and environmental impact of our operations, which we believe is key to attracting new customers and maintaining relationships with our current customers, regulators and the communities in which we operate. As a result of our strong emphasis on training and safety protocols, we have one of the best safety records and reputations in the industry which helps us to attract and retain employees. We have maintained a strong safety record even as our employee base increased by 574% over the past four years. From the beginning of 2013 to 2016, our TRIR and lost time incident rate (“LTIR”) dropped by approximately 69% and 75%, respectively, and, for the year ended December 31, 2016, our TRIR and LTIR statistics were 0.22 and 0.06, respectively. We believe we are among the safest service providers in the industry. For example, we achieved a TRIR, which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. In addition, all of our field-based management are provided financial incentives to satisfy safety standards and customer expectations, which we believe motivates them to continually maintain a focus on quality and safety. We work diligently to meet or exceed applicable safety and environmental requirements from our customers and regulatory agencies, and we intend to continue to enhance our safety monitoring function as our business grows and operating conditions change. For example, we have made investments in more efficient engines and dual-fuel kits to comply with customer requirements to reduce emissions and noise at well site. In 2016, the U.S. Environmental Protection Agency (the “EPA”) and the Department of Transportation’s National Highway Traffic Safety Administration jointly finalized standards for new on-road medium- and heavy-duty vehicles and engines that would improve fuel efficiency and cut carbon emissions. In accordance with the new standards, all of the Company’s hydraulic fracturing fleets with model years from 2018 onwards will have Tier IV engines. In addition, we have also invested in spill prevention equipment and remediation systems and dust control technology, which we believe allows us to meet or exceed the latest Occupational Safety and Health Administration (“OSHA”) requirements and standards. We have also deployed high-grade cameras to remotely monitor high-risk zones in our field operations, which we believe helps reduce safety risks to our employees. We believe that our commitment to maintaining a culture that prioritizes safety and the environment is critical to the long-term success and growth of our business. +Investing Further in Our Robust Maintenance Program. +We have in place a rigorous preventative maintenance program to continuously maintain our fleets, resulting in less downtime, reduced equipment failure in demanding conditions, lower operating costs and overall safer and more reliable operations. Due to our strong balance sheet, we have been able to sustain investment in maintenance, including preemptive purchases of key components and upgrades to our fleets throughout the downturn. We believe +10 +that the quality of our fleets and our maintenance program enhance our ability to both secure contracts with new customers and to service our existing customers reliably and efficiently. Our active fleet uptime is reinforced by preventive maintenance on our equipment, allowing us to minimize the negative impact to our customers from equipment failure. In addition, we continue to monitor advances in hydraulic fracturing and wireline technology and make strategic purchases to enhance our existing capabilities. +Maintaining a Conservative Balance Sheet to Preserve Operational and Strategic Flexibility. +We carefully manage our liquidity by continuously monitoring cash flow, capital spending and debt capacity. Our focus on maintaining our financial strength and flexibility provides us with the ability to execute our strategy through industry volatility and commodity price cycles, as evidenced by our recent completion of the Trican transaction and continued investment in our robust maintenance program. We intend to maintain a conservative approach to managing our balance sheet to preserve operational and strategic flexibility. At December 31, 2016, we had $48.9 million and $146.1 million of cash on hand on an actual basis and on an as adjusted basis after giving effect to the use of net proceeds received by us in connection with the IPO, respectively. Additionally, we had $40.3 million of availability under our 2016 ABL Facility, providing us with the means to fund deployment of fleets and grow our operations. After giving effect to the ABL Refinancing Transaction, we would have had $50.4 million of availability under our New ABL Facility as of December 31, 2016 on an as adjusted basis. As of February 28, 2017, we had $90.3 million of availability under our New ABL Facility. +We have further described our outstanding balances and current activities for our Notes, our 2016 Term Loan Facility and the recent New Term Loan Facility (as defined herein) with Owl Rock closed on March 15, 2017, in Note 8 (Long- Term Debts) and Note 25 (Subsequent Events) of Keane Group’s financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. +Continued Evaluation of Consolidation Opportunities that Strengthen Capabilities and Create Value. +We believe that our ability to identify, execute and integrate acquisitions is a competitive advantage. Since 2011, we have completed three acquisitions that have diversified our geographic presence and service line capabilities. In April 2013, we acquired the wireline technologies division of Calmena Energy Services to expand our wireline operations capabilities in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we completed the Trican transaction, creating a leading independent provider of hydraulic fracturing services in the United States. This acquisition added high quality equipment, provided increased scale in key operating basins, expanded our customer base and offered significant cost reduction opportunities. To date we have identified and implemented a plan to achieve over $80 million of annualized cost savings as a result of facility consolidations, head count rationalization and procurement savings. The Trican transaction also provided us access to proprietary technology and engineering capabilities that have enhanced our ability to provide integrated services solutions. We intend to continue to evaluate potential acquisitions on an opportunistic basis that would complement our existing service offerings or expand our geographic capabilities and allow us to earn an appropriate return on invested capital. +Our Industry +Our industry provides oilfield services to North American onshore oil and natural gas exploration and production companies. Demand for our industry’s services is predominantly influenced by the completion of hydraulic fracturing stages in unconventional wells in North America, and is driven by several factors including rig count, well count, service intensity and the timing and style of well completions. Ultimately, these drivers depend primarily on the level of drilling activity by oil and natural gas companies, which, in turn, depends largely on the current and anticipated prices of crude oil, natural gas and natural gas liquids. +Impact of Current and Anticipated Prices for Crude Oil, Natural Gas and Natural Gas Liquids +Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove our industry into a downturn. Following a trough in early 2016, oil prices and natural gas prices have recovered to $53.75 and $3.71, +11 +respectively, or approximately 105%, and 149% respectively, as of December 31, 2016, from their lows in early 2016 of $26.19 and $1.49, respectively. U.S. rig count has recovered to 658 , or approximately 63%, as of December 31, 2016, from its low of 404 in early 2016. Recent events, including declines in North American production and agreements by OPEC members to reduce oil production quotas, have provided upward momentum for energy prices. We believe that recent increases in oil and natural gas prices, as well as moderate relief from the global oversupply of oil and domestic oversupply of natural gas, should increase demand for our services and create a more stable demand environment than has been experienced in the prior 24 months. +The US Energy Information Administration (the “EIA”) projects that the average WTI spot price will increase through 2040 from growing demand and the development of more costly oil resources. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) expectations of continued growth in the U.S. gross domestic product; (ii) an increased likelihood that regulatory and legislative initiatives regarding domestic carbon emissions policy will drive greater demand for cleaner burning fuels such as natural gas; (iii) increased acceptance of natural gas as a clean and abundant domestic fuel source that can lead to greater energy independence of the U.S. by reducing its dependence on imported petroleum; (iv) the emergence of low-cost natural gas shale developments; and (v) continued growth in electricity generation from intermittent renewable energy sources, primarily wind and solar energy, for which natural-gas-fired generation is a logical back-up power supply source. We believe that as the prices of oil and natural gas increase, exploration and production activity will increase, driving an increased demand for our services. +Shale Resources in North America +The combined application of hydraulic fracturing and directional drilling technologies and their refinement continues to provide additional resource potential with new multi-billion barrel fields of oil and trillions of cubic feet of natural gas discovered over last five years. As of 2014, the EIA identified 59 billion barrels of recoverable tight oil and 610 trillion cubic feet of recoverable shale gas within the United States, ranking it second to Russia globally in shale oil resources. We believe that this inventory, which has increased materially due to technological innovation, should create multi-decade demand for our industry’s services. +In addition, we believe that U.S. unconventional shale resources will continue to capture an increasing share of global capital spending on oil and natural gas resources as a result of their competitive positioning on the global cost curve and the relatively low level of political and legal risk in North America as compared to other regions. From 2015 to 2016, demand for global liquids, or oil and natural gas liquid products, increased by approximately 1.8 million barrels per day according to the EIA. The EIA further expects global liquids demand to increase by approximately 1.6 million barrels per day from 2016 to 2017. Similarly, natural gas demand in North America is expected to increase by approximately 1.5 billion cubic feet per day by 2018, largely based upon growth in industrial and household demand, an increase in natural gas exports and continued substitution of gas for coal by utilities and industry. Furthermore, Spears & Associates estimates that capital expenditures for drilling and completion in the contiguous United States will increase by 38% over the next two years, which we believe would benefit our industry. +Increases in Horizontal Drilling Activity and Stages Per Well. +Over the past decade, oil and gas companies have focused on exploiting the vast resource potential available across many of North America’s unconventional resource plays through the application of horizontal drilling and completion technologies, including the use of multi-stage hydraulic fracturing, in order to increase recovery of oil and natural gas. In turn, E&P companies are focused on utilizing drilling and completion equipment and techniques that optimize cost and efficiency. As E&P companies have continued to refine the methodology used to recover oil and natural gas from wells, they have generally favored increases in both the number of hydraulic fracturing stages per well, with growth in per well stage count of approximately 75% between 2012 and 2016, and the amount of proppant used per stage, with growth in proppant per stage of approximately 54% from 2012 to 2016. Both of these secular trends have driven incremental demand for our industry’s services for each completed well due to requirements for larger amounts of equipment. For example, despite a 67% decline in the number of wells drilled from the 2014 to 2016 and excluding the acquisition of the Acquired Trican Operations, we have increased the volume of work our company has performed by 42% during the same period as measured by stage count. +12 +Many industry experts predict a significant recovery in drilling activity in 2017 and 2018. According to Spears & Associates, total U.S. drilling rig count is expected to reach approximately 823 and 982 in 2017 and 2018, respectively, with approximately 79% expected to be drilling wells with horizontal laterals. Due to improvements in technology, including increased lateral lengths and tighter spacing between stages, drilling rigs have become more efficient in recent years. From 2012 to 2016, average wells per horizontal drilling rig have increased from 13.6 wells per rig to 21.1 wells per rig, respectively, and average stages per horizontal well have increased from 16.3 stages per well to 28.5 stages per well, respectively. +Demand for our industry’s services is also influenced by the natural decline in productivity of shale oil and gas wells over time. The amount of hydrocarbons produced from a typical shale oil and gas well declines more quickly than a conventional well, with production from a shale well generally falling substantially in the first year. New wells are required to be brought online relatively quickly to replace production lost from the natural decline. As a result of the high average production decline rates and current demand forecasts, we believe that a large number of wells will need to be drilled and completed on a continuous basis to offset production declines. +In addition, according to the EIA, an estimated 5,379 drilled but uncompleted (“DUC”) wells were in backlog as of December 2016, which we believe will provide a near-term source of demand for completion related services. The decline in commodity prices that began in late 2014 resulted in many E&P companies delaying the completion or fracturing of drilled wells, which represents approximately 36% of the total cost of a well. In connection with the increase and stabilization of the price of oil, E&P companies have recently begun to work through their DUC inventory in select basins, such as the Permian Basin and Bakken Formation, allowing us to deploy additional resources to such basins as a result. +Decline in Number of Service Providers, Deployable Capacity and Skilled Labor as a Result of Cyclical Downturn +From late 2009 through late 2014, there was a rapid increase in the demand for fracturing services. This growth in demand was met with an influx of new companies providing such services and a large increase in deployable hydraulic fracturing equipment. Since late 2014, the significant decline in demand for hydraulic fracturing services and resulting overcapacity in the market have led to industry consolidation and attrition, with the estimated number of service providers shrinking from a peak of 54 service providers in 2014 to 39 service providers as of December 31, 2016. As of December 31, 2016, based on estimated deployable capacity, there were six large providers with over 1 million horsepower, 10 medium-sized providers, including us, with between 300,000 and 1 million horsepower, and 23 smaller providers with less than 300,000 horsepower. We believe industry consolidation will position our company to succeed as demand for our industry’s services continues to increase. +We also believe that the financial distress of many of our competitors has caused them to significantly lower maintenance spending, and instead remove existing parts and components from idle equipment to service active equipment, which has reduced, and will continue to reduce, the amount of deployable equipment. While the total supply of deployable equipment, as compared to marketed equipment, is opaque, industry analysts estimate that total marketed and deployable capacity has declined between 25% and 50% from its peak. Due to the significant wear and tear on working equipment from high service intensity, the potential cost for other providers to redeploy older, idle fleets may be as much as $10 million to $20 million per fleet, depending on the level of previous use and preventative maintenance spend, as well as the amount of time spent idle. We believe these significant redeployment costs may drive the permanent retirement of older equipment by some of our competitors. As demand for our industry’s services increases, we believe we will benefit from our rigorous preventative maintenance program in contrast to many of our competitors’ underinvestment in, and resulting loss of, deployable equipment. +Finally, in addition to the reduction in number of service providers and deployable hydraulic fracturing equipment, headcount of total oilfield service employees in our industry is estimated to have decreased by 46% from its 2014 peak to 2016. We believe that companies that have remained relatively active during the industry downturn, such as ours, will benefit from retaining and developing skilled personnel as demand for our industry’s services increases. +Segments +13 +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our coiled tubing, cementing and drilling divisions. This segmentation is based on the primary end markets we serve, our customer base, the complementary nature of our services, our management structure and the financial information that is reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit, gross margin and resulting synergistic efficiency of utilization. We monitor our cost of services using such metrics as cost of operations per stage for divisions in our Completion Services segment and cost of operations per working day for divisions in our Other Services segment. For further information on our operating segments, please see Note 21 (Business Segments) to the consolidated financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Completion Services Segment +Hydraulic Fracturing . We provide hydraulic fracturing and related well stimulation services to E&P companies, particularly to those operating in unconventional oil and natural gas reservoirs and requiring technically and operationally advanced services. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. Our customers benefit from our expertise in fracturing of horizontal and vertical oil- and natural gas-producing wells in shale and other unconventional geological formations. +The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid—typically a mixture of water, chemicals and guar—into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. Proppant generally consists of raw sand, resin-coated sand or ceramic particles. The fracturing fluid is engineered to lose viscosity, or “break,” and is subsequently removed from the formation, leaving the proppant suspended in the mineral fractures. Once our customer has flushed the fracturing fluids from the well using a controlled flow-back process, the customer manages fluid and water removal. +Our technologically advanced fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. Our hydraulic fracturing units consist primarily of high-pressure hydraulic pumps, diesel engines, radiators and other supporting equipment that are typically mounted on flat-bed trailers. We refer to the group of units and other equipment, such as blenders, data vans, sand storage, tractors, manifolds and high pressure fracturing iron, which are necessary to perform a typical fracturing job as a “fleet,” and the personnel assigned to each fleet as a “crew.” We have 23 hydraulic fracturing fleets, of which 13 were deployed as of December 31, 2016 with crews ranging from 24 to 55 employees each. +An important element of hydraulic fracturing services is determining the proper fracturing fluid, proppant and injection program to maximize results. Our field engineering personnel provide technical evaluation and job design recommendations for customers as an integral element of our hydraulic fracturing service. Technological developments in the industry over the past several years have focused on proppant density control, liquid gel concentration capabilities, computer design and monitoring of jobs and clean-up properties for fracturing fluids. +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale. These regions are expected to account for approximately 87% of all new horizontal wells anticipated to be drilled between 2017 and 2020. +Wireline Technologies . Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that +14 +consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. The ball-activated plug diverts fracturing fluids through the perforations into the formation. Our ability to provide both the wireline and hydraulic fracturing services required for a “plug-and-perf” completion increases efficiencies for our customers by reducing downtime between each process, which in turn allows us to complete more stages in a day and ultimately reduces the number of days it takes our customer to complete a well. We have 23 wireline units, of which eight were deployed as of December 31, 2016 with crews of approximately 10 to 12 employees each. +Other Services Segment +Coiled Tubing . We provide various coiled tubing services to facilitate well servicing and workover operations as well as the completion of horizontal wells. Coiled tubing services involve the use of a flexible, continuous metal pipe spooled on a large reel which is then lowered into oil and natural gas wells to perform various workover applications, including wellbore clean outs and maintenance, nitrogen services, thru-tubing fishing, and formation stimulation using acid and other chemicals. Advantages of utilizing coiled tubing over a more costly workover rig include: (i) the smaller size and mobility of a coiled tubing unit compared to a workover rig, (ii) the ability to perform workover applications without having to “shut-in” the well during such operations, (iii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, and (iv) the ability to direct fluids into a wellbore with more precision. Larger diameter coiled tubing units have recently been utilized for horizontal well completion applications such as (i) the drill out of temporary isolation plugs that separate frac zones, (ii) the clean out of the well for final production after the hydraulic fracturing job has been completed and (iii) in conjunction with hydraulic fracturing operations to stimulate zones not requiring high pressures or significant proppant volume. +Drilling, Cementing, Acidizing and Nitrogen Services . We are also equipped to offer our customers drilling, cementing, acidizing and nitrogen-based well stimulation services. +Equipment +We have approximately 944,250 hydraulic horsepower and can deploy up to 23 fleets, of which 13 fleets were deployed as of December 31, 2016. Our hydraulic fracturing equipment consists of modern units specially designed to handle well completions with long lateral segments and multiple fracturing stages in high-pressure and unconventional formations. We also maintain a fleet of 23 wireline units (of which eight were deployed as of December 31, 2016), seven coiled tubing units, 14 cementing units and two fit-for-purpose Schramm rigs for top-hole air drilling. +Each hydraulic fracturing fleet also includes the necessary blending units, manifolds, data vans and other ancillary equipment. We have the flexibility to allocate pressure pumps and other equipment among our fleets as needed to satisfy customer demand. +Our hydraulic fracturing equipment is comprised of components sourced from manufacturers including Caterpillar, Inc., Cummins, Inc. and Gardner Denver, Inc. and was assembled by various North American companies including Surefire Industries, LLC and UE Manufacturing, LLC. We historically have purchased the majority of our wireline, coiled tubing and cementing units from System One MFG Inc., Surefire Industries, LLC and Peerless Limited, respectively. Our company is not dependent on any one company for the source of our components and assembly of our equipment. We believe our equipment is in good condition and suitable for our current operations. +Customers +Our customers primarily include major integrated and large independent oil and natural gas exploration and production companies. For the year ended December 31, 2016 , our top three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, collectively accounted for approximately 48% of total revenues. For the year ended December 31, 2015 , our top four customers, EQT Production Company, Shell Exploration & Production, XTO Energy and Southwestern Energy Company, collectively accounted for +15 +approximately 90% of total revenues. During the year ended December 31, 2016 and 2015 , on an actual basis, no other customers accounted for 10% or more of our revenues. +Suppliers +We purchase the materials used in our hydraulic fracturing, wireline and other services from various suppliers. In March 2016, in connection with the Trican transaction, Keane received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, such as MVP Frac ™ and TriVert ™ (the “Fracking Fluids”), for Keane’s pressure pumping services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane to purchase the Fracking Fluids from Trican’s suppliers. +During the year ended December 31, 2016, we purchased approximately 5% to 10% of our materials or equipment, as a percentage of overall costs, from Gardner Denver. During the year ended December 31, 2015, we purchased approximately 5% to 10% of our materials or equipment, as a percentage of overall costs, from Surefire Industries, LLC, Santrol, D & I Silica LLC and Precision Additives Inc. +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe that we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, we may not always be able to make alternative arrangements in the event of any interruption or shortage in the supply of certain of our materials. In addition, certain materials for which we do not currently have long-term supply agreements, such as guar (which experienced a shortage and significant price increase in 2012), could experience shortages and significant price increases in the future. As a result, we may be unable to mitigate any future supply shortages and our results of operations, prospects and financial condition could be adversely affected. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the United States, and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. Our integrated hydraulic fracturing and wireline services compete with large, integrated oilfield service companies such as Halliburton Company, Schlumberger Limited and Baker Hughes Incorporated, as well as other companies such as RPC, Inc., Superior Energy Services, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc. and FTS International, Inc. Our hydraulic fracturing services also compete with Calfrac Well Services Ltd., U.S. Well Services, Patterson-UTI Energy, Inc., ProPetro Services, Inc. and Liberty Oilfield Services. In addition, the business segments in which we compete are highly fragmented. We also compete regionally with a significant number of smaller service providers. +We believe that the principal competitive factors in the markets we serve are technical expertise, equipment capacity, work force competency, efficiency, safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on safety, performance and quality of our crews, equipment and services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Cyclical Nature of Industry +We operate in a highly cyclical industry. The key factor driving demand for our services is the level of drilling activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Global supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. Producers tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted in increased supplies +16 +and reduced prices which in turn tend to reduce demand for oilfield services. For these reasons, the results of our operations may fluctuate from quarter to quarter and year to year, and these fluctuations may distort comparisons of results across periods. +Employees +As of December 31, 2016, we employed 1,401 people, of which approximately 72% were compensated on an hourly basis. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. We consider our relationship with our employees to be satisfactory. +Seasonality +Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Our insurance includes coverage for commercial general liability, damage to our real and personal property, damage to our mobile equipment, pollution liability (covering both third-party liabilities and first-party site specific property damage), workers’ compensation and employer’s liability, auto liability and other specialty risks. Our insurance includes various limits and deductibles or self-insured retentions, which must be met prior to, or in conjunction with, recovery. Specifically, our commercial general liability policy provides for a limit of $2 million per occurrence and $4 million per project in the aggregate. Our excess liability program is structured in three layers: the lead policy provides for a limit of $5 million per occurrence and $5 million in the aggregate, with a $10,000 self-insured retention per incident; the second layer provides for a limit of $20 million per occurrence and $20 million in the aggregate, with a $10,000 self-insured retention per incident; and the third layer provides for a limit of $50 million per occurrence and $50 million in the aggregate, with a $10,000 self-insured retention per incident. +To cover potential pollution risks, our commercial generally liability policy is endorsed with sudden and accidental coverage and our excess liability policies provide additional limits of liability for covered sudden and accidental pollution losses. Additionally, we maintain a contractors’ pollution liability program that provides for a +17 +total limit of $20 million per incident and $20 million in the aggregate with a self-insured retention of $100,000 per incident for both sudden and gradual pollution liability. We also maintain $100 million in excess insurance over the contractors’ pollution liability policy for sudden pollution incidents. +In addition, we maintain site specific pollution insurance that provides for a limit of $10 million per incident and $10 million in the aggregate with a $100,000 deductible per incident for both on and off-site clean-up as well as third-party property damage and bodily injury. Our site-specific pollution coverage affords third-party liability and first party clean-up coverage. Our contractors’ pollution liability insurance covers liabilities associated with our hydraulic fracturing operations in the field, while our site-specific pollution insurance covers liabilities arising from insured locations. The insured locations are properties that we own or lease. +Environmental Regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the EPA, issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act, referred to as “CERCLA” or the Superfund law, and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current or former owner or operator of the site where the release occurred and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”), and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties +18 +where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. However, at this time, we have not been made aware of any such releases. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Our compliance, or the consequences of any failure to comply, could have a material adverse effect on our business, financial condition and operational results. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December of 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +19 +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. However, compliance or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition and operational results. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the United States to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (1) stationary and portable equipment and (2) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to foreseeable environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily +20 +injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. See “—Insurance.” +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Safety and Health Regulation +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the proposed new rule regarding respirable silica sand. Although it is not possible to estimate the financial and compliance impact of the proposed respirable silica sand rule or any other proposed rule, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Intellectual Property +Our engineering and technology efforts are focused on providing cost-effective solutions to the challenges our customers face when fracturing and stimulating wells. In connection with the Trican transaction, we acquired our Engineered Solutions Center, which we believe provides value-added capabilities to both our new and existing customers. We believe our Engineered Solutions Center enables us to support our customers’ technical specifications with a focus on reducing costs and increasing production. As pressure pumping complexity increases and the need for comprehensive, solution-driven approaches grows, our Engineered Solutions Center is able to meet our customers’ business objectives cost-effectively by offering flexible design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (1) economical and effective fracture designs, (2) enhanced fracture stimulation methods, (3) next-generation fluids and technologically advanced diverting agents, such as MVP Frac ™ and TriVert ™ , which we received the right to use as part of the Trican transaction, (4) dust control technologies and (5) customized solutions to individual customer and reservoir requirements. +In addition, in connection with the Trican transaction, we acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business. Keane also entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates, other than the Acquired Trican Intellectual Property (as defined herein). See “Item 13. Certain Relationships and Related-Party Transactions and Director Independence—Trican Transaction” for more information. We believe that the proprietary technology and engineering capabilities acquired in the Trican transaction have enhanced our integrated services solutions and better positioned our company to meet our customers’ technical demands. +21 +We believe the information regarding our customer and supplier relationships are also valuable proprietary assets. We have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. Except for the foregoing, we do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Implications of Being an Emerging Growth Company +We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and, for so long as we are an emerging growth company, are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to: +• +not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; +• +not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; +• +reduced disclosure obligations regarding executive compensation; and +• +exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. +We may remain an “emerging growth company” until as late as December 31, 2022, the fiscal year-end following the fifth anniversary of the completion of our IPO, though we may cease to be an emerging growth company earlier under certain circumstances, including if (1) we have more than $1.0 billion in annual revenue in any fiscal year, (2) the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 or (3) we issue more than $1.0 billion of non-convertible debt over a three-year period. +In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to irrevocably “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. +22 +Item 1A. Risk Factors +RISK FACTORS +Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Risks Related to Our Business and Industry +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry in the U.S., and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources in the U.S. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control, including: +• prices, and expectations about future prices, for oil and natural gas; +• domestic and foreign supply of, and demand for, oil and natural gas and related products; +• the level of global and domestic oil and natural gas inventories; +• +the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the United States; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• available pipeline, storage and other transportation capacity; +• lead times associated with acquiring equipment and products and availability of qualified personnel; +• the discovery rates of new oil and natural gas reserves; +• +federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +• +the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• geopolitical developments and political instability in oil and natural gas producing countries; +• +actions of the Organization of the Petroleum Exporting Countries, its members and other state-controlled oil companies relating to oil price and production controls; +• +advances in exploration, development and production technologies or in technologies affecting energy consumption; +23 +• the price and availability of alternative fuels and energy sources; +• weather conditions and natural disasters; +• +uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; and +• U.S. federal, state and local and non-U.S. governmental regulations and taxes. +The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. In addition, a decrease in the development of oil and natural gas reserves in our market areas may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +A prolonged economic slowdown or recession in the U.S., adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further slowdown in the E&P industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and gas and decreased prices for oil and gas. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices and the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the spending patterns of our customers and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower utilization of, and may be forced to lower our rates for, our equipment and services. +Historical prices for crude oil and natural gas have been extremely volatile and are expected to continue to be volatile. For example, since 1999, oil prices have ranged from as low as approximately $10 per barrel to over $100 per barrel. The spot price per barrel as of December 31, 2016 was $53.75. In recent years, oil and natural gas prices and, therefore, the level of exploration, development and production activity, have experienced a sustained decline from the highs in the latter half of 2014, as a result of an increasing global supply of oil and a decision by OPEC to sustain its production levels in spite of the decline in oil prices, as well as slowing economic growth in the Eurozone and China. Since November 2014, prices for U.S. oil have weakened in response to continued high levels of production by OPEC, a buildup in inventories and lower global demand. As a result of the significant decline in the price of oil, beginning in late 2014, E&P companies moved to significantly cut costs, both by decreasing drilling and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing services. In turn, service providers, including hydraulic fracturing service providers, were forced to lower their operating costs and capital expenditures, while continuing to operate their businesses in an extremely competitive environment. In November 2016, OPEC announced its agreement to a framework for limiting crude output; however, the global supply excess may persist if OPEC member countries do not adhere to the production caps or if non-OPEC member countries increase production in response to increasing oil prices. Prolonged periods of price instability in the oil and natural gas industry will adversely affect the demand for our products and services and our financial condition, prospects and results of operations. +24 +Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar geothermal, tidal, fuel cells and biofuels) could reduce demand for our services and create downward pressure on the revenue we are able to derive from such services, as they are dependent on oil and natural gas commodity prices. +Fuel conservation measures could reduce demand for oil and natural gas. +Fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• equipment defects; +• vehicle accidents; +• explosions and uncontrollable flows of gas or well fluids; +• unusual or unexpected geological formations or pressures and industrial accidents; +• blowouts; +• cratering; +• loss of well control; +• collapse of the borehole; and +• damaged or lost drilling equipment. +In addition, our hydraulic fracturing and well completion services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenue, and any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is +25 +customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Litigation and Other Proceedings Could Have a Negative Impact on Our Business. +The nature of our business makes us susceptible to legal proceedings and governmental investigations from time to time. In addition, during periods of depressed market conditions, such as the one we have been experiencing, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +On November 4, 2016, a former employee of Keane filed a complaint for a proposed class or collective action in the United States District Court for the Western District of Pennsylvania entitled Meals v. Keane Frac GP, LLC, et al ., alleging that certain field professionals were not properly classified under the Fair Labor Standards Act (“FLSA”) and Pennsylvania law. We filed our answer on November 30, 2016 denying the material allegations of the complaint, and on March 16, 2017 plaintiff filed a motion for conditional certification of a collective action. On December 27, 2016, two former employees filed a complaint for a proposed class or collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al ., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. We filed our answer on February 3, 2017 denying the material allegations of the complaint. We are currently unable to estimate the range of loss, if any, that may result from these matters. +Competition within the oilfield services industry may adversely affect our ability to market our services. +The oilfield services industry is highly competitive and fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope and retained skilled personnel. We believe the principal competitive factors in the market areas we serve are price, equipment quality, supply chains, balance sheet strength and financial condition, product and service quality, safety record, availability of crews and equipment and technical proficiency. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than our products and services or expand into service areas where we operate. Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our results of operations, financial condition and prospects. Significant increases in overall market capacity have previously caused price competition and led to lower pricing and utilization levels for our services. +The competitive environment has intensified since late 2014 as a result of the industry downturn and oversupply of oilfield services. We have seen substantial reductions in the prices we can charge for our services based on reduced demand and resulting overcapacity. Any significant future increase in overall market capacity for completion services could adversely affect our business and results of operations. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and +26 +others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement all new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. For example, from April 1, 2016 to December 31, 2016, we commissioned seven hydraulic fracturing fleets to service customers at a total cost of approximately $11.0 million, including capital expenditures. Based on current component and labor costs, we believe that our remaining inactive hydraulic fracturing fleets can be made operational at a cost of less than $2.0 million per fleet. However, the costs of components and labor have increased in the past and may increase in the future with increases in demand, which will require us to incur additional costs to make our remaining active fleets operational. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Further, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other completion service related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase the cost to make our inactive fleets operational. +We are dependent on a few customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our customers are engaged in the oil and natural gas E&P business in the U.S. Historically, we have been dependent upon a few customers for a significant portion of our revenues. For the year ended December 31, 2016, our top three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, collectively accounted for approximately 48% of total revenues. For the year ended December 31, 2015, our top four customers, EQT Production Company, Shell Exploration & Production, XTO Energy and Southwestern Energy Company, collectively accounted for approximately 90% of total revenues. +Our business, financial condition, prospects and results of operations could be materially adversely affected if one or more of our significant customers ceases to engage us for our services on favorable terms or at all or fails to pay or delays in paying us significant amounts of our outstanding receivables. Although we do have contracts for multiple projects with certain of our customers, most of our services are provided on a project-by-project basis. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects and results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to +27 +volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and/or results of operations. +Our commitments under supply agreements could exceed our requirements, and our reliance on suppliers exposes us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. Additionally, our reliance on outside suppliers for some of the key materials and equipment we use in providing our services involves risks, including limited control over the price, timely delivery and quality of such materials or equipment. +Unexpected and immediate changes in the availability and pricing of raw materials, or the loss of or interruption in operations of one or more of our suppliers, could have a material adverse effect on our results of operations, prospects and financial condition. +Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. For example, during 2012, companies in our industry experienced a shortage of guar, which is a key ingredient in fracturing fluids. This shortage resulted in an unexpected and immediate increase in the price of guar. During 2008, our industry faced sporadic proppant shortages requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials. +The proppant market is a highly competitive and volatile part of the supply chain on which our industry depends. +Although the scarcity of proppant and chemicals at various periods between 2011 and 2014 has largely been reversed as a result of increased manufacturing efficiency, expanded capacity and decreased demand, the proppant market remains highly competitive and relatively volatile. An increase in the cost of proppant as a result of increased demand or a decrease in the number of proppant providers as a result of consolidation could increase our cost of an essential raw material in hydraulic stimulation and have a material adverse effect on our business, operations, prospects and financial condition. +We may record losses or impairment charges related to idle assets or assets that we sell. +Prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses. These events could result in the recognition of impairment charges that increase our net loss. Prior to our acquisition of the Acquired Trican Operations, Trican recorded significant impairment charges, and we may record significant impairment charges in the future. Significant impairment charges as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods. +Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. +Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or +28 +reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability, or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services, thereby possibly having a material adverse impact on our financial condition. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues. +We are subject to the EPA, U.S. Department of Transportation, U.S. Nuclear Regulation Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution. The energy extraction sector is one of the sectors designated for increased enforcement by the EPA, which will continue to regulate our industry in the years to come, potentially resulting in additional regulations that could have a material adverse impact on our business, prospects or financial condition. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of +29 +certain off-road diesel engines we can purchase. Further, the emission control and fuel quality regulations could result in increased costs. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. Additionally, if we expand the size or scope of our operations, we could be subject to existing regulations that are more stringent than the requirements under which we are currently allowed to operate or require additional authorizations to continue operations. Compliance with this additional regulatory burden could increase our operating or other costs. +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substance Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA, such as the proposed regulation relating to respirable silica sand, could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +If the EPA or another federal or state-level agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. The EPA recently issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont have banned or are in the process of banning the use of high volume hydraulic fracturing. Alternatively, some municipalities are or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw +30 +materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. For more information, see “Item 1. Business—Environmental Regulation.” +Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +We use intellectual property relating to hydraulic fracturing fluids and electronic pump control which is subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely affect our business. +Trican has licensed our use of certain of its hydraulic fracturing fluids and electronic pump control technology under non-exclusive agreements. Accordingly, Trican has the right to license the same technologies and fracturing fluids that we use in our operations to our competitors, which could adversely affect our business. The rights obtained under this license may be shared with others who have been granted a similar non-exclusive license. As a result, the non-exclusive nature of this license may lead to conflicts between us and others granted similar rights. +If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share. +We do not have patents or patent applications relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes. +We may be subject to interruptions or failures in our information technology systems. +We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches, or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our sales and profitability. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations including as a motor carrier by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel +31 +emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a more desirable work environment. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to further expand our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Further, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations. +We may be unable to maintain key employees, technical personnel and other skilled or qualified workers due to immigration enforcement action or related loss. +We require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately. In some cases, it may be necessary to obtain a required work authorization from the U.S. Department of Homeland Security or similar government agency prior to a foreign national working as an employee for us. Although we do not know of any issues with our employees, we could lose an employee or be subject to an enforcement action that may have a material adverse effect on our business, financial condition, prospects or results of operations. +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect the demand for our services by decreasing the demand for natural gas or unusually cold winters could adversely affect our ability to perform our services, for example, due to delays in the delivery of products that we need to provide our services. Our operations in arid regions can be affected by droughts and limited access to water used in our hydraulic fracturing operations. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include: +32 +• curtailment of services; +• weather-related damage to facilities and equipment, resulting in delays in operations; +• +inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and +• loss of productivity. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if wells, operations sites or other related facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and gas, which, in turn, could also reduce the demand for our products and services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as New York State and within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +We may not be successful in identifying and making acquisitions. +Part of our strategy to expand our geographic scope and customer relationships, increase our access to technology and to grow our business is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• failure to identify attractive targets; +• +incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• failure to obtain financing on acceptable terms or at all; +33 +• restrictions in our debt agreements; +• failure to successfully integrate the operations or management of any acquired operations or assets; +• failure to retain or attract key employees; and +• diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations of management are combined. Any such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• a failure of our due diligence process to identify significant risks or issues; +• the loss of customers of the acquired company or our company; +• negative impact on the brands or banners of the acquired company or our company; +• a failure to maintain or improve the quality of customer service; +• difficulties assimilating the operations and personnel of the acquired company; +• our inability to retain key personnel of the acquired company; +• the incurrence of unexpected expenses and working capital requirements; +• our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• difficulty in maintaining internal controls, procedures and policies; +• mistaken assumptions about the overall costs of equity or debt; and +• unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +34 +Our historical financial statements may not be indicative of future performance. +In light of the Trican transaction completed in March 2016, our operating results only reflect the impact of the acquisition for dates after the closing of the transaction, and, therefore, comparisons with prior periods are difficult. As a result, our limited historical financial performance as the owner of the Acquired Trican Operations may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. +Furthermore, as a result of the implementation of new business initiatives and strategies following the completion of the Trican transaction, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future. +Risks Related to Owning Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2016, on an as adjusted basis after giving effect to the application of the use of our net proceeds received upon completion of the IPO on January 25, 2017, we had $138.8 million of debt outstanding (not including capital lease obligations). +Our substantial indebtedness could have important consequences to you. For example, it could: +• +adversely affect the market price of our common stock; +• +increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• +require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• +limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• +limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• +place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• +sales of assets; +• +sales of equity; or +• +negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +Despite our significant indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our substantial leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the New ABL Facility and the New Term Loan Facility (together with the New ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements.” +35 +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for additional information. +Increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +Risks Related to Owning Our Common Stock +Keane Investor and our Sponsor control us and may have conflicts of interest with other stockholders in the future. +Keane Investor controls approximately 70% of our common stock. As a result, Keane Investor is able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Seven of our 11 directors are employees of, appointees of, or advisors to, members of Cerberus, as described under “Item 10. Directors, Officers and Corporate Governance.” Cerberus, through Keane Investor, will +36 +also have sufficient voting power to amend our organizational documents. The interests of Cerberus may not coincide with the interests of other holders of our common stock. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to own a significant amount of the outstanding shares of our common stock through Keane Investor, Cerberus will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions. +We are restricted from competing with Trican in the oilfield services business in Canada, which may adversely affect our access to, or our ability to expand within, the Canadian market. +We agreed to a non-competition provision with Trican as part our acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, we may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, we also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. These restrictions may adversely affect our access to or ability to expand within the Canadian market. Additionally, Trican has an ownership interest in Keane Investor, and conflicts of interest may therefore arise between Trican and our other shareholders relating to opportunities to enter into or expand within the Canadian oilfield business. +We will incur increased costs as a result of being a publicly traded company. +As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) and related rules implemented by the Securities and Exchange Commission (“SEC”). We will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation. +We are a “controlled company” within the meaning of the New York Stock Exchange (“NYSE”) rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. Our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements. +Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: +• the requirement that a majority of the board of directors consist of independent directors; +• the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; +37 +• the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and +• the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. +We currently utilize, and intend to continue to utilize these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. +Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors. +As a company with less than $1.0 billion in revenue during fiscal 2016, we qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include: +• we are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; +• we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); +• we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; and +• we are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. +We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our common stock held by non-affiliates as of June 30, 2017, or issue more than $1.0 billion of non-convertible debt over a three-year period. +The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have chosen to irrevocably “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. +We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock. +Provisions in our charter documents, certain agreements governing our indebtedness, the Stockholders’ Agreement and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation and our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions +38 +could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• from and after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited; +• from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited; +• from and after such date that Keane Investor and its respective Affiliates (or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• limits on who may call stockholder meetings; +• requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and, therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our +39 +board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +Pursuant to a limited liability company agreement entered into by Cerberus and certain other entities and individuals who agreed to co-invest with Cerberus through Keane Investor (the “Keane Investor LLC Agreement”), such appointees shall be selected by Keane Investor’s board of managers so long as Keane is a controlled company under the applicable rules of the NYSE. See “Item 13. Certain Relationships and Related-Party Transactions and Director Independence—Keane Investor Limited Liability Company Agreement.” +The Stockholders’ Agreement provides that, except as otherwise required by applicable law, from the date on which (a) Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor has the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining an 11-person board of directors unless the management board of Keane Investor otherwise agrees by the affirmative vote of 80% of the management board of Keane Investor; (b) a Holder (as defined herein) has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted. +If our Existing Owners sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that our Existing Owners might sell shares of common stock could also create a perceived overhang and depress our market price. We have 103,128,019 shares of common stock outstanding of which 72,239,439 shares are held by our Existing Owners through our current +40 +principal stockholder, Keane Investor. Prior to the IPO, we and our Existing Owners agreed with the underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters for at least 180 days after January 19, 2017. Pursuant to the lock-up agreement, among other exceptions, we may enter into an agreement providing for the issuance of our common stock in connection with the acquisition, merger or joint venture with another publicly traded entity during the 180-day restricted period after January 19, 2017. In addition, all of our Existing Owners will be subject to the holding period requirement of Rule 144 under the Securities Act (“Rule 144”). When the lock-up agreements expire, these shares will become eligible for sale, in some cases subject to the requirements of Rule 144. +In addition, our Existing Owners, through Keane Investor, will have substantial demand and incidental registration rights, as described in “Item 13. Certain Relationships and Related–Party Transactions and Director Independence–Stockholders’ Agreement.” The market price for shares of our common stock may drop when the restrictions on resale by our Existing Owners lapse. +Any sale of additional common stock by our Existing Owners in the public market may result in additional dilution to our stockholders. +Because we do not intend to pay dividends for the foreseeable future, our stockholders may not receive any return on investment unless they sell their common stock for a price greater than that which they paid for it. +We do not intend to pay dividends for the foreseeable future, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources.” +Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 396,871,981 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 7,734,601 shares of our common stock for awards that may be issued under our Equity and Incentive Award Plan. Any common stock that we issue, including under our Equity and Incentive Award Plan or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the filing of this Annual Report on Form 10-K. The number of shares of our common stock issued in +41 +connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +42 +Item 1B. Unresolved Staff Comments +None. +43 +Item 2. Properties +Properties +Our principal properties include our corporate headquarters, district offices, sales offices and our engineering and technology facility, as well as the hydraulic fracturing units and other equipment and vehicles operating out of these facilities. We believe our facilities are in good condition and suitable for our current operations. Below is a table detailing our properties in the United States as of December 31, 2016: +Location +Own/ +Lease +Purpose +Service +Active/ +Idle +Size (sqft/acres) +Houston, TX +Lease +Executive / Finance +N/A +Active +9,998 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +27,700 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +2,414 sqft +Oklahoma City, OK +Lease +Sales Office +Sales +Idle +3,366 sqft +Denver, CO +Lease +Sales Office +Sales +Active +2,377 sqft +Pittsburgh, PA +Lease +Sales Office +Sales +Active +2,300 sqft +Pittsburgh, PA +Lease +Sales Office +Sales +Idle +3,900 sqft +The Woodlands, TX +Lease +Engineering & Technology +N/A +Active +23,040 sqft +Mansfield, PA +Own +Field Operations +Hydraulic Fracturing, Wireline +Active +30,200 sqft/77.0 acres +Odessa, TX +Own +Field Operations +Hydraulic Fracturing, Wireline, Coiled Tubing +Active +97,006 sqft/40.0 acres +Mill Hall, PA +Lease +Field Operations +Hydraulic Fracturing, Wireline, Coiled Tubing +Active +64,000 sqft/8.2 acres +Monessen, PA +Lease +Field Operations +Hydraulic Fracturing +Idle +78,220 sqft/7.9 Acres +New Stanton, PA +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +20,126 sqft/7.5 Acres +Williston, ND +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +25,000 sqft/7.0 Acres +Mathis, TX +Own +Field Operations +Hydraulic Fracturing, +Coiled Tubing +Active +66,725 sqft/47.4 acres +Springtown, TX +Own +Field Operations +Hydraulic Fracturing +Active +29,855 sqft/14.7 acres +Shawnee, OK +Own +Field Operations +Hydraulic Fracturing +Active +39,100 sqft/56.1 acres +Searcy, AR +Own +Field Operations +Hydraulic Fracturing +Idle +33,190 sqft/10.2 acres +Woodward, OK +Own +Field Operations +Hydraulic Fracturing +Idle +33,273 sqft/24.2 acres +Roanoke, TX +Lease +Warehouse +Hydraulic Fracturing, Wireline, Coiled Tubing +Active +49,500 sqft +44 +Item 3. Legal Proceedings +Legal Proceedings +Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims, claims alleging failure to comply with the overtime provisions of the FLSA and other employment-related disputes. Some of these suits purport or may be determined to be class or collective actions and/or seek substantial damages. It is our management’s opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive or liquidated damages, will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters. +On November 4, 2016, a former employee of Keane filed a complaint for a proposed class or collective action in the United States District Court for the Western District of Pennsylvania entitled Meals v. Keane Frac GP, LLC, et al ., alleging that certain field professionals were not properly classified under the Fair Labor Standards Act (“FLSA”) and Pennsylvania law. We filed our answer on November 30, 2016 denying the material allegations of the complaint, and on March 16, 2017 plaintiff filed a motion for conditional certification of a collective action. On December 27, 2016, two former employees filed a complaint for a proposed class or collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al ., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. We filed our answer on February 3, 2017 denying the material allegations of the complaint. We are currently unable to estimate the range of loss, if any, that may result from these matters. +Item 4. Mine Safety Disclosures +Not applicable. +45 +PART II. +References Within This Annual Report +As used in Part II of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; and (vi) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its respective controlled affiliates and investment funds. +Item 5. Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities +Market Information +On January 25, 2017, we consummated an initial public offering of our common stock at a price of $19.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “FRAC.” Prior to that time, there was no public market for our stock. As a result we have not set forth quarterly information with respect to the high and low prices for our common stock for the two most recent fiscal years. From January 20, 2017, our first day of trading on NYSE, to March 17, 2017, the high and low prices for our common stock were $22.93 and $14.49, respectively. +Holders +As of February 28, 2017, there were three shareholders of record of our common stock. The number of record holders does not include persons who held shares of our common stock in nominee or “street name” accounts through brokers. +Dividends +We do not intend to pay dividends for the foreseeable future. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +Use of Proceeds From Registered Securities +On January 19, 2017, our Registration Statement on Form S-1 (File No. 333-215079) was declared effective by the SEC for our IPO pursuant to which 15,700,000 shares were registered and sold by us and 15,074,000 shares were registered by us and sold by the selling stockholder (including 4,014,000 shares sold pursuant to the exercise of +46 +the underwriters’ over-allotment option), at a price of $19.00 per share. Citigroup Global Markets Inc., Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and J.P. Morgan Securities LLC acted as joint book-running managers for our IPO. Wells Fargo Securities, LLC, Piper Jaffray & Co. and Houlihan Lokey Capital, Inc. acted as senior co-managers for our IPO. Guggenheim Securities, LLC, Scotia Capital (USA) Inc. and Stephens Inc. acted as co-managers for our IPO. We received $260.3 million in net proceeds after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by us and $18.6 million of underwriting discounts and commissions payable by us associated with the shares sold by the selling stockholder, excluding approximately $4.5 million in offering expenses payable by us with respect to the shares sold by us and the selling stockholder. We did not receive any of the proceeds from the sale of shares of common stock sold by the selling stockholder. +The net proceeds were used to (i) fully repay our existing balance of approximately $99 million under our 2016 Term Loan Facility, and, in addition, approximately $13.8 million of prepayment premium related to such repayment and (ii) repay $50.0 million of our Notes, and, in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining $97.0 million is to be used for general corporate purposes. +Recent Sales of Unregistered Securities +Set forth below is information regarding all unregistered securities sold, issued or granted by us within the past three years. +On May 1, 2016, October 1, 2016, October 24, 2016 and November 7, 2016, Keane Group granted 1,176.47, 6,470.6, 2,352.94 and 5,294.12 Class B Units, respectively, to Keane Management Holdings, LLC pursuant to the Keane Management Holdings LLC Management Incentive Plan. The equity holders of Keane Management Holdings, LLC were certain directors and members of the management team of Keane. +On December 31, 2014 and April 1, 2015, Keane Group granted 3,305.79 and 5,509.65 (in the aggregate) Series 3 Class C Units, respectively, to certain members of management under the Keane Class C Management Incentive Plan. Each Series 3 Class C Unit was generally subject to time- and performance- based vesting. +On April 8, 2014, Keane Group granted 5,509.65 Series 2 Class C Units, in the aggregate, to certain members of the management team under the Keane Class C Management Incentive Plan. Each Series 2 Class C Unit was generally subject to time- and performance- based vesting. +In connection with the acquisition of the Acquired Trican Operations and the consummation of the Trican transaction on March 16, 2016: +(1) Keane Group effected a reclassification of the equity structure of Keane Group such that the original Series 1 Class C Units in existence prior to the Trican transaction were canceled and eliminated and the Class A Units and Class B Units of Keane Group in existence prior to the Trican transaction were reclassified as follows: (a) KG Fracing Acquisition Corp. reclassified 1,000,000.00 old Class A Units into 318,452.46 new Class A Units of Keane Group; (b) SJK Family Limited Partnership, LP reclassified 69,799.50 old Class B Units into 7,627.86 new Class A Units; (c) KCK Family Limited Partnership, LP reclassified 69,799.50 old Class B Units into 7,627.86 new Class A Units; (d) Brian Keane reclassified 199,975.10 old Class B Units into 20,835.38 new Class A Units; (e) Tim Keane reclassified 199,975.10 old Class B Units into 20,835.38 new Class A Units; and (f) KSD Newco Corp. reclassified 460,450.80 old Class B Units into 47,974.30 new Class A Units. +(2) Keane Group entered into contribution and exchange agreements whereby, in connection with certain member loans made to Keane Group on December 23, 2014: (a) KG Fracing Acquisition Corp. contributed all of its right, title and interest in and to such member loan (other than accrued but unpaid interest, which was canceled and forgiven) made by KG Fracing Acquisition Corp. to Keane Group in the amount of $15,000,000 in exchange for 31,101.45 Class A Units; (b) KCK Family Limited Partnership, LP contributed all of its right, title and interest in and to such member loan (other than accrued but unpaid interest, which was canceled and forgiven) made by KCK Family Limited Partnership, LP to Keane Group +47 +in the amount of $2,500,000 in exchange for 5,183.57 Class A Units; and (c) SJK Family Limited Partnership, LP contributed all of its right, title and interest in and to such member loan (other than accrued but unpaid interest, which was canceled and forgiven) made by SJK Family Limited Partnership, LP to Keane Group in the amount of $2,500,000 in exchange for 5,183.57 Class A Units. +(3) Keane Group issued and sold Class A Units for an aggregate purchase price of $246,777,777.78 as follows: (a) 176,899.66 Class A Units to KG Fracing Acquisition Corp.; (b) 236,900.83 Class A Units to KGH Investor Holdings, LLC; (c) 10,688.84 Class A Units to KCK Family Limited Partnership, LP; and (d) 10,688.84 Class A Units to SJK Family Limited Partnership, LP. +(4) Keane Group issued 100,000 Class A Units and 294,117.65 Class C Units to Trican Well Service, L.P. +(5) Except to the extent the Series 2 or Series 3 Class C Units were canceled, the holders of the Series 2 Class C Units and Series 3 Class C Units contributed such Class C Units to Keane Management Holdings LLC in exchange for interests in Keane Management Holdings LLC pursuant to the Keane Management Holdings LLC Management Incentive Plan. Keane Management Holdings LLC was issued 85,882.35 Class B Units in Keane. +Any proceeds received from the transactions described above were used for the Trican transaction and the general working capital of the business. +As part of our IPO-related corporate reorganization, we issued 87,313,439 shares of common stock to Keane Investor, 52,082 shares of common stock to Marc G. R. Edwards, 31,249 shares of common stock to Gary M. Halverson and 31,249 shares of common stock to Elmer D. Reed (with the shares of common stock issued to Messrs. Edwards, Halverson and Reed registered pursuant to our S-8 registration statement filed with the SEC on January 25, 2017). +Unless otherwise stated, the sales and/or granting of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act (or Regulation D promulgated thereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. We did not pay or give, directly or indirectly, any commission or other remuneration, including underwriting discounts or commissions, in connection with any of the issuances of securities listed above. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. All recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to information about us. The sales of these securities were made without any general solicitation or advertising. +48 +Item 6. Selected Financial Data +The selected financial data for periods prior to the IPO set forth below was derived from the audited consolidated financial statements of Keane Group and should be read in conjunction with “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.” +Year ended +December 31, 2016 (1) +Year ended +December 31, 2015 +Year ended +December 31, 2014 +(in thousands of dollars, except per share amounts) +Statement of Operations Data: +Revenue +$ +420,570 +$ +366,157 +$ +395,834 +Costs of services (2) +416,342 +306,596 +323,718 +Depreciation and amortization +100,979 +69,547 +68,254 +Selling, general and administrative expenses +52,768 +25,811 +25,459 +Impairment +185 +3,914 +11,098 +Total operating costs and expenses +570,274 +405,868 +428,529 +Operating loss +(149,704 +) +(39,711 +) +(32,695 +) +Other expense (income), net +(916 +) +1,481 +2,418 +Interest expense +38,299 +23,450 +10,473 +Total other expenses +37,383 +24,931 +12,891 +Net loss +$ +(187,087 +) +$ +(64,642 +) +$ +(45,586 +) +Unaudited Pro-forma Per Unit Data (3) +Pro-forma loss per unit - basic and diluted +$ +(2.14 +) +$ +(0.74 +) +$ +(0.52 +) +Weighted average number of units - basic and diluted +87,428 +87,428 +87,428 +Statement of Cash Flows Data: +Cash flows from operating activities +$ +(54,054 +) +$ +37,521 +$ +18,732 +Cash flows from investing activities +(227,161 +) +(26,038 +) +(138,870 +) +Cash flows from financing activities +276,633 +(10,518 +) +137,298 +Other Financial Data: +Capital expenditures (4) +$ +229,093 +$ +27,246 +$ +141,393 +Adjusted EBITDA (6) +1,921 +41,885 +59,563 +Balance Sheet Data (at end of period): +Total assets +$ +536,940 +$ +324,795 +$ +418,855 +Long-term debt (including current portion) (5) +269,750 +207,067 +208,688 +Total liabilities +374,688 +244,635 +272,215 +Total members’ equity +162,252 +80,160 +146,640 +(1) +Commencing on March 16, 2016, our consolidated financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations. +(2) +Excludes depreciation and amortization, shown separately. +(3) +The earnings per unit amounts have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. +49 +(4) Capital expenditures for the year ended December 31, 2016 includes $205.5 million of capital expenditures related to Acquired Trican Operations. +(5) +Long-term debt includes $18.4 million of unamortized debt discount and debt issuance costs and excludes capital lease obligations. +(6) +Adjusted EBITDA is a Non-GAAP Measure that provides supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. This Non-GAAP Measure excludes the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitates review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA provides helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. +Adjusted EBITDA is defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. +Set forth below is a reconciliation of net loss to Adjusted EBITDA: +(Thousands of Dollars) +Year Ended December 31, +2016 +2015 +2014 +Net income (loss) +$ +(187,087 +) +$ +(64,642 +) +$ +(45,586 +) +Depreciation and amortization +100,979 +69,547 +68,254 +Interest expense, net +38,299 +23,450 +10,473 +Income tax (benefit) expense(a) +(114 +) +793 +366 +EBITDA +$ +(47,923 +) +$ +29,148 +$ +33,507 +Acquisition, integration, expansion and divestiture costs(b)(c) +37,302 +6,272 +9,062 +Fleet commissioning costs +9,998 +— +— +Impairment of assets(d) +185 +3,914 +11,098 +Unit-based compensation(e) +1,985 +312 +2,417 +Changes in value of financial instruments(f) +0 +0 +2,270 +Other(g) +374 +2,239 +1,209 +Adjusted EBITDA +$ +1,921 +$ +41,885 +$ +59,563 +(a) +Income tax (benefit) expense includes add-back for income tax expense related to Canadian operations recorded in selling, general and administrative expenses in the consolidated statement of operations. +(b) +Represents professional fees, integration costs, earn-outs, lease-termination costs, severance, start-up and other costs associated with the Trican transaction and integration and the acquisition of Ultra Tech Frac Services, LLC (the “UTFS Acquisition”), organic growth initiatives, and costs associated with the wind-down of our Canadian operations. For the year ended December 31, 2016, $13.6 million was recorded in costs of services, $23.4 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $3.5 million was recorded in selling, general and administrative expenses and $1.7 million was recorded in other expense, net. For the year ended December 31, 2014, $8.6 million was recorded in costs of services, $0.3 million was recorded in selling, general and administrative expenses and $0.2 million was recorded in other expense, net. +(c) +For the year ended December 31, 2016, $35.0 million was associated with the Trican transaction, $1.7 million was associated with initial public offering-related and other special projects-related costs and the remaining amount was related to severance. For the year ended December 31, 2015, $2.7 million was associated with the wind-down of our Canadian operations, $2.4 million with integration costs and the balance related to startup and severance costs. For the year ended December 31, 2014, $9.0 million was associated with the UTFS Acquisition and integration and hydraulic fracturing repositioning and a nominal amount was allocated to other items. +(d) +Represents non-cash impairment charges with respect to our long-lived assets and intangible assets. +(e) +Represents non-cash amortization of units issued to our employees over the vesting period, net of any forfeitures which are reflected in selling, general and administrative expenses. +(f) +Represents non-cash loss on debt extinguishment. +(g) +Represents legal expenses, consulting costs, development charges, forfeiture of deposit on hydraulic fracturing equipment purchase orders and other miscellaneous charges. For the year ended December 31, 2016, the foregoing was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net. For the year ended December 31, 2014, $0.7 million was recorded in selling, general and administrative expenses and $0.5 million was recorded in other expense, net. +50 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included within “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described under “Item 1. Business—Initial Public Offering and Organizational Transactions.” +The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane. +This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “Item 1A. Risk Factors” of this Annual Report on Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +Overview +We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. With approximately 944,250 hydraulic horsepower spread across 23 hydraulic fracturing fleets and 23 wireline trucks located in the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and other active oil and gas basins, we provide industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. Our company prides itself on our outstanding employee culture, our efficiency and our ability to meet and exceed the expectations of our customers and communities in which we operate. +We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized E&P customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity, and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, +51 +provides us the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and challenges. +As of December 31, 2016, we had 13 hydraulic fracturing fleets and eight wireline trucks operating in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation and the Bakken Formation. We are one of the largest providers of hydraulic fracturing services in the Permian Basin, the Marcellus Shale/Utica Shale and the Bakken Formation by total hydraulic horsepower deployed. +We believe the demand for our services will increase over the medium and long-term as a result of a number of favorable industry trends. While drilling and completion activity has improved along with a rebound in commodity prices from their lows in early 2016 of $26.19 per barrel (based on the WTI spot price) and $1.49 per mmBtu for natural gas, we believe there are long-term fundamental demand and supply trends that will benefit our company. We believe demand for our services will grow from: +• increases in customer drilling budgets focused in our core service areas; +• increases in the percentage of rigs that are drilling horizontal wells; +• increases in the length of the typical horizontal wellbore; +• increases in the number of fracture stages in a typical horizontal wellbore; and +• increases in pad drilling and simultaneous fracturing/wireline operations. +We believe demand and pricing for our services will be further enhanced by a reduction in available hydraulic fracturing equipment as a result of: +• cannibalization of parked equipment and increased maintenance costs; +• aging of existing fleets given the limited investment since the industry downturn in late 2014; +• +increased customer focus on well-capitalized, safe and efficient service providers that can meet or exceed their requirements; and +• reduced access to capital for fleet acquisition, maintenance and deployment. +How We Generate Our Revenues and Evaluate Our Business +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our coiled tubing, cementing and drilling divisions. This segmentation is based on the primary end markets we serve, our customer base, the complementary nature of our services, our management structure and the financial information that is reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. We monitor our cost of services using such metrics as cost of operations per stage for divisions in our Completion Services segment and cost of operations per working day for divisions in our Other Services segment. +Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenues less segment direct and indirect cost of services. Cost of services include direct and indirect labor costs, proppant and freight, maintenance of equipment, chemicals, fuel and transportation freight costs, contract services, crew costs and other miscellaneous expenses. Gross margin is calculated by dividing segment gross profit by segment revenue. +The Costs of Conducting Our Business +The principal expenses involved in conducting our completion services are materials and freight, labor costs, the costs of maintaining our equipment and fuel costs. +Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Approximately 81% of our field service employees are paid on an hourly basis. Another key component of labor +52 +costs relates to the ongoing training of our field service employees, which improves safety rates and reduces attrition. +Approximately 97% of our direct cost of services is associated with the Completion Services segment, with a majority of those costs relating to our hydraulic fracturing division. We incur significant costs relating to the proppant, chemicals, guar and fuel used in our hydraulic fracturing operations. These costs fluctuate with usage increases in proportion to increases in the number, size and utilization of our fleets, as well as the prices for each material, including delivery costs. +Fiscal 2016 Highlights +• +Ranked as one of the top three providers in major growth basins, the Permian, Marcellus / Utica, SCOOP/STACK and Bakken based on deployed hydraulic horsepower +• +Completed the integration of Trican’s U.S. oilfield service operations seamlessly and expanded our hydraulic fracturing capacity to 23 fleets at December 31, 2016, and achieved cost savings of approximately $80 million +• +Received Shell’s Global Well Services Performance Award, recognizing exceptional performance and customer service in hydraulic fracturing and wireline services +• +Continued strong hiring, retention and training track record +• +Decreased our TRIR and LTIR by approximately 56% and 50%, respectively, from 2015 to 2016 +2017 Outlook +As described above, we believe the demand for our services will increase over the medium and long-term as a result of a number of favorable industry trends, including projected increases in demand for oil and natural gas liquids products, projected increases in drilling activity, and projected increases in capital expenditures for drilling and completions in the United States. We are encouraged by the increase in well completion activity we are seeing across our diversified footprint. We also believe that several differentiating attributes will enable our future success, including our high-quality, fit-for-purpose and well maintained equipment, our financial strength and discipline, the scale and flexibility of our supply chain, our ability to offer customized completions solutions and our speed-to-market advantage. +Having deployed two additional fleets in January 2017 and another one in March 2017, we currently have 16 hydraulic fracturing fleets deployed, representing approximately 70% utilization on our 23 total fleets. We were able to see continued improvement in our pricing for new dedicated capacity agreements, which reflected increased leading-edge pricing of approximately 25% sequentially on a gross basis. These factors and general improvement in market conditions lead us to expect sequential revenue increases of between 30% and 40% in the first quarter of 2017. Offsetting the revenue increases is the recent inflation in input costs, including sand. This inflation will serve as a partial headwind to our profitability, given the lag effect of pricing re-openers on our pressure pumping agreements. However, our agreements with our customers allow us to adjust pricing every three to six months to recover inflation and align contract pricing to market terms. As a result, the inflation in input costs may cause short term margin compression. In addition, we continue to leverage our scale in the market to drive efficiencies on our supply chain and logistics network with increased volume and activity. +Overall, we believe that favorable trends in pricing, our established business model and the operating efficiency we benefit from with our current customers will enable us to generate attractive cash flow from incremental hydraulic fracturing fleet deployment in 2017. As a result, we are prepared to responsibly accelerate the re-activation of our remaining horsepower subject to the availability of our resources and/or the hiring and proper training of our crews. +53 +Results of Operations +Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 +The following is a comparison of our results of operations for 2016 compared to 2015 . Our results for the year ended December 31, 2016 include the financial and operating results of Keane and the Acquired Trican Operations for the period from March 16, 2016 through December 31, 2016. Results for the period prior to March 16, 2016 reflect the financial and operating results of Keane Group only. Accordingly, comparisons of our results for 2016 to 2015 may not be meaningful. +The following table sets forth selected operating data for the periods indicated: +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenues +Variance +Description +2016 +2015 +2016 +2015 +$ +% +Completion Services +$ +410,854 +$ +363,820 +98 +% +99 +% +$ +47,034 +13 +% +Other Services +9,716 +2,337 +2 +% +1 +% +7,379 +316 +% +Revenue +420,570 +366,157 +100 +% +100 +% +54,413 +15 +% +Completion Services +401,891 +305,036 +96 +% +83 +% +96,855 +32 +% +Other Services +14,451 +1,560 +3 +% +0 +% +12,891 +826 +% +Costs of services (excluding depreciation and amortization, shown separately) +416,342 +306,596 +99 +% +84 +% +109,746 +36 +% +Completion Services +8,963 +58,784 +2 +% +16 +% +(49,821 +) +(85 +%) +Other Services +(4,735 +) +777 +(1 +%) +0 +% +(5,512 +) +(709 +%) +Gross profit +4,228 +59,561 +1 +% +16 +% +(55,333 +) +(93 +%) +Depreciation and amortization +100,979 +69,547 +24 +% +19 +% +31,432 +45 +% +Selling, general and administrative expenses +52,768 +25,811 +13 +% +7 +% +26,957 +104 +% +Impairment +185 +3,914 +0 +% +1 +% +(3,729 +) +(95 +%) +Operating loss +(149,704 +) +(39,711 +) +(36 +%) +(11 +%) +(109,993 +) +277 +% +Other expense (income), net +(916 +) +1,481 +0 +% +0 +% +(2,397 +) +(162 +%) +Interest expense +38,299 +23,450 +9 +% +6 +% +14,849 +63 +% +Total other expenses +37,383 +24,931 +9 +% +7 +% +12,452 +50 +% +Net loss +$ +(187,087 +) +$ +(64,642 +) +(44 +%) +(18 +%) +$ +(122,445 +) +189 +% +Revenues. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2016 increased by $54.4 million or 15% , to $420.6 million from $366.2 million in 2015 . The increase in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $47.0 million , or 13% , to $410.9 million in 2016 from $363.8 million in 2015 . This change was primarily attributable to a 100% growth in the number of deployed hydraulic fracturing fleets, as a result of increased utilization of our combined asset base following our acquisition of the Acquired Trican Operations. This increase was offset by a 43% decrease in the revenue per deployed hydraulic fracturing fleet as a result of competitive pricing driven by current market conditions. +Other Services: Other Services segment revenue increased by $7.4 million , or 316% , to $9.7 million in 2016 from $2.3 million in 2015 . The change was primarily attributable to revenues from the coiled tubing and cementing divisions acquired in connection with the Acquired Trican Operations, which contributed $9.7 million of revenue to +54 +this segment in 2016. This increase was offset by a $2.3 million reduction in revenues from the drilling division, which was idled in May 2015 as a result of the significant decrease in rig count. +Costs of services. Costs of services in 2016 increased by $109.7 million , or 36% , when compared to 2015 . This increase was driven by higher activity in the Completion Services segment, increased costs in connection with a prolonged completion timeline driven by customer completion delays and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $23.6 million consisting of acquisition and integration costs of approximately $13.6 million associated with the Acquired Trican Operations and commissioning costs of approximately $10.0 million , including labor and maintenance, to deploy idle hydraulic fracturing fleets and coiled tubing units acquired from Trican. These increases were partially offset by our cost saving initiatives as described below. Costs of services as a percentage of total revenue for in 2016 was 99% , which represented an increase of 15% from 2015 . Excluding one-time costs of $23.6 million (described above) and $1.4 million in 2016 and 2015 , respectively, total costs of services was $392.7 million and $305.2 million in 2016 and 2015 , or 93% and 83% of revenue, respectively, an increase as a percentage of revenue of 10% . Costs of services, as a percentage of total revenue is presented below: +Year Ended December 31, +Description +2016 +2015 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +98 +% +84 +% +14 +% +Other Services +149 +% +67 +% +82 +% +Total cost of services as a percentage of total revenue +99 +% +84 +% +15 +% +The change in cost of services by reportable segment is further discussed below. +Completion Services: Completion Services segment cost of services increased by $96.9 million or 32% , to $401.9 million in 2016 from $305.0 million in 2015 . As a percentage of segment revenue, total cost of services was 98% and 84% , in 2016 and 2015 , respectively, an increase as a percentage of revenue of 14% . The increase in segment cost of services was driven by higher activity coupled with longer lateral segments and increased proppant volume and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $22.5 million consisting of acquisition and integration costs of approximately $13.2 million associated with the Acquired Trican Operations and commissioning costs of approximately $9.3 million , including labor and maintenance, to deploy idle hydraulic fracturing fleets acquired from Trican. These increases were partially offset by cost saving initiatives to drive down supply and material costs through negotiated price concessions from vendors, management of labor costs and our fixed cost structure through facility consolidation and other cost saving initiatives related to shipping and equipment costs. Excluding one-time costs of $22.5 million and $0.9 million in 2016 and 2015 , respectively, Completion Services segment costs of services was $379.4 million and $304.2 million in 2016 and 2015 , or 92% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 8% . +Other Services: Other Services segment cost of services increased by $12.9 million to $14.5 million , or 826% in 2016 from $1.6 million in 2015 . The increase was primarily attributable to cost of services in connection with the deployment of, and increased headcount related to, our coiled tubing and cementing operations acquired from Trican, which included one-time integration and commissioning costs of $1.1 million . This increase was partially offset by the $0.6 million decrease of cost of services related to the idling of our drilling services in May 2015. We idled our cementing services and coiled tubing division in April 2016 and December 2016, respectively. All associated overhead has been re-allocated to the Completion Services segment or eliminated. Excluding one-time costs of $1.1 million in 2016 described above, and $0.5 million in 2015 , Other Services segment costs of services was $ 13.3 million and $1.1 million in 2016 and 2015 , or 137% and 46% of segment revenue, respectively, which is an increase as a percentage of segment revenue of 91% . This increase was a result of unfavorable absorption of fixed costs on low revenue as coiled tubing was a new division acquired as part of the Acquired Trican Operations. +Depreciation and amortization. Depreciation and amortization expense increased by $31.4 million , or 45% , to $101.0 million in 2016 from $69.5 million in 2015 . This increase was primarily attributable to additional +55 +depreciation and amortization expense of $42.1 million related to the property and equipment included in the Acquired Trican Operations. This increase was partially offset by a decrease in depreciation expense of Keane’s existing equipment due to some assets becoming fully depreciated and reduced capital expenditures in 2016. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $27.0 million , or 104% , to $52.8 million in 2016 from $25.8 million in 2015 . The increase in SG&A expense is related to increased headcount, property taxes and insurance associated with a larger asset base as a result of the Acquired Trican Operations. SG&A as a percentage of total revenue was 13% in 2016 compared with 7% in 2015 . Total one-time charges, excluding unit-based compensation, were $23.4 million in 2016 and $3.5 million in 2015 , which were primarily related to the acquisition and integration of the Acquired Trican Operations and professional fees incurred in connection with the IPO. These costs were partially offset by a decrease in SG&A expenses of our Canadian subsidiary due to $2.5 million of wind-down costs incurred during 2015, which were no longer recurring during 2016. Excluding one-time costs of $23.4 million and $3.5 million described above, SG&A expense was $29.4 million and $22.3 million in 2016 and 2015 , respectively, which represents an increase of 31% primarily driven by the acquisition of the Acquired Trican Operations. +Impairment. In 2016 , we recognized impairment expense of $0.2 million as a result of our non-compete agreement relating to the drilling business within our Other Services segment, due to the fact that this non-compete was no longer expected to generate any future cash flows. In 2015 , we recognized impairment expense of $3.9 million , which was comprised of a $2.4 million impairment on indefinite-lived intangible assets in our Completion Services segment as a result of the loss of certain customer relationships related to our acquisition of Ultra Tech Frac Services, LLC (the “UTFS Acquisition”), a $1.2 million impairment on the trade name of our drilling business in our Other Services segment and a $0.3 million impairment on our drilling rig fleet in our Other Services segment. +Other expense (income), net. Other expense (income), net, in 2016 decreased by $2.4 million , or 162% to income of $0.9 million from expense of $1.5 million in 2015 . This decrease in was primarily driven by an expense recognized in 2015 related to the forfeiture of a $1.7 million deposit due to the cancellation of a hydraulic fracturing equipment purchase order, which was no longer recurring during 2016. +Interest expense, net. Interest expense, net of interest income, increased by $14.8 million , or 63% to $38.3 million in 2016 from $23.5 million in 2015 . This increase was primarily attributable to a $4.9 million increase in interest expense on our Notes due to an increase in the interest rate in accordance with the modified terms of the NPA; $7.0 million interest expense incurred on the 2016 Term Loan Facility in connection with the Trican acquisition; $1.8 million of unrealized and realized losses related to an interest rate swap derivative with all changes in its fair value being recognized within other expenses starting from March 2016, which is the date when hedge accounting was discontinued; and a $3.1 million increase in amortization of debt issuance costs and higher commitment fees incurred on the 2016 ABL Facility. These increases were partially offset by $1.7 million decrease in interest expense as a result of the forgiveness of interest on the Related Party Loan on March 16, 2016. +Net income (loss). Net loss was $187.1 million in 2016 as compared with net loss of $64.6 million in 2015 . The increase in net loss is due to the changes in revenues and expenses discussed above. Upon consummation of the IPO, our successor, Keane Group, Inc., became a corporation subject to federal income taxes. +56 +Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 +The following is a comparison of our results of operations for 2015 compared to 2014 . +The following table sets forth selected operating data for the periods indicated: +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenues +Variance +Description +2015 +2014 +2015 +2014 +$ +% +Completion Services +$ +363,820 +$ +383,173 +99 +% +97 +% +$ +(19,353 +) +(5 +%) +Other Services +2,337 +12,661 +1 +% +3 +% +(10,324 +) +(82 +%) +Revenue +366,157 +395,834 +100 +% +100 +% +(29,677 +) +(7 +%) +Completion Services +305,036 +314,783 +83 +% +80 +% +(9,747 +) +(3 +%) +Other Services +1,560 +8,935 +0 +% +2 +% +(7,375 +) +(83 +%) +Costs of services (excluding depreciation and amortization, shown separately) +306,596 +323,718 +84 +% +82 +% +(17,122 +) +(5 +%) +Completion Services +58,784 +68,390 +16 +% +17 +% +(9,606 +) +(14 +%) +Other Services +777 +3,726 +0 +% +1 +% +(2,949 +) +(79 +%) +Gross profit +59,561 +72,116 +16 +% +18 +% +(12,555 +) +(17 +%) +Depreciation and amortization +69,547 +68,254 +19 +% +17 +% +1,293 +2 +% +Selling, general and administrative expenses +25,811 +25,459 +7 +% +6 +% +352 +1 +% +Impairment +3,914 +11,098 +1 +% +3 +% +(7,184 +) +(65 +%) +Operating loss +(39,711 +) +(32,695 +) +(11 +%) +(8 +%) +(7,016 +) +21 +% +Other expense +1,481 +2,418 +0 +% +1 +% +(937 +) +(39 +%) +Interest expense +23,450 +10,473 +6 +% +3 +% +12,977 +124 +% +Total other expenses +24,931 +12,891 +7 +% +3 +% +12,040 +93 +% +Net loss +$ +(64,642 +) +$ +(45,586 +) +(18 +%) +(12 +%) +$ +(19,056 +) +42 +% +Revenues. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2015 decreased by $29.7 million , or 7% to $366.2 million from $395.8 million in 2014 . The decrease in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue decreased by $19.4 million , or 5% to $363.8 million in 2015 from $383.2 million in 2014 . This decline was primarily attributable to a 13% decrease in the revenue per deployed hydraulic fracturing fleet as a result of pricing pressure for our services, partially offset by a 9% increase in the number of deployed hydraulic fracturing fleets. +Other Services: Other Services segment revenue decreased by $10.3 million , or 82% , to $2.3 million in 2015 from $12.7 million in 2014 . The reduction was primarily attributable to a reduction in revenues from drilling services, which were idled in May 2015 as a result of the significant decrease in rig count throughout 2015. +Costs of Services. Costs of services in 2015 decreased by $17.1 million , or 5% , to $306.6 million from $323.7 million in 2014 , primarily due to the decrease in revenue of $29.7 million during the same period. Costs of services as a percentage of total revenue in 2015 were 84% , which represented a slight increase of 2% from the prior year. The decrease in cost of services by reportable segment is further discussed below. +57 +Year Ended December 31, +Description +2015 +2014 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +84 +% +82 +% +2 +% +Other Services +67 +% +71 +% +(4 +%) +Total cost of services as a percentage of total revenue +84 +% +82 +% +2 +% +Completion Services: Completion Services segment cost of services decreased by $9.7 million , or 3% , to $305.0 million in 2015 from $314.8 million in 2014 . This decrease is primarily related to a decrease in Completion Services segment revenue, coupled with management’s continued efforts and focus on cost saving initiatives to drive down supply and material costs through negotiated price concessions from vendors and management of labor costs. As a percentage of segment revenue, Completion Services segment costs of services was 84% and 82% in 2015 and 2014 , respectively. +Other Services: Other Services segment cost of services decreased by $7.4 million , or 83% , to $1.6 million in 2015 from $8.9 million in 2014 . The decrease was attributable to a reduction in cost of services for our drilling services, which were idled in May 2015. +Depreciation and amortization. Depreciation and amortization expense increased by $1.3 million , or 2% , to $69.5 million in 2015 from $68.3 million in 2014 . This increase was primarily attributable to additional depreciation associated with new hydraulic fracturing and wireline equipment acquired during the second half of 2014 and 2015, partially offset by higher depreciation charge during 2014 due to the revision of the estimated useful lives of hydraulic fracturing assets with cumulative effect reflected in the year of change in accounting estimate. +Selling, general and administrative expense. SG&A expense, which represents the costs associated with managing and supporting our operations, increased by $0.4 million , or 1% to $25.8 million in 2015 from $25.5 million in 2014 . SG&A as a percentage of revenue increased to 7% in 2015 as compared with 6% in 2014 . Changes in SG&A were primarily attributable to a $2.3 million increase in legal and professional fees related to our acquisition of the Acquired Trican Operations and a $0.9 million increase in the costs of the Canadian subsidiary due to its wind-down of activities in the second quarter of 2015. In addition, income tax expense related to the Canadian subsidiary’s operations increased by $0.4 million in 2015 as compared with 2014. These increases were partially offset by a $3.1 million decrease in payroll expense related to the U.S. operations due to lower stock based compensation and bonus expense associated with lower year over year performance. +Impairment. In 2015 , we recognized impairment expense of $3.9 million , which was comprised of a $2.4 million impairment on indefinite-lived intangible assets in our Completion Services segment as a result of the loss of certain customer relationships related to the UTFS Acquisition, a $1.2 million impairment on the trade name of our drilling services in our Other Services segment and a $0.3 million impairment on our drilling rig fleet in our Other Services segment. In 2014 , we recognized impairment expense of $11.1 million , which was comprised of a $0.5 million impairment in our Completion Services segment as a result of the loss of certain customer relationships in our Canadian wireline operations, a $10.0 million impairment of definite-lived intangible assets in our Other Services segment as a result of the termination of a customer contract and a $0.6 million impairment on the trade name of our drilling division in our Other Services segment. +Other expense, net. Other expense, net of other income, decreased by $0.9 million , or 39% , to $1.5 million in 2015 as compared with $2.4 million in 2014 . This decrease was primarily attributed to a loss on debt extinguishment of $2.3 million recognized in 2014 for the extinguishment of our then existing term note with PNC Bank, N.A. and an accrual for the minimum commitment obligation on a sand transload contract of $0.3 million, partially offset by the 2015 forfeiture of a $1.7 million deposit due to the cancellation of a hydraulic fracturing equipment order. +Interest expense, net. Interest expense, net of interest income, increased by $13.0 million , or 124% , to $23.5 million in 2015 from $10.5 million in 2014 . This increase was attributable to additional interest expense due to the issuance of the Notes, which were issued in August and December 2014, amortization of the related debt +58 +financing costs and interest on the Shareholder Loan (as defined herein) and new capital leases entered into in November 2014. +Net income (loss). Net loss was $64.6 million in 2015 as compared with net loss of $45.6 million in 2014 . The increase in net loss is due to the changes in revenues and expenses discussed above. +Liquidity and Capital Resources +Historically, we have met our liquidity needs principally from cash flows from operating activities, borrowings under bank credit agreements and other debt offerings. During 2015 , our primary source of cash was cash flows from operating activities. During 2016 , our primary sources of cash were the loans under our 2016 Term Loan Facility. In addition, in March 2016 we received an equity contribution of $200.0 million from our shareholders to partially fund our acquisition of the Acquired Trican Operations and for working capital. Our principal uses of cash are to fund capital expenditures, acquisitions and to service our outstanding debt. +At December 31, 2016, we had $48.9 million of cash and $40.3 million of availability under our 2016 ABL Facility, which resulted in a total liquidity position (as defined by our combined cash and availability under our asset-based revolving credit facility) of $89.2 million. +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock at a public offering price of $19.00 per share, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. We received $260.3 million in net proceeds after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by us and $18.6 million of underwriting discounts and commissions payable by us associated with the shares sold by the selling stockholder, excluding approximately $4.5 million in offering expenses payable by us with respect to the shares sold by us and the selling stockholder. The net proceeds were used to (i) fully repay our existing balance of approximately $99 million under our 2016 Term Loan Facility, and, in addition, approximately $13.8 million of prepayment premium related to such repayment and (ii) repay $50.0 million of our Notes, and, in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining $97.0 million is to be used for general corporate purposes. As a result, our cash on hand increased by $97.0 million to $145.9 million , resulting in a total liquidity position of $186.2 million as of December 31, 2016 on an as adjusted basis. +On February 17, 2017, as part of the ABL Refinancing Transaction we entered into the New ABL Facility. The New ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the New ABL Facility. No early termination fees were incurred by Keane Group, Inc. in connection with such termination. After giving effect to the ABL Refinancing Transaction, we would have had $50.4 million of availability under our New ABL Facility as of December 31, 2016 on an as adjusted basis. As of February 28, 2017, we had $90.3 million of availability under our New ABL Facility. +On March 15, 2017, we entered into the New Term Loan Facility. The proceeds from New Term Loan Facility were used to repay all amounts outstanding under the NPA, which was terminated in connection with the effectiveness of the New Term Loan Facility. The remaining proceeds were used to pay transaction fees and expenses and for general corporate purposes. +Our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial and business and other factors, many of which are beyond our control. +We believe that our existing cash position, cash generated through operations and our financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for the next 12 months. +59 +Cash Flows +The table below summarizes our cash flows for the years ended December 31, 2016 , 2015 and 2014 +Year ended December 31, +(Thousands of Dollars) +2016 +2015 +2014 +Net cash provided by (used in) operating activities +$ +(54,054 +) +$ +37,521 +$ +18,732 +Net cash used in investing activities +(227,161 +) +(26,038 +) +(138,870 +) +Net cash provided (used in) by financing activities +276,633 +(10,518 +) +137,298 +Effect of foreign exchange rate on cash +80 +250 +(400 +) +Net change in cash +$ +(4,502 +) +$ +1,215 +$ +16,760 +Net Cash (Used in) Provided by Operating Activities +Net cash used in operating activities was $54.1 million in 2016 compared to net cash provided by operating activities of $37.5 million in 2015 . The decrease in operating cash flows was primarily attributable to competitive pricing pressure as a result of market conditions, which resulted in a decrease in operating results in 2016, as described in the “Results of Operations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” In addition, the decrease in operating cash flows was also driven by acquisition, integration and commissioning costs of approximately $47.3 million associated primarily with the Acquired Trican Operations incurred during 2016. +Net cash provided by operating activities was $37.5 million in 2015 , compared to $18.7 million in 2014 . The increase in operating cash flows was primarily attributable to positive operating results generated by our Completion Services segment, as well as cash generated by working capital changes. +Net Cash Used in Investing Activities +Net cash used in investing activities was $227.2 million in 2016 and $26.0 million in 2015 . This increase was primarily attributable to the cash payment of $203.9 million to Trican as part of our acquisition of the Acquired Trican Operations during 2016. +Net cash used in investing activities was $26.0 million in 2015 and $138.9 million in 2014 . This change is primarily attributable to significant purchases of hydraulic fracturing equipment during 2014, resulting in a net decrease in year over year purchases of equipment by $104.4 million and net decreases in advances of deposit on equipment by $9.8 million. +Net Cash Provided by (Used in) Financing Activities +Net cash provided by financing activities was $276.6 million in 2016 as compared with net cash used in financing activities of $10.5 million in December 31, 2015. Net cash flow provided by financing activities in 2016 was primarily attributable to a capital contribution from shareholders of $200 million and the gross proceeds from our 2016 Term Loan Facility of $100 million. The capital contribution and the gross proceeds from the 2016 Term Loan Facility were used to fund the acquisition of the Acquired Trican Operations and working capital. These inflows were partially offset by cash paid for debt issuance costs of $15.1 million. Net cash flow used in financing activities in 2015 was primarily due to an amortization payment on the Notes and a final contingent consideration payment related to the UTFS Acquisition. +Net cash used in financing activities was $10.5 million in 2015 , compared to net cash provided by financing activities of $137.3 million in 2014 . Net cash provided by financing activities in 2014 primarily relates to $185.9 million net proceeds from the Notes and $20.0 million from the Shareholder Loan, partially offset by extinguishment of capital leases of $48.2 million and payment of $9.5 million in connection with the UTFS Acquisition. In 2015, net cash used in financing activities was primarily related to $5.0 million of principal +60 +payments on the Notes and a final contingent consideration payment of $2.5 million made in February 2015 in connection with the UFTS Acquisition. +Capital Expenditures +The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and company initiatives. Capital expenditures for growth and company initiatives are discretionary. We currently estimate that our capital expenditures for 2017 will range from $50 million to $60 million . We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors including expected industry activity levels and company initiatives (exclusive of acquisitions). +Contractual Commitments and Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments at December 31, 2016 . +(Thousands of Dollars) +Contractual obligations +Total +Less +than 1 +Year +1-3 Years +3-5 Years +Thereafter +Long-term debt, including current portion (1) +$ +288,103 +$ +7,500 +$ +190,000 +$ +90,603 +$ +— +Estimated interest payments (2) +100,188 +32,226 +58,341 +9,621 +— +Capital lease obligations (3) +8,672 +2,945 +5,727 +0 +— +Operating lease obligations (4) +31,987 +9,213 +15,322 +5,869 +1,583 +Purchase commitments (5) +108,313 +20,555 +60,859 +26,899 +— +$ +537,263 +$ +72,439 +$ +330,249 +$ +132,992 +$ +1,583 +(1) +Long-term debt excludes interest payments on each obligation and represents our obligations under our 2016 Term Loan Facility, which was repaid in full upon consummation of the IPO, as well as our obligations under our Notes, which were partially repaid upon consummation of the IPO and fully repaid upon our entering into the New Term Loan Facility. In addition, these amounts exclude the principal related to the New Term Loan Facility, which was entered into on March 15, 2017 and $18.4 million of unamortized debt discount and debt issuance costs. +(2) +Estimated interest payments are based on debt balances outstanding as of December 31, 2016 and include interest related to the 2016 Term Loan Facility, which was repaid in full upon consummation of the IPO, as well as our obligations under our Notes, which were partially repaid upon consummation of the IPO and fully repaid upon our entering into the New Term Loan Facility. In addition, these amounts exclude the interest related to the New Term Loan Facility, which was entered into on March 15, 2017. Interest rates used for variable rate debt are based on the prevailing current LIBOR rate. +(3) +Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc. +(4) +Operating lease obligations are related to our real estate and rail cars. +(5) +Purchase commitments primarily relate to our agreements with vendors for sand purchases. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +Principal Debt Agreements +2016 ABL Facility +On March 16, 2016, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac, LP, KS Drilling, LLC, Keane Frac ND, LLC and Keane Frac TX, LLC entered into an amendment which modified their existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) with certain financial institutions (collectively, the “2016 ABL Lenders”) and PNC Bank, National Association, as agent for the 2016 ABL Lenders. +On February 17, 2017, we replaced our 2016 ABL Facility with the New ABL Facility. +New ABL Facility +61 +On February 17, 2017, Keane Group, Inc., Keane Group, Keane Frac, LP, KS Drilling, LLC (together with Keane Group, Keane Frac, LP and each other person that becomes an ABL Borrower under the New ABL Facility in accordance with the terms thereof, the "ABL Borrowers") and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the "New ABL Facility") with each lender from time to time party thereto and Bank of America, N.A. as administrative agent and collateral agent. The New ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the New ABL Facility. No early termination fees were incurred by Keane Group, Inc. in connection with such termination. We refer to the above as the “ABL Refinancing Transaction.” The following is a summary of the material provisions of the New ABL Facility. It does not include all of the provisions of the New ABL Facility, does not purport to be complete and is qualified in its entirety by reference to the New ABL Facility described. +Structure. The New ABL Facility provides for a $150 million revolving credit facility (with a $20 million subfacility for letters of credit), subject to a borrowing base (as described below). In addition, subject to approval by the applicable lenders and other customary conditions, the New ABL Facility allows for an increase in commitments of up to $75 million. +Maturity . The loans arising under the initial commitments under the New ABL Facility, that have not been extended, mature on February 17, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Borrowing Base . The amount of loans and letters of credit available under the New ABL Facility is limited to, at any time of calculation, an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 75% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves. +Interest . Amounts outstanding under the New ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if total net leverage is greater than 4.0:1.0, 3.50%, (y) if the total net leverage ratio is less than or equal to 4.0:1.0 but greater than 3.5:1.0, 3.25% or (z) if the total net leverage ratio is less than or equal to 3.5:1.0, 3.00%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if total net leverage is greater than 4.0:1.0, 4.50%, (y) if the total net leverage ratio less than or equal to 4.0:1.0 but greater than 3.5:1.0, 4.25% or (z) if the total net leverage ratio is less than or equal to 3.5:1.0, 4.00%. The margin is set at the highest level until the first day following the second full fiscal quarter ending after February 17, 2017 and the total net leverage ratio is determined on the last day of the most recent fiscal quarter then ended. Following an event of default, the New ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2.00% per annum during the continuance of such event of default, and the letter of credit fees increase by 2.00%. +Guarantees . Subject to certain exceptions as set forth in the definitive documentation for the New ABL Facility, the amounts outstanding under the New ABL Facility are guaranteed by Keane Group, Inc., KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the "ABL Guarantors"). +Security . Subject to certain exceptions as set forth in the definitive documentation for the New ABL Facility, the obligations under the New ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable; inventory; chattel paper, instruments and documents related to accounts, receivables, inventory, equipment securing the New ABL Facility; lender-provided hedges; cash; deposit accounts and cash and cash equivalents credited thereto; payment intangibles, general intangibles, commercial tort claims and books and records related to any of the foregoing; rights to business interruption insurance; and supporting obligations of the company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the New ABL +62 +Facility (collectively, the “ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of Keane Group, Inc. and the ABL Guarantors to the extent not constituting ABL Facility Priority Collateral. +Fees . Certain customary fees are payable to the lenders and the agents under the New ABL Facility. +Affirmative and Negative Covenants . The New ABL Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the New ABL Facility). +Financial Covenants . The New ABL Facility provides that if any of (a) an event of default is occurring and continuing, (b) if no loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, liquidity is less than the greater of (i) 15% of the loan cap and (ii) $17,500,000 at any time or (c) if any loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, excess availability is less than the greater of (i) 15% of the loan cap and (ii) $17,500,000 at any time, then the consolidated fixed charge coverage ratio, as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, may not be lower than 1.0:1.0. This financial covenant will remain in effect until the thirtieth consecutive day that all such triggers no longer exist. The results of operation and indebtedness of any unrestricted subsidiaries will not be taken into account for purposes of compliance with this financial covenant. +Events of Default . The New ABL Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the New ABL Facility). +2016 Term Loan Facility +On March 16, 2016, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC and Keane Frac, LP, entered into a credit agreement (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders. The 2016 Term Loan Facility initially provided for a $100 million term loan. The 2016 Term Loan Facility was prepaid in full on January 25, 2017 in connection with the IPO. +In conjunction with the 2016 Term Loan Facility, KGH Intermediate Holdco II, LLC executed a new interest rate swap effective March 31, 2016 through May 9, 2019 which was designated as a cash flow hedge. Under the terms of the interest rate swap, KGH Intermediate Holdco II, LLC receives LIBOR based variable interest rate payments, subject to a 1.50% floor, and makes payments based on a fixed rate of 1.868%, thereby effectively creating the equivalent of fixed-rate debt for the notional amount hedged of the 2016 Term Loan Facility. As of December 31, 2016, the notional amount of the interest rate swap is $98.1 million , decreasing quarterly to match the outstanding balance of the 2016 Term Loan Facility. +New Term Loan Facility +On March 15, 2017, Keane Group, Inc., Keane Group, Keane Frac, LP , KS Drilling, LLC (together with Keane Group, Keane Frac, LP and each other person that becomes a New Term Loan Borrower under the New Term Loan Facility in accordance with the terms thereof, the "New Term Loan Borrowers")and the New Term Loan Guarantors (as defined below) entered into a term loan agreement (the "New Term Loan Facility") with each lender from time to time party thereto and Owl Rock Capital Corporation as administrative agent and collateral agent. The following is a summary of the material provisions of the New Term Loan Facility. It does not include all of the provisions of the New Term Loan Facility, does not purport to be complete and is qualified in its entirety by reference to the New Term Loan Facility described. +Structure. The New Term Loan Facility provides for a $150 million initial term loan facility. In addition, subject to certain customary conditions, the New Term Loan Facility allows for incremental term loans in an amount equal to the sum of (a) $50,000,000 (less certain amounts in connection with permitted notes and subordinated +63 +indebtedness), plus (b) $75,000,000 (less certain amounts in connection with permitted notes and subordinated indebtedness), but only to fund permitted acquisitions subject to, in the case of subclause (b), immediately after giving effect thereto, the minimum liquidity covenant described below is satisfied, plus (c) an unlimited amount, subject to, in the case of subclause (c), immediately after giving effect thereto, the total net leverage ratio being less than 1.75:1.00. +Maturity. August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The New Term Loan Facility amortizes in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding, commencing with June 30, 2017. +Interest. The initial term loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 6.25%, or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25%. Following an event of default, the New Term Loan Facility bears interest at the rate otherwise applicable to such term loans at such time plus an additional 2.00% per annum during the continuance of such event of default. +Prepayments . The New Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the New Term Loan Facility and the agent for the New ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the New Term Loan Agreement) and (c) 50% (subject to step-downs to zero, in accordance with a total net leverage ratio test) of excess cash flow minus certain voluntary prepayments made under the New Term Loan Facility and all voluntary prepayments of loans under the New ABL Facility to the extent the commitments under the New ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by Keane Group, Inc., KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each New Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the "New Term Loan Guarantors"). +Security. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the New Term Loan Borrowers and the New Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the ABL Facility Priority Collateral. +Fees. Certain customary fees are payable to the lenders and the agents under the New Term Loan Facility. +Affirmative and Negative Covenants. The New Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the New Term Loan Facility). +Financial Covenant. The New Term Loan Facility provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the loan parties that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the New ABL Facility, may not be less than $35,000,000. +Events of Default. The New Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the New Term Loan Facility). +Note Purchase Agreements +On March 16, 2016, KGH Intermediate Holdco II, LLC, entered into an amendment which modified its existing note purchase agreement (as amended, the “NPA”) with certain financial institutions (collectively, the “Purchasers”) and U.S. Bank National Association, as agent for the Purchasers. The NPA initially provided for $200 +64 +million of secured notes (which included a $50 million subfacility for delayed draw notes) (the “Notes”). The Notes bore interest at a rate per annum equal to 12.00%. As of December 31, 2016, $190 million of notes were outstanding under the NPA. In connection with the IPO, $50 million of the NPA was paid off on January 25, 2017. As of March 15, 2017, $138.7 million of notes were outstanding under the NPA, which were repaid in full on March 15, 2017 in connection with the Company entering into the New Term Loan Facility, as discussed in detail above. +Off-Balance Sheet Arrangements +Except for our normal operating leases, we do not have any off-balance sheet financing arrangements, transactions or special purpose entities. +Related Party Transactions +Prior to the completion of our IPO, our board of directors adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +For further details about our transactions with Related Parties please refer to “Item 8. Financial Statements and Supplementary Data” and Note18 (Related Party Transactions) of Keane Group’s financial statements of this Annual Report on Form 10-K. +Critical Accounting Policies and Estimates +The preparation of the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +In the notes accompanying the audited consolidated financial statements, we describe the significant accounting policies used in the preparation of our consolidated financial statements. We believe that the following represent the most significant estimates and management judgments used in preparing the consolidated financial statements. +Revenue Recognition +Revenue from our Completion Services and Other Services segments is earned and recognized as services are rendered, which is generally on a per stage, daily or hourly rate, or on a similar basis. All revenue is recognized +65 +when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability is reasonably assured, as follows: +Completion Services Revenue +We provide hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements, or on a spot market basis. Revenue is recognized upon the completion of each job. Once a job has been completed to the customer’s satisfaction, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, additional equipment used on the job, if any, and other miscellaneous items. This field ticket is used to create an invoice, which is sent to the customer upon the completion of each job. +Other Services Revenue +We provide certain complementary services such as coiled tubing, cementing and drilling pursuant to contractual arrangements, such as term contracts or on a spot basis. We typically charge the customer for the services performed and materials provided on a per job basis. +Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations and comprehensive loss and net cash provided by operating activities in the consolidated statements of cash flows. +Property, Plant, and Equipment +We calculate depreciation based on the estimated useful lives of our assets. When assets are placed into service, we make estimates with respect to their useful lives that we believe are reasonable. However, the cyclical nature of our business, which results in fluctuations in the use of our equipment and the environments in which we operate, could cause us to change our estimates, thus affecting the future calculation of depreciation. +We continuously perform repair and maintenance expenditures on our service equipment. Expenditures for renewals and betterments that extend the lives of our service equipment, which may include the replacement of significant components of service equipment, are capitalized and depreciated. Other repairs and maintenance costs are expensed as incurred. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to our capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset are capitalized. +We separately identify and account for certain significant components of our hydraulic fracturing units including the engine, transmission, power end and radiator, which requires us to separately estimate the useful lives of these components. For the majority of our other service equipment, we do not separately identify and track depreciation of specific original components. When we replace components of these assets, we typically have to estimate the net book values of the components that are retired, which is based primarily upon replacement cost, age and original estimated useful life. +Definite-lived Intangible Assets +At December 31, 2016, our balance of definite-lived intangible assets was $44.0 million, and the related amortization reflected in our statement of operations was $5.7 million , $4.9 million and $5.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. These intangible assets are primarily related to customer relationships, trade names, software and proprietary chemical blends acquired in business acquisitions. We calculate amortization for these assets based on their estimated useful lives. When these assets are recorded, we make estimates with respect to their useful lives that we believe are reasonable. However, these estimates contain judgments regarding the future utility of these assets and a change in our assessment of the useful lives of these assets could materially change the future calculation of amortization. +66 +Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets +Long-lived assets, such as property, plant, equipment and definite-lived intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable, such as insufficient cash flows or plans to dispose of or sell long-lived assets before the end of their previously estimated useful lives. If the carrying amount is not recoverable, we recognize an impairment loss equal to the amount by which the carrying amount exceeds fair value. We estimate fair value based on projected future discounted cash flows. Our fair value calculations for long-lived assets and intangible assets contain uncertainties because they require us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. We also apply judgment in the selection of a discount rate that reflects the risk inherent in our current business model. +We measure the fair value of our property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. +We have acquired goodwill and indefinite-lived intangible assets related to business acquisitions. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We review our goodwill and indefinite-lived intangible assets on an annual basis, during the fourth quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill or an indefinite-lived intangible asset may exceed its fair value. If the carrying value of goodwill or an indefinite-lived intangible asset exceeds its fair value, we recognize an impairment loss for this difference. Our impairment loss calculations for goodwill and indefinite-lived intangible assets contain uncertainties because they require us to estimate fair values of our reporting units, which have been defined as our reportable segments, and intangible assets, respectively. We estimate fair values based on various valuation techniques such as discounted cash flows and comparable market analyses. These types of analyses contain uncertainties because they require us to make judgments and assumptions regarding future profitability, industry factors, planned strategic initiatives, discount rates and other factors. +If actual results or performance of certain business units are not consistent with our estimates and assumptions, we may be subject to additional impairment charges, which could be material to our results of operations. For example, if our results of operations significantly decline as a result of a decline in the price of oil, there could be a material increase in the impairment of long-lived assets in future periods. Also, if the actual results or performance of our Completion Services segment are not consistent with our projections, estimates and assumptions, there could be goodwill impairment charges in future periods. +Derivative Instruments and Hedging Activities +We are exposed to certain risks related to our ongoing business operations. We utilize interest rate derivatives to manage interest rate risk associated with our floating-rate borrowings. We recognize all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged, until the hedged item affects earnings. +We only enter into derivative contracts that we intend to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, we formally document the hedging relationship and our risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively and a description of the method used to measure ineffectiveness. We also formally assess, both at the inception of the +67 +hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +We discontinue hedge accounting prospectively when we determine that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we continue to carry the derivative at its fair value on the balance sheet and recognize any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, we discontinue hedge accounting and recognize immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship. +Unit-Based Compensation +Prior to consummation of the IPO, the Company sponsored a unit-based management compensation program called the Keane Management Holdings LLC Management Incentive Plan (the “Class B Plan”). The Company accounted for the units granted under the Class B Plan as compensation cost measured at the fair value of the award on the date of grant using the Black-Scholes option pricing model. The determination of grant date fair value using an option pricing model is highly complex and requires judgment as well as assumptions regarding a number of complex and subjective variables. These variables include the fair value of the Company’s common ownership interest pre-IPO, the expected unit price volatility over the expected term of the awards, risk free interest rates, expected dividend yield and discount for lack of marketability pre-IPO. These estimates will not be used to determine the fair value of any awards granted under the Class B Plan following the IPO. +The Company recognized compensation expense for the Class B units on a straight-line basis over the service period of the entire award. In connection with the IPO and the reorganization, on January 20, 2017, the Class B Plan was assigned to and assumed by Keane Investor. +Prior to the completion of the Trican transactions on March 16, 2016, the Company sponsored the Class C Management Incentive Plan (the “Class C Plan”), under which Class C units were granted to management. The Class C units granted under the Class C Plan vested based on the participants continued employment with the Company for time-based units and based on both the participants continued employment with the Company and the achievement of performance objectives as determined by the Compensation Committee for performance-based units. The Company estimated the fair value of the Class C units on the date of grant using a Monte-Carlo option pricing model. The Company recognized compensation expense for the Class C units on a straight-line basis over the service period of the entire award for the time-based component and ratably over the vesting period for the performance based component subject to the attainment of certain performance objectives. On March 16, 2016, the Company canceled all outstanding Class C units issued under the Class C Plan and issued to management Class B units under the Class B Plan using an applicable conversion ratio specific to each participant. +Tax Contingencies +While Keane Group is not subject to federal income taxes for U.S. federal tax purposes, it is subject to foreign income tax for Canadian federal and provincial tax purposes. Keane Group is also subject to other state and local taxes, including margin tax in the state of Texas. As such, with the exception of the state of Texas and its Canadian subsidiary, Keane Group is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income tax for the operations of the Company. Keane Group’s tax returns, like those of most companies, are periodically audited by federal, state and local tax authorities. These audits include questions regarding Keane Group’s tax filing positions, including the timing and amount of deductions and the reporting of various taxable transactions. At any one time, multiple tax years are subject to audit +68 +by the various tax authorities. In evaluating the exposures associated with Keane Group’s various tax filing positions, Keane Group may record a liability for such exposures. A number of years may elapse before a particular matter, for which Keane Group has established a liability, is audited and fully resolved or clarified. Keane Group adjusts its liability for these tax exposures in the period in which a tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. +Upon consummation of the IPO and Organizational Transactions, Keane Group, Inc., a corporation incorporated under the laws of the state of Delaware, became subject to federal income taxes and will calculate deferred income tax assets and liabilities that could potentially be significant. +Our liabilities for these tax positions contain uncertainties because we are required to make assumptions and apply judgment to estimate the exposures associated with our various filing positions. Although we believe that our judgments and estimates are reasonable, actual results could differ, and we may be subject to losses or gains that could be material. +Business Combinations +Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note 3 (Acquisition) in Keane Group, Holding, LLC’s consolidated financial statements in “Item 8. Financial Statements and Supplemental Data.” +Recent Accounting Pronouncements +See Note 2 (Summary of Significant Accounting Policies) , Note 22 (Recently Adopted Accounting Standards) and Note 23 (Recently Issued Accounting Standards) to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for a discussion of recently adopted and issued accounting pronouncements. +69 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +At December 31, 2016, we held no significant derivative instruments that materially increased our exposure to market risks for interest rates, foreign currency rates, commodity prices or other market price risks. +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers, however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. Refer to “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2016. +Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk. +70 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +Keane Group, Inc. +Audited Financial Statements +Report of Independent Registered Public Accounting Firm +72 +Balance Sheet as of December 31, 2016 +73 +Notes to Balance Sheet +74 +Keane Group Holdings, LLC +Audited Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm +77 +Consolidated Balance Sheets +78 +Consolidated Statements of Operations and Comprehensive (Loss) +79 +Consolidated Statements of Changes in Members’ Equity +80 +Consolidated Statements of Cash Flows +81 +Notes to Consolidated Financial Statements +83 +71 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders +Keane Group, Inc.: +We have audited the accompanying balance sheet of Keane Group, Inc. as of December 31, 2016. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. +In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Keane Group, Inc. as of December 31, 2016, in conformity with U.S. generally accepted accounting principles. +/s/ KPMG LLP +Houston, Texas +March 20, 2017 +72 +KEANE GROUP, INC. +Balance Sheet +December 31, 2016 +Assets +Cash +$ +— +Total assets +— +Liabilities +Total liabilities +— +Commitments and contingencies +Stockholder’s Equity +Common stock, par value $0.01 per share, 500,000,000 shares authorized, none issued and outstanding +— +Total stockholder’s equity +— +Total liabilities and stockholder’s equity +$ +— +See accompanying notes to the balance sheet. +73 +KEANE GROUP, INC. +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +1. Organization and Operations +Keane Group, Inc. (the “Company”) is a Delaware Corporation, incorporated on October 13, 2016. Following an initial public offering (“IPO”) and related reorganization, the Company became a holding corporation for Keane Group Holdings, LLC and its subsidiaries. +2. Summary of Significant Accounting Policies +(a) Basis of Presentation +The Company’s balance sheet has been prepared in accordance with U.S. generally accepted accounting principles. Separate statements of operations, cash flows, and changes in stockholder’s equity and comprehensive income have not been presented because this entity has had no operations to date. +(b) Underwriting Commissions and Offering Costs +Underwriting commissions and offering costs incurred in connection with the Company’s common stock offerings will be reflected as a reduction of additional paid-in capital. Underwriting commissions and offering costs incurred in 2016 in connection with the Company’s IPO, consummated on January 25, 2017, were not recorded in the Company’s balance sheet as of December 31, 2016, because such costs did not become the Company’s liability until the Company completed an IPO. +(c) Organizational Costs +Organizational costs incurred in 2016 were not recorded in the Company’s balance sheet as of December 31, 2016, because such costs did not become the Company’s liability until the Company completed an IPO. Upon completion of an IPO, further costs incurred to organize the Company will be expensed as incurred. +3. Shareholder’s Equity +The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.01 per share and 50,000,000 shares of preferred stock with a par value of $0.01 per share. Under the Company’s certificate of incorporation as in effect as of October 13, 2016, all shares of common stock are identical. The Board of Directors has the authority to issue one or more series of preferred stock without stockholder approval. +4. Subsequent Events +On October 13, 2016, in connection with the filing of the registration statement on Form S-1, under the Securities Act of 1933, for the initial public offering (the “IPO”) of shares of common stock of the Company, the Company was formed as a Delaware Corporation to become a holding corporation for Keane Group Holdings, LLC and its subsidiaries. Immediately prior to the completion of the IPO (as discussed above), the existing investors of Keane Group Holdings, LLC contributed all of their direct and indirect equity interests in Keane Group Holdings, LLC to Keane Investor Holdings LLC (“Keane Investor”), and Keane Investor contributed these equity interests to the Company in exchange for shares of its common stock. These transactions are referred to collectively as the “Organizational Transactions.” As a result, all membership interests in Keane Group Holdings, LLC were exchanged for an aggregate of 87,428,019 of common stock in the Company on January 20, 2017. In connection with the consummation of the IPO on January 25, 2017 (as described below), the underwriters exercised their overallotment option of 4,014,000 shares; thereby resulting in Keane Investor and our independent directors owning 72,354,019 of shares of common stock in the Company. In addition, the Organizational Transactions represented a transaction +74 +KEANE GROUP, INC. +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +between entities under common control and will be accounted for similar to pooling of interest, whereby the Company became the successor and Keane Group Holdings, LLC the predecessor for the purposes of financial reporting. +On January 25, 2017, the Company completed the IPO of 30,774,000 shares of our common stock, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as result of the underwriters’ exercise of their overallotment option. The gross proceeds of the IPO to the Company, at the public offering price of $19.00 per share, was $298.3 million , which resulted in net proceeds to the Company of $260.3 million , after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by the Company and $18.6 million of underwriting discounts and commissions payable by the Company associated with the shares of common stock sold by the selling stockholder, excluding approximately $4.5 million in offering expenses payable by us with respect to the shares sold by us and the selling stockholder. The Company did not receive any proceeds from the sale of the shares by the selling stockholder. The net proceeds received from the IPO were used to fully repay KGH Intermediate Holdco II, LLC’s term loan balance of $99 million and the associated prepayment penalty of $13.8 million , and repay $50 million of its 12% secured notes due 2010 (the “Notes”), as described in Note 8 (Long-Term Debt) of Keane Group Holdings, LLC and subsidiaries consolidated financial statements, and in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining net proceeds will be used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +On February 17, 2017, the Company, Keane Frac LP, KS Drilling, LLC and the guarantors party thereto entered into an asset-based revolving credit agreement (the "New ABL Facility") with each lender from time to time party thereto and Bank of America, N.A. as administrative agent and collateral agent. The New ABL Facility replaced the 2016 ABL Facility, as defined in Note 8 (Long-Term Debt) of Keane Group Holdings, LLC and Subsidiaries consolidated financial statements, which agreement was terminated in connection with the effectiveness of the New ABL Facility. The New ABL Facility provides for a $150 million revolving credit facility (with a $20 million subfacility for letters of credit), subject to a borrowing base. In addition, subject to approval by the applicable lenders and other customary conditions, the New ABL Facility allows for an increase in commitments of up to $75 million. No early termination fees were incurred by the Company in connection with such termination. +On February 17, 2017, the Company and Keane Group Holdings, LLC were joined as guarantors to the agreement governing the Notes, and the parties also entered into an amendment to, among other things, (i) allow the Company to provide its financial statements and reports to the noteholders and calculate covenants and ratios using such financial statements, (ii) enter into an intercreditor agreement with Bank of America, N.A. as administrative agent and collateral agent under the New ABL Facility and (iii) allow certain restricted payments. +On March 15, 2017, the Company, Keane Group Holdings, LLC (the "Term Loan Lead Borrower"), Keane Frac, KS Drilling and the guarantors thereto entered into a term loan agreement (the "New Term Loan Facility") with each lender from time to time party thereto and Owl Rock Capital Corporation as administrative agent and collateral providing for a $150 million senior secured term loan facility (the "New Term Loan") with a maturity date of August 18, 2022. The New Term Loan has an interest rate of per annum equal to, at the Term Loan Lead Borrower’s option, either (a) the base rate plus 6.25% or (b) LIBOR (subject to a 1.00% floor) plus 7.25%. Subject to certain conditions, the Term Loan Lead Borrower has the right to request an increase of the Term Loan in an amount of up to $125 million. The New Term Loan Facility includes a $35 million minimum liquidity requirement. In connection with entering into the New Term Loan Facility, KGH Intermediate Holdco II, LLC repaid all amounts outstanding under the Notes. +75 +KEANE GROUP, INC. +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +76 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders +Keane Group, Inc.: +We have audited the accompanying consolidated balance sheets of Keane Group Holdings, LLC and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keane Group Holdings, LLC and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. +/s/ KPMG LLP +Houston, Texas +March 20, 2017 +77 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Consolidated Balance Sheets +(Amounts in thousands) +December 31, +2016 +December 31, +2015 +Assets +Current assets: +Cash and cash equivalents +$ +48,920 +$ +53,422 +Trade and other accounts receivable +66,277 +15,640 +Inventories, net +15,891 +4,668 +Prepaid and other current assets +14,618 +1,868 +Total current assets +145,706 +75,598 +Property and equipment, net +294,209 +153,625 +Goodwill +50,478 +48,882 +Intangible assets +44,015 +45,616 +Other noncurrent assets +2,532 +1,074 +Total assets +536,940 +324,795 +Liabilities and Members’ Equity +Liabilities +Current liabilities: +Accounts payable +$ +48,484 +$ +12,562 +Accrued expenses +42,892 +14,024 +Current maturities of capital lease obligations +2,633 +1,742 +Current maturities of long-term debt +2,512 +2,918 +Other current liabilities +3,171 +1,100 +Total current liabilities +99,692 +32,346 +Capital lease obligations, less current maturities +5,442 +6,365 +Long-term debt, less current maturities +267,238 +181,975 +Long term debt—related party +— +22,174 +Other noncurrent liabilities +2,316 +1,775 +Total noncurrent liabilities +274,996 +212,289 +Total liabilities +374,688 +244,635 +Commitments and Contingencies (Note 17) +Members’ equity +Members’ equity +453,810 +186,510 +Retained earnings (deficit) +(288,771 +) +(101,684 +) +Accumulated other comprehensive (loss) +(2,787 +) +(4,666 +) +Total members’ equity +162,252 +80,160 +Total liabilities and members’ equity +$ +536,940 +$ +324,795 +See accompanying notes to consolidated financial statements. +78 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Consolidated Statements of Operations and Comprehensive (Loss) +Years Ended December 31, 2016, 2015 and 2014 +(Amounts in thousands, except for per unit amounts) +2016 +2015 +2014 +Revenue +$ +420,570 +$ +366,157 +$ +395,834 +Operating costs and expenses: +Cost of services (excluding depreciation of $94,770, $64,325 and $62,143, respectively, included in depreciation and amortization presented below) +416,342 +306,596 +323,718 +Depreciation and amortization +100,979 +69,547 +68,254 +Selling, general and administrative expenses +52,768 +25,811 +25,459 +Impairment +185 +3,914 +11,098 +Total operating costs and expenses +570,274 +405,868 +428,529 +Operating loss +(149,704 +) +(39,711 +) +(32,695 +) +Other expense: +Other income (expense), net +916 +(1,481 +) +(2,418 +) +Interest expense +(38,299 +) +(23,450 +) +(10,473 +) +Total other expenses +(37,383 +) +(24,931 +) +(12,891 +) +Net loss +(187,087 +) +(64,642 +) +(45,586 +) +Other comprehensive income (loss): +Foreign currency translation adjustments +22 +(741 +) +(1,148 +) +Hedging activities +1,857 +(1,187 +) +(854 +) +Total comprehensive (loss) +$ +(185,208 +) +$ +(66,570 +) +$ +(47,588 +) +Unaudited Pro-forma net loss per unit: +Basic and diluted net loss per unit +$ +(2.14 +) +$ +(0.74 +) +$ +(0.52 +) +Unaudited Pro-forma weighted-average units outstanding: basic and diluted +87,428 +87,428 +87,428 +See accompanying notes to consolidated financial statements. +79 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Consolidated Statements of Changes in Members’ Equity +Years Ended December 31, 2016, 2015 and 2014 +(Amounts in thousands) +Members’ equity +Retained Earnings (deficit) +Accumulated other comprehensive income (loss) +Total +Balance as of December 31, 2013 +$ +184,340 +$ +8,544 +$ +(736 +) +$ +192,148 +Distributions +(337 +) +— +— +(337 +) +Unit awards vested +2,417 +— +— +2,417 +Other comprehensive loss +— +— +(2,002 +) +(2,002 +) +Net loss +— +(45,586 +) +— +(45,586 +) +Balance as of December 31, 2014 +$ +186,420 +$ +(37,042 +) +$ +(2,738 +) +$ +146,640 +Distributions +(222 +) +— +— +(222 +) +Unit awards vested +312 +— +— +312 +Other comprehensive loss +— +— +(1,928 +) +(1,928 +) +Net loss +— +(64,642 +) +— +(64,642 +) +Balance as of December 31, 2015 +$ +186,510 +$ +(101,684 +) +$ +(4,666 +) +$ +80,160 +Contribution of equity +222,646 +— +— +222,646 +Issuance of Class A and Class C Units +42,669 +— +— +42,669 +Unit awards amortization +1,985 +— +— +1,985 +Other comprehensive income +— +— +1,879 +1,879 +Net loss +— +(187,087 +) +— +(187,087 +) +Balance as of December 31, 2016 +$ +453,810 +$ +(288,771 +) +$ +(2,787 +) +$ +162,252 +See accompanying notes to consolidated financial statements. +80 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Consolidated Statements of Cash Flows +Years Ended December 31, 2016, 2015 and 2014 +(Amounts in thousands) +2016 +2015 +2014 +Cash flows from operating activities: +Net loss +$ +(187,087 +) +$ +(64,642 +) +$ +(45,586 +) +Adjustments to reconcile net loss to net cash provided by operating activities +Depreciation and amortization +100,979 +69,547 +68,254 +Amortization of deferred financing fees +4,152 +2,112 +633 +Loss on debt extinguishment +— +— +2,270 +Loss on impairment of assets +185 +3,914 +11,098 +Gain on sales of assets +(387 +) +(270 +) +(912 +) +Unrealized loss on de-designation of a derivative +3,038 +— +— +Accrued interest on loan—related party +471 +2,174 +— +Unit-based compensation +1,985 +312 +2,417 +Decrease (increase) in accounts receivable +(13,027 +) +36,933 +(36,091 +) +Decrease (increase) in inventories +8,485 +11,841 +(12,952 +) +Decrease (increase) in prepaid and other current assets +(5,994 +) +105 +159 +Decrease (increase) in other assets +32 +1,047 +452 +Increase (decrease) in accounts payable +14,214 +(12,650 +) +12,803 +Increase (decrease) in accrued expenses +19,735 +(13,185 +) +16,575 +Increase (decrease) in other liabilities +(835 +) +283 +(388 +) +Net cash (used in) provided by operating activities +(54,054 +) +37,521 +18,732 +Acquisition of business +(203,900 +) +— +— +Purchase of property and equipment +(23,126 +) +(26,086 +) +(130,485 +) +Advances of deposit on equipment +(420 +) +(1,114 +) +(10,871 +) +Implementation of ERP software +(453 +) +(69 +) +(130 +) +Proceeds from sale of assets +711 +1,278 +1,760 +Payments for leasehold improvements +— +(46 +) +(37 +) +Proceeds from insurance recoveries +22 +— +888 +Payments received (advances) on note receivable +5 +(1 +) +5 +Net cash used in investing activities +(227,161 +) +(26,038 +) +(138,870 +) +Cash flows from financing activities: +Proceeds from the Notes and the Term Loan +100,000 +— +245,000 +Payments on the Notes and the Term Loan +(5,647 +) +(5,000 +) +(59,135 +) +Proceeds from capital leases +— +— +12,924 +Payments on capital leases +(2,668 +) +(1,661 +) +(61,091 +) +Payment of debt issuance costs +(15,052 +) +(1,135 +) +(10,563 +) +Payments on contingent consideration liability +— +(2,500 +) +(9,500 +) +Contributions (distributions) +200,000 +(222 +) +(337 +) +Proceeds from loan—related party +— +— +40,000 +Payments on loan—related party +— +— +(20,000 +) +Net cash (used in) provided by financing activities +276,633 +(10,518 +) +137,298 +Noncash effect of foreign translation adjustments +80 +250 +(400 +) +Net increase in cash and cash equivalents +(4,502 +) +1,215 +16,760 +Cash and cash equivalents, beginning +53,422 +52,207 +35,447 +Cash and cash equivalents, ending +$ +48,920 +$ +53,422 +$ +52,207 +81 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Consolidated Statements of Cash Flows +Years Ended December 31, 2016, 2015 and 2014 +(Amounts in thousands) +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net +$ +25,516 +$ +19,157 +$ +9,751 +Income taxes +— +220 +Non-cash investing and financing activities: +Non-cash purchases of property and equipment +9,364 +3,138 +Non-cash forgiveness of related party loan +22,646 +— +Non-cash issuance of Class A and C Units +42,669 +— +Non-cash reduction in capital lease obligations +(1,281 +) +— +See accompanying notes to consolidated financial statements. +82 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +(1) Basis of Presentation and Nature of Operations +(a) Business Description +Keane Group Holdings, LLC and subsidiaries (the “Company”) is a multi-basin provider of oilfield services to oil and natural gas exploration and production companies in the United States and Canada. Through its subsidiaries, the Company provides customers with premium hydraulic fracturing, wireline and other services, with a focus on complex, technically demanding well completions. In 2015, the Company exited its wireline operations in Canada. +The Company is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. The Company’s primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. The Company operates primarily in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale. +Through its subsidiary Keane Frac, LP, the Company acquired Trican’s U.S. Operations and obtained access to its operating bases located in strategic oil and gas basins and operations in hydraulic fracturing, coiled tubing, cementing and other completion services. Refer to Note 3 ( Acquisition ) for further details. +(b) Formation and Reorganization +The Company was formed on March 2, 2011, to hold interests in consolidated subsidiaries including Keane Frac, LP, Keane Frac GP, LLC and KS Drilling, LLC, in anticipation of a sale of a controlling interest in the Company and its subsidiaries. This acquisition was completed on March 22, 2011, when KG Fracing Acquisition Corporation, an affiliate of Cerberus Capital Management, L.P., acquired a majority ownership stake in the equity of the Company. The acquisition was accounted for as a business combination and created a new basis of accounting. These consolidated financial statements are those of the successor company, Keane Group Holdings, LLC and subsidiaries. The Company’s predecessor, Keane and Sons Drilling Corporation, was established in 1973. +On October 13, 2016, in connection with the filing of the registration statement on Form S-1, under the Securities Act of 1933, for the initial public offering (the “IPO”) of shares of common stock of Keane Group, Inc. (“KGI”), KGI was formed as a Delaware Corporation to become a holding corporation for Keane Group Holdings, LLC and its subsidiaries. Immediately prior to the completion of the IPO, the existing investors of the Company contributed all of their direct and indirect equity interests in Keane Group Holdings, LLC to Keane Investor Holdings LLC (“Keane Investor”), and Keane Investor contributed these equity interests to KGI in exchange for shares of its common stock. These transactions are referred to collectively as the “Organizational Transactions”. As a result, all membership interests in the Company were exchanged for an aggregate of 87,428,019 of common stock in KGI on January 20, 2017. In connection with the consummation of the IPO on January 25, 2017 (as described below), the underwriters exercised their overallotment option of 4,014,000 shares; thereby resulting in Keane Investor and our independent directors owning 72,354,019 of shares of common stock in KGI. In addition, the Organizational Transactions represented a transaction between entities under common control and will be accounted for similar to pooling of interest, whereby KGI became the successor and Keane Group Holdings, LLC the predecessor for the purposes of financial reporting. +On January 25, 2017, KGI completed the IPO of 30,774,000 shares of its common stock, which included 15,700,000 shares offered by KGI and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as result of the underwriters’ exercise of their overallotment option. The gross proceeds of the IPO to KGI, based on the public offering price of $19.00 per share, was $298.3 million , which resulted in net proceeds to KGI of $260.3 million , after deducting $19.4 million of underwriting discounts and commissions and $18.6 million +83 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +of underwriting discounts and commissions payable by KGI associated with the shares sold by the selling stockholder. KGI did not receive any proceeds from the sale of the shares by the selling stockholder. The net proceeds received from the IPO were used to fully repay the Company’s Term Loan balance of $99 million and the associated prepayment penalty of $13.8 million , and repay $50 million of the Notes (as defined herein), and in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining net proceeds will be used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the Organizational Transactions, KGI had 103,128,019 shares of common stock outstanding. +(c) Basis of Presentation +The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). +The consolidated financial statements include the accounts of Keane Group Holdings, LLC and its subsidiaries. All amounts are presented in thousands of U.S. dollars unless otherwise stated. Certain prior period amounts have been reclassified to conform to the current presentation. +(2) Summary of Significant Accounting Policies +(a) Use of Estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as a consideration in the acquisition, unit-based incentive plan awards and derivatives. +(b) Principles of Consolidation +The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Keane Group Holdings, LLC and its consolidated subsidiaries: KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac, LP, Keane Frac TX, LLC, Keane Frac ND, LLC, Keane Frac GP, LLC, KS Drilling, LLC and Keane Completions CN Corp. +Refer to Note 3 (Acquisitions) for discussion of the acquisitions completed during the year. +All intercompany transactions and balances have been eliminated. +(c) Business Combinations +Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements” using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note 3 (Acquisition) . +84 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +(d) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from all asset sale proceeds and insurance recoveries, excluding proceeds related to obsolescence, is considered to be restricted. The Company may, at management’s discretion, reinvest up to $1 million of asset sale proceeds during each fiscal year for capital expenditures. Asset sale proceeds in excess of $1 million in a fiscal year are required to be applied as a prepayment of the 2016 Term Loan Facility. Refer to Note 8 (Long-Term Debt) . The Company had a qualifying insurance recovery of $ 0.02 million under the 2016 Term Loan Facility for the year ended December 31, 2016 and had qualifying asset sale proceeds of $0.2 million for the years ended December 31, 2015 and 2014 . The Company did not have any restricted cash as of December 31, 2016 and 2015 . +(e) Trade Accounts Receivable +Trade accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the Company’s customers’ financial condition, the amount of receivables in dispute, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable were $ 65.4 million and $ 14.8 million as at December 31, 2016 and 2015, respectively. The Company does not have an established allowance for doubtful accounts. The Company does not have an established reserve amount as it does not have significant balance sheet credit exposure related to its customers as of December 31, 2016 and 2015 . +(f) Inventories +Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the weighted average cost method for all inventories. Costs of inventories include purchase, conversion and other costs incurred in bringing the inventory to its existing location and condition. Spare parts are valued at the lower of cost or market. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on our historical usage of inventory on-hand, volume on hand versus anticipated usage, technological advances, and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on hand, or not fitting our equipment are written-off. +(g) Revenue Recognition +Revenue from the Company’s Completion Services and Other Services segments are earned and recognized as services are rendered, which is generally on a per stage, daily or hourly rate. All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability +85 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +is reasonably assured. Shipping and handling costs related to customer contracts are charged to cost of services. To the extent such costs are billable to the customer, the amounts are recorded as revenue. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations and comprehensive loss and net cash provided by operating activities in the consolidated statements of cash flows. +Revenue from the Company’s Completion Services and Other Services are recognized as follows: +Completion Services +The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements, or on a spot market basis. Revenue is recognized upon the completion of each job. Once a job has been completed to the customer’s satisfaction, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, which is recognized at the beginning of the job upon arriving on location, additional equipment used on the job, if any, and other miscellaneous items. This field ticket is used to create an invoice, which is sent to the customer upon the completion of each job. +Other Services +The Company provides certain complementary services such as coiled tubing, cementing and drilling pursuant to contractual arrangements, such as term contracts. The Company typically charges the customer for the services performed and resources provided on a daily, hourly or per job basis. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to several days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous items. The Company typically charges the customer for the services performed and resources provided on a daily basis at agreed-upon spot market rates. +(h) Property and Equipment +Property and equipment, inclusive of equipment under capital lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Management bases the estimate of the useful life and salvage value of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset and the term of the lease. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized net within operating costs and expenses in the consolidated statements of operations. +86 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Major classifications of property and equipment and their respective useful lives are as follows: +Land +Indefinite life +Building and leasehold improvements +16 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +Depreciation methods, useful lives and residual values are reviewed annually and adjusted if appropriate. +(i) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized. +(j) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment analysis, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. Goodwill is allocated to one reporting unit, Completion Services. +In 2016, the Company reassessed its reporting units and performed its goodwill impairment assessment as of October 31, 2016 based on two updated reporting units: Completion Services and Other Services. This is consistent with the Company’s reportable segments, which were reassessed effective January 1, 2016. Completion Services comprises hydraulic fracturing and wireline services, and Other Services segment comprises drilling services, cement and coiled tubing. In 2015 and 2014, the Company performed its goodwill impairment assessment based on the then applicable reporting units: hydraulic fracturing, wireline and drilling. +When performing impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Impairment analysis for 2016 and 2015 was performed as of October 31, of each respective year. The sharp fall in commodity prices during the fourth quarter of 2014 was deemed a triggering event, and in 2014, the Company re-assessed goodwill for impairment as of November 30, 2014. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting segment, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated solely to its Completion Services segment. If the carrying amount of the reportable segment exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method. +87 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +For the year ended December 31, 2016, the Company performed Step 1 of the goodwill impairment assessment for the goodwill associated with the Completion Services reporting unit. The fair value of this reporting unit was significantly in excess of its carrying value, and therefore no goodwill impairment was recognized. Fair value of the Completion Services reporting unit was determined using a combination of income approach utilizing discounted cash flow model and market approach based on the valuation multiples of guideline public companies +No goodwill impairment has been recognized since inception in 2013. +The Company’s indefinite-lived assets consist of the Company’s trade names. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. The aforementioned sharp fall in commodity prices during the fourth quarter of 2014 was deemed a triggering event, and in 2014, the Company tested the indefinite-lived intangible assets for impairment as of November 30, 2014, using the relief from royalty method. +There was no indefinite-lived asset impairment recognized during 2016 , 2015 or 2014 . +(k) Long-Lived Assets +The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be at the service line level, hydraulic fracturing, wireline, drilling, coiled tubing and cementing, as well as an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset that generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment. +Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense. +The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-complete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. +In 2016, for the Company’s property and equipment, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized. For the property and equipment in each of the asset groups within the Company’s Completion Services segment, the Company’s assessment was based on the following factors: commodity prices have stabilized, market +88 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +conditions have improved as evidenced by an increase in overall demand and pricing power for the Company’s hydraulic fracturing and wireline services, and the Company experienced strong revenue growth throughout 2016 with improved results in the fourth quarter of 2016. For the property and equipment in each of the asset groups within the Company’s Other Services segment, the Company’s assessment was based on the following factors: at December 31, 2016, the fair values of the drilling services’ property and equipment and the coiled tubing and cementing services’ property and equipment, acquired as a result of the acquisition of Trican’s U.S. Operations, were reflective of the deteriorated market conditions experienced from late 2014 through the first quarter of 2016. From the second quarter of 2016, oil and natural gas prices and rig count estimates have improved significantly, a trend which Management believes will continue throughout 2017. +In 2016, for the Company’s definite-lived assets, the Company recorded a $ 0.2 million of impairment charge relating to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset. +In 2015, the continued fall in commodity prices was deemed a triggering event, and the Company tested its long-lived assets for impairment as of October 31, 2015. The Company recorded a $2.4 million impairment on its definite-lived customer contracts, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”). The Company recorded a $1.2 million impairment, on its trade name, under the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of the period then ended. See Note 4 ( Intangible Assets ). The Company also recorded a $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable. +In 2014, the sharp fall in commodity prices during the fourth quarter of 2014 was deemed a triggering event, and the Company tested its long-lived assets for impairment as of December 31, 2014. In 2014, the Company recorded a $10.5 million impairment on its definite-lived customer contract, as a result of the termination of two customer contracts in its Completion Services and Other Services segments, and recorded a $ 0.6 million impairment on its trade name under the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of the period then ended. See Note 4 ( Intangible Assets ) . +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets. +(l) Derivative Instruments and Hedging Activities +The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged, until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being +89 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses related to the hedging relationship that were accumulated in other comprehensive income. +(m) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated statements of operations and comprehensive loss. +(n) Fair Value Measurement +Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• +Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• +Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• +Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. +90 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +(o) Employee Benefits and Postemployment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, Compensation—Nonretirement Post-Employment Benefits. In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, Exit or Disposal Cost Obligations. A liability is recognized for one time termination benefits when the Company is committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount. +(p) Unit-Based Compensation +Prior to the consummation of the IPO, the Company sponsored a unit-based management compensation program called the Keane Management Holdings LLC Management Incentive Plan (the “Class B Plan”). The Company accounted for the Class B units granted under the Class B Plan as compensation cost measured at the fair value of the award on the date of grant using the Black-Scholes option pricing model. The determination of grant date fair value using an option pricing model is highly complex and requires judgment as well as assumptions regarding a number of complex and subjective variables. These variables include the fair value of the Company’s common ownership interest pre-IPO, the expected unit price volatility over the expected term of the awards, risk free interest rates, expected dividend yield and discount for lack of marketability pre-IPO. These estimates will not be used to determine the fair value of any new awards granted under the Class B Plan following the IPO. +The Company recognized compensation expense for the Class B units on a straight-line basis over the service period of the entire award. In connection with the IPO and the reorganization, on January 20, 2017, the Class B Plan was assigned to and assumed by Keane Investor. +Prior to the completion of the Trican transaction on March 16, 2016, the Company sponsored the Class C Management Incentive Plan (the “Class C Plan”), under which Class C units were granted to management. The Class C units granted under the Class C plan vested based on the participants continued employment with the Company for time-based units and based on both the participants continued employment with the Company and the achievement of performance objectives as determined by the Compensation Committee for performance-based units. The Company estimated the fair value of the Class C units on the date of grant using a Monte-Carlo option pricing model. The Company recognized compensation expense for the Class C units on a straight-line basis over the service period of the entire award for the time based component and ratably over the vesting period for the performance based component subject to the attainment of certain performance objectives. On March 16, 2016, the Company canceled all outstanding Class C units issued under the Class C Plan and issued to management Class B units under the Class B Plan using an applicable conversion ratio specific to each participant. +(q) Leases +The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property and equipment. Operating lease expense is recorded on a straight-line basis over the lease term. +91 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Landlord incentives are recorded as deferred rent and amortized as reductions to lease expense on a straight-line basis over the life of the applicable lease. +(r) Research and development costs +Research and development costs are expensed as incurred. Research and development costs incurred directly by the Company were $2.2 million , nil and nil for the years ended December 31, 2016, 2015 and 2014, respectively. +(s) Other assets and prepaid expenses +Prepaid and other current assets comprise prepaid sand, prepaid insurance and other similar items. In addition, the Company incurred certain professional fees in connection with the contemplated IPO of KGI’s common stock. In accordance with Staff Accounting Bulletin Sub-Topic 5A “Expenses of Offering”, specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering once it is completed. As of December 31, 2016, the Company capitalized $3.1 million of offering costs, incurred on behalf of KGI, which are presented within other current assets in the consolidated statements of financial condition as of December 31, 2016. Following the consummation of the IPO on January 25, 2017, these offering costs will be reclassified from other current assets and presented net of proceeds within additional paid-in capital section of KGI’s consolidated statement of financial condition. +(t) Taxes +For U.S. federal tax purposes, the Company is treated as a partnership. As such, any liability for federal income taxes is the responsibility of the members. No provision for U.S. federal and state income taxes has been provided in the consolidated financial statements of the Company, with the exception of the state of Texas. Limited liability companies are subject to Texas margin tax. +In addition, the Company has a Canadian subsidiary, which is treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company is subject to foreign income tax. +The Company is responsible for certain state income and franchise taxes, which include Pennsylvania, Texas and New York. These amounts are reflected as selling, general and administrative expense in the consolidated financial statements of the Company. +Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 16 for details of amounts recorded in the consolidated financial statements. +(u) Unaudited pro-forma earnings per unit +The earnings per unit amounts have been computed to give effect to the Organizational Transactions, as if they had occurred at the beginning of the earliest period presented, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO. +92 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +( 3 ) Acquisition +On March 16, 2016, the Company acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Trican’s U.S. Operations”), for total consideration of $ 248.1 million comprised of $ 199.4 million in cash, $ 6.0 million in adjustments pursuant to terms of the acquisition agreement to Trican Well Service Ltd. and $ 42.7 million in Class A and C Units in the Company (the “Trican Transaction”). Trican’s U.S. Operations provides oilfield services to oil and natural gas exploration and production companies across multiple basins in the United States. +This acquisition allowed the Company to significantly strengthen its position as a leader in the completion services business across key U.S. basins, enabling it to more than triple its hydraulic fracturing horsepower, acquire access to proprietary technology, engineering capability and new service lines, including coiled tubing and cementing, and expand into additional basins in Texas and the SCOOP/STACK Formation, while deepening the Company’s existing presence in the Permian Basin, Marcellus Shale/Utica Shale and Bakken Formation. +The Company accounted for the acquisition of Trican’s U.S. Operations using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the acquisition have been recorded based on their fair values. The Company has substantially completed its valuation estimates and determined the purchase price allocation. This purchase accounting is subject to the twelve month measurement period adjustments to reflect any new information that may be obtained in the future about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. +93 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +The following tables summarize the fair value of the consideration transferred for the acquisition of Trican’s U.S. Operations and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the acquisition date: +Total Purchase Consideration: +(Thousands of Dollars) +Cash consideration +$ +199,400 +Net working capital purchase price adjustment +6,000 +Class A and C Units issued +42,669 +Total consideration +$ +248,069 +Accounts receivable +$ +37,377 +Inventories +20,006 +Prepaid expenses +7,170 +Property and equipment +205,546 +Intangible assets +3,880 +Total identifiable assets acquired +273,979 +Accounts payable +(12,630 +) +Accrued expenses +(9,524 +) +Current maturities of capital lease obligations +(1,594 +) +Capital lease obligations, less current maturities +(2,386 +) +Other non-current liabilities +(1,372 +) +Total liabilities assumed +(27,506 +) +Goodwill +1,596 +Total purchase price consideration +$ +248,069 +During the third quarter of 2016, the Company made a payment of $ 4.5 million related to the net working capital purchase price adjustment. The remaining $ 1.5 million will be paid upon resolution of certain contingencies specified in the purchase agreement. The Company incurred $ 16.5 million of transaction related costs in connection with the acquisition of Trican’s U.S. Operations during the year ended December 31, 2016 which were included within selling, general and administrative expense in the accompanying consolidated statement of operations and comprehensive loss. +The contractual value of acquired accounts receivable was $ 37.4 million on the date of acquisition. +94 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill is primarily attributable to expected synergies and the assembled workforce. The entire amount of the goodwill was allocated to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible. +Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following: +Estimated useful life +(in Years) +Fair value +(Thousands of Dollars) +Customer contracts +1.8 +$ +3,500 +Non-compete agreements +2.0 +50 +Fracking Fluids +4.8 +330 +Total intangible assets +$ +3,880 +Weighted average life of finite-lived intangibles +2.1 +For the valuation of the customer relationship intangible asset, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s cost of equity. +The non-compete agreements intangible asset was valued using the “lost income” approach including the probability of competing. Estimated cash flows were discounted at the weighted average cost of capital due to the low risk profile of this contract. The term of the non-compete agreement is two years from the closing date of the Trican Transaction. +As part of the acquisition of Trican’s U.S. Operations, the Company obtained the right to use certain proprietary fracking-related fluids, including MVP Frac TM and TriVert TM (the “Fracking Fluids”), for its own pressure pumping services to its customers. The Fracking Fluids were valued using the “income-based relief-from-royalty” method. Under this method, revenues expected to be generated by the technology are multiplied by a selected royalty rate. The estimated after-tax royalty revenue stream is then discounted to present value using the Company’s cost of equity. +The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors. +The Company’s consolidated statement of operations and comprehensive loss include revenues (unaudited) of $ 199.7 million and gross profit (unaudited) of $ 5.3 million , respectively, from Trican’s U.S. Operations from the date of acquisition on March 16, 2016 to December 31, 2016 . +The following combined pro forma information assumes the acquisition of Trican’s U.S. Operations occurred on January 1, 2015. The pro forma information presented below is for illustrative purposes only and does not reflect future events that may occur after December 31, 2016 or any operating efficiencies or inefficiencies that may result from the acquisition of Trican’s U.S. Operations. The information is not necessarily indicative of results that would have been achieved had the Company controlled Trican’s U.S. Operations during the periods presented or the results that the Company will experience going forward. Pro forma net loss for the year ended December 31, 2015, includes $ 3.3 million of non-recurring transaction expenses and $ 1.4 million of employee related costs. The pro forma +95 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +information does not include any remaining future integration costs or transaction costs that the Company may incur related to the acquisition. +(Thousands of Dollars) +Unaudited +Year ended December 31, +2016 +2015 +Revenues +$ +464,036 +$ +738,128 +Net income (loss) +(216,490 +) +(441,492 +) +( 4 ) Intangible Assets +The intangible assets balance in the Company’s consolidated balance sheets represents the fair value, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2016 +Remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +8.8 +$ +52,400 +$ +(20,336 +) +$ +32,064 +Non-compete agreements +8.7 +750 +(288 +) +462 +Trade name +0.9 - Indefinite life +11,090 +(686 +) +10,404 +Technology +2.3 +2,324 +(1,239 +) +1,085 +Total +$ +66,564 +$ +(22,549 +) +$ +44,015 +(Thousands of Dollars) +December 31, 2015 +Remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +10.3 +$ +48,900 +$ +(15,486 +) +$ +33,414 +Non-compete agreements +10.3 +1,000 +(316 +) +684 +Trade name +1.9 - Indefinite life +11,090 +(464 +) +10,626 +Technology +2.2 +1,645 +(753 +) +892 +Total +$ +62,635 +$ +(17,019 +) +$ +45,616 +Keane’s trade name intangible valued at $ 10.2 million has been assigned an indefinite useful life. The trade name purchased in the UltraTech acquisition has been assigned a four year useful life. +For the year ended December 31, 2016 , the Company recorded an impairment charge of $ 0.2 million associated with the non-compete agreement in the drilling division within its Other Services segment due to the fact that this non-compete was no longer expected to generate any future cash flows. +For the year ended December 31, 2015 , the Company recorded an impairment charge of $ 3.6 million associated with customer relationships related to the Completion Services segment in the amount of $ 2.4 million and +96 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +trade name under the Other Services segment of $ 1.2 million . As part of the Company’s asset impairment analysis, it was determined that there were no future net cash flows associated with the UTFS’s customers for which the intangible asset was recognized, and the carrying amount was not recoverable. It was also determined that the fair value of the trade name based on the net present value of future cash flows was less than its net book value as of the period then ended. It was also determined that the carrying amount of the trade name in the drilling services business was no longer recoverable since there were no sufficient future cash flows generated by its operations and the remaining balance was written-off. +Impairment recorded during the year ended December 31, 2014 is comprised of $10.0 million and $0.5 million associated with customer contracts related to the Other Services and Completion Services segments, respectively, and $0.6 million associated with the Company’s trade name under the Other Services segment. As part of the Company’s annual asset impairment analysis, it was determined there were not any future net cash flows associated with the customer for which the intangible asset was related, and the carrying amounts of the respective assets were not recoverable. +Amortization expense related to the intangible assets for the years ended December 31, 2016 , 2015 and 2014 was $5.7 million , $4.9 million and $5.9 million , respectively. +Amortization for the intangible assets excluding trade name of $10.2 million with indefinite useful life and in process software, over the next five years, is as follows: +(Thousands of Dollars) +2017 +$ +6,082 +2018 +3,537 +2019 +3,454 +2020 +3,375 +2021 +3,307 +(5) Goodwill +The changes in the carrying amount of goodwill for the years ended December 31, 2016 , 2015 and 2014 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2013 +$ +49,363 +Foreign currency translation +(350 +) +Goodwill as of December 31, 2014 +$ +49,013 +Foreign currency translation +(131 +) +Goodwill as of December 31, 2015 +$ +48,882 +Acquisition of Trican +1,596 +Goodwill as of December 31, 2016 +$ +50,478 +Goodwill recognized in connection with the acquisition of Trican’s U.S. Operations was allocated to the Completion Services segment. Refer to Note 3 ( Acquisition ) for further details. There were no triggering events +97 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +identified and no impairment recorded since inception and for the years ended December 31, 2016 , 2015 and 2014 , respectively. +(6) Inventories, net +Inventories, net consisted of the following at December 31, 2016 and 2015 : +(Thousands of Dollars) +Year ended December 31, +2016 +2015 +Sand, including freight +$ +6,520 +$ +2,048 +Chemicals and consumables +4,774 +345 +Materials and supplies +4,597 +2,275 +Total inventory, net +$ +15,891 +$ +4,668 +The Company reviews the carrying value of inventory on a quarterly basis to verify that inventory is measured at the lower of cost or market value. +See Note 17 ( Commitments and Contingencies ) for information on the Company’s inventory-related purchase obligations. +(7) Property and Equipment, ne t +Property and equipment at December 31, 2016 and December 31, 2015 were as follows: +(Thousands of Dollars) +December 31, +2016 +2015 +Land +$ +5,166 +$ +1,316 +Building and leasehold improvements +30,750 +12,374 +Office furniture, fixtures and equipment +4,780 +2,269 +Machinery and equipment +514,017 +303,715 +554,713 +319,674 +Less accumulated depreciation +(261,292 +) +(167,980 +) +Construction in progress +788 +1,931 +$ +294,209 +$ +153,625 +The machinery and equipment balance as of December 31, 2016 and 2015 includes $10.1 million of hydraulic fracturing equipment under capital lease. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was $ 5.7 million and $ 3.0 million as of December 31, 2016 and December 31, 2015 , respectively. In addition, machinery and equipment as of December 31, 2016 includes $ 2.4 million of vehicles under capital lease resulting from the acquisition of Trican’s U.S. Operations. Accumulated depreciation related to these items was $ 0.6 million as of December 31, 2016 . Refer to Note 8 ( Long-Term Debt ) for further details. +98 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Total depreciation for the years ended December 31, 2016 , 2015 and 2014 was $95.3 million , $64.6 million and $62.3 million , respectively. +There were no triggering events identified and no impairment recorded for the year ended December 31, 2016 . During the year ended December 31, 2015 , the Company recorded $ 0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable. No impairment was recorded in 2014 . +( 8 ) Long-Term Debt +Long-term debt at December 31, 2016 and 2015 consisted of the following: +(Thousands of Dollars) +December 31, +2016 +2015 +Notes due August 8, 2019 +$ +190,000 +$ +193,750 +Term Loan due March 16, 2021 +98,103 +— +Capital lease +8,075 +8,107 +Related Party Loan +— +22,174 +Less: Unamortized debt discount and debt issuance costs +(18,353 +) +(8,857 +) +Total debt +277,825 +215,174 +Less: Current portion +5,145 +4,660 +Long-term debt, including capital leases +$ +272,680 +$ +210,514 +In March 2016, the related party loan with a principal amount of $20.0 million was contributed and exchanged for Class A Units in the Company, and accrued interest of $2.6 million was forgiven and canceled. As a result, the total amount of $22.6 million was recorded as a capital contribution. See Note 18 ( Related Party Transactions ) for further details. +2016 ABL Facility +On August 8, 2014, KGH Intermediate Holdco II, LLC (“Holdco II”) and certain of its subsidiaries entered into an Amended and Restated Revolving Credit and Security Agreement (the “2016 ABL Facility”) with PNC Bank, National Association, as lender and administrative agent, which provided for a $30 million asset based revolving credit loan. Loans under the 2016 ABL Facility bore interest by reference, at Holdco II’s election, to the base rate or the London Interbank Offered Rate (“LIBOR”), plus an applicable margin of 0.75% on base rate loans and 2.25% on LIBOR rate loans. The 2016 ABL Facility matures on January 8, 2019. +On April 7, 2015, Holdco II and certain of its subsidiaries entered into the Second Amendment to the Amended and Restated Revolving Credit and Security Agreement, which, among other things, increased the commitment amount under the 2016 ABL Facility to $50 million and increased the formula amount of the borrowing base to include the value of certain specifically identified equipment. +On March 16, 2016, in connection with the Trican Transaction, Holdco II and certain of its subsidiaries entered into the Third Amendment to the Amended and Restated Revolving Credit and Security Agreement (the “2016 ABL Facility”), which, among other things, increased the commitment amount of the 2016 ABL Facility to $100 million and increased the applicable margin to 2.25% on base rate loans and 4.00% on LIBOR rate loans, +99 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +subject to reductions. A letter of credit in the amount of $2.0 million was issued against the Revolver to CIT Finance LLC (“CIT”) relating to a capital lease (see Capital Leases). +Amounts outstanding under the 2016 ABL Facility bear interest at a rate per annum equal to, at our option, (a) the base rate, plus an applicable margin equal to (i) 2.25% or (ii) if the borrowers maintain a fixed charge coverage ratio of 1.00 to 1.00 for 4 consecutive fiscal quarters, 1.25% or (b) the LIBOR rate, plus an applicable margin equal to (i) 4.00% or (ii) if the borrowers maintain a fixed charge coverage ratio of 1.00 to 1.00 for 4 consecutive fiscal quarters, 3.00%. Following an event of default, the 2016 ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2.00% per annum during the continuance of such event of default, and the letter of credit fees increase by 2.00%. +There were no amounts outstanding under the 2016 ABL Facility as of December 31, 2016 and December 31, 2015 . The Company’s availability under the 2016 ABL Facility was $ 40.3 million and $ 32.6 million as of December 31, 2016 and December 31, 2015 , respectively. Holdco II is required to pay a quarterly commitment fee of 0.75% to 1.50% on the unused portion of the 2016 ABL Facility. Holdco II is subject to certain customary affirmative and negative covenants related to its borrowings, including maintaining a fixed charge coverage ratio of not less than 1.00 to 1.00, which is only tested following the occurrence of a covenant trigger event, i.e. when the liquidity on any day is less than or equal to the greater of (i) $12.5 million and (ii) an amount equal to the lesser of (x) 20% of the formula amount and (y) $20.0 million. The covenant trigger event is deemed to be continuing until liquidity exceeds these thresholds for thirty consecutive days. As of December 31, 2016 Holdco II did not have any covenant trigger events. +The Company incurred debt issuance costs of $ 1.7 million , $0.4 million and $0.10 million associated with these transactions for the years ended December 31, 2016 , 2015 and 2014 , respectively. Unamortized debt issuance costs on the 2016 ABL Facility amounted to $1.4 million and $0.3 million as of December 31, 2016 and 2015 , respectively, and were recorded within other long-term assets. Amortization of deferred debt issuance costs associated with the ABL Facility was $0.6 million , $0.1 million and nil for the years ended December 31, 2016 , 2015 and 2014 , respectively. +Senior Secured Notes +On August 8, 2014, Holdco II and certain of its subsidiaries entered into a Note Purchase Agreement (the “NPA”) with U.S. Bank National Association (“U.S. Bank”), acting as administrative agent for the purchasers thereunder. Under the NPA, Holdco II issued senior secured notes (the “Notes”) in an aggregate principal amount of $150 million, of which approximately $122.9 million of the proceeds were used to retire existing debt. As a result of this transaction, the Company recognized a loss on debt extinguishment in the amount of $2.3 million representing the unamortized debt issuance costs on the existing debt. On September 24, 2014, Holdco II issued an additional borrowing under the delayed draw Notes in the aggregate principal amount of $50 million, bringing the total outstanding principal amount to $200 million. The Notes bear interest at LIBOR plus 7.50%, subject to a 1.00% floor, and mature on August 8, 2019. Principal payments of $1.3 million plus interest are due quarterly. The Notes are secured by property and equipment and other assets and are guaranteed by KGH Intermediate Holdco I, LLC (“Holdco I”) and certain of its subsidiaries. +On March 16, 2016, in connection with the Trican Transaction, Holdco II and certain of its subsidiaries entered into the Fourth Amendment to the NPA, which, among other things, converted the variable interest rate of LIBOR plus 7.50%, subject to a 1.00% floor, to a fixed rate of 12.00%. Any overdue principal amount in respect of the Notes bears interest at the rate otherwise applicable to the Notes at such time plus an additional 2.00%. The NPA is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions in excess of an aggregate amount of $1.0 million in any fiscal year, subject to certain exceptions and reinvestment rights; (b) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted +100 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +under the NPA); and (c) 50% of excess cash flow minus certain optional prepayments on and after the date the Term Loan has been paid in full. +Holdco II executed an interest rate swap that mirrors its existing interest rate swap to offset the impact of future changes in LIBOR. As a result of the hedged forecasted cash flows becoming no longer probable of occurring, the Company discontinued hedge accounting prospectively for the existing swap and de-designated it as no longer being part of a hedging relationship. Both the existing interest rate swap and the new one are accounted for at fair value through earnings with unrealized gains (losses) recognized within interest expense prospectively. See Note 10 ( Derivatives ) . The Company accounted for the amended interest rate as a debt modification and capitalized additional debt issuance costs of $4.2 million, which represented fees paid to holders of the Notes. +The Company capitalized $10.5 million of deferred financing costs during 2014 and an additional $0.5 million during 2015 in connection with the aforementioned $200 million of Notes. During 2016, the Company capitalized $4.2 million of debt issuance costs associated with Fourth Amendment to the NPA. +The Company recorded amortization of debt issuance costs associated with the Notes of $2.8 million , $2.0 million and $0.5 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. +The NPA contains various affirmative and negative covenants including a financial covenant, which requires compliance with a minimum fixed charge coverage ratio of not less than 1.00:1.00. This covenant is only tested following occurrence of a covenant trigger event, i.e. when the liquidity on any day is less than or equal to $20 million. The covenant trigger event is deemed to be continuing until excess availability exceeds $20 million for thirty consecutive days. The Company was in compliance with covenants under the NPA as of December 31, 2016 . +The principal balance of the Notes was $190.0 million and $193.8 million as of December 31, 2016 and 2015 , respectively. +2016 Term Loan Facility +On March 16, 2016, in connection with the Trican Transaction, Holdco II entered into a Credit Agreement (the “2016 Term Loan Facility”) with CLMG Corp., acting as administrative agent for the lenders thereunder. The 2016 Term Loan Facility provides for a first lien term loan (the “Term Loan”) in the principal amount of $100 million. The Term Loan bears interest by reference, at Holdco II’s election, to the base rate or LIBOR rate, plus an applicable margin of 6.00% on base rate loans and 7.00% on LIBOR rate loans, subject to a 1.50% floor. The Term Loan matures on March 16, 2021 or if the Notes mature on or prior to March 16, 2021, then the date that is 91 days prior to the earlier of (i) March 16, 2021 and (ii) the date of the maturity of the obligations under the NPA. Principal payments of $0.625 million plus interest are due quarterly. The Term Loan is secured by property and equipment and other assets, and is guaranteed by Holdco I and certain of its subsidiaries. +In conjunction with the 2016 Term Loan Facility, Holdco II executed a new interest rate swap effective March 31, 2016 through May 9, 2019 which was designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives LIBOR based variable interest rate payments, subject to a 1.50% floor, and makes payments based on a fixed rate of 1.868%, thereby effectively creating the equivalent of fixed-rate debt for the notional amount hedged of the 2016 Term Loan Facility. As of December 31, 2016, the notional amount of the interest rate swap was $98.1 million , decreasing quarterly to match the outstanding balance of the 2016 Term Loan Facility. +The 2016 Term Loan Facility contains various affirmative and negative covenants including a financial covenant which is the same as the financial covenant under the NPA. The Company was in compliance with covenants under the 2016 Term Loan Facility as of December 31, 2016 . +101 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +In connection with the initial borrowings under of the Term Loan, the Company incurred $8.8 million and $0.3 million of debt issuance costs for the years ended December 31, 2016 and 2015 , respectively. The total amount of debt issuance costs includes $2.0 million of fees paid to the administrative agent recorded as an original issue discount. The Company recorded the Term Loan on the balance sheet at its outstanding principal amount, net of the unamortized debt issuance costs and unamortized debt discount. The Company recorded amortization of debt discount and debt issuance costs associated with the Term Loan of $0.8 million for the year ended December 31, 2016 . +Maturities of Term Loan and Notes for the next five years are presented below: +(Thousands of Dollars) +Year-end December 31, +2017 +$ +7,500 +2018 +8,750 +2019 +181,250 +2020 +2,500 +2021 +88,103 +$ +288,103 +On January 25, 2017, KGI completed the IPO. The net proceeds received from the IPO were used to fully repay the Company’s Term Loan balance of approximately $99 million and the associated prepayment penalty of $13.8 million and repay $50 million of the Notes, and in addition, approximately $0.5 million of prepayment premium related to such repayment. +Deferred Financing Costs +Costs incurred to obtain financing are capitalized and amortized using the effective interest method and netted against the carrying amount of the related borrowing. The amortization is recorded in interest expense on the consolidated statements of operations and comprehensive (loss) and was $4.2 million , $2.1 million and $0.6 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. +In connection with the adoption of ASU 2015-03, as of December 31, 2015, the Company reclassified short-term deferred financings costs of $2.1 million and long-term deferred financing costs of $6.8 million from other current assets and other non-current assets, respectively, to current maturities of long-term debt and to long-term debt, less current maturities, respectively. +In connection with the retrospective adoption of ASU 2015-15, the Company recorded $0.4 million of unamortized deferred financing costs related to the Revolver and capital lease obligation within other long-term assets, as of December 31, 2015. +Capital Leases +The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2016 and 2019. The capital lease obligation for fracturing equipment obtained through a capital lease with CIT has a lease term of 60 months and interest rate of 4.73% per annum. Total interest expense incurred on this lease was $0.3 million , $0.4 million and $0.04 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. Total remaining principal balance outstanding on the CIT lease as of December 31, 2016 and 2015 was $6.3 million and $8.0 million , respectively. The Company leases certain machinery and equipment under a capital lease that expires +102 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +in 2018. Total remaining principal balance outstanding on this lease as of December 31, 2016 and 2015 was $0.04 million and $0.07 million , respectively. +As part of the acquisition of Trican’s U.S. Operations, the Company assumed capital leases for light weight vehicles with ARI Financial Services Inc. The lease terms on the vehicles range from 36 to 60 months and interest rates range from 2.25% to 3.75%. The outstanding capital lease obligation balance was $1.7 million as of December 31, 2016 . Depreciation of assets held under capital leases is included within depreciation expense. +Future annual capital lease commitments, including the interest component as of December 31, 2016 for the next five years are listed below: +(Thousands of Dollars) +Year-end December 31, +2017 +$ +2,945 +2018 +2,885 +2019 +2,842 +2020 +— +Subtotal +8,672 +Less amount representing interest(1) +(597 +) +Total +$ +8,075 +(1) +Amount necessary to reduce net minimum payments to present value calculated at the Company’s implicit rate at inception. +Related Party Loan +For additional information on the related party indebtedness, see Note 18 ( Related Party Transactions ) . +(9) Significant Risks and Uncertainties Including Business and Credit Concentrations +The Company operates in two reportable segments: Completion Services and Other Services, with significant concentration in the Completion Services segment. During the year ended December 31, 2016 , sales to Completion Services customers represented 98% and 212% of the Company’s consolidated revenue and gross profit, respectively. During the year ended December 31, 2015 , sales to Completion Services customers represented 99% and 99% of the Company’s consolidated revenue and gross profit, respectively. In 2014 , sales to Completion Services customers represented 97% and 95% of the Company’s consolidated revenue and gross profit, respectively. +The Company depends on its customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which in turn is affected by current and expected levels of oil and natural gas prices. As a result of depressed oil prices from late 2014 into early 2016, the energy services industry has been in a downturn characterized by excess equipment capacity across the U.S. Completion Services and Other Services markets. This downturn has impacted the demand for the Company’s services and ability to negotiate pricing that will generate desirable margins. Through its impairment analyses, the Company determined the carrying values of its goodwill and the majority of its long-lived and indefinite-lived assets were recoverable based on the Company’s forecast model. +For the year ended December 31, 2016 , revenue from the top three customers individually represented 18% , 15% and 15% of the Company’s consolidated revenue. For the year ended December 31, 2015 , revenue from two customers individually represented 38% and 21% of the Company’s consolidated revenue. For the year ended +103 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +December 31, 2014 , revenue from two customers individually represented 30% and 23% of the Company’s consolidated revenue. Revenue is earned from each of these customers within the Company’s Completion Services segment. +For the year ended December 31, 2016, purchases from one supplier represented approximately 5% to 10% of the Company’s overall costs. During the year ended December 31, 2015, purchases from four suppliers represented approximately 5% to 10% of the Company’s overall costs. The costs for each of these customers were incurred within the Company’s Completion Services segment. +For the years ended December 31, 2016 , 2015 and 2014 , revenues from the Company’s Canadian operations were nil, $6.9 million and $18.6 million, respectively. The Company began to wind-down its Canadian operations in April 2015. See Note 19 ( Wind-down of a Foreign Subsidiary ) . +( 10 ) Derivatives +Holdco II uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. Holdco II does not speculate using derivative instruments. +On March 16, 2016, Holdco II converted its Notes issued pursuant to the NPA from variable rate to a fixed rate debt and separately executed the 2016 Term Loan Facility with a variable interest rate. At that date, the existing interest rate swap, which had LIBOR based variable interest rate payments, subject to a 1.00% floor, no longer qualified for hedge accounting as the 2016 Term Loan Facility has LIBOR based variable interest rate payments, subject to a 1.50% floor. +As a result of the hedged forecasted cash flows becoming no longer probable of occurring, the Company discontinued hedge accounting prospectively and de-designated the interest rate swap as no longer being part of a hedging relationship. The net derivative loss calculated based on the fair value of the swap on the date of the discontinuance of the hedge accounting of $3.0 million was reclassified from AOCI to earnings due to it becoming probable that the forecasted transaction will not occur in the originally specified time period. The derivative is accounted for at fair value through earnings with unrealized gains (losses) recorded within interest expense prospectively. +Rather than terminate the existing interest rate swap, Holdco II executed an offsetting, at-market interest rate swap. Neither of the offsetting swap transactions is designated as a hedge for accounting purposes. As a result of the offsetting swap transaction, the Company is required to make quarterly cash payments totaling $2.8 million to the swap counterparty through August 2019. Of this amount, $0.4 million has been paid through December 31, 2016 . The remaining $2.4 million will be paid as follows: +(Thousands of Dollars) +Year +Average Notional +Remaining Payments(1) +2017 +140,156 +$ +(840 +) +2018 +135,938 +(1,022 +) +2019 +132,188 +(502 +) +Total +$ +(2,364 +) +(1) +The remaining payments are locked in and calculated by taking the difference between the original swap which pays a fixed rate of 2.061% and the offsetting swap which receives a fixed rate of 1.47% multiplied by the notional. +104 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +In conjunction with the 2016 Term Loan Facility, Holdco II executed a new interest rate swap effective March 31, 2016 through May 9, 2019 which was designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives LIBOR based variable interest rate payments, subject to a 1.50% floor, and makes payments based on a fixed rate of 1.868%, thereby effectively creating the equivalent of fixed-rate debt for the notional amount hedged of the 2016 Term Loan Facility. As of December 31, 2016 , the notional amount of the interest rate swap was $98.1 million , decreasing quarterly to match the outstanding balance of the 2016 Term Loan Facility. +The Company reports the fair value of derivative instruments on the consolidated balance sheets in other current assets, other noncurrent assets, other current liabilities, and other noncurrent liabilities. The Company determines the current and noncurrent classification based on when the transaction settlement is scheduled to occur. The Company nets the fair value of derivative instruments by counterparty in the accompanying consolidated balance sheets where the right to offset exists. +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments +Derivatives +not +designated as +hedging +instruments +Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet(1) +Net Amounts +Presented in +the Balance +Sheet(2) +As of December 31, 2016: +Other current asset +$ +— +$ +342 +$ +342 +$ +(342 +) +$ +— +Other noncurrent asset +129 +— +129 +(129 +) +— +Other current liability +(313 +) +(959 +) +(1,272 +) +342 +(930 +) +Other noncurrent liability +— +(1,473 +) +(1,473 +) +129 +(1,344 +) +As of December 31, 2015: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +— +— +— +— +— +Other current liability +(1,100 +) +— +(1,100 +) +— +(1,100 +) +Other noncurrent liability +(941 +) +— +(941 +) +— +(941 +) +(1) +With all of the Company’s financial trading counterparties, agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) +There are no amounts subject to an enforceable master netting arrangement which are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +105 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars). +For the year ended December 31, +2016 +2015 +2014 +Location +Amount of loss recognized in AOCI on derivative(effective portion) +$ +(1,784 +) +$ +(2,765 +) +$ +(1,262 +) +AOCI +Amount of loss reclassified from AOCI into income (effective portion) +(603 +) +(1,578 +) +(408 +) +Interest Expense +Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result of originally forecasted transaction becoming probable of not occurring +(3,038 +) +— +— +Interest Expense +Amount of gain (loss) recognized in income on derivative (ineffective portion) +— +— +— +Interest Expense +The loss recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated statements of operations and comprehensive loss. +There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2016 , $0.3 million of net losses will be reclassified from accumulated other comprehensive income into earnings within the next 12 months. +The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under ASC 815, “Derivative Financial Instruments,” (in thousands of dollars): +Year Ended December 31, +Description +Location +2016 +2015 +2014 +Gains/(Loss) on Interest Contracts +Interest expense +$ +240 +$ +— +$ +— +(1) +Total gains and losses recorded in interest expense for the year ended December 31, 2016 related to derivatives was a net loss of $3.4 million. This is made up of a $3.0 million loss recognized as a result of reclassifying amounts from AOCI to income as a result of the originally forecasted transaction becoming probable of not occurring, a $0.6 million loss reclassified out of AOCI to income pursuant to hedge accounting, and a partially offsetting $0.2 million gain related to gains and losses from derivatives not under hedge accounting subsequent to the hedge accounting de-designation that occurred on March 16, 2016. +See Note 11 ( Fair Value Measurements and Financial Instruments ) for further information related to the Company’s derivative instruments. +106 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +( 11 ) Fair Value Measurements and Financial Instruments +The Company discloses the fair values of its assets and liabilities according to the quality of valuation inputs under the following hierarchy: +• +Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• +Level 2 Inputs: Inputs other than quoted prices that are directly or indirectly observable. +• +Level 3 Inputs: Unobservable inputs that are significant to the fair value of assets or liabilities. +The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. Transfers occur at the end of the reporting period. There were no transfers into or out of Levels 1, 2 and 3 during the years ended December 31, 2016 and 2015 , respectively. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative, long-term debt, capital lease obligations and contingent liability. The carrying values of all the Company’s financial instruments included in the accompanying balance sheets approximated or equaled their fair values at December 31, 2016 and 2015 . +• +The carrying values of cash and cash equivalents, accounts receivable and accounts payable (including accrued liabilities) approximated fair value at December 31, 2016 and 2015 , due to their short-term nature. +• +The carrying value of amounts outstanding under long-term debt agreements with variable rates approximated fair value at December 31, 2016 and 2015 , as the variable interest rates approximated market rates. +• +The fair market value of the derivative financial instrument reflected on the balance sheet as of December 31, 2016 and 2015 was determined using industry-standard models that consider various assumptions including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +Recurring Fair Value Measurement +The following table presents the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2016 and 2015 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2016 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +$ +— +$ +— +$ +— +$ +— +Liabilities: +Interest rate derivatives +2,274 +— +2,274 +— +107 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Fair value measurements at reporting date using +December 31, 2015 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +$ +— +$ +— +$ +— +$ +— +Liabilities: +Interest rate derivatives +2,041 +— +2,041 +— +Non-Recurring Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of Trican’s U.S. Operations were recorded at their fair values on the date of acquisition. See Note 3 ( Acquisition ) for further details. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +The Company recorded an impairment charge of $0.2 million associated with the non-compete agreement related to its Other Services segment during the year ended December 31, 2016 . +In 2015, the Company recorded $2.4 million impairment on its definite-lived intangible assets, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”) and $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable. +In 2014, the Company recorded $10.5 million impairment on its definite-lived intangible assets, primarily as a result of the termination of two customer contracts in its Completion Services and Other Services segments. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposits with financial institutions totaled $48.9 million and $53.4 million as of December 31, 2016 and 2015 , respectively, which exceeded FDIC insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 days or less. As of December 31, 2016 trade receivables from the top four customers individually represented 15% , 14% , 13% and 12% respectively, of total accounts receivable. As of December 31, 2015 , trade receivables from the top three customers individually +108 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +represented 54%, 26% and 17%, respectively, of total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. +( 12 ) Defined Contribution Plan +The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions of up to 3.5% of compensation. Contributions made by the Company were $1.4 million , $0.9 million and $0.8 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. +(13) Unit-Based Compensation +Class B Plan +On March 16, 2016, the Company canceled all outstanding Class C units issued under its Class C Management Incentive Plan (the “Class C Plan”) and issued Class B units under the Keane Management Holdings LLC Management Incentive Plan (“Class B Plan”). Using an applicable conversion ratio specific to each participant the Company issued 83,529 Class B units to former participants in the Class C Plan, of which 80,784 were fully vested upon issuance. The remaining 2,745 were subject to vesting based on the same time-based schedule that applied under a participant’s canceled Class C award agreement, subject to the participant’s continued employment, without regard to the achievement of any performance objectives that applied under the Class C units (see “Class C Plan” below). In addition, on March 16, 2016, the Company also issued 2,353 Class B units to a member of the Company’s management. These Class B units vest in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The grant date fair value of the Class B units issued on March 16, 2016 was $98.97 . +The Company accounted for the exchange of Class C units for Class B units as a modification. In accordance with the requirements of ASC 718, the Company calculated incremental fair value on the difference between the fair value of the modified award and the fair value of the original award immediately prior to the modification. The incremental fair value related to vested units was recognized immediately as compensation expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards will be recognized as compensation expense over the remaining vesting period. +During the second quarter of 2016, the Company issued 1,177 Class B units to a member of the Company’s management. These Class B units vest in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $98.97 per Class B unit on the date of grant. +During the fourth quarter of 2016, the Company issued 6,471 Class B units to members of the Board of Directors of the Company and 7,647 to other management personnel. These Class B units vest in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $73.20 per Class B unit on the date of grant. +Rollforward of Class B units issued during the year ended December 31, 2016 is as follows: +109 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Year Ended December 31, 2016 +Number of Class B Units +Weighted average grant date fair value +Total non-vested at the beginning of the year +— +Units replaced +83,529 +$ +98.97 +Units issued +17,647 +78.35 +Units vested +(82,255 +) +98.60 +Units canceled or forfeited +(3,137 +) +98.97 +Non-vested balance at the end of the year +15,784 +77.84 +Non-cash compensation cost related to Class B units recognized in operating results was $2.0 million . In addition, the Company recognized $0.1 million reduction in unit compensation due to forfeitures for the years ended December 31, 2016 . Total unrecognized compensation cost related to unvested Class B units was $1.3 million as of December 31, 2016 . These costs were expected to be recognized over the weighted average remaining vesting period of 2.6 years. +The Company used the Option-Pricing Method to value Class B units. Since the Company’s equity was not publicly traded, expected volatility was estimated based on the volatility of similar entities with publicly traded equity. The risk-free rate for the expected term of the units was based upon the observed yields of U.S. Treasury STRIPS interpolated to match the expected time to liquidity. The Company also calculated the discount for lack of marketability using the Finnerty protective put model. The time to liquidity was based upon the expected time to a successful liquidity event. +On January 20, 2017, upon consummation of the IPO of Keane Group Inc., the Class B units issued to the members of the Board of Directors were converted into 114,580 shares in Keane Group Inc. at the IPO offering price of $19.00 per share. +Assumptions used in calculating the fair value of Class B units granted during the year are summarized below: +Weighted Average for the Year Ended December 31, 2016 +Valuation assumptions: +Expected dividend yield +0 +% +Expected equity volatility +99.8 +% +Expected term (years) +2.5 +Risk-free interest rate +1.0 +% +Lack of marketability discount +29.3 +% +Weighted average fair value per Class B Unit +$ +95.73 +Class C Plan +Prior to the completion of the Trican Transaction, the Company sponsored the Class C Plan to grant Class C units to management. Under the Class C Plan, a maximum of 149,425 Class C units were authorized, of which 113,283 were outstanding as of December 31, 2015. The Class C units granted under the Class C Plan vested based on the participants continued employment with the Company (“Time-Based Units”) and based on the achievement of performance objectives as determined by the Compensation Committee (“Performance-Based Units”). Generally, +110 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +the Time-Based Units vested one-third on each of the first three anniversary dates of the grant date, subject to the participant’s continued employment. The Performance-Based Units vested over the same periods, subject to the attainment of certain performance objectives. As of March 16, 2016, of the total outstanding Class C units issued under the Class C Plan, 97,305 were fully vested and 4,408 were unvested. +The Company determined the fair value of the Class C unit awards with the assistance from a third-party valuation expert. The fair value of each Class C unit award was estimated on the date of grant using a Monte Carlo option pricing model. A significant input of the option pricing method was the enterprise value of Keane Group Holding, LLC. The Company estimated the enterprise value utilizing a combination of the income and market approaches. Additional significant inputs used in the option pricing method included the length of holding period, discount for lack of marketability and volatility. +The Company granted 8,815 and 5,510 Class C units in 2015 and 2014 , respectively. During 2015 and 2014 , 28,650 and 6,061 Class C units were bought back, respectively. The total amount paid during the years ended December 31, 2015 and 2014 for Class C unit buy backs was $0.2 million and $0.2 million, respectively. Furthermore, the Company recognized $0.2 million relating to withholding taxes on settlements for the year ended December 31, 2015 . +Non-cash compensation cost related to Time-Based Units recognized in operating results during the years ended December 31, 2015 and 2014 was $0.2 million and $1.3 million, respectively. At December 31, 2015 and 2014 , there was $0.2 million and $0.2 million, respectively, of total unrecognized compensation cost related to unvested Time-Based Units under the Class C Plan. +Non-cash compensation cost with respect to the vested portion of the Performance-Based Units recognized in operating results during the years ended December 31, 2015 and 2014 was $0.2 million and $1.1 million, respectively. The awards for Performance-Based Units were accounted for at fair value. With respect to the remaining unvested portion of the Performance-Based Units, no compensation cost had been recognized as of December 31, 2015 , because the performance criteria had not been defined. +The inputs used to calculate the fair value determination of the 2015 performance-based awards are provided in the following table. Because the Company’s units were not publicly traded, expected volatility was estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the unit is based on the U.S. Treasury yield curve at the date of grant. +2015 +2014 +Valuation assumptions: +Expected dividend yield +— +% +— +% +Expected volatility +60% - 70% +47.5 +% +Expected term (years) +2 - 3 +2 - 5 +Risk-free interest rate +0.80% - 1.10% +1.49 +% +111 +(14) Accumulated Other Comprehensive Income +Accumulated other comprehensive income (loss) (“AOCI”) in the equity section of the balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items +Interest rate +contract +AOCI +December 31, 2013 +$ +(736 +) +$ +— +$ +(736 +) +Other comprehensive income (loss) +(1,148 +) +(854 +) +(2,002 +) +December 31, 2014 +$ +(1,884 +) +$ +(854 +) +$ +(2,738 +) +Other comprehensive income (loss) +(741 +) +(1,187 +) +(1,928 +) +December 31, 2015 +$ +(2,625 +) +$ +(2,041 +) +$ +(4,666 +) +Other comprehensive income (loss) +22 +1,857 +1,879 +December 31, 2016 +$ +(2,603 +) +$ +(184 +) +$ +(2,787 +) +The following table summarizes reclassifications out of accumulated other comprehensive income during the years ended December 31 (in thousands of dollars): +Year ended December 31, +Affected line item +in the consolidated +statement of +operations and +comprehensive loss +2016 +2015 +2014 +Interest rate derivatives, hedging +$ +(3,641 +) +$ +(1,578 +) +$ +(408 +) +Interest expense +Foreign currency items +— +— +— +Other income +Total reclassifications +$ +(3,641 +) +$ +(1,578 +) +$ +(408 +) +(15) Operating Leases +The Company has certain non-cancelable operating leases for various equipment and office facilities. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on the Company by the leasing agreements with regard to asset dispositions or borrowing ability. Some lease arrangements include renewal and purchase options or escalation clauses. In addition, certain lease contracts acquired from Trican include rent holidays, rent concessions and leasehold improvement incentives. Leasehold improvements made at the inception of leases or during lease terms are amortized over the remaining period of 10 months to 35 years . +Rental expense for operations, excluding daily rentals and reimbursable rentals was $9.2 million , $6.3 million and $7.2 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. +Sublease proceeds were $0.3 million , $0.05 million and nil for the years ended December 31, 2016 , 2015 and 2014 , respectively, all related to the subleased properties of Canadian operations and were recorded as a reduction of the Canadian Operations’ exit costs liability (see below). +112 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Minimum lease commitments under operating leases for the next five years are $32.0 million , as listed below: +Year-end December 31, +(Thousands of Dollars) +2017 +$ +9,213 +2018 +8,282 +2019 +7,040 +2020 +3,499 +2021 and Thereafter +3,953 +Total +$ +31,987 +The Company has three long-term operating leases in Canada that expire in 2018. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016. As of December 31, 2016 , the total minimum sub-lease payments to be received in the future under the active subleases are $0.3 million in 2017 and $0.01 million in 2018 . +Exit costs associated with real estate operating leases +The Company assumed several real estate operating leases in connection with the acquisition of Trican’s U.S. Operations. In an effort to consolidate its facilities and to reduce costs, the Company vacated eight of the combined properties and recorded a cease-use liability for the total amount of $8.1 million . Subsequent to the recording of the liability, the Company successfully negotiated exit agreements for four of the properties, resulting in net payments of $2.6 million . In December 2016, due to immediate need for office space, the Company made a decision to re-enter one of the leases acquired from Trican and renegotiated its terms. The Company moved into the renegotiated office space and vacated the outgrown facility in the first quarter of 2017. As a result, the amendment to the lease was accounted for as a new lease and exit liability associated with the lease in the amount of $2.4 million was reversed through the same line item in the statement of operations where it was previously recognized. Exit costs are presented within selling, general and administrative expense in the consolidated statement of operations. +The following table presents the roll forward of the exit cost liability (in thousands of dollars): +Year Ended December 31, 2016 +Beginning balance at January 1, 2016 +$ +— +Charges incurred +8,052 +Reversal of liability due to change in estimate +(2,356 +) +Cash buyout of lease +(2,636 +) +Lease amortization and other adjustments +(1,390 +) +Total lease and contract obligations, ending balance +$ +1,670 +(16) Income Taxes +The Company is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, taxable income or loss is passed through to and included in the taxable income of the members, with the exception of the state of Texas. Limited liability companies are subject to Texas margin tax. Accordingly, with the exception of the state of Texas and its Canadian subsidiary, the Company is not a taxable +113 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company. The Company is liable for various other state and local taxes. +For the years ended December 31, 2016 , 2015 and 2014 , income (loss) from continuing operations before taxes consist of the following: +(Thousands of Dollars) +December 31, +2016 +2015 +2014 +Domestic +$ +(187,308 +) +$ +(64,470 +) +$ +(46,815 +) +Foreign +$ +221 +$ +(172 +) +$ +1,229 +Net loss +$ +(187,087 +) +$ +(64,642 +) +$ +(45,586 +) +Income taxes charged to income (loss) from continuing operations were as follows: +(Thousands of Dollars) +Year Ended December 31, +2016 +2015 +2014 +Current (benefit) provision: +State and local +$ +— +$ +— +$ +— +Foreign +$ +— +$ +(197 +) +$ +265 +Total current provision +— +(197 +) +265 +Deferred provision: +State and local +(114 +) +— +— +Foreign +— +990 +101 +Total deferred provision +(114 +) +990 +101 +Provision for income taxes +$ +(114 +) +$ +793 +$ +366 +114 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were: +(Thousands of Dollars) +Year Ended December 31, +2016 +2015 +2014 +Deferred tax assets +Intangibles +231 +139 +— +Valuation allowance +(139 +) +(139 +) +— +Total deferred tax assets +92 +— +— +Deferred tax liabilities +PP&E and intangibles +$ +— +$ +(22 +) +$ +(36 +) +Total deferred tax liabilities +— +(22 +) +(36 +) +Net deferred tax assets (liabilities) +$ +92 +$ +(22 +) +$ +(36 +) +The valuation allowance for foreign deferred tax assets as of December 31, 2016 and 2015 of $0.1 million , is related to the Company’s tax basis in certain assets located in Canada, and it is more likely than not the deferred tax assets will not be realized. +The Company or one of its subsidiaries files income tax returns and is subject to an entity-level tax in Canada and Texas. The Company is currently open to audit under the statute of limitations by the Canadian Revenue Agency for the 2013 through 2015 tax years. The Company is open to audit under the statute of limitations for the 2012 through 2016 tax years in the state of Texas. The Company had no provisions for uncertain tax positions as of December 31, 2016 and 2015 . +( 17 ) Commitments and Contingencies +As of December 31, 2016 and 2015 , the Company had $0.1 million and $1.1 million of deposits on equipment, respectively. There were no purchase commitments on equipment outstanding as of December 31, 2016 and $ 1.7 million of estimated purchase commitments at December 31, 2015 . +In connection with the Company’s acquisition of UTFS in 2013, the Company made the final contingent consideration payment of $2.5 million in February 2015. +At December 31, 2016 and 2015 , the Company had issued letters of credit under the 2016 ABL Facility of $2.0 million , which secured performance obligations related to the CIT capital lease. Refer to Note 8 ( Long-Term Debt ) for further details on the CIT capital lease. +On March 26, 2012, the Company entered into a railcar and transload agreement with B&H Rail Corporation (“B&H”). The agreement had an effective date of March 1, 2012 and a term of five years with a renewal option of three additional five-year terms. B&H owns a railspur and transloading facility located in Coopers, New York. This agreement required B&H to make certain property improvements and allowed the Company almost exclusive use of this terminal. As part of the agreement, the Company has committed annual volume obligations. In the event of any annual shortfall, the Company is subject to a penalty fee. The Company met the minimum commitment at +115 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +December 31, 2016 . For the years ended December 31, 2016 , 2015 and 2014 , the Company recorded a total charge of $0.02 million , $0.2 million and $0.5 million , respectively, associated with the committed shortfall. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements and must pay penalties in the event of any shortfall. During the years ended December 31, 2016 , 2015 and 2014 there were no shortfalls under these contracts. +In connection with acquisition of Trican’s U.S. Operations, the Company assumed obligations under three sand supply agreements. The Company is subject to minimum purchase requirements and must pay penalties in the event of any shortfalls. During the year ended December 31, 2016 , the Company met minimum purchase commitments and did not recognize any shortfalls under these contracts. +Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of December 31, 2016 are listed below: +(Thousands of Dollars) +Year-end December 31, +2017 +$ +20,555 +2018 +31,054 +2019 +29,805 +2020 +18,316 +2021 +8,583 +$ +108,313 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions as is typical of our industry. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors including experience with similar matters, past history, precedents, relevant financial and other evidence and facts specific to the matter. In accordance with US GAAP, we accrue for contingencies where the occurrence of a loss is probable and can be reasonably estimated. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome, based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations. +The company has been served with class and collective action claims alleging that we failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act and state laws. We are evaluating the background facts and at this time cannot predict the outcome of these claims and are not able to reasonably estimate the potential impact, if any, such outcome would have on our financial position, results of operations or cash flows. +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or +116 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of its business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +( 18 ) Related Party Transactions +Cerberus Operations and Advisory Company, an affiliate of the Company’s principal equity holder, provides certain consulting services to the Company. The Company paid $1.0 million , $0.7 million and $0.3 million for these services during the years ended December 31, 2016 , 2015 and 2014 , respectively. +On December 23, 2014, the Company entered into a $20.0 million loan with KG Fracing Acquisition Corp. and S&K Management Services, LLC, affiliates of the Company (the “Related Party Loan”). The Related Party Loan had a scheduled maturity of November 8, 2019 and bore non-cash interest at 10.0% per annum. Total interest accrued on the Related Party Loan as of December 31, 2015 was $ 2.2 million . The Company recognized $0.4 million and $ 2.2 million of accrued interest expense on the Related Party Loan for the period from January 1 to March 15, 2016 and for the year ended December 31, 2015, respectively. On March 16, 2016, the Related Party Loan was contributed and exchanged for Class A Units of the Company, and the associated accrued interest expense was forgiven. As a result of this transaction, the Company recognized $ 22.6 million as a capital contribution from its equity holders. +The Company leased a residential house from a current employee which was discontinued in the second half of 2015. The Company paid $ 0.04 million and $0.09 million in rents associated with the lease during the year ended December 31, 2015 and 2014, respectively. +( 19 ) Wind-down of a Foreign Subsidiary +During the first quarter of 2015, the Company’s Canadian operations lost an open bid for the renewal of a customer contract that had been material to the foreign operations in prior years. Due to the loss of this contract, coupled with the unfavorable market conditions driven by low oil prices, management decided to exit wireline operations in Canada and implemented an exit strategy to dispose of the assets of the Canadian operations in multiple phases. +The phases were as follows: +• +Phase 1 included completing the remainder of the customer contract during the first quarter of 2015. +• +Phase 2 included disposing of the physical assets of the Canadian operations by selling them to third parties or transferring them to Keane Frac, LP during the second quarter of 2015. +• +Phase 3 included repatriating $8.0 million CAD ($6.7 million USD) of cash from Keane Completions CN Corp. +• +Phase 4 included settlement of the outstanding obligations of the Canadian operations. The Company has three long-term operating leases still in effect. These leases and any trailing costs are settled on an ad hoc +117 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +basis. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016. +• +Phase 5 included transitioning the $4.7 million CAD of goodwill related to the Completion Services segment from Keane Completions CN Corp. to Holdco II as of December 31, 2015. +As of this time, Management has no formal plan to substantially liquidate its Canadian subsidiary. +As of December 31, 2016 , all material costs associated with the wind-down of the Canadian subsidiary have been identified, and we do not expect to incur any additional significant costs associated with the wind-down of the Canadian subsidiary. Exit costs were incurred within the Company’s Completion Services reportable segment. The Company did not incur any Canadian subsidiary exit related costs during the year ended December 31, 2016 . Exit costs incurred during the year ended December 31, 2015 and the line items where they appear on the consolidated statements of operations and comprehensive loss were as follows: +(Thousands of Dollars) +Location in consolidated +statements of operations and +comprehensive loss +Description +Year ended +December 31, 2015 +Cost of services +Severance pay +$ +208 +Selling, general and administrative expenses +Severance pay +$ +267 +Consulting and legal fees +39 +Retention pay +187 +Asset sales and disposals costs +525 +Lease exit costs +1,375 +Other costs +121 +$ +2,514 +The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which are presented as accrued liabilities on the consolidated balance sheets, were as follows for the year ended December 31, 2016 : +(Thousands of Dollars) +Year ended December 31, +2016 +2015 +Beginning balance at January 1, +$ +759 +$ +— +Charges incurred +— +1,707 +Cash payments net of cash receipts +(290 +) +(491 +) +Currency lease accretion and other adjustments +(236 +) +(457 +) +Total lease obligations, ending balance +$ +233 +$ +759 +118 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +(20) Limited Liability Company +As a limited liability company, the members are not liable for any debt, obligation or other liability of the Company. As noted in Note 1(b), the Company restructured its legal entities on March 2, 2011. The Company shall continue in perpetuity until terminated. +As of December 31, 2016 the Company had three classes of units – Class A units, Class B units and Class C units. +There are 1,000,000 of Class A units of which 10% is held by Trican Well Services, L.P., 23% by KGH Investor Holdings LLC, 53% by KG Fracing Acquisition Corp. and the remaining 14% by the Keane family. Class A units have voting rights, priority of distributions and a liquidation preference of $468 million. +Class B units include 85,882 units held by Keane Management Holdings utilized for issuance of Class B Units under the Class B Incentive Plan. Class B units have no voting rights and participate in distributions in excess of the Class A liquidation preference. +On March 16, 2016, in connection with the acquisition of Trican’s U.S. Operations, the Company issued to Trican Well Service, L.P. 100,000 Class A units and 294,117.65 fully vested Class C units. The total estimated fair value of Class A units was $36.0 million and estimated fair value of Class C units was $6.7 million. Class C units participate in distributions above certain thresholds in the event of specified liquidation events as described in the Third Amended and Restated Limited Liability Company Agreement of Keane Holdings, LLC. Class C unit holders do not have voting rights. +Valuation assumptions used in calculating the fair value of Class A units and Class C units are summarized below: +Class A +Class C +Valuation assumptions: +Expected dividend yield +0.0 +% +0.0 +% +Expected equity volatility +53.8 +% +154.3 +% +Expected term (years) +2.5 +2.5 +Risk-free interest rate +1.05 +% +1.0 +% +Lack of marketability discount +18.1 +% +31.9 +% +Refer to Note 25 ( Subsequent Events ) for discussion of the Organizational Transactions and the IPO. +(21) Business Segments +Management operates the Company in two reporting segments: Completion Services and Other Services. In connection with the Trican Transaction, the Company allocated Trican’s U.S. Operations’ hydraulic fracturing business to the Completion Services segment and its coiled tubing, cementing and other businesses to the Other Services segment. +Completion Services. The Company’s Completion Services segment includes its hydraulic fracturing and wireline businesses. The Company’s customers use its hydraulic fracturing services to enhance the production of oil +119 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +and natural gas from formations with low permeability. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid—typically a mixture of water, chemicals and guar—into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. Proppant generally consists of raw sand, resin-coated sand or ceramic particles. The fracturing fluid is engineered to lose viscosity, or “break,” and is subsequently removed from the formation, leaving the proppant suspended in the mineral fractures. +In addition, the Company also provides wireline services. Wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. The Company typically provides its wireline services in conjunction with its hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for the Company’ customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. The ball-activated plug diverts fracturing fluids through the perforations into the formation. The ability to provide both the wireline and hydraulic fracturing services required for a “plug-and-perf” completion increases efficiencies for customers by reducing downtime between each process, which in turn allows the Company to complete more stages in a day and ultimately reduces the number of days it takes a customer to complete a well. +The Company provides its Completion Services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation and the Bakken Formation. +Other Services: Other Services is comprised of coiled tubing, cementing, acidizing and nitrogen services. +Coiled Tubing: The Company provides various coiled tubing services to facilitate well servicing and workover operations as well as the completion of horizontal wells. Coiled tubing services involve the use of a flexible, continuous metal pipe spooled on a large reel which is then lowered into oil and natural gas wells to perform various workover applications, including wellbore clean outs and maintenance, nitrogen services, thru-tubing fishing, and formation stimulation using acid and other chemicals. Advantages of utilizing coiled tubing over a more costly workover rig include: (i) the smaller size and mobility of a coiled tubing unit compared to a workover rig, (ii) the ability to perform workover applications without having to “shut-in” the well during such operations, (iii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, and (iv) the ability to direct fluids into a wellbore with more precision. Larger diameter coiled tubing units have recently been utilized for horizontal well completion applications such as (i) the drill out of temporary isolation plugs that separate frac zones, (ii) the clean out of the well for final production after the hydraulic fracturing job has been completed and (iii) in conjunction with hydraulic fracturing operations to stimulate zones not requiring high pressures or significant proppant volume. +Drilling, Cementing, Acidizing and Nitrogen Services: The Company is also equipped to offer their customers drilling, cementing, acidizing and nitrogen-based well stimulation services. +During 2016, in connection with the acquisition of Trican’s U.S. Operations, the Company reassessed the composition of its reportable segments effective January 1, 2016. The change in the reportable segments resulted from the change in the structure of internal organization and was reflected through retrospective presentation of prior period segment information. As such, the corresponding information for 2015 and 2014 has been restated to present segment information on a comparable basis. +120 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Management evaluates the performance of each segment based on gross profit and operating (loss) income. All inter-segment transactions are eliminated in consolidation. +The following tables present financial information with respect to the Company’s segments. Corporate and other represents costs not directly associated with an operating segment, such as interest expense and corporate overhead. Corporate assets include cash, deferred financing costs, derivative and entity-level machinery and equipment. +(Thousands of Dollars) +Year Ended December 31, +2016 +2015 +2014 +Operations by business segment +Revenue: +Completion Services +$ +410,854 +$ +363,820 +$ +383,173 +Other Services +9,716 +2,337 +12,661 +Total revenue +$ +420,570 +$ +366,157 +$ +395,834 +Gross profit by business segment +Completion Services +$ +8,963 +$ +58,784 +$ +68,390 +Other Services +(4,735 +) +777 +3,726 +Total gross profit +$ +4,228 +$ +59,561 +$ +72,116 +Operating (loss) income: +Completion Services +$ +(80,563 +) +$ +(11,260 +) +$ +5,496 +Other Services +(10,156 +) +(3,864 +) +(12,022 +) +Corporate and Other +(58,985 +) +(24,587 +) +(26,169 +) +Total operating (loss) +$ +(149,704 +) +$ +(39,711 +) +$ +(32,695 +) +Capital expenditures (1) : +Completion Services +$ +176,316 +$ +27,228 +$ +140,927 +Other Services +18,428 +8 +407 +Corporate and Other +34,349 +10 +59 +Total capital expenditures +$ +229,093 +$ +27,246 +$ +141,393 +Depreciation and amortization: +Completion Services +$ +89,432 +$ +65,114 +$ +62,579 +Other Services +5,087 +3,169 +5,156 +Corporate and Other +6,460 +1,264 +519 +Total depreciation and amortization +$ +100,979 +$ +69,547 +$ +68,254 +Impairment: +Completion Services +$ +— +$ +2,443 +$ +506 +Other Services +185 +1,471 +10,592 +Corporate and Other +— +— +— +Total impairment +$ +185 +$ +3,914 +$ +11,098 +121 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Exit Costs: +Completion Services +$ +— +$ +2,722 +$ +— +Other Services +— +— +— +Corporate and Other +5,696 +— +— +Total exit costs +$ +5,696 +$ +2,722 +$ +— +Income tax provision: +Completion Services +$ +(114 +) +$ +— +$ +— +Corporate and Other +— +793 +366 +Total income tax: +$ +(114 +) +$ +793 +$ +366 +Revenue by geography: +United States +$ +420,570 +$ +359,289 +$ +377,230 +Canada +— +6,868 +18,604 +Total revenue +$ +420,570 +$ +366,157 +$ +395,834 +(1) +Capital expenditures include assets of $205.5 million from the acquisition of Trican’s U.S. Operations, comprising of $154.5 million allocated to Completions Services, $17.9 million to Other Services and $33.1 million to Corporate Services. +(Thousands of Dollars) +Year Ended December, 31 +2016 +2015 +Total assets by segment: +Completion Services +$ +412,947 +$ +267,250 +Other Services +18,485 +7,064 +Corporate and Other +105,508 +50,481 +Total assets +$ +536,940 +$ +324,795 +Total assets by geography: +United States +$ +535,395 +$ +322,193 +Canada +1,545 +2,602 +Total assets +$ +536,940 +$ +324,795 +Goodwill by segment: +Completion Services +$ +50,478 +$ +48,882 +Other Services +— +— +Corporate and Other +— +— +Total goodwill +$ +50,478 +$ +48,882 +(22) Selected Quarterly Financial Data +The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2016 , 2015 and 2014 . The unaudited quarterly information includes all adjustments that, in the +122 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. +Year Ended December 31, 2016 +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +61,195 +$ +91,589 +$ +116,753 +$ +151,033 +Costs of services (excluding depreciation and amortization, shown separately) +67,845 +85,039 +120,480 +142,978 +Depreciation and amortization +13,968 +27,723 +30,256 +29,032 +Selling, general and administrative expenses +20,160 +15,356 +9,394 +7,858 +Impairment +- +- +- +185 +Total operating costs and expenses +101,973 +128,118 +160,130 +180,053 +Operating loss +(40,778 +) +(36,529 +) +(43,377 +) +(29,020 +) +Other expense (income), net +(133 +) +(874 +) +470 +(379 +) +Interest expense +8,408 +10,037 +9,963 +9,891 +Total other expenses +8,275 +9,163 +10,433 +9,512 +Net loss +$ +(49,053 +) +$ +(45,692 +) +$ +53,810 +$ +(38,532 +) +123 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +Year Ended December 31, 2015 +Selected Financial Data: +First Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +119,249 +$ +108,675 +$ +84,250 +$ +53,983 +Costs of services (excluding depreciation and amortization, shown separately) +100,648 +85,270 +70,333 +50,345 +Depreciation and amortization +19,525 +17,509 +16,051 +16,462 +Selling, general and administrative expenses +6,170 +6,878 +5,848 +6,915 +Impairment +— +3,914 +— +Total operating costs and expenses +126,343 +109,657 +96,146 +73,722 +Operating loss +(7,094 +) +(982 +) +(11,896 +) +(19,739 +) +Other expense (income), net +1,447 +(221 +) +54 +201 +Interest expense +5,791 +5,883 +5,984 +5,792 +Total other expenses +7,238 +5,662 +6,038 +5,993 +Net loss +$ +(14,332 +) +$ +(6,644 +) +$ +(17,934 +) +$ +(25,732 +) +(23) Recently Adopted Accounting Standards +In January 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01, “Income Statement—Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” which eliminates from U.S. GAAP the concept of extraordinary items. The ASU is effective for annual periods beginning after December 15, 2015. The Company implemented the provisions of ASU 2015-01, prospectively, effective January 1, 2016. The adoption of ASU 2015-11 did not have a material impact on the consolidated financial statements of the Company. +In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The ASU also requires amortization of debt issuance costs to be reported as interest expense. The ASU is effective for annual periods beginning after December 15, 2015. The Company adopted this Standard effective January 1, 2016 on a retrospective basis and presented all debt issuance costs net within long-term debt. Refer to Note 8 ( Long-Term Debt ) for quantification of the impact of the adoption of this ASU. +In August 2015, the FASB issued ASU No. 2015-15, “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which allows for debt issuance costs associated with line-of-credit arrangements to be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any +124 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +outstanding borrowings on the line-of-credit arrangement. The ASU is effective for annual periods beginning after December 15, 2015. The Company implemented the provisions of ASU 2015-15 on January 1, 2016. Refer to Note 8 ( Long-Term Debt ) for quantification of the impact of the adoption of this ASU. +In December 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires adjustments to provisional amounts in a business combination be recognized in the reporting period in which the adjustment amounts are determined, eliminating the requirement to retrospectively account for those adjustments. The ASU also requires companies to disclose the amounts recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company will apply the provisions of ASU 2015-16 to any measurement period adjustments that arise subsequent to January 1, 2016. +In August 2014, the FASB issued ASU No 2014-15, “Presentation of Financial Statements - Going Concern,” which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal years, and interim periods within those years, ending after December 15, 2016, with early application permitted. The Company implemented the provision of ASU 204-15 on January 1, 2016. The adoption of ASU 2014-15 did not have any impact on the consolidated financial statements of the Company. +(24) Recently Issued Accounting Standards +In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this ASU on its various revenue streams and established processes. The Company’s approach includes performing a detailed review of all contracts within our various reporting units and comparing historical accounting policies and practices to the new accounting guidance. The Company’s implementation plan also includes identifying and establishing new policies, procedures and controls related to accounting for contracts with customers and quantifying any adoption date adjustments. The Company will adopt this standard utilizing the modified retrospective method. +During 2016, FASB issued ASU 2016-08, “Principal versus Agent”, ASU 2016-10, “Licenses of Intellectual Property (IP) and Identification of Performance Obligations”, ASU 2016-12, “Narrow Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections and Improvements”. All these ASUs are designed to address various issues raised by the constituents to the Transition Resource Group (TRG) and help minimize diversity in practice in applying ASU 2014-09, “Revenue from Contracts with Customers.” The Company will adopt these standards utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09. +125 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +In July, 2015, the FASB issued ASU 2015-11, “Inventory, Simplifying the Measurement of Inventory”, which requires that an entity should measure inventory at the lower of cost and net realizable value. The realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The Company will adopt this standard as of January 1, 2017. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. +In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The ASU is effective for annual periods beginning after December 15, 2018. The Company will implement the provisions of ASU 2016-01 effective January 1, 2018. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company anticipates the adoption of this standard will result in a significant increase in its assets and liabilities, as the Company has certain operating and real property lease arrangements for which it is the lessee. The standard is effective for the Company beginning on January 1, 2019. +In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which is effective for fiscal years and interim periods within fiscal years beginning after December 31, 2016, with a cumulative-effect and prospective approach to be used for implementation. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. The Company does not expect the adoption of this standard to have any impact on its consolidated financial statements. +In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with a modified-retrospective approach to be used for implementation. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Specifically, this new guidance requires using a forward-looking, expected loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This will replace the currently used model and likely result in an earlier recognition of allowance for losses. The Company does not expect the adoption of this standard to have any impact on its consolidated financial statements. +126 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017, with a full retrospective approach to be used upon implementation and early adoption allowed. ASU 2016-15 provides guidance on eight different issues, intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company will adopt this standard effective January 1, 2018. The Company does not expect the adoption of this standard to have a material impact. +In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Asset Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. The ASU is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustments will include recognition of the income tax consequences of intra-entity transfers of assets, other than inventory, that occur before the adoption date. Early adoption is permitted but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company does not expect the adoption of this standard to have a material impact on its Company’s consolidated financial statements, as the Company has minimal intra-entity transfers of qualifying assets. +In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash,” which stipulates that the amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. The amendments to this Update do not provide a definition of restricted cash or restricted cash equivalents. The Company does not expect the adoption of this standard to have any impact on its consolidated financial statements. +In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of asset or business. This Update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. Early adoption is allowed for transactions that occurred before the issuance date or effective date of the amendments only when the transaction has not been reported in the financial statements previously issued. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. +In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 of the goodwill impairment test with the goodwill impairment amount calculated as amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This Update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019 and should be applied prospectively with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not expect the adoption of this standard to have any impact on its consolidated financial statements. +( 25 ) Subsequent Events +On October 13, 2016, in connection with the filing of the registration statement on Form S-1, under the Securities Act of 1933, for the IPO of shares of common stock of KGI, KGI was formed as a Delaware Corporation to become a holding corporation for Keane Group Holdings, LLC and its subsidiaries. Immediately prior to the completion of the IPO (as discussed above), the existing investors of the Company contributed all of their direct and +127 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +indirect equity interests in Keane Group Holdings, LLC to Keane Investor, and Keane Investor contributed these equity interests to KGI in exchange for shares of its common stock. These transactions are referred to collectively as the “Organizational Transactions”. As a result, all membership interests in the Company were exchanged for an aggregate of 87,428,019 of common stock in KGI on January 20, 2017. In connection with the consummation of the IPO on January 25, 2017 (as described below), the underwriters exercised their overallotment option of 4,014,000 shares; thereby resulting in Keane Investor and our independent directors owning 72,354,019 of shares of common stock in KGI. In addition, the Organizational Transactions represented a transaction between entities under common control and will be accounted for similar to pooling of interest, whereby KGI became the successor and Keane Group Holdings, LLC the predecessor for the purposes of financial reporting. In addition, upon consummation of the IPO and Organizational Transactions, KGI became subject to federal income taxes. +On January 20, 2017, upon commencement of the IPO of Keane Group Inc., the Class B units issued to the members of the Board of Directors were converted into 114,580 shares of restricted stock in Keane Group Inc. at the IPO offering price of $19.00 per share. These shares of restricted stock vest in three equal installments, beginning October 1, 2017, subject to continued service with the Company. +On January 25, 2017, KGI completed an IPO of 30,774,000 shares of its common stock, which included 15,700,000 shares offered by KGI and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as result of the underwriters’ exercise of their overallotment option. The gross proceeds of the IPO to KGI, based on the public offering price of $19.00 per share, was $298.3 million , which resulted in net proceeds to KGI of $260.3 million , after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by KGI and $18.6 million of underwriting discounts and commissions payable by KGI associated with the shares sold by the selling stockholder, excluding approximately $4.5 million in offering expenses payable by us with respect to the shares sold by us and the selling stockholder. KGI did not receive any proceeds from the sale of the shares by the selling stockholder. The net proceeds received from the IPO were used to fully repay the Company’s Term Loan balance of $99 million and the associated prepayment penalty of $13.8 million , and repay $50 million of the Notes, and in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining net proceeds will be used for general corporate purposes including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the Organizational Transactions, KGI had 103,128,019 shares of common stock outstanding. +On January 25, 2017, KGH Intermediate Holdco II, LLC, KGH Intermediate Holdco I, LLC, Keane Frac, LP, Keane Frac GP, LLC and KS Drilling, LLC (collectively, the “Note Parties”) entered into an amendment which modified the existing NPA with the purchasers thereunder and U.S. Bank National Association, to, among other things, permit the Note Parties to enter into a revolving credit facility in an aggregate principal amount equal to $150 million and to exclude any cash proceeds received in connection with the issuance of common equity of the Company as part of the IPO from the calculation of excess cash flow. +On February 17, 2017, the Company, KGI, Keane Frac, LP, KS Drilling, LLC and the guarantors party thereto entered into an asset-based revolving credit agreement (the "New ABL Facility") with each lender from time to time party thereto and Bank of America, N.A. as administrative agent and collateral agent. The New ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the New ABL Facility. The New ABL Facility provides for a $150 million revolving credit facility (with a $20 million subfacility for letters of credit), subject to a borrowing base. In addition, subject to approval by the applicable lenders and other customary conditions, the New ABL Facility allows for an increase in commitments of up to $75 million. No early termination fees were incurred by KGI in connection with such termination. +On February 17, 2017, KGI and the Company were joined as guarantors to the NPA, and the parties also entered into an amendment to, among other things, (i) allow KGI to provide its financial statements and reports to the noteholders and calculate covenants and ratios using such financial statements, (ii) enter into an intercreditor +128 +KEANE GROUP HOLDINGS, LLC AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Years Ended December 31, 2016, 2015 and 2014 +agreement with Bank of America, N.A. as administrative agent and collateral agent under the New ABL Facility and (iii) allow certain restricted payments. +On March 15, 2017, KGI, the Company (the "Term Loan Lead Borrower"), Keane Frac, LP, KS Drilling and the guarantors thereto entered into a term loan agreement (the "New Term Loan Facility") with each lender from time to time party thereto and Owl Rock Capital Corporation as administrative agent and collateral providing for a new five and a half-year $150 million senior secured term loan facility (the "New Term Loan"). The New Term Loan has an interest rate of per annum equal to, at the Term Loan Lead Borrower’s option, either (a) the base rate plus 6.25% or (b) LIBOR (subject to a 1.00% floor) plus 7.25%. Subject to certain conditions, the Company has the right to request an increase of the New Term Loan in an amount of up to $125 million. The New Term Loan Facility includes a $35 million minimum liquidity requirement. In connection with entering into the New Term Loan Facility, the Company repaid all amounts outstanding under the NPA. +129 +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies. +In addition, because we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting . +Item 9B. Other Information +None. +130 +PART III +References Within This Annual Report +As used in Part III of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; and (vi) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its respective controlled affiliates and investment funds. +Item 10. Directors, Executive Officers and Corporate Governance +Executive Officers and Directors +The following table sets forth information regarding our board of directors and executive officers: +Name +Age† +Position +James C. Stewart +54 +Chairman and Chief Executive Officer +Gregory L. Powell +42 +President and Chief Financial Officer +M. Paul DeBonis Jr. +57 +Chief Operating Officer +Kevin M. McDonald +49 +Executive Vice President, General Counsel & Secretary +James J. Venditto +65 +Vice President, Engineering and Technology +Ian J. Henkes +45 +Vice President, Human Resources +Marc G. R. Edwards*(a)(b)(d) +56 +Lead Director +Lucas N. Batzer(c) +33 +Director +Dale M. Dusterhoft(b)(d) +56 +Director +James E. Geisler(a)(c) +50 +Director +Lisa A. Gray(c)(d) +61 +Director +Gary M. Halverson*(a)(d) +58 +Director +Shawn Keane(b) +50 +Director +Elmer D. Reed*(c) +67 +Director +Lenard B. Tessler +64 +Director +Scott Wille(b) +35 +Director +† +As of December 31, 2016 +* +Independent Director +(a) +Member, Audit and Risk Committee +(b) +Member, Compensation Committee +(c) +Member, Compliance Committee +(d) +Member, Nominating and Corporate Governance Committee +Executive Officer and Director Biographies +James C. Stewart , Chairman and Chief Executive Officer . Mr. Stewart became the Chairman and Chief Executive Officer of Keane in March 2011. Prior to joining Keane, from 2007 to 2009, he served as the President and Chief Executive Officer of a privately held international drilling company. From 2006 to 2007, Mr. Stewart served as Vice President of Integrated Drilling Services for Weatherford International plc, based in London and +131 +Dubai, where he created and managed a global business unit that included a 50-rig international land contract drilling group and a global project management team. Mr. Stewart began his career with Schlumberger Limited, where he held senior leadership positions across the globe over the span of 22 years. Mr. Stewart’s qualifications to serve as Chairman and Chief Executive Officer include his broad leadership experience with oilfield services, as well as his long tenure and successes in the oil and natural gas market. +Gregory L. Powell , President and Chief Financial Officer . Mr. Powell has served as Chief Financial Officer of Keane since March 2011. He previously held the title of Vice President between March 2011 and July 2015, when he became President. Prior to joining Keane, Mr. Powell served as an Operations Executive for Cerberus from 2006 to March 2011. During his tenure at Cerberus, he was responsible for evaluating new investments and partnering with portfolio companies to maximize value creation. Mr. Powell previously served on the board of directors and audit committee of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies. Prior to joining Cerberus, Mr. Powell spent ten years with General Electric, starting with global leadership training and growing into various leadership roles in Finance and Mergers and Acquisitions, with his last role being Chief Financial Officer for GE Aviation—Military Systems. +M. Paul DeBonis Jr. , Chief Operating Officer . Mr. DeBonis has served as Chief Operating Officer of Keane since May 2011. Prior to joining Keane, he served as President of Big Country Energy Services USA LP from May 2010 to May 2011 and as President of Pure Energy Services (USA), Inc. from June 2005 to May 2010. He previously served as Oilfield Services Marketing Manager at Schlumberger Limited. Mr. DeBonis started his oil and gas career with Dowell Services in the fracturing and cementing departments. He has worked in several basins throughout the United States and Canada. Mr. DeBonis was a Schlumberger Field Engineer Graduate in 1985. Mr. DeBonis has authored and published two papers related to hydraulic fracturing for the Society of Petroleum Engineers. +Kevin M. McDonald , Executive Vice President, General Counsel & Secretary . Mr. McDonald has served as Keane’s Executive Vice President, General Counsel & Secretary since November 2016. Prior to joining Keane, he served in leadership roles at Marathon Oil Corporation from 2012 to 2016, including as Deputy General Counsel of Corporate Legal Services and Government Relations, Deputy General Counsel of Governance, Compliance & Corporate Services and Assistant General Counsel. He practiced as a partner at the international law firm Fulbright & Jaworski LLP (now Norton Rose Fulbright LLP) in 2012. Mr. McDonald previously held various counsel positions, including President & Chief Executive Officer and acting General Counsel at Arms of Hope, a non-profit organization, from 2008 to 2012, Senior Vice President, General Counsel & Chief Compliance Officer at Cooper Industries between from 2006 to 2008, Associate General Counsel at Anadarko Petroleum from 2006 to 2008 and Managing Counsel (Litigation) at Valero Energy from 2002 to 2004. Mr McDonald began his career as an associate at Norton Rose Fulbright LLP between 1992 and 2001. +James J. Venditto , Vice President, Engineering and Technology . Mr. Venditto joined Keane in March 2016, following Keane’s acquisition of the Acquired Trican Operations. At Trican, he had served as Vice President of Technical Services from July 2011 to March 2016. Prior to that, Mr. Venditto worked for Anadarko Petroleum as a Project Production Engineering Advisor from July 2010 to July 2011 and as a Senior Staff Engineer from November 2009 to July 2010. Mr. Venditto has also held numerous technical positions with Shell Oil Company. Mr. Venditto is a member of the Society of Petroleum Engineers. He has authored articles in more than 25 technical publications and has more than 25 issued U.S. patents, many of which are related to hydraulic fracturing. +Ian J. Henkes , Vice President, Human Resources . Mr. Henkes has served as Keane’s Vice President for Human Resources since February 2016. Prior to joining Keane, he served as Human Resources Manager for Schlumberger’s Drilling & Measurements global businesses from August 2014 to February 2016, as Vice President for North America at Pathfinder Energy Services from January 2013 to September 2014 and as Personnel Manager at Pathfinder Energy Services from September 2012 to December 2012. Prior to joining Pathfinder Energy Services, Mr. Henkes served in various roles at Schlumberger from 1994 to 2012. +Marc G. R. Edwards , Lead Director . Mr. Edwards has served as President and Chief Executive Officer and as a member of the board of directors of Diamond Offshore Drilling, Inc., a deepwater water drilling contractor, since 2014. He previously spent 30 years at Halliburton Company, where he worked in various roles, most recently +132 +as Senior Vice President of the Completion and Production Division. Mr. Edwards developed an extensive background in the global energy industry during his tenure at Halliburton, which enables him to provide important contributions and a new perspective to our board of directors. His day-to-day leadership experience gives him invaluable insight regarding the operations of an oilfield services company. +Lucas N. Batzer , Director . Mr. Batzer has served as a member of Keane’s board of directors since March 2016. He currently serves as a Senior Vice President of Private Equity at Cerberus, which he joined in August 2009. Prior to joining Cerberus, Mr. Batzer worked as an analyst at The Blackstone Group from 2007 to 2009. He has served on the boards of directors of ABC Group and Reydel Automotive, two automotive component suppliers, since June 2016 and November 2014, respectively. Mr. Batzer’s experience in the private equity industry, board experience and comprehensive knowledge of our business and operational strategy, positions him as an important resource on our board of directors. +Dale M. Dusterhoft , Director . Mr. Dusterhoft has served as a member of Keane’s board of directors since March 2016 and currently serves as Chief Executive Officer and as a director of Trican, which he joined at its inception in 1996. He has served on the board of directors of Trican since August 2009. Prior to becoming Chief Executive Officer of Trican, Mr. Dusterhoft was the Company’s Senior Vice President of Technical Services. Before joining Trican, Mr. Dusterhoft worked for 12 years with a major Canadian pressure pumping company, where he held management positions in Operations, Sales and Engineering. Mr. Dusterhoft serves on the board of the Alberta Children’s Hospital Foundation and the Calgary Petroleum Club. In addition, Mr. Dusterhoft is a past President of the Canadian Association of Drilling Engineers, the Canadian Section of the Society of Petroleum Engineers and a past member of the Industry Advisory Board of the Schulich School of Engineering at the University of Calgary. Mr. Dusterhoft’s years of leadership and operational experience in large, successful enterprises in the oil industry is valuable to our board of directors’ understanding of the industry. +James E. Geisler , Director . Mr. Geisler has served as a member of Keane’s board of directors since April 2016. Mr. Geisler currently serves as an Executive Vice Chairman of Cerberus Operations and Advisory Company, LLC (“COAC”), an affiliate of Cerberus, which he joined in June 2014. Prior to joining Cerberus, Mr. Geisler served as both Chief Operating Officer and Chief Financial Officer of CreoSalus. From 1993 to 2009, he held several positions at United Technologies Corporation including Co-Chief Financial Officer and head of Acquisitions and Strategy. Mr. Geisler began his career at General Electric Company. He currently serves as Chairman of the Board of DynCorp and on the board of directors of three Cerberus portfolio companies, including PaxVax, Inc., a specialty vaccine company, Renovalia Energy, a renewable energy company, and Remington Outdoor Company, a firearms manufacturer holding company. Mr. Geisler previously served on the Board of Directors of Your Community Bankshares. Mr. Geisler’s broad financial and operational experience positions him as an essential advisor on a variety of matters to our board of directors. +Lisa A. Gray , Director. Ms. Gray has served as a member of Keane’s board of directors since March 2011. Ms. Gray has served as Vice Chairman of COAC since May 2015, and has served as General Counsel of COAC since 2004. Prior to joining Cerberus, she served as Chief Operating Executive and General Counsel for WAM!NET Inc. from 1996 to 2004. Prior to that, she was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd from 1990 to 1996. Prior to that, she was active in several non-profit corporations. Ms. Gray has over 25 years of experience in the areas of mergers and acquisitions, corporate debt restructuring and corporate governance. Ms. Gray serves as Vice Chairman and General Counsel of COAC, an affiliate of our largest beneficial owner, and has extensive experience and familiarity with us. In addition, Ms. Gray has extensive legal and corporate governance skills, which broaden the scope of our board of directors’ experience. +Gary M. Halverson , Independent Director . Mr. Halverson has served as a member of Keane’s board of directors since September 2016. In 2016, Mr. Halverson became a Senior Advisor at First Reserve, a private equity firm that focuses on energy investments, and a Partner at 360 Development Partners, a commercial real estate firm. Mr. Halverson was formerly Group President of Drilling and Production Systems and Senior Vice President at Cameron International Corporation from 2014 to 2016 prior to its sale to Schlumberger in 2016. He has over 38 years of industry experience with Cameron, where he worked in various roles across the U.S., Latin America and Asia, including President of Surface Systems between 2005 and 2014, Vice President and General Manager for Western Hemisphere between 2002 and 2006, General Manager of Latin America between 2001 and 2002 and +133 +Director of Sales and Marketing for Asia/Pacific/Middle East between 1993 and 2001. Mr. Halverson formerly served as Chairman of the Board of Directors of the Petroleum Equipment Suppliers Association, as a director on the board of the General Committee of Special Programs of the American Petroleum Institute, as a director on the board of the Well Control Institute and was the U.S. delegate to the World Petroleum Congress. Mr. Halverson’s extensive involvement in the oilfield service industry brings a valuable perspective to our Board. +Shawn Keane , Director . Mr. Keane has served as a member of Keane’s board of directors since March 2011. Mr. Keane served as President of Keane from 2008 to 2011 and helped transition the company into the hydraulic fracturing industry in the Marcellus/Utica Shale. Previously, he served as Keane’s Vice President between 2000 and 2008, and in various management positions from 1983 to 2000, when he began his employment with Keane & Sons Drilling, Inc., a predecessor entity of Keane. Mr. Keane’s knowledge of our company’s operational history and experience in the oilfield services industry is valuable to our board of directors’ understanding of our business and financial performance. +Lenard B. Tessler , Director . Mr. Tessler has served as a member of Keane’s board of directors since October 2012. Mr. Tessler is currently Vice Chairman and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. He is a member of the Board of Directors of Albertsons Companies, a food and drug retailer, where he serves as Lead Director, and a Trustee of the New York-Presbyterian Hospital, where he also serves as member of the Investment Committee and the Budget and Finance Committee. Mr. Tessler’s leadership roles at our largest beneficial owner, his board service, his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provide critical skills for our board of directors to oversee our strategic planning and operations. +Elmer D. Reed , Independent Director . Mr. Reed has served as a member of Keane’s board of directors since April 2011. Prior to joining our board of directors, Mr. Reed served as Vice President, Executive Sales for Select Energy Services from 2010 to 2015 and in various management positions for BJ Services Company from 2003 to 2010, Newpark Drilling Fluids from 2001 to 2003 and Halliburton Energy Services from 1971 to 1999. Mr. Reed has over 45 years of oilfield service and operational experience. He served as a member of the board of directors of Circle Star Energy, an E&P company, in 2012. Mr. Reed has been active in the Independent Petroleum Association of America and is a lifetime member of the Society of Petroleum Engineers. He is also a member of Houston Livestock Show and Rodeo and Houston Farm and Ranch, and regularly assists with infrastructure development projects in South America. Mr. Reed strengthens our board of directors with decades of experience in the oilfield service industry. +Scott Wille , Director . Mr. Wille has served as a member of Keane’s board of directors since March 2011. Mr. Wille is currently Co-Head of North American Private Equity and Managing Director at Cerberus, which he joined in 2006. Prior to joining Cerberus, Mr. Wille worked in the leveraged finance group at Deutsche Bank Securities Inc. from 2004 to 2006. Mr. Wille has served as a director of Remington Outdoor Company, Inc., a designer, manufacturer and marketer of firearms, ammunition and related products, since February 2014 and Albertsons Companies since 2015. Mr. Wille previously served as a director of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies, from September 2010 to October 2012. Mr. Wille’s experience in the financial and private equity industries, together with his in-depth knowledge of our company and its acquisition strategy, are valuable to our board of directors’ understanding of our business and financial performance. +Board of Directors +Family Relationships +None of our officers or directors has any family relationship with any director or other officer. “Family relationship” for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin. +134 +Board Composition +Our business and affairs are currently managed under the board of directors of Keane. Our board of directors has 11 members, comprised of 8 directors affiliated with Keane Investor (including one executive officer) and three independent directors. Members of the board of directors will be elected at our annual meeting of stockholders to serve for a term of one year or until their successors have been elected and qualified, subject to prior death, resignation, retirement or removal from office. +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +Controlled Company +Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including: +• +the requirement that a majority of the board of directors consist of independent directors; +• +the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; +• +the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and +• +the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. +We currently utilize, and intend to continue to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. +In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after specified transition periods. +More specifically, if we cease to be a controlled company within the meaning of these rules, we will be required to (i) satisfy the majority independent board requirement within one year of our status change, and (ii) have (a) at least one independent member on each of our nominating and corporate governance committee and compensation committee by the date of our status change, (b) at least a majority of independent members on each committee within 90 days of the date of our status change and (c) fully independent committees within one year of the date of our status change. +Board Leadership Structure +Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of the board of directors should be separate. However, James C. Stewart currently serves as both Chief Executive Officer and Chairman. Our board of directors has considered its leadership structure and believes at this time that our company and its stockholders are best served by having one person serve in both positions. Combining the roles fosters accountability, effective decision-making and alignment between interests of our board of directors and management. Mr. Stewart also is able to use the in-depth focus and perspective gained in his executive function to assist our board of directors in addressing both internal and external issues affecting the company. +135 +Our corporate governance guidelines provide for the election of one of our directors to serve as Lead Director when the Chairman of the board of directors is also the Chief Executive Officer. Marc G. R. Edwards currently serves as our Lead Director, and is responsible for serving as a liaison between the Chairman and the non-management directors, approving meeting agendas and schedules for our board and presiding at executive sessions of the non-management directors and any other board meetings at which the Chairman is not present, among other responsibilities. +Our board of directors expects to periodically review its leadership structure to ensure that it continues to meet the company’s needs. +Role of Board in Risk Oversight +While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit and risk committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our compliance committee is responsible for overseeing the management of compliance and regulatory risks facing our company and risks associated with business conduct and ethics. Our nominating and corporate governance committee oversees risks associated with corporate governance. Pursuant to our board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by our board of directors and its committees. +Board Committees +Our board of directors has assigned certain of its responsibilities to permanent committees consisting of board members appointed by it. +Audit and Risk Committee +Our audit and risk committee consists of Marc G. R. Edwards, James C. Geisler and Gary M. Halverson, with Mr. Geisler serving as chair of the committee. The committee assists the board in its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements (to the extent not otherwise handled by our compliance committee), our independent auditor’s qualifications and independence, and the establishment and performance of our internal audit function and the performance of the independent auditor. Under the applicable corporate governance standards of the NYSE, a company listing in connection with its initial public offering is permitted to phase in its compliance with the independent audit committee requirements set forth in the rules of NYSE on the same schedule as it is permitted to phase in its compliance with the independent audit committee requirement pursuant to Rule 10A-3 under the Exchange Act, that is: (1) one independent member at the time of listing; (2) a majority of independent members within 90 days of listing; and (3) all independent members within one year of listing. Messrs. Edwards and Halverson qualify as independent directors under the corporate governance standards of the rules of the NYSE and the independence requirements of Rule 10A-3 of the Exchange Act. Within one year of our listing on the NYSE, we expect that Mr. Geisler will resign from our audit and risk committee and be replaced with a new director who is independent under the rules of the NYSE and Rule 10A-3 of the Exchange Act. Our board of directors has determined that Mr. Geisler qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K. Each member of the audit and risk committee is able to read and understand fundamental financial statements, including our balance sheet, statement of operations and cash flows statements. +Our board of directors has adopted a written charter under which the audit and risk committee operates. A copy of the audit and risk committee charter, which satisfies the applicable standards of the SEC and the NYSE, is available on our website. +136 +Compensation Committee +Our compensation committee consists of Dale M. Dusterhoft, Marc G. R. Edwards, Shawn Keane and Scott Wille, with Scott Wille serving as chair of the committee. The compensation committee of the board of directors is authorized to review our compensation and benefits plans to ensure they meet our corporate objectives, approve the compensation structure of our executive officers and evaluate our executive officers’ performance and advise on salary, bonus and other incentive and equity compensation. A copy of the compensation committee charter is available on our website. +Compliance Committee +Our compliance committee consists of Lucas N. Batzer, James E. Geisler, Lisa A. Gray and Elmer D. Reed, with Lisa A. Gray serving as chair of the committee. The purpose of the compliance committee is to assist the board in implementing and overseeing our compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks facing our company, and monitor our performance with respect to such programs, policies and procedures. A copy of the charter for the compliance committee is available on our website. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Marc G. R. Edwards, Dale M. Dusterhoft, Lisa A. Gray and Gary M. Halverson, with Marc G. R. Edwards serving as chair of the committee. The nominating and corporate governance committee is primarily concerned with identifying individuals qualified to become members of our board of directors, selecting the director nominees for the next annual meeting of the stockholders, selection of the director candidates to fill any vacancies on our board of directors and the development of our corporate governance guidelines and principles. A copy of the nominating and corporate governance committee charter is available on our website. +Section 16(a) Beneficial Ownership Reporting Compliance +Following our IPO, the United States securities laws require our directors, executive officers and greater than 10% shareholders to file reports of ownership of our common stock on Forms 3, 4 and 5 with the SEC, with us and with the New York Stock Exchange. +However, for the year ended December 31, 2016, our directors, executive officers and greater than 10% shareholders were not required to file such reports, because we were, prior to the IPO, not subject to the requirements of the Securities Exchange Act of 1934. +Code of Business Conduct and Ethics +We have adopted a written code of business conduct and ethics (“Code of Business Conduct and Ethics”) that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. In addition, our senior financial officers, including our principal executive officer and principal financial officer, are subject to a written code of ethics for senior financial officers. We have made a current copy of both codes available on our website, www.keanegrp.com and both are available in print and without charge to any person who sends a written request to our Corporate Secretary at 2121 Sage Road, Suite 370, Houston, TX 77056. In addition, we intend to post on our website all disclosures that are required by law or the New York Stock Exchange listing standards concerning any amendments to, or waives from, any provision of either code. +Shareholder Recommendation of Director Nominees +We do not have formal procedures in place by which shareholders may recommend nominees to our board of directors. +Corporate Governance Guidelines +We have adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE, as applicable, that serve as a flexible framework within which our board of directors and its committees +137 +operate. These guidelines cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman and Chief Executive Officer, executive sessions, standing board committees, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. A copy of our corporate governance guidelines are posted on our website. +Compensation Committee Report +The JOBS act provides that, so long as a company qualifies as an “emerging growth company,” it will be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act. Accordingly, we have not included such analyses or a report from our Compensation Committee. +138 +Item 11. Executive Compensation +As an emerging growth company, we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act. These rules require compensation disclosure for our principal executive officer and the two most highly compensated executive officers other than our principal executive officer. We refer to these officers as our named executive officers or “NEOs.” Our NEOs for the year ended December 31, 2016 were: +• +James C. Stewart, our Chairman and Chief Executive Officer; +• +Gregory L. Powell, our President and Chief Financial Officer; and +• +M. Paul DeBonis Jr., our Chief Operating Officer. +Summary Compensation Table +Name and +Principal +Position +Year +Salary +($) +Bonus +($)(1) +Unit Awards +($) +Option Awards +($) +Non- +Equity +Incentive +Plan +Compensation +($)(2) +Change in +Pension +Value and +Nonqualified +Deferred +Compensation +Earnings +($) +All +Other +Compensation +($)(3) +Total +($) +(a) +(b) +(c) +(d) +(e) +(f) +(g) +(h) +(i) +(j) +James C. Stewart +2016 +640,000 +133,333 +1,466,667 +2,270,742 +Chairman and Chief Executive Officer +2015 +692,308 +1,160,000 +1,897,712 +Gregory L. Powell +2016 +360,000 +233,333 +1,306,667 +1,929,673 +President and Chief Financial Officer +2015 +389,423 +740,000 +1,160,102 +M. Paul DeBonis Jr. +2016 +240,000 +33,333 +466,667 +769,223 +Chief Operating Officer +2015 +259,615 +460,000 +754,000 +1. +Reflects a monthly retention payment for each NEO (as described below). +2. +For fiscal year 2015, reflects amounts paid to the NEOs under our annual bonus plan for such fiscal year. For fiscal year 2016, these amounts reflect (a) bonus payments under our Value Creation Plan (as described below) and (b) (i) an amount equal to 50% of the annual target bonus for each NEO, as applicable, under our 2016 Bonus Plan (as defined herein), which was paid in connection with the consummation of the IPO and, (iii) an additional amount equal to 50% of the annual target bonus for each NEO that will be paid based on our performance under our 2016 Bonus Plan (the additional amount under this clause (ii) is subject to final approval by our Board of Directors). +3. +A detailed breakdown of “All Other Compensation” is provided in the table below: +Name +Year +Automobile +Allowance +($)(a) +401(k) Plan Company Contribution +($) +Total +($) +James C. Stewart +2016 +21,000 +9,742 +30,742 +2015 +21,404 +24,000 +45,404 +Gregory L. Powell +2016 +21,000 +8,673 +29,673 +2015 +21,404 +9,275 +30,679 +M. Paul DeBonis Jr. +2016 +21,000 +8,223 +29,223 +2015 +21,404 +12,981 +34,385 +(a) +Represents an automobile allowance in the amount of $1,700 per month. +139 +Narrative Disclosure to Summary Compensation Table +Bonus Arrangements +2016 Annual Bonus Plan +Each of our NEOs participated in our Annual Bonus Plan established for fiscal 2016 (the “2016 Bonus Plan”). Consistent with each NEO’s Executive Employment Agreement (as defined below), the 2016 Bonus Plan provided for an annual bonus with a target award opportunity for each NEO of 100% of base salary based on our achievement of economic performance goals. As a result of the Trican transaction and market volatility, our board elected not to set specific performance targets for the 2016 Bonus Plan. +Pursuant to each Executive Employment Agreement, because the IPO was consummated prior to May 1, 2017, 50% of the target bonus payable to each NEO under the 2016 Bonus Plan was accelerated and paid in connection with the consummation of the IPO in the amount set forth in the table below. +Partial Acceleration of +Fiscal 2016 Target Bonus +James C. Stewart +$ +400,000 +Gregory L. Powell +$ +320,000 +M. Paul DeBonis Jr. +$ +150,000 +The remaining 50% of the target bonus for each NEO under the 2016 Bonus Plan was subject to the determination of our board of directors following completion of our final audit based on our economic performance compared to peer companies. Based on our final audit, we believe that our economic performance in fiscal year 2016 compared favorably to peer companies and that we achieved our target performance under the 2016 Bonus Plan. Therefore, in addition to the 50% of the annual target bonus that was paid to each NEO in connection with the IPO, an additional 50% of the annual target bonus for each NEO will be paid to our NEOs based on our performance in fiscal year 2016 (such additional amount is subject to final approval by our Board of Directors). +Value Creation Plan +Upon the consummation of the Trican transaction, each NEO became eligible to participate in our Value Creation Plan (the “Value Creation Plan”). Pursuant to the Value Creation Plan, each NEO is eligible to receive up to three bonus payments, each in the amount of $666,667 for Messrs. Stewart and Powell and in the amount of $166,667 for Mr. DeBonis. Each bonus payment is payable upon our achievement of a financial or other milestone and the NEO remaining continuously employed through the payment date. +The first bonus was paid to the NEOs in June 2016 upon our achievement of over $66 million of demonstrated run-rate cost-out as outlined in our Trican underwriting plan. The second bonus was paid upon the consummation of the IPO. The third bonus payment will be made if we generate at least $135 million of Adjusted EBITDA in Fiscal 2017 and will be paid following the completion of our 2017 audit. +Employment Agreements +During fiscal 2015, Messrs. Stewart, Powell and Debonis were parties to employment agreements with KGH Intermediate Holdco II, LLC, dated March 5, 2014, May 15, 2013 and May 11, 2011, respectively (the “Executive Employment Agreements”). The Executive Employment Agreements were subsequently amended and restated on March 14, 2016, effective upon the consummation of the Trican transaction on March 16, 2016. The Executive Employment Agreements were further amended and restated as of January 3, 2017, including to reflect that effective upon the consummation of the IPO, each Executive Employment Agreement would be assigned to the company. The Executive Employment Agreements provide for an initial term that will expire on March 16, 2019, and thereafter automatically renew for additional one-year periods unless either party provides written notice at least 90 days prior to the end of the then term. +140 +The following table sets forth the annual rate of base salary that each NEO is currently entitled to receive under the respective Executive Employment Agreement, in each case subject to the across-the-board 20% payroll reduction approved by the Compensation Committee on March 4, 2015 (the “Payroll Reduction Initiative”); the annual rate of base salary each NEO will be entitled to receive if and when the Payroll Reduction Initiative is rescinded effective on the effective date of the rescission (the “Rescission Date”); and the monthly retention payment each NEO is entitled to receive for each full calendar month following March 16, 2016 through the month prior to the month in which the Rescission Date occurs (the “Retention Payments”): +Base Salary Prior to +Rescission Date (prior +to 20% reduction) +Base Salary following +Rescission Date +Monthly Retention +Payment Prior to +Rescission Date +James C. Stewart +$ +800,000 +$ +1,000,000 +$ +13,333 +Gregory L. Powell +$ +450,000 +$ +800,000 +$ +23,333 +M. Paul DeBonis Jr. +$ +300,000 +$ +350,000 +$ +3,333 +Each Executive Employment Agreement provides that the NEO is eligible for an annual bonus targeted at 100% of base salary for the applicable year. Prior to the Rescission Date, the annual bonus for Mr. Stewart will be calculated without regard to any reduction in base salary pursuant to the Payroll Reduction Initiative and the annual bonus for Mr. Powell will be equal to the sum of 100% of his base salary and the Retention Payment payable to him for the applicable year. +Each Executive Employment Agreement provided that, upon the consummation of the IPO, the respective NEO became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, our board approved, and each NEO agreed, that in lieu of the NEO's cash retention payments, the NEO was granted a deferred stock award under our Equity and Incentive Award Plan. Each NEO's deferred stock award provides that, subject to the NEO remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his Executive Employment Agreement, the first stock bonus will vest on January 1, 2018 and be paid on February 15, 2018, and the second stock bonus will vest on January 1, 2019 and be paid on February 15, 2019. If we incur a change of control or if the NEO’s employment is terminated by us without Cause or, in the case of Mr. Stewart or Mr. Powell, by him for Good Reason (as such terms are defined below), the NEO will be entitled to receive payment of any unpaid stock bonus. Each stock bonus will be paid in that number of shares of our common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts +First Bonus +Second Bonus +James C. Stewart +$ +1,975,706 +$ +1,975,706 +Gregory L. Powell +$ +1,646,422 +$ +1,646,422 +M. Paul DeBonis Jr. +$ +658,569 +$ +658,569 +Pursuant to each Executive Employment Agreement with Mr. Stewart and Mr. Powell, in the event of his termination of employment by us without Cause or due to our non-renewal of the applicable Executive Employment Agreement, or by Mr. Stewart or Mr. Powell for Good Reason, subject to the execution of a release, Mr. Stewart or Mr. Powell, as applicable, will be entitled to: +• +severance payments equal to two times: +• +for Mr. Stewart, the sum of his annual base salary (determined without regard to any reduction in his base salary pursuant to the Payroll Reduction Initiative), and the lesser of the average of the annual bonuses he received during the two years prior to termination and his target bonus; or +• +for Mr. Powell, either (x) if the date of termination is prior to the Rescission Date, the sum of his annual base salary and any Retention Payments paid to him for the 12-month period prior to the date +141 +of termination, or (y) if the date of termination is following the Rescission Date, his annual base salary; +• +a pro rata annual bonus for the year of termination; and +• +any earned but unpaid bonus under the Value Creation Plan relating to any milestone achieved prior to the date of termination. +Pursuant to each Executive Employment Agreement with Mr. Stewart and Mr. Powell, in the event of his termination of employment due to death or disability, he will be entitled to: +• +severance payments equal to three months of base salary plus the amount of any Retention Payments paid for the three-month period prior to the date of termination; +• +a pro rata annual bonus for the year of termination; and +• +any earned but unpaid bonus under the Value Creation Plan relating to any milestone achieved prior to the date of termination. +Upon Mr. Powell’s termination of employment other than death or voluntarily without Good Reason, Mr. Powell will also be eligible for reimbursement of the cost of continuation coverage of group health coverage for up to 12 months. +Pursuant to the Executive Employment Agreement with Mr. DeBonis, in the event of a termination of Mr. DeBonis’ employment by us without Cause, subject to his execution of a release, Mr. DeBonis will be entitled to severance payments equal to two times the sum of his annual base salary. +For purposes of the Executive Employment Agreements, “Cause” generally means: +• +indictment, conviction or plea of no contest to a felony or any crime involving dishonesty or theft; +• +conduct in connection with employment duties or responsibilities that is fraudulent or unlawful; +• +conduct in connection with employment duties or responsibilities that is grossly negligent and which has a materially adverse effect on us or our business; +• +willful misconduct or contravention of specific lawful directions related to a material duty or responsibility directed to be undertaken from our board; +• +material breach of obligations under the applicable Executive Employment Agreement; +• +any acts of dishonesty resulting or intending to result in personal gain or enrichment at our expense; +• +failure to comply with a material policy; or +• +for Mr. Powell, his failure to maintain primary residence in the Houston, Texas metropolitan area. +For purposes of the Executive Employment Agreements with Messrs. Stewart and Powell, “Good Reason” generally means: +• +our failure to cure a material breach of our obligations under the applicable Executive Employment Agreement; +• +a material diminution of duties, position or title (in the case of Mr. Stewart, other than any diminution in connection with the appointment of a new Chairman or Chief Executive Officer if following such appointment Mr. Stewart remains as either Chairman or Chief Executive Officer); +• +a material reduction in base salary; or +142 +• +a change in office location that increases the NEO’s commute from his principal residence by more than 50 miles. +Outstanding Equity Awards at Fiscal Year End 2016 +As of December 31, 2016, none of our NEOs held an unexercised or unvested equity award. +Director Compensation +Director Compensation Table +Three current members of our board of directors, Elmer D. Reed, Marc G. R. Edwards and Gary M. Halverson, and one former member of our board of directors, Gary Moore, received compensation for service on our board of directors during 2016, as set forth in the table below and as described in “—Director Compensation—Narrative Disclosure to Director Compensation Table.” +(in dollars) +Name +Fees +Earned or +Paid in +Cash +Unit +Awards(1) +Option +Awards +Non-Equity +Incentive Plan +Compensation +Change in +Pension Value +and non- +qualified +Deferred +Compensation +Earnings +All Other +Compensation +Total +Gary Moore +$ +22,167 +$ +— +$ +22,167 +Elmer D. Reed +70,833 +129,132 +199,965 +Marc G. R. Edwards +25,000 +215,294 +240,294 +Gary M. Halverson +18,750 +129,177 +147,927 +(1) +Reflects the grant date fair value calculated in accordance with ASC 718 of $ 73.20 per Series 2 Class B Units granted to Messrs. Reed, Edwards and Halverson (1,764.1, 2,941.2, 1,764.7 Units, respectively). See Note 13 (Unit-Based Compensation) in our consolidated financial statements, included in this Annual Report on Form 10-K, for a discussion of the assumptions used in the valuation of unit-based awards. +Narrative Disclosure to Director Compensation Table +Director Services Agreements +We have entered into Director Services Agreements with each of Marc G. R. Edwards, Gary M. Halverson and Elmer D. Reed. The Director Services Agreements provide that each such director serve on an at-will basis until the earlier of disability, death, resignation or removal. +Pursuant to the Director Services Agreement with Mr. Edwards, he serves as our lead director and is entitled to receive an annual fee of $100,000 per year. The Director Services Agreements with Messrs. Halverson and Reed provide that each director is entitled to receive an annual fee of $75,000 per year. +In addition to the Director Services Agreements with Messrs. Edwards, Halverson and Reed, each of our other non-employee directors will be entitled to receive an annual fee of $75,000 per year. +Prior to Gary Moore’s resignation from our board of directors, we were party to a Director Services Agreement with Mr. Moore pursuant to which he was entitled to receive an annual fee of $70,000 per year. +Equity Awards +In fiscal year 2016, each of our current independent directors was granted the number of Series 2 Class B Interests (“Series 2 Class B Interest”) of Keane Management Holdings LLC set forth in the table below under the Keane Management Holdings LLC Management Incentive Plan. Each Series 2 Class B Interest represented the economic equivalent of a Series 2 Class B Unit of the company. +143 +Series 2 Class B Interests +Grant Date +Marc G. R. Edwards +2,941.18 +October 1, 2016 +Gary M. Halverson +1,764.71 +October 1, 2016 +Elmer D. Reed +1,764.71 +October 1, 2016 +In connection with the consummation of the IPO, our independent directors received grants of the number of shares of restricted stock set forth in the table below under our Equity and Incentive Award Plan in substitution for the independent director’s outstanding Series 2 Class B Interests. Such restricted stock is subject to substantially the same vesting conditions as the Series 2 Class B Interests. +Subject to continued service with the company or its subsidiaries on each vesting date, the restricted stock will vest in equal installments on each of October 1, 2017, October 1, 2018 and October 1, 2019, and will become fully vested upon a change in control. All unvested restricted stock will be forfeited upon a termination of service for any reason, except that upon a termination of service without cause, (i) all unvested restricted stock that would have vested on the next vesting date following the termination will vest upon such termination and (ii) the remaining unvested restricted stock will remain outstanding for a period of 90 days following the termination date and will vest if a change in control occurs during such 90-day period. +Shares of Restricted Stock +Marc G. R. Edwards +52,082 +Gary M. Halverson +31,249 +Elmer D. Reed +31,249 +Compensation Committee Interlocks and Insider Participation +None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee. +144 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters +Equity Compensation Plan Information +In accordance with the rules of the SEC, the following table sets forth information about our equity compensation plans as of December 31, 2016. As of December 31, 2016, we had one equity compensation plan, the Keane Management Holdings LLC Management Incentive Plan, which was approved by the security holders of Keane Management Holdings LLC. +Number of securities to be issued upon exercise of outstanding options, warrants and rights +(#) +Weighted-average exercise price of outstanding options, warrants and rights +($) +Number of securities remaining available for future issuance under equity compensation plans +(#) +Equity compensation plans approved by security holders (1) +— +— +78,431 +Equity compensation plans not approved by security holders +— +— +— +Total +— +— +78,431 +(1) +In connection with the IPO and the Organizational Transactions, the Keane Management Holdings LLC Management Incentive Plan was assigned to and assumed by Keane Investor and no further awards will be granted thereunder. +In January 2017, our board of directors and stockholders approved our Equity and Incentive Plan. The table above does not include any amounts issuable under our Equity and Incentive Plan. +Security Ownership of Certain Beneficial Owners and Management +The following table sets forth information regarding the beneficial ownership of our common stock as of March 20, 2017 by: +• +each person who is known by us to beneficially own 5% or more of our outstanding shares of capital stock; +• +the selling stockholder; +• +each member of our board of directors; +• +each of our executive officers named in the Summary Compensation Table under “Item 11. Executive Compensation”; and +• +all of our directors and executive officers as a group. +145 +Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. None of the persons listed in the following table owns any securities that are convertible into common stock at his or her option currently or within 60 days of our listing date on the NYSE. Unless otherwise indicated, the address for each 5% stockholder, director and executive officer listed below is c/o Keane Group, Inc., 2121 Sage Road, Suite 370, Houston, TX 77056. +Shares of common stock beneficially owned +Name of Beneficial Owner +(#) +(%) +5% Stockholders : +Keane Investor Holdings LLC(1)(2) +72,239,439 +70.0% +Directors : +James C. Stewart +— +— +Lucas N. Batzer +— +— +Dale M. Dusterhoft +— +— +Marc G. R. Edwards +* +* +James E. Geisler +— +— +Lisa A. Gray +— +— +Gary M. Halverson +* +* +Shawn Keane +— +— +Elmer D. Reed +* +* +Lenard B. Tessler +— +— +Scott Wille +— +— +Named Executive Officers : +Gregory L. Powell +— +— +M. Paul DeBonis Jr. +— +— +All directors and executive officers as a group(3) (16 persons) +* +* +* +Represents less than 1%. +(1) +Keane Investor is held by a private investor group, including affiliates of Cerberus, members of the Keane family, Trican Well Service, L.P. and certain current members of management. Messrs. Batzer, Geisler, Tessler, Wille and Ms. Gray are affiliated with Cerberus. Affiliates of Cerberus have indirect economic interests in 55,144,294 shares, or 53.5% of our outstanding common stock, calculated based on Cerberus’ Class A interests in Keane Investor. Mr. Dusterhoft is Chief Executive Officer and a director of Trican Well Service, L.P., which has, through its ownership of Class A Units in Keane Investor, indirect economic interests in 7,223,944 shares, or 7.0% of our outstanding common stock. Shawn Keane is affiliated with several of the Keane Parties (as defined herein) that own Class A Units in Keane Investor and which, collectively, have indirect economic interests in 9,871,202 shares, or 9.6% of our outstanding common stock. As a result of the IPO, several members of our management, including Messrs. Stewart, Powell and DeBonis and 2 additional officers, hold 90,000 Class B Units in Keane Investor. As a result, such individuals will be entitled to certain cash distributions from Keane Investor following the distribution of $468 million to holders of Class A Units in Keane Investor. Trican Well Service, L.P. also holds Class C Units in Keane Investor that entitle Trican to certain cash distributions from Keane Investor following certain distributions to the holders of Class A Units and Class B Units. See “Item 13. Certain Relationships and Related-Party Transactions and Director Independence.” +(2) +The address for Keane Investor Holdings LLC and Messrs. Batzer, Geisler, Tessler, Wille and Ms. Gray is c/o Cerberus Capital Management, L.P., 875 Third Avenue, New York, New York 10022. +146 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $1.0 million , $0.7 million and $0.3 million for 2016 , 2015 , 2014 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Ceberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +IPO-Related Transactions +In connection with our corporate reorganization, we engaged in transactions with affiliates and our Existing Owners. See “Item 1. Business—Initial Public Offering and Organizational Transactions” for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +147 +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a stockholders agreement with Keane Investor (the “Stockholders’ Agreement”). The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each +148 +such Holder, a “Demand Holder”) may, at any time after 180 days following the completion of the IPO request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period, that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40,000,000, and that we are not required to effect more than five demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of the IPO to its equity holders, Holders other than Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we were required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• +from the date on which Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of Keane and our board of directors, and all applicable legal, regulatory +149 +and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• +for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party +150 +Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure +151 +that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• +the Related Party’s interest in the Related Party Transaction; +• +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• +whether the transaction is being undertaken in the ordinary course of business of the company; +• +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• +the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• +whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• +whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• +any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• +Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• +Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +152 +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +153 +Item 14. Principal Accountant Fees and Services +Audit Fees +The following table summarizes fees paid or accrued to our independent registered public accounting firm, KPMG LLP (“KPMG”), in connection with various services for the years ended December 31, 2015 and 2016 respectively: +(Thousands of Dollars) +2016 +2015 +Audit Fees (1) +$ +671 +$ +288 +Audit –Related Fees (2) +1,832 +7 +Tax Fees (3) +231 +138 +All Other Fees (4) +45 +— +Total +$ +2,779 +$ +432 +(1) +Consists of fees for professional services rendered for the audits of our consolidated financial statements for fiscal years 2016 , 2015 and 2014 included in our Registration Statement on Form S-1 and Annual Report on Form 10-K +(2) +Consists of fees billed for assurance and related services, primarily related to our initial public offering. +(3) +Consists of fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning. +(4) +Consists of fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees. +Pre-Approval Policy +Our audit and risk committee has adopted a policy (the “Pre-Approval Policy”), that sets forth the procedures and conditions pursuant to which audit and non-audit services proposed to be performed by the independent auditor may be pre-approved. The Pre-Approval Policy generally provides that we will not engage KPMG to render any audit, audit-related, tax or permissible non-audit service unless the service is either (i) explicitly approved by the audit and risk committee (“specific pre-approval”) or (ii) entered into pursuant to the pre-approval policies and procedures described in the Pre-Approval Policy (“General Pre-Approval”). Unless a type of service to be provided by KPMG has received General Pre-Approval under the Pre-Approval Policy, it requires specific pre-approval by the audit and risk committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval. On an annual basis, the audit and risk committee reviews and generally pre-approves the services (and related fee levels or budgeted amounts) that may be provided by KPMG without first obtaining specific pre-approval from our audit and risk committee. Our audit and risk committee may revise the list of general pre-approved services from time to time, based on subsequent determinations. +During 2016 and 2015 , no services were provided to us by KPMG other than in accordance with the pre-approval policies and procedures described above. +154 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +Keane Group, Inc. +Audited Financial Statements +Report of Independent Registered Public Accounting Firm +72 +Balance Sheet as of December 31, 2016 +73 +Notes to Balance Sheet +74 +Keane Group Holdings, LLC +Audited Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm +77 +Consolidated Balance Sheets +78 +Consolidated Statements of Operations and Comprehensive (Loss) +79 +Consolidated Statements of Changes in Members’ Equity +80 +Consolidated Statements of Cash Flows +81 +Notes to Consolidated Financial Statements +83 +155 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Incorporated by Reference +Exhibit +Number +Exhibit Description +Filed/ +Furnished +Herewith +Form +File No. +Exhibit +Filing +Date +3.1 +Certificate of Incorporation of Keane Group, Inc., including Amendment of Certificate of Incorporation, dated October 13, 2016 +S-1 +333-215079 +3.1 +12/14/16 +3.2 +Bylaws of Keane Group, Inc. +* +4.1 +Stockholders’ Agreement, dated as of January 20, 2017, by and among Keane Group, Inc. and the stockholders named therein +8-K +001-37988 +10.1 +1/26/17 +10.1 +Asset-Based Revolving Credit Agreement, dated February 17, 2017, by and among Keane Group Holdings, LLC, as the Lead Borrower, Keane Frac LP and KS Drilling, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent +8-K +001-37988 +10.1 +2/23/17 +10.2 +Term Loan Agreement, dated March 15, 2017, among Keane Group, Inc., as the Parent Guarantor, Keane Group Holdings, LLC, as the Lead Borrower, the borrowers thereto, the Lenders Party thereto, and Owl Rock Capital Corporation, as administrative and collateral agent and lead arranger +* +10.3 +Keane Management Holdings LLC Management Incentive Plan +S-1 +333-215079 +10.6 +12/14/16 +10.4 +Keane Group, Inc. Equity and Incentive Award Plan +* +10.5 +Form of Keane Group, Inc. Executive Incentive Bonus Plan +S-1 +333-215079 +10.8 +12/14/16 +10.6 +Form of Indemnification Agreement +S-1 +333-215079 +10.9 +12/14/16 +10.7 +Form of Director Services Agreement +S-1 +333-215079 +10.10 +12/14/16 +10.8 +Form of Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James C. Stewart +S-1 +333-215079 +10.11 +12/14/16 +10.9 +Form of Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Gregory L. Powell +S-1 +333-215079 +10.12 +12/14/16 +10.10 +Form of Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and M. Paul DeBonis Jr. +S-1 +333-215079 +10.13 +12/14/16 +156 +10.11 +Employment Agreement, dated as of October 20, 2016, by and between Keane Group Holdings, LLC and Kevin M. McDonald +S-1 +333-215079 +10.14 +12/14/16 +10.12 +Employment Agreement, dated March 15, 2016, by and between KGH Intermediate Holdco II, LLC and James J. Venditto +S-1 +333-215079 +10.15 +12/14/16 +10.13 +Employment Agreement, dated as of February 1, 2016, by and between Keane Group Holdings, LLC and Ian J. Henkes +S-1 +333-215079 +10.16 +12/14/16 +10.14 +Form of Amendment to Employment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James J. Venditto +S-1 +333-215079 +10.17 +12/14/16 +10.15 +Form of Amendment to Employment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Ian J. Henkes +S-1 +333-215079 +10.18 +12/14/16 +10.16 +Form of Assignment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Kevin M. McDonald +S-1 +333-215079 +10.19 +12/14/16 +10.17 +Keane Value Creation Plan +S-1 +333-215079 +10.20 +12/14/16 +10.18 +Limited Liability Company Agreement of Keane Investor Holdings LLC, dated as of January 20, 2017, by and among Cerberus International II Master Fund, L.P., Cerberus Institutional Partners, L.P. — Series Four, Cerberus Institutional Partners V, L.P., Cerberus CP Partners, L.P., Cerberus MG Fund, L.P., CIP VI Overseas Feeder, Ltd., CIP VI Institutional Feeder, L.P., JS Keane Coinvestor LLC, Trican Well Services, L.P., SJK Family Limited Partnership, LP, KCK Family Limited Partnership, LP, Tim Keane, Brian Keane, SJ Keane Family Trust, Jacquelyn Keane, Cindy Keane, KC Family Trust, Cerberus Capital Management, L.P., S & K Management Services, LLC and the Persons listed on Schedule A thereto +8-K +001-37988 +10.4 +1/26/17 +10.19 +Asset Purchase Agreement, dated as of January 25, 2016, by and among Keane Group Holdings, LLC, Keane Frac, LP, Trican Well Service Ltd. and the seller companies named therein +S-1 +333-215079 +10.22 +12/14/16 +10.20 +Intellectual Property License Agreement, dated as of March 16, 2016, by and between Trican Well Service Ltd. and Keane Frac LP +S-1 +333-215079 +10.23 +12/14/16 +10.21 +Intellectual Property License Agreement, dated as of March 16, 2016, by and among Trican Well Service Ltd., Trican Well Service, L.P. and Keane Frac LP +S-1 +333-215079 +10.24 +12/14/16 +10.22 +Keane Group, Inc. Form of Restricted Stock Award +8-K +001-37988 +10.3 +1/26/17 +10.23 +Keane Group, Inc. Form of Deferred Stock Award Agreement +* +21.1 +Schedule of Subsidiaries of Keane Group, Inc. +** +157 +23.1 +Consent of KPMG LLP, Independent Registered Public Accounting Firm +** +23.2 +Consent of KPMG LLP, Independent Registered Public Accounting Firm +** +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +** +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +** +32.1 +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +** +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** Furnished herewith. +Item 16. Form 10-K Summary +None. +158 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 20, 2017 . +Keane Group, Inc. +(Registrant) +By: +/s/ James C. Stewart +James C. Stewart +Chairman and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +159 +Signature +Title +Date +/s/ James C. Stewart +Chairman and Chief Executive Officer +(Principle Executive Officer) +March 20, 2017 +James C. Stewart +/s/ Gregory L. Powell +President and Chief Financial Officer +(Principle Financial Officer) +March 20, 2017 +Gregory L. Powell +/s/ Marc G. R. Edwards +Lead Director +March 20, 2017 +Marc G. R. Edwards +/s/ Lucas N. Batzer +Director +March 20, 2017 +Lucas N. Batzer +/s/ Dale M. Dusterhoft +Director +March 20, 2017 +Dale M. Dusterhoft +/s/ James E. Geisler +Director +March 20, 2017 +James E. Geisler +/s/ Lisa A. Gray +Director +March 20, 2017 +Lisa A. Gray +/s/ Gary M. Halverson +Director +March 20, 2017 +Gary M. Halverson +/s/ Shawn Keane +Director +March 20, 2017 +Shawn Keane +/s/ Lenard B. Tessler +Director +March 20, 2017 +Lenard B. Tessler +/s/ Elmer D. Reed +Director +March 20, 2017 +Elmer D. Reed +/s/ Scott Wille +Director +March 20, 2017 +Scott Wille +160 \ No newline at end of file diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/filing_metadata.csv b/raw/filings/0001688476/2016/0001688476-17-000007/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c679486dd820d886fc58be1df746036da7edf27f --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2017-03-21,2016-12-31,2017-03-21T00:09:15.000Z,0001688476-17-000007,a201610-kdoc.htm,10-K,4797701,0,0,https://www.sec.gov/Archives/edgar/data/1688476/000168847617000007/a201610-kdoc.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847617000007/,2016,2016,1 diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/item1.txt b/raw/filings/0001688476/2016/0001688476-17-000007/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0964d4e491b60bb2201e42b600c65ff26eb6759 --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/item1.txt @@ -0,0 +1,189 @@ +Item 1. Business +Initial Public Offering and Organizational Transactions +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock at a public offering price of $19.00 per share, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. We received $260.3 million in net proceeds after deducting $19.4 million of underwriting discounts and commissions associated with the shares sold by us and $18.6 million of underwriting discounts and commissions payable by us associated with the shares sold by the selling stockholder. The net proceeds were used to (i) fully repay our existing balance of approximately $99 million under our 2016 Term Loan Facility (as defined herein), and, in addition, approximately $13.8 million of prepayment premium related to such repayment and (ii) repay $50.0 million of our Notes (as defined herein), and, in addition, approximately $0.5 million of prepayment premium related to such repayment. The remaining $97.0 million is to be used for general corporate purposes. We did not receive any of the proceeds from the sale of shares of common stock sold by the selling stockholder. +Keane is a holding company with no direct operations. In connection with the IPO, we completed a series of organizational transactions, including the following: +• +Certain entities affiliated with our Sponsor, certain members of the Keane family, Trican and certain members of our management, whom we refer to as our “Existing Owners,” contributed all of their direct and indirect equity interests in Keane Group Holdings, LLC to Keane Investor Holdings LLC (“Keane Investor”); +• +Keane Investor contributed all of its equity interests in Keane Group to Keane in exchange for common stock of Keane; and +• +our independent directors received grants of restricted stock of Keane in substitution for their interests in Keane Group. +As a result of these transactions, certain other transactions completed in connection with the IPO (collectively, the “Organizational Transactions”) and the IPO, (i) Keane is a holding company with no material assets other than its ownership of Keane Group and its subsidiaries, (ii) an aggregate of 72,354,019 shares of our common stock are owned by Keane Investor and our independent directors, and Keane Investor entered into the Stockholders’ Agreement (as defined herein) with Keane, (iii) our Existing Owners became holders of equity interests in our controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of Keane consists of (y) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (z) undesignated and unissued preferred stock. +4 +Our Company +We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. With approximately 944,250 hydraulic horsepower spread across 23 hydraulic fracturing fleets and 23 wireline trucks located in the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and other active oil and gas basins, we provide industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. Our company prides itself on our outstanding employee culture, our efficiency and our ability to meet and exceed the expectations of our customers and communities in which we operate. +We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. We believe our proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity, and multiple fracturing stages in challenging high-pressure formations. +We operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation and the Bakken Formation. We are one of the largest providers of hydraulic fracturing services in the Permian Basin, the Marcellus Shale/Utica Shale and the Bakken Formation by total hydraulic horsepower deployed. +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. We seek to deploy our assets with well-capitalized customers that have long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach increases efficiencies and provides potential cost savings for our customers, allowing us to broaden our relationships with existing customers and attract new ones. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and challenges. +We believe the demand for our services will increase over the medium and long-term as a result of a number of favorable industry trends. While drilling and completion activity has improved along with a rebound in commodity prices from their lows in early 2016 of $26.19 per barrel (based on the Cushing WTI Spot Oil Price (“WTI”)) and $1.49 per million British Thermal Units (“mmBtu”) for natural gas, we believe there are long-term fundamental demand and supply trends that will benefit our company. We believe demand for our services will grow from: +• increases in customer drilling budgets focused in our core service areas; +• increases in the percentage of rigs that are drilling horizontal wells; +• increases in the length of the typical horizontal wellbore; +• increases in the number of fracture stages in a typical horizontal wellbore; and +• increases in pad drilling and simultaneous fracturing/wireline operations. +We believe demand and pricing for our services will be further enhanced by a reduction in available hydraulic fracturing equipment as a result of: +• cannibalization of parked equipment and increased maintenance costs; +• aging of existing fleets given the limited investment since the industry downturn in late 2014; +• +increased customer focus on well-capitalized, safe and efficient service providers that can meet or exceed their requirements; and +5 +• reduced access to capital for fleet acquisition, maintenance and deployment. +Pricing levels for our industry’s services are driven primarily by asset utilization. With the downturn in commodity prices from late 2014 into 2016, per Coras Research, LLC, asset utilization across the hydraulic fracturing industry declined from 77% at the end of 2014 to 60% at the end of 2016. As of December 31, 2016, of our total 23 hydraulic fracturing fleets, 13 fleets, or 56% of our total fleets, were deployed. We believe our asset utilization rate reflects the quality of our assets and services. +In addition, due to lack of investment in maintenance and aging equipment, per Coras Research, LLC, approximately 89% of active industry equipment was deployed as of December 31, 2016. As of December 31, 2016, we had 16 active hydraulic fracturing fleets, of which 13 fleets, or 87%, were deployed. As of February 28, 2017, we had 16 active hydraulic fracturing fleets, all of which were deployed. Based on current pricing for component parts and labor, we believe our remaining seven inactive fleets can be made operational at a cost of less than $2.0 million per fleet. +Our History +Our company was founded in 1973 by the Keane family in Lewis Run, Pennsylvania. We have been well regarded as a customer-focused operator that prioritizes safety, the environment and our relationship with the communities in which we operate. We are committed to maintaining conservative financial policies and a disciplined approach to asset deployment, adding new capacity with customers with significant capital budgets and steady development programs rather than on a speculative basis. +We have developed what we believe is an industry-leading, completions-focused platform by emphasizing health, safety and environmental stewardship as our highest priority, implementing an efficient cost structure focused on disciplined cost controls, establishing a sophisticated supply chain and investing in state-of-the-art systems and leveraging technology and infrastructure to support growth. Through these initiatives, our platform has demonstrated the ability to scale with an increase in activity. For example, in 2013, we organically entered into the Bakken Formation, where we remain one of the most active service providers, and, in 2014, we successfully recruited and integrated over 450 employees into our business, resulting in a 74% increase in our employee base. +We believe that our ability to identify, execute and integrate acquisitions is a competitive advantage. We have demonstrated the ability to grow both organically and through opportunistic acquisitions. From 2010 to 2014, we organically added seven hydraulic fracturing fleets deployed across the Marcellus Shale/Utica Shale, the Bakken Formation and the Permian Basin. We have also completed three acquisitions that have diversified our geographic presence and service line capabilities. In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with wireline operations capabilities in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we completed the opportunistic acquisition of Trican’s U.S. oilfield service operations resulting in the expansion of our hydraulic fracturing operations to the current 23 fleets and establishing Keane as one of the largest pure-play providers of integrated well completion services in the U.S. with approximately 944,250 hydraulic horsepower. This acquisition added high quality equipment, provided increased scale in key operating basins, expanded our customer base and offered significant cost reduction opportunities. We implemented a plan to achieve over $80 million of annualized cost savings as a result of facility consolidations, head count rationalization and procurement savings. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide integrated services solutions. We intend to continue to evaluate potential acquisitions on an opportunistic basis that would complement our existing service offerings or expand our geographic capabilities. +Our Competitive Strengths +We believe that technical expertise, fleet capability, equipment quality and robust preventive maintenance programs, integrated solutions, experience, scale in leading basins and health, safety and environmental (“HSE”) performance are the primary differentiating factors within the industry. We specialize in providing customized completion solutions to our customers that increase efficiency, improve safety and lower their overall cost. +6 +Accordingly, we believe the following strengths differentiate us from many of our competitors and contribute to our ongoing success: +Multi-Basin Service Provider with Close Proximity to Our Customers. +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale. These regions are expected to account for approximately 87% of all new horizontal wells anticipated to be drilled between 2017 and 2020. In addition, the high-density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +In particular, we are one of the largest providers in the Permian Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the United States, respectively. According to Spears & Associates, the Permian Basin and the Marcellus Shale/Utica Shale are expected to account for the greatest crude oil and natural gas production growth in the U.S. through 2020 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, representing approximately 59% of the increase in U.S. rig count from its May 2016 low of 404 to 658 as of December 2016. +Our Houston, Texas-based headquarters, eight field offices and numerous management and sales offices are in close proximity to unconventional resource plays which allows us to take a hands-on approach to customer relationships at multiple levels within our organization, anticipate our customers’ needs and efficiently deploy our assets. +The below map represents our areas of operation: +Customer-Tailored Approach. +We seek to develop long-term partnerships with our customers by investing significant time and effort educating them on our value proposition and maintaining a continuous dialogue as we deliver ongoing service. We believe our direct line of communication with our customers at the senior management level as well as with key operational managers in the field provides us with the ability to address issues quickly and efficiently and is highly valued by our customers. In November 2016, we received Shell Global Solutions International’s annual Well Services Performance Award in recognition of our Permian Basin team’s exceptional 2016 performance and customer service in hydraulic fracturing and wireline services. +7 +In connection with the Trican transaction, we acquired our Engineered Solutions Center, which we believe provides value-added capabilities to both our new and existing customers. We believe our Engineered Solutions Center enables us to support our customers’ technical specifications with a focus on reducing costs and increasing production. As pressure pumping complexity increases and the need for comprehensive, solution-driven approaches grows, our Engineered Solutions Center is able to meet our customers’ business objectives cost-effectively by offering flexible design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (1) economical and effective fracture designs, (2) enhanced fracture stimulation methods, (3) next-generation fluids and technologically advanced diverting agents, such as MVP Frac ™ and TriVert ™ , which we received the right to use as part of the Trican transaction, (4) dust control technologies and (5) customized solutions to individual customer and reservoir requirements. +Track Record of Providing Safe and Reliable Solutions. +Safety is our highest priority and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate (“TRIR”), which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. We believe we have an industry leading behavior-based safety program to ensure each employee understands the importance of safety. Depending on job requirements, each new employee goes through a rigorous on-boarding and training program, is assigned a dedicated mentor, is routinely subject to our “Fit for Duty” verification program and periodically attends safety and technical certification programs. Our customers seek to protect their field employees, contractors and communities in which they serve as well as minimize the risk of disproportionately high costs that can result from an HSE incident. As a result, our customers demand robust HSE programs from their service providers and view safety records as a key criterion for vendor selection. We believe our safety and training record creates a competitive advantage by enhancing our ability to develop long-term relationships with our customers, allowing us to qualify to tender bids on more projects than many of our competitors and enabling us to attract and retain employees. +Modern, High-Quality Asset Base and Robust Maintenance Program. +We have invested in modern equipment, including dual-fuel fracturing pumps, Tier IV engines, stainless steel fluid ends, dry friction reducer and dry guar, to enhance our efficiency and safety. In addition, our high-quality, heavy-duty hydraulic fracturing and wireline fleets reduce operational downtime and maintenance costs while enhancing our ability to provide reliable, safe and consistent service to our customers. We have approximately 944,250 total hydraulic horsepower and can deploy up to 23 hydraulic fracturing fleets. As of December 31, 2016, we had 13 hydraulic fracturing fleets and eight wireline trucks deployed. We believe we have a robust preventative maintenance program for both our active and inactive fleets which allows us to respond to customer demand in a timely, safe and cost-efficient manner, and we continue to invest in and stock critical parts and components. From April 1, 2016 to December 31, 2016, we commissioned seven hydraulic fracturing fleets to service customers at a total cost of approximately $11.0 million, including capital expenditures. In addition, based on current pricing for component parts and labor, we believe our remaining inactive hydraulic fleets can be made operational at a cost of less than $2.0 million per fleet. Based upon our recent deployment experience, we believe it takes up to 45 days to activate and staff a single well completions fleet including hydraulic fracturing and wireline crews, allowing us to quickly and cost-effectively respond to an increase in customer demand. Our conservative financial profile and continued investment in our assets and fleets should enable us to maintain an efficient operating cost structure as we begin to redeploy assets, ensuring our operators have safe, well-maintained equipment to service our customers. +Flexible Supply Chain Management Capabilities. +Our sophisticated logistics network is comprised of strategically-located field offices, proppant storage facilities and proprietary last-mile transportation solutions. We have a dedicated supply chain team that manages sourcing and logistics to ensure flexibility and continuity of supply in a cost-effective manner across all areas of operation. We maintain multi-year relationships with industry-leading suppliers of proppant and have contracted secure supply at pricing reflecting current market conditions for the majority of our expected demand through 2020, based on existing job designs. We currently have a network of 1,046 modern railcars, which are being leased to us on a multi-year basis, and which provides us with valuable and flexible logistical support for our operations. Our logistics infrastructure also includes access to eight third-party unit train facilities, which improve railcar turn times +8 +and reduce transit costs, and approximately 50 transload facilities. In addition, we own over 120 pneumatic sand-hauling trucks for last-mile transportation to the well site, which gives us the ability to access and deliver proppant where and when needed. We believe our supply chain and logistics network provide us with a competitive advantage by allowing us to quickly respond during periods of increased demand for our services. +Strong Balance Sheet and Disciplined Use of Capital. +We believe our balance sheet strength represents a significant competitive advantage, allowing us to pro-actively maintain our fleet while also pursuing opportunistic initiatives to further grow and expand our base business with new and existing customers. Our customers seek to employ well-capitalized service providers that are in the best position to meet their service requirements and their financial obligations, and, as a result, we intend to continue to maintain a strong balance sheet. +We adjust our capital expenditures based on prevailing industry conditions, the availability of capital and other factors as needed. Throughout the industry downturn that began in 2014, we have prioritized continued investment in our robust maintenance program to ensure our fleet of equipment can be deployed efficiently as demand recovers. At December 31, 2016, we had $48.9 million on an actual basis and $146.1 million of cash on an as adjusted basis after giving effect to the IPO and the use of net proceeds received by us in connection with the IPO. Additionally, we had $40.3 million of availability under our 2016 ABL Facility (as defined herein), providing us with the means to fund deployment of inactive fleets and grow our operations. After giving effect to the ABL Refinancing Transaction (as defined herein), we would have had $50.4 million of availability under our New ABL Facility (as defined herein) as of December 31, 2016 on an as adjusted basis. As of February 28, 2017, we had $90.3 million of availability under our New ABL Facility. We intend to continue to prioritize maintenance, upgrades, refurbishments and acquisitions, in a disciplined and diligent manner, carefully evaluating these investments based on their ability to maintain or improve our competitive position and strengthen our financial profile while creating value for our shareholders. +Best-in-Class Management Team with Extensive Industry Experience. +The members of our management team are seasoned operating, financial and administrative executives with extensive experience in and knowledge of the oilfield services industry. Our management team is led by our Chairman and Chief Executive Officer, James C. Stewart, who has over 30 years of industry experience. Each member of our management team brings significant leadership and operational experience with long tenures in the industry and respective careers at highly regarded companies, including Schlumberger Limited, Halliburton, Baker Hughes, Weatherford International, Marathon Oil, Anadarko Petroleum and General Electric. The members of our executive management team provide us with valuable insight into our industry and a thorough understanding of customer requirements. +Our Strategy +Our principal business objective is to increase shareholder value by profitably growing our business while safely providing best-in-class completion services. We expect to achieve this objective through: +Efficiently Capitalizing on Industry Recovery. +Hydraulic fracturing represents the largest cost of completing a shale oil or gas well and is a mission-critical service required for the continued development of U.S. shale resources. Upon a recovery in demand for oilfield services in the U.S., the hydraulic fracturing sector is expected to have among the highest growth rates among oilfield service providers. Industry reports have forecasted that the North American onshore stimulation sector, which includes hydraulic fracturing, will increase at a compound annual growth rate, a measure of growth rate for selected points in time, of 10% from 2006 to 2020 and of 30% from 2016 through 2020. As a well-capitalized provider operating in the most active unconventional oil and natural gas basins in the U.S., we believe that our business is well positioned to capitalize efficiently on an industry recovery. We have invested significant resources and capital to develop a market leading platform with demonstrated capabilities and technical skills that is well equipped to address increased demand from our customers. We believe that our rigorous preventative maintenance program provides us with a well-maintained hydraulic fracturing fleet and the ability to deploy inactive fleets +9 +efficiently. Based upon our recent experience and current pricing for components and labor, we believe it will take approximately 45 days to activate a single hydraulic fracturing fleet, allowing us to quickly and cost-effectively respond to an increase in customer demand at a cost of less than $2.0 million per fleet. We also believe we can incrementally deploy each of our wireline trucks in less than 30 days at a nominal cost. +Developing and Expanding Relationships with Existing and New Customers. +We target well-capitalized customers that we believe will be long-term participants in the development of conventional and unconventional resources in the U.S., value safe and efficient operations, have the financial stability and flexibility to weather industry cycles and seek to develop a long-term relationship with us. We believe our high-quality fleets, diverse completion service offerings, engineering and technology solutions and geographic footprint with basin density in some of the most active basins position us well to expand and develop relationships with our existing and new customers. These qualities, combined with our past performance, have resulted in the renewal and new award of service contracts by our customers and by an expansion of the basins in which we operate for these customers. We believe these arrangements will provide us an attractive revenue stream while leaving us the ability to deploy our remaining fleets as industry demand and pricing continue to recover. We have invested in our sales organization, nearly tripling its headcount over the past two years. Together with our sales team, our Chief Executive Officer and our President and Chief Financial Officer are deeply involved with our commercial sales effort, fostering connectivity throughout a customer’s organization to further develop the relationship. We believe this level of senior management engagement differentiates us from many of our larger integrated peers. +Continuing Our Industry Leading Safety Performance and Focus on the Environment. +We are committed to maintaining and improving the safety, reliability, efficiency and environmental impact of our operations, which we believe is key to attracting new customers and maintaining relationships with our current customers, regulators and the communities in which we operate. As a result of our strong emphasis on training and safety protocols, we have one of the best safety records and reputations in the industry which helps us to attract and retain employees. We have maintained a strong safety record even as our employee base increased by 574% over the past four years. From the beginning of 2013 to 2016, our TRIR and lost time incident rate (“LTIR”) dropped by approximately 69% and 75%, respectively, and, for the year ended December 31, 2016, our TRIR and LTIR statistics were 0.22 and 0.06, respectively. We believe we are among the safest service providers in the industry. For example, we achieved a TRIR, which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. In addition, all of our field-based management are provided financial incentives to satisfy safety standards and customer expectations, which we believe motivates them to continually maintain a focus on quality and safety. We work diligently to meet or exceed applicable safety and environmental requirements from our customers and regulatory agencies, and we intend to continue to enhance our safety monitoring function as our business grows and operating conditions change. For example, we have made investments in more efficient engines and dual-fuel kits to comply with customer requirements to reduce emissions and noise at well site. In 2016, the U.S. Environmental Protection Agency (the “EPA”) and the Department of Transportation’s National Highway Traffic Safety Administration jointly finalized standards for new on-road medium- and heavy-duty vehicles and engines that would improve fuel efficiency and cut carbon emissions. In accordance with the new standards, all of the Company’s hydraulic fracturing fleets with model years from 2018 onwards will have Tier IV engines. In addition, we have also invested in spill prevention equipment and remediation systems and dust control technology, which we believe allows us to meet or exceed the latest Occupational Safety and Health Administration (“OSHA”) requirements and standards. We have also deployed high-grade cameras to remotely monitor high-risk zones in our field operations, which we believe helps reduce safety risks to our employees. We believe that our commitment to maintaining a culture that prioritizes safety and the environment is critical to the long-term success and growth of our business. +Investing Further in Our Robust Maintenance Program. +We have in place a rigorous preventative maintenance program to continuously maintain our fleets, resulting in less downtime, reduced equipment failure in demanding conditions, lower operating costs and overall safer and more reliable operations. Due to our strong balance sheet, we have been able to sustain investment in maintenance, including preemptive purchases of key components and upgrades to our fleets throughout the downturn. We believe +10 +that the quality of our fleets and our maintenance program enhance our ability to both secure contracts with new customers and to service our existing customers reliably and efficiently. Our active fleet uptime is reinforced by preventive maintenance on our equipment, allowing us to minimize the negative impact to our customers from equipment failure. In addition, we continue to monitor advances in hydraulic fracturing and wireline technology and make strategic purchases to enhance our existing capabilities. +Maintaining a Conservative Balance Sheet to Preserve Operational and Strategic Flexibility. +We carefully manage our liquidity by continuously monitoring cash flow, capital spending and debt capacity. Our focus on maintaining our financial strength and flexibility provides us with the ability to execute our strategy through industry volatility and commodity price cycles, as evidenced by our recent completion of the Trican transaction and continued investment in our robust maintenance program. We intend to maintain a conservative approach to managing our balance sheet to preserve operational and strategic flexibility. At December 31, 2016, we had $48.9 million and $146.1 million of cash on hand on an actual basis and on an as adjusted basis after giving effect to the use of net proceeds received by us in connection with the IPO, respectively. Additionally, we had $40.3 million of availability under our 2016 ABL Facility, providing us with the means to fund deployment of fleets and grow our operations. After giving effect to the ABL Refinancing Transaction, we would have had $50.4 million of availability under our New ABL Facility as of December 31, 2016 on an as adjusted basis. As of February 28, 2017, we had $90.3 million of availability under our New ABL Facility. +We have further described our outstanding balances and current activities for our Notes, our 2016 Term Loan Facility and the recent New Term Loan Facility (as defined herein) with Owl Rock closed on March 15, 2017, in Note 8 (Long- Term Debts) and Note 25 (Subsequent Events) of Keane Group’s financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. +Continued Evaluation of Consolidation Opportunities that Strengthen Capabilities and Create Value. +We believe that our ability to identify, execute and integrate acquisitions is a competitive advantage. Since 2011, we have completed three acquisitions that have diversified our geographic presence and service line capabilities. In April 2013, we acquired the wireline technologies division of Calmena Energy Services to expand our wireline operations capabilities in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we completed the Trican transaction, creating a leading independent provider of hydraulic fracturing services in the United States. This acquisition added high quality equipment, provided increased scale in key operating basins, expanded our customer base and offered significant cost reduction opportunities. To date we have identified and implemented a plan to achieve over $80 million of annualized cost savings as a result of facility consolidations, head count rationalization and procurement savings. The Trican transaction also provided us access to proprietary technology and engineering capabilities that have enhanced our ability to provide integrated services solutions. We intend to continue to evaluate potential acquisitions on an opportunistic basis that would complement our existing service offerings or expand our geographic capabilities and allow us to earn an appropriate return on invested capital. +Our Industry +Our industry provides oilfield services to North American onshore oil and natural gas exploration and production companies. Demand for our industry’s services is predominantly influenced by the completion of hydraulic fracturing stages in unconventional wells in North America, and is driven by several factors including rig count, well count, service intensity and the timing and style of well completions. Ultimately, these drivers depend primarily on the level of drilling activity by oil and natural gas companies, which, in turn, depends largely on the current and anticipated prices of crude oil, natural gas and natural gas liquids. +Impact of Current and Anticipated Prices for Crude Oil, Natural Gas and Natural Gas Liquids +Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove our industry into a downturn. Following a trough in early 2016, oil prices and natural gas prices have recovered to $53.75 and $3.71, +11 +respectively, or approximately 105%, and 149% respectively, as of December 31, 2016, from their lows in early 2016 of $26.19 and $1.49, respectively. U.S. rig count has recovered to 658 , or approximately 63%, as of December 31, 2016, from its low of 404 in early 2016. Recent events, including declines in North American production and agreements by OPEC members to reduce oil production quotas, have provided upward momentum for energy prices. We believe that recent increases in oil and natural gas prices, as well as moderate relief from the global oversupply of oil and domestic oversupply of natural gas, should increase demand for our services and create a more stable demand environment than has been experienced in the prior 24 months. +The US Energy Information Administration (the “EIA”) projects that the average WTI spot price will increase through 2040 from growing demand and the development of more costly oil resources. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) expectations of continued growth in the U.S. gross domestic product; (ii) an increased likelihood that regulatory and legislative initiatives regarding domestic carbon emissions policy will drive greater demand for cleaner burning fuels such as natural gas; (iii) increased acceptance of natural gas as a clean and abundant domestic fuel source that can lead to greater energy independence of the U.S. by reducing its dependence on imported petroleum; (iv) the emergence of low-cost natural gas shale developments; and (v) continued growth in electricity generation from intermittent renewable energy sources, primarily wind and solar energy, for which natural-gas-fired generation is a logical back-up power supply source. We believe that as the prices of oil and natural gas increase, exploration and production activity will increase, driving an increased demand for our services. +Shale Resources in North America +The combined application of hydraulic fracturing and directional drilling technologies and their refinement continues to provide additional resource potential with new multi-billion barrel fields of oil and trillions of cubic feet of natural gas discovered over last five years. As of 2014, the EIA identified 59 billion barrels of recoverable tight oil and 610 trillion cubic feet of recoverable shale gas within the United States, ranking it second to Russia globally in shale oil resources. We believe that this inventory, which has increased materially due to technological innovation, should create multi-decade demand for our industry’s services. +In addition, we believe that U.S. unconventional shale resources will continue to capture an increasing share of global capital spending on oil and natural gas resources as a result of their competitive positioning on the global cost curve and the relatively low level of political and legal risk in North America as compared to other regions. From 2015 to 2016, demand for global liquids, or oil and natural gas liquid products, increased by approximately 1.8 million barrels per day according to the EIA. The EIA further expects global liquids demand to increase by approximately 1.6 million barrels per day from 2016 to 2017. Similarly, natural gas demand in North America is expected to increase by approximately 1.5 billion cubic feet per day by 2018, largely based upon growth in industrial and household demand, an increase in natural gas exports and continued substitution of gas for coal by utilities and industry. Furthermore, Spears & Associates estimates that capital expenditures for drilling and completion in the contiguous United States will increase by 38% over the next two years, which we believe would benefit our industry. +Increases in Horizontal Drilling Activity and Stages Per Well. +Over the past decade, oil and gas companies have focused on exploiting the vast resource potential available across many of North America’s unconventional resource plays through the application of horizontal drilling and completion technologies, including the use of multi-stage hydraulic fracturing, in order to increase recovery of oil and natural gas. In turn, E&P companies are focused on utilizing drilling and completion equipment and techniques that optimize cost and efficiency. As E&P companies have continued to refine the methodology used to recover oil and natural gas from wells, they have generally favored increases in both the number of hydraulic fracturing stages per well, with growth in per well stage count of approximately 75% between 2012 and 2016, and the amount of proppant used per stage, with growth in proppant per stage of approximately 54% from 2012 to 2016. Both of these secular trends have driven incremental demand for our industry’s services for each completed well due to requirements for larger amounts of equipment. For example, despite a 67% decline in the number of wells drilled from the 2014 to 2016 and excluding the acquisition of the Acquired Trican Operations, we have increased the volume of work our company has performed by 42% during the same period as measured by stage count. +12 +Many industry experts predict a significant recovery in drilling activity in 2017 and 2018. According to Spears & Associates, total U.S. drilling rig count is expected to reach approximately 823 and 982 in 2017 and 2018, respectively, with approximately 79% expected to be drilling wells with horizontal laterals. Due to improvements in technology, including increased lateral lengths and tighter spacing between stages, drilling rigs have become more efficient in recent years. From 2012 to 2016, average wells per horizontal drilling rig have increased from 13.6 wells per rig to 21.1 wells per rig, respectively, and average stages per horizontal well have increased from 16.3 stages per well to 28.5 stages per well, respectively. +Demand for our industry’s services is also influenced by the natural decline in productivity of shale oil and gas wells over time. The amount of hydrocarbons produced from a typical shale oil and gas well declines more quickly than a conventional well, with production from a shale well generally falling substantially in the first year. New wells are required to be brought online relatively quickly to replace production lost from the natural decline. As a result of the high average production decline rates and current demand forecasts, we believe that a large number of wells will need to be drilled and completed on a continuous basis to offset production declines. +In addition, according to the EIA, an estimated 5,379 drilled but uncompleted (“DUC”) wells were in backlog as of December 2016, which we believe will provide a near-term source of demand for completion related services. The decline in commodity prices that began in late 2014 resulted in many E&P companies delaying the completion or fracturing of drilled wells, which represents approximately 36% of the total cost of a well. In connection with the increase and stabilization of the price of oil, E&P companies have recently begun to work through their DUC inventory in select basins, such as the Permian Basin and Bakken Formation, allowing us to deploy additional resources to such basins as a result. +Decline in Number of Service Providers, Deployable Capacity and Skilled Labor as a Result of Cyclical Downturn +From late 2009 through late 2014, there was a rapid increase in the demand for fracturing services. This growth in demand was met with an influx of new companies providing such services and a large increase in deployable hydraulic fracturing equipment. Since late 2014, the significant decline in demand for hydraulic fracturing services and resulting overcapacity in the market have led to industry consolidation and attrition, with the estimated number of service providers shrinking from a peak of 54 service providers in 2014 to 39 service providers as of December 31, 2016. As of December 31, 2016, based on estimated deployable capacity, there were six large providers with over 1 million horsepower, 10 medium-sized providers, including us, with between 300,000 and 1 million horsepower, and 23 smaller providers with less than 300,000 horsepower. We believe industry consolidation will position our company to succeed as demand for our industry’s services continues to increase. +We also believe that the financial distress of many of our competitors has caused them to significantly lower maintenance spending, and instead remove existing parts and components from idle equipment to service active equipment, which has reduced, and will continue to reduce, the amount of deployable equipment. While the total supply of deployable equipment, as compared to marketed equipment, is opaque, industry analysts estimate that total marketed and deployable capacity has declined between 25% and 50% from its peak. Due to the significant wear and tear on working equipment from high service intensity, the potential cost for other providers to redeploy older, idle fleets may be as much as $10 million to $20 million per fleet, depending on the level of previous use and preventative maintenance spend, as well as the amount of time spent idle. We believe these significant redeployment costs may drive the permanent retirement of older equipment by some of our competitors. As demand for our industry’s services increases, we believe we will benefit from our rigorous preventative maintenance program in contrast to many of our competitors’ underinvestment in, and resulting loss of, deployable equipment. +Finally, in addition to the reduction in number of service providers and deployable hydraulic fracturing equipment, headcount of total oilfield service employees in our industry is estimated to have decreased by 46% from its 2014 peak to 2016. We believe that companies that have remained relatively active during the industry downturn, such as ours, will benefit from retaining and developing skilled personnel as demand for our industry’s services increases. +Segments +13 +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our coiled tubing, cementing and drilling divisions. This segmentation is based on the primary end markets we serve, our customer base, the complementary nature of our services, our management structure and the financial information that is reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit, gross margin and resulting synergistic efficiency of utilization. We monitor our cost of services using such metrics as cost of operations per stage for divisions in our Completion Services segment and cost of operations per working day for divisions in our Other Services segment. For further information on our operating segments, please see Note 21 (Business Segments) to the consolidated financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Completion Services Segment +Hydraulic Fracturing . We provide hydraulic fracturing and related well stimulation services to E&P companies, particularly to those operating in unconventional oil and natural gas reservoirs and requiring technically and operationally advanced services. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. Our customers benefit from our expertise in fracturing of horizontal and vertical oil- and natural gas-producing wells in shale and other unconventional geological formations. +The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid—typically a mixture of water, chemicals and guar—into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. Proppant generally consists of raw sand, resin-coated sand or ceramic particles. The fracturing fluid is engineered to lose viscosity, or “break,” and is subsequently removed from the formation, leaving the proppant suspended in the mineral fractures. Once our customer has flushed the fracturing fluids from the well using a controlled flow-back process, the customer manages fluid and water removal. +Our technologically advanced fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. Our hydraulic fracturing units consist primarily of high-pressure hydraulic pumps, diesel engines, radiators and other supporting equipment that are typically mounted on flat-bed trailers. We refer to the group of units and other equipment, such as blenders, data vans, sand storage, tractors, manifolds and high pressure fracturing iron, which are necessary to perform a typical fracturing job as a “fleet,” and the personnel assigned to each fleet as a “crew.” We have 23 hydraulic fracturing fleets, of which 13 were deployed as of December 31, 2016 with crews ranging from 24 to 55 employees each. +An important element of hydraulic fracturing services is determining the proper fracturing fluid, proppant and injection program to maximize results. Our field engineering personnel provide technical evaluation and job design recommendations for customers as an integral element of our hydraulic fracturing service. Technological developments in the industry over the past several years have focused on proppant density control, liquid gel concentration capabilities, computer design and monitoring of jobs and clean-up properties for fracturing fluids. +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale. These regions are expected to account for approximately 87% of all new horizontal wells anticipated to be drilled between 2017 and 2020. +Wireline Technologies . Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that +14 +consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. The ball-activated plug diverts fracturing fluids through the perforations into the formation. Our ability to provide both the wireline and hydraulic fracturing services required for a “plug-and-perf” completion increases efficiencies for our customers by reducing downtime between each process, which in turn allows us to complete more stages in a day and ultimately reduces the number of days it takes our customer to complete a well. We have 23 wireline units, of which eight were deployed as of December 31, 2016 with crews of approximately 10 to 12 employees each. +Other Services Segment +Coiled Tubing . We provide various coiled tubing services to facilitate well servicing and workover operations as well as the completion of horizontal wells. Coiled tubing services involve the use of a flexible, continuous metal pipe spooled on a large reel which is then lowered into oil and natural gas wells to perform various workover applications, including wellbore clean outs and maintenance, nitrogen services, thru-tubing fishing, and formation stimulation using acid and other chemicals. Advantages of utilizing coiled tubing over a more costly workover rig include: (i) the smaller size and mobility of a coiled tubing unit compared to a workover rig, (ii) the ability to perform workover applications without having to “shut-in” the well during such operations, (iii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, and (iv) the ability to direct fluids into a wellbore with more precision. Larger diameter coiled tubing units have recently been utilized for horizontal well completion applications such as (i) the drill out of temporary isolation plugs that separate frac zones, (ii) the clean out of the well for final production after the hydraulic fracturing job has been completed and (iii) in conjunction with hydraulic fracturing operations to stimulate zones not requiring high pressures or significant proppant volume. +Drilling, Cementing, Acidizing and Nitrogen Services . We are also equipped to offer our customers drilling, cementing, acidizing and nitrogen-based well stimulation services. +Equipment +We have approximately 944,250 hydraulic horsepower and can deploy up to 23 fleets, of which 13 fleets were deployed as of December 31, 2016. Our hydraulic fracturing equipment consists of modern units specially designed to handle well completions with long lateral segments and multiple fracturing stages in high-pressure and unconventional formations. We also maintain a fleet of 23 wireline units (of which eight were deployed as of December 31, 2016), seven coiled tubing units, 14 cementing units and two fit-for-purpose Schramm rigs for top-hole air drilling. +Each hydraulic fracturing fleet also includes the necessary blending units, manifolds, data vans and other ancillary equipment. We have the flexibility to allocate pressure pumps and other equipment among our fleets as needed to satisfy customer demand. +Our hydraulic fracturing equipment is comprised of components sourced from manufacturers including Caterpillar, Inc., Cummins, Inc. and Gardner Denver, Inc. and was assembled by various North American companies including Surefire Industries, LLC and UE Manufacturing, LLC. We historically have purchased the majority of our wireline, coiled tubing and cementing units from System One MFG Inc., Surefire Industries, LLC and Peerless Limited, respectively. Our company is not dependent on any one company for the source of our components and assembly of our equipment. We believe our equipment is in good condition and suitable for our current operations. +Customers +Our customers primarily include major integrated and large independent oil and natural gas exploration and production companies. For the year ended December 31, 2016 , our top three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, collectively accounted for approximately 48% of total revenues. For the year ended December 31, 2015 , our top four customers, EQT Production Company, Shell Exploration & Production, XTO Energy and Southwestern Energy Company, collectively accounted for +15 +approximately 90% of total revenues. During the year ended December 31, 2016 and 2015 , on an actual basis, no other customers accounted for 10% or more of our revenues. +Suppliers +We purchase the materials used in our hydraulic fracturing, wireline and other services from various suppliers. In March 2016, in connection with the Trican transaction, Keane received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, such as MVP Frac ™ and TriVert ™ (the “Fracking Fluids”), for Keane’s pressure pumping services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane to purchase the Fracking Fluids from Trican’s suppliers. +During the year ended December 31, 2016, we purchased approximately 5% to 10% of our materials or equipment, as a percentage of overall costs, from Gardner Denver. During the year ended December 31, 2015, we purchased approximately 5% to 10% of our materials or equipment, as a percentage of overall costs, from Surefire Industries, LLC, Santrol, D & I Silica LLC and Precision Additives Inc. +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe that we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, we may not always be able to make alternative arrangements in the event of any interruption or shortage in the supply of certain of our materials. In addition, certain materials for which we do not currently have long-term supply agreements, such as guar (which experienced a shortage and significant price increase in 2012), could experience shortages and significant price increases in the future. As a result, we may be unable to mitigate any future supply shortages and our results of operations, prospects and financial condition could be adversely affected. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the United States, and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. Our integrated hydraulic fracturing and wireline services compete with large, integrated oilfield service companies such as Halliburton Company, Schlumberger Limited and Baker Hughes Incorporated, as well as other companies such as RPC, Inc., Superior Energy Services, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc. and FTS International, Inc. Our hydraulic fracturing services also compete with Calfrac Well Services Ltd., U.S. Well Services, Patterson-UTI Energy, Inc., ProPetro Services, Inc. and Liberty Oilfield Services. In addition, the business segments in which we compete are highly fragmented. We also compete regionally with a significant number of smaller service providers. +We believe that the principal competitive factors in the markets we serve are technical expertise, equipment capacity, work force competency, efficiency, safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on safety, performance and quality of our crews, equipment and services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Cyclical Nature of Industry +We operate in a highly cyclical industry. The key factor driving demand for our services is the level of drilling activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Global supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. Producers tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted in increased supplies +16 +and reduced prices which in turn tend to reduce demand for oilfield services. For these reasons, the results of our operations may fluctuate from quarter to quarter and year to year, and these fluctuations may distort comparisons of results across periods. +Employees +As of December 31, 2016, we employed 1,401 people, of which approximately 72% were compensated on an hourly basis. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. We consider our relationship with our employees to be satisfactory. +Seasonality +Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Our insurance includes coverage for commercial general liability, damage to our real and personal property, damage to our mobile equipment, pollution liability (covering both third-party liabilities and first-party site specific property damage), workers’ compensation and employer’s liability, auto liability and other specialty risks. Our insurance includes various limits and deductibles or self-insured retentions, which must be met prior to, or in conjunction with, recovery. Specifically, our commercial general liability policy provides for a limit of $2 million per occurrence and $4 million per project in the aggregate. Our excess liability program is structured in three layers: the lead policy provides for a limit of $5 million per occurrence and $5 million in the aggregate, with a $10,000 self-insured retention per incident; the second layer provides for a limit of $20 million per occurrence and $20 million in the aggregate, with a $10,000 self-insured retention per incident; and the third layer provides for a limit of $50 million per occurrence and $50 million in the aggregate, with a $10,000 self-insured retention per incident. +To cover potential pollution risks, our commercial generally liability policy is endorsed with sudden and accidental coverage and our excess liability policies provide additional limits of liability for covered sudden and accidental pollution losses. Additionally, we maintain a contractors’ pollution liability program that provides for a +17 +total limit of $20 million per incident and $20 million in the aggregate with a self-insured retention of $100,000 per incident for both sudden and gradual pollution liability. We also maintain $100 million in excess insurance over the contractors’ pollution liability policy for sudden pollution incidents. +In addition, we maintain site specific pollution insurance that provides for a limit of $10 million per incident and $10 million in the aggregate with a $100,000 deductible per incident for both on and off-site clean-up as well as third-party property damage and bodily injury. Our site-specific pollution coverage affords third-party liability and first party clean-up coverage. Our contractors’ pollution liability insurance covers liabilities associated with our hydraulic fracturing operations in the field, while our site-specific pollution insurance covers liabilities arising from insured locations. The insured locations are properties that we own or lease. +Environmental Regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the EPA, issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act, referred to as “CERCLA” or the Superfund law, and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current or former owner or operator of the site where the release occurred and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”), and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties +18 +where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. However, at this time, we have not been made aware of any such releases. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Our compliance, or the consequences of any failure to comply, could have a material adverse effect on our business, financial condition and operational results. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December of 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +19 +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. However, compliance or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition and operational results. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the United States to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (1) stationary and portable equipment and (2) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to foreseeable environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily +20 +injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. See “—Insurance.” +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Safety and Health Regulation +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the proposed new rule regarding respirable silica sand. Although it is not possible to estimate the financial and compliance impact of the proposed respirable silica sand rule or any other proposed rule, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Intellectual Property +Our engineering and technology efforts are focused on providing cost-effective solutions to the challenges our customers face when fracturing and stimulating wells. In connection with the Trican transaction, we acquired our Engineered Solutions Center, which we believe provides value-added capabilities to both our new and existing customers. We believe our Engineered Solutions Center enables us to support our customers’ technical specifications with a focus on reducing costs and increasing production. As pressure pumping complexity increases and the need for comprehensive, solution-driven approaches grows, our Engineered Solutions Center is able to meet our customers’ business objectives cost-effectively by offering flexible design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (1) economical and effective fracture designs, (2) enhanced fracture stimulation methods, (3) next-generation fluids and technologically advanced diverting agents, such as MVP Frac ™ and TriVert ™ , which we received the right to use as part of the Trican transaction, (4) dust control technologies and (5) customized solutions to individual customer and reservoir requirements. +In addition, in connection with the Trican transaction, we acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business. Keane also entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates, other than the Acquired Trican Intellectual Property (as defined herein). See “Item 13. Certain Relationships and Related-Party Transactions and Director Independence—Trican Transaction” for more information. We believe that the proprietary technology and engineering capabilities acquired in the Trican transaction have enhanced our integrated services solutions and better positioned our company to meet our customers’ technical demands. +21 +We believe the information regarding our customer and supplier relationships are also valuable proprietary assets. We have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. Except for the foregoing, we do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Implications of Being an Emerging Growth Company +We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and, for so long as we are an emerging growth company, are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to: +• +not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; +• +not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; +• +reduced disclosure obligations regarding executive compensation; and +• +exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. +We may remain an “emerging growth company” until as late as December 31, 2022, the fiscal year-end following the fifth anniversary of the completion of our IPO, though we may cease to be an emerging growth company earlier under certain circumstances, including if (1) we have more than $1.0 billion in annual revenue in any fiscal year, (2) the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 or (3) we issue more than $1.0 billion of non-convertible debt over a three-year period. +In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to irrevocably “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. +22 \ No newline at end of file diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/item13.txt b/raw/filings/0001688476/2016/0001688476-17-000007/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c393786938260d022c99fbf986ea3fba56b84bc --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/item13.txt @@ -0,0 +1,89 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $1.0 million , $0.7 million and $0.3 million for 2016 , 2015 , 2014 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Ceberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +IPO-Related Transactions +In connection with our corporate reorganization, we engaged in transactions with affiliates and our Existing Owners. See “Item 1. Business—Initial Public Offering and Organizational Transactions” for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +147 +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a stockholders agreement with Keane Investor (the “Stockholders’ Agreement”). The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each +148 +such Holder, a “Demand Holder”) may, at any time after 180 days following the completion of the IPO request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period, that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40,000,000, and that we are not required to effect more than five demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of the IPO to its equity holders, Holders other than Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we were required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• +from the date on which Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of Keane and our board of directors, and all applicable legal, regulatory +149 +and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• +for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party +150 +Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure +151 +that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• +the Related Party’s interest in the Related Party Transaction; +• +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• +whether the transaction is being undertaken in the ordinary course of business of the company; +• +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• +the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• +whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• +whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• +any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• +Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• +Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +152 +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +153 \ No newline at end of file diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/item9a.txt b/raw/filings/0001688476/2016/0001688476-17-000007/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..0d1da9ff0dd4a01501fe40089e427bae2819af1a --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/item9a.txt @@ -0,0 +1,8 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies. +In addition, because we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting . \ No newline at end of file diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/rp_note.txt b/raw/filings/0001688476/2016/0001688476-17-000007/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2016/0001688476-17-000007/rpt_disclosure.txt b/raw/filings/0001688476/2016/0001688476-17-000007/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c393786938260d022c99fbf986ea3fba56b84bc --- /dev/null +++ b/raw/filings/0001688476/2016/0001688476-17-000007/rpt_disclosure.txt @@ -0,0 +1,89 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $1.0 million , $0.7 million and $0.3 million for 2016 , 2015 , 2014 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Ceberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +IPO-Related Transactions +In connection with our corporate reorganization, we engaged in transactions with affiliates and our Existing Owners. See “Item 1. Business—Initial Public Offering and Organizational Transactions” for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +147 +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a stockholders agreement with Keane Investor (the “Stockholders’ Agreement”). The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each +148 +such Holder, a “Demand Holder”) may, at any time after 180 days following the completion of the IPO request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period, that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40,000,000, and that we are not required to effect more than five demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of the IPO to its equity holders, Holders other than Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we were required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• +from the date on which Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of Keane and our board of directors, and all applicable legal, regulatory +149 +and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• +for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• +for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party +150 +Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure +151 +that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• +the Related Party’s interest in the Related Party Transaction; +• +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• +whether the transaction is being undertaken in the ordinary course of business of the company; +• +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• +the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• +whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• +whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• +any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• +Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• +Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +152 +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +153 \ No newline at end of file diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/filing.txt b/raw/filings/0001688476/2017/0001688476-18-000011/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..2cb5edff61fa8016bd74670e3e76724d98c4b598 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/filing.txt @@ -0,0 +1,7640 @@ +10-K +1 +a201710-kxdoc.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, DC 20549 +FORM 10-K +(Mark One) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _____ to _____ +Commission File Number 001-37988 +Keane Group, Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware +38-4016639 +(State or other jurisdiction +of incorporation or organization) +(I.R.S. Employer +Identification No.) +2121 Sage Road, Suite 370, Houston, TX +77056 +(Address of principal executive offices) +(Zip code) +Registrant’s telephone number, including area code: (713) 960-0381 +Title of Each Class +Name of Each Exchange On Which Registered +Common Stock, $0.01, par value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +¨ +Accelerated filer +¨ +Non-accelerated filer +x (do not check if a smaller reporting company) +Smaller reporting company +¨ +Emerging Growth Company +¨ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2017 , was approximately $492.4 million. +As of February 26, 2018, the registrant had 112,243,769 shares of common stock outstanding. +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +13 +Item 1B. +Unresolved Staff Comments +33 +Item 2. +Properties +34 +Item 3. +Legal Proceedings +35 +Item 4. +Mine Safety Disclosures +35 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +36 +Item 6. +Selected Financial Data +39 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +42 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +67 +Item 8. +Financial Statements and Supplementary Data +68 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +133 +Item 9A. +Controls and Procedures +133 +Item 9B. +Other Information +133 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +134 +Item 11. +Executive Compensation +142 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +165 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +166 +Item 14. +Principal Accountant Fees and Services +172 +PART IV +Item 15. +Exhibits and Financial Schedules +173 +Item 16. +Form 10-K Summary +177 +Signatures +178 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• our business strategy; +• our plans, objectives, expectations and intentions; +• our future operating results; +• the competitive nature of the industry in which we conduct our business, including pricing pressures; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• legal proceedings and effect of external investigations; +• the effect of a loss of, or the financial distress of, one or more key customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• the market price and availability of materials or equipment; +• technology; +• +our ability to obtain permits, approvals and authorizations from governmental and third parties and the effects of government regulation; +• planned acquisitions and future capital expenditures; +• our ability to successfully integrate RockPile; +• our ability to service our debt obligations; +• +financial strategy, liquidity or capital required for our ongoing operations and acquisitions and our ability to raise additional capital; +• increased costs as a result of being a public company; +• our status as a controlled company; and +• our ability or intention to pay dividends or to effectuate repurchases of our common stock. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and +1 +prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in any forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in such forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources, such as content and estimates provided by Coras Research, LLC as of December 2017. Coras Research, LLC is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment advisor. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +This Annual Report on Form 10-K includes references to utilization of hydraulic fracturing assets. Utilization for our own fleets, as used in this Annual Report on Form 10-K, is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. For the purposes of this Annual Report on Form 10-K, we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization. Furthermore, we define active fleets as fleets available for deployment and commissioning fleets as idle hydraulic horsepower being converted to active fleets. As a result, as additional fleets are incrementally deployed, our utilization rate increases. +We define industry utilization as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by 45,000 hydraulic horsepower. +We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +On January 25, 2017, we consummated an initial public offering (“IPO”). Our business prior to the IPO was conducted through Keane Group Holdings, LLC and its consolidated subsidiaries (“Keane Group”). To effectuate the IPO, we completed a series of transactions that resulted in a reorganization of our business, resulting in Keane Group, Inc. as a +2 +holding company with no material assets other than its ownership of Keane Group. For further details, see Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data disclosed in Part II, “ Item 6 . Selected Financial Data” and Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations” (collectively, the “Financial Statement Sections”) reflect the consolidated business and operations of Keane Group. Financial results for 2016 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company's predecessor for accounting purposes, as there was no activity under Keane Group, Inc. in 2016. +3 +PART I +References Within This Annual Report +As used in Part I of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds. +Item 1. Business +General description of the business +Founded in 1973, Keane Group, Inc. is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. Through organic growth and four opportunistic acquisitions between 2013 and 2017, we operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation, with approximately 1.2 million hydraulic horsepower spread across 26 hydraulic fracturing fleets, 31 wireline trucks, 24 cementing pumps and other ancillary assets. The five cornerstones of our operating principles and culture continue to be focus on health, safety and environment; efficiency and operational excellence; our partnership with our customers; transparency in our value creation; and our responsibilities to our stakeholders. +In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with a platform to commence wireline operations in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations"), resulting in the expansion of our hydraulic fracturing operations to include approximately 950,000 hydraulic horsepower, increased scale in key operating basins, an expansion in our customer base and significant cost reduction opportunities. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide engineering solutions. In July 2017, we acquired RockPile Energy Services, LLC, resulting in an increase in our pumping capacity by more than 25% and our expanded presence in the Permian Basin and Bakken Formation. We also acquired a high-quality customer base, expanded our service offerings and capabilities within our Other Services segment and integrated certain members of RockPile’s high caliber management team. We ended 2017 with having placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, that will increase our total hydraulic horsepower to more than 1.3 million upon expected delivery during the second and third quarters of 2018. +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our cementing and drilling divisions. Our Completion Services segment accounted for 99% , 98% , and 99% of consolidated revenue during the years ended December 31, 2017, 2016 and 2015, respectively. For further discussion on financial information about our segments, see Note (22) Business Segments of Part II, “ Item 8. Financial Statements and Supplementary Data.” +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid -typically a mixture of water, chemicals and proppant into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +Other Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annual isolation and hydraulic seal, while protecting fresh water zones of our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers' wells. +Drilling. We are equipped to provide top-hole air drilling services. Our drilling services were idled in May 2015. +Business strategy +Our principal business objective is to increase shareholder value by profitably growing our business, while providing best-in-class completion services, with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +capitalizing efficiently on industry recovery; +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities and create value. +For further discussion on the business strategies we plan to continue executing in 2018, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +5 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2017, no customer represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2015, four customers, EQT Production Company, XTO Energy, Shell Exploration & Production and Southwestern Energy Company, individually represented more than 10% of our consolidated revenue. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the U.S., and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. In addition, the business segments in which we compete are highly fragmented. Our integrated hydraulic fracturing and wireline services compete with large, integrated oilfield service companies such as Halliburton Company, Schlumberger Limited, Weatherford International plc and Baker Hughes Incorporated, as well as other companies such as RPC, Inc., Superior Energy Services, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc. and FTS International, Inc. Our hydraulic fracturing services also compete with Calfrac Well Services Ltd., U.S. Well Services, Patterson-UTI Energy, Inc., ProPetro Services, Inc. and Liberty Oilfield Services. We also compete regionally with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, our technical expertise, our equipment capacity, our work force competency, our efficiency, our safety record, our reputation, our experience and our prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored approach, our safety record, the performance and quality of our crews, our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements, such as guar (which experienced a shortage and significant price increase in 2012), could experience shortages and significant price increases in the future. +In March 2016, in connection with the acquisition of the Acquired Trican Operations, Keane received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, such as MVP Frac™ and TriVert™ (the “Fracking Fluids”), for Keane’s pressure pumping services to its customers. The license does not allow Keane to manufacture the Fracking Fluids, but allows Keane to purchase the Fracking Fluids from Trican’s suppliers. +The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business. +6 +Research and Development costs +Our engineering and technology efforts are focused on providing cost-effective solutions to the challenges our customers face when fracturing and stimulating wells. We believe our Engineered Solutions Center, located in The Woodlands, Texas, enables us to support our customers’ technical specifications, by offering flexible, cost-effective design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (i) economical and effective fracture designs, (ii) enhanced fracture stimulation methods, (iii) next-generation fluids and technologically advanced diverting agents, such as MVP Frac™ and TriVert™, which we received the right to use as part of the Trican transaction, (iv) dust control technologies and (v) customized solutions to individual customer and reservoir requirements. +We incurred research and development costs of $3.7 million , $2.2 million and nil for the years ended December 31, 2017, 2016 and 2015, respectively. +Intellectual property +In connection with the acquisition of the Acquired Trican Operations, we acquired ownership of substantially all intellectual property relating primarily to Trican’s U.S. oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business. Keane also entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates. See Part III, “ Item 13 . Certain Relationships and Related-Party Transactions and Director Independence-Trican Transaction” for more information. We believe the proprietary technology and engineering capabilities acquired in the Trican transaction have enhanced our integrated services solutions and better positioned our company to meet our customers’ technical demands. +We believe the information regarding our customer and supplier relationships are also valuable proprietary assets. We have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. Except for the foregoing, we do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis. +Employees +As of December 31, 2017, we employed 2,748 people, of which approximately 80% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices. +Environmental regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to +7 +protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current or former owner or operator of the site where the release occurred and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in +8 +competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +9 +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to foreseeable environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +10 +Safety and health regulation +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieve a total recordable incident rate, which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. We believe we have an industry leading behavior-based safety program to ensure each employee understands the importance of safety. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the proposed new rule regarding respirable silica sand. Although it is not possible to estimate the financial and compliance impact of the proposed respirable silica sand rule or any other proposed rule, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of that web site is https://www.sec.gov/. +11 +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +12 +Item 1A. Risk Factors +RISK FACTORS +Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Risks Related to Our Business and Industry +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry in the U.S., and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources in the U.S. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control, including: +• +prices, and expectations about future prices, for oil and natural gas; +• +domestic and foreign supply of, and demand for, oil and natural gas and related products; +• +the level of global and domestic oil and natural gas inventories; +• +the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the United States; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +available pipeline, storage and other transportation capacity; +• +lead times associated with acquiring equipment and products and availability of qualified personnel; +• +the discovery rates of new oil and natural gas reserves; +• +federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +• +the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• +geopolitical developments and political instability in oil and natural gas producing countries; +• +actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil price and production controls; +13 +• +advances in exploration, development and production technologies or in technologies affecting energy consumption; +• +the price and availability of alternative fuels and energy sources; +• +disruptions due to natural disasters, unexpected weather conditions, etc.; +• +uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; and +• +U.S. federal, state and local and non-U.S. governmental regulations and taxes. +The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. In addition, a decrease in the development of oil and natural gas reserves in our market areas may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices and the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the spending patterns of our customers and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower utilization of, and may be forced to lower our rates for, our equipment and services. +Historical prices for crude oil and natural gas have been extremely volatile and are expected to continue to be volatile. For example, since 1999, oil prices have ranged from as low as approximately $10 per barrel to over $100 per barrel. In recent years, oil and natural gas prices and, therefore, the level of exploration, development and production activity, experienced a sustained decline from the highs in the latter half of 2014 as a result of an increasing global supply of oil and a decision by OPEC to sustain its production levels in spite of the decline in oil prices and slowing economic growth in the Eurozone and China. From late 2014 to second half of 2016, prices +for U.S. oil weakened in response to continued high levels of production by OPEC, a buildup in inventories and lower global demand. OPEC’s recent agreement to reduce its oil production has provided upward momentum for oil and natural gas prices, but member nations may opt to not follow this agreement. Although beginning in late 2016 oil prices and natural gas prices have recovered to $60.46 per barrel and $3.69 per MMbtu, respectively, as of December 29, 2017, the volatility of our industry persists. +As a result of the significant decline in the price of oil, beginning in late 2014, E&P companies moved to significantly cut costs, both by decreasing drilling and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing services. In turn, service providers, including hydraulic fracturing service providers, were forced to lower their operating costs and capital expenditures, while continuing to operate their businesses in an extremely competitive environment. Prolonged periods of price instability in the oil and natural gas industry will adversely affect the demand for our products and services and our financial condition, prospects and results of operations. +Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar geothermal, tidal, fuel cells and biofuels) and fuel conservation measures could reduce demand for our services and create downward pressure on the revenue we are able to derive from such services, as they are dependent on oil and natural gas commodity prices. +14 +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• +equipment defects; +• +vehicle accidents; +• +explosions and uncontrollable flows of gas or well fluids; +• +unusual or unexpected geological formations or pressures and industrial accidents; +• +blowouts; +• +cratering; +• +loss of well control; +• +collapse of the borehole; and +• +damaged or lost drilling equipment. +In addition, our hydraulic fracturing and well completion services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenue, and any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +15 +Litigation and other proceedings could have a negative impact on our business. +The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note ( 18 ) Commitments and Contingencies of Part II, " Item 8 . Financial Statements and Supplementary Data" for further discussion of our legal and environmental contingencies for the years ended December 31, 2017 , 2016 and 2015 . +Competition within the oilfield services industry may adversely affect our ability to market our services. +The oilfield services industry is highly competitive and fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope and retained skilled personnel. We believe the principal competitive factors in the market areas we serve are multi-basin service capability, proximity to customers, technical expertise, equipment capacity, work force competency, efficiency, safety records, reputation experience and price. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than our products and services or expand into service areas where we operate. Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our results of operations, financial condition and prospects. Significant increases in overall market capacity have previously caused price competition and led to lower pricing and utilization levels for our services. +The competitive environment has intensified since late 2014 as a result of the industry downturn and oversupply of oilfield services. We have seen substantial reductions in the prices we can charge for our services based on reduced demand and resulting overcapacity. Any significant future increase in overall market capacity for completion services could adversely affect our business and results of operations. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. For example, from April 1, 2016 through December 31, 2017, we commissioned 14 hydraulic fracturing fleets to service customers at a total cost to deploy of $29.0 million, including capital expenditures. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Further, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, between December 8, 2017 and December 10, 2017, we placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower representing three additional hydraulic fracturing fleets, with anticipated capital expenditures for the three fleets of approximately $115.0 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other completion service related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase the cost to make our inactive fleets operational. +16 +Until recently, we were dependent on a few customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our customers are engaged in the oil and natural gas E&P business in the U.S. Historically, we have been dependent upon a few customers for a significant portion of our revenues. For the year ended December 31, 2017, no customer represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2015, four customers, EQT Production Company, XTO Energy, Shell Exploration & Production and Southwestern Energy Company, individually represented more than 10% of our consolidated revenue. +Our business, financial condition, prospects and results of operations could be materially adversely affected if one or more of our significant customers ceases to engage us for our services on favorable terms or at all or fails to pay or delays in paying us significant amounts of our outstanding receivables. Although we do have contracts for multiple projects with certain of our customers, most of our services are provided on a project-by-project basis. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects and results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and/or results of operations. +Our commitments under supply agreements could exceed our requirements, and our reliance on suppliers exposes us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. Additionally, our reliance on outside suppliers for some of the key materials and equipment we use in providing our services involves risks, including limited control over the price, timely delivery availability and quality of such materials or equipment. In addition to continued growth and demand for sand, some transitory factors that also can potentially affect timely delivery and availability of sand include inclement weather, flooding impacts, rail-related output constraints and delays on opening new mine sources. +Unexpected and immediate changes in the availability and pricing of raw materials, or the loss of or interruption in operations of one or more of our suppliers, could have a material adverse effect on our results of operations, prospects and financial condition. +Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. For example, during 2012, +17 +companies in our industry experienced a shortage of guar, which is a key ingredient in fracturing fluids. This shortage resulted in an unexpected and immediate increase in the price of guar. During 2008, our industry faced sporadic proppant shortages requiring work stoppages, which adversely impacted the operating results of several competitors. An increase in the cost of proppant as a result of increased demand or a decrease in the number of proppant providers could increase our cost of an essential raw material in hydraulic stimulation and have a material adverse effect on our business, operations, prospects and financial condition. We may not be able to mitigate any future shortages of raw materials. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. +Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. +Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations +18 +may impose strict liability, joint and several liability, or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services, thereby possibly having a material adverse impact on our financial condition. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues. +We are subject to the EPA, U.S. Department of Transportation, U.S. Nuclear Regulation Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution. The energy extraction sector is one of the sectors designated for increased enforcement by the EPA, which will continue to regulate our industry in the years to come, potentially resulting in additional regulations that could have a material adverse impact on our business, prospects or financial condition. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the emission control and fuel quality regulations could result in increased costs. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. Additionally, if we expand the size or scope of our operations, we could be subject to existing regulations that are more stringent than the requirements under which we are currently allowed to operate or require additional authorizations to continue operations. Compliance with this additional regulatory burden could increase our operating or other costs. +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substance Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA, such as the proposed regulation relating to respirable silica sand, could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +19 +If the EPA or another federal or state-level agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. The EPA recently issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont have banned or are in the process of banning the use of high volume hydraulic fracturing. Alternatively, some municipalities are or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. For more information, see “ Item 1 . Business—Environmental regulation.” +Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +20 +Comprehensive tax reform bills could adversely affect our business and financial condition. +The U.S. government has enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate, additional limitations on the tax deductibility of interest, immediate deductions for certain new investments instead of deductions for depreciation expense over time and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected. +We use intellectual property relating to hydraulic fracturing fluids and electronic pump control which is subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely affect our business. +Trican has licensed our use of certain of its hydraulic fracturing fluids and electronic pump control technology under non-exclusive agreements. Accordingly, Trican has the right to license the same technologies and fracturing fluids that we use in our operations to our competitors, which could adversely affect our business. The rights obtained under this license may be shared with others who have been granted a similar non-exclusive license. As a result, the non-exclusive nature of this license may lead to conflicts between us and others granted similar rights. +If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share. +We do not have patents or patent applications relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes. +We may be subject to interruptions or failures in our information technology systems. +We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches, or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our sales and profitability. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations including as a motor carrier by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could +21 +adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a more desirable work environment. Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to further expand our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Further, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations. +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect the demand for our services by decreasing the demand for natural gas. In addition, unusually cold winters and other weather conditions could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. For example, recent weather-induced rail congestion, combined with flooding impacts at suppliers’ mines, has contributed to a reduction in the availability of sands used in our operations. Our operations in arid regions can also be affected by droughts and limited access to water used in our hydraulic fracturing operations. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include: +• +curtailment of services; +• +weather-related damage to facilities and equipment, resulting in delays in operations; +• +inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and +• +loss of productivity. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic +22 +fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as New York State and within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +We may not be successful in identifying and making acquisitions. +Part of our strategy to expand our geographic scope and customer relationships, increase our access to technology and to grow our business is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• +failure to identify attractive targets; +• +incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• +failure to obtain financing on acceptable terms or at all; +• +restrictions in our debt agreements; +• +failure to successfully integrate the operations or management of any acquired operations or assets; +• +failure to retain or attract key employees; and +• +diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations of management are combined. Any such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +23 +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• +a failure of our due diligence process to identify significant risks or issues; +• +the loss of customers of the acquired company or our company; +• +negative impact on the brands or banners of the acquired company or our company; +• +a failure to maintain or improve the quality of customer service; +• +difficulties assimilating the operations and personnel of the acquired company; +• +our inability to retain key personnel of the acquired company; +• +the incurrence of unexpected expenses and working capital requirements; +• +our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• +difficulty in maintaining internal controls, procedures and policies; +• +mistaken assumptions about the overall costs of equity or debt; and +• +unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +Our historical financial statements may not be indicative of future performance. +In light of the Trican transaction completed in March 2016 and the RockPile Acquisition completed in July 2017, our operating results only reflect the impact of the acquisition for dates after the closing of the transaction, and, therefore, comparisons with prior periods are difficult. As a result, our limited historical financial performance as the owner of the Acquired Trican Operations and RockPile may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. +Furthermore, as a result of the implementation of new business initiatives and strategies following the completion of the Trican and RockPile transactions, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future. +24 +Risks Related to Owning Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2017 , we had $275.1 million of debt outstanding, net of discounts and deferred financing costs (not including capital lease obligations). After giving effect to our borrowing base, we had approximately $199.7 million of availability under our 2017 ABL Facility. +Our substantial indebtedness could have important consequences to you. For example, it could: +• +adversely affect the market price of our common stock; +• +increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• +require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• +limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• +limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• +place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• +sales of assets; +• +sales of equity; or +• +negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +Despite our significant indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our substantial leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2017 ABL Facility (as defined herein) and the 2017 Term Loan Facility (as defined herein and, together with the 2017 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details. +25 +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2017 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +Risks Related to Owning Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price. +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including +• +the failure of securities analysts to cover, or continue to cover, our common stock, or changes in financial estimates by analysts; +• +changes in, or investors’ perception of, the hydraulic fracturing industry; +26 +• +the activities of competitors; +• +future issuances and sales of our common stock, including in connection with acquisitions; +• +our quarterly or annual earnings or those of other companies in our industry; +• +the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• +regulatory or legal developments in the United States; +• +litigation involving us, our industry, or both; and +• +general economic conditions. +As a result of these factors, you may not be able to resell your shares of our common stock at or above the offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +Keane Investor and our Sponsor control us and may have conflicts of interest with other stockholders in the future. +Keane Investor controls approximately 50.7% of our common stock. As a result, Keane Investor is able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Seven of our 12 directors are employees of, appointees of, or advisors to, members of Cerberus, as described under Part III, “ Item 10. Directors, Officers and Corporate Governance.” Cerberus, through Keane Investor, will also have sufficient voting power to amend our organizational documents. The interests of Cerberus may not coincide with the interests of other holders of our common stock. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to own a significant amount of the outstanding shares of our common stock through Keane Investor, Cerberus will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions. +We are restricted from competing with Trican in the oilfield services business in Canada, which may adversely affect our access to, or our ability to expand within, the Canadian market. +We agreed to a non-competition provision with Trican as part our acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, we may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, we also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. These restrictions may adversely affect our access to or ability to expand within the Canadian market. Additionally, Trican has an ownership interest in Keane Investor, and conflicts of interest may therefore arise between Trican and our other shareholders relating to opportunities to enter into or expand within the Canadian oilfield business. +27 +We will continue to incur increased costs as a result of becoming a publicly traded company. +As a newly public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the New York Stock Exchange (“NYSE”). Being subject to these rules and regulations will result in additional legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place significant strain on management, systems and resources. +These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory actions and potentially civil litigation. +We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. Our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements. +Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: +• the requirement that a majority of the board of directors consist of independent directors; +• the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and +• the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. +We currently utilize, and intend to continue to utilize these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. +Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation and our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• from and after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our +28 +certificate of incorporation (and such assignee’s or designee’s Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited; +• from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited; +• from and after such date that Keane Investor and its respective Affiliates (or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• limits on who may call stockholder meetings; +• requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and, therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +Pursuant to a limited liability company agreement entered into by Cerberus and certain other entities and individuals who agreed to co-invest with Cerberus through Keane Investor (the “Keane Investor LLC Agreement”), +29 +such appointees shall be selected by Keane Investor’s board of managers so long as Keane is a controlled company under the applicable rules of the NYSE. See Part III, “ Item 13 . Certain Relationships and Related-Party Transactions and Director Independence—Keane Investor Limited Liability Company Agreement.” +Our Stockholders’ Agreement (as defined herein) provides that, except as otherwise required by applicable law, from the date on which (a) Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor has the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining an 11-person board of directors unless the management board of Keane Investor otherwise agrees by the affirmative vote of 80% of the management board of Keane Investor; (b) a Holder (as defined herein) has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted. +If Keane Investor, WDE RockPile Aggregate, LLC and three other individuals who acquired shares of our common stock in the RockPile acquisition (together with WDE RockPile Aggregate, LLC, the “RockPile Holders”) sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor or the RockPile Holders might sell shares of common stock could also create a perceived overhang and depress our market price. 112,243,769 shares of common stock are outstanding of which 65,579,625 shares are held by Keane Investor and the RockPile Holders. +Keane Investor and our executive officers and directors, but not the RockPile Holders, have previously agreed with certain underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters until at least April 17, 2018. When the lock-up agreements expire, these shares will become +30 +eligible for sale, The market price for shares of our common stock may drop when the restrictions on resale by Keane Investor lapse. +In addition, Keane Investor and the RockPile Holders have substantial demand and incidental registration rights, as described in Part III, “ Item 13 . Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” +We may be required to make payments under our contingent value rights agreement with the RockPile Holders. +Subject to the terms and conditions of the Contingent Value Rights Agreement (the "CVR Agreement") by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement, the "RockPile Holders") entered into upon consummation of the RockPile acquisition, the RockPile Holders received non-transferable contingent value rights, which collectively entitle the RockPile Holders to receive from the Company, in certain circumstances, an aggregate payment amount of up to $20.0 million. The aggregate payment amount is contingent upon the difference between $19.00 and the trading price of Keane’s common stock in a 30-trading day period prior to April 3, 2018, the nine-month maturity date of the contingent value rights, with such amount to be reduced, in certain circumstances, to the extent the Company shares acquired by the RockPile Holder's in the RockPile acquisition are resold by the RockPile Holders prior to the maturity date. To the extent we are required to make a payment to the RockPile Holders under the CVR Agreement upon maturity, our liquidity may be adversely affected. For additional information on our obligations under the CVR Agreement, see Note (3) Acquisition s of Part II, " Item 8 . Financial Statements and Supplemental Data." +If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the market price of our common stock could decline. +The trading market for our common shares likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts fail to cover our securities, if those analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline +Because we do not currently intend to pay dividends, our stockholders may not receive any return on investment unless they sell their common stock for a price greater than that which they paid for it. +We do not currently intend to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources.” +Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +31 +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 387,756,231 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 7,734,601 shares of our common stock for awards that may be issued under our Equity and Incentive Award Plan. Any common stock that we issue, including under our Equity and Incentive Award Plan or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the filing of this Annual Report on Form 10-K. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +32 +Item 1B. Unresolved Staff Comments +None. +33 +Item 2. Properties +Properties +Our principal properties include our corporate headquarters, district offices, sales offices and our engineering and technology facility, as well as the hydraulic fracturing units and other equipment and vehicles operating out of these facilities. We believe our facilities are in good condition and suitable for our current operations. Below is a table detailing our properties in the United States as of December 31, 2017 : +Location +Own/ +Lease +Purpose +Service +Active/ +Idle +Size (sqft/acres) +Denver, CO +Lease +Executive / Finance +N/A +Active +19,706 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +27,700 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +2,414 sqft +Pittsburgh, PA +Lease +Sales Office +Sales +Active +2,300 sqft +The Woodlands, TX +Lease +Engineering & Technology +N/A +Active +23,040 sqft +Dickinson, ND +Own +Field Operations +Hydraulic Fracturing +Active +21,772 sqft/34.9 acres +Shawnee, OK +Own +Field Operations +Hydraulic Fracturing +Active +39,100 sqft/56.1 acres +Mansfield, PA +Own +Field Operations +Hydraulic Fracturing, Wireline +Active +30,200 sqft/77.0 acres +Odessa, TX +Own +Field Operations +Hydraulic Fracturing, Wireline, Cementing +Active +97,006 sqft/40.0 acres +Springtown, TX +Own +Field Operations +Hydraulic Fracturing +Active +29,855 sqft/14.7 acres +Dickinson, ND +Lease +Field Operations +Hydraulic Fracturing +Active +33,375 sqft/9.7 acres +Williston, ND +Lease +Field Operations +Hydraulic Fracturing +Active +16,825 sqft/5.71 acres +Williston, ND +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +43,375 sqft +Mill Hall, PA +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +64,000 sqft/8.2 acres +New Stanton, PA +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +20,126 sqft/7.5 Acres +Pleasanton, TX +Lease +Field Operations +Hydraulic Fracturing +Active +10,488 acres +Alexander, ND +Lease +Field Maintenance and Storage Facility +Hydraulic Fracturing +Active +6,500 sqft/16.3 acres +Roanoke, TX +Lease +Warehouse +Hydraulic Fracturing, Wireline, Cementing +Active +49,500 sqft +Lewis Run, PA +Own +Abandoned +N/A +Idle +2,500 sqft +Mathis, TX +Own +Abandoned +Hydraulic Fracturing +Idle +66,725 sqft/47.4 acres +Oklahoma City, OK +Lease +Abandoned +Sales +Idle +3,366 sqft +Monessen, PA +Lease +Abandoned +Hydraulic Fracturing +Idle +78,220 sqft/7.9 Acres +Houston, TX +Lease +Abandoned +N/A +Idle +9,998 sqft +34 +Item 3. Legal Proceedings +Legal Proceedings +Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters. +On December 27, 2016, two former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the Fair Labor Standards Act ("FLSA") and Pennsylvania law. The parties agreed to settle the claims in the first quarter of 2018 for $4.2 million. Settlement of this collective action is subject to court approval. Additionally, we are involved in a commercial dispute whereby a former customer has commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC, and on December 15, 2017, made a claim for contractual damages of approximately $4.0 million. The Company intends to vigorously dispute the merits of this asserted claim and plans to assert affirmative counterclaims for unpaid bills and other damages. Other than amounts previously accrued and disclosed, we are currently unable to estimate the range of loss, if any, that may result from these matters. +Item 4. Mine Safety Disclosures +Not applicable. +35 +PART II +References Within This Annual Report +As used in Part II of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our initial public offering (“IPO”), and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds. +Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +Market Information +On January 25, 2017, we consummated an initial public offering of our common stock at a price of $19.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “FRAC.” Prior to that time, there was no public market for our stock. As a result, we have not set forth quarterly information with respect to the high and low prices for our common stock for periods prior to January 20, 2017, the first day our common stock traded on the NYSE. +2017 +High +Low +First Quarter (January 25, 2017 - March 31, 2017) +$ +22.93 +$ +13.68 +Second Quarter +$ +16.81 +$ +12.42 +Third Quarter +$ +16.92 +$ +12.51 +Fourth Quarter +$ +19.13 +$ +13.63 +36 +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor's 500 Stock Index, the Standard & Poor's MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (C&J Energy Services, Inc., Patterson-UTI Energy, Inc., RPC, Inc., Superior Energy Services, Inc. and Weatherford International plc), since January 20, 2017, the first day our common stock traded on the NYSE. +The graph assumes $100 was invested on January 20, 2017, the first day our stock was traded on the NYSE, in our common stock, the Standard & Poor's 500 Stock Index, the Standard & Poor's MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers as we believe it is an appropriate benchmark for our line of business/industry. +Holders +As of February 23, 2018, there were 10 shareholders of record of our common stock. The number of record holders does not include persons who held shares of our common stock in nominee or “street name” accounts through brokers. +Dividends +We do not currently intend to pay dividends. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors +37 +may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +On February 26, 2018, we announced that our Board of Directors has authorized a stock repurchase program of up to $100 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The duration of the stock buy-back program will be 12 months. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. +Securities Authorized for Issuance Under Equity Compensation Plans +See Part II, " Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters" for information regarding securities authorized for issuance and Issuer Purchases of Equity Securities. +No shares of our common stock were repurchased during the three months ended December 31, 2017. +38 +Item 6. Selected Financial Data +The selected financial data for periods was derived from the audited consolidated and combined financial statements of Keane and should be read in conjunction with Part I, “ Item 1A . Risk Factors,” Part II, “ Item 7 . Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “ Item 8 . Financial Statements and Supplementary Data." +Year ended +December 31, +2017 (1) +Year ended December 31, 2016 (2) +Year Ended +December 31, +2015 +(in thousands of dollars, except per share amounts) +Statement of Operations Data: +Revenue +$ +1,542,081 +$ +420,570 +$ +366,157 +Cost of services (3) +1,282,561 +416,342 +306,596 +Depreciation and amortization +159,280 +100,979 +69,547 +Selling, general and administrative expenses +93,526 +53,155 +26,081 +Gain on disposal of assets +(2,555 +) +(387 +) +(270 +) +Impairment +— +185 +3,914 +Total operating costs and expenses +1,532,812 +570,274 +405,868 +Operating income (loss) +9,269 +(149,704 +) +(39,711 +) +Other expense (income), net +13,963 +916 +(1,481 +) +Interest expense (4) +(59,223 +) +(38,299 +) +(23,450 +) +Total other expenses +(45,260 +) +(37,383 +) +(24,931 +) +Loss before income taxes +$ +(35,991 +) +$ +(187,087 +) +$ +(64,642 +) +Income tax expense +$ +(150 +) +$ +— +$ +— +Net loss +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Per Share Data (5) +Net loss per share - basic and diluted +$ +(0.34 +) +$ +(2.14 +) +$ +(0.74 +) +Weighted average number of shares - basic and diluted +106,321 +87,313 +87,313 +Statement of Cash Flows Data: +Cash flows from operating activities +$ +79,691 +$ +(54,054 +) +$ +37,521 +Cash flows from investing activities +(250,776 +) +(227,161 +) +(26,038 +) +Cash flows from financing activities +218,122 +276,633 +(10,518 +) +Other Financial Data: +Capital expenditures (6) +$ +189,629 +$ +23,545 +$ +27,246 +Adjusted EBITDA (8) +214,525 +1,921 +41,885 +Balance Sheet Data (at end of period): +Total assets +$ +1,043,116 +$ +536,940 +$ +324,795 +Long-term debt (including current portion) (7) +275,055 +269,750 +207,067 +Total liabilities +530,024 +374,688 +244,635 +Total members’ equity +513,092 +162,252 +80,160 +39 +(1) +Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile. +(2) +Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations (as defined herein). +(3) +Excludes depreciation and amortization, shown separately. +(4) +Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company (as defined herein) of its 2016 ABL Facility (as defined herein) and the Company's early debt extinguishment of its 2016 Term Loan Facility (as defined herein) and Senior Secured Notes (as defined herein). +(5) +The pro forma earnings per unit amounts have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. +(6) +Capital expenditures do not include, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations. +(7) +Long-term debt includes $8.1 million, $18.4 million and $8.9 million of unamortized debt discount and debt issuance costs for 2017, 2016 and 2015, respectively, and excludes capital lease obligations. +(8) +Adjusted EBITDA and Adjusted Gross Profit are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. These non-GAAP financial measures exclude the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of its operating performance to that of other companies. +Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance. +40 +Set forth below is a reconciliation of net loss to Adjusted EBITDA and Adjusted Gross Profit: +(Thousands of Dollars) +Year Ended December 31, +2017 +2016 +2015 +Net loss +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Depreciation and amortization +159,280 +100,979 +69,547 +Interest expense, net +59,223 +38,299 +23,450 +Income tax (benefit) expense (a) +150 +(114 +) +793 +EBITDA +$ +182,512 +$ +(47,923 +) +$ +29,148 +Acquisition, integration and expansion (b) +(4,674 +) +35,630 +6,272 +Offering-related expenses (c) +7,069 +1,672 +— +Commissioning costs +12,565 +9,998 +— +Impairment of assets (d) +— +185 +3,914 +Non-cash stock compensation (e) +10,578 +1,985 +312 +Other (f) +6,475 +374 +2,239 +Adjusted EBITDA +$ +214,525 +$ +1,921 +$ +41,885 +Other income (expense) +(13,963 +) +(916 +) +$ +1,481 +Selling, general and administrative (a) +93,526 +53,271 +$ +25,288 +Management Adjustments not associated with Cost of Services +(19,128 +) +(26,451 +) +$ +(7,740 +) +Adjusted gross profit +$ +274,960 +$ +27,825 +$ +60,914 +(a) +Income tax (benefit) expense as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015. +(b) +Represents professional fees, integration and divestiture costs, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile and the Acquired Trican Operations, organic growth initiatives and wind-down of our Canadian operations. For the year ended December 31, 2017, $1.7 million was recorded in costs of services, $10.7 million was recorded in selling, general and administrative expense, $3.3 million gain was recorded in gain on disposal of assets and $13.8 million of income was recorded in other expense, net. For the year ended December 31, 2016, $13.9 million was recorded in costs of services, $23.2 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $3.5 million was recorded in selling, general and administrative expenses and $1.7 million was recorded in other expense, net. +(c) +Represents professional fees and other miscellaneous expenses related to the Organizational Transactions (defined herein), the Company's initial public offering and the sale of the Company's stock by a selling stockholder in January 2018. For the year ended December 31, 2017, $1.3 million was recorded in cost of services and $5.8 million was recorded in selling, general and administrative expense. For the year ended December 31, 2016, $1.7 million was recorded in selling, general and administrative expenses. +(d) +Represents non-cash impairment charges with respect to our long-lived assets and intangible assets. +(e) +In 2017, represents non-cash amortization of equity awards issued under Keane Group, Inc.’s Equity and Incentive Award Plan (the "Plan"). According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units, and/or other deferred compensation. In 2016 and 2015, represents adjustments to the non-cash profit interests related to Keane Group Holdings, LLC. In all three years, these costs were recorded in selling, general and administrative expenses. +(f) +Represents contingency accruals related to certain litigation claims, readiness costs associated with Keane's initial internal controls design documentation for Sarbanes-Oxley compliance, using COSO 2013 framework, net gains on disposal of assets, forfeiture of deposit on hydraulic fracturing equipment purchase orders and other miscellaneous charges. For the year ended December 31, 2017, $0.8 million was recorded in gain on disposal of assets and $5.8 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2016, $0.4 million was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net. +41 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane. +This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “ Item 1A . Risk Factors” of this Annual Report on Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +EXECUTIVE OVERVIEW +Organization +We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. Our total capacity includes approximately 1.2 million hydraulic horsepower. From our 26 currently deployable hydraulic fracturing fleets (“fleets”), 31 wireline trucks, 24 cementing pumps and other ancillary assets located in the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through our partnerships with our customers, our transparency concerning value creation and our responsibilities to employees and customers. +In December 2017, we placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower representing three additional hydraulic fracturing fleets, with anticipated capital expenditures for the three fleets of approximately $115.0 million, expected to be delivered in the second and third quarters of 2018. +42 +We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity, and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing and wireline divisions and ancillary services; and Other Services, which includes our cementing and drilling divisions. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, including price adjustments to offset commodity inflation and align with market, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, as well as individual direct and indirect costs on a per stage and per fleet basis. +Acquisition of RockPile +On July 3, 2017, the Company acquired 100% of the outstanding equity interests of RockPile. RockPile was a multi-basin provider of integrated well completion services in the United States, whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. The acquisition of RockPile was completed for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights (“CVR”) granted pursuant to the CVR Agreement, as further described in Note (3) Acquisition s) of Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and in the Company's Current Report on Form 8-K filed on July 3, 2017. +Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our pumping capacity by more than 25%, further strengthening our position as one of the largest pure-play providers of integrated well completion services in the United States. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment. +Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017. +Financial results +Revenue in 2017 totaled $1.5 billion , an increase of 267% compared to revenue in 2016 of $420.6 million . Our strong revenue growth in 2017 was driven by the following factors, (i) completion of the acquisition of RockPile, which added 245,000 hydraulic horsepower, the largest contributor to year over year growth, (ii) continued deployment of available horsepower with seven fleets commissioned and deployed in 2017 and (iii) continued execution of our pricing strategy of aligning pricing with our clients under dedicated agreements with periodic re-openers priced at market rate. We exited 2016 with 13 operating fleets and exited 2017 with 26 operating, with six fleets, including one newbuild fleet, acquired through the acquisition of RockPile. On an average basis, we operated 21.1 fleets during 2017 compared to 9.8 fleets during 2016 . The revenue growth drivers for 2017 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with sand, trucking, labor, and chemicals. Consistent +43 +with our efforts to maintain and grow the supply of key commodities and skilled workforce, as influenced by market capacity, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of $9.3 million in 2017 , as compared to an operating loss of $149.7 million in 2016 . +We reported net loss of $36.1 million , or $0.34 per basic and diluted share, in 2017 , compared to net loss of $187.1 million , or $2.14 per basic and diluted share, in 2016 . Net income in 2017 includes $15.4 million of management adjustments to cost of services to arrive at Adjusted Gross Profit. Approximately $12.4 million of this amount was driven by costs for the re-commissioning of seven previously idled fleet, $1.7 million by acquisition and integration costs incurred for the acquisition of RockPile and $1.3 million by bonuses paid out to key operational employees in connection with our IPO. Approximately $34.5 million of management adjustments to selling, general and administrative expenses to arrive at Adjusted EBITDA during 2017 were driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million in commissioning costs. Approximately $4.1 million of management adjustments to (gain) loss on disposal of assets to arrive at Adjusted EBITDA during 2017 were related to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas. See Note ( 7 ) Property and Equipment, net of Part II," Item 8. Financial Statements and Supplementary Data" for further details on these asset sales. Approximately $13.8 million of management adjustments to other income to arrive at Adjusted EBITDA during 2017 was primarily driven by $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of the CVR associated with the acquisition of RockPile. +Business outlook +Commodity prices improved significantly throughout 2017, following a period of depressed prices and activity throughout the industry downturn of 2015 and 2016. West Texas Intermediate (“WTI”) crude oil prices averaged $50.88 per barrel in 2017, compared to a low of $26.19 per barrel in February 2016. Henry Hub Natural Gas prices averaged $2.99 per MMBtu in 2017, compared to a low of $1.49 per MMBtu in March 2016. The general rebound in commodity prices has led to an increase in drilling activity across the industry, with total U.S. land rig count averaging 856 rigs in 2017, compared to an average of 486 rigs in 2016. +The increase in drilling rigs and activity, combined with the completion of previously drilled wells, has led to a significant growth in the demand for U.S. completions services. We continue to expect improvements in demand and higher leading-edge pricing for our services across our diversified footprint, as the availability of high-quality hydraulic fracturing equipment remains tight, capital expenditure for drilling and completions in the U.S. stabilizes at a higher level of activity and customers place increased focus on partnering with well-capitalized, safe and efficient service providers. +Given the energy industry's outlook for 2018 activity levels, we expect further increases in the demand for our services over the next several quarters, driven by supportive industry fundamentals, including higher commodity prices and increases in completions intensity. Across the industry, exploration and production companies are executing completion designs with greater intensity, including longer laterals, more stages per well, tighter well spacing and increased proppant loadings. We believe the availability and supply of completions services is impacted by increases in completions intensity, resulting in increases in the amount of equipment that must be utilized per job and acceleration of maintenance cycles, both of which have a tightening effect on available supply. Furthermore, given the fragmented nature of the completions services industry, combined with varying levels of asset readiness and capital availability, we expect further consolidation in the industry. +44 +Oil and natural gas prices are significant drivers behind the pace and location of our customer activity. We actively monitor the trends in oil and natural gas prices and focus on maintaining flexibility. While commodity prices have improved throughout 2017 and into 2018, we expect volatility and uncertainty to remain in place throughout the year. This backdrop, combined with asset attrition and newbuild lead-times, should support an environment for attractive cash generation on our fleets throughout 2018. +The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business. In addition, continued tightening of the labor market could result in higher wage rates, as well as increased recruiting, hiring, onboarding and training costs. +We continue to believe in the strength of the near-term and long-term fundamentals of our business, including our high-quality, fit-for-purpose and well-maintained equipment, our financial strength and discipline and the scale and flexibility of our supply chain. +Fiscal 2017 Highlights +• +IPO: completed initial public offering and listing of common stock on NYSE +• +Utilization: deployed all idle fleets at attractive cost with full utilization +• +Newbuild: placed preemptive and strategic order for three newbuild fleets +• +Profitability: continued to increase annualized Adjusted Gross Profit per fleet +• +Mergers and acquisition: executed strategic acquisition of RockPile +• +Balance sheet: maintained and improved conservative balance sheet and liquidity +• +Portfolio optimization: sold workover rigs acquired in the acquisition of RockPile and coiled tubing assets acquired in the acquisition of the Acquired Trican Operations +Fiscal 2018 Outlook +In 2018, our principal business objective continues to be growing our business and safely providing best-in-class services in other Completion Services and Other Services segments. We expect to achieve our objective through: +• +partner and grow with customers who focus their efforts on high-efficiency completions jobs under dedicated agreements; +• +allocate our assets to maximize utilization and returns, including diversification of geography and commodity; +• +improve profitability of fully-utilized fleets through increased leading-edge pricing and efficiencies; +• +leverage our flexible and scalable logistics infrastructure to provide assurance of timely supply at lowest landed cost; +• +leverage our platform to identify, retain and promote talent to sustain growth and support operational excellence; +• +pursue expansion opportunities for our cementing assets; +45 +• +maintain agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply; +• +maintain our conservative and flexible capital position, supporting continued growth and maintenance of active equipment; and +• +explore potential opportunities for mergers or acquisitions, focused on portfolio expansion and market opportunities. +Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein. +Financial markets, liquidity, and capital resources +On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million . The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of $99.0 million and the associated prepayment premium of $13.8 million , and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million . The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility ("2017 ABL Facility"), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million. +On March 15, 2017, we obtained a $150.0 million term loan facility (the “2017 Term Loan Facility”). We used the proceeds from our 2017 Term Loan Facility to fully repay our Senior Secured Notes. On July 3, 2017, we secured $135.0 million in incremental term loans under an incremental term loan facility (the “Incremental Term Loan Facility” and together with the 2017 Term Loan Facility, the “New Term Loan Facility”), which are subject to substantially the same terms as the outstanding initial term loans under the 2017 Term Loan Facility. The majority of the proceeds from the incremental term loans was used to fund our acquisition of 100% of the outstanding equity interests of RockPile. As a result of entering into the Incremental Term Loan Facility, we expect our average annualized interest expense to increase from $12.4 million to $23.6 million. +At December 31, 2017 , we had approximately $96.1 million of cash available. We also had $199.7 million available under our asset-based revolving credit facility as of December 31, 2017 , which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments. +On January 17, 2018, our Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering of shares of our common stock on behalf of Keane Investor (the "selling stockholder"), pursuant to which 15,320,015 were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Following completion of the secondary offering, Keane Investor owns approximately 50.7% of the Company's outstanding common stock. We incurred $1.2 million of transaction costs related to the secondary offering in 2017, which were included under selling, general and administrative expenses within the consolidated +46 +and combined statement of operations. We anticipate we will incur approximately $12.9 million of transactions costs related to the secondary offering in 2018, primarily related to the payment of underwriting discounts and commissions payable by the Company. +For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein. +BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation. These regions are expected to account for approximately 70% of all new horizontal wells anticipated to be drilled during 2018 and 2019. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +In particular, we are one of the largest providers in the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the United States. According to Spears & Associates, the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale are expected to account for 61% of total active rigs in the U.S. during 2018 through 2022 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an 166% increase in rig count from their combined May 2016 low of 194 to 516 as of December 31, 2017 . +Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. +Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below. +The following table shows the average oil and natural gas prices for WTI and Henry Hub natural gas: +Year Ended December 31, +2017 +2016 +2015 +Oil price - WTI (1) +$ +50.88 +$ +43.14 +$ +48.69 +Natural gas price - Henry Hub (2) +2.99 +2.52 +2.63 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +47 +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type +2017 +2016 +2015 +Oil +703 +408 +750 +Natural Gas +172 +100 +227 +Other +1 +1 +1 +Total +876 +509 +978 +Year Ended December 31, +Drilling Type +2017 +2016 +2015 +Horizontal +736 +400 +744 +Vertical +70 +60 +139 +Directional +70 +49 +95 +Total +876 +509 +978 +Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. +Following a trough in early 2016, oil prices and natural gas prices have recovered to $60.46 and $3.69, respectively, or approximately 131% and 148%, respectively, as of December 29, 2017, from their lows in early 2016 of $26.19 and $1.49, respectively. The US Energy Information Administration (the “EIA”) projects WTI spot prices to average $56.0 and $57.0 and Henry Hub natural gas prices to average $2.88 and $2.92 in 2018 and 2019, respectively. +With the rebound in commodity prices from their lows in early 2016, drilling and completion activity has continued to increase in 2017, with U.S. active rig count in December 2017 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility has continued to persist. Despite this market volatility, we continue to experience increased demand for our services and believe we are in a more stable demand environment than existed during the above-mentioned market decline. +The EIA projects that the average WTI spot price will increase through 2040 from growing demand and the development of more costly oil resources. Global liquids demand is expected to increase by approximately 1.0 million barrels per day from 2017 to 2018. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) expectations of continued growth in the U.S. gross domestic product; (ii) an increased likelihood that regulatory and legislative initiatives regarding domestic carbon emissions policy will drive greater demand for cleaner burning fuels such as natural gas; (iii) increased acceptance of natural gas as a clean and abundant domestic fuel source that can lead to greater energy independence of the U.S. by reducing its dependence on imported petroleum; (iv) the emergence of low-cost natural gas shale developments; and (v) continued growth in electricity generation from intermittent renewable energy sources, primarily wind and solar energy, for which natural-gas-fired generation is a logical back-up power supply source. Natural gas demand in North America is expected to increase by approximately 6.9 billion cubic feet per day from 2017 to 2018. +Across the industry, customers are executing well designs with increased sand tonnage pumped to help supersize their wells to increase well productivity. This increase in sand tonnage pumped has led to a significant +48 +tightening in the market for sand and sand transportation. Coras Research, LLC forecasts that average proppant pumped per horizontal well will increase 18% to 14.4 million pounds by 2019 from an estimated 12.2 million pounds in 2017. +49 +RESULTS OF OPERATIONS IN 2017 COMPARED TO 2016 +Year Ended December 31, 2017 Compared with Year Ended December 31, 2016 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2017 +2016 +2017 +2016 +$ +% +Completion Services +$ +1,527,287 +$ +410,854 +99 +% +98 +% +$ +1,116,433 +272 +% +Other Services +14,794 +9,716 +1 +% +2 +% +5,078 +52 +% +Revenue +1,542,081 +420,570 +100 +% +100 +% +1,121,511 +267 +% +Completion Services +1,269,263 +401,891 +82 +% +96 +% +867,372 +216 +% +Other Services +13,298 +14,451 +1 +% +3 +% +(1,153 +) +(8 +%) +Costs of services (excluding depreciation and amortization, shown separately) +1,282,561 +416,342 +83 +% +99 +% +866,219 +208 +% +Completion Services +258,024 +8,963 +17 +% +2 +% +249,061 +2,779 +% +Other Services +1,496 +(4,735 +) +0 +% +(1 +%) +6,231 +(132 +%) +Gross profit +259,520 +4,228 +17 +% +1 +% +255,292 +6,038 +% +Depreciation and amortization +159,280 +100,979 +10 +% +24 +% +58,301 +58 +% +Selling, general and administrative expenses +93,526 +53,155 +6 +% +13 +% +40,371 +76 +% +(Gain) on disposal of assets +(2,555 +) +(387 +) +0 +% +0 +% +(2,168 +) +560 +% +Impairment +— +185 +0 +% +0 +% +(185 +) +(100 +%) +Operating income (loss) +9,269 +(149,704 +) +1 +% +(36 +%) +158,973 +(106 +%) +Other income, net +13,963 +916 +1 +% +0 +% +13,047 +1,424 +% +Interest expense +(59,223 +) +(38,299 +) +(4 +%) +(9 +%) +(20,924 +) +55 +% +Total other expenses +(45,260 +) +(37,383 +) +(3 +%) +(9 +%) +(7,877 +) +21 +% +Income tax expense +(150 +) +— +0 +% +0 +% +(150 +) +0 +% +Net income (loss) +$ +(36,141 +) +$ +(187,087 +) +(2 +%) +(44 +%) +$ +150,946 +(81 +%) +Revenue. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2017 increased by $1.1 billion , or 267% , to $1.5 billion from $420.6 million in 2016 . This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $1.1 billion , or 272% , to $1.5 billion in 2017 from $410.9 million in 2016 . This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”), as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%. +Other Services: Other Services segment revenue increased by $5.1 million , or 52% , to $14.8 million in 2017 from $9.7 million in 2016 . This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in +50 +December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested of our workover assets during the third and fourth quarters of 2017. +Cost of services. Cost of services in 2017 increased by $866.2 million , or 208% , to $1.3 billion from $416.3 million in 2016 . This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue ), (ii) price inflation in our key input costs, including labor, sand and sand trucking, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increase in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets. In 2017 , we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016 , we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83% , which represented a decrease of 16% from 99% in 2016 . Excluding the above-mentioned management adjustments, total cost of services was $1.27 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%. +Cost of services, as a percentage of total revenue is presented below: +Year Ended December 31, +Description +2017 +2016 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +83 +% +98 +% +(15 +)% +Other Services +90 +% +149 +% +(59 +)% +Total cost of services as a percentage of total revenue +83 +% +99 +% +(16 +)% +The change in cost of services by reportable segment is further discussed below. +Completion Services: Completion Services segment cost of services increased by $867.4 million , or 216% , to $1.3 billion in 2017 from $401.9 million in 2016 . As a percentage of segment revenue, total cost of services was 83% and 98% , in 2017 and 2016 , respectively, a decrease as a percentage of revenue of 15% . This change in cost of services was driven by (i) higher activity (as discussed above under Revenue) , (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017 , we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016 , we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.25 billion and $379.1 million in 2017 and 2016 , or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%. +Other Services: Other Services segment cost of services decreased by $1.2 million , or 8% , to $13.3 million in 2017 from $14.5 million in 2016 . This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017 , we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016 , we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management +51 +adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016 , or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%. +Depreciation and amortization. Depreciation and amortization expense increased by $58.3 million , or 58% , to $159.3 million in 2017 from $101.0 million in 2016 . This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million , or 76% , to $93.5 million in 2017 from $53.2 million in 2016 . This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016 . Total management adjustments were $34.5 million in 2017 , driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to acquisition and integration costs associated with the acquisition of RockPile. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016 , respectively, which represents an increase of 124%. +Gain on disposal of assets. Gain on disposal of assets in 2017 increased by $2.2 million , or 560% , to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016 . This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas. +Other income (expense), net. Other income (expense), net, in 2017 increased by $13.0 million , or 1,424% , to income of $14.0 million in 2017 from income of $0.9 million in 2016 . This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of the contingent value rights granted by the Company in connection with the acquisition of RockPile. +Interest expense, net. Interest expense, net of interest income, increased by $20.9 million , or 55% , to $59.2 million in 2017 from $38.3 million in 2016 . This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our New Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates. +Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)% . The effective rate is primarily made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets. +Net loss. Net loss was $36.1 million in 2017 , as compared with net loss of $187.1 million in 2016 . The decrease from the net loss in 2016 is due to the changes in revenue and expenses discussed above. +52 +Year Ended December 31, 2016 Compared with Year Ended December 31, 2015 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2016 +2015 +2016 +2015 +$ +% +Completion Services +$ +410,854 +$ +363,820 +98 +% +99 +% +$ +47,034 +13 +% +Other Services +9,716 +2,337 +2 +% +1 +% +7,379 +316 +% +Revenue +420,570 +366,157 +100 +% +100 +% +54,413 +15 +% +Completion Services +401,891 +305,036 +96 +% +83 +% +96,855 +32 +% +Other Services +14,451 +1,560 +3 +% +0 +% +12,891 +826 +% +Cost of services (excluding depreciation and amortization, shown separately) +416,342 +306,596 +99 +% +84 +% +109,746 +36 +% +Completion Services +8,963 +58,784 +2 +% +16 +% +(49,821 +) +(85 +%) +Other Services +(4,735 +) +777 +(1 +%) +0 +% +(5,512 +) +(709 +%) +Gross profit +4,228 +59,561 +1 +% +16 +% +(55,333 +) +(93 +%) +Depreciation and amortization +100,979 +69,547 +24 +% +19 +% +31,432 +45 +% +Selling, general and administrative expenses +53,155 +26,081 +13 +% +7 +% +27,074 +104 +% +(Gain) on disposal of assets +(387 +) +(270 +) +0 +% +0 +% +(117 +) +43 +% +Impairment +185 +3,914 +0 +% +1 +% +(3,729 +) +(95 +%) +Operating loss +(149,704 +) +(39,711 +) +(36 +%) +(11 +%) +(109,993 +) +277 +% +Other income, net +916 +(1,481 +) +0 +% +0 +% +2,397 +(162 +%) +Interest expense +(38,299 +) +(23,450 +) +(9 +%) +(6 +%) +(14,849 +) +63 +% +Total other expenses +(37,383 +) +(24,931 +) +(9 +%) +(7 +%) +(12,452 +) +50 +% +Income tax expense +— +— +0 +% +0 +% +— +— +% +Net loss +$ +(187,087 +) +$ +(64,642 +) +(44 +%) +(18 +%) +$ +(122,445 +) +189 +% +Revenue. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2016 increased by $54.4 million , or 15% , to $420.6 million from $366.2 million in 2015 . This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $47.0 million , or 13% , to $410.9 million in 2016 from $363.8 million in 2015 . This change was primarily attributable to a 100% growth in the number of deployed hydraulic fracturing fleets, as a result of increased utilization of our combined asset base following our acquisition of the Acquired Trican Operations. This increase was offset by a 43% decrease in the revenue per deployed hydraulic fracturing fleet as a result of competitive pricing driven by current market conditions. +Other Services: Other Services segment revenue increased by $7.4 million , or 316% , to $9.7 million in 2016 from $2.3 million in 2015 . The change was primarily attributable to revenues from the coiled tubing and cementing divisions acquired in connection with the Acquired Trican Operations in 2016. This increase was offset by a $2.3 million reduction in revenues from the drilling division, which was idled in May 2015, as a result of the significant decrease in rig count. +Cost of services. Cost of services in 2016 increased by $109.7 million , or 36% , to 416.3 million from $306.6 million in 2015 . This increase was driven by higher activity in the Completion Services segment, increased +53 +costs in connection with a prolonged completion timeline driven by customer completion delays and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $23.9 million, consisting of acquisition and integration costs of approximately $13.9 million associated with the Acquired Trican Operations and commissioning costs of approximately $10.0 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets and coiled tubing units acquired from Trican. These increases were partially offset by our cost saving initiatives as described below. Costs of services as a percentage of total revenue for in 2016 was 99%, which represented an increase of 15% from 2015. Excluding one-time costs of $23.9 million (described above) and $1.4 million in 2016 and 2015, respectively, total costs of services was $392.4 million and $305.2 million in 2016 and 2015, or 93% and 83% of revenue, respectively, an increase as a percentage of revenue of 10%. +Cost of services, as a percentage of total revenue is presented below: +Year Ended December 31, +Description +2016 +2015 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +98 +% +84 +% +14 +% +Other Services +149 +% +67 +% +82 +% +Total cost of services as a percentage of total revenue +99 +% +84 +% +15 +% +The change in cost of services by reportable segment is further discussed below. +Completion Services: Completion Services segment cost of services increased by $96.9 million , or 32% , to $401.9 million in 2016 from $305.0 million in 2015 . As a percentage of segment revenue, total cost of services was 99% and 84% , in 2016 and 2015 , respectively, an increase as a percentage of revenue of 15% . The increase in segment cost of services was driven by higher activity coupled with longer lateral segments and increased proppant volume and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $22.8 million, consisting of acquisition and integration costs of approximately $13.5 million associated with the Acquired Trican Operations and commissioning costs of approximately $9.3 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets acquired from Trican. These increases were partially offset by cost saving initiatives to drive down supply and material costs through negotiated price concessions from vendors, management of labor costs and our fixed cost structure through facility consolidation and other cost saving initiatives related to shipping and equipment costs. Excluding one-time costs of $22.8 million and $0.9 million in 2016 and 2015, respectively, Completion Services segment costs of services was $379.1 million and $304.2 million in 2016 and 2015, or 92% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 8%. +Other Services: Other Services segment cost of services increased by $12.9 million , or 826% , to $14.5 million in 2016 from $1.6 million in 2015 . The increase was primarily attributable to cost of services in connection with the deployment of, and increased headcount related to, our coiled tubing and cementing operations acquired from Trican, which included one-time integration and commissioning costs of $1.1 million. This increase was partially offset by the $0.6 million decrease of cost of services related to the idling of our drilling services in May 2015. We idled our cementing services and coiled tubing division in April 2016 and December 2016, respectively. All associated overhead has been re-allocated to the Completion Services segment or eliminated. Excluding one-time costs of $1.1 million in 2016 described above, and $0.5 million in 2015, Other Services segment costs of services was $13.3 million and $1.1 million in 2016 and 2015, or 137% and 46% of segment revenue, respectively, which is an increase as a percentage of segment revenue of 91%. This increase was a result of unfavorable absorption of fixed costs on low revenue as coiled tubing was a new division acquired as part of the Acquired Trican Operations. +Depreciation and amortization. Depreciation and amortization expense increased by $31.4 million , or 45% , to $101.0 million in 2016 from $69.5 million in 2015 . This increase was primarily attributable to additional +54 +depreciation and amortization expense of $42.1 million related to the property and equipment included in the Acquired Trican Operations. This increase was partially offset by a decrease in depreciation expense of Keane’s existing equipment due to some assets becoming fully depreciated and reduced capital expenditures in 2016. +Selling, general and administrative expense. SG&A expense increased by $27.1 million , or 104% , to $53.2 million in 2016 from $26.1 million in 2015 . The increase in SG&A expense is related to increased headcount, property taxes and insurance associated with a larger asset base as a result of the Acquired Trican Operations. SG&A as a percentage of total revenue was 13% in 2016 compared with 7% in 2015. Total one-time charges were $26.9 million in 2016 and $3.8 million in 2015, which were primarily related to the acquisition and integration of the Acquired Trican Operations and professional fees incurred in connection with the IPO. These costs were partially offset by a decrease in SG&A expenses of our Canadian subsidiary due to $2.5 million of wind-down costs incurred during 2015, which were no longer recurring during 2016. Excluding one-time costs of $26.9 million and $3.8 million described above, SG&A expense was $26.3 million and $22.3 million in 2016 and 2015, respectively, which represents an increase of 18% primarily driven by the acquisition of the Acquired Trican Operations. +Gain on disposal of assets. Gain on disposal of assets, in 2016 increased by $0.1 million , or 43% , to a gain of $0.4 million in 2016 from gain of $0.3 million in 2015 . +Impairment. In 2016 , we recognized impairment expense of $0.2 million as a result of our non-compete agreement relating to the drilling business within our Other Services segment, due to the fact that this non-compete was no longer expected to generate any future cash flows. In 2015 , we recognized impairment expense of $3.9 million, which was comprised of a $2.4 million impairment on indefinite-lived intangible assets in our Completion Services segment as a result of the loss of certain customer relationships related to our acquisition of Ultra Tech Frac Services, LLC (the “UTFS Acquisition”), a $1.2 million impairment on the trade name of our drilling business in our Other Services segment and a $0.3 million impairment on our drilling rig fleet in our Other Services segment. +Other income (expense), net. Other income (expense), net, in 2016 increased by $2.4 million , or 162% , to income of $0.9 million in 2016 from expense of $1.5 million in 2015 . This increase in was primarily driven by an expense recognized in 2015 related to the forfeiture of a $1.7 million deposit due to the cancellation of a hydraulic fracturing equipment purchase order, which was no longer recurring during 2016. +Interest expense, net. Interest expense, net of interest income, increased by $14.8 million , or 63% , to $38.3 million in 2016 from $23.5 million in 2015 . This increase was primarily attributable to a $4.9 million increase in interest expense on our Senior Secured Notes due to an increase in the interest rate in accordance with the modified terms of the agreement governing the Senior Secured Notes; $7.0 million interest expense incurred on the 2016 Term Loan Facility in connection with the Trican acquisition; $1.8 million of unrealized and realized losses related to an interest rate swap derivative with all changes in its fair value being recognized within other expenses starting from March 2016, which is the date when hedge accounting was discontinued; and a $3.1 million increase in amortization of debt issuance costs and higher commitment fees incurred on the 2016 ABL Facility. These increases were partially offset by $1.7 million decrease in interest expense as a result of the forgiveness of interest on a $20 million related party loan with KG Fracing Acquisition Corp. and S&K Management Services, LLC, on March 16, 2016. +Net loss. Net loss was $187.1 million in 2016 , as compared with net loss of $64.6 million in 2015 . This increase in net loss is due to the changes in revenue and expenses discussed above. +ENVIRONMENTAL MATTERS +We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note ( 18 ) ( Commitments and Contingencies ) to the consolidated and combined financial statements. +55 +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company's ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +As of December 31, 2017 , we had $96.1 million of cash and $278.5 million of debt, compared to $48.9 million of cash and $272.7 million of debt as of December 31, 2016 . In 2017 , 2016 and 2015 , we had capital expenditures of $189.6 million , $23.5 million and $27.2 million , respectively, exclusive of the cash payment attributable to the acquisition of RockPile on July 3, 2017 of $116.6 million or the Acquired Trican Operations on March 16, 2016 of $203.9 million. +(Thousands of Dollars) +Year Ended December 31, +2017 +2016 +2015 +Net cash provided by (used) in operating activities +$ +79,691 +$ +(54,054 +) +$ +37,521 +Net cash used in investing activities +$ +(250,776 +) +$ +(227,161 +) +$ +(26,038 +) +Net cash provided by (used in) financing activities +$ +218,122 +$ +276,633 +$ +(10,518 +) +Significant sources and uses of cash during 2017 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of the Acquired Trican Operations. See Note ( 18 ) ( Commitments and Contingencies ) of Part II, " Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +• +Investing activities: +– +Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note ( 7 ) ( Property and Equipment, net ) of Part II, " Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +• +Financing activities: +– +Cash provided from IPO proceeds, $255.5 million. See Note (1)(a) Initial Public Offering of Part II, " Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +– +The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. See Note ( 8 ) Long-Term Debt of Part II, " Item 8 . Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +– +The Incremental Term Loan Facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were +56 +primarily used to fund the acquisition of RockPile. See Note ( 8 ) ( Long-Term Debt ) of Part II, " Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +Uses of cash: +• +Investing activities: +– +Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement. +– +Cash used for capital expenditures of $164.4 million, associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment. +• +Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes. +Significant sources and uses of cash during the twelve months ended December 31, 2016 +Sources of cash: +• +Investing activities: Total net proceeds of $0.7 million primarily related to the sale of assets from our idled drilling division within our Other Services segment. +• +Financing activities: Net cash provided from a capital contribution from shareholders of $200.0 million and the net proceeds from our 2016 Term Loan Facility of $91.2 million. See Note ( 8 ) ( Long-Term Debt ) of Part II, " Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. +Uses of cash: +• +Operating activities: Net cash used in operating activities of $54.1 million was primarily attributable to competitive pricing pressure as a result of market conditions, combined with the acquisition, integration and commissioning costs of approximately $47.3 million associated with the acquisition of the Acquired Trican Operations. +• +Investing activities: +– +Cash consideration of $205.4 million associated with the acquisition of the Acquired Trican Operations. +– +Cash used for capital expenditures of $23.5 associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets. +• +Financing activities: Cash used to repay and service our debt facilities, including prepayment penalties and capital leases but excluding interest, in 2016 was $8.8 million. +Significant sources and uses of cash during the twelve months ended December 31, 2015 +Sources of cash: +• +Operating activities: Net cash provided by operating activities of $37.5 million was primarily attributable to positive operating results generated by our Completion Services segment, as well as cash generated by working capital changes. +57 +• +Investing activities: Total net proceeds of $1.3 million primarily related to the sale of assets from our idled drilling division within our Other Services segment. +Uses of cash: +• +Investing activities: Net cash used for investing activities of $27.2 million was primarily related to final payments upon delivery for our newbuild fleet, coupled with maintenance capital expenditures to support our active fleets. +• +Financing activities: Net cash used in financing activities was primarily related to repay and service our debt facilities, including capital leases but excluding interest, of $6.9 million and a final contingent consideration payment of $2.5 million made in February 2015 in connection with the acquisition of Ultra Tech Frac Services, LLC. +Future sources and use of cash +Capital expenditures for 2018 will be related to maintenance capital spend to support our existing active fleets and the completion of the three newbuild hydraulic fracturing fleets of approximately 150,000 hydraulic horsepower and three wireline spreads, which are anticipated to be delivered in the second and third quarters of 2018. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2018 will range between $230.0 million and $240.0 million. +Debt service for the twelve months period ended December 31, 2018 is projected to be $31.5 million. We anticipate our debt service will be funded by cash flows from operations. +On February 26, 2018, we announced that our Board of Directors has authorized a stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The duration of the stock buy-back program will be 12 months. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. +Other factors affecting liquidity +Financial position in current market. As of December 31, 2017 , we had $ 96.1 million of cash and a total of $199.7 million available under our revolving credit facility. Furthermore, we have no material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments, contingent liabilities and stock repurchase. +Guarantee agreements. In the normal course of business, we have agreements with a financial institution under which $2.0 million of letters of credit were outstanding as of December 31, 2017 . +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets, as well as unsettled political conditions. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. +58 +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2017 . +(Thousands of Dollars) +Contractual obligations +Total +2018 +2019-2021 +2022-2024 +2025+ +Long-term debt, including current portion (1) +$ +283,200 +$ +2,850 +$ +8,550 +$ +271,800 +$ +— +Estimated interest payments (2) +108,841 +23,559 +70,726 +14,556 +— +Capital lease obligations (3) +8,518 +3,633 +4,885 +— +— +Operating lease obligations (4) +47,572 +16,173 +26,608 +4,791 +— +Purchase commitments (5) +211,957 +133,070 +78,887 +— +— +Equity method investment +1,138 +1,138 +— +— +— +Legal contingency +4,250 +4,250 +— +— +— +$ +665,476 +$ +184,673 +$ +189,656 +$ +291,147 +$ +— +(1) +Long-term debt excludes interest payments on each obligation and represents our obligations under our New Term Loan Facility. In addition, these amounts exclude $8.1 million of unamortized debt discount and debt issuance costs. +(2) +Estimated interest payments are based on debt balances outstanding as of December 31, 2017 and include interest related to the New Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate ( “ LIBOR ” ). +(3) +Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc and includes interest payments. +(4) +Operating lease obligations are related to our real estate, rail cars and light duty vehicles with ARI Financial Services Inc, Enterprise FM Trust, PNC Bank, Anderson Rail Group, CIT Bank, Compass Rail VIII, SMBC Rail Services and Trinity Industries Leasing Company. +(5) +Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +Principal Debt Agreements +2017 ABL Facility +On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility (as defined herein) in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The following is a summary of the material provisions of the 2017 ABL Facility. It does not include all of the provisions of the 2017 ABL Facility, does not purport to be complete and is qualified in its entirety by reference to the 2017 ABL Facility described. +Structure. As of September 30, 2017, the February 2017 ABL Facility provided for a $150.0 million revolving credit facility (with a $20.0 million sub-facility for letters of credit), subject to a borrowing base (as described below). On December 22, 2017, we entered into an amended and restated February 2017 ABL Facility (the “Amended 2017 ABL Facility and, together with the February 2017 ABL Facility, the “2017 ABL Facility”). The Amended 2017 ABL Facility among other things, increased the total amount of aggregate commitments by an additional $150.0 million. As a result, the 2017 ABL Facility provided for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a borrowing base (as described below). In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million. +59 +Maturity . The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Borrowing Base . Pursuant to the terms of the 2017 ABL Facility, the amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 80% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves. +Interest . Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted London Interbank Offered Rate (“LIBOR”) rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when Consolidated EBITDA (as defined herein) as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%; provided that if Consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above. +Guarantees . Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”). +Security . Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory and frac iron equipment; certain other assets and property thereto, including chattel paper, instruments, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral. +Fees . Certain customary fees are payable to the lenders and the agents under the 2017 ABL Facility. +Restricted Payment Covenant . The 2017 ABL Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2017 ABL Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million in any four consecutive fiscal quarter period, and to the extent Consolidated EBITDA in any four consecutive fiscal quarter period equals or exceeds $350.0 million, such amount is increased to $50.0 million for so long as Consolidated EBITDA continues to equal or exceed such threshold. Additionally, KGI may make additional cash dividends and other restricted payments to the extent no event of default exists or results therefrom and either (x) excess availability under the 2017 ABL Facility equals or exceeds the greater of (i) 17.5% of the lesser of the +60 +aggregate commitments and the borrowing base and (ii) $30.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period, and the Consolidated Fixed Charge Coverage Ratio (as defined herein) is at least 1.0 to 1.0, or (y) excess availability equals or exceeds the greater of (i) 20% of the lesser of the aggregate commitments and the borrowing base and (ii) $35.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period. +“Consolidated EBITDA”, generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs. +“Consolidated Fixed Charge Coverage Ratio”, generally is defined as the ratio of (a) Consolidated EBITDA for the applicable period, minus certain capital expenditures and income taxes paid in cash during such period to (b) interest charges paid or required to be paid in cash, plus scheduled principal payments on certain indebtedness required to be made in cash, plus certain regularly scheduled restricted payments paid in cash, plus restricted payments made using the general restricted payments basket during such period. +Affirmative and Negative Covenants . The 2017 ABL Facility contains various other affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility). +Financial Covenants . Pursuant to the terms of the 2017 ABL Facility, the 2017 ABL Facility requires that the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered The Consolidated Fixed Charge Coverage Ratio will only be tested upon the occurrence of an event or default or if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $20.0 million at any time. +Events of Default . The 2017 ABL Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2017 ABL Facility). +New Term Loan Facility +On March 15, 2017, Keane Group, Keane Frac, LP and KS Drilling, LLC (together with Keane Group, Keane Frac, LP and each other person that becomes a New Term Loan Borrower under the New Term Loan Facility in accordance with the terms thereof, collectively, the “New Term Loan Borrowers”) and the New Term Loan Guarantors (as defined below) entered into a term loan facility (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock, as administrative agent and collateral agent. On the RockPile Closing Date, the New Term Loan Borrowers and the New Term Loan Guarantors (as defined below) entered in an incremental term loan facility (the “Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent. The following is a summary of the material provisions of the New Term Loan Facility. It does not include all of the provisions of the New Term Loan Facility, does not purport to be complete and is qualified in its entirety by reference to the New Term Loan Facility described. +Structure. The 2017 Term Loan Facility provides for a $150.0 million initial term loan facility and the Incremental Term Loan Facility provides for a $135.0 million incremental term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a) $50.0 million (less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than 1.75:1.00. +61 +Maturity. August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The loans under the 2017 Term Loan Facility amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding, commencing with June 30, 2017. The loans under the Incremental Term Loan Facility amortize in quarterly installments equal to (a) the aggregate original principal amount of the loans under the Incremental Term Loan Facility, times (b) the ratio of (x) the amount of all loans under the 2017 Term Loan Facility that are being repaid on such date to (y) the total aggregate principal amount of all loans under the 2017 Term Loan Facility that remained outstanding as of the RockPile Closing Date, but giving pro forma effect to the amortization payment to be made on June 30, 2017, commencing with September 30, 2017. +Interest. The Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 6.25%, or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25%. Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. +Prepayments . The New Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the New Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the New Term Loan Agreement) and (c) 50% (subject to step-downs to zero, in accordance with the Total Net Leverage Ratio (as defined below) of excess cash flow minus certain voluntary prepayments made under the New Term Loan Facility and all voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each New Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “New Term Loan Guarantors”). +Security. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the New Term Loan Borrowers and the New Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral. +Fees. Certain customary fees are payable to the lenders and the agents under the New Term Loan Facility. +Restricted Payment Covenant. The New Term Loan Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The New Term Loan Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million (subject to reduction based on certain outstanding investments and prepayments of indebtedness) during the term of the facility. If the pro forma Total Net Leverage Ratio (as defined below) is no greater than 3.0 to 1.0 after giving effect to such restricted payment, we can also pay dividends or make other restricted payments up to the amount of the Cumulative Credit (as defined below). Both of these exceptions are also subject to the requirements that there is no event of default and that we have unrestricted cash plus loan availability under the 2017 ABL Facility of at least $35.0 million after the making of any cash dividend or other restricted payment. +“Total Net Leverage Ratio”, generally, is defined as the ratio of (a) the aggregate principal amount of indebtedness in an amount that would be reflected on our balance sheet in accordance with GAAP (but hedging +62 +exposure is included only for amounts exceeding $5.0 million) minus cash and cash equivalents not to exceed $100.0 million to (b) Consolidated EBITDA (calculated in substantially the same manner as in the 2017 ABL Facility). +“Cumulative Credit”, generally, is defined as an amount equal to the excess cash flow not required to repay the Term Loans plus other customary additions reduced by the amount of Cumulative Credit used prior to such time. However, for so long as the Total Net Leverage Ratio is less than 1.75:1:00 after giving effect to any proposed restricted payments, the amount of Cumulative Credit is unlimited. +Affirmative and Negative Covenants. The New Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the New Term Loan Facility). +Financial Covenant. The New Term Loan Facility provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the New Term Loan Borrowers and the New Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than $35.0 million. +Events of Default. The New Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the New Term Loan Facility). +Off-Balance Sheet Arrangements +Except for our normal operating leases, we do not have any material off-balance sheet financing arrangements, transactions or special purpose entities. +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data" and Item 13. "Certain Relationships and Related-Party Transactions and Director Independence." +63 +Critical Accounting Policies and Estimates +The preparation of our consolidated and combined financial statements and related notes to the consolidated and combined financial statements included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidation and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Acquisition s of Part II, " Item 8 . Financial Statements and Supplementary Data" for further discussion on our recently completed acquisitions during the years ended December 31, 2017 and 2016 . +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note ( 18 ) Commitments and Contingencies of Part II, " Item 8 . Financial Statements and Supplementary Data" for further discussion of our legal, environmental and other regulatory contingencies for the years ended December 31, 2017 , 2016 and 2015 . +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. +64 +We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note (2) (j) Goodwill and Indefinite-Lived Intangible Assets and (2) (k) Long-Lived Assets of Part II, " Item 8 . Financial Statements and Supplementary Data" for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2017 , 2016 and 2015 . +Income Taxes +We account for income taxes in accordance with ASC 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to the Company’s historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we will reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of its tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments +65 +expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +On December 22, 2017, new tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act was signed into law. We evaluated the provisions of the Tax Cuts and Jobs Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on the consolidated financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Cuts and Jobs Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Cuts and Job Act are not expected to have an adverse impact on our consolidated financial statements. We will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine our estimates in 2018. +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note ( 24 ) New Accounting Pronouncements of Part II, " Item 8 . Financial Statements and Supplementary Data." +NON-GAAP FINANCIAL MEASURES +From time to time in our financial reports, we will use certain non-GAAP financial measures to provide supplemental information that we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing Keane's ongoing operating performance, and thereby facilitates review of Keane's operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to Keane's results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of Keane's operating performance to that of other companies. +Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance. +66 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +At December 31, 2017 , we held no significant derivative instruments that materially increased our exposure to market risks for interest rates, foreign currency rates, commodity prices or other market price risks. +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers, however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. Refer to Part II, “ Item 7 . Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2017 . +Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk. +67 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +Keane Group, Inc. +Audited Consolidated and Combined Financial Statements +Report of Independent Registered Public Accounting Firm +69 +Consolidated and Combined Balance Sheets +70 +Consolidated and Combined Statements of Operations and Comprehensive (Loss) +72 +Consolidated and Combined Statements of Changes in Owners’ Equity +74 +Consolidated and Combined Statements of Cash Flows +75 +Notes to Consolidated and Combined Financial Statements +77 +68 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Stockholders and Board of Directors +Keane Group, Inc.: +Opinion on the Consolidated and Combined Financial Statements +We have audited the accompanying consolidated and combined balance sheets of Keane Group, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +February 28, 2018 +69 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Balance Sheets +(Amounts in thousands) +December 31, +2017 +December 31, +2016 +Assets +Current assets: +Cash and cash equivalents +$ +96,120 +$ +48,920 +Trade and other accounts receivable, net +238,018 +66,277 +Inventories, net +33,437 +15,891 +Prepaid and other current assets +8,519 +14,618 +Total current assets +376,094 +145,706 +Property and equipment, net +468,000 +294,209 +Goodwill +134,967 +50,478 +Intangible assets +57,280 +44,015 +Other noncurrent assets +6,775 +2,532 +Total assets +$ +1,043,116 +$ +536,940 +Liabilities and Owners' Equity +Liabilities +Current liabilities: +Accounts payable +$ +92,348 +$ +48,484 +Accrued expenses +135,175 +42,892 +Current maturities of capital lease obligations +3,097 +2,633 +Current maturities of long-term debt +1,339 +2,512 +Stock based compensation - current +4,281 +— +Deferred revenue +5,000 +— +Other current liabilities +914 +3,171 +Total current liabilities +242,154 +99,692 +Capital lease obligations, less current maturities +4,796 +5,442 +Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities +273,715 +267,238 +Stock based compensation - noncurrent +4,281 +— +Other noncurrent liabilities +5,078 +2,316 +Total noncurrent liabilities +287,870 +274,996 +Total liabilities +530,024 +374,688 +Owners’ equity +Members' equity +— +453,810 +Common stock, par value $0.01 per share (authorized 500,000 shares, issued 111,831 shares) +1,118 +— +Paid-in capital in excess of par value +541,074 +— +Retained deficit +(27,372 +) +(288,771 +) +Accumulated other comprehensive (loss) +(1,728 +) +(2,787 +) +Total owners’ equity +513,092 +162,252 +70 +Total liabilities and owners’ equity +$ +1,043,116 +$ +536,940 +See accompanying notes to consolidated and combined financial statements. +71 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +(Amounts in thousands, except for per unit amounts) +Twelve Months Ended +December 31, +2017 +2016 +2015 +Revenue +$ +1,542,081 +$ +420,570 +$ +366,157 +Operating costs and expenses: +Cost of services (1) +1,282,561 +416,342 +306,596 +Depreciation and amortization +159,280 +100,979 +69,547 +Selling, general and administrative expenses +93,526 +53,155 +26,081 +Gain on disposal of assets +(2,555 +) +(387 +) +(270 +) +Impairment +— +185 +3,914 +Total operating costs and expenses +1,532,812 +570,274 +405,868 +Operating income (loss) +9,269 +(149,704 +) +(39,711 +) +Other income (expense): +Other income (expense), net +13,963 +916 +(1,481 +) +Interest expense (2) +(59,223 +) +(38,299 +) +(23,450 +) +Total other expenses +(45,260 +) +(37,383 +) +(24,931 +) +Loss before income taxes +(35,991 +) +(187,087 +) +(64,642 +) +Income tax expense (3) +(150 +) +— +— +Net loss +(36,141 +) +(187,087 +) +(64,642 +) +Net loss attributable to predecessor +(7,918 +) +— +— +Net loss attributable to Keane Group, Inc. +(28,223 +) +(187,087 +) +(64,642 +) +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +96 +22 +(741 +) +Hedging activities +791 +1,857 +(1,187 +) +Total comprehensive loss +$ +(35,254 +) +$ +(185,208 +) +$ +(66,570 +) +Net loss per share (4) : +Basic net loss per share +$ +(0.34 +) +$ +(2.14 +) +$ +(0.74 +) +Diluted net loss per share +$ +(0.34 +) +$ +(2.14 +) +$ +(0.74 +) +Weighted-average shares outstanding: basic (3) +106,321 +87,313 +87,313 +Weighted-average shares outstanding: diluted (3) +106,321 +87,313 +87,313 +(1) +Cost of services during the years ended December 31, 2017 , 2016, and 2015 excludes depreciation of $150.6 million , $94.7 million , and $64.3 million , respectively. Depreciation related to cost of services is presented within depreciation and amortization separately disclosed. +(2) +Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company (as defined herein) of its 2016 ABL Facility (as defined herein) and the Company's early debt extinguishment of its 2016 Term Loan Facility (as defined herein) and Senior Secured Notes (as defined herein). +(3) Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015. +72 +(4) +The pro forma earnings per share amounts have been computed to give effect to the Organizational Transactions (as defined herein), including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Existing Owners' (as defined herein) membership interests for the newly-created ownership interests. +See accompanying notes to consolidated and combined financial statements. +73 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Changes in Owners' Equity +(Amounts in thousands) +Members’ equity +Common Stock +Paid-in Capital in Excess of Par Value +Retained Earnings (deficit) +Accumulated other comprehensive income (loss) +Total +Balance as of December 31, 2014 +$ +186,420 +$ +— +$ +— +$ +(37,042 +) +$ +(2,738 +) +$ +146,640 +Distributions +(222 +) +— +— +— +— +(222 +) +Unit awards amortization +312 +— +— +— +— +312 +Other comprehensive loss +— +— +— +— +(1,928 +) +(1,928 +) +Net loss +— +— +— +(64,642 +) +— +(64,642 +) +Balance as of December 31, 2015 +$ +186,510 +$ +— +$ +— +$ +(101,684 +) +$ +(4,666 +) +$ +80,160 +Contribution of equity +222,646 +— +— +— +— +222,646 +Issuance of Class A and Class C Units +42,669 +— +— +— +— +42,669 +Unit awards amortization +1,985 +— +— +— +— +1,985 +Other comprehensive income +— +— +— +— +1,879 +1,879 +Net loss +— +— +— +(187,087 +) +— +(187,087 +) +Balance as of December 31, 2016 +$ +453,810 +$ +— +$ +— +$ +(288,771 +) +$ +(2,787 +) +$ +162,252 +Net loss prior to the Organizational Transactions +— +— +— +(7,918 +) +— +(7,918 +) +Effect of the Organizational Transactions +(453,810 +) +— +156,270 +297,540 +— +— +Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives +— +1,031 +245,902 +— +— +246,933 +Equity-based compensation recognized subsequent to the Organizational Transactions +— +— +10,578 +— +— +10,578 +Effect of RockPile acquisition +— +87 +130,203 +— +— +130,290 +Other comprehensive income +— +— +— +— +1,059 +1,059 +Deferred tax adjustment +— +— +(1,879 +) +— +— +(1,879 +) +Net loss subsequent to Organizational Transactions +— +— +— +(28,223 +) +— +(28,223 +) +Balance as of December 31, 2017 +$ +— +$ +1,118 +$ +541,074 +$ +(27,372 +) +$ +(1,728 +) +$ +513,092 +See accompanying notes to consolidated and combined financial statements. +74 +KEANE GROUP, INC. AND SUBSIDIARIES +Condensed Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Twelve Months Ended +December 31, +2017 +2016 +2015 +Cash flows from operating activities: +Net loss +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Adjustments to reconcile net loss to net cash provided by operating activities +Depreciation and amortization +159,280 +100,979 +69,547 +Amortization of deferred financing fees +5,241 +4,152 +2,112 +Loss on debt extinguishment, including prepayment premiums +31,084 +— +— +Gain on disposal of assets +(2,555 +) +(387 +) +(270 +) +Unrealized loss on de-designation of a derivative +963 +3,038 +— +Accrued interest on loan—related party +— +471 +2,174 +Loss on impairment of assets +— +185 +3,914 +Equity-based compensation +10,578 +1,985 +312 +Other non-cash (expense) +(322 +) +— +— +Changes in operating assets and liabilities +Decrease (increase) in trade and other accounts receivable, net +(113,047 +) +(13,027 +) +36,933 +Decrease (increase) in inventories +(15,475 +) +8,485 +11,841 +Decrease (increase) in prepaid and other current assets +20,294 +(5,994 +) +105 +Decrease (increase) in other assets +(336 +) +32 +1,047 +Increase (decrease) in accounts payable +(141 +) +14,214 +(12,650 +) +Increase (decrease) in accrued expenses +41,446 +19,735 +(13,185 +) +Increase (decrease) in other liabilities +(21,178 +) +(835 +) +283 +Net cash provided by (used) in operating activities +79,691 +(54,054 +) +37,521 +Cash flows from investing activities +Acquisition of business +(116,576 +) +(203,900 +) +— +Purchase of property and equipment +(141,340 +) +(23,126 +) +(26,086 +) +Advances of deposit on equipment +(23,096 +) +(420 +) +(1,114 +) +Implementation of software +(687 +) +(453 +) +(69 +) +Proceeds from sale of assets +30,565 +711 +1,278 +Payments for leasehold improvements +(157 +) +— +(46 +) +Proceeds from insurance recoveries +515 +22 +— +Payments received (advances) on note receivable +— +5 +(1 +) +Net cash used in investing activities +(250,776 +) +(227,161 +) +(26,038 +) +Cash flows from financing activities: +Proceeds from issuance of common stock +255,494 +— +— +Proceeds from the secured notes and term loan facility +285,000 +100,000 +— +Payments on the secured notes and term loan facility +(289,902 +) +(5,647 +) +(5,000 +) +Payments on capital leases +(2,861 +) +(2,668 +) +(1,661 +) +75 +KEANE GROUP, INC. AND SUBSIDIARIES +Condensed Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Prepayment premiums on early debt extinguishment +(15,817 +) +— +— +Payment of debt issuance costs +(13,792 +) +(15,052 +) +(1,135 +) +Payments on contingent consideration liability +— +— +(2,500 +) +Contributions (distributions) +— +200,000 +(222 +) +Net cash provided by (used in) financing activities +218,122 +276,633 +(10,518 +) +Non-cash effect of foreign translation adjustments +163 +80 +250 +Net increase in cash, cash equivalents and restricted cash +47,200 +(4,502 +) +1,215 +Cash, cash equivalents and restricted cash, beginning +48,920 +53,422 +52,207 +Cash, cash equivalents and restricted cash, ending +$ +96,120 +$ +48,920 +$ +53,422 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net +$ +30,104 +$ +25,516 +$ +19,157 +Income taxes +— +— +220 +Non-cash investing and financing activities: +Non-cash purchases of property and equipment +$ +25,193 +$ +9,364 +$ +3,138 +Non-cash forgiveness of related party loan +— +22,646 +— +Non-cash issuance of acquisition shares +130,290 +— +— +Non-cash issuance of Class A and C Units +— +42,669 +— +Non-cash reduction in capital lease obligations +20 +1,281 +— +Non-cash additions to capital lease obligations +2,739 +— +— +See accompanying notes to consolidated and combined financial statements. +76 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 1 ) Basis of Presentation and Nature of Operations +Keane Group, Inc. (the “Company”, “KGI” or “Keane”) was formed on October 13, 2016 as a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company. +The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X. +The Company's accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company's estimates. +Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company's financial position as of December 31, 2017 , the results of its operations and its cash flows for the years ended December 31, 2017 , 2016 , and 2015 . Such adjustments are of a normal recurring nature. +The consolidated and combined financial statements include the accounts of Keane Group, Inc. and Keane Group, each together with their consolidated subsidiaries. +The consolidated financial statements for the period from January 1, 2016 to March 15, 2016 reflect only the historical results of the Company prior to the completion of the Company's acquisition of the Acquired Trican Operations (as defined herein). The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company's acquisition of RockPile. +Earnings per share and weighted-average shares outstanding for the years ended December 31, 2017 , 2016 , and 2015 have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended December 31, 2017 , 2016 , and 2015 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company's predecessor for accounting purposes, as there was no activity under Keane Group, Inc. prior to 2017. +(a) Initial Public Offering +On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million . The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s term loan balance of $99.0 million and the associated prepayment premium of $13.8 million , and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million . The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value. +77 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(b) Organizational Transactions +In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following: +• +Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company's management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”); +• +Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and +• +The Company's independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group. +The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes. +As a result of the Organizational Transactions and the IPO, (i) the Company is a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of 72,354,019 shares of the Company's common stock were owned by Keane Investor and certain of the Company's independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company's controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock. +( 2 ) Summary of Significant Accounting Policies +(a) Use of Estimates +The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as a consideration in the acquisition, unit-based incentive plan awards and derivatives. +(b) Principles of Consolidation +The accompanying consolidated and combined financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Keane Group, Inc. and its consolidated subsidiaries: Keane Group Holdings, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac, LP, Keane Frac TX, LLC, Keane Frac ND, LLC, Keane Frac GP, LLC, KS Drilling, LLC and Keane Completions CN Corp. +All intercompany transactions and balances have been eliminated. +78 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(c) Business Combinations +Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements” using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note (3) Acquisition s for discussion of the acquisitions completed during 2017 and 2016. +(d) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from qualifying asset sale proceeds and insurance recoveries, excluding asset sales related to certain permitted dispositions, of more than $10.0 million , under the New Term Loan Facility (as defined herein), and of more than $25.0 million , under the 2017 ABL Facility (as defined herein), is considered to be restricted. The Company may, at management’s discretion, reinvest any part of such proceeds in assets (other than current assets) useful for its business (in the case of the New Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2017 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the New Term Loan Facility or the 2017 ABL Facility. +The Company did no t have any qualifying asset sale proceeds that exceeded the dollar thresholds described above for the year ended December 31, 2017 . The Company had a qualifying insurance recovery of $0.5 million under the New Term Loan Facility for the year ended December 31,2017. The Company had a qualifying insurance recover of $0.02 million under the 2016 Term Loan Facility for the year ended December 31, 2016 and had qualifying asset sale proceeds of $0.2 million for the year ended December 31, 2015 . The Company did no t have any restricted cash as of December 31, 2017 and 2016 . +(e) Trade Accounts Receivable +Trade accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current market conditions and the Company’s customers’ financial condition, the amount of receivables in dispute, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable were $235.8 million and $65.4 million at December 31, 2017 and December 31, 2016 , respectively. As of December 31, 2017 and December 31, 2016 , the Company had an allowance for doubtful accounts of $0.5 million and nil , respectively. +79 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(f) Inventories +Inventories are stated at the lower of cost or market (net realizable value). Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated and combined statements of operations using the weighted average cost method for all inventories. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on our historical usage of inventory on-hand, volume on hand versus anticipated usage, technological advances, and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on hand, or not fitting our equipment are written-off. +(g) Revenue Recognition +Revenue from the Company’s Completion Services and Other Services segments are earned and recognized as services are rendered, which is generally on a per stage, daily or hourly rate. All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability is reasonably assured. Contract acquisition and origination costs are expensed as incurred, and are recorded in selling, general and administrative expenses in the consolidated and combined statements of operations. Shipping and handling costs related to customer contracts are charged to cost of services in the consolidated and combined statements of operations. To the extent such costs are billable to the customer, the amounts are recorded as revenue. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated and combined statements of operations and net cash provided by operating activities in the consolidated and combined statements of cash flows. +Revenue from the Company’s Completion Services and Other Services are recognized as follows: +Completion Services +The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements, or on a spot market basis. Revenue is recognized upon the completion of each job. Once a job has been completed to the customer’s satisfaction, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, which is recognized at the beginning of the job upon arriving on location, additional equipment used on the job, if any, and other miscellaneous items. This field ticket is used to create an invoice, which is sent to the customer upon the completion of each job. +Other Services +The Company provides certain complementary services such as cementing and drilling pursuant to contractual arrangements, such as term contracts. The Company typically charges the customer for the services performed and resources provided on a daily, hourly or per job basis. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to several days. Revenue is recognized upon completion of each day’s work, based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous items. The Company typically charges the customer for the services performed and resources provided on a daily basis at agreed-upon spot market rates. +80 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +We will adopt a new revenue recognition standard effective January 1, 2018 that will supersede existing revenue recognition guidance. +(h) Property and Equipment +Property and equipment, inclusive of equipment under capital lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years . Management bases the estimate of the useful life and salvage value of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset and the term of the lease. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized net within operating costs and expenses in the consolidated statements of operations. +Major classifications of property and equipment and their respective useful lives are as follows: +Land +Indefinite life +Building and leasehold improvements +16 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +Leasehold improvements are assigned a useful life equal to the term of the related lease. +Depreciation methods, useful lives and residual values are reviewed annually. +(i) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized. +(j) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment analysis, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated to one reporting unit, Completion Services. +In 2016, the Company reassessed its reporting units and performed its goodwill impairment assessment as of October 31, 2016 based on two updated reporting units: Completion Services and Other Services. This is consistent with the Company’s reportable segments, which were reassessed effective January 1, 2016. Completion Services comprises hydraulic fracturing and wireline services, and Other Services segment comprises cementing and drilling services. In 2015, the Company performed its goodwill impairment assessment based on the then applicable reporting units: hydraulic fracturing, wireline and drilling. +81 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting segment, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated solely to its Completion Services segment. If the carrying amount of the reportable segment exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method. +In 2017, the Company performed Step 0 of the goodwill impairment assessment for the goodwill associated with the Completion Services reporting unit, by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recognized. The Company's assessment was based on the following factors: commodity prices have stabilized, the Company continued to experience strong growth throughout 2017 in both revenue and EBITDA, the performance of the Company's stock price subsequent to its IPO, the enactment of the "Tax Relief for Individuals and Families" tax reform legislation and improved market conditions, as evidenced by growth in the U.S. gross domestic product, growth in the average annual return for the S&P 500 and Dow Jones indexes, production cuts by members of the Organization of the Petroleum Exporting Countries ("OPEC") and non-OPEC members and positive trends and forecasts for the oil and gas industry, +No goodwill impairment has been recognized since inception in 2013. +The Company’s indefinite-lived assets consist of the Company’s trade names. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. +There was no indefinite-lived asset impairment recognized during 2017 , 2016 or 2015 . +(k) Long-Lived Assets +The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be at the service line level, hydraulic fracturing, wireline, drilling, coiled tubing and cementing, as well as an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset that generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment. +Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense. +82 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. +In 2017, for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized. For the property and equipment and definite-lived intangible assets in each of the asset groups within the Company’s Completion Services segment, the Company’s assessment was based on the following factors: commodity prices have stabilized, market conditions have improved as evidenced by an increase in overall demand and pricing power for the Company’s hydraulic fracturing and wireline services, and the Company experienced strong revenue growth throughout 2017. For the property and equipment and definite-lived intangible asset in each of the asset groups within the Company’s Other Services segment, the Company’s assessment was based on the following factors: at October 31, 2017, the fair values of the drilling services’ property and equipment and cementing services’ property and equipment, acquired as a result of the acquisition of Trican’s U.S. Operations, were reflective of the deteriorated market conditions experienced from late 2014 through the first quarter of 2016. From the second quarter of 2016, oil and natural gas prices and rig count estimates have improved significantly, a trend which Management believes will continue throughout 2018. Also at October 31, 2017, the fair values of the cementing services' property and equipment and definite-lived customer contract, acquired as a result of the acquisition of RockPile, were recorded at appraised fair market only four months prior to the Company's impairment analysis, and the Company has plans to ramp up its idle cementing assets in 2018, in response to strong customer demand. +In 2016, for the Company’s definite-lived assets, the Company recorded a $0.2 million of impairment charge relating to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset. +In 2015, the continued fall in commodity prices was deemed a triggering event, and the Company tested its long-lived assets for impairment as of October 31, 2015. The Company recorded a $2.4 million impairment on its definite-lived customer contracts, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”). The Company recorded a $1.2 million impairment, on its trade name, under the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of the period then ended. The Company also recorded a $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable. +See Note (4) Intangible Assets and Note for further details on the Company's impairment of its intangible assets. +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets. +(l) Derivative Instruments and Hedging Activities +The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings +83 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses related to the hedging relationship that were accumulated in other comprehensive income. +(m) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated statements of operations and comprehensive loss. +(n) Fair Value Measurement +Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +84 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +• +Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• +Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• +Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +(o) Employee Benefits and Postemployment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, Compensation—Nonretirement Post-Employment Benefits. In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, Exit or Disposal Cost Obligations. A liability is recognized for one time termination benefits when the Company is committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount. +(p) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”) and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company's common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. As a newly established public company, the Company's attrition rate for key management personnel is insignificant. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +Compensation expense from time-based restricted stock awards, RSUs and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +Deferred compensation expense associated with liability based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company's stock on the date of settlement. +85 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Tax deductions on the stock-based compensation awards will not be realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows. +The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by the Company withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees' income tax obligations are accounted for as treasury shares that are subsequently retired. +For additional information, see Note ( 12 ) ( Equity-Based Compensation ). +(q) Leases +The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property and equipment. Operating lease expense is recorded on a straight-line basis over the lease term. Landlord incentives are recorded as deferred rent and amortized as reductions to lease expense on a straight-line basis over the life of the applicable lease. +(r) Research and development costs +Research and development costs are expensed as incurred. Research and development costs incurred directly by the Company were $3.7 million , $2.2 million and nil for the years ended December 31, 2017 , 2016 and 2015 , respectively. +(s) Taxes +Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the year ended December 31, 2017 . +See Note ( 17 ) ( Income Taxes ) for a detailed discussion of the Company's taxes and activities thereof during the year ended December 31, 2017 . +In addition, the Company has a Canadian subsidiary, which is treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company is subject to foreign income tax. +The Company is responsible for certain state income and franchise taxes, which include Pennsylvania, Texas and New York. These amounts are reflected as selling, general and administrative expense in the consolidated financial statements of the Company. +Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +86 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(t) Equity-method investments +Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the non-controlled entities' operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company's share of the entity's income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated and combined balance sheets. +As of December 31, 2017 , the Company has recognized $0.6 million for its only equity-method investment. +(u) Pro-forma earnings per unit +The earnings per unit amounts have been computed to give effect to the Organizational Transactions, as if they had occurred at the beginning of the earliest period presented, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO. +(3) Acquisition s +(a) Trican +On March 16, 2016, the Company acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”), for total consideration of $248.1 million , comprised of $199.4 million in cash, $6.0 million in adjustments pursuant to terms of the acquisition agreement to Trican and $42.7 million in Class A and C Units in the Company (the “Trican Transaction”). +The Company accounted for the acquisition of the Acquired Trican Operations using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the acquisition have been recorded based on their fair values. The Company finalized the purchase price allocation in March 2017 and recorded certain measurement period adjustments during the quarter ended March 31, 2017. +87 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table summarizes the fair value of the consideration transferred for the acquisition of the Acquired Trican Operations and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the acquisition date: +Total Purchase Consideration: +(Thousands of Dollars) +Preliminary Purchase Price Allocation +Adjustments +Final Purchase Price Allocation +Cash consideration +$ +199,400 +$ +— +$ +199,400 +Net working capital purchase price adjustment +6,000 +— +6,000 +Class A and C Units issued +42,669 +— +42,669 +Total consideration +$ +248,069 +$ +— +$ +248,069 +Accounts receivable +$ +37,377 +$ +— +$ +37,377 +Inventories +20,006 +(202 +) +19,804 +Prepaid expenses +7,170 +— +7,170 +Property and equipment +205,546 +(413 +) +205,133 +Intangible assets +3,880 +— +3,880 +Total identifiable assets acquired +273,979 +(615 +) +273,364 +Accounts payable +(12,630 +) +469 +(12,161 +) +Accrued expenses +(9,524 +) +(9,524 +) +Current maturities of capital lease obligations +(1,594 +) +— +(1,594 +) +Capital lease obligations, less current maturities +(2,386 +) +— +(2,386 +) +Other non-current liabilities +(1,372 +) +— +(1,372 +) +Total liabilities assumed +(27,506 +) +469 +(27,037 +) +Goodwill +1,596 +146 +1,742 +Total purchase price consideration +$ +248,069 +$ +— +$ +248,069 +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill is primarily attributable to expected synergies and the assembled workforce. The entire amount of the goodwill was allocated to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible. +Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following: +88 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Estimated useful life +(in Years) +Fair value +(Thousands of Dollars) +Customer contracts +1.8 +$ +3,500 +Non-compete agreements +2.0 +50 +Fracking Fluids +4.8 +330 +Total intangible assets +$ +3,880 +Weighted average life of finite-lived intangibles +2.1 +For the valuation of the customer relationship intangible asset, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s cost of equity. +The non-compete agreements intangible asset was valued using the “lost income” approach including the probability of competing. Estimated cash flows were discounted at the weighted average cost of capital due to the low risk profile of this contract. The term of the non-compete agreement is two years from the closing date of the Trican Transaction. +As part of the acquisition of Trican’s U.S. Operations, the Company obtained the right to use certain proprietary fracking-related fluids, including MVP FracTM and TriVertTM (the “Fracking Fluids”), for its own pressure pumping services to its customers. The Fracking Fluids were valued using the “income-based relief-from-royalty” method. Under this method, revenues expected to be generated by the technology are multiplied by a selected royalty rate. The estimated after-tax royalty revenue stream is then discounted to present value using the Company’s cost of equity. +The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors. +The remaining amount of working capital purchase adjustment of $1.5 million , which was recorded as a payable on the date of acquisition, was reversed into income on the consolidated and combined statements of operations as part of the gain on the Trican indemnification settlement . This did not result in any adjustment to the purchase accounting, as the settlement occurred after the twelve-month measurement period was completed. See Note ( 18 ) ( Commitments and Contingencies ) for further details. +The following unaudited pro forma information assumes the acquisition of the Acquired Trican Operations occurred on January 1, 2015. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2016 , or any operating efficiencies or inefficiencies that resulted from the acquisition of the Acquired Trican Operations. The information is not necessarily indicative of the results that would have been achieved had the Company controlled the Acquired Trican Operations during the period presented. The pro forma information does not include any integration or transactions costs that the Company incurred related to the acquisition in the periods following the period presented. +89 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Unaudited +Year Ended +December 31, 2016 +Revenue +$ +464,036 +Net Income +$ +(217,313 +) +The Company’s consolidated and combined statement of operations and comprehensive income (loss) include revenue (unaudited) of $191.0 million and gross profit (unaudited) of $10.4 million from the Acquired Trican Operations from the date of acquisition on March 16, 2016 to December 31, 2016 . +(b) RockPile +On July 3, 2017 (the “RockPile Closing Date” or the “RockPile Acquisition Date”), the Company acquired 100% of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the United States, whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the United States. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment. +The acquisition of RockPile was completed for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in owners' equity in the consolidated and combined balance sheet, was calculated using the closing price of the Company's common stock on July 3, 2017, of $16.29 , discounted by 7.9% to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. +Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount does not exceed $2.30 . The CVR Payment Amount is the difference between (a) $19.00 and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty ( 20 ) trading days randomly selected by the Company during the thirty ( 30 ) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount shall be reduced on a dollar for dollar basis if the sum of the following exceeds $165.0 million : +• +(i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus +• +(ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus +• +(iii) the Aggregate CVR Payment Amount. +As of December 31, 2017 , the Company has recognized a liability of $6.7 million for the Aggregate CVR Payment Amount, which is recorded in current liabilities in the consolidated and combined balance sheet. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock. +90 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +On August 31, 2017, the Company delivered to the Principal Seller a closing statement with its determination of the final closing cash purchase price. This determination included the Company's calculation of working capital deficit, as compared to the Principal Seller's estimated working capital deficit used in determining the cash consideration paid on the RockPile Closing Date. Resolution of the differences between the Company's calculation and the Principal Seller's calculation of the working capital deficit has been completed and recorded as adjustments to our preliminary purchase accounting allocation, with no adverse impact on the Company's financial position. +The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The purchase accounting is subject to the twelve-month measurement adjustment period to reflect any new information that may be obtained in the future about facts and circumstances that existed as of the RockPile Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of that date. +91 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following tables summarize the fair value of the consideration transferred for the acquisition of RockPile and the preliminary allocation of the purchase price to the fair values of the assets acquired, liabilities assumed and equity consideration at the RockPile Acquisition Date: +Total Purchase Consideration: +Preliminary Purchase Price Allocation +Adjustments +Purchase Price Allocation as of December 31, 2017 +(Thousands of Dollars) +Cash consideration +$ +123,293 +$ +(6,717 +) +$ +116,576 +Equity consideration +130,290 +— +130,290 +Contingent consideration +11,962 +— +11,962 +Less: Cash acquired +(20,379 +) +20,379 +— +Total purchase consideration, less cash acquired +$ +245,166 +$ +13,662 +$ +258,828 +Trade and other accounts receivable +$ +57,117 +$ +1,588 +$ +58,705 +Inventories, net +2,853 +138 +2,991 +Prepaid and other current assets +13,630 +(717 +) +12,913 +Property and equipment, net +157,654 +8,653 +166,307 +Intangible assets +20,967 +(1,267 +) +19,700 +Notes receivable +250 +(250 +) +— +Other noncurrent assets +363 +(57 +) +306 +Total identifiable assets acquired +252,834 +8,088 +260,922 +Accounts payable +(38,999 +) +16,242 +(22,757 +) +Accrued expenses +(22,161 +) +(15,924 +) +(38,085 +) +Deferred revenue +(23,053 +) +698 +(22,355 +) +Other non-current liabilities +(827 +) +(2,412 +) +(3,239 +) +Total liabilities assumed +(85,040 +) +(1,396 +) +(86,436 +) +Goodwill +77,372 +6,970 +84,342 +Total purchase price consideration +$ +245,166 +$ +13,662 +$ +258,828 +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill in this acquisition is primarily attributable to expected synergies and new customer relationships and was allocated to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years. +92 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Intangible assets related to the acquisition of RockPile consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Customer contracts +10.8 +$ +19,700 +Total +$ +19,700 +For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole. +For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component. +The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile's operations with that of the Company, including retention bonuses and severance payments. Harmonization costs consist of expenses incurred in connection with aligning RockPile's accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +(Thousands of Dollars) +Transaction Type +Year Ended +December 31, 2017 +Location +Deal costs +$ +513 +Cost of services +Deal costs +6,166 +Selling, general and administrative expenses +Integration +214 +Cost of services +Integration +1,124 +Selling, general and administrative expenses +Harmonization +656 +Selling, general and administrative expenses +$ +8,673 +The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events that may occur after July 2, 2017 or any operating efficiencies or inefficiencies that may result from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented or the results that the Company will experience going forward. Pro forma net loss for the twelve months ended December 31, 2016 includes $0.8 million of non-recurring +93 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +retention bonuses associated with the acquisition,which were incurred after the closing and $1.8 million of compensation costs associated with the executives of RockPile whom the Company retained. In addition, the Company incurred $2.2 million of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing. The pro forma information does not include any remaining future integration costs or transaction costs that the Company may incur related to the acquisition. +(Thousands of Dollars) +Unaudited +Year Ended December 31, +2017 +2016 +Revenue +$ +1,732,279 +$ +543,966 +Net income (loss) +(49,584 +) +(206,417 +) +Net loss per share (basic and diluted) +$ +(0.44 +) +$ +(2.36 +) +Weighted-average shares outstanding +Basic +111,735 +87,313 +Diluted +111,735 +87,313 +The Company’s consolidated and combined statement of operations and comprehensive income (loss) includes revenue (unaudited) of $192.2 million and gross profit (unaudited) of $29.8 million , from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017 . +(4) Intangible Assets +The intangible assets balance in the Company’s consolidated and combined balance sheets represents the fair value, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2017 +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +9.1 +$ +68,600 +$ +(23,049 +) +$ +45,551 +Non-compete agreements +8.1 +750 +(360 +) +390 +Trade name +Indefinite life +10,200 +— +10,200 +Technology +2.1 +3,023 +(1,884 +) +1,139 +Total +$ +82,573 +$ +(25,293 +) +$ +57,280 +94 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +December 31, 2016 +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +8.8 +$ +52,400 +$ +(20,336 +) +$ +32,064 +Non-compete agreements +8.7 +750 +(288 +) +462 +Trade name +0.9 - Indefinite life +11,090 +(686 +) +10,404 +Technology +2.3 +2,324 +(1,239 +) +1,085 +Total +$ +66,564 +$ +(22,549 +) +$ +44,015 +Amortization expense related to the intangible assets for the years ended December 31, 2017 , 2016 and 2015 was $7.1 million , $5.7 million and $4.9 million , respectively. +Amortization for the intangible assets excluding trade name of $10.2 million with indefinite useful life and in process software, over the next five years, is as follows: +Year-end December 31, +(Thousands of Dollars) +2018 +$ +6,010 +2019 +5,128 +2020 +5,041 +2021 +4,973 +2022 +4,973 +(5) Goodwill +The changes in the carrying amount of goodwill for the years ended December 31, 2017 , 2016 and 2015 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2015 +$ +48,882 +Acquisition of Trican's U.S. Operations +1,596 +Goodwill as of December 31, 2016 +50,478 +Acquisitions +84,489 +Goodwill as of December 31, 2017 +$ +134,967 +The changes in the carrying amount of goodwill for the year ended December 31, 2017 consisted of $0.2 million of purchase price adjustments related to the acquisition of the Acquired Trican Operation and $84.3 million recognized in connection with the acquisition of RockPile. These additions to goodwill were allocated to the Completion Services segment. Goodwill recognized in connection with the acquisition of Trican's U.S. Operations was allocated to the Completion Services segment. For additional information, see Note (3) ( Acquisition s). There were no triggering events identified and no impairment recorded since inception and for the years ended December 31, 2017 , 2016 and 2015 . +95 +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2017 and December 31, 2016 : +(Thousands of Dollars) +December 31, +2017 +December 31, +2016 +Sand, including freight +$ +11,551 +$ +6,520 +Chemicals and consumables +7,940 +4,774 +Materials and supplies +13,946 +4,597 +Total inventory, net +$ +33,437 +$ +15,891 +Inventories are reported net of obsolescence reserves of $0.3 million and $0.1 million as of December 31, 2017 and 2016 , respectively. The Company recognized $0.3 million , $0.02 million and $0.05 million of obsolescence expense during the years ended December 31, 2017 , 2016 and 2015 . +( 7 ) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2017 and December 31, 2016 : +(Thousands of Dollars) +December 31, +2017 +December 31, +2016 +Land +$ +5,186 +$ +5,166 +Building and leasehold improvements +30,322 +30,750 +Office furniture, fixtures and equipment +6,338 +4,780 +Machinery and equipment +773,516 +514,017 +815,362 +554,713 +Less accumulated depreciation +(372,617 +) +(261,292 +) +Construction in progress +25,255 +788 +Total property and equipment, net +$ +468,000 +$ +294,209 +The machinery and equipment balance as of December 31, 2017 and 2016 included $10.1 million of hydraulic fracturing equipment under capital lease. The machinery and equipment balance as of December 31, 2017 and 2016 also included approximately $5.1 million and $2.4 million , respectively, of vehicles under capital leases. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was $8.3 million and $5.7 million as of December 31, 2017 and 2016 , respectively. Accumulated depreciation for the vehicles under capital leases was $1.6 million and $0.6 million as of December 31, 2017 and 2016 , respectively. +All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations. The following summarizes the proceeds received and (gains) losses recognized on the disposal of certain assets the years ended December 31, 2017 , 2016 and 2015 : +During the year ended December 31, 2017 , the Company divested the following assets: +• +Idle facility in Searcy, Arkansas, acquired in the acquisition of the Acquired Trican Operations, divested for net proceeds of $0.5 million and a net loss of $0.6 million , within the Corporate segment; +96 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +• +Idle facility in Woodward, Oklahoma, acquired in the acquisition of the Acquired Trican Operations, divested for net proceeds of $2.4 million and a net gain of $0.5 million , within the Completion Services segment; +• +Air compressor units, divested for net proceeds of $0.9 million and a net gain of $0.9 million , within the Other Services segment; +• +Twelve workover rigs acquired in the acquisition of RockPile, divested for net proceeds of $16.7 million with no (gain) or loss, within the Other Services segment; +• +Hydraulic fracturing operating equipment, divested for a net loss of $0.6 million , within the Completions segment; and +• +Idle coiled tubing assets, divested for net proceeds of $10.0 million and a net gain of $3.5 million , within the Other Services segment. +During the year ended December 31, 2016 , the Company also divested various immaterial assets for net proceeds of $0.7 million and a net gain of $0.4 million , primarily within the Completions Services segment. +During the year ended December 31, 2015 , the Company divested of certain drilling assets and vehicles for net proceeds of $1.3 million and a net gain of $0.3 million , primarily within the Other Services segment. +( 8 ) Long-Term Debt +Long-term debt at December 31, 2017 and December 31, 2016 consisted of the following: +(Thousands of Dollars) +December 31, +2017 +December 31, +2016 +New Term Loan Facility +$ +283,202 +$ +— +Senior Secured Notes +— +190,000 +2016 Term Loan Facility +— +98,103 +Capital leases +7,918 +8,075 +Less: Unamortized debt discount and debt issuance costs +(8,173 +) +(18,353 +) +Total debt, net of unamortized debt discount and debt issuance costs +282,947 +277,825 +Less: Current portion +(4,436 +) +(5,145 +) +Long-term debt, net of unamortized debt discount and debt issuance costs, including capital leases +$ +278,511 +$ +272,680 +2016 ABL Facility +On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac, LP, KS Drilling, LLC, Keane Frac ND, LLC, Keane Frac TX, LLC and Keane Frac GP, LLC entered into an amendment which modified their existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) with certain financial institutions (collectively, the “2016 ABL Lenders”) and PNC Bank, National Association (“PNC Bank”), as agent for the 2016 ABL Lenders. +On February 17, 2017, the Company replaced its 2016 ABL Facility with the 2017 ABL Facility (as described below). +97 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company expensed $0.3 million in deferred financing costs related to the proportionate decrease in the borrowing capacity with PNC Bank under the new 2017 ABL Facility. The remaining $1.0 million in deferred financing costs related to the 2016 ABL Facility is being amortized over the life of the 2017 ABL Facility. +2017 ABL Facility +On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The 2017 ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the 2017 ABL Facility. No early termination fees were incurred by the Company in connection with such termination. On December 22, 2017, KGI and certain of its subsidiaries amended and restated the asset-based revolving credit agreement governing the February 2017 ABL Facility (the "Amended 2017 ABL Facility" and together with the February 2017 ABL Facility, the "2017 ABL Facility") to, among other things, increase by $150.0 million the total amount of aggregate commitments by the lenders party thereto. +The 2017 ABL Facility provides for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a Borrowing Base (as defined below). In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an increase in commitments of up to $150.0 million . Loans arising under the initial commitments of the 2017 ABL Facility, unless extended, mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33% , 1.00% , (y) if the average excess availability is greater than or equal to 33% but less than 66% , 0.75% or (z) if the average excess availability is greater than or equal to 66% , 0.50% , or (b) the adjusted London Interbank Offered Rate (“LIBOR”) rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33% , 2.00% , (y) if the average excess availability is greater than or equal to 33% but less than 66% , 1.75% or (z) if the average excess availability is greater than or equal to 66% , 1.50% . The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when Consolidated EBITDA (as defined herein) as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25% ; provided that if Consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above. “Consolidated EBITDA,” generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs. Following an event of default, the 2017 ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2.00% per annum during the continuance of such event of default, and the letter of credit fees increase by 2.00% . +The amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, a borrowing base (the “Borrowing Base”) in an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 80% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to +98 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves. +Subject to certain exceptions, as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment; certain other assets and property related thereto, including chattel paper, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral. +Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”). +The 2017 ABL Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility), including a financial covenant, which provides that (a) if any event of default is occurring and continuing, (b) if no loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, liquidity is less than the greater of (i) 10% of the lesser of (x) the commitments of the 2017 ABL Lenders, which as of December 31, 2017 was $300.0 million , and (y) the Borrowing Base, at any time of determination (the “Loan Cap”) and (ii) $20.0 million at any time or (c) if any loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, excess availability is less than the greater of (i) 10% of the Loan Cap and (ii) $20.0 million at any time, then the consolidated fixed charge coverage ratio, as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, may not be lower than 1.0 :1.0. This financial covenant will remain in effect until the thirtieth consecutive day that all such triggers no longer exist. +In connection with the February 2017 ABL Facility and the Amended 2017 ABL Facility in December 2017, the Company incurred $4.7 million of debt issuance costs during the year ended December 31, 2017 . See “Deferred Financing Costs” below for discussion of unamortized debt issuance costs as of December 31, 2017 . +There were no amounts outstanding under the 2017 ABL Facility as of December 31, 2017 . The Company's availability under the 2017 ABL Facility was $199.7 million as of December 31, 2017 . +2016 Term Loan Facility +On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP, entered into a credit agreement (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders. The 2016 Term Loan Facility provided for a $100.0 million term loan. The 2016 Term Loan Facility was prepaid in full on January 25, 2017, in connection with the IPO. The Company paid a prepayment premium of $13.8 million . +The Company accounted for this transaction as an early debt extinguishment and expensed $8.2 million in deferred financing costs associated with the 2016 Term Loan Facility. +99 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +New Term Loan Facility +On March 15, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes a 2017 Term Loan Borrower under the 2017 Term Loan Facility in accordance with the terms thereof, collectively, the “2017 Term Loan Borrowers”) and the 2017 Term Loan Guarantors (as defined below) entered into a term loan agreement (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock Capital Corporation (“Owl Rock”), as administrative agent and collateral agent. +On July 3, 2017, the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors entered into an incremental term loan facility (the “2017 Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent. +The 2017 Term Loan Facility provides for a $150.0 million initial term loan facility, and the 2017 Incremental Term Loan Facility provides for a $135.0 million term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a) $50.0 million (less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than 1.75 :1.00. +The Term Loans bear interest at a rate per annum equal to, at Keane Group Holdings, LLC's option, (a) the base rate plus 6.25% , or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25% . Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. The Term Loans mature on August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral. +Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each 2017 Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “2017 Term Loan Guarantors”). +The New Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the New Term Loan Facility), including a financial covenant, which provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the 2017 Term Loan Borrowers and 2017 Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than $35.0 million . The Company was in compliance with all covenants under the New Term Loan Facility as of December 31, 2017 . +In connection with the initial borrowings under the 2017 Term Loan Facility, the Company incurred $5.0 million of debt issuance costs during the quarter ended March 31, 2017. In connection with the borrowings under the 2017 Incremental Term Loan Facility, the Company incurred $4.1 million of debt issuance costs during the year ended December 31, 2017 . The Company recorded both Term Loans on the balance sheet at their outstanding principal amounts, net of the unamortized debt issuance costs. See “Deferred Financing Costs” below for discussion of unamortized debt issuance costs as of December 31, 2017 . +100 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Maturities of the Term Loans for the next five years are presented below: +(Thousands of Dollars) +Year-end December 31, +2018 +2,850 +2019 +2,850 +2020 +2,850 +2021 +2,850 +2022 +271,800 +$ +283,200 +Any prepayment of the Term Loans will not result in a prepayment penalty. +Senior Secured Notes +The Company retired its existing note purchase agreement (the “NPA”) with certain financial institutions (collectively, the “Purchasers”) and U.S. Bank National Association, as agent for the Purchasers, in connection with the IPO and execution of the 2017 Term Loan Facility. In connection with the IPO, $50.0 million of the NPA was repaid on January 25, 2017. The remaining outstanding balance of $138.7 million was repaid in full on March 15, 2017, upon execution of the 2017 Term Loan Facility. The Company paid a prepayment premium of $1.9 million related to both repayments. +The Company accounted for this transaction as an early debt extinguishment and expensed $6.8 million in deferred financing costs associated with the NPA. +Deferred Financing Costs +Costs incurred to obtain financing are capitalized and amortized using the effective interest method and netted against the carrying amount of the related borrowing. The amortization is recorded in interest expense on the consolidated and combined statements of operations and comprehensive income (loss). Amortization expense related to the capitalized deferred financing costs for the years ended December 31, 2017 , 2016 and 2015 was $5.2 million , $4.2 million and $2.1 million , respectively. +Unamortized deferred financing costs associated with the 2016 ABL Facility and the 2017 ABL Facility were $5.0 million and $1.5 million as of December 31, 2017 and 2016 , respectively, and are recorded in other noncurrent assets on the consolidated and combined balance sheets. +Capital Leases +The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2018 and 2021. The capital lease obligation for fracturing equipment obtained through a capital lease with CIT has a lease term of 60 months and interest rate of 4.73% per annum. Total remaining principal balance outstanding on the CIT lease as of December 31, 2017 and 2016 was $4.5 million and $6.3 million , respectively. Total interest expense incurred on this lease was $0.3 million , $0.3 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. +The Company leases certain machinery and equipment under a capital lease with FNB that expires in 2018. Total remaining principal balance outstanding on this lease as of December 31, 2017 and 2016 was $0.02 million and $0.04 million , respectively. Total interest expense incurred on this lease was less than $0.01 million for the years ended December 31, 2017 and 2016, respectively. +101 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +As part of the acquisition of Trican’s U.S. Operations, the Company assumed capital leases for light weight vehicles with ARI Financial Services Inc. The lease terms on the vehicles range from 36 to 60 months and interest rates range from 2.25% to 3.75% . In 2017, the Company leased additional light weight vehicles with ARI Financial Services, Inc. The new vehicle leases have terms of 48 months and interest rates ranging from 3.60% and 3.98% . The total outstanding capital lease obligation on the vehicles leased from ARI as of December 31, 2017 and 2016 was $3.0 million and $1.7 million , respectively. Total interest expense incurred on these leases was $0.04 million and $0.01 million for the years ended December 31, 2017 and 2016, respectively. +In 2017, the Company entered into capital leases for light weight vehicles with Enterprise Fleet Trust. The vehicle leases have terms of 48 months and an interest rate of 8.5% . The total outstanding capital lease obligation for the vehicles leased from Enterprise Fleet Trust as of December 31, 2017 was $0.3 million , and total interest incurred for the year ended December 31, 2017 was $0.01 million . +Depreciation of assets held under capital leases is included within depreciation expense. See Note ( 7 ) Property and Equipment, net for further details. +Future annual capital lease commitments, including the interest component as of December 31, 2017 for the next five years are listed below: +Year-end December 31, +(Thousands of Dollars) +2018 +$ +3,633 +2019 +3,600 +2020 +758 +2021 +527 +2022 +— +Subtotal +8,518 +Less amount representing interest +(600) +$ +7,918 +(9) Significant Risks and Uncertainties +The Company operates in two reportable segments: Completion Services and Other Services, with significant concentration in the Completion Services segment. During the years ended December 31, 2017 , 2016 and 2015 , sales to Completion Services customers represented 99% , 98% , and 99% of the Company’s consolidated revenue, respectively. During the years ended December 31, 2017 , 2016 and 2015 , sales to Completion Services customers represented 99% , 212% , and 99% of the Company's consolidated gross profit, respectively. +The Company depends on its customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which in turn, is affected by current and expected levels of oil and natural gas prices. Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove the industry into a downturn. Recent events have provided upward momentum for energy prices. With the rebound in commodity prices from their lows in early 2016, drilling and completion activity has continued to increase in 2017, with U.S. active rig count in December 2017 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility has continued to persist. Despite this market volatility, the Company continues to experience increased demand for its services and believes it is in a more stable demand environment than existed during the above-mentioned market decline. +102 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +For the year ended December 31, 2017 , no customer represented more than 10% of the Company's consolidated revenue. For the year ended December 31, 2016 , revenue from the Company's top three customers individually represented 18% , 15% and 15% of the Company's consolidated revenue, respectively. For the year ended December 31, 2015 , revenue from the Company's top two customers represented 38% and 21% of the Company's consolidated revenue, respectively. Revenue is earned from each of these customers within the Completion Services segment. +For the years ended December 31, 2017 , 2016 and 2015 , purchases from two suppliers, one supplier and four suppliers represented approximately 5% to 10% of the Company’s overall purchases, respectively. The costs for each of these suppliers were incurred within the Completion Services segment. +(10) Derivatives +Holdco II uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. +In September 2017, Holdco II amended an existing interest rate swap and entered into a new forward starting interest rate swap to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the New Term Loan Facility. +The amended swap, which is effective through September 30, 2019, is designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a 1% floor, and makes payments based on a fixed rate of 2.055% ; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above 1.0% . As of December 31, 2017 , the notional amount of the interest rate swap was $136.9 million , decreasing quarterly by $0.9 million . +In conjunction with the amendment of the existing interest rate swap, Holdco II executed a new forward starting interest rate swap effective September 30, 2019 through August 18, 2022, which was designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a 1% floor, and makes payments based on a fixed rate of 2.345% ; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above 1.0% . The notional amount for the first quarterly reset period effective September 30, 2019 is $130.3 million , decreasing quarterly by $0.9 million . +Additionally, on September 28, 2017, the Company terminated two interest rate swaps that were not designated as hedges for a cash payment of $0.8 million . +103 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments +Derivatives +not +designated as +hedging +instruments +Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2017: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +324 +— +324 +— +324 +Other current liability +(254 +) +— +(254 +) +— +(254 +) +Other noncurrent liability +— +— +— +— +— +As of December 31, 2016: +Other current asset +$ +— +$ +342 +$ +342 +$ +(342 +) +$ +— +Other noncurrent asset +129 +— +129 +(129 +) +— +Other current liability +(313 +) +(959 +) +(1,272 +) +342 +(930 +) +Other noncurrent liability +— +(1,473 +) +(1,473 +) +129 +(1,344 +) +(1) +With all of the Company’s financial trading counterparties, agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) +There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2017 +2016 +2015 +Location +Amount of gain (loss) recognized in other comprehensive income ("OCI") on derivative +$ +791 +$ +(1,784 +) +$ +(2,765 +) +OCI +Amount of loss reclassified from AOCI into income +(72 +) +(603 +) +(1,578 +) +Interest Expense +Amount of loss reclassified from AOCI into income as a result of originally forecasted transaction becoming probable of not occurring +(100 +) +(3,038 +) +— +Interest Expense +The loss recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss). +There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2017 , $0.3 million of net gains will be reclassified from accumulated other comprehensive income into earnings within the next 12 months. +104 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 815, “Derivative Financial Instruments,” (in thousands of dollars): +Year Ended December 31, +Description +Location +2017 +2016 +2015 +Gains (loss) on interest contracts +Interest expense +$ +(367 +) +$ +240 +$ +— +See Note ( 11 ) ( Fair Value Measurements and Financial Information ) for further information related to the Company’s derivative instruments. +( 11 ) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt, capital lease obligations and contingent liability. As of December 31, 2017 and 2016 , the carrying values of the Company's financial instruments, included in its consolidated and combined balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016 . +Recurring Fair Value Measurement +At December 31, 2017 and 2016 , the two financial instruments measured by the Company at fair value on a recurring basis were its interest rate derivatives and the Aggregate CVR Payment Amount related to the Acquisition of RockPile. +The fair market value of the derivative financial instrument reflected on the balance sheet as of December 31, 2017 and 2016 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data +The fair market value of the Aggregate CVR Payment Amount reflected on the balance sheet as of December 31, 2017 was determined using a Monte Carlo option pricing model that considers various assumptions, including the Company's stock price, the length of the holding period and discount for volatility. The Aggregate CVR Payment Amount was not outstanding at December 31, 2016. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock. +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2017 and 2016 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2017 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +$ +70 +$ +— +$ +70 +$ +— +Aggregate CVR Payment +— +— +— +— +Liabilities: +Interest rate derivatives +— +— +— +— +Aggregate CVR Payment +6,665 +— +6,665 +— +105 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Fair value measurements at reporting date using +December 31, 2016 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +— +— +— +— +Liabilities: +Interest rate derivatives +2,274 +— +2,274 +— +Non-Recurring Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the Acquired Trican Operations and RockPile were recorded at their fair values on the date of acquisition. See Note (3) Acquisition s for further details. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +In 2017, the Company determined there were no events that would indicate the carrying amount of its indefinite-lived assets and long-lived assets may not be recoverable, and as such, no impairment charge was recognized. +In 2016, the Company recorded an impairment charge of $0.2 million associated with the non-compete agreement related to its Other Services segment. +In 2015, the Company recorded a $2.4 million impairment on its definite-lived intangible assets, within its Completion Services segment, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”), a $1.2 million impairment on its trade name, within the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of December 31, 2015 and a $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposit with financial institutions totaled $96.1 million and $48.9 million as of December 31, 2017 and 2016 , respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor's credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +106 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The majority of the Company’s trade receivables have payment terms of 30 days or less. As of December 31, 2017 , trade receivables from the Company's top customer represented 17% of total accounts receivable. As of December 31, 2016 , trade receivables from the top four customers individually represented 15% , 14% , 13% and 12% of total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has not had to write-off any bad debts for its customers as of December 31, 2017 and 2016 and has a process in place to collect all receivables within 30 to 60 days of aging. +( 12 ) Equity-Based Compensation +Under the Company's Equity and Incentive Award Plan, compensation expense for restricted stock awards, RSUs, non-qualified stock options and deferred compensation awards to be settled in shares of the Company's common stock is determined based on the fair value of the awards at the date of grant. The fair value of these awards is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs and non-qualified stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation expense associated with liability based awards, such as deferred compensation awards with a fixed monetary amount to be settled in shares of the Company's common stock at the closing price of the Company's stock on the vesting date, is recognized based on the fixed monetary amount agreed upon at the grant date and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +As of December 31, 2017 , the Company has four types of equity-based compensation under the Equity and Incentive Award Plan: (i) deferred stock awards for three executive officers, (ii) restricted stock awards issued to independent directors, (iii) restricted stock units issued to executive officers and key management employees, and (iv) non-qualified stock options issued to executive officers. The Company has reserved 7,734,601 shares of its common stock for awards that may be issued under the Equity and Incentive Award Plan. +The following table summarizes equity-based compensation costs for the years ended December 31, 2017 , 2016 and 2015 (in thousands of dollars): +Twelve Months Ended +December 31, +2017 +2016 +2015 +Class C Interests +$ +— +$ +— +$ +313 +Class B Interests +— +1,984 +— +Deferred stock awards +4,280 +— +— +Restricted stock awards +399 +— +— +Restricted stock units +4,766 +— +— +Non-qualified stock options +1,133 +— +$ +— +Equity-based compensation cost +$ +10,578 +$ +1,984 +$ +313 +107 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(a) Class C Interests +Prior to the completion of the Trican Transaction, the Company sponsored its Class C Management Incentive Plan (the “Class C Plan”) to grant Class C units to management. Under the Class C Plan, a maximum of 149,425 Class C units were authorized, of which 113,283 were outstanding as of December 31, 2015. The Class C units granted under the Class C Plan vested based on the participants continued employment with the Company (“Time-Based Units”) and based on the achievement of performance objectives as determined by the Compensation Committee (“Performance-Based Units”). Generally, the Time-Based Units vested one-third on each of the first three anniversary dates of the grant date, subject to the participant’s continued employment. The Performance-Based Units vested over the same periods, subject to the attainment of certain performance objectives. As of March 16, 2016, of the total outstanding Class C units issued under the Class C Plan, 97,305 were fully vested and 4,408 were unvested. +The Company determined the fair value of the Class C unit awards with the assistance from a third-party valuation expert. The fair value of each Class C unit award was estimated on the date of grant using a Monte Carlo option pricing model. A significant input of the option pricing method was the enterprise value of Keane Group Holding, LLC. The Company estimated the enterprise value utilizing a combination of the income and market approaches. Additional significant inputs used in the option pricing method included the length of holding period, discount for lack of marketability and volatility. +The Company granted 8,815 Class C units in 2015. During 2015, 28,650 Class C units were bought back, respectively. The total amount paid during the year ended December 31, 2015 for Class C unit buy backs was $0.2 million . Furthermore, the Company recognized $0.2 million relating to withholding taxes on settlements for the year ended December 31, 2015. +Non-cash compensation cost related to Time-Based Units recognized in operating results during the year ended December 31, 2015 was $0.2 million . At December 31, 2015, there was $0.2 million of total unrecognized compensation cost related to unvested Time-Based Units under the Class C Plan. +Non-cash compensation cost with respect to the vested portion of the Performance-Based Units recognized in operating results during the year ended December 31, 2015 was $0.2 million . The awards for Performance-Based Units were accounted for at fair value. With respect to the remaining unvested portion of the Performance-Based Units, no compensation cost had been recognized as of December 31, 2015, because the performance criteria had not been defined. +(b) 2016 Class B Interests - Management Incentive Plan +On March 16, 2016, the Company canceled all outstanding Class C units issued under its Class C Management Incentive Plan (the “Class C Plan”) and issued Class B units under the Keane Management Holdings LLC Management Incentive Plan (“Class B Plan”). Using an applicable conversion ratio specific to each participant the Company issued 83,529 Class B units to former participants in the Class C Plan, of which 80,784 were fully vested upon issuance. The remaining 2,745 were subject to vesting based on the same time-based schedule that applied under a participant’s canceled Class C award agreement, subject to the participant’s continued employment, without regard to the achievement of any performance objectives that applied under the Class C units (see “Class C Plan” below). In addition, on March 16, 2016, the Company also issued 2,353 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The grant date fair value of the Class B units issued on March 16, 2016 was $98.97 . +The Company accounted for the exchange of Class C units for Class B units as a modification. In accordance with the requirements of ASC 718, the Company calculated incremental fair value on the difference between the fair value of the modified award and the fair value of the original award immediately prior to the modification. The incremental fair value related to vested units was recognized immediately as compensation +108 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards will be recognized as compensation expense over the remaining vesting period. +During the second quarter of 2016, the Company issued 1,177 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $98.97 per Class B unit on the date of grant. +During the fourth quarter of 2016, the Company issued 6,471 Class B units to members of the Board of Directors of the Company and 7,647 to other management personnel. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $73.20 per Class B unit on the date of grant. +The Company used the Option-Pricing Method to value Class B units. Since the Company’s equity was not publicly traded, expected volatility was estimated based on the volatility of similar entities with publicly traded equity. The risk-free rate for the expected term of the units was based upon the observed yields of U.S. Treasury financial instruments interpolated to match the expected time to liquidity. The Company also calculated the discount for lack of marketability using the Finnerty protective put model. The time to liquidity was based upon the expected time to a successful liquidity event +As described in Note ( 1 ) ( Basis of Presentation and Nature of Operations ) , in order to effectuate the IPO, the Company completed the Organizational Transactions, which resulted in the Existing Owners contributing all of their direct and indirect equity interests in Keane Group to Keane Investor. +During the years ended December 31, 2017 and 2016 , the Company recognized nil and $2.0 million , respectively, of non-cash compensation expense into income related to the Company’s Management Incentive Plan. As all vested and unvested membership units were contributed to Keane Investor, which is not a subsidiary of the Company, on January 20, 2017, the Company will not recognize any additional non-cash compensation expense associated with unvested membership units in the future. +(c) Deferred stock awards +Upon consummation of the IPO, the executive officers of the Company identified in the table below, became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the "Compensation Committee") of the board of directors of the Company (the "Board of Directors") approved, and each executive officer agreed, that in lieu of the executive officer's cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company's common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts +First +Second +James C. Stewart +$ +1,975,706 +$ +1,975,706 +Gregory L. Powell +$ +1,646,422 +$ +1,646,422 +M. Paul DeBonis Jr. +$ +658,569 +$ +658,569 +109 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017. +The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018, and the second stock bonus will vest on January 1, 2019 to be paid on February 15, 2019. For the year ended December 31, 2017 , the Company recognized $4.3 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017 , total unamortized compensation cost related to unvested deferred stock awards was $4.3 million , which the Company expects to recognize over the remaining weighted-average period of 1 year . +(d) Restricted stock awards +O n January 20, 2017, upon consummation of the IPO, the Class B units issued to the independent members of the Board of Directors under the Company’s Management Incentive Plan were converted into 114,580 restricted shares of the Company's common stock. These restricted stock awards vest with respect to 33.33% of the shares beginning on October 1, 2017, and with respect to an additional 33.33% of the shares on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested. +This exchange of Class B units for restricted stock was treated as a modification of awards classified as equity under ASC 718, “Compensation - Stock Compensation,” as the Company viewed the transaction as an exchange of the original award for a new award. To measure the compensation cost associated with the modification of the equity-classified awards, the Company calculated the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fair value immediately following the modification was $0.3 million , which will be expensed as non-cash stock compensation expense into income over the vesting period. +On May 15, 2017, an independent member of the Board of Directors received 18,947 restricted shares of the Company’s common stock. This restricted stock award will vest with respect to 33.33% of the shares on May 15, 2018, and with respect to an additional 33.33% of the shares on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. +For the three and twelve months ended December 31, 2017 , the Company recognized $0.4 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017 , total unamortized compensation cost related to unvested restricted stock awards was $0.7 million , which the Company expects to recognize over the remaining weighted-average period of 1.94 years. +Rollforward of restricted stock awards as of December 31, 2017 is as follows: +Number of Restricted Stock Awards +Weighted average grant date fair value +Total non-vested at January 20, 2017 +114,580 +$ +22.00 +Shares issued +18,947 +14.49 +Shares vested +(38,192 +) +22.00 +Shares forfeited +— +— +Non-vested balance at December 31, 2017 +95,335 +$ +20.51 +110 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(e) Restricted stock units +During the year ended December 31, 2017 , executive officers and key management personnel received, in total, 1,238,127 RSUs under the Equity and Incentive Award Plan. 1,104,208 of these RSU awards vest with respect to 33.33% beginning on January 20, 2018 and 133,919 of these RSU awards vest with respect to 33.33% beginning on the first anniversary of the date of grant. The remaining RSU awards vest with respect to an additional 33.33% on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +The Company recognized these RSUs at fair value based on the closing price of the Company's common stock on the date of grant. The compensation expense associated with these RSUs will be amortized into income on a straight-line basis over the vesting period. For the year ended December 31, 2017 , the Company recognized $4.8 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017 , total unamortized compensation cost related to unvested restricted stock units was $11.3 million , which the Company expects to recognize over the remaining weighted-average period of 2.11 years . +On April 3, 2017, an executive officer of the Company awarded 23,263 RSUs to an officer of the Company pursuant to an authority delegated by the Compensation Committee. It was subsequently determined that such grant required approval from the Compensation Committee, and on September 13, 2017, the Compensation Committee ratified the action. +Rollforward of restricted stock units as of December 31, 2017 is as follows: +Number of Restricted Stock Units +Weighted average grant date fair value +Total non-vested at December 31, 2016 +— +$ +— +Units issued +1,238,127 +14.66 +Units vested +— +— +Actual units forfeited +(138,507 +) +14.95 +Non-vested balance at December 31, 2017 +1,099,620 +$ +14.62 +(f) Non-qualified stock options +On April 3, 2017, certain executive officers received, in total, 605,766 of non-qualified stock options under the Equity and Incentive Award Plan. These stock options vest with respect to 33.33% of the stock options on January 20, 2018 and with respect to an additional 33.33% of the stock options on the next two anniversaries. Additional non-qualified stock options were granted on July 3, 2017 and subsequently forfeited in September 2017. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the six year anniversary of the grant date. +The Company recognized these stock options at fair value determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. The compensation expense associated with these stock options will be amortized into income on a straight-line basis over the vesting period. For the year ended December 31, 2017 , the Company recognized $1.1 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017 , total unamortized compensation cost related to unvested stock options was $2.5 million , which the Company expects to recognize over the remaining weighted-average period of 2.05 years . +111 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Rollforward of stock options as of December 31, 2017 is as follows: +Number of Stock Options +Weighted average grant date fair value +Total outstanding at December 31, 2016 +— +$ +— +Options granted +640,854 +6.16 +Options exercised +— +— +Actual options forfeited +(50,877 +) +6.16 +Options expired +— +— +Total outstanding at December 31, 2017 +589,977 +$ +6.16 +There were no stock options exercisable or vested at December 31, 2017 . +Assumptions used in calculating the fair value of the stock options granted during the year are summarized below: +Weighted Average as of December 31, 2017 +Valuation assumptions: +Expected dividend yield +0 +% +Expected equity volatility +51.5 +% +Expected term (years) +6 +Risk-free interest rate +1.6 +% +Exercise price per stock option +$ +19.00 +Market price per share +$ +14.49 +Weighted average fair value per stock option +$ +6.16 +( 13 ) Owners’ Equity +(a) Certificate of Incorporation +The Company was formed as a Delaware corporation on October 13, 2016. The Company's certificate of incorporation provides for (i) the authorization of 500,000,000 shares of common stock with a par value of $0.01 per share and (ii) the authorization of 50,000,000 shares of undesignated preferred stock with a par value of $0.01 per share that may be issued from time to time by the Board of Directors in one or more series. +Each holder of the Company's common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company's common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions. +112 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(b) Keane Group Holdings Recapitalization +As described in Note ( 1 ) ( Basis of Presentation and Nature of Operations ), the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of 1,000,000 class A units, 176,471 class B units and 294,118 class C units, being converted to an aggregate of 87,428,019 shares of the Company's common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate 87,428,019 shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled $453.8 million . The Company recorded $0.9 million of par value common stock and the remaining $452.9 million as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group's retained deficit as of January 20, 2017 of $296.7 million . +(c) Initial Public Offering +As described in Note ( 1 ) ( Basis of Presentation and Nature of Operations ), on January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters' exercise of their overallotment option. The net proceeds of the IPO to the Company was $255.5 million , which were used to fully repay Holdco II’s term loan balance of $99.0 million and the associated prepayment penalty of $13.8 million , and repay $50.0 million of its 12% secured notes due 2019 and the associated prepayment penalty of approximately $0.5 million . The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value. +(d) RockPile Acquisition +As described in Note (3) ( Acquisition s), the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights, as described in Note (3) ( Acquisition s) . The fair value of the Acquisition Shares was calculated using the closing price of the Company's common stock on July 3, 2017, of $16.29 , discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had 111,831,176 shares of common stock outstanding. +113 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(14) Accumulated Other Comprehensive (Loss) +Accumulated other comprehensive (loss) in the equity section of the consolidated and combined balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items +Interest rate +contract +AOCI +December 31, 2016 +$ +(2,603 +) +$ +(184 +) +$ +(2,787 +) +Other comprehensive income, before tax +96 +963 +1,059 +Income tax expense (1) +— +— +— +December 31, 2017 +$ +(2,507 +) +$ +779 +$ +(1,728 +) +(1) The deferred tax liability created by other comprehensive income was netted against the Company's deferred tax asset, which was offset by a valuation allowance. +The following table summarizes reclassifications out of accumulated other comprehensive (loss) during years ended December 31, 2017 , 2016 and 2015 (in thousands of dollars): +Affected line item +in the consolidated and combined +statements of +operations and +comprehensive income (loss) +Year Ended December 31, +2017 +2016 +2015 +Interest rate derivatives, hedging +$ +(172 +) +$ +(3,641 +) +$ +(1,578 +) +Interest expense +Foreign currency items +— +— +— +Other income +Total reclassifications +$ +(172 +) +$ +(3,641 +) +$ +(1,578 +) +(15) Earnings per Share +Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company's Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +114 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows: +Year Ended December 31, +2017 +2016 +2015 +Numerator: +Net income (loss) +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Denominator: +Basic weighted-average common shares outstanding (1) +106,321 +87,313 +87,313 +Dilutive effect of restricted stock awards granted to Board of Directors +36 +— +— +Dilutive effect of deferred stock award granted to NEOs +— +— +— +Dilutive effect of RSUs granted under stock incentive plans +135 +— +— +Dilutive effect of options granted under stock incentive plans +— +— +— +Diluted weighted-average common shares outstanding (2) +106,492 +87,313 +87,313 +(1) +The basic weighted-average common shares outstanding have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Company's Existing Owners' membership interests for the newly-created ownership interests. +(2) +As a result of the net loss incurred by the Company for the years ended December 31, 2017 , 2016 and 2015 , the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Operating Leases +The Company has certain non-cancelable operating leases for various equipment and office facilities. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on the Company by the leasing agreements with regard to asset dispositions or borrowing ability. Some lease arrangements include renewal and purchase options or escalation clauses. In addition, certain lease contracts acquired from Trican Well Service, L.P. include rent holidays, rent concessions and leasehold improvement incentives. Leasehold improvements made at the inception of a lease or during the lease term are amortized over the remaining period of 10 months to 35 years . +Rental expense for operations, excluding daily rentals and reimbursable rentals, was $11.8 million , $9.2 million and $6.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. During the year ended December 31, 2017, the company recognized $0.6 million of rental expense related to non-cancelable sale-leasebacks on 68 Peterbilt tractors acquired from the RockPile acquisition that expire in 2020. Future minimum lease payments include $3.4 million related to the sale leasebacks. +Sublease proceeds were $0.3 million , $0.3 million and $0.05 million for the years ended December 31, 2017 , 2016 and 2015 , respectively, all of which related to the subleased properties of the Company's Canadian operations. These sublease proceeds were recorded as a reduction of the Company's Canadian operations’ exit costs liability. +115 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Minimum lease commitments remaining under operating leases for the next five years are $45.4 million , as listed below: +Year-end December 31, +(Thousands of Dollars) +2018 +$ +16,173 +2019 +14,408 +2020 +8,210 +2021 +3,990 +2022 +2,606 +Total +$ +45,387 +The Company has three long-term operating leases in Canada that expire in 2018. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016, respectively. As of December 31, 2017 , the total minimum sublease payments to be received in the future under the active subleases is $0.01 million in 2018 . The Company's subleases terminate after 2018. +The Company assumed several real estate operating leases in connection with the acquisition of the Acquired Trican Operations. In an effort to consolidate its facilities and to reduce costs, the Company vacated eight of the combined properties and recorded a cease-use liability for the total amount of $8.1 million . Subsequent to the recording of the liability, the Company successfully negotiated exit agreements for four of the properties, resulting in net payments of $2.6 million . In December 2016, due to immediate need for office space, the Company decided to re-enter one of the leases acquired from Trican Well Service, L.P. and renegotiated its terms. As a result, the amendment to the lease was accounted for as a new lease, and the cease-use liability associated with the lease in the amount of $2.4 million was reversed through the same line item in the statement of operations where it was previously recognized. In 2017, the Company vacated the outgrown facility and moved into the renegotiated office space, and recorded a cease-use liability of $0.5 million . During the third quarter of 2017, the Company assumed additional real estate operating leases in connection with the acquisition of Rockpile. As part of a further consolidation of operations, the Company vacated one of these facilities and recorded a cease-use liability of $0.7 million . Exit costs, including accretion expense, are presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). +The following table presents the roll forward of the cease-use liability: +(Thousands of Dollars) +Beginning balance at January 1, 2017 +$ +1,670 +Exit costs +1,164 +Cash buyout of lease +(702 +) +Lease amortization and other adjustments +(862 +) +Ending balance at December 31, 2017 +$ +1,270 +116 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 17 ) Income Taxes +Keane Group Holdings, LLC was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. As a result of the IPO and related Organizational Transactions, Keane Group, Inc. was formed as a corporation to hold all of the operational assets of Keane Group. Because Keane Group, Inc. is a taxable entity, the Company established a provision for deferred income taxes as of January 20, 2017. Accordingly, a provision for federal and state corporate income taxes has been made only for the operations of Keane Group, Inc. from January 20, 2017 through December 31, 2017 in the accompanying consolidated and combined financial statements. +The following table summarizes the income from continuing operations before income taxes in the following jurisdictions: +(Thousands of Dollars) +Year Ended December 31, +2017 +2016 +2015 +Domestic +$ +(35,904 +) +$ +(187,308 +) +$ +(64,470 +) +Foreign +(87 +) +221 +(172 +) +(35,991 +) +(187,087 +) +(64,642 +) +The components of our income tax provision are as follows: +(Thousands of Dollars) +Year Ended December 31, +2017 +2016 +2015 +Current: +Federal +$ +— +$ +— +$ +— +State +614 +— +— +Foreign +— +— +(197 +) +Total current income tax provision +614 +— +(197 +) +Deferred: +Federal +(536 +) +— +— +State +72 +(114 +) +— +Foreign +— +— +990 +Total deferred income tax provision +(464 +) +(114 +) +990 +$ +150 +$ +(114 +) +$ +793 +117 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate, currently 35%, to the income tax provision in our financial statements. The Company’s effective tax rate for 2017 of (0.53)% differs from the statutory rate, primarily due to state taxes, a valuation allowance and a reduction of the corporate income tax rate from 35% to 21%, due to the enactment of the Tax Cuts and Jobs Act in December 2017. The Company's effective tax rate for 2016 and 2015 was 0.06% and (1.23)% , respectively. +(Thousands of Dollars) +December 31, +2017 +% of Income Before Income Taxes +December 31, +2016 +% of Income Before Income Taxes +December 31, +2015 +% of Income Before Income Taxes +Income tax provision computed at the statutory federal rate +$ +(9,795 +) +35.00 +% +$ +(65,480 +) +35.00 +% +$ +(22,625 +) +35.00 +% +Reconciling items: +State income taxes, net of federal tax benefit +(334 +) +1.19 +% +(114 +) +0.06 +% +— +— +% +Deferred tax asset valuation adjustment +(32,593 +) +116.46 +% +— +— +% +— +— +% +Tax rate change +41,591 +(148.61 +)% +— +— +% +— +— +% +Other +1,281 +(4.57 +)% +— +— +% +— +— +% +Flow through income not taxable +— +— +% +65,480 +(35.00 +)% +22,625 +(35.00 +)% +Foreign taxes +— +— +% +— +— +% +793 +(1.23 +)% +Income tax provision +$ +150 +(0.53 +)% +$ +(114 +) +0.06 +% +$ +793 +(1.23 +)% +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The Company adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes", during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent. +(Thousands of Dollars) +Year Ended December 31, +2017 +2016 +2015 +Deferred tax assets: +Stock-based compensation +$ +2,467 +$ +— +$ +— +Net operating loss carry-forwards +70,745 +— +— +Accruals and other +3,994 +— +— +Intangibles +— +231 +139 +Gross deferred tax assets +77,206 +231 +139 +Valuation allowance +(65,347 +) +(139 +) +(139 +) +Total deferred tax assets +11,859 +92 +— +Deferred tax liability: +PP&E and intangibles +(11,319 +) +— +(22 +) +Prepaids and other +(1,954 +) +— +— +Total deferred tax liability +(13,273 +) +— +(22 +) +Net deferred tax liability +$ +(1,414 +) +$ +92 +$ +(22 +) +118 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +As of December 31, 2017, the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of $320.0 million . Of this amount, $85.6 million related to the Company’s current year federal tax loss, and the remaining $234.4 million was generated prior to the IPO transaction. As part of the IPO transaction (immediately before), the existing owners of Keane Group contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC, who then contributed those interests to the Company in exchange for common stock of the Company. This event constituted a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the acquisition. As of December 31, 2017, it is expected that the NOLs subject to IRC Section 382 will be available for use during the applicable carryforward period without becoming permanently lost by the Company. The Company’s Section 382 annual limitation is $19.2 million . This annual limitation is available to be carried forward to the following year if not utilized. As the Company realized a taxable loss for the year ended December 31, 2017, the current year limitation of $19.2 million will be available for use in 2018. As such, the total annual limitation available for use in 2018 will be $38.4 million . The Company’s total NOL Carryforward available to reduce federal taxable income in 2018 is $124.0 million . These carryforwards will begin to expire in 2031. +Included in the Company’s recording of its initial deferred taxes, pursuant to the Organizational Transactions, are deferred tax liabilities related to certain of the Company's indefinite-lived intangible assets. The deferred tax liability related to these indefinite-lived intangible assets will only reverse at the time of ultimate sale or impairment. Due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot be used to support an equal amount of the deferred tax asset. This is often referred to as a “naked credit.” The Company recognized a deferred tax liability of $1.9 million associated with this naked credit upon the IPO. This is presented within other noncurrent liabilities in the audited consolidated and combined balance sheet. This amount will increase as additional tax amortization is recognized, but will only decrease if the indefinite-lived intangibles are sold, impaired or if the Company establishes indefinite-lived deferred tax assets such as NOLs with an indefinite life under the newly passed Tax Cuts and Jobs Act legislation. +ASC 740, "Income Taxes", requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of Keane Group, Inc., excluding deferred tax liabilities related to certain indefinite lived intangibles. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowance as of December 31, 2017 was $65.3 million . The valuation allowance for foreign deferred tax assets as of December 31, 2016 and 2015 of $0.1 million was related to the Company's tax basis in certain assets located in Canada. +119 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2017 +$ +139 +Charge as debit to equity +97,801 +Charge as (benefit) expense to income tax provision for current year activity +8,032 +Charge as (benefit) expense to income tax provision for change in deferred tax rate +(40,625 +) +Changes to other comprehensive income +— +Valuation allowance as of December 31, 2017 +$ +65,347 +In December 2017, the Tax Cuts and Jobs Act legislation was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a U.S. federal corporate income tax rate reduction from 35% to 21% as well as many other changes. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. As a result, the Company recorded a $41.6 million expense related to the re-measurement of the deferred tax assets and liabilities from 35% to the new 21% tax rate in December 2017. Additionally, the Company recorded a $40.6 million benefit related to the re-measurement of the ending valuation allowance from 35% to the new 21%. The effects of other provisions of the Act are not expected to have an adverse impact on our consolidated and combined financial statements. The Company will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine its estimates as necessary in 2018. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2017 , 2016 and 2015 . The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company's tax returns and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company's tax returns are open to audit under the statute of limitations for the years ended December 31, 2014 through December 31, 2016 for federal tax purposes and for the years ended December 31, 2013 through December 31, 2016 for state tax purposes. +( 18 ) Commitments and Contingencies +As of December 31, 2017 and 2016 , the Company had $19.8 million and $0.1 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $82.5 million and nil , as of December 31, 2017 and 2016 , respectively. +As of December 31, 2017 , the Company anticipates committing $4.2 million to research and development with its equity-method investee, that is expected to generate economic benefits in 2019. +As of December 31, 2017 and 2016 , the Company had issued letters of credit of $2.0 million under the 2017 ABL Facility and 2016 ABL Facility, respectively, which secured performance obligations related to the Company's CIT capital lease. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. +120 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of December 31, 2017 are listed below: +(Thousands of Dollars) +Year-end December 31, +2018 +$ +45,942 +2019 +42,717 +2020 +26,087 +2021 +10,083 +2022 +— +$ +124,829 +Trican Indemnification Settlement +As part of the asset purchase agreement (the “APA”) executed for the acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures the Company incurred to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the APA. On June 12, 2017, the Company and Trican reached a settlement that resulted in proceeds of $2.1 million and net gain on settlement of $3.6 million . This gain is presented within other income in the consolidated and combined statements of operations and comprehensive income (loss). +The Company made a claim with its insurance company to recover additional funds under the representation and warranty policy associated with this acquisition. In October 2017, the Company reached an agreement with the insurance company to settle for $4.2 million . +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. In accordance with GAAP, the Company accrues for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on the Company's best estimate of the expected liability. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations. +The Company has been served with class and collective action claims alleging that the Company failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act ("FLSA") and state laws. On December 27, 2016, two former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. The parties agreed to settle the claims in the first quarter of 2018 for $4.2 million . Settlement of this collective action is subject to court approval. In accordance with GAAP, the Company recognized an estimated liability of $4.2 million as of December 31, 2017, as the occurrence of a loss was probable and reasonably estimable on this 2016 claim, based on events that occurred prior to the filing of the Company's 2017 Annual Report on Form 10-K. +121 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Additionally, the Company is involved in a commercial dispute whereby a former customer has commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC, and on December 15, 2017, made a claim for contractual damages of approximately $4.0 million . The Company intends to vigorously dispute the merits of this asserted claim and plans to assert affirmative counterclaims for unpaid bills and other damages. The Company is currently unable to estimate the range of loss, if any, that may result from this matter. +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Regulatory Audits +In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it will conduct a routine audit of Keane Frac TX, LLC's direct payment sales tax for the periods of January 2014 through May 2017. The audit is expected to commence in March 2018. The Company is currently unable to estimate the range of loss, if any, that may result from this matter. +(19) Related Party Transactions +Cerberus Operations and Advisory Company, an affiliate of the Company’s principal equity holder, provides certain consulting services to the Company. The Company paid $0.3 million , $1.0 million and $0.7 million during the years ended December 31, 2017 , 2016 and 2015 , respectively. +In connection with the Company's reorganization, the Company engaged in transactions with affiliates. See Note ( 1 ) ( Basis of Presentation and Nature of Operations ) and Note ( 13 ) ( Owners’ Equity ) for a description of these transactions. +In connection with the Company's research and development initiatives, the Company has engaged in transactions with its equity-method investee. See Note ( 18 ) Commitments and Contingencies for a description of these commitments. As of December 31, 2017, the Company has purchased $0.6 million of shares in its equity-method investee. +As part of the APA executed for our acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures incurred by the Company to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the APA. On June 12, 2017, the Company and Trican reached a settlement that resulted in proceeds to the Company of $2.1 million and net gain on settlement to the Company of $3.6 million . Trican, pursuant to its conditional rights under the Company's Stockholders' Agreement entered into in connection with the IPO, has appointed its President and Chief Executive Officer to serve as a member of the Board of Directors. +122 +In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million . +On January 17, 2018, the Company's Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor Holdings LLC (the "selling stockholder"), pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor Holdings LLC controlled 50.9% of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor controls 50.7% of the Company's outstanding common stock. The Company incurred $1.2 million of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately $12.9 million of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering. +(20) Defined Contribution Plan +The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions of up to 3.5% of compensation. Contributions made by the Company were $4.9 million , $1.4 million and $0.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. +(21) Wind-down of a Foreign Subsidiary +During the first quarter of 2015, the Company’s Canadian operations lost an open bid for the renewal of a customer contract that had been material to the foreign operations in prior years. Due to the loss of this contract, coupled with the unfavorable market conditions driven by low oil prices, management decided to exit wireline operations in Canada and implemented an exit strategy to dispose of the assets of the Canadian operations in multiple phases. +The phases were as follows: +• +Phase 1 included completing the remainder of the customer contract during the first quarter of 2015. +• +Phase 2 included disposing of the physical assets of the Canadian operations by selling them to third parties or transferring them to Keane Frac, LP during the second quarter of 2015. +• +Phase 3 included repatriating $8.0 million CAD ( $6.7 million USD) of cash from Keane Completions CN Corp. +• +Phase 4 included settlement of the outstanding obligations of the Canadian operations. The Company has three long-term operating leases still in effect. These leases and any trailing costs are settled on an ad hoc basis. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016. +• +Phase 5 included transitioning the $4.7 million CAD of goodwill related to the Completion Services segment from Keane Completions CN Corp. to Holdco II as of December 31, 2015. +As of this time, Management has no formal plan to substantially liquidate its Canadian subsidiary. +123 +As of December 31, 2017 , all material costs associated with the wind-down of the Canadian subsidiary were identified, and we do no t expect to incur any additional significant costs associated with the wind-down of the Canadian subsidiary. Exit costs were incurred within the Company’s Completion Services reportable segment. The Company did no t incur any Canadian subsidiary exit related costs during the years ended December 31, 2017 or December 31, 2016. +Exit costs incurred during the year ended December 31, 2015 and the line items where they appear on the consolidated statements of operations and comprehensive loss were as follows: +(Thousands of Dollars) +Location in consolidated statements of operations and comprehensive loss +Description +Year ended December 31, 2015 +Costs of services +Severance pay +$ +208 +Selling, general and administrative expenses +Severance pay +$ +267 +Consulting and legal fees +39 +Retention pay +187 +Asset sales and disposals costs +525 +Lease exit costs +1,375 +Other costs +121 +$ +2,514 +The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which are presented as accrued liabilities on the consolidated balance sheets, were as follows for the year ended December 31, 2017: +(Thousands of Dollars) +2017 +2016 +Beginning balance at January 1, +$ +233 +$ +759 +Charges incurred +— +— +Cash payments net of cash receipts +(214 +) +(290 +) +Currency lease accretion and other adjustments +30 +(236 +) +Total lease obligations, ending balance +$ +49 +$ +233 +(22) Business Segments +Management operates the Company in two reporting segments: Completion Services and Other Services. Management evaluates the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. All inter-segment transactions are eliminated in consolidation. +124 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with an operating segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2017 +2016 +2015 +Operations by business segment +Revenue: +Completion Services +$ +1,527,287 +$ +410,854 +$ +363,820 +Other Services +14,794 +9,716 +2,337 +Total revenue +$ +1,542,081 +$ +420,570 +$ +366,157 +Gross profit (loss): +Completion Services +$ +258,024 +$ +8,963 +$ +58,784 +Other Services +1,496 +(4,735 +) +777 +Total gross profit +$ +259,520 +$ +4,228 +$ +59,561 +Operating income (loss): +Completion Services +$ +115,691 +$ +(80,563 +) +$ +(11,260 +) +Other Services +(197 +) +(10,156 +) +(3,864 +) +Corporate and Other +(106,225 +) +(58,985 +) +(24,587 +) +Total operating income (loss) +$ +9,269 +$ +(149,704 +) +$ +(39,711 +) +Depreciation and amortization: +Completion Services +$ +141,385 +$ +89,432 +$ +65,114 +Other Services +5,757 +5,087 +3,169 +Corporate and Other +12,138 +6,460 +1,264 +Total depreciation and amortization +$ +159,280 +$ +100,979 +$ +69,547 +(Gain) loss on disposal of assets +Completion Services +$ +948 +$ +(538 +) +$ +357 +Other Services +(4,064 +) +(44 +) +(651 +) +Corporate and Other +561 +195 +24 +Total (gain) on disposal of assets +$ +(2,555 +) +$ +(387 +) +$ +(270 +) +Impairment: +Completion Services +$ +— +$ +— +$ +2,443 +Other Services +— +185 +1,471 +Corporate and Other +— +— +— +Total impairment +$ +— +$ +185 +$ +3,914 +Exit Costs: +Completion Services +$ +— +$ +— +$ +2,722 +Other Services +— +— +— +Corporate and Other +$ +1,221 +$ +5,696 +$ +— +125 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Total exit costs +$ +1,221 +$ +5,696 +$ +2,722 +Income tax provision (1) : +Completion Services +$ +— +$ +— +$ +— +Corporate and Other +$ +(150 +) +$ +— +$ +— +Total income tax: +$ +(150 +) +$ +— +$ +— +Net income (loss): +Completion Services +$ +115,691 +$ +(80,563 +) +$ +(11,260 +) +Other Services +(197 +) +(10,156 +) +(3,864 +) +Corporate and Other +(151,635 +) +(96,368 +) +(49,518 +) +Total net loss +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Capital expenditures (2) : +Completion Services +$ +185,329 +$ +21,736 +$ +27,228 +Other Services +1,718 +487 +8 +Corporate and Other +2,582 +1,322 +10 +Total capital expenditures +$ +189,629 +$ +23,545 +$ +27,246 +(1) Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015. +(2) +Capital expenditures do not include net assets from the acquisition of RockPile on July 3, 2017 of $116.6 million or the Acquired Trican Operations on March 16, 2016 of $205.5 million . +(Thousands of Dollars) +December 31, +2017 +December 31, +2016 +Total assets by segment: +Completion Services +$ +863,419 +$ +412,947 +Other Services +21,877 +18,485 +Corporate and Other +157,820 +105,508 +Total assets +$ +1,043,116 +$ +536,940 +Total assets by geography: +United States +$ +1,041,596 +$ +535,395 +Canada +1,520 +1,545 +Total assets +$ +1,043,116 +$ +536,940 +Goodwill by segment: +Completion Services +$ +134,967 +$ +50,478 +Total goodwill +$ +134,967 +$ +50,478 +126 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(23) Selected Quarterly Financial Data +The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2017 and 2016 . The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. +Year Ended December 31, 2017 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +240,153 +$ +323,136 +$ +477,302 +$ +501,490 +Costs of services (excluding depreciation and amortization, shown separately) +223,992 +278,384 +391,089 +389,096 +Depreciation and amortization +30,373 +32,739 +46,204 +49,964 +Selling, general and administrative expenses +17,986 +22,337 +28,592 +24,611 +(Gain) loss on disposal of assets +(434 +) +(5 +) +302 +(2,418 +) +Total operating costs and expenses +271,917 +333,455 +466,187 +461,253 +Operating income (loss) +(31,764 +) +(10,319 +) +11,115 +40,237 +Other income, net +4 +3,701 +942 +9,316 +Interest expense +(40,361 +) +(4,349 +) +(7,195 +) +(7,318 +) +Total other expenses +(40,357 +) +(648 +) +(6,253 +) +1,998 +Income tax income (expense) +(134 +) +(931 +) +(797 +) +1,712 +Net income (loss) +$ +(72,255 +) +$ +(11,898 +) +$ +4,065 +$ +43,947 +127 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Year Ended December 31, 2016 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +61,195 +$ +91,589 +$ +116,753 +$ +151,033 +Costs of services (excluding depreciation and amortization, shown separately) +67,845 +85,039 +120,480 +142,978 +Depreciation and amortization +13,968 +27,723 +30,256 +29,032 +Selling, general and administrative expenses +20,168 +15,820 +9,218 +7,949 +(Gain) loss on disposal of assets +(8 +) +(464 +) +176 +(91 +) +Impairment +— +— +— +185 +Total operating costs and expenses +101,973 +128,118 +160,130 +180,053 +Operating loss +(40,778 +) +(36,529 +) +(43,377 +) +(29,020 +) +Other expense (income), net +(133 +) +(874 +) +470 +(379 +) +Interest expense +8,408 +10,037 +9,963 +9,891 +Total other expenses +8,275 +9,163 +10,433 +9,512 +Net loss +$ +(49,053 +) +$ +(45,692 +) +$ +(53,810 +) +$ +(38,532 +) +( 24 ) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In July 2015, the FASB issued ASU 2015-11, “Inventory, Simplifying the Measurement of Inventory,” which requires that an entity should measure inventory at the lower of cost and net realizable value. The realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements. +In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. The Company adopted this standard as of January 1, 2017, retrospectively. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements for prior periods. +In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which is effective for fiscal years and interim periods within fiscal years beginning after December 31, 2016, with a cumulative-effect and prospective approach to be used for implementation. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have an adverse impact to the Company's financial condition or results of operations. +In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, +128 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +2017, with a full retrospective approach to be used upon implementation and early adoption allowed. ASU 2016-15 provides guidance on eight different issues intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard effective January 1, 2017, which impacted the presentation of its cash payments for prepayment penalties incurred in connection with the early termination of its 2016 ABL Facility, 2016 Term Facility and Senior Secured Notes. The Company presented the cash payments for the prepayment penalties as cash used in financing activities. +In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash,” which stipulates that the amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. The amendments to this update do not provide a definition of restricted cash or restricted cash equivalents. The Company early adopted this standard effective January 1, 2017. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements, as it does not have any restricted cash. +In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements”, which provides technical corrections, clarifications and improvements on a wide range of topics in the ASC. The amendments in this ASU generally fall into one of four categories: (i) amendments related to differences between original guidance and the ASC, (ii) guidance clarification and reference corrections, (iii) simplification and (iv) minor improvements. Transition guidance varies based on the amendments in the ASUs. The amendments that require transition guidance are effective for fiscal years and interim periods beginning after December 15, 2016. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements. +In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 of the goodwill impairment test with the goodwill impairment amount calculated as the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted prospectively for any impairment tests performed after January 1, 2017. The Company early adopted this standard, prospectively, as of January 1, 2017 and applied this standard to its annual goodwill impairment assessment. +In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies what constitutes a modification of a share-based payment award. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard effective January 1, 2017, which impacted the accounting for the equity-based awards, issued under the Equity and Incentive Award Plan, in its consolidated and combined financial statements. The Company applied this standard to determine that its conversion of the Class B units issued to the independent members of the Board of Directors into restricted shares required the Company to apply modification accounting. +In August 2017, the FASB issued ASC 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements, eliminates the need to separately measure and report hedge ineffectiveness and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The Company early adopted this standard effective September 28, 2017, in conjunction with its hedge designation of two interest rate swaps, to benefit from the ability to perform ongoing hedge effectiveness assessments on a qualitative basis and the removal of the requirement to separately measure and report hedge ineffectiveness. There were no active hedge relationships upon adoption. Accordingly, the adoption did not impact +129 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +the opening balance of accumulated other comprehensive income or net assets in the Company's consolidated and combined financial statements. +(b) Recently Issued Accounting Standards +In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. The Company has completed its evaluation of the impact of the adoption of this ASU on its various revenue streams and established processes and determined the adoption of this ASU will not have a material impact on the Company's current revenue recognition processes. +During 2016, FASB issued ASU 2016-08, “Principal versus Agent,” ASU 2016-10, “Licenses of Intellectual Property (IP) and Identification of Performance Obligations” and ASU 2016-12, “Narrow Scope Improvements and Practical Expedients”. During 2017, FASB issued ASC 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. All these ASUs are designed to address various issues raised by the constituents to the Transition Resource Group and help minimize diversity in practice in applying ASU 2014-09. The Company will adopt these standards utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09. +In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual periods beginning after December 15, 2018. The Company will implement the provisions of ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of this standard will have a material impact on its consolidated and combined financial statements. +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company anticipates the adoption of this standard will result in a significant increase in its assets and liabilities, as the Company has certain operating and real property lease arrangements for which it is the lessee. The standard is effective for the Company beginning on January 1, 2019. +130 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Asset Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. ASU 2016-16 is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustments will include recognition of the income tax consequences of intra-entity transfers of assets, other than inventory, that occur before the adoption date. Early adoption is permitted, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company does not expect the adoption of this standard to have a material impact on its consolidated and combined financial statements, as the Company has minimal intra-entity transfers of qualifying assets. +In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. Early adoption is allowed for transactions that occurred before the issuance date or effective date of the amendments only when the transaction has not been reported in the financial statements previously issued. The Company does not expect the adoption of this standard to have a material impact on its consolidated and combined financial statements. +In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset”. Subtopic 610-20 was issued as part of the new revenue recognition standard and provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. ASU 2017-05 (i) clarifies the definition of “in substance nonfinancial assets,” (ii) unifies guidance related to partial sales of nonfinancial assets, (iii) eliminates rules specifically addressing sales of real estate, (iv) removes exceptions to the financial asset derecognition model and (v) clarifies the accounting for contributions of nonfinancial assets to joint ventures. The Company will adopt this standard utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated and combined financial statements. +(25) Subsequent Events +Secondary Common Stock Offering +On January 17, 2018, the Company's Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor Holdings LLC (the "selling stockholder"), pursuant to which 15,320,015 shares were sold by the selling shareholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor Holdings LLC controlled 50.9% of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor Holdings LLC controls 50.7% of the Company's outstanding common stock. The Company incurred $1.2 million of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately $12.9 million of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering. +131 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Stock Repurchase Program +On February 26, 2018, the Company announced that its Board of Directors has authorized a stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to its shareholders as management continues to expect further growth and profitability. The duration of the stock buy-back program will be 12 months . The program does not obligate the Company to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at the Company's discretion. +132 +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies. +In addition, because we were an “emerging growth company” for fiscal year 2017, under the JOBS Act, our independent registered public accounting firm was not required to attest to the effectiveness of our internal control over financial reporting for fiscal year 2017. As of January 1, 2018, we no longer qualify as an emerging growth company. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financing reporting that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting . +Item 9B. Other Information +On February 26, 2018, Mr. James E. Geisler voluntarily resigned as a member of the Board of Directors of Keane Group, Inc. (the "Company"), and ceased to be a member of any committee of the Company’s Board of Directors, effective immediately. Mr. Geisler’s resignation was not the result of any disagreements with the Company or the Board of Directors. +In connection with Mr. Geisler’s resignation, the Company’s Board of Directors has determined that authorized number of directors on the Board of Directors be decreased to 11 directors. In addition, Mr. Shawn Keane was appointed to the Compliance Committee in satisfaction of its membership requirements. +133 +PART III +References Within This Annual Report +As used in Part III of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds. +Item 10. Directors, Executive Officers and Corporate Governance +Executive Officers and Directors +The following table sets forth information regarding our board of directors and executive officers: +Name +Age† +Position +James C. Stewart +55 +Chairman and Chief Executive Officer +Gregory L. Powell +43 +President and Chief Financial Officer +M. Paul DeBonis Jr. +58 +Chief Operating Officer +Kevin M. McDonald +51 +Executive Vice President, General Counsel & Secretary +Phung Ngo-Burns +52 +Chief Accounting Officer +Ian J. Henkes +46 +Vice President & General Manager, South Region and National Wireline +Marc G. R. Edwards*(a)(b)(d) +57 +Lead Director +Lucas N. Batzer(c) +34 +Director +Dale M. Dusterhoft(b)(d) +57 +Director +Christian A. Garcia*(a) +54 +Director +Lisa A. Gray(c)(d) +62 +Director +Gary M. Halverson*(a)(d) +59 +Director +Shawn Keane(b)(c) +52 +Director +Elmer D. Reed*(c) +69 +Director +Lenard B. Tessler +65 +Director +Scott Wille(b) +37 +Director +† +As of December 31, 2017 +* +Independent Director +(a) +Member, Audit and Risk Committee +(b) +Member, Compensation Committee +(c) +Member, Compliance Committee +(d) +Member, Nominating and Corporate Governance Committee +134 +Executive Officer and Director Biographies +James C. Stewart , Chairman and Chief Executive Officer . Mr. Stewart became the Chairman and Chief Executive Officer of Keane in March 2011. Prior to joining Keane, from 2007 to 2009, he served as the President and Chief Executive Officer of a privately held international drilling company. From 2006 to 2007, Mr. Stewart served as Vice President of Integrated Drilling Services for Weatherford International plc, based in London and Dubai, where he created and managed a global business unit that included a 50-rig international land contract drilling group and a global project management team. Mr. Stewart began his career with Schlumberger Limited, where he held senior leadership positions across the globe over the span of 22 years. Mr. Stewart’s qualifications to serve as Chairman and Chief Executive Officer include his broad leadership experience with oilfield services, as well as his long tenure and successes in the oil and natural gas market. +Gregory L. Powell , President and Chief Financial Officer . Mr. Powell has served as Chief Financial Officer of Keane since March 2011. He previously held the title of Vice President between March 2011 and July 2015, when he became President. Prior to joining Keane, Mr. Powell served as an Operations Executive for Cerberus from 2006 to March 2011. During his tenure at Cerberus, he was responsible for evaluating new investments and partnering with portfolio companies to maximize value creation. Mr. Powell previously served on the board of directors and audit committee of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies. Prior to joining Cerberus, Mr. Powell spent ten years with General Electric, starting with global leadership training and growing into various leadership roles in Finance and Mergers and Acquisitions, with his last role being Chief Financial Officer for GE Aviation—Military Systems. +M. Paul DeBonis Jr. , Chief Operating Officer . Mr. DeBonis has served as Chief Operating Officer of Keane since May 2011. Prior to joining Keane, he served as President of Big Country Energy Services USA LP from May 2010 to May 2011 and as President of Pure Energy Services (USA), Inc. from June 2005 to May 2010. He previously served as Oilfield Services Marketing Manager at Schlumberger Limited. Mr. DeBonis started his oil and gas career with Dowell Services in the fracturing and cementing departments. He has worked in several basins throughout the United States and Canada. Mr. DeBonis was a Schlumberger Field Engineer Graduate in 1985. Mr. DeBonis has authored and published two papers related to hydraulic fracturing for the Society of Petroleum Engineers. +Kevin M. McDonald , Executive Vice President, General Counsel & Secretary . Mr. McDonald has served as Keane’s Executive Vice President, General Counsel & Secretary since November 2016. Prior to joining Keane, he served in leadership roles at Marathon Oil Corporation from 2012 to 2016, including as Deputy General Counsel of Corporate Legal Services and Government Relations, Deputy General Counsel of Governance, Compliance & Corporate Services and Assistant General Counsel. He practiced as a partner at the international law firm Fulbright & Jaworski LLP (now Norton Rose Fulbright LLP) in 2012. Mr. McDonald previously held various counsel positions, including President & Chief Executive Officer and acting General Counsel at Arms of Hope, a non-profit organization, from 2008 to 2012, Senior Vice President, General Counsel & Chief Compliance Officer at Cooper Industries between from 2006 to 2008, Associate General Counsel at Anadarko Petroleum from 2006 to 2008 and Managing Counsel (Litigation) at Valero Energy from 2002 to 2004. Mr McDonald began his career as an associate at Norton Rose Fulbright LLP between 1992 and 2001. +Phung Ngo-Burns , Chief Accounting Officer . Mrs. Ngo-Burns has served as Keane's Chief Accounting Officer since March 2017. Prior to joining Keane, Ms. Ngo-Burns served as Senior Director with Alvarez and Marsal since 2012. From 2002 to 2012, Ms. Ngo-Burns served as Chief Financial Officer of Ability Holdings, Inc. and held several executive roles in the finance department of ExpressJet Holdings, Inc., including as Executive Vice President and Chief Financial Officer. Ms. Ngo-Burns brings nearly 30 years of accounting experience to the Keane and holds an M.B.A. from the University of Houston and a B.S. in Business and Accounting from Oklahoma State University. +Ian J. Henkes , Vice President & General Manager, South Region and National Wireline . Mr. Henkes joined Keane as Vice President for Human Resources in February 2016 and was promoted to his current position in July 2017. Prior to joining Keane, he served as Human Resources Manager for Schlumberger’s Drilling & +135 +Measurements global businesses from August 2014 to February 2016, as Vice President for North America at Pathfinder Energy Services from January 2013 to September 2014 and as Personnel Manager at Pathfinder Energy Services from September 2012 to December 2012. Prior to joining Pathfinder Energy Services, Mr. Henkes served in various roles at Schlumberger from 1994 to 2012. +Marc G. R. Edwards , Lead Director . Mr. Edwards has served as President and Chief Executive Officer and as a member of the board of directors of Diamond Offshore Drilling, Inc., a deepwater water drilling contractor, since 2014. He previously spent 30 years at Halliburton Company, where he worked in various roles, most recently as Senior Vice President of the Completion and Production Division. Mr. Edwards developed an extensive background in the global energy industry during his tenure at Halliburton, which enables him to provide important contributions and a new perspective to our board of directors. His day-to-day leadership experience gives him invaluable insight regarding the operations of an oilfield services company. +Lucas N. Batzer , Director . Mr. Batzer has served as a member of Keane’s board of directors since March 2016. He currently serves as a Managing Director of Private Equity at Cerberus, which he joined in August 2009. Prior to joining Cerberus, Mr. Batzer worked as an analyst at The Blackstone Group from 2007 to 2009. He has served on the boards of directors of ABC Group and Reydel Automotive, two automotive component suppliers, since June 2016 and November 2014, respectively. Mr. Batzer’s experience in the private equity industry, board experience and comprehensive knowledge of our business and operational strategy, positions him as an important resource on our board of directors. +Dale M. Dusterhoft , Director . Mr. Dusterhoft has served as a member of Keane’s board of directors since March 2016 and currently serves as Chief Executive Officer and as a director of Trican, which he joined at its inception in 1996. He has served on the board of directors of Trican since August 2009. Prior to becoming Chief Executive Officer of Trican, Mr. Dusterhoft was the Company’s Senior Vice President of Technical Services. Before joining Trican, Mr. Dusterhoft worked for 12 years with a major Canadian pressure pumping company, where he held management positions in Operations, Sales and Engineering. Mr. Dusterhoft serves on the board of the Alberta Children’s Hospital Foundation and the Calgary Petroleum Club. In addition, Mr. Dusterhoft is a past President of the Canadian Association of Drilling Engineers, the Canadian Section of the Society of Petroleum Engineers and a past member of the Industry Advisory Board of the Schulich School of Engineering at the University of Calgary. Mr. Dusterhoft’s years of leadership and operational experience in large, successful enterprises in the oil industry is valuable to our board of directors’ understanding of the industry. +Christian A. Garcia , Director . Mr. Garcia currently serves as Executive Vice President and Chief Financial Officer of Visteon Corporation, a role he has held since October 2016. Previously, Mr. Garcia served in various executive and leadership roles at Halliburton Company, including as Senior Vice President and Acting Chief Financial Officer. Mr. Garcia has a Bachelor of Science in Business Economics from the University of the Philippines and a Master of Science in Management in Finance from Purdue University, and brings over 30 years of financial experience to the Company. +Lisa A. Gray , Director. Ms. Gray has served as a member of Keane’s board of directors since March 2011. Ms. Gray has served as Vice Chairman of COAC since May 2015, and has served as General Counsel of COAC since 2004. Prior to joining Cerberus, she served as Chief Operating Executive and General Counsel for WAM!NET Inc. from 1996 to 2004. Prior to that, she was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd from 1990 to 1996. Prior to that, she was active in several non-profit corporations. Ms. Gray has over 25 years of experience in the areas of mergers and acquisitions, corporate debt restructuring and corporate governance. Ms. Gray serves as Vice Chairman and General Counsel of COAC, an affiliate of our largest beneficial owner, and has extensive experience and familiarity with us. In addition, Ms. Gray has extensive legal and corporate governance skills, which broaden the scope of our board of directors’ experience. +Gary M. Halverson , Independent Director . Mr. Halverson has served as a member of Keane’s board of directors since September 2016. In 2016, Mr. Halverson became a Senior Advisor at First Reserve, a private equity firm that focuses on energy investments, and a Partner at 360 Development Partners, a commercial real estate firm. Mr. Halverson was formerly Group President of Drilling and Production Systems and Senior Vice President at +136 +Cameron International Corporation from 2014 to 2016 prior to its sale to Schlumberger in 2016. He has over 38 years of industry experience with Cameron, where he worked in various roles across the U.S., Latin America and Asia, including President of Surface Systems between 2005 and 2014, Vice President and General Manager for Western Hemisphere between 2002 and 2006, General Manager of Latin America between 2001 and 2002 and Director of Sales and Marketing for Asia/Pacific/Middle East between 1993 and 2001. Mr. Halverson formerly served as Chairman of the Board of Directors of the Petroleum Equipment Suppliers Association, as a director on the board of the General Committee of Special Programs of the American Petroleum Institute, as a director on the board of the Well Control Institute and was the U.S. delegate to the World Petroleum Congress. Mr. Halverson’s extensive involvement in the oilfield service industry brings a valuable perspective to our Board. +Shawn Keane , Director . Mr. Keane has served as a member of Keane’s board of directors since March 2011. Mr. Keane served as President of Keane from 2008 to 2011 and helped transition the company into the hydraulic fracturing industry in the Marcellus/Utica Shale. Previously, he served as Keane’s Vice President between 2000 and 2008, and in various management positions from 1983 to 2000, when he began his employment with Keane & Sons Drilling, Inc., a predecessor entity of Keane. Mr. Keane’s knowledge of our company’s operational history and experience in the oilfield services industry is valuable to our board of directors’ understanding of our business and financial performance. +Lenard B. Tessler , Director . Mr. Tessler has served as a member of Keane’s board of directors since October 2012. Mr. Tessler is currently Vice Chairman and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. He is a member of the Board of Directors of Albertsons Companies, a food and drug retailer, where he serves as Lead Director, and a Trustee of the New York-Presbyterian Hospital, where he also serves as member of the Investment Committee and the Budget and Finance Committee. Mr. Tessler’s leadership roles at our largest beneficial owner, his board service, his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provide critical skills for our board of directors to oversee our strategic planning and operations. +Elmer D. Reed , Independent Director . Mr. Reed has served as a member of Keane’s board of directors since April 2011. Prior to joining our board of directors, Mr. Reed served as Vice President, Executive Sales for Select Energy Services from 2010 to 2015 and in various management positions for BJ Services Company from 2003 to 2010, Newpark Drilling Fluids from 2001 to 2003 and Halliburton Energy Services from 1971 to 1999. Mr. Reed has over 45 years of oilfield service and operational experience. He served as a member of the board of directors of Circle Star Energy, an E&P company, in 2012. Mr. Reed has been active in the Independent Petroleum Association of America and is a lifetime member of the Society of Petroleum Engineers. He is also a member of Houston Livestock Show and Rodeo and Houston Farm and Ranch, and regularly assists with infrastructure development projects in South America. Mr. Reed strengthens our board of directors with decades of experience in the oilfield service industry. +Scott Wille , Director . Mr. Wille has served as a member of Keane’s board of directors since March 2011. Mr. Wille is currently Co-Head of North American Private Equity and Senior Managing Director at Cerberus, which he joined in 2006. Prior to joining Cerberus, Mr. Wille worked in the leveraged finance group at Deutsche Bank Securities Inc. from 2004 to 2006. Mr. Wille has served as a director of Remington Outdoor Company, Inc., a designer, manufacturer and marketer of firearms, ammunition and related products, since February 2014 and Albertsons Companies since 2015. Mr. Wille previously served as a director of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies, from September 2010 to October 2012. Mr. Wille’s experience in the financial and private equity industries, together with his in-depth knowledge of our company and its acquisition strategy, are valuable to our board of directors’ understanding of our business and financial performance. +137 +Board of Directors +Family Relationships +None of our officers or directors has any family relationship with any director or other officer. “Family relationship” for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin. +Board Composition +Our business and affairs are currently managed under the board of directors of Keane. Our board of directors has 11 members, comprised of 7 directors affiliated with Keane Investor (including one executive officer) and four independent directors. Members of the board of directors will be elected at our annual meeting of stockholders to serve for a term of one year or until their successors have been elected and qualified, subject to prior death, resignation, retirement or removal from office. +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +Controlled Company +Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including: +• the requirement that a majority of the board of directors consist of independent directors; +• the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and +• the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. +We currently utilize, and intend to continue to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. +In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after specified transition periods. +More specifically, if we cease to be a controlled company within the meaning of these rules, we will be required to (i) satisfy the majority independent board requirement within one year of our status change, and (ii) have (a) at least one independent member on each of our nominating and corporate governance committee and compensation committee by the date of our status change, (b) at least a majority of independent members on each committee within 90 days of the date of our status change and (c) fully independent committees within one year of the date of our status change. +138 +Board Leadership Structure +Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of the board of directors should be separate. However, James C. Stewart currently serves as both Chief Executive Officer and Chairman. Our board of directors has considered its leadership structure and believes at this time that our company and its stockholders are best served by having one person serve in both positions. Combining the roles fosters accountability, effective decision-making and alignment between interests of our board of directors and management. Mr. Stewart also is able to use the in-depth focus and perspective gained in his executive function to assist our board of directors in addressing both internal and external issues affecting the company. +Our corporate governance guidelines provide for the election of one of our directors to serve as Lead Director when the Chairman of the board of directors is also the Chief Executive Officer. Marc G. R. Edwards currently serves as our Lead Director, and is responsible for serving as a liaison between the Chairman and the non-management directors, approving meeting agendas and schedules for our board and presiding at executive sessions of the non-management directors and any other board meetings at which the Chairman is not present, among other responsibilities. +Our board of directors expects to periodically review its leadership structure to ensure that it continues to meet the company’s needs. +Role of Board in Risk Oversight +While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit and risk committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our compliance committee is responsible for overseeing the management of compliance and regulatory risks facing our company and risks associated with business conduct and ethics. Our nominating and corporate governance committee oversees risks associated with corporate governance. Pursuant to our board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by our board of directors and its committees. +Board Committees +Our board of directors has assigned certain of its responsibilities to permanent committees consisting of board members appointed by it. +Audit and Risk Committee +Our audit and risk committee consists of Marc G. R. Edwards, Christian A. Garcia and Gary M. Halverson, with Mr. Garcia serving as chair of the committee. The committee assists the board in its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements (to the extent not otherwise handled by our compliance committee), our independent auditor’s qualifications and independence, and the establishment and performance of our internal audit function and the performance of the independent auditor. Each of Messrs. Garcia, Edwards and Halverson qualify as independent directors under the corporate governance standards of the rules of the NYSE and the independence requirements of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Mr. Garcia qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K. Each member of the audit and risk committee is able to read and understand fundamental financial statements, including our balance sheet, statement of operations and cash flows statements. +Our board of directors has adopted a written charter under which the audit and risk committee operates. A copy of the audit and risk committee charter, which satisfies the applicable standards of the SEC and the NYSE, is available on our website. +139 +Compensation Committee +Our compensation committee consists of Dale M. Dusterhoft, Marc G. R. Edwards, Shawn Keane and Scott Wille, with Scott Wille serving as chair of the committee. The compensation committee of the board of directors is authorized to review our compensation and benefits plans to ensure they meet our corporate objectives, approve the compensation structure of our executive officers and evaluate our executive officers’ performance and advise on salary, bonus and other incentive and equity compensation. A copy of the compensation committee charter is available on our website. +Compliance Committee +Our compliance committee consists of Lucas N. Batzer, Lisa A. Gray, Shawn Keane and Elmer D. Reed, with Lisa A. Gray serving as chair of the committee. The purpose of the compliance committee is to assist the board in implementing and overseeing our compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks facing our company, and monitor our performance with respect to such programs, policies and procedures. A copy of the charter for the compliance committee is available on our website. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Dale M. Dusterhoft, Marc G. R. Edwards, Lisa A. Gray and Gary M. Halverson, with Marc G. R. Edwards serving as chair of the committee. The nominating and corporate governance committee is primarily concerned with identifying individuals qualified to become members of our board of directors, selecting the director nominees for the next annual meeting of the stockholders, selection of the director candidates to fill any vacancies on our board of directors and the development of our corporate governance guidelines and principles. A copy of the nominating and corporate governance committee charter is available on our website. +Section 16(a) Beneficial Ownership Reporting Compliance +All of our directors, executive officers and greater than 10% shareholders are required to file initial statements and reports of changes of ownership of our common stock on Forms 3, 4 and 5 with the SEC. +We have reviewed these reports, including any amendments there to and written representations from the directors and executive officers. Based upon this review, we believe that all 2017 filing requirements were met for each of our directors and executive officers subject to Section 16(a). +Code of Business Conduct and Ethics +We have adopted a written code of business conduct and ethics (“Code of Business Conduct and Ethics”) that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. In addition, our senior financial officers, including our principal executive officer and principal financial officer, are subject to a written code of ethics for senior financial officers. We have made a current copy of both codes available on our website, www.keanegrp.com and both are available in print and without charge to any person who sends a written request to our Corporate Secretary at 2121 Sage Road, Suite 370, Houston, TX 77056. In addition, we intend to post on our website all disclosures that are required by law or the New York Stock Exchange listing standards concerning any amendments to, or waives from, any provision of either code. +Shareholder Recommendation of Director Nominees +We do not have formal procedures in place by which shareholders may recommend nominees to our board of directors. +Corporate Governance Guidelines +We have adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE, as applicable, that serve as a flexible framework within which our board of directors and its committees +140 +operate. These guidelines cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman and Chief Executive Officer, executive sessions, standing board committees, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. A copy of our corporate governance guidelines are posted on our website. +141 +Item 11. Executive Compensation +EXECUTIVE COMPENSATION +Compensation Discussion & Analysis +This Compensation Discussion & Analysis (“CD&A”) explains our executive compensation program for our named executive officers (“NEOs”) listed below. This CD&A also describes the compensation committee’s process for making pay decisions, as well as its rationale for specific decisions related to the fiscal year ended December 31, 2017 (“fiscal year 2017”). +NEO +Title +James C. Stewart +Chairman and Chief Executive Officer ("CEO") +Gregory L. Powell +President and Chief Financial Officer ("CFO") +M. Paul DeBonis Jr. +Chief Operating Officer +Kevin M. McDonald +Executive Vice President, General Counsel & Secretary +Ian J. Henkes +Vice President & General Manager, South Region and National Wireline (1) +R. Curt Dacar +Former Chief Commercial Officer (2) +________________ +(1) +Mr. Henkes served in the position of Vice President of Human Resources through June 30, 2017. Effective as of July 1, 2017, he was promoted to the position of Vice President & General Manager, South Region and National Wireline. +(2) +Mr. Dacar separated from service with the Company on September 1, 2017. +Executive Summary +Compensation Practices & Policies +The following practices and policies in our program promote sound compensation governance and are in the best interests of our stockholders and executives: +• +We link a significant portion of compensation to our annual financial performance or long-term stock price performance +• +We use an independent compensation consultant +• +We have a clawback policy covering cash and equity compensation +• +We have a prohibition on option repricing without stockholder approval +• +We have a prohibition on hedging of Company securities by our executive officers +• +We provide no single-trigger change-of-control cash severance payments +• +We provide no excise tax gross-ups +2017 Compensation Actions At-A-Glance +The compensation committee took the following compensation-related actions for fiscal year 2017: +• +Compensation Adjustments: +• +Starting on March 4, 2015, each of Messrs. Stewart, Powell and DeBonis participated in a cost reduction program that included a 20% reduction to each such NEO’s base salary. Due to the Company’s improved economic conditions and financial performance, effective July 1, 2017, the compensation committee approved the restoration of the base salaries of each of Messrs. Stewart, Powell and DeBonis to the level provided for in the NEO’s Executive Employment Agreement (as discussed below). +142 +• +In connection with our IPO, the compensation committee approved an increase in Mr. Henkes’ severance entitlement from six months to twelve months of his base salary. Further, due to his increased responsibilities in connection with his promotion from Vice President of Human Resources to Vice President & General Manager, South Region and National Wireline, effective as of July 2017, the compensation committee approved an increase of Mr. Henkes’ annual base salary from $245,000 to $300,000, and of his target annual bonus from 75% to 100% of base salary. +• +In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experiences and following a review of the compensation paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved an increase of Mr. McDonald’s annual base salary from $335,000 to $400,000, and his target annual bonus from 75% to 100% of base salary. +• +Retention Bonuses/ Deferred Stock Awards: In 2016, in connection with our IPO, the compensation committee approved cash retention bonuses to each of Messrs. Stewart, Powell, DeBonis and Henkes to incentivize successful completion of the IPO and their continued service with the Company. To further align the interests of our senior management team with our stockholders, on March 16, 2017, the compensation committee and each of Messrs. Stewart, Powell and DeBonis agreed that in lieu of cash retention payments, such NEOs would be granted Deferred Stock Awards as further described below. +• +Annual Incentives: The compensation committee adopted an annual bonus program for fiscal year 2017, based on the achievement of specific Company performance objectives. Based on our level of achievement, our compensation committee has determined that each of our currently employed NEOs is eligible to receive an amount under the 2017 Executive Bonus Program equal to 200% of the NEO’s target bonus. +• +Long-Term Incentives: A significant amount of the compensation delivered to the NEOs is in the form of equity. In addition to the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis, the NEOs were awarded long-term incentives consisting of a mixture of restricted stock unit awards and stock options. The compensation committee believes the use of these equity vehicles creates strong alignment with the Company’s stockholders by linking NEO compensation closely to stock performance. For the stock options granted to the NEOs in fiscal year 2017, the exercise price was set at $19.00 per share, our IPO price. This resulted in a premium of approximately 30% above the closing price of our common stock on the grant date with respect to the stock options granted to the NEOs other than Mr. Dacar, and a premium of approximately 17% above the closing price of our common stock on the grant date with respect to the stock options granted to Mr. Dacar. +What Guides Our Program +Our Compensation Philosophy +Our compensation philosophy is driven by the following guiding principles: +• +A significant portion of an executive’s total compensation should be variable (“at-risk”) and linked to the achievement of specific short- and long-term performance objectives. +• +Executives should be compensated through pay elements (base salaries, short and long-term incentives) designed to enhance stockholder value by incentivizing our executives to work towards goals that drive a suitable rate of return on stockholder investment. +• +Target compensation should be competitive with that being offered to individuals in comparable roles at other companies with which we compete for talent to ensure we employ the best people to lead the successful implementation of our business plans and to attract the caliber of executive we need to support the long-term growth of our enterprise. +• +Decisions about compensation should be guided by best-practice governance standards and rigorous processes that encourage prudent decision-making. +143 +The Principal Elements of Pay +Our compensation philosophy is supported by the following principal elements of pay: +Pay Element +How it's Paid +Purpose +Base Salary +Cash +(Fixed) +Provide a competitive base salary rate relative to similar positions in the market and enable the Company to attract and retain critical executive talent +Annual Incentives +Cash +(Variable) +Reward executives for delivering on annual financial and strategic objectives that contribute to stockholder value creation +Long-Term Incentives +Equity +(Variable) +Provide incentives for executives to execute on longer-term financial and strategic goals that drive stockholder value creation and support the Company’s retention strategy +Retention Rewards +Cash or Equity +(Fixed) +Provide incentive for executives to remain employed with the Company following our IPO to continue to drive stockholder value creation and support the Company’s retention strategy. +Pay Mix +A majority of NEO total direct compensation for fiscal year 2017 was variable, at approximately 93% for our CEO, and approximately of 91% for our other NEOs (excluding Mr. Dacar). The following charts illustrate the total direct compensation mix for our CEO and our other NEOs for fiscal year 2017: +93% Variable +91% Variable +Our Decision Making Process +The Role of the Compensation Committee +The compensation committee oversees the executive compensation program for our NEOs. The compensation committee is comprised of members of our board of directors. As a “controlled company,” the company is not required to comply with the NYSE corporate governance requirement that the compensation committee be composed entirely of independent directors. The compensation committee works very closely with its independent consultant and management to examine the effectiveness of the Company’s executive compensation program throughout the year. The compensation committee evaluates, determines and approves the compensation of our CEO and other executive officers, and to recommend the compensation of our outside directors. The compensation committee administers the Company’s equity plans and has overall responsibility for monitoring of the Company’s executive compensation policies, plans and programs. The compensation committee may delegate its authority relating to non-employee director compensation to a subcommittee consisting of one or more members, when appropriate. Details of the compensation committee’s authority +144 +and responsibilities are specified in the committee’s charter which is available on the Company’s website at www.keanegrp.com. +The Role of Management +Compensation committee meetings are regularly attended by our CEO, CFO and General Counsel. Each of the management attendees provides the compensation committee with his specific expertise and the business and financial context necessary to understand and properly target financial and performance metrics. None of the members of management are present during the compensation committee’s deliberations regarding their own compensation adjustments, but the Company’s independent compensation consultant may participate in those discussions. +The Role of the Independent Consultant +The compensation committee has the full authority to engage compensation consultants and other advisors to assist it in the performance of its responsibilities. Prior to retaining, or seeking advice from, a compensation consultant or other advisor, the compensation committee must consider the independence of such compensation consultant or other advisor. The independent compensation consultant retained by the compensation committee reports directly to the compensation committee. +In 2017, the compensation committee engaged Pearl Meyer & Partners, LLC (“Pearl Meyer”) as its independent compensation consultant. The compensation committee assessed the independence of Pearl Meyer and determined that its work for the compensation committee has not raised any conflict of interest. In 2017, Pearl Meyer provided services to the compensation committee, including (i) a refreshed compensation review for the executive officers of the Company, including the NEOs, (ii) an assessment of the Company’s compensation components compared to survey and peer group data; and (iii) recommendations for total compensation opportunity guidelines (i.e., base salary and annual and long-term incentive targets). Pearl Meyer does not provide any services to the Company or any of its subsidiaries other than the services provided to the compensation committee. +145 +The Role of the Peer Group +The compensation committee strives to set a competitive level of total compensation for each NEO as compared with executives in similar positions at peer companies. For purposes of setting fiscal year 2017 compensation levels, in conjunction with the recommendation of Pearl Meyer, the compensation committee took into account publicly-available data from industry compensation surveys and proxy statements from the group of peer companies listed below. +Peer Companies +C&J Energy Services +Patterson-UTI Energy, Inc. +Ensco, Plc. +Pioneer Energy Services Corp. +Forum Energy Technologies +Precision Drilling Corporation +Helmerich & Payne, Inc. +ProPetro Holding Corp. +Nabors Industries, Ltd. +Rowan Companies, Plc. +Noble Corporation, Plc. +RPC, Inc. +Oil States International, Inc. +Superior Energy Services, Inc. +Parker Drilling Company +________________ +Peer Group Data Summary +Revenue* +Market Cap** +$ Millions +Percentile +25th +$ +775 +$ +1,139 +50th +$ +1,338 +$ +1,559 +75th +$ +1,768 +$ +2,165 +FRAC +$ +1,561 +$ +1,673 +Percentile Rank +56th +55th +* +Projected 2017—Source Standard & Poor’s Capital IQ; +** +As of November 30, 2017—Source Standard & Poor’s Capital IQ +This market data is not the sole determinant in setting executive pay levels. The compensation committee also considers Company and individual performance, the nature of an individual’s role within the Company, and his or her experience and contributions to his or her current role when making its compensation-related decisions. +The 2017 Executive Compensation Program in Detail +Base Salary +We provide each of our NEOs with a competitive fixed annual base salary. The base salaries for our NEOs are set forth in employment agreements between the Company and each NEO (the “Executive Employment Agreements”) and are reviewed annually by the compensation committee by taking into account the results achieved by each executive, his future potential contributions, scope of responsibilities and experience, and competitive pay practices. See the section titled “—Executive Employment Agreements” below for a further discussion regarding the Executive Employment Agreements. +Pursuant to the Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis, each such NEO’s base salary was subject to the across-the-board 20% payroll reduction approved by the compensation committee on March 4, 2015 (the “Payroll Reduction Initiative”). Due to the Company’s improved economic conditions and financial performance, the compensation committee rescinded the Payroll Reduction Initiative effective July 1, 2017 +146 +(the “Rescission Date”). The following table sets forth the annual rate of base salary that each of Messrs. Stewart, Powell and DeBonis was entitled to receive prior to the Rescission Date and the annual rate of base salary each such NEO became entitled to receive on the Rescission Date: +Base Salary Prior to +Rescission Date +Base Salary Following +Rescission Date +James C. Stewart +$ +800,000 +$ +1,000,000 +Gregory L. Powell +$ +450,000 +$ +800,000 +M. Paul DeBonis Jr. +$ +300,000 +$ +350,000 +Pursuant to the Executive Employment Agreements with each of Messrs. McDonald and Henkes, for fiscal year 2017 such NEOs were initially entitled to an annual base salary of $335,000 and $245,000, respectively. In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experience, and following a review of the base salaries paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved a 19% market-based adjustment of Mr. McDonald’s annual base salary to $400,000. In connection with the increased responsibilities assumed by Mr. Henkes in connection with his promotion, effective as of July 2017, the compensation committee approved a 22% adjustment of Mr. Henkes’ annual base salary to $300,000. +Pursuant to the Executive Employment Agreements entered into with Mr. Dacar as of May 18, 2017, Mr. Dacar was entitled to an annual base salary of $440,000. The compensation package provided to Mr. Dacar was intended to incentivize him to remain with the Company and assist in the integration of the RockPile business into the Company’s operations. +Special Bonuses, Payments and Awards +Trican Transaction Retention Payments +Effective upon the consummation of the Trican transaction, our board of directors approved the payment of monthly retention bonuses to Messrs. Stewart, Powell and DeBonis, in the amounts set forth in the table below (the “Retention Payments”), to be paid through the month prior to the month in which the Payroll Reduction Initiative was rescinded. The Retention Payments were reflected in the Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis. The intent of the Retention Payments was to provide additional compensation to Messrs. Stewart, Powell and DeBonis during the Payroll Reduction Initiative in recognition of their managing a larger entity following the consummation of the Trican transaction. Due to the Company’s improved economic conditions and financial performance, the compensation committee rescinded the Payroll Reduction Initiative on the Rescission Date and thereafter Messrs. Stewart, Powell and DeBonis ceased to be eligible to receive the Retention Payments. +Monthly Retention +Payment Prior to +Rescission Date +James C. Stewart +$ +13,333 +Gregory L. Powell +$ +23,333 +M. Paul DeBonis Jr. +$ +3,333 +IPO Bonus and Deferred Stock Awards +In 2016, our board of directors approved a cash bonus pool to be allocated to employees who services were deemed necessary for the consummation of an initial public offering of our stock, including Messrs. Stewart, Powell, DeBonis and Henkes (“IPO Bonuses”). Subject to the consummation of an initial public offering of our stock, participants in the bonus pool would become eligible to receive two IPO Bonus payments, the first on January 1, 2018 and the second on January 1, 2019, subject to continued service through the payment date. Accordingly, upon the consummation of the IPO, Messrs. Stewart, Powell, DeBonis and Henkes each became eligible to receive two IPO Bonus payments in the amounts set forth in the table below, the first on January 1, 2018 and the second on January 1, 2019. The Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis, were amended to reflect these IPO Bonus payments. +On March 16, 2017, to further align the interests of Messrs. Stewart, Powell and DeBonis with those of our stockholders, our board of directors approved, and each such NEO agreed, that in lieu of such cash IPO Bonus payments, +147 +the NEO was granted a deferred stock award under our Equity and Incentive Award Plan. Each deferred stock award provides that, subject to the NEO remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his Executive Employment Agreement, the first stock bonus became vested on January 1, 2018 and be paid on February 15, 2018, and the second stock bonus will become vested on January 1, 2019 and be paid on February 15, 2019. If we incur a change of control or if the NEO’s employment is terminated by us without Cause or, in the case of Mr. Stewart or Mr. Powell, by him for Good Reason (such terms are discussed below), the NEO will be entitled to receive payment of any unpaid stock bonus. Each stock bonus will be paid in that number of shares of our common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts +First Bonus +Second Bonus +James C. Stewart +$ +1,975,706 +$ +1,975,706 +Gregory L. Powell +$ +1,646,422 +$ +1,646,422 +M. Paul DeBonis Jr. +$ +658,569 +$ +658,569 +Ian J. Henkes +$ +43,897 +$ +43,897 +RockPile Transaction Bonus Award +In connection with the RockPile Transaction, we agreed to provide Mr. Dacar with three separate cash retention bonuses subject to his continued employment: $630,000 if he remained employed by RockPile through the closing date of the RockPile Transaction; $315,000 on the first anniversary of the closing date of the RockPile Transaction; and $315,000 on the second anniversary of the closing date of the RockPile Transaction (the “RockPile Bonuses”). The first RockPile Bonus was paid to Mr. Dacar in connection with the closing of the RockPile Transaction. Pursuant to the Dacar Separation Agreement (as defined below), the Company has agreed that following his separation from service, Mr. Dacar remains eligible to receive the remaining RockPile Bonus payments when otherwise payable. +Value Creation Plan +Effective upon the consummation of the Trican transaction, each of Messrs. Stewart, Powell and DeBonis became eligible to participate in our Value Creation Plan (the “Value Creation Plan”). Pursuant to the Value Creation Plan, each such NEO was eligible to receive up to three bonus payments, each in the amount of $666,667 for Messrs. Stewart and Powell and in the amount of $166,667 for Mr. DeBonis. Each bonus payment was payable upon our achievement of a financial or other milestone and the NEO remaining continuously employed through the payment date. +The first bonus was paid to the NEOs in June 2016 upon our achievement of over $66 million of demonstrated synergies as outlined in our Trican underwriting plan. The second bonus was paid upon the consummation of the IPO. The third bonus payment was payable if we generated at least $135 million of Adjusted EBITDA in fiscal year 2017. Subject to confirmation and approval by the compensation committee, this milestone was achieved and the third bonus was earned in fiscal year 2017 and will be paid in 2018. +2017 Annual Incentives +Each Executive Employment Agreement provides that the NEO is eligible for an annual bonus. The Executive Employment Agreements with Messrs. Stewart, Powell and DeBonis each provide, and the Executive Employment agreement with Dacar provided, for a target annual bonus at 100% of base salary for the applicable year and the Executive Employment Agreements with Messrs. McDonald and Henkes each provided for a target annual bonus at 75% of base salary for the applicable year. In connection with the increased responsibilities assumed by Mr. Henkes in connection with his promotion, effective as of July 2017, the compensation committee approved an increase of Mr. Henkes’ target annual bonus to 100% of base salary. In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experience, and following a review of the compensation paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved an increase of Mr. McDonald’s target annual bonus to 100% of base salary. The actual annual bonuses payable to Messrs. Henkes and McDonald will be determined by applying 75% to the base salary paid for the period prior to the increase in their target bonuses, and 100% to the base salary paid for the period following the increase in their target bonuses. +The compensation committee adopted the Annual Executive Bonus Program for Fiscal Year 2017 (the “2017 Executive Bonus Program”) under the terms of the Company’s Executive Incentive Bonus Plan. Initially, the 2017 +148 +Executive Bonus Program provided that each NEO was eligible to receive an annual bonus for fiscal year 2017 calculated by multiplying the NEO’s target bonus by the achieved “Funding Level” based on the Company’s achievement of the following metrics: +Performance Objectives +2017 Performance Metrics +Weighting +Corporate Financial Results +Cash Flow +50% +Corporate Financial Results +Adjusted EBITDA +50% +The funding amount was to be determined as set forth in the table below: +Achievement Level +Performance Hurdle +Funding Level +Threshold +Cash Flow: $0 +Adjusted EBITDA: $73.6M +50% +Target +Cash Flow: $16M +Adjusted EBITDA: $92M +100% +Stretch Level 1 +Cash Flow: $31M +Adjusted EBITDA: $115M +150% +Stretch Level 2 +Cash Flow: $50M +Adjusted EBITDA: $138M +200% +Stretch Level 3 +Cash Flow: >$50M +Adjusted EBITDA: >$138M +Linear incremental bonus increase up to the maximum bonus award provided under the Company's Executive Incentive Bonus Plan. +The Funding Level would increase on a linear basis between the Threshold, Target and stretch performance hurdles. +The compensation committee chose to utilize cash flow from operating activities and Adjusted EBITDA as they are pure measures of our profitability and how well our management team is operating the Company on a day-to-day basis. +In October 2017, in consultation with its compensation consultant Pearl Meyer, the compensation committee determined that: +• +as a result of favorable market conditions and the Company’s ability to deploy additional fleets, and the resultant increase in working capital, cash flow became less of an indicator of management or the Company’s performance; +• +market conditions resulted in Adjusted EBITDA having an increased importance as a performance metric; +• +the successful integration of the RockPile business had become a priority for management for fiscal year 2017; and +• +the initial Adjusted EBITDA “Performance Hurdle” metrics, which were based on our IPO performance modeling, required updating following the RockPile Transaction to reflect the resulting additional Adjusted EBITDA reflected in the disclosed transaction forecast model used in connection with the RockPile Transaction. +Therefore, the compensation committee determined that the metrics under the 2017 Executive Bonus Plan should be adjusted to provide that the “Funding Level” would be based on the Company’s achievement of the following metrics: +Performance Objectives +2017 Performance Metrics +Weighting +Corporate Financial Results +Adjusted EBITDA +70% +Strategic Achievements +The successful completion of, and execution of the integration plan for, the RockPile Transaction ("RockPile Integration") +30% +149 +The funding of the Adjusted EBITDA metric was further adjusted as follows: +Achievement Level +Performance Hurdle +Funding Level +Threshold +$98.8M +50% +Target +$123.5M +100% +Stretch Level 1 +$154.4M +150% +Stretch Level 2 +$185.3M +200% +Stretch Level 3 +>$185.3M +Linear incremental bonus increase up to the maximum bonus award provided under the Company's Executive Incentive Bonus Plan. +The Funding Level would increase on a linear basis between the Threshold, Target and stretch performance hurdles. +For fiscal year 2017 we achieved a level of Adjusted EBITDA of $214.5 million and our compensation committee determined that the RockPile Integration has substantially been achieved. Based on such achievements, our compensation committee approved a Funding Level equal to 200% of the target bonus for each participant in the 2017 Executive Bonus Program. As result, our currently employed NEOs becoming eligible to receive the payments set forth in the table below: +2017 Annual Bonus +James C. Stewart +$ +2,000,000 +Gregory L. Powell +$ +1,600,000 +M. Paul DeBonis Jr. +$ +700,000 +Kevin M. McDonald +$ +527,768 +Ian J. Henkes +$ +484,706 +2017 Long-Term Incentives +Long-term equity awards provide a strong link between executive pay and stockholder interests. Our NEOs are eligible to receive long-term equity awards under the stockholder approved Equity and Incentive Award Plan. For fiscal year 2017, equity awards were granted as a combination of stock options and restricted stock unit awards. +• +Stock options are performance-based awards that provide meaningful incentives for management to execute on the longer-term financial and strategic growth goals that drive stockholder value creation. This is because they only provide value to the NEOs if the price of the Company’s stock appreciates over time. Specifically, the value of the award depends on the price of our common stock in the future as compared to the exercise price of the options granted. There can be no assurance that any value will actually be realized under the stock options. As discussed below, for the stock options granted to the NEOs in fiscal year 2017, the exercise price was set at $19.00 per share, our IPO price, which resulted in a premium above the closing price of our common stock on the applicable grant date. +• +Restricted stock unit awards are intended to provide the NEOs with the economic equivalent of a direct ownership interest in the Company during the vesting period and provide the Company with significant retention security regardless of post-grant stock price volatility. +For fiscal year 2017, in conjunction with our IPO, the compensation committee consulted with Pearl Meyer and reviewed long-term incentive awards granted by other companies that had recently consummated initial public offerings and emerging companies. The compensation committee approved grants at levels higher than it intends to grant in future years to recognize the achievement of our NEOs in growing the business and positioning the Company for success following our IPO, to provide a market-based forward-looking retention and performance incentive for our NEOs, and to help ensure a meaningful initial ownership stake for each of our NEOs as a basis for sustained share ownership and direct stockholder alignment. In part to achieve these goals, the compensation committee determined that the initial awards granted to our senior management team for fiscal year 2017 would be calculated based on a value of $19.00 per share, our +150 +IPO price. Pearl Meyer provided the compensation committee with benchmark award levels, which the compensation committee reduced with respect to Messrs. Stewart, Powell and DeBonis after taking into consideration the Deferred Stock Awards granted to such NEOs. To further align such awards with our success following the IPO, the exercise price for the stock options granted to the NEOs in fiscal year 2017 (including to Mr. Dacar), was set at $19.00 per share, our IPO price. This resulted in a premium of approximately 30% above the closing price of our common stock on the grant date with respect to the stock options granted to the NEOs other than Mr. Dacar, and a premium of approximately 17% above the closing price of our common stock on the grant date with respect to the stock options granted to Mr. Dacar. +With respect to Mr. Dacar, the compensation committee approved grants to him in connection with his agreement to join the Company following the RockPile Transaction at a level intended to incentivize him to remain with the Company and assist in the integration of the RockPile business into the Company’s operations. Mr. Dacar forfeited his Stock options and restricted stock units upon his separation of service from the Company on September 1, 2017. +The table below shows the number of long-term incentive awards granted for fiscal year for each of the NEOs: +NEO +Stock Option +Awards +Restricted Stock +Unit Awards +Total Grant Date +Value ($) (1) +James C. Stewart +214,888 +214,888 +4,438,356 +Gregory L. Powell +174,775 +174,775 +3,609,852 +M. Paul DeBonis Jr. +56,454 +56,454 +1,166,016 +Kevin M. McDonald +80,702 +80,702 +1,666,842 +Ian J. Henkes +31,579 +31,579 +652,242 +R. Curt Dacar +35,088 +35,088 +787,876 +(1) Reflects the grant date fair value calculated in accordance with ASC 718. +The stock options and restricted stock units granted to the NEOs in fiscal year 2017 will vest in one-third increments on January 20 of each of 2018, 2019 and 2020, contingent upon the continued employment of the NEO through each vesting date. The stock options and restricted stock units will become fully vested in the event that the NEO’s employment is terminated without Cause, or other than in the case of Mr. DeBonis, for Good Reason, within twelve months following a change in control. +Executive Employment Agreements +Each currently employed NEO has entered into Executive Employment Agreements with the Company (which, in connection with the IPO, assumed the obligations under the Executive Employment Agreements from KGH Intermediate Holdco II, LLC with respect to Messrs. Stewart, Powell and DeBonis, and from Keane Group Holdings, LLC with respect to Messrs. McDonald and Henkes). The Executive Employment Agreements each provide for an initial term that will expire on March 16, 2019 with respect to Messrs. Stewart, Powell and DeBonis, November 7, 2019 with respect to Mr. McDonald, and February 1, 2018 with respect to Mr. Henkes. The Executive Employment Agreement will automatically renew for additional one-year periods unless either party provides written notice at least 90 days prior to the end of the then term and, as a result, Mr. Henkes’ Executive Employment Agreement has been renewed for an additional year. +Pursuant to the Executive Employment Agreements with the currently employed NEOs, in the event of a termination of the NEO’s employment by us without Cause or due to our non-renewal of the applicable Executive Employment Agreement, or by Messrs. Stewart, Powell, McDonald or Henkes for Good Reason, subject to the execution of a release, the NEO will be entitled to the following severance benefits: +• +severance payments equal to: +– +for Mr. Stewart, two times the sum of his annual base salary, and the lesser of the average of the annual bonuses he received during the two years prior to termination and his target bonus; +– +for Mr. Powell, two times his annual base salary; and +– +for Messrs. DeBonis, McDonald and Henkes, his annual base salary +• +for Messrs. Stewart and Powell, a pro rata annual bonus for the year of termination; +151 +• +for Mr. Powell (upon any termination other than death or voluntarily without Good Reason), and Messrs. McDonald and Henkes, reimbursement of the cost of continuation coverage of group health coverage for, in the cases of Messrs. Powell and McDonald up to twelve months following termination, and in the case of Mr. Henkes, up to six months following termination. +In addition, pursuant to the Executive Employment Agreements with Mr. Stewart and Mr. Powell, in the event of his termination of employment due to death or disability, subject to the execution of a release, he or his estate, as applicable, will be entitled to: +• +severance payments equal to three months of base salary paid for the three-month period following the date of termination; and +• +a pro rata annual bonus for the year of termination. +As an additional incentive to Mr. McDonald to accept employment with the Company, his Executive Employment Agreement provided that if a change in control had been consummated on or prior to December 31, 2017, in lieu of such amount he would have been entitled to a severance payment in the amount of $1,750,000. +For purposes of the Executive Employment Agreements, “Cause” generally means: +• +indictment, conviction or plea of no contest to a felony or any crime involving dishonesty or theft; +• +conduct in connection with employment duties or responsibilities that is fraudulent or unlawful; +• +conduct in connection with employment duties or responsibilities that is grossly negligent and which has a materially adverse effect on us or our business; +• +willful misconduct or contravention of specific lawful directions related to a material duty or responsibility directed to be undertaken from our board of directors; +• +material breach of obligations under the applicable Executive Employment Agreement; +• +any acts of dishonesty resulting or intending to result in personal gain or enrichment at our expense; +• +failure to comply with a material policy; or +• +for Mr. Powell, his failure to maintain primary residence in the Houston, Texas metropolitan area. +For purposes of the Executive Employment Agreements, as applicable, “Good Reason” generally means: +• +our failure to cure a material breach of our obligations under the applicable Executive Employment Agreement; +• +a material diminution of duties, position or title (in the case of Mr. Stewart, other than any diminution in connection with the appointment of a new Chairman or Chief Executive Officer if following such appointment Mr. Stewart remains as either Chairman or Chief Executive Officer); +• +a material reduction in base salary (and in the case of Mr. McDonald, his target bonus); or +• +a change in office location that increases the NEO’s commute from his principal residence by more than 50 miles. +Dacar Agreements +Mr. Dacar entered into an Executive Employment Agreement with the Company, dated May 18, 2017, which became effective on July 3, 2017, the closing date of the RockPile Transaction. The Executive Employment Agreement with Mr. Dacar provided for an initial term through July 3, 2020, with automatic renewals for additional one-year periods unless either party provided written notice at least 90 days prior to the end of the then term. +In connection with his separation from service with the Company, Mr. Dacar and the Company entered into a Separation Agreement and General Release dated as of September 1, 2017 (the “Dacar Separation Agreement"). Pursuant to the Dacar Separation Agreement, Mr. Dacar agreed to a release of claims against the Company and became eligible to receive the following severance benefits under his Executive Employment Agreement: (i) severance payments in the amount of $880,000, which amount is equal to two-years of his base salary, that will be paid in monthly installments for a +152 +period of two years from his separation date, and (ii) reimbursement of his cost for continuation coverage for group health coverage in the amount of $1,153 per month, for up to twelve months from his separation date. In addition, the Company agreed that Mr. Dacar would remain eligible to receive the remaining RockPile Bonus payments owed to him when otherwise payable, as discussed above. +Benefits & Perquisites +Our NEOs also generally participate in other benefit plans on the same terms as all of our other employees. These plans include employee benefit plans maintained by the Company, including the 401(k) program, the medical insurance and reimbursement program, the group term life insurance program, and the group disability program. +Our NEOs also receive an automobile allowance in the amount of $21,000 per year for Messrs. Stewart, Powell and DeBonis, and $20,400 per year for Messrs. McDonald and Henkes. During his employment, the Company paid the premiums for Mr. Dacar’s welfare benefits under an executive benefit plan assumed by the Company in connection with the RockPile Transaction (which program ended on December 31, 2017), and provided Mr. Dacar with a weekly phone allowance. +Other Compensation Practices, Policies and Guidelines +Claw Back Policy +On February 23, 2017, our board of directors adopted the Company’s Compensation Recovery Policy (the “Claw Back Policy”). Pursuant to the Claw Back Policy, in the event of a revision and reissuance of a financial statement previously issued by the Company (an “Accounting Restatement”), our board of directors in its discretion may determine that the officer will be required to repay all or a portion of the amount of incentive-based compensation received by an officer of the Company that exceeds the amount of such compensation that such officer otherwise would been received determined based upon the Accounting Restatement. In the event that any such Accounting Restatement is required due to material non-compliance by the Company with any financial reporting requirement under the securities laws, then an executive officer of the Company will be obligated to repay the amount of incentive-based compensation received by such executive officer that exceeds the amount of such compensation that the executive officer otherwise would have received determined based upon the Accounting Restatement. The Claw Back Policy applies to any incentive-based compensation received by an officer of the Company during the three completed fiscal years of the Company immediately preceding the date of the applicable Accounting Restatement. For purposes of the Claw Back Policy, “incentive-based compensation” means any compensation (whether in cash, common stock, or otherwise) to an officer of the Company, that is granted, earned, vested or for which the amount is determined, wholly or in part, on the attainment by the Company of (i) any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, (ii) any measure that is derived wholly or in part from such measures, or (iii) the Company’s stock price and total shareholder return. +Anti-Hedging Policy +We prohibit the NEOs and other executives from engaging in transactions designed to insulate them from changes in the Company’s stock price. Therefore, the Company has an anti-hedging policy that prohibits our NEOs from entering into transactions that include (without limitation) equity swaps or short sales of our securities, margin accounts or pledges of our securities, and hedges or monetization transactions involving our securities that are designed to hedge or offset any decrease in the market value of the Company’s securities. In addition, the purchase or sale of puts, calls, options, or other derivative securities based on the Company’s securities is prohibited under this policy, and borrowing against any account in which our securities are held is prohibited. +2017 Risk Assessment +Each year, the Company performs a detailed risk analysis of each of its compensation programs. If warranted, the compensation committee will recommend changes to address concerns or considerations raised in the risk review process. Changes may be recommended for the program design or its oversight and administration in order to mitigate unreasonable risk, if any is determined to exist. The compensation committee has concluded that the Company’s compensation arrangements do not encourage any employees to take unnecessary and excessive risks. We do not believe that any risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on the Company. +153 +Compensation Committee Interlocks and Insider Participation +None of the members of the compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee. +Impact of Tax and Accounting +We regularly consider the various tax and accounting implications of our compensation plans. When determining the amount of long-term incentives and equity grants to executives and employees, the compensation costs associated with the grants are reviewed, as required by FASB ASC Topic 718. +For 2017, Section 162(m) of the Code generally prohibited any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the CEO and the next three highest compensated officers for such year, other than the CFO. The deduction limit under Section 162(m) of the Code did not apply to the Company in 2017 because, in general, Section 162(m) of the Code allowed for a three-year transition period after a company becomes publicly traded in connection with an initial public offering. Commencing in 2018, Section 162(m) of the Code has been revised to generally prohibit any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the CEO and the next four highest compensated officers for such year, including the CFO, and any employee who was covered under Section 162(m) of the Code in a prior year. In addition, commencing in 2018, Section 162(m) of the Code has been amended to remove an exception for qualified performance-based compensation. The compensation committee believes that it is important for it to retain maximum flexibility in designing compensation programs that are in the best interest of the Company and its stockholders. Therefore, the compensation committee, while considering tax deductibility as a factor in determining compensation, may not limit compensation to $1 million in any taxable year if it believes that the compensation is commensurate with the performance of the covered employee. +154 +Compensation Committee Report +The compensation committee has reviewed and discussed this CD&A with the Company’s management. Based on the review and discussions, the compensation committee has recommended to our board of directors that this CD&A be included in this Annual Report on Form 10-K. +The Compensation Committee +Scott Wille, Chair +Dale M. Dusterhoft +Marc G.R. Edwards +Shawn Keane +155 +Summary Compensation Table +Name and Principal Position +Year +Salary +($) +Bonus +($)(1) +Stock +Awards +($)(2) +Option +Awards +($)(3) +Non- +Equity +Incentive +Plan +Compensation +($)(4) +Change in +Pension +Value and +Nonqualified +Deferred +Compensation +Earnings +($) +All +Other +Compensation +($)(5) +Total +($) +(a) +(b) +(c) +(d) +(e) +(f) +(g) +(h) +(i) +(j) +James C. Stewart +2017 +813,077 +80,000 +7,065,139 +1,324,629 +3,333,334 +— +45,000 +12,661,179 +Chairman and Chief Executive Officer +2016 +640,000 +133,333 +— +— +1,466,667 +— +30,742 +2,270,742 +2015 +692,308 +— +— +— +1,160,000 +— +45,404 +1,897,712 +Gregory L. Powell +2017 +571,539 +140,000 +5,825,334 +1,077,362 +2,933,334 +— +39,000 +10,586,569 +President and Chief Financial Officer +2016 +360,000 +233,333 +— +— +1,306,667 +— +29,673 +1,929,673 +2015 +389,423 +— +— +— +740,000 +— +30,679 +1,160,102 +M. Paul DeBonis Jr. +2017 +292,885 +20,000 +2,135,156 +347,998 +1,033,334 +— +45,000 +3,874,373 +Chief Operating Officer +2016 +240,000 +33,333 +— +— +466,667 +— +29,223 +769,223 +2015 +259,615 +— +— +— +460,000 +— +34,385 +754,000 +Kevin M. McDonald +2017 +338,750 +— +1,169,372 +497,470 +527,768 +— +38,719 +2,572,079 +Executive Vice President, Legal Counsel & Secretary +Ian J. Henkes +2017 +271,154 +— +457,580 +194,662 +484,706 +— +38,400 +1,446,502 +Vice President, Operations South & National Wireline GM +Robert Dacar +2017 +76,155 +1,260,000 +571,584 +216,292 +0 +— +76,000 +2,200,031 +Former Chief Commercial Officer(6) +________________ +(1) +Reflects a monthly retention payment to each of Messrs. Stewart, Powell and DeBonis through June 2017. Reflects cash bonuses payable to Mr. Dacar in connection with the RockPile Transaction, of which $630,000 was paid to Mr. Dacar in fiscal year 2017. Pursuant to the Dacar Separation Agreement, he will receive payments in the amount of $315,000 on each of the first and second anniversaries of the closing date of the RockPile Transaction, which amounts are deemed earned in fiscal year 2017 for the purposes of this Summary Compensation Table. +(2) +Reflects the grant date fair value calculated in accordance with ASC 718 of the restricted stock units granted to the NEOs in fiscal year 2017 and of the deferred stock awards granted to each of Messrs. Stewart, Powell and DeBonis in fiscal year 2017. See Note 12—Stock- Based Compensation in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K for a discussion of the assumptions used in the valuation of such awards. Mr. Dacar forfeited his restricted stock units upon his resignation on September 1, 2017. +(3) +Reflects the grant date fair value calculated in accordance with ASC 718 of the stock option granted to the NEOs in fiscal year 2017. See Note 12—Stock-Based Compensation in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K for a discussion of the assumptions used in the valuation of such awards. Mr. Dacar forfeited his stock options upon his resignation on September 1, 2017. +(4) +For fiscal year 2017, these amounts reflect (a) bonus payments earned in fiscal year 2017 under our Value Creation Plan to Messrs. Stewart, Powell and DeBonis and (b) an amount equal to 200% of the annual target bonus for each NEO (other than Mr. Dacar) payable under our 2017 Executive Bonus Program. For the fiscal year ended December 31, 2016, these amounts reflect (a) bonus payments earned in fiscal year 2016 under our Value Creation Plan and (b) amounts paid to the NEOs under our annual bonus plan for such fiscal year. For the fiscal year ended December 31, 2015, reflects amounts paid to the NEOs under our annual bonus plan for such fiscal year. +156 +(5) +A detailed breakdown of “All Other Compensation” is provided in the table below: +Name +Year +Automobile +Allowance +($) +401(k) Plan +Company +Contribution +($) +Severance +($) +Expenses +($) (a) +Total +($) +James C. Stewart +2017 +21,000 +24,000 +— +— +45,000 +2016 +21,000 +9,742 +— +— +30,742 +2015 +21,404 +24,000 +— +— +45,404 +Gregory L. Powell +2017 +21,000 +18,000 +— +— +39,000 +2016 +21,000 +8,673 +— +— +29,673 +2015 +21,404 +9,275 +— +— +30,679 +M. Paul DeBonis Jr. +2017 +21,000 +24,000 +— +— +45,000 +2016 +21,000 +8,223 +— +— +29,223 +2015 +21,404 +12,981 +— +— +34,385 +Kevin M. McDonald +2017 +20,400 +18,319 +— +— +38,719 +Ian J. Henkes +2017 +20,400 +18,000 +— +— +38,400 +Robert Dacar +2017 +— +1,290 +73,333 +1,377 +76,000 +(a) +Reflects (i) payments in the amount of $1,197 made by the Company for Mr. Dacar’s welfare benefits pursuant to a RockPile executive benefit plan assumed by the Company in connection with the RockPile Transaction (which program ended on December 31, 2017), and (ii) a $180 phone allowance provided to Mr. Dacar. +(6) +Mr. Dacar joined the Company and was appointed as our Chief Commercial Officer on July 3, 2017, the closing date of the RockPile Transaction. Mr. Dacar resigned from the Company on September 1, 2017. +157 +Grants of Plan Based Awards in Fiscal Year 2017 +Estimated Future Payouts +Under Non-Equity Incentive +Plan Awards(1) +Estimated Future Payouts +Under Equity Incentive +Plan Awards(4) +All +Other +Stock +Awards: +Number +of +Shares +of Stock +or Units +(#)(5) +All Other +Option +Awards: +Number of +Securities +Underlying +Options +(#)(6) +Exercise +or Base +Price of +Option +Awards +($/Share) +Grant +Date +Fair +Value of +Stock +and +Option +Awards +($)(7) +Name +Grant +Date +Threshold +($)(2) +Target +($)(2) +Maximum +($)(3) +Threshold +($)(2) +Target +($)(2) +Maximum +($)(3) +James C. Stewart +500,000 +1,000,000 +5,000,000 +— +— +— +— +— +— +— +3/16/2017 +— +— +— +— +3,951,412 +— +— +— +— +— +4/3/2017 +— +— +— +— +— +— +214,888 +— +— +3,113,727 +4/3/2017 +— +— +— +— +— +— +— +214,888 +19.00 +1,324,629 +Gregory L. Powell +400,000 +800,000 +5,000,000 +— +— +— +— +— +— +— +3/16/2017 +— +— +— +— +3,292,844 +— +— +— +— +— +4/3/2017 +— +— +— +— +— +— +174,775 +— +— +2,532,490 +4/3/2017 +— +— +— +— +— +— +— +174,775 +19.00 +1,077,362 +M. Paul DeBonis Jr. +175,000 +350,000 +5,000,000 +— +— +— +— +— +— +— +3/16/2017 +— +— +— +— +1,317,138 +— +— +— +— +— +4/3/2017 +— +— +— +— +— +— +56,454 +— +— +818,018 +4/3/2017 +— +— +— +— +— +— +— +56,454 +19.00 +347,998 +Kevin M. McDonald +191,942 +263,884 +5,000,000 +— +— +— +— +— +— +— +4/3/2017 +— +— +— +— +— +— +80,702 +— +— +1,169,372 +4/3/2017 +— +— +— +— +— +— +— +80,702 +19.00 +497,470 +Ian J. Henkes +121,177 +242,353 +5,000,000 +— +— +— +— +— +— +— +4/3/2017 +— +— +— +— +— +— +31,579 +— +— +457,580 +4/3/2017 +— +— +— +— +— +— +— +31,579 +19.00 +194,662 +Robert Dacar +109,096 +218,192 +5,000,000 +— +— +— +— +— +— +— +7/3/2017 +— +— +— +— +— +— +35,088 +— +— +571,583 +7/3/2017 +— +— +— +— +— +— +— +35,088 +19.00 +216,292 +_______________ +(1) +Amounts represent the range of annual cash incentive awards the NEO was potentially entitled to receive based on the achievement of performance goals for fiscal year 2017 under the 2017 Executive Bonus Program as more fully described in “—Compensation Discussion and Analysis—2017 Annual Incentives.” The amounts actually paid are reported in the Non-Equity Incentive Plan column of the Summary Compensation table. Pursuant to the 2017 Executive Bonus Plan, performance below a specific threshold will result in no payment with respect to that performance goal. +(2) +For Mr. McDonald, reflects pro-rated threshold and target level amounts based on an annual base salary rate of $335,000 and target bonus of 75% of base salary through November 30, 2017, and an annual base salary rate of $400,000 and target bonus of 100% of base salary from December 1, 2017 through December 31, 2017. For Mr. Henkes, reflects pro-rated threshold and target level amounts based on an annual base salary rate of $245,000 and target bonus of 75% of base salary through June 30, 2017, and an annual base salary rate of $300,000 and target bonus of 100% of base salary from July 1, 2017 through December 31, 2017. For Mr. Dacar, reflects a pro-rated annual bonus for the period from July 3, 2017, the date he commenced employment with the Company, through December 31, 2017. Mr. Dacar forfeited his eligibility to receive an annual bonus upon his resignation from the Company. +(3) +Reflects the maximum bonus payable to any executive under the Company’s Executive Incentive Bonus Plan. +(4) +Reflects the aggregate value of the stock bonuses that may be issued in shares of our common stock under the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis. +(5) +Represents restricted stock units granted to the NEOs, as described in “—Compensation Discussion and Analysis—2017 Long-Term Incentives.” +(6) +Represent stock options granted to the NEOs, as described in “—Compensation Discussion and Analysis—2017 Long-Term Incentives.” +(7) +Reflects the grant date fair value as calculated in accordance with ASC 718. Assumptions used in the valuation of equity based awards are discussed in “Note 12—Stock-Based Compensation” in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K. +158 +Outstanding Equity Awards at Fiscal Year End 2017 +Option Awards +Stock Unit Awards +Name +Number of +securities +underlying +unexercised +options +(#) +exercisable +Number of +securities +underlying +unexercised +options +(#) +unexercisable +(1) +Equity +incentive +plan +awards: +number of +securities +underlying +unexercised +unearned +options (#) +Option +exercise +price +($) +Option +expiration +date +Number +of +shares +or units +of stock +that +have not +vested +(#) +Market +value of +shares +or units +of stock that +have not +vested +($) +Equity +incentive +plan +awards: +number of +unearned +shares, +units or +other +rights that +have not +vested +(#) +Equity +incentive +plan +awards: +market or +payout +value of +unearned +shares, +units or +other +rights that +have not +vested ($) +(a) +(b) +(c) +(d) +(e) +(f) +(g) +(h) +(i) +(j) +James C. Stewart +— +214,888 +— +19.00 +4/3/2023 +— +— +— +— +— +— +— +— +— +214,888 +(2) +4,085,021 +(4) +— +3,951,412 +(5) +Gregory L. Powell +— +174,775 +— +19.00 +4/3/2023 +— +— +— +— +— +— +— +— +— +174,775 +(2) +3,322,473 +(4) +— +3,292,844 +(5) +M. Paul DeBonis Jr. +— +56,454 +— +19.00 +4/3/2023 +— +— +— +— +— +— +— +— +— +56,454 +(2) +1,073,191 +(4) +— +1,317,138 +(5) +Kevin M. McDonald +— +80,702 +— +19.00 +4/3/2023 +— +— +— +— +— +— +— +— +— +80,702 +(2) +1,534,145 +(4) +— +— +— +3,529 +(3) +— +— +(6) +— +(7) +— +— +— +— +Ian J. Henkes +— +31,579 +— +19.00 +4/3/2023 +— +— +— +— +— +— +— +— +— +31,579 +(2) +600,317 +($) +— +— +— +3,529 +(3) +— +— +(6) +— +(7) +— +— +— +— +Robert Dacar +— +— +— +— +— +— +— +— +— +_______________ +(1) +Reflects the number of unvested stock options held by the NEO. These stock options will become vested and exercisable in equal portions on January 20 of each of 2018, 2019 and 2020, and will become fully vested and exercisable in the event that the NEO’s employment terminates without cause or for good reason within twelve months following a change in control. +(2) +Reflects the number of unvested restricted stock units held by the NEO. These restricted stock units will become vested in equal portions on January 20 of each of 2018, 2019 and 2020, and will become fully vested in the event that the NEO’s employment terminates without cause or for good reason within twelve months following a change in control. +(3) +Reflects the number of Class B Units of Keane Investor held by the NEO. The Class B Units were granted to the NEOs prior to consummation of the IPO under a unit-based management compensation program sponsored by the company prior to the IPO called the Keane Management Holdings LLC Management Incentive Plan (the “Class B Plan”). In connection with the IPO, the Class B Plan was assigned to and assumed by Keane Investor. The Class B Units represent profit interests in Keane Investor that are solely obligations of Keane Investor. The units held by Mr. McDonald will vest in equal portions on November 7, 2018 and November 7, 2019. The units held by Mr. Henkes will vest in equal portions on March 15, 2018 and March 15, 2019. If the NEO’s service is terminated without cause, all unvested units that would have vested on the next vesting date following termination will vest upon such termination, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. +(4) +Based on the closing price per share of our common stock on December 29, 2017 of $19.01. +(5) +Reflects the aggregate value of the stock bonuses that may be issued in shares of common stock under the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis. Such amounts became vested 50% on January 1, 2018 and will be paid in a number of shares of our common stock with a fair market value equal to such amount on February 15, 2018, and will become vested 50% on January 1, 2019 and paid in a number of shares of our common stock with a fair market value equal to such amount on February 15, 2019. Such amounts will become fully vested and paid in a number of shares of our common stock with a fair market value equal to such amount upon a change in control or a termination of employment without cause, or in the case of Messrs. Stewart and Powell, for good reason. +(6) +Class B Units have no exercise price. Instead, Mr. Henkes may be entitled to certain cash distributions from Keane Investor following the distribution of $468,000,000 to holders of Class A Units in Keane Investor, and Mr. McDonald may be entitled to certain cash distributions from Keane Investor following the distribution of $1,200,000,000 to holders of Class A Units and other Class B Units in Keane Investor. +(7) +Class B Units have no expiration date. +159 +Option Exercises and Stock Vested in Fiscal Year 2017 +No stock options were exercised and no restricted stock unit awards or deferred stock unit awards vested during fiscal year 2017. +Potential Payments Upon Termination or Change in Control +The tables below describe and estimate the amounts and benefits that our NEOs would have been entitled to receive upon a termination of their employment in certain circumstances or, if applicable, upon a change in control, assuming such events occurred as of December 31, 2017, the last day of fiscal year 2017. The estimated payments are not necessarily indicative of the actual amounts any of our NEOs would have received in such circumstances. The tables exclude compensation amounts accrued through December 31, 2017 that would be paid in the normal course of continued employment, such as accrued but unpaid salary, payment for accrued but unused vacation and vested account balances under our retirement plans that are generally available to all of our salaried employees. Where applicable, the information in the table uses a price per share for our common stock of $19.01, the closing price on December 29, 2017 (the “Year-End Closing Price”). Generally, payment of severance benefits to an NEO following termination of employment is subject to the NEO’s timely execution and non-revocation of a release of claims in favor of the Company. +As stated elsewhere in this Annual Report on Form 10-K, Mr. Dacar resigned during fiscal year 2017 and became eligible to receive the severance benefits described in “—Compensation Discussion and Analysis—Dacar Agreements.” +James C. Stewart +Payments and Benefits +Death or +Disability ($) +For Cause or +Without +Good Reason ($) +Without +Cause or for +Good Reason, +No Change in +Control ($) +Without +Cause or for +Good Reason, +Upon or Following +Change in +Control ($) +Change in +Control, No +Termination of +Employment ($) +Cash Severance(1) +250,000 +— +2,000,000 +2,000,000 +— +Annual Bonus(2) +2,000,000 +— +2,000,000 +2,000,000 +— +Deferred Stock Award Vesting(3) +— +— +3,951,412 +3,951,412 +3,951,412 +Stock Option Vesting(4) +— +— +— +2,149 +— +Restricted Stock Unit Vesting(5) +— +— +— +4,085,021 +— +Health Benefits +— +— +— +— +— +Total +2,250,000 +— +7,951,412 +12,038,582 +3,951,412 +_______________ +(1) +Reflects severance payments equal to (i) in the event of Mr. Stewart’s death or disability, three months of his base salary payable over the three-month period following his termination, or (ii) in the event of a termination of Mr. Stewart’s employment without Cause or for Good Reason, an amount equal to two times his annual base salary payable over the 24-month period following his termination. +(2) +Reflects the annual bonus payable to Mr. Stewart for fiscal year 2017 under our 2017 Executive Bonus Program. +(3) +Pursuant to his Deferred Stock Award, Mr. Stewart’s unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause or for Good Reason. +(4) +Pursuant to his Stock Option Award, Mr. Stewart’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. +(5) +Pursuant to his Restricted Stock Unit Award, Mr. Stewart’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. +160 +Gregory L. Powell +Payments and Benefits +Death ($) +Disability ($) +For Cause or +Without +Good Reason ($) +Without +Cause or for +Good Reason, +No Change in +Control ($) +Without +Cause or for +Good Reason, +Upon or Following +Change in +Control ($) +Change in +Control, No +Termination of +Employment ($) +Cash Severance(1) +200,000 +200,000 +— +1,600,000 +1,600,000 +— +Annual Bonus(2) +1,600,000 +1,600,000 +— +1,600,000 +1,600,000 +— +Deferred Stock Award Vesting(3) +— +— +— +3,292,844 +3,292,844 +3,292,844 +Stock Option Vesting(4) +— +— +— +— +1,748 +— +Restricted Stock Unit Vesting(5) +— +— +— +— +3,322,473 +— +Health Benefits(6) +— +18,730 +— +18,730 +18,730 +— +Total +1,800,000 +1,818,730 +— +6,511,574 +9,835,795 +3,292,844 +_______________ +(1) +Reflects severance payments equal to (i) in the event of Mr. Powell’s death or disability, three months of his base salary payable over the three-month period following his termination, or (ii) in the event of a termination of Mr. Powell’s employment without Cause or for Good Reason, an amount equal to two times his annual base salary payable over the 24 month period following his termination. +(2) +Reflects of the annual bonus payable to Mr. Powell for fiscal year 2017 under our 2017 Executive Bonus Program. +(3) +Pursuant to his Deferred Stock Award, Mr. Powell’s unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause or for Good Reason. +(4) +Pursuant to his Stock Option Award, Mr. Powell’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. +(5) +Pursuant to his Restricted Stock Unit Award, Mr. Powell’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. +(6) +Reflects our payment for the cost of continuation health coverage for Mr. Powell for twelve months following his termination. +M. Paul DeBonis Jr. +Payments and Benefits +Death or +Disability ($) +For Cause or +Voluntary +Terminations ($) +Without Cause, +No Change in +Control ($) +Without Cause, +Upon or +Following +Change in +Control ($) +Change in +Control, No +Termination of +Employment ($) +Cash Severance(1) +— +— +700,000 +700,000 +— +Annual Bonus +— +— +— +— +— +Deferred Stock Award Vesting(2) +— +— +1,317,138 +1,317,138 +1,317,138 +Stock Option Vesting(3) +— +— +— +565 +— +Restricted Stock Unit Vesting(4) +— +— +— +1,073,191 +— +Health Benefits +— +— +— +— +— +Total +— +— +2,017,138 +3,090,894 +1,317,138 +_______________ +(1) +Reflects severance payments equal to two times Mr. DeBonis’ annual base salary payable over the 24 month period following his termination in the event of a termination of his employment without Cause. +(2) +Pursuant to his Deferred Stock Award, Mr. DeBonis’ unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause. +(3) +Pursuant to his Stock Option Award, Mr. DeBonis’ unvested stock options will become fully vested in the event of a termination of his employment without Cause within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. +(4) +Pursuant to his Restricted Stock Unit Award, Mr. DeBonis’ unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause within twelve months following a change in control. +161 +Kevin M. McDonald +Payments and Benefits +Death or +Disability ($) +For Cause or +Without +Good Reason ($) +Without +Cause or for +Good Reason, +No Change in +Control ($) +Without +Cause or for +Good Reason, +Upon or Following +Change in +Control ($) +Change in +Control, No +Termination of +Employment ($) +Cash Severance(1) +— +— +400,000 +1,750,000 +— +Annual Bonus +— +— +— +— +— +Stock Option Vesting(2) +— +— +— +807 +— +Restricted Stock Unit Vesting(3) +— +— +— +1,534,145 +— +Class B Unit Vesting(4) +— +— +— +— +— +Health Benefits(5) +— +— +13,276 +13,276 +— +Total +— +— +413,276 +3,298,228 +— +_______________ +(1) +Reflects severance payments equal to (i) Mr. McDonald’s annual base salary payable in a lump sum in the event of a termination of his employment without Cause or for Good Reason if no change in control was consummated on or prior to December 31, 2017, or (ii) $1,750,000 payable in a lump sum in the event of a termination of his employment without Cause or for Good Reason if a change in control had been consummated on or prior to December 31, 2017. +(2) +Pursuant to his Stock Option Award, Mr. McDonald’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. +(3) +Pursuant to his Restricted Stock Unit Award, Mr. McDonald’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. +(4) +Pursuant to his Class B Interest Award Agreement, the next tranche of Mr. Henkes’ unvested Class B Units of Keane Investor Holdings LLC will become vested in the event of a termination of his employment without Cause, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. The market value of the Class B Units is not determinable, because there is no public market for such units. Therefore, such value, if any, has not been included herein. +(5) +Reflects our payment for the cost of continuation health coverage for Mr. McDonald for twelve months following his termination. +Ian J. Henkes +Payments and Benefits +Death or +Disability ($) +For Cause or +Without +Good Reason ($) +Without +Cause or for +Good Reason, +No Change in +Control ($) +Without +Cause or for +Good Reason, +Upon or Following +Change in +Control ($) +Change in +Control, No +Termination of +Employment ($) +Cash Severance(1) +— +— +300,000 +300,000 +— +Annual Bonus +— +— +— +— +— +Stock Option Vesting(2) +— +— +— +316 +— +Restricted Stock Unit Vesting(3) +— +— +— +600,317 +— +Class B Unit Vesting(4) +— +— +— +— +— +Health Benefits(5) +— +— +9,365 +9,365 +— +Total +— +— +309,365 +909,998 +— +_______________ +(1) +Reflects severance payments equal to Mr. Henkes’ annual base salary payable over the 12 month period following his termination in the event of a termination of his employment without Cause or for Good Reason. +(2) +Pursuant to his Stock Option Award, Mr. Henkes’ unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. +(3) +Pursuant to his Restricted Stock Unit Award, Mr. Henkes’ unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. +(4) +Pursuant to his Class B Interest Award Agreement, the next tranche of Mr. Henkes’ unvested Class B Units of Keane Investor Holdings LLC will become vested in the event of a termination of his employment without Cause, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. The market value of the Class B Units is not determinable, because there is no public market for such units. Therefore, such value, if any, has not been included herein. +(5) +Reflects our payment for the cost of continuation health coverage for Mr. Henkes for six months following his termination. +162 +Director Compensation +Director Compensation Table +All non-employee members of our board of directors earned or received compensation for service on our board of directors during fiscal year 2017, as set forth in the table below and as described in the accompanying narrative. +(in dollars) +Name +Fees +Earned or +Paid in +Cash +$ +Stock +Awards +$ (1) +Option +Awards +$ +Non-Equity +Incentive Plan +Compensation +$ +Change in +Pension Value +and non- +qualified +Deferred +Compensation +Earnings +$ +All Other +Compensation +$ +Total +Gary M. Halverson +75,000 +— +— +— +— +— +75,000 +Elmer D. Reed +75,000 +— +— +— +— +— +75,000 +Marc G. R. Edwards +100,000 +— +— +— +— +— +100,000 +Christian A. Garcia (2) +59,505 +274,542 +— +— +— +— +334,047 +Lucas N. Batzer (3) +75,000 +75,000 +Dale M. Dusterhoft +75,000 +75,000 +James E. Geisler (3) +75,000 +75,000 +Lisa A. Gray (3) +75,000 +75,000 +Shawn Keane (3) +75,000 +75,000 +Lenard B. Tessler (3) +75,000 +75,000 +Scott Wille (3) +75,000 +75,000 +(1) +Reflects the grant date fair value calculated in accordance with ASC 718 of the restricted stock granted to Mr. Garcia in fiscal year 2017. See Note ( 12 ) Equity-Based Compensation in our consolidated and combined financial statements, included in this Annual Report on Form 10-K, for a discussion of the assumptions used in the valuation of such awards. +(2) +Mr. Garcia joined our board of directors effective May 15, 2017. +As of December 31, 2017 , the aggregate number of shares of restricted stock held by each non-employee director was: +Name +Number of Shares of Restricted Stock +Gary M. Halverson +20,833 +Elmer D. Reed +20,833 +Marc G. R. Edwards +34,722 +Christian A. Garcia +18,947 +Narrative Disclosure to Director Compensation Table +Director Services Agreements +We have entered into Director Services Agreements with each of Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed. The Director Services Agreements provide that each such director serve on an at-will basis until the earlier of disability, death, resignation or removal. +Pursuant to the Director Services Agreement with Mr. Edwards, he serves as our lead director and is entitled to receive an annual fee of $100,000 per year. The Director Services Agreements with Messrs. Halverson, Reed and Garcia provide that each director is entitled to receive an annual fee of $75,000 per year. Mr Garcia receives an additional annual fee of $20,000 for his service as chair of the audit and risk committee. +In connection with his appointment as a director, on May 15, 2017, we granted Mr. Garcia 18,947 shares of restricted stock under our Equity and Incentive Award Plan. Subject to Mr. Garcia’s continued service with the Company on each vesting date, his restricted stock will vest in three equal installments on each of March 15, 2018, March 15, 2019 +163 +and March 15, 2020, and will become fully vested upon a change in control. All unvested restricted stock will be forfeited upon a termination of service for any reason, except that upon a termination of service without cause, (i) all unvested restricted stock that would have vested on the next vesting date following the termination will vest upon such termination and (ii) the remaining unvested restricted stock will remain outstanding for a period of 90 days following the termination date and will vest if a change in control occurs during such 90-day period. +Commencing in fiscal year 2017, each of the other non-employee members of our board or directors became eligible to receive a director service fee in the amount of $75,000 per year. +Compensation Committee Interlocks and Insider Participation +None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee. +164 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +Information about the number of shares of our common stock beneficially owned by each director and named executive officer, by all directors and executive officers as a group and on each beneficial owner of more than 5% of our common stock is contained in our 2018 Proxy Statement and is incorporated herein by reference. +Equity Compensation Plan Information +In accordance with the rules of the SEC, the following table sets forth information about our equity compensation plans as of December 31, 2017. As of December 31, 2017, we had in place the Keane Management Holdings LLC Management Incentive Plan, which was approved by the security holders of Keane Management Holdings LLC, and the Equity and Incentive Award Plan, which was approved by the security holders of Keane Group, Inc. +Number of securities to be issued upon exercise of outstanding options, warrants and rights +(#) +Weighted-average exercise price of outstanding options, warrants and rights +($) +Number of securities remaining available for future issuance under equity compensation plans +(#) +Equity compensation plans approved by security holders (1) +— +— +5,911,477 +Equity compensation plans not approved by security holders +— +— +— +Total +— +— +5,911,477 +(1) +In connection with the IPO and the Organizational Transactions, the Keane Management Holdings LLC Management Incentive Plan was assigned to and assumed by Keane Investor and no further awards will be granted thereunder. +165 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $0.3 million , $1.0 million and $0.7 million during 2017 , 2016 and 2015 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Cerberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +Organizational Transactions +In connection with our corporate reorganization and in connection with our IPO, we entered in transactions with certain of our affiliates who became members of Keane Investor. See Note ( 1 ) Basis of Presentation and Nature of Operations of " Item 8. Financial Statements and Supplementary Data" for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican +166 +transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a Stockholders' Agreement (the “Stockholders’ Agreement”) with Keane Investor. Upon the consummation of the RockPile Acquisition, on July 3, 2017, the Company, RockPile Energy Holdings, LLC (“RockPile Holdings”), WDE RockPile Aggregate, LLC (the “White Deer Holder”), LLC and Keane Investor amended and restated such Stockholders' Agreement. The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each such Holder, a “Demand Holder”) may, subject to limitations, request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared +167 +effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, and either RockPile Holdings or the White Deer Holder may require that we effect a registration with respect to the Registrable Securities held by the RockPile Holders (as defined in the Stockholders’ Agreement), provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period (excluding a marketed underwritten offering at the request of RockPile Holdings or the White Deer Holder), that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40.0 million or 100% of the Registrable Securities then held by such Demand Holder, that we are not required to effect more than one demand registration (including a marketed underwritten offering) at the request of RockPile Holdings or the White Deer Holder and that we are not required to effect more than six demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the Company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of this offering to its equityholders, Holders other Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we are required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• from the date on which the Company is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of the Company and our board of directors, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a +168 +number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then- outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. RockPile Holdings (or WDE RockPile Aggregate, LLC, if +RockPile Holdings designates its appointment right) shall be entitled, subject to certain conditions, to appoint one individual in the capacity of Observer to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. If the Keane Parties, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the Keane Parties at the time of this offering, the Keane Parties shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. If Trican, directly or indirectly, ceases to beneficially own at least 25% of our common stock beneficially owned by Trican at the time of this offering, Trican shall no longer have any right to appoint Observers and shall cause such appointed Observers to immediately resign. If the RockPile Holders, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the RockPile Holders at the time of the RockPile Closing Date, RockPile Holdings shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Coiled Tubing Asset Sales +In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the +169 +audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +170 +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• the Related Party’s interest in the Related Party Transaction; +• the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• whether the transaction is being undertaken in the ordinary course of business of the company; +• whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +171 +Item 14. Principal Accountant Fees and Services +Audit Fees +The following table summarizes fees paid or accrued to our independent registered public accounting firm, KPMG LLP (“KPMG”), in connection with various services for the years ended December 31, 2017 and 2016 respectively: +(Thousands of Dollars) +2017 +2016 +Audit Fees (1) +$ +1,377 +$ +671 +Audit –Related Fees (2) +983 +1,832 +Tax Fees (3) +690 +231 +All Other Fees (4) +264 +45 +Total +$ +3,314 +$ +2,779 +(1) +Consists of fees for professional services rendered for the audits of our consolidated financial statements for fiscal years 2017, 2016 and 2015 included in our Registration Statements on Form S-1 and Annual Report on Form 10-K +(2) +Consists of fees billed for assurance and related services, primarily related to our initial public offering and acquisition of RockPile +(3) +Consists of fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning. +(4) +Consists of fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees. +Pre-Approval Policy +Our audit and risk committee has adopted a policy (the “Pre-Approval Policy”), that sets forth the procedures and conditions pursuant to which audit and non-audit services proposed to be performed by the independent auditor may be pre-approved. The Pre-Approval Policy generally provides that we will not engage KPMG to render any audit, audit-related, tax or permissible non-audit service unless the service is either (i) explicitly approved by the audit and risk committee (“specific pre-approval”) or (ii) entered into pursuant to the pre-approval policies and procedures described in the Pre-Approval Policy (“General Pre-Approval”). Unless a type of service to be provided by KPMG has received General Pre-Approval under the Pre-Approval Policy, it requires specific pre-approval by the audit and risk committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval. On an annual basis, the audit and risk committee reviews and generally pre-approves the services (and related fee levels or budgeted amounts) that may be provided by KPMG without first obtaining specific pre-approval from our audit and risk committee. Our audit and risk committee may revise the list of general pre-approved services from time to time, based on subsequent determinations. +During 2017 and 2016, no services were provided to us by KPMG other than in accordance with the pre-approval policies and procedures described above. +172 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +Keane Group Holdings, LLC +Audited Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm +69 +Consolidated Balance Sheets +70 +Consolidated Statements of Operations and Comprehensive (Loss) +72 +Consolidated Statements of Changes in Owners’ Equity +74 +Consolidated Statements of Cash Flows +75 +Notes to Consolidated Financial Statements +77 +173 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Incorporated by Reference +Exhibit +Number +Exhibit Description +Filed/ +Furnished +Herewith +Form +File No. +Exhibit +Filing +Date +3.1 +Certificate of Incorporation of Keane Group, Inc., including Amendment of Certificate of Incorporation, dated October 13, 2016 +S-1 +333-215079 +3.1 +12/14/16 +3.2 +Bylaws of Keane Group, Inc. +10-K +001-37988 +3.2 +3/21/17 +4.1 +Amended and Restated Stockholders’ Agreement, dated as of July 3, 2017, by and among Keane Group, Inc. and the stockholders named therein +8-K +001-37988 +10.3 +7/3/17 +10.1 +Amended and Restated Asset-Based Revolving Credit Agreement, dated December 22, 2017, by and among Keane Group Holdings, LLC, as the Lead Borrower, Keane Frac LP and KS Drilling, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent +8-K +001-37988 +10.1 +12/28/17 +10.2 +Term Loan Agreement, dated March 15, 2017, among Keane Group, Inc., as the Parent Guarantor, Keane Group Holdings, LLC, as the Lead Borrower, the borrowers thereto, the Lenders Party thereto, and Owl Rock Capital Corporation, as administrative and collateral agent and lead arranger +10-K +001-37988 +10.2 +03/21/17 +10.3 +Incremental Facility Agreement and Amendment No. 1, dated as of July 3, 2017, by and among Keane Group Holdings, LLC (“KGH LLC”), Keane Frac, LP and KS Drilling, LLC, as borrowers, the Company, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC and Keane Frac GP, LLC, as guarantors, each of the incremental lenders party thereto, each of the existing lenders party thereto, and Owl Rock Capital Corporation (“Owl Rock”), as administrative agent and collateral agent, to the Term Loan Agreement, dated as of March 15, 2017, among the Company, as the parent guarantor, KGH LLC, as the lead borrower, the other borrowers and guarantors party thereto, the existing lenders, and Owl Rock, as administrative agent and collateral agent +8-K +001-37988 +10.4 +7/3/17 +10.4 +Keane Management Holdings LLC Management Incentive Plan† +S-1 +333-215079 +10.6 +12/14/16 +10.5 +Keane Group, Inc. Equity and Incentive Award Plan† +10-K +001-37988 +10.4 +3/21/17 +174 +10.6 +Form of Keane Group, Inc. Executive Incentive Bonus Plan† +S-1 +333-215079 +10.8 +12/14/16 +10.7 +Form of Indemnification Agreement† +S-1 +333-215079 +10.9 +12/14/16 +10.8 +Form of Director Services Agreement† +S-1 +333-215079 +10.10 +12/14/16 +10.9 +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James C. Stewart† +S-1 +333-215079 +10.11 +12/14/16 +10.10 +Form of Second Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Gregory L. Powell† +S-1 +333-215079 +10.12 +12/14/16 +10.11 +Form of Second Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and M. Paul DeBonis Jr.† +S-1 +333-215079 +10.13 +12/14/16 +10.12 +Employment Agreement, dated as of October 20, 2016, by and between Keane Group Holdings, LLC and Kevin M. McDonald† +S-1 +333-215079 +10.14 +12/14/16 +10.13 +Employment Agreement, dated as of February 1, 2016, by and between Keane Group Holdings, LLC and Ian J. Henkes† +S-1 +333-215079 +10.16 +12/14/16 +10.14 +Form of Amendment to Employment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Ian J. Henkes† +S-1 +333-215079 +10.18 +12/14/16 +10.15 +Form of Assignment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Kevin M. McDonald† +S-1 +333-215079 +10.19 +12/14/16 +10.16 +Employment Agreement, dated February 20, 2017, by and between KGH Intermediate Holdco II, LLC and Phung Ngo-Burns† +8-K +001-37988 +10.1 +4/4/17 +10.17 +Keane Value Creation Plan† +S-1 +333-215079 +10.20 +12/14/16 +10.18 +Limited Liability Company Agreement of Keane Investor Holdings LLC, dated as of January 20, 2017, by and among Cerberus International II Master Fund, L.P., Cerberus Institutional Partners, L.P. — Series Four, Cerberus Institutional Partners V, L.P., Cerberus CP Partners, L.P., Cerberus MG Fund, L.P., CIP VI Overseas Feeder, Ltd., CIP VI Institutional Feeder, L.P., JS Keane Coinvestor LLC, Trican Well Services, L.P., SJK Family Limited Partnership, LP, KCK Family Limited Partnership, LP, Tim Keane, Brian Keane, SJ Keane Family Trust, Jacquelyn Keane, Cindy Keane, KC Family Trust, Cerberus Capital Management, L.P., S & K Management Services, LLC and the Persons listed on Schedule A thereto +8-K +001-37988 +10.4 +1/26/17 +175 +10.19 +Asset Purchase Agreement, dated as of January 25, 2016, by and among Keane Group Holdings, LLC, Keane Frac, LP, Trican Well Service Ltd. and the seller companies named therein +S-1 +333-215079 +10.22 +12/14/16 +10.20 +Intellectual Property License Agreement, dated as of March 16, 2016, by and between Trican Well Service Ltd. and Keane Frac LP +S-1 +333-215079 +10.23 +12/14/16 +10.21 +Intellectual Property License Agreement, dated as of March 16, 2016, by and among Trican Well Service Ltd., Trican Well Service, L.P. and Keane Frac LP +S-1 +333-215079 +10.24 +12/14/16 +10.22 +Purchase Agreement, dated May 18, 2017, by and among the Keane Group, Inc., Rockpile Energy Holdings, LLC, RockPile Management NewCo, LLC and Rockpile Energy Services, LLC, on behalf of itself and its subsidiaries +8-K +333-215079 +10.1 +5/19/17 +10.23 +Contingent Value Rights Agreement, dated July 3, 2017, by and among the Company, RockPile Energy Holdings, LLC and the Permitted Holders +8-K +001-37988 +10.1 +7/3/17 +10.24 +Keane Group, Inc. Form of Restricted Stock Award† +8-K +001-37988 +10.3 +1/26/17 +10.25 +Keane Group, Inc. Form of Deferred Stock Award Agreement† +10-K +001-37988 +10.23 +3/21/17 +10.26 +Form of RSU Award Agreement† +10-Q +001-37988 +10.1 +8/3/17 +10.27 +Form of Non-Qualified Stock Option Award Agreement† +10-Q +001-37988 +10.2 +8/3/17 +12.1 +Computation of Ratio of Earnings to Fixed Charges +* +21.1 +Schedule of Subsidiaries of Keane Group, Inc. +* +23.1 +Consent of KPMG LLP, Independent Registered Public Accounting Firm +* +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +* +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +* +32.1 +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +** +101.INS +XBRL Instance Document +* +101.SCH +XBRL Taxonomy Extension Schema Document +* +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +* +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +* +176 +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +* +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +* +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** Furnished herewith. +Item 16. Form 10-K Summary +None. +177 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 28, 2018 . +Keane Group, Inc. +(Registrant) +By: +/s/ James C. Stewart +James C. Stewart +Chairman and Chief Executive Officer +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ James C. Stewart +Chairman and Chief Executive Officer +(Principal Executive Officer) +February 28, 2018 +James C. Stewart +/s/ Gregory L. Powell +President and Chief Financial Officer +(Principal Financial Officer) +February 28, 2018 +Gregory L. Powell +/s/ Phung Ngo-Burns +Chief Accounting Officer +(Principal Accounting Officer) +February 28, 2018 +Phung Ngo-Burns +/s/ Marc G. R. Edwards +Lead Director +February 28, 2018 +Marc G. R. Edwards +/s/ Lucas N. Batzer +Director +February 28, 2018 +Lucas N. Batzer +/s/ Dale M. Dusterhoft +Director +February 28, 2018 +Dale M. Dusterhoft +/s/ Christian A. Garcia +Director +February 28, 2018 +Christian A. Garcia +178 +/s/ Lisa A. Gray +Director +February 28, 2018 +Lisa A. Gray +/s/ Gary M. Halverson +Director +February 28, 2018 +Gary M. Halverson +/s/ Shawn Keane +Director +February 28, 2018 +Shawn Keane +/s/ Lenard B. Tessler +Director +February 28, 2018 +Lenard B. Tessler +/s/ Elmer D. Reed +Director +February 28, 2018 +Elmer D. Reed +/s/ Scott Wille +Director +February 28, 2018 +Scott Wille +179 \ No newline at end of file diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/filing_metadata.csv b/raw/filings/0001688476/2017/0001688476-18-000011/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e7ecc7739d3ce959bc8b258149738679cac887d9 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2018-03-01,2017-12-31,2018-03-01T00:15:10.000Z,0001688476-18-000011,a201710-kxdoc.htm,10-K,18194537,1,0,https://www.sec.gov/Archives/edgar/data/1688476/000168847618000011/a201710-kxdoc.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847618000011/,2017,2017,1 diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/item1.txt b/raw/filings/0001688476/2017/0001688476-18-000011/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e961b69c9462c3769868157634e8c8148f15d845 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/item1.txt @@ -0,0 +1,83 @@ +Item 1. Business +General description of the business +Founded in 1973, Keane Group, Inc. is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. Through organic growth and four opportunistic acquisitions between 2013 and 2017, we operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation, with approximately 1.2 million hydraulic horsepower spread across 26 hydraulic fracturing fleets, 31 wireline trucks, 24 cementing pumps and other ancillary assets. The five cornerstones of our operating principles and culture continue to be focus on health, safety and environment; efficiency and operational excellence; our partnership with our customers; transparency in our value creation; and our responsibilities to our stakeholders. +In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with a platform to commence wireline operations in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations"), resulting in the expansion of our hydraulic fracturing operations to include approximately 950,000 hydraulic horsepower, increased scale in key operating basins, an expansion in our customer base and significant cost reduction opportunities. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide engineering solutions. In July 2017, we acquired RockPile Energy Services, LLC, resulting in an increase in our pumping capacity by more than 25% and our expanded presence in the Permian Basin and Bakken Formation. We also acquired a high-quality customer base, expanded our service offerings and capabilities within our Other Services segment and integrated certain members of RockPile’s high caliber management team. We ended 2017 with having placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, that will increase our total hydraulic horsepower to more than 1.3 million upon expected delivery during the second and third quarters of 2018. +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our cementing and drilling divisions. Our Completion Services segment accounted for 99% , 98% , and 99% of consolidated revenue during the years ended December 31, 2017, 2016 and 2015, respectively. For further discussion on financial information about our segments, see Note (22) Business Segments of Part II, “ Item 8. Financial Statements and Supplementary Data.” +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid -typically a mixture of water, chemicals and proppant into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +Other Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annual isolation and hydraulic seal, while protecting fresh water zones of our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers' wells. +Drilling. We are equipped to provide top-hole air drilling services. Our drilling services were idled in May 2015. +Business strategy +Our principal business objective is to increase shareholder value by profitably growing our business, while providing best-in-class completion services, with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +capitalizing efficiently on industry recovery; +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities and create value. +For further discussion on the business strategies we plan to continue executing in 2018, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +5 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2017, no customer represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2015, four customers, EQT Production Company, XTO Energy, Shell Exploration & Production and Southwestern Energy Company, individually represented more than 10% of our consolidated revenue. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the U.S., and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. In addition, the business segments in which we compete are highly fragmented. Our integrated hydraulic fracturing and wireline services compete with large, integrated oilfield service companies such as Halliburton Company, Schlumberger Limited, Weatherford International plc and Baker Hughes Incorporated, as well as other companies such as RPC, Inc., Superior Energy Services, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc. and FTS International, Inc. Our hydraulic fracturing services also compete with Calfrac Well Services Ltd., U.S. Well Services, Patterson-UTI Energy, Inc., ProPetro Services, Inc. and Liberty Oilfield Services. We also compete regionally with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, our technical expertise, our equipment capacity, our work force competency, our efficiency, our safety record, our reputation, our experience and our prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored approach, our safety record, the performance and quality of our crews, our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements, such as guar (which experienced a shortage and significant price increase in 2012), could experience shortages and significant price increases in the future. +In March 2016, in connection with the acquisition of the Acquired Trican Operations, Keane received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, such as MVP Frac™ and TriVert™ (the “Fracking Fluids”), for Keane’s pressure pumping services to its customers. The license does not allow Keane to manufacture the Fracking Fluids, but allows Keane to purchase the Fracking Fluids from Trican’s suppliers. +The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business. +6 +Research and Development costs +Our engineering and technology efforts are focused on providing cost-effective solutions to the challenges our customers face when fracturing and stimulating wells. We believe our Engineered Solutions Center, located in The Woodlands, Texas, enables us to support our customers’ technical specifications, by offering flexible, cost-effective design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (i) economical and effective fracture designs, (ii) enhanced fracture stimulation methods, (iii) next-generation fluids and technologically advanced diverting agents, such as MVP Frac™ and TriVert™, which we received the right to use as part of the Trican transaction, (iv) dust control technologies and (v) customized solutions to individual customer and reservoir requirements. +We incurred research and development costs of $3.7 million , $2.2 million and nil for the years ended December 31, 2017, 2016 and 2015, respectively. +Intellectual property +In connection with the acquisition of the Acquired Trican Operations, we acquired ownership of substantially all intellectual property relating primarily to Trican’s U.S. oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business. Keane also entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates. See Part III, “ Item 13 . Certain Relationships and Related-Party Transactions and Director Independence-Trican Transaction” for more information. We believe the proprietary technology and engineering capabilities acquired in the Trican transaction have enhanced our integrated services solutions and better positioned our company to meet our customers’ technical demands. +We believe the information regarding our customer and supplier relationships are also valuable proprietary assets. We have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. Except for the foregoing, we do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis. +Employees +As of December 31, 2017, we employed 2,748 people, of which approximately 80% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices. +Environmental regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to +7 +protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current or former owner or operator of the site where the release occurred and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in +8 +competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +9 +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to foreseeable environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +10 +Safety and health regulation +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieve a total recordable incident rate, which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. We believe we have an industry leading behavior-based safety program to ensure each employee understands the importance of safety. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the proposed new rule regarding respirable silica sand. Although it is not possible to estimate the financial and compliance impact of the proposed respirable silica sand rule or any other proposed rule, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of that web site is https://www.sec.gov/. +11 +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +12 \ No newline at end of file diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/item13.txt b/raw/filings/0001688476/2017/0001688476-18-000011/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f70a891b28e98bac174096cc3d4969d28586da81 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/item13.txt @@ -0,0 +1,76 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $0.3 million , $1.0 million and $0.7 million during 2017 , 2016 and 2015 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Cerberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +Organizational Transactions +In connection with our corporate reorganization and in connection with our IPO, we entered in transactions with certain of our affiliates who became members of Keane Investor. See Note ( 1 ) Basis of Presentation and Nature of Operations of " Item 8. Financial Statements and Supplementary Data" for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican +166 +transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a Stockholders' Agreement (the “Stockholders’ Agreement”) with Keane Investor. Upon the consummation of the RockPile Acquisition, on July 3, 2017, the Company, RockPile Energy Holdings, LLC (“RockPile Holdings”), WDE RockPile Aggregate, LLC (the “White Deer Holder”), LLC and Keane Investor amended and restated such Stockholders' Agreement. The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each such Holder, a “Demand Holder”) may, subject to limitations, request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared +167 +effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, and either RockPile Holdings or the White Deer Holder may require that we effect a registration with respect to the Registrable Securities held by the RockPile Holders (as defined in the Stockholders’ Agreement), provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period (excluding a marketed underwritten offering at the request of RockPile Holdings or the White Deer Holder), that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40.0 million or 100% of the Registrable Securities then held by such Demand Holder, that we are not required to effect more than one demand registration (including a marketed underwritten offering) at the request of RockPile Holdings or the White Deer Holder and that we are not required to effect more than six demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the Company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of this offering to its equityholders, Holders other Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we are required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• from the date on which the Company is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of the Company and our board of directors, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a +168 +number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then- outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. RockPile Holdings (or WDE RockPile Aggregate, LLC, if +RockPile Holdings designates its appointment right) shall be entitled, subject to certain conditions, to appoint one individual in the capacity of Observer to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. If the Keane Parties, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the Keane Parties at the time of this offering, the Keane Parties shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. If Trican, directly or indirectly, ceases to beneficially own at least 25% of our common stock beneficially owned by Trican at the time of this offering, Trican shall no longer have any right to appoint Observers and shall cause such appointed Observers to immediately resign. If the RockPile Holders, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the RockPile Holders at the time of the RockPile Closing Date, RockPile Holdings shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Coiled Tubing Asset Sales +In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the +169 +audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +170 +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• the Related Party’s interest in the Related Party Transaction; +• the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• whether the transaction is being undertaken in the ordinary course of business of the company; +• whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +171 \ No newline at end of file diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/item9a.txt b/raw/filings/0001688476/2017/0001688476-18-000011/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..1cc64552e11329248c9361ea2f9ee002eecfe211 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/item9a.txt @@ -0,0 +1,8 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies. +In addition, because we were an “emerging growth company” for fiscal year 2017, under the JOBS Act, our independent registered public accounting firm was not required to attest to the effectiveness of our internal control over financial reporting for fiscal year 2017. As of January 1, 2018, we no longer qualify as an emerging growth company. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financing reporting that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting . \ No newline at end of file diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/rp_note.txt b/raw/filings/0001688476/2017/0001688476-18-000011/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2017/0001688476-18-000011/rpt_disclosure.txt b/raw/filings/0001688476/2017/0001688476-18-000011/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..f70a891b28e98bac174096cc3d4969d28586da81 --- /dev/null +++ b/raw/filings/0001688476/2017/0001688476-18-000011/rpt_disclosure.txt @@ -0,0 +1,76 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services. +We paid COAC, an affiliate of Cerberus, fees totaling approximately $0.3 million , $1.0 million and $0.7 million during 2017 , 2016 and 2015 , respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future. +KG Fracing Acquisition Corp., an affiliate of Cerberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units. +Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor. +Organizational Transactions +In connection with our corporate reorganization and in connection with our IPO, we entered in transactions with certain of our affiliates who became members of Keane Investor. See Note ( 1 ) Basis of Presentation and Nature of Operations of " Item 8. Financial Statements and Supplementary Data" for a description of these transactions. +Trican Transaction +On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group. +As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center. +Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”). +We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.” +In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican +166 +transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement. +In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement. +Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies. +Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs. +At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations. +Stockholders’ Agreement +In connection with the IPO, Keane entered into a Stockholders' Agreement (the “Stockholders’ Agreement”) with Keane Investor. Upon the consummation of the RockPile Acquisition, on July 3, 2017, the Company, RockPile Energy Holdings, LLC (“RockPile Holdings”), WDE RockPile Aggregate, LLC (the “White Deer Holder”), LLC and Keane Investor amended and restated such Stockholders' Agreement. The rights of Keane Investor under such agreement are described below: +Registration Rights +Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each such Holder, a “Demand Holder”) may, subject to limitations, request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities). +With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared +167 +effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding. +Any Demand Holder may require that we effect a registration, and either RockPile Holdings or the White Deer Holder may require that we effect a registration with respect to the Registrable Securities held by the RockPile Holders (as defined in the Stockholders’ Agreement), provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period (excluding a marketed underwritten offering at the request of RockPile Holdings or the White Deer Holder), that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40.0 million or 100% of the Registrable Securities then held by such Demand Holder, that we are not required to effect more than one demand registration (including a marketed underwritten offering) at the request of RockPile Holdings or the White Deer Holder and that we are not required to effect more than six demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the Company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. +In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of this offering to its equityholders, Holders other Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration. +Board Representation Rights +Pursuant to the Stockholders’ Agreement, we are required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors. +Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights: +• from the date on which the Company is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided , however , that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of the Company and our board of directors, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”); +• for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a +168 +number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number); +• for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then- outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. +Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. RockPile Holdings (or WDE RockPile Aggregate, LLC, if +RockPile Holdings designates its appointment right) shall be entitled, subject to certain conditions, to appoint one individual in the capacity of Observer to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. If the Keane Parties, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the Keane Parties at the time of this offering, the Keane Parties shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. If Trican, directly or indirectly, ceases to beneficially own at least 25% of our common stock beneficially owned by Trican at the time of this offering, Trican shall no longer have any right to appoint Observers and shall cause such appointed Observers to immediately resign. If the RockPile Holders, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the RockPile Holders at the time of the RockPile Closing Date, RockPile Holdings shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. +Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. +Indemnification; Expenses +We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor. +Keane Investor Limited Liability Company Agreement +Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock. +Coiled Tubing Asset Sales +In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the +169 +audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate. +No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee. +If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate. +170 +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider: +• the Related Party’s interest in the Related Party Transaction; +• the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +• whether the transaction is being undertaken in the ordinary course of business of the company; +• whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; +• the purpose of, and the potential benefits to the company of, the Related Party Transaction; +• a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +• whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; +• whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and +• any other relevant information regarding the Related Party Transaction or the Related Party. +The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee. +• Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +• Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction. +Director Independence +Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. +171 \ No newline at end of file diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/filing.txt b/raw/filings/0001688476/2018/0001688476-19-000005/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4d3e17b2be452ac35f37ba5551600da12423427 --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/filing.txt @@ -0,0 +1,5918 @@ +10-K +1 +a201810-kxdoc.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, DC 20549 +FORM 10-K +(Mark One) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2018 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _____ to _____ +Commission File Number 001-37988 +Keane Group, Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware +38-4016639 +(State or other jurisdiction +of incorporation or organization) +(I.R.S. Employer +Identification No.) +1800 Post Oak Boulevard, Suite 450, Houston, TX +77056 +(Address of principal executive offices) +(Zip code) +Registrant’s telephone number, including area code: (713) 960-0381 +2121 Sage Road, Suite 370, Houston, TX, 77056 +(Former address of principal executive office) +Securities registered pursuant to Section 12(b) of the Act +Title of Each Class +Name of Each Exchange On Which Registered +Common Stock, $0.01 par value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +x +Accelerated filer +¨ +Non-accelerated filer +¨ +Smaller reporting company +¨ +Emerging Growth Company +¨ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2018 , was approximately $716.4 million . +As of February 25, 2019 , the registrant had 104,405,121 shares of common stock outstanding. +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +12 +Item 1B. +Unresolved Staff Comments +32 +Item 2. +Properties +33 +Item 3. +Legal Proceedings +34 +Item 4. +Mine Safety Disclosures +34 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +35 +Item 6. +Selected Financial Data +39 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +43 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +69 +Item 8. +Financial Statements and Supplementary Data +70 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +132 +Item 9A. +Controls and Procedures +132 +Item 9B. +Other Information +133 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +135 +Item 11. +Executive Compensation +136 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +137 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +138 +Item 14. +Principal Accountant Fees and Services +139 +PART IV +Item 15. +Exhibits and Financial Schedules +140 +Item 16. +Form 10-K Summary +143 +Signatures +144 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• our business strategy; +• our plans, objectives, expectations and intentions; +• our future operating results; +• the competitive nature of the industry in which we conduct our business, including pricing pressures; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• the impact of pipeline capacity constraints; +• the impact of adverse weather conditions; +• the effects of government regulation; +• legal proceedings, liability claims and effect of external investigations; +• the effect of a loss of, or the financial distress of, one or more key customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• our ability to maintain the right level of commitments under our supply agreements; +• the market price and availability of materials or equipment; +• the impact of new technology; +• our ability to employ a sufficient number of skilled and qualified workers; +• our ability to obtain permits, approvals and authorizations from governmental and third parties; +• planned acquisitions and future capital expenditures; +• our ability to maintain effective information technology systems; +• our ability to maintain an effective system of internal controls over financial reporting; +• our ability to service our debt obligations; +• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital; +1 +• the market volatility of our stock; +• our ability or intention to pay dividends or to effectuate repurchases of our common stock; +• the impact of Keane Investor and our Sponsor; and +• the impact of our corporate governance structure. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +This Annual Report on Form 10-K includes references to utilization of hydraulic fracturing assets. Utilization for our own fleets, as used in this Annual Report on Form 10-K, is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. For the purposes of this Annual Report on Form 10-K, we define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. +We define industry utilization as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by approximately 45,000 hydraulic horsepower. +We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +2 +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +On January 25, 2017, we consummated an initial public offering (“IPO”). Our business prior to the IPO was conducted through Keane Group Holdings, LLC and its consolidated subsidiaries (“Keane Group”). To effectuate the IPO, we completed a series of transactions that resulted in a reorganization of our business, resulting in Keane Group, Inc. as a holding company with no material assets other than its ownership of Keane Group. For further details, see Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data disclosed in Part II, “ Item 6 . Selected Financial Data” and Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflect the consolidated business and operations of Keane Group. Financial results for 2016 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company’s predecessor for accounting purposes, as there was no activity under Keane Group, Inc. in 2016. +3 +PART I +References Within This Annual Report +As used in Part I of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term “RockPile” refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term “RSI” refers to Refinery Specialties, Incorporated; (viii) the term “Keane Investor” refers to Keane Investor Holdings LLC and (ix) the term “Sponsor” or “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds. +Item 1. Business +General description of the business +Founded in 1973, Keane Group, Inc. is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. Through organic growth and five opportunistic acquisitions between 2013 and 2018, we operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation, with approximately 1.4 million hydraulic horsepower spread across 29 hydraulic fracturing fleets, 34 wireline trucks, 24 cementing pumps and other ancillary assets. We distinguish ourselves through three key principles: (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all stakeholders. +In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with a platform to commence wireline operations in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we acquired the majority of the U.S. assets and assumed certain liabilities of Trican U.S. (the “Acquired Trican Operations”), resulting in the expansion of our hydraulic fracturing operations to include approximately 950,000 hydraulic horsepower, increased scale in key operating basins, an expansion in our customer base and significant cost reduction opportunities. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide engineering solutions. In July 2017, we acquired RockPile, resulting in an increase in our pumping capacity by more than 25% and an expansion of our presence in the Permian Basin and Bakken Formation. We also acquired a high-quality customer base, expanded our service offerings and capabilities within our Other Services segment and integrated certain members of RockPile’s high caliber management team. In 2018, we acquired approximately 90,000 hydraulic horsepower from RSI. Additionally, in 2018, we completed the purchase of approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets. +In December 2018, we completed the wind-down of Keane Completions CN Corp, which was formed when we acquired the wireline technologies division of Calmena Energy Services. +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions and ancillary services; and Other Services, including our cementing division and ancillary services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +Other Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones of our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. +Ancillary services in the Other Services segment include our idled drilling services. +Business strategy +Our principal business objective is helping our customers maximize production, while delivering safe, high quality and efficient services. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in driving efficiencies, including our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2019 , see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +5 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. F or the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 48% of our consolidated revenue and 42% of our total accounts receivable for the fiscal year ended December 31, 2016. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the U.S., and the competitive landscape varies in each. Our major competitors for hydraulic fracturing services, which make up the majority of our revenues, include C&J Energy Services, Inc., FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. We also compete regionally with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +Intellectual property +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +6 +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. +Employees +As of December 31, 2018 , we had 2,833 employees, of which, approximately 79% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Environmental regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +7 +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are +8 +subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third- +9 +party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Safety and health regulation +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate of 0.37 in 2018, which is substantially less than the industry average of 1.54 from 2013 to 2017. We believe total recordable incident rate is a reliable measure of safety performance. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand. +Although it is not possible to estimate the financial and compliance impact of proposed rules, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal +10 +losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +11 +Item 1A. Risk Factors +RISK FACTORS +Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified, or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Risks Related to Our Industry +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry in the U.S., and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources in the U.S. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control, including: +• +prices and expectations about future prices for oil and natural gas; +• +domestic and foreign supply of, and demand for, oil and natural gas and related products; +• +the level of global and domestic oil and natural gas inventories; +• +the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the U.S.; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +available pipeline, storage and other transportation capacity; +• +lead times associated with acquiring equipment and products and availability of qualified personnel; +• +the discovery rates of new oil and natural gas reserves; +• +federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +• +the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• +geopolitical developments and political instability in oil and natural gas producing countries; +• +actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil price and production controls; +12 +• +advances in exploration, development and production technologies or in technologies affecting energy consumption; +• +the price and availability of alternative fuels and energy sources; +• +disruptions due to natural disasters, unexpected weather conditions and similar factors; +• +merger and divestiture activity amongst oil and natural gas producers; +• +uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; and +• +U.S. federal, state and local and non-U.S. governmental regulations and taxes. +The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices, the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers, and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower utilization of, and may be forced to lower our prices or rates charged for, our equipment and services. +Historical prices for crude oil and natural gas have been extremely volatile and are expected to experience continued volatility. For example, since 1999, oil prices have ranged from as low as approximately $10 per barrel to over $100 per barrel, reaching a high of $107.95 per barrel in June of 2014. From late 2014 to the second half of 2016, oil and natural gas prices and, therefore, the level of exploration, development and production activity, experienced a sustained decline from the highs in the latter half of 2014, as a result of an increasing global supply of oil and a decision by OPEC to sustain its production levels in spite of the decline in oil prices and slowing economic growth in the Eurozone and China. Although oil and natural gas prices experienced modest recovery since the first quarter of 2016, with oil reaching a high of $76.40 per barrel on October 3, 2018 before declining by approximately 42% over the course of almost three months to a low of $44.48 per barrel in late December 2018. During the first quarter of 2016, natural gas prices were as low as $1.49 per million British thermal units (“MMbtu”) and, despite volatility, reached a high of $4.70 per MMbtu on November 21, 2018, before declining to $3.25 per MMbtu on December 28, 2018. Continued price volatility for oil and natural gas is expected during 2019. +E&P companies have historically moved to reduce costs in connection with significant declines in the price of oil, both by decreasing drilling and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing and well completions services. In turn, service providers, including hydraulic fracturing and well completions service providers, may be forced to lower their operating costs and capital expenditures, while continuing to operate their businesses in an extremely competitive environment. Prolonged periods of decreased oil prices or price instability in the oil and natural gas industry will adversely affect the demand for our products and services and our financial condition, prospects and results of operations. For more information, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations–Business Outlook.” +13 +Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) and fuel conservation measures could reduce demand for our services and create downward pressure on the revenue we are able to derive from such services, as they are dependent on oil and natural gas commodity prices. +Pipeline capacity constraints in the Permian Basin may temporarily disrupt our operations during the near term. +One of our most important geographic markets is the Permian Basin. Recently, the oil and gas industry was concerned that the region’s capacity to transport oil to market, primarily to regional refineries, was not sufficient to support the growing production of the region. Additional pipeline capacity under construction in the region is not anticipated to be completed until the third quarter of 2019. If pipeline capacity remains or becomes more constrained in the Permian Basin, our activity in the region may decline, which could have a material adverse effect on our business, results of operations, prospects and financial condition. +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect the demand for our services by decreasing the demand for natural gas. In addition, unusually cold winters and other weather conditions could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. For example, weather-induced rail congestion, combined with flooding impacts at suppliers’ mines, has contributed previously to a reduction in the availability of sand used in our operations. Our operations in arid regions can also be affected by droughts and limited access to water used in our hydraulic fracturing operations. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include: +• +curtailment of services; +• +weather-related damage to facilities and equipment, resulting in delays in operations; +• +inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and +• +loss of productivity. +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• +equipment defects; +• +vehicle accidents; +• +explosions and uncontrollable flows of gas or well fluids; +• +unusual or unexpected geological formations or pressures and industrial accidents; +• +blowouts; +• +cratering; +• +loss of well control; +• +collapse of the borehole; and +• +damaged or lost drilling and well completions equipment. +14 +Catastrophic or significantly adverse events can occur at well sites where we conduct our operations, including blow outs resulting in explosions, fires, personal injuries, property damage, pollution and regulatory responsibility. In response, we typically require indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid or be financially unable to meet their obligations, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and could have a material adverse effect on our business, financial condition, prospects and results of operations. +Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities and personnel to well sites. In response, we also typically require indemnities, releases and limitations on liability in our contracts with our suppliers and service providers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. +In addition, our hydraulic fracturing and well completion services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenue. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +Competition and excess equipment within the oilfield services industry may adversely affect our ability to market our services. +The oilfield services industry is highly competitive and at times, available pressure pumping and well completions equipment exceed the demand for such equipment. A low commodity price environment can result in substantially more pressure pumping and well completion equipment being available than are needed to meet demand. In addition, in recent years, there has been a substantial increase in the construction of new pressure pumping equipment. Low commodity prices and the construction of new equipment can result in excess capacity and substantial competition for a diminishing amount of pressure pumping demand. Even in an environment of high oil and natural gas prices and increased drilling completions activity, reactivation and improvement of existing pressure pumping equipment and operations and the construction of new pressure pumping equipment can lead to an excess supply of equipment. +The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. We believe the principal competitive factors in the market areas we serve are multi-basin service capability, proximity to customers, technical expertise, equipment capacity, work force competency, efficiency, safety records, reputation, experience and price. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate. +Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our results of operations, financial condition and prospects. We periodically seek to increase prices on our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in +15 +raising or maintaining our existing prices. With the active rig count below the peak seen in 2014 and pressure pumping equipment still idle, there is considerable pricing pressure on pressure pumping services. Even if we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing as costs increase could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Accordingly, high competition and excess equipment can cause oil and natural gas service contractors to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our pressure pumping and well completion services. +Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. +Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure +16 +to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues. +We are subject to the EPA, U.S. Department of Transportation, U.S. Nuclear Regulation Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the emission control and fuel quality regulations could result in increased costs. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substance Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +If the EPA or another federal or state-level agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. In December 2016, the EPA issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +17 +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont, states in which we have no operations, have banned or are in the process of banning the use of high-volume hydraulic fracturing. Alternatively, some municipalities are or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations, if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. For more information, see “ Item 1 . Business—Environmental regulation.” +Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations, including as a motor carrier by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase +18 +our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +Risks Related to Our Business +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Litigation and other proceedings could have a negative impact on our business. +The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2018 , 2017 and 2016 . +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, in 2018, we purchased approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, for approximately $129.4 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other completion service-related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations. +19 +The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our customers are engaged in the oil and natural gas E&P business in the U.S. Historically, we have been dependent upon a few customers for a significant portion of our revenues. F or the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 48% of our consolidated revenue and 42% of our total accounts receivable . +Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our contracts with our customers are typically annual to multi-year contracts. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and results of operations. +Our commitments under supply agreements could exceed our requirements, and our reliance on suppliers exposes us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. Additionally, our reliance on outside suppliers for some of the key materials and equipment we use in providing our services involves risks, including limited control over the price, timely delivery availability and quality of such materials or equipment. In addition to continued growth and demand for sand, some transitory factors that also can potentially affect timely delivery and availability of sand include inclement weather, flooding impacts, rail-related output constraints and delays on opening new mine sources. +20 +Unexpected and immediate changes in the availability and pricing of raw materials, or the loss of or interruption in operations of one or more of our suppliers, could have a material adverse effect on our results of operations, prospects and financial condition. +Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. For example, during 2012, companies in our industry experienced a shortage of guar, which is a key ingredient in fracturing fluids. This shortage resulted in an unexpected and immediate increase in the price of guar. During 2008, our industry faced sporadic proppant shortages requiring work stoppages, which adversely impacted the operating results of several competitors. An increase in the cost of proppant as a result of increased demand or a decrease in the number of proppant providers could increase our cost of an essential raw material in hydraulic stimulation and have a material adverse effect on our business, operations, prospects and financial condition. We may not be able to mitigate any future shortages of raw materials. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a less demanding work environment. Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to adjust our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +21 +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. New York and Vermont, states in which we have no operations, have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +We may not be successful in identifying and making acquisitions. +Part of our strategy to expand our geographic scope and customer relationships, increase our access to technology and to grow our business is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• +failure to identify attractive targets; +• +incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• +failure to obtain financing on acceptable terms or at all; +• +restrictions in our debt agreements; +• +failure to successfully integrate the operations or management of any acquired operations or assets; +• +failure to retain or attract key employees; and +• +diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices, as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations or management are combined. Any +22 +such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• +a failure of our due diligence process to identify significant risks or issues; +• +the loss of customers of the acquired company or our company; +• +negative impact on the brands or banners of the acquired company or our company; +• +a failure to maintain or improve the quality of our customer service; +• +difficulties assimilating the operations and personnel of the acquired company; +• +our inability to retain key personnel of the acquired company; +• +the incurrence of unexpected expenses and working capital requirements; +• +our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• +difficulty in maintaining internal controls, procedures and policies; +• +mistaken assumptions about the overall costs of equity or debt; and +• +unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +23 +A failure of our information technology systems, including the implementation of our new enterprise resource planning system, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting. +We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. A failure or prolonged interruption in our information technology systems, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows. +We are in the process of implementing an enterprise resource planning (“ERP”) system that will assist with the collection, storage, management and interpretation of data from our business activities to support future growth and to integrate significant processes. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP system implementations are complex and time-consuming and involve substantial expenditures on system software and implementation activities, as well as changes to business processes and internal control over financial reporting. The implementation of the ERP system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will continue to be beneficial to the extent anticipated. Any disruptions, delays or deficiencies in the design and implementation of our new ERP system, particularly ones that impact our financial reporting and accounting systems or our ability to provide services, send invoices, track payments or fulfill contractual obligations, could adversely affect our business, financial condition, results of operations and cash flows. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be impacted, which could cause us to fail to meet our reporting obligations. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and processes and to record operational and financial data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, as well as those of our customers, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period of time. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +If we fail to maintain an effective system of internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business and result in material misstatements in our financial statements. +Effective internal controls are necessary for us to provide timely and reliable financial reports, prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). For example, Section 404 requires us, among other things, to annually review and report on, and our independent +24 +registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any deficiencies or material weaknesses identified by our management in our internal control over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results, prevent us from identifying future deficiencies and material weaknesses or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions, about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls could result in material misstatements in our financial statements and subject us to increased regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business. +Risks Related to Owning Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2018 , we had $340.7 million of debt outstanding, net of discounts and deferred financing costs (not including capital lease obligations). After giving effect to our borrowing base, we had approximately $184.0 million of availability under our 2017 ABL Facility (as defined herein). +Our substantial indebtedness could have important consequences to you. For example, it could: +• +adversely affect the market price of our common stock; +• +increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• +require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• +limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• +limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• +place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• +sales of assets; +• +sales of equity; or +• +negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +25 +Despite our significant indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our substantial leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2017 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 2017 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details. +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2017 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +26 +Risks Related to Owning Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price. +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including +• +the failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts; +• +changes in, or investors’ perception of, the hydraulic fracturing industry; +• +the activities of competitors; +• +future issuances and sales of our common stock, including in connection with acquisitions; +• +our quarterly or annual earnings or those of other companies in our industry; +• +the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• +regulatory or legal developments in the U.S.; +• +litigation involving us, our industry, or both; and +• +general economic conditions. +In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted. +As of February 25, 2019 , 104,405,121 shares of common stock were outstanding, of which 51,668,175 shares were held by Keane Investor. If Keane Investor sells substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price. +Because we do not currently pay dividends, our stockholders may not receive any return on investment, unless they sell their common stock for a price greater than that which they paid for it. +We do not currently pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources.” +27 +Under the Delaware General Corporation Law (the “DGCL”), our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves. +We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves. In February 2018, our board of directors approved a share repurchase program, authorizing us to repurchase up to $100 million of common stock. The share purchase program has been periodically reset and is currently set to expire in December 2019. The share repurchase program currently has the capacity to spend up to an additional $100.0 million on share repurchases. Since the inception of our share repurchase program through December 31, 2018, we have repurchased 8.1 million shares at an aggregate cost of approximately $105.0 million . +Although our board of directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value, because the market price of our common stock may decline below levels at which we repurchased shares of stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness. +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 395,594,879 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 7,734,601 shares of our common stock for awards that may be issued under our Equity and Incentive Award Plan. Any common stock that we issue, including under our Equity and Incentive Award Plan or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +28 +Keane Investor and Cerberus own a significant amount of our common stock and continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control. +Keane Investor currently controls approximately 49.5% of our common stock. Even though Keane Investor no longer controls a majority of our common stock, Keane Investor continues to have significant influence over us, including the election of our directors, determination of our corporate and management policies and determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Four of our 12 directors are employees of, appointees of, or advisors to, members of Cerberus. With Keane Investor’s common stock ownership falling below 50.0% as of December 6, 2018, we ceased being a “controlled company” within the meaning of the New York Stock Exchange (“NYSE”) rules and are subject to further independence requirements by the NYSE. We currently anticipate that the Compensation Committee and Nominating and Corporate Governance Committee of our board of directors will be comprised of a majority of independent directors by of March 6, 2019, and will be entirely independent by December 6, 2019. Furthermore, we anticipate that our board of directors will be comprised of a majority of independent directors by December 6, 2019 in compliance with NYSE requirements. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, the concentration of ownership held by Cerberus could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. +Although we are no longer a “controlled company” within the meaning of the New York Stock Exchange rules, we continue to qualify for, and intend to rely on, certain transition-based exemptions from such corporate governance requirements, and as a result you will not have the same protections afforded to stockholders of companies that are subject to such requirements. +Keane Investor no longer controls a majority of our outstanding common stock. As a result, we ceased being a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: +• the requirement that a majority of the board of directors consist of independent directors; +• +the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and +• +the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. +We currently utilize some of these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and corporate governance and compensation committees consist entirely of independent directors. The NYSE rules provide for phase-in periods for these requirements. As a result, our nominating and corporate governance and compensation committees will not be required to be composed of a majority of independent directors until March 6, 2019, and we will not be required to be fully compliant with all of the requirements until December 6, 2019. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. In addition, we may not be able to attract and retain the number of independent directors needed to comply with NYSE rules during the transition period. +29 +Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation, our bylaws and our Stockholders’ Agreement, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• +the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• +our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• +the manner in which stockholders can remove directors from the board will be limited; +• +stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited; +• +from and after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• who may call stockholder meetings is limited; +• +requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our Company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• +requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• +our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights +30 +and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +In connection with the IPO, Keane entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with Keane Investor. Our Stockholders’ Agreement provides that, except as otherwise required by applicable law, from the date on which (a) Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor has the right to designate a number of individuals who satisfy the director requirements equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining an 11-person board of directors unless the management board of Keane Investor otherwise agrees by the affirmative vote of 80% of the management board of Keane Investor; (b) a Holder has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +31 +Item 1B. Unresolved Staff Comments +None. +32 +Item 2. Properties +Properties +Our principal properties include our corporate headquarters, district offices, sales offices and our engineering and technology facility, as well as the hydraulic fracturing units and other equipment and vehicles operating out of these facilities. We believe our facilities are in good condition and suitable for our current operations. Below is a table detailing our properties, by purpose, in the United States. +Location +Own/ +Lease +Purpose +Service +Active/ +Idle +Size (sqft/acres) +Denver, CO +Lease +Executive / Finance +N/A +Active +19,706 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +43,768 sqft +Houston, TX +Lease +Executive / Finance +N/A +Active +5,588 sqft +The Woodlands, TX +Lease +Engineering & Technology +N/A +Active +23,040 sqft +Canonsburg, PA +Lease +Sales Office +Sales +Active +4,697 sqft +Dickinson, ND +Own +Field Operations +Hydraulic Fracturing +Active +21,772 sqft/34.9 acres +Mansfield, PA +Own +Field Operations +Hydraulic Fracturing, Wireline +Active +30,200 sqft/77.0 acres +Odessa, TX +Own +Field Operations +Hydraulic Fracturing, Wireline, Cementing +Active +97,006 sqft/40.0 acres +Springtown, TX +Own +Field Operations +Hydraulic Fracturing +Active +29,855 sqft/14.7 acres +Dickinson, ND +Lease +Field Operations +Hydraulic Fracturing +Active +33,375 sqft/9.7 acres +Williston, ND +Lease +Field Operations +Wireline, Cementing +Active +43,375 sqft +Williston, ND +Lease +Field Operations +Hydraulic Fracturing +Active +16,825 sqft/5.71 acres +Bellafonte, PA +Lease +Field Operations +Hydraulic Fracturing +Active +12,000 sqft/7.5 acres +Mill Hall, PA +Lease +Field Operations +Hydraulic Fracturing +Active +64,000 sqft/8.2 acres +Mount Pleasant, PA +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +20,126 sqft/7.5 acres +Pleasanton, TX +Lease +Field Operations +Hydraulic Fracturing, Wireline +Active +10,488 acres +Alexander, ND +Lease +Field Maintenance and Storage Facility +Hydraulic Fracturing +Active +6,500 sqft/16.3 acres +Mount Pleasant, PA +Lease +Field Maintenance and Storage Lot +Hydraulic Fracturing, Wireline +Active +5 acres +Fort Worth, TX +Lease +Warehouse +Hydraulic Fracturing, Wireline, Cementing +Active +78,272 sqft +Shawnee, OK +Own +Abandoned +Hydraulic Fracturing +Idle +39,100 sqft/56.1 acres +Lewis Run, PA +Own +Abandoned +N/A +Idle +2,500 sqft +Oklahoma City, OK +Lease +Abandoned +Sales +Idle +3,366 sqft +Houston, TX +Lease +Abandoned +N/A +Idle +9,998 sqft +33 +Item 3. Legal Proceedings +Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters. +See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal contingencies. +Item 4. Mine Safety Disclosures +Not applicable. +34 +PART II +References Within This Annual Report +As used in Part II of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our initial public offering (“IPO”), and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term “RockPile” refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term “RSI” refers to Refinery Specialties, Incorporated; (viii) the term “Keane Investor” refers to Keane Investor Holdings LLC and (ix) the term “Sponsor” or “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds. +Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +Market Information +On January 25, 2017, we consummated an initial public offering of our common stock at a price of $19.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “FRAC.” Prior to that time, there was no public market for our stock. +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (C&J Energy Services, Inc., FTS International, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., RPC, Inc., Superior Energy Services, Inc. and Weatherford International plc), since January 1, 2018. +35 +The graph assumes $100 was invested on January 1, 2018 in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers, as we believe it is an appropriate benchmark for our line of business/industry. +Holders +As of February 25, 2019, there were four shareholders of record of our common stock. The number of record holders does not include persons who held shares of our common stock in nominee or “street name” accounts through brokers. +Dividends +We have not paid any cash dividends on our common stock to date. However, we anticipate that our board of directors will consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +On February 26, 2018, we announced that our board of directors had authorized a stock repurchase program of up to $100 million of our outstanding common stock, with the intent of returning value to our shareholders, as we continue to expect further growth and profitability. The program does not obligate us to +36 +purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. The duration of the stock buy-back program was 12 months. +On July 26, 2018, we announced that our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. +Effective October 26, 2018, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to September 2019 from a previous expiration of February 2019. +Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. +Securities Authorized for Issuance Under Equity Compensation Plans +In accordance with the rules of the SEC, the following table sets forth information about our equity compensation plans as of December 31, 2018. As of December 31, 2018, we had in place the Keane Management Holdings LLC Management Incentive Plan, which was approved by the security holders of Keane Management Holdings LLC, and the Equity and Incentive Award Plan, which was approved by the security holders of Keane Group, Inc. +Equity Compensation Plan Information +Number of securities to be issued upon exercise of outstanding options, warrants and rights +(#) +Weighted-average exercise price of outstanding options, warrants and rights +($) +Number of securities remaining available for future issuance under equity compensation plans +(#) +Equity compensation plans approved by security holders (1) +— +— +7,734,601 +Equity compensation plans not approved by security holders +— +— +— +Total +— +— +7,734,601 +(1) +In connection with the IPO and the Organizational Transactions, described within Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data,” the Keane Management Holdings LLC Management Incentive Plan was assigned to and assumed by Keane Investor and no further awards will be granted thereunder. +37 +Purchases of Equity Securities +Issuer Purchases of Equity Securities +Settlement Period +(a) Total Number of Shares Purchased +(b) Average Price Paid per Share +(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) +(d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)(2)(3) +October 1, 2018 through October 26, 2018 +1,551,330 +$ +11.70 +1,551,330 +$ +52,544,047 +October 26, 2018 through October 31, 2018 +— +$ +— +— +$ +100,000,000 +November 1, 2018 through November 30, 2018 +1,000,000 +$ +11.73 +1,000,000 +$ +88,270,000 +December 1, 2018 through December 31, 2018 +520,000 +$ +10.66 +— +$ +88,270,000 +Total +3,071,330 +$ +11.53 +2,551,330 +$ +88,270,000 +(1) +On February 26, 2018, we announced that our board of directors authorized a12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100.0 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. +(2) +On December 3, 2018, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC (the “Underwriter”) and Keane Investor, relating to the underwritten offering of 5,251,249 shares (the “Shares”). All of the Shares were sold by Keane Investor. The Underwriter purchased the Shares from Keane Investor pursuant to the Underwriting Agreement at a price of $10.66 per share. In addition, pursuant to the Underwriting Agreement, we purchased from the Underwriter 520,000 shares of common stock that were sold by Keane Investor to the Underwriter, at a price per share equal to the price paid by the Underwriter to Keane Investor. This repurchase was not made pursuant to our stock repurchase program authorized by our board of directors. +(3) +Commission costs incurred by the Company to repurchase its shares are not included in the calculation of Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs. +38 +Item 6. Selected Financial Data +The selected financial data for the periods presented was derived from the audited consolidated and combined financial statements of Keane and should be read in conjunction with Part I, “ Item 1A . Risk Factors,” Part II, “ Item 7 . Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Year ended +December 31, 2018 +Year ended December 31, 2017 (1) +Year ended December 31, 2016 (2) +Year ended December 31, 2015 +(in thousands of dollars, except per share amounts) +Statement of Operations Data: +Revenue +$ +2,137,006 +$ +1,542,081 +$ +420,570 +$ +366,157 +Cost of services (3) +1,660,546 +1,282,561 +416,342 +306,596 +Depreciation and amortization +259,145 +159,280 +100,979 +69,547 +Selling, general and administrative expenses +114,258 +93,526 +53,155 +26,081 +(Gain) loss on disposal of assets +5,047 +(2,555 +) +(387 +) +(270 +) +Impairment +— +— +185 +3,914 +Total operating costs and expenses +2,038,996 +1,532,812 +570,274 +405,868 +Operating income (loss) +98,010 +9,269 +(149,704 +) +(39,711 +) +Other income (expense), net +(905 +) +13,963 +916 +(1,481 +) +Interest expense (4) +(33,504 +) +(59,223 +) +(38,299 +) +(23,450 +) +Total other expenses +(34,409 +) +(45,260 +) +(37,383 +) +(24,931 +) +Income (loss) before income taxes +63,601 +(35,991 +) +(187,087 +) +(64,642 +) +Income tax expense +(4,270 +) +(150 +) +— +— +Net income (loss) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Per Share Data (5) +Basic net income (loss) per share +$ +0.54 +$ +(0.34 +) +$ +(2.14 +) +$ +(0.74 +) +Diluted net Income (loss) per share +0.54 +(0.34 +) +(2.14 +) +(0.74 +) +Weighted average number of shares: +basic +109,335 +106,321 +87,313 +87,313 +Weighted average number of shares: +diluted +109,660 +106,321 +87,313 +87,313 +Statement of Cash Flows Data: +Cash flows from operating activities +$ +350,311 +$ +79,691 +$ +(54,054 +) +$ +37,521 +Cash flows from investing activities +(297,506 +) +(250,776 +) +(227,161 +) +(26,038 +) +Cash flows from financing activities +(68,554 +) +218,122 +276,633 +(10,518 +) +Other Financial Data: +Capital expenditures (6) +$ +291,543 +$ +189,629 +$ +23,545 +$ +27,246 +39 +Year ended +December 31, 2018 +Year ended December 31, 2017 (1) +Year ended December 31, 2016 (2) +Year ended December 31, 2015 +Adjusted EBITDA (8) +391,856 +214,525 +1,921 +41,885 +Balance Sheet Data (at end of period): +Total assets +$ +1,054,579 +$ +1,043,116 +$ +536,940 +$ +324,795 +Long-term debt (including current portion) (7) +340,730 +275,055 +269,750 +207,067 +Total liabilities +567,398 +530,024 +374,688 +244,635 +Total stockholders’ equity +487,181 +513,092 +162,252 +80,160 +(1) +Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile. +(2) +Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations. +(3) +Excludes depreciation and amortization, shown separately. +(4) +Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs, incurred in connection with the early debt extinguishment of our 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing of our then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the early debt extinguishment of our the term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein). +(5) +The pro forma earnings per unit amounts for 2017, 2016 and 2015 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of pro forma earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. +(6) +Capital expenditures do not include, for the year ended December 31, 2018, $35.0 million of capital expenditures related to the asset acquisition from RSI, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations. +(7) +Long-term debt includes $7.5 million , $8.2 million and $18.4 million of unamortized debt discount and debt issuance costs for 2018 , 2017 and 2016 , respectively, and excludes capital lease obligations. +(8) +Adjusted EBITDA and Adjusted Gross Profit are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. These non-GAAP financial measures exclude the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. +Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance. +40 +Set forth below is a reconciliation of net loss to Adjusted EBITDA and Adjusted Gross Profit: +(Thousands of Dollars) +Year Ended December 31, +2018 +2017 +2016 +2015 +Net income (loss) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Depreciation and amortization +259,145 +159,280 +100,979 +69,547 +Interest expense, net +33,504 +59,223 +38,299 +23,450 +Income tax (benefit) expense (a) +4,270 +150 +(114 +) +793 +EBITDA +$ +356,250 +$ +182,512 +$ +(47,923 +) +$ +29,148 +Acquisition, integration and expansion (b) +16,609 +(4,674 +) +35,630 +6,272 +Offering-related expenses (c) +12,969 +7,069 +1,672 +— +Commissioning costs +— +12,565 +9,998 +— +Impairment of assets (d) +— +— +185 +3,914 +Non-cash stock compensation (e) +17,166 +10,578 +1,985 +312 +Other (f) +(11,138 +) +6,475 +374 +2,239 +Adjusted EBITDA +$ +391,856 +$ +214,525 +$ +1,921 +$ +41,885 +Other income (expense), net +905 +(13,963 +) +$ +(916 +) +$ +1,481 +(Gain) loss on disposal of assets +5,047 +(2,555 +) +$ +(387 +) +$ +(270 +) +Selling, general and administrative (a) +114,258 +93,526 +$ +53,269 +$ +26,081 +Management Adjustments not associated with Cost of Services (g) +(35,379 +) +(16,573 +) +$ +(26,062 +) +$ +(8,263 +) +Adjusted gross profit +$ +476,687 +$ +274,960 +$ +27,825 +$ +60,914 +(a) +Income tax (benefit) expense as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016. +(b) +Represents professional fees, integration and divestiture costs, contingent value rights liability adjustments, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile and the Acquired Trican Operations, the asset acquisition from RSI and organic growth initiatives and wind-down of our Canadian operations. For the year ended December 31, 2018, $0.2 million was recorded in cost of services, $0.4 million was recorded in selling, general and administrative expenses, $2.7 million was recorded in gain on disposal of assets and $13.3 million was recorded in other expense, net. For the year ended December 31, 2017, $1.7 million was recorded in costs of services, $10.7 million was recorded in selling, general and administrative expense, $3.3 million gain was recorded in gain on disposal of assets and $13.8 million of income was recorded in other expense, net. For the year ended December 31, 2016, $13.9 million was recorded in costs of services, $21.4 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $2.9 million was recorded in selling, general and administrative expenses, $0.6 million gain was recorded in gain on disposal of assets and $1.7 million was recorded in other expense, net. +(c) +Represents professional fees and other miscellaneous expenses related to the Organizational Transactions, the Company's initial public offering and the sale of the Company's stock by a selling stockholder in January 2018. For the year ended December 31, 2018, $13.0 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2017, $1.3 million was recorded in cost of services and $5.8 million was recorded in selling, general and administrative expense. For the year ended December 31, 2016, $1.7 million was recorded in selling, general and administrative expenses. +(d) +Represents non-cash impairment charges with respect to our long-lived assets and intangible assets. +(e) +In 2018 and 2017, represents non-cash amortization of equity awards issued under Keane Group, Inc.’s Equity and Incentive Award Plan (the “Plan”). According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units and/or other deferred compensation. In 2016, represents adjustments to the non-cash profit interests related to Keane Group Holdings, LLC. In all three years, these costs were recorded in selling, general and administrative expenses. +(f) +Represents gain recognized for insurance proceeds received in connection with a fire that damaged a portion of one hydraulic fracturing fleet on July 1, 2018, contingency accruals related to certain litigation claims, readiness costs associated with our initial internal controls design documentation for Sarbanes-Oxley compliance, using COSO 2013 framework, net gains on disposal of assets, rating agency fees for establishing initial ratings in connection with entering into the 2018 Term Loan Facility (as defined herein) and forfeiture of deposits on +41 +hydraulic fracturing equipment purchase orders. For the year ended December 31, 2018, $3.8 million was recorded in selling, general and administrative expenses and $14.9 million was recorded in other expense, net. For the year ended December 31, 2017, $0.7 million was recorded in gain on disposal of assets and $7.2 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2016, $0.4 million was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net. +(g) +Excludes management adjustments associated with selling, general and administrative expenses, gain (loss) on disposal of assets within the Corporate segment and other income (expense), net. +42 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. +On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane. +This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “ Item 1A . Risk Factors” of this Annual Report on Form 10-K, which are incorporated herein by reference. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +EXECUTIVE OVERVIEW +Organization +We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions. Our total capacity includes approximately 1.4 million hydraulic horsepower. From our 29 currently deployable hydraulic fracturing fleets (“fleets”), 34 wireline trucks, 24 cementing units and other ancillary assets located in the Permian Basin, the Marcellus/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through three key principles, which include (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all our stakeholders. +We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion +43 +requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing, wireline divisions and ancillary services; and Other Services, which exclusively includes our cementing division. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, such as price adjustments that offset commodity inflation and align with market rates, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, together with individual direct and indirect costs on a per stage and per fleet basis. +Asset Acquisition from Refinery Specialties, Incorporated +On July 24, 2018, we executed a purchase agreement with RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $35.4 million , inclusive of a $0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds we received in connection with a fire that resulted in damage to a portion of one of our fleets (for further details see Note ( 7 ) Property and Equipment, net of Part II, “ Item 8 . Financial Statements and Supplementary Data”). We also assumed operating leases for light duty vehicles in connection with the RSI transaction, and RSI entered into a non-compete arrangement in turn with us. In September 2018, we reached an agreement with RSI to refund us $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $34.6 million , and we incurred $0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $35.0 million . +Acquisition of RockPile +On July 3, 2017, we acquired 100% of the outstanding equity interests of RockPile, a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. The acquisition of RockPile was completed for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of our common stock and contingent value rights (“CVR”) granted pursuant to the Contingent Value Rights Agreement (“CVR Agreement”), as further described in Note (3) Acquisition s) of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our hydraulic fracturing fleet size by more than 25%, and further strengthened our position as one of the largest pure-play providers of integrated well completion services in the U.S. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment. +Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017. +In early April 2018, in accordance with the terms and conditions of the CVR Agreement, we calculated and paid the final Aggregate CVR Payment Amount, due to the Holders of the CVRs, of $19.9 million . +44 +Financial results +Revenue in 2018 totaled $2.1 billion , an increase of 39% compared to revenue in 2017 of $1.5 billion . Our strong revenue growth in 2018 was driven by the following factors, (i) an increase in deployed fleets as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and additional newbuild fleets commissioned throughout 2018, (ii) stronger completions performance on a relative per crew basis in terms of stages completed and hours pumped and (iii) continued execution of our strategy of aligning with our clients under dedicated agreements, with periodic re-openers priced at market rate. We exited 2018 with 29 deployable fleets, which included the three newbuild fleets in 2018 and one fleet acquired through the acquisition of RSI. We exited 2017 with 27 operating fleets, which included six acquired fleets, including one newbuild fleet acquired through the acquisition of RockPile. In 2018, due to market conditions and client budget constraints creating white space on our calendar, we operated an equivalent of 24.5 fleets at 100% utilization, compared to 21.1 fleets at 100% utilization during 2017. The revenue growth drivers for 2018 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with, trucking, labor and chemicals, partially offset by deflation in sand prices due to surplus of sand supply. Consistent with our efforts to maintain and grow the supply of our key commodities and skilled workforce, as influenced by market demand, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of $98.0 million in 2018 , as compared to an operating income of $9.3 million in 2017 . +We reported net income of $59.3 million , or 0.54 per basic and diluted share, in 2018 , compared to net loss of $36.1 million , or $(0.34) per basic and diluted share, in 2017 . Excluding the adjustments discussed below, adjusted net income in 2018 and 2017 was $95.0 million and $4.1 million, respectively, or $0.87 and $(0.04) per basic and diluted share, respectively. +Net income in 2018 includes approximately $0.2 million of management adjustments to arrive at Adjusted Gross Profit (as defined herein), which is related to integration costs associated with the asset acquisition from RSI. Net income in 2018 includes a further $35.5 million of management adjustments to arrive at Adjusted EBITDA (as defined herein), driven by $17.2 million of non-cash stock compensation expense, $14.9 million gain from the insurance proceeds received in connection with the July 1, 2018 accidental fire, a $13.2 million adjustment to our CVR liability associated with the acquisition of RockPile, based on the cash settlement in early April 2018, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, a $2.7 million markdown to fair value of our idle real estate in Mathis, Texas, upon its sale, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses. +Net income in 2017 includes $11.2 million of management adjustments to arrive at Adjusted Gross Profit, driven by $12.4 million of re-commissioning costs for seven previously idled fleets, $1.7 million of acquisition and integration costs related to the acquisition of RockPile and $1.3 million of bonuses paid out to key operational employees in connection with our IPO, offset by a $4.2 million gain on disposal of assets. Net income in 2017 includes a further $20.8 million of management adjustments to arrive at Adjusted EBITDA, driven primarily by $10.7 million of transaction costs primarily related to the acquisition of RockPile, $10.6 million of non-cash stock compensation expense, a $7.8 million gain on indemnification settlements with Trican, $7.2 million of litigation contingencies, a $5.3 million gain related to the mark-to-market valuation adjustment of our CVR liability associated with the acquisition of RockPile, $3.6 million in bonuses to key personnel in connection with our IPO, $1.2 million of transaction costs related to the secondary offering in January 2018, $1.0 million of organizational restructuring costs, a $0.7 million gain due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and $0.2 million in commissioning costs. +45 +Financial markets, liquidity, and capital resources +On January 25, 2017, we completed the IPO of 30,774,000 shares of our common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by us and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to us, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million . The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of $99.0 million and the associated prepayment premium of $13.8 million , and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million . The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, we had 103,128,019 shares of common stock outstanding. +On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility (“2017 ABL Facility”), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million. +On May 25, 2018, we obtained a $350.0 million term loan facility (the “2018 Term Loan Facility”). The proceeds of the 2018 Term Loan Facility were used to repay Keane Group’s then-existing term loan facility (the “2017 Term Loan Facility”) and to pay related fees and expenses, with the excess proceeds going to fund general corporate purposes. As a result of entering into the 2018 Term Loan Facility, we experienced an average annualized savings of $7.9 million in interest expense in 2018, when compared to the 2017 Term Loan Facility. +At December 31, 2018 , we had approximately $80.2 million of cash available. We also had $184.0 million available under our asset-based revolving credit facility as of December 31, 2018 , which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments. +We filed a Registration Statement on Form S-1 (File No. 333-222500) that was declared effective on January 17, 2018 by the Securities and Exchange Commission (the “SEC”) for an offering of shares of our common stock on behalf of Keane Investor (the “selling stockholder”). 15,320,015 shares were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Subsequently, we filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, the selling stockholder sold 5,251,249 shares of our common stock at a price to the public of $11.02 per share. In conjunction with this subsequent offering, we repurchased 520,000 shares of our common stock. We did not sell any common stock in, and did not receive any of the proceeds from this secondary offering. As a direct result of this secondary offering, Keane Investor owned approximately 49.6% of our outstanding common stock as of December 31, 2018 and currently owns approximately 49.5% of our common stock. +For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein. +Fiscal 2018 Highlights +• +Acquisition: executed strategic asset acquisition of approximately 90,000 hydraulic horsepower from RSI at attractive value; +• +Revenue: increased average annualized Revenue per deployed fleet to $85.5 million in 2018 compared to $72.4 million in 2017; +46 +• +Profitability: increased average annualized Adjusted Gross Profit per fully-utilized fleet to $19.5 million in 2018 compared to $12.9 million in 2017; +• +Utilization: increased efficiency by maintaining average fleet utilization of 88% and increased wireline bundling to 78% ; +• +Safety: achieved a total recordable incident rate of 0.37 , which remains substantially less than the industry average; +• +Balance sheet: maintained and improved conservative balance sheet, financial flexibility and liquidity; +• +Liquidity: generated operating cash flow of $350.3 million ; +• +Share repurchases: completed $105 million of stock repurchases, representing 8.1 million shares of our common stock; and +• +Secondary offerings: completed two secondary offerings on behalf of Keane Investor for approximately 18.6 million shares, which increased public float and reduced Keane Investor’s ownership in the Company to 49.6% as of December 31, 2018 and 49.5% as of February 25, 2019. +Business outlook +In 2017 and through a significant portion of 2018, our industry experienced an increase in the level of drilling activity, driven by growth in E&P capital spending budgets. Commodity prices improved, with crude oil and natural gas prices well above levels prevailing at the beginning of 2017. West Texas Intermediate (“WTI”) crude oil prices averaged $64.94 per barrel in 2018, as compared to $50.88 per barrel in 2017, and Henry Hub Natural Gas prices averaged $3.17 per MMBtu in 2018, as compared to $2.99 per MMBtu in 2017. These dynamics, combined with the completion of previously drilled wells, led to significant growth in the demand for U.S. completion services. At the same time, the availability and supply of completions services was impacted by higher completions intensity, which drove increases in the amount of equipment that must be utilized per fleet and acceleration of maintenance cycles, both of which had a tightening effect on available supply. +In the fourth quarter of 2018, the industry faced growing headwinds, including E&P capital budget exhaustion, early achievement of E&P production targets, price differentials and normal seasonality, resulting in softness in demand for completions services. At the same time, the price of crude oil experienced a significant and rapid decline beginning in November 2018, exacerbating the negative impacts on completions activity. The decline in crude oil prices coincided with E&P budgeting processes, driving many E&P companies to delay budgeting cycles and activity in early 2019. In addition, as we reached the price re-opener periods on a portion of our dedicated agreements, the current imbalance of frac supply resulted in pressure on net price. Most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope. We currently believe we have strong visibility on utilization for approximately two-thirds of our fleets in 2019, providing a strong baseload upon which to build. +Fiscal 2019 Objectives +In 2019, our principal business objective continues to be growing our business and safely providing best-in-class services in Completion Services and Other Services segments, while delivering shareholder value. We expect to achieve our objective through: +• +partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation; +47 +• +allocating our assets to maximize utilization and returns, including diversification of geographies and commodities; +• +maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies; +• +investing in technology to further drive efficiencies and differentiation of service offerings; +• +leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost; +• +leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence; +• +pursuing organic expansion opportunities for our cementing assets; +• +maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency; +• +maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment; +• +exploring potential opportunities for mergers or acquisitions, focused on gaining scale, achieving synergies and delivering shareholder returns; and +• +returning capital to shareholders in a disciplined fashion. +Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein. +BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS +We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation. These regions are expected to account for approximately 68% of all new horizontal wells anticipated to be drilled during 2019 through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +In particular, we are one of the largest providers of completion services in the Permian Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the U.S. According to Spears & Associates, the Permian Basin and the Marcellus Shale/Utica Shale are expected to account for 53% of total active rigs in the U.S. during 2019 through 2021 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an 229% increase in rig count from their combined May 2016 low of 170 to 560 as of December 31, 2018 . +Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand. +Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below. +48 +The following table shows the average oil and natural gas prices for WTI and Henry Hub natural gas: +Year Ended December 31, +2018 +2017 +2016 +Oil price - WTI (1) +$ +64.94 +$ +50.88 +$ +43.14 +Natural gas price - Henry Hub (2) +$ +3.17 +$ +2.99 +$ +2.52 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type +2018 +2017 +2016 +Oil +841 +703 +408 +Natural Gas +190 +172 +100 +Other +1 +1 +1 +Total +1,032 +876 +509 +Year Ended December 31, +Drilling Type +2018 +2017 +2016 +Horizontal +900 +736 +400 +Vertical +63 +70 +60 +Directional +69 +70 +49 +Total +1,032 +876 +509 +Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. +Following a trough in early 2016, oil prices and natural gas prices have recovered to $45.15 and $ 3.25 , respectively, or approximately 72% and 118% , respectively, as of December 31, 2018 from their lows in early 2016 of $26.19 and $1.49 , respectively. As of January 2019, the US Energy Information Administration (the “EIA”) projects WTI spot prices to average $53.0 in the first quarter of 2019 before gradually increasing to $57.0 in the fourth quarter of 2019 and Henry Hub natural gas prices to average $2.89 in 2019. +With the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. active rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, we continued to experience increased demand for our services during 2018. +The EIA projects that the average WTI spot price will increase through 2020 due to growing demand. As of January 2019, global liquids demand is expected to average 101.5 million barrels per day in 2019. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale +49 +developments. As of January 2019, natural gas demand in North America is expected to average 82.65 billion cubic feet per day in 2019. +Our financial performance in 2018 is reflective of the increased demand within the completion services industry and our ability to navigate the anticipated sector-wide challenges in 2019. +50 +RESULTS OF OPERATIONS IN 2018 COMPARED TO 2017 +Year Ended December 31, 2018 Compared with Year Ended December 31, 2017 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2018 +2017 +2018 +2017 +$ +% +Completion Services +$ +2,100,956 +$ +1,527,287 +98 +% +99 +% +$ +573,669 +38 +% +Other Services +36,050 +14,794 +2 +% +1 +% +21,256 +144 +% +Revenue +2,137,006 +1,542,081 +100 +% +100 +% +594,925 +39 +% +Completion Services +1,622,106 +1,269,263 +76 +% +82 +% +352,843 +28 +% +Other Services +38,440 +13,298 +2 +% +1 +% +25,142 +189 +% +Costs of services (excluding depreciation and amortization, shown separately) +1,660,546 +1,282,561 +78 +% +83 +% +377,985 +29 +% +Completion Services +478,850 +258,024 +22 +% +17 +% +220,826 +86 +% +Other Services +(2,390 +) +1,496 +0 +% +0 +% +(3,886 +) +(260 +%) +Gross profit +476,460 +259,520 +22 +% +17 +% +216,940 +84 +% +Depreciation and amortization +259,145 +159,280 +12 +% +10 +% +99,865 +63 +% +Selling, general and administrative expenses +114,258 +93,526 +5 +% +6 +% +20,732 +22 +% +(Gain) loss on disposal of assets +5,047 +(2,555 +) +0 +% +0 +% +7,602 +(298 +%) +Operating income +98,010 +9,269 +5 +% +1 +% +88,741 +957 +% +Other income (expense), net +(905 +) +13,963 +0 +% +1 +% +(14,868 +) +(106 +%) +Interest expense +(33,504 +) +(59,223 +) +(2 +%) +(4 +%) +25,719 +(43 +%) +Total other expenses +(34,409 +) +(45,260 +) +(2 +%) +(3 +%) +10,851 +(24 +%) +Income tax expense +(4,270 +) +(150 +) +0 +% +0 +% +(4,120 +) +2,747 +% +Net income (loss) +$ +59,331 +$ +(36,141 +) +3 +% +(2 +%) +$ +95,472 +(264 +%) +Revenue. Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in 2018 increased by $594.9 million , or 39% , to $2.1 billion from $1.5 billion in 2017 . This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $573.7 million , or 38% , to $2.1 billion in 2018 from $1.5 billion in 2017 . This change was primarily attributable to a 17% growth in our average number of fully-utilized fleets, as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and deployment of additional fleets throughout 2018, together with increased stage count and efficiency from both our existing and newly-deployed fleets. These factors drove an increase in annualized revenue per fully-utilized fleet of 18%. +Other Services: Other Services segment revenue increased by $21.3 million , or 144% , to $36.0 million in 2018 from $14.8 million in 2017 . This increase in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile and reactivation of cementing assets that were previously idled. Revenue in 2018 was primarily earned in our cementing division, while revenue in 2017 was earned in our cementing, workover and +51 +coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested our coiled tubing assets during the fourth quarter of 2017. We divested our workover assets during the third and fourth quarters of 2017. +Cost of services. Cost of services in 2018 increased by $378.0 million , or 29% , to $1.7 billion from $1.3 billion in 2017 . This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue ), (ii) price inflation in our key input costs, including labor, chemicals, and sand trucking, partially offset by sand deflation, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs and (iv) an increase in fleets working twenty-four hour operations. In 2018 , we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017 , we had management adjustments of $12.4 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Cost of services as a percentage of total revenue in 2018 was 78% , which represented a decrease of 5% from 83% in 2017 . Excluding the above-mentioned management adjustments, total cost of services was $1.7 billion and $1.3 billion in 2018 and 2017 , or 78% and 82% of revenue, respectively, a decrease as a percentage of revenue of 4%. +Cost of services, as a percentage of total revenue is presented below: +Year Ended December 31, +Description +2018 +2017 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +77 +% +83 +% +(6 +)% +Other Services +107 +% +90 +% +17 +% +Total cost of services as a percentage of total revenue +78 +% +83 +% +(5 +)% +The change in cost of services by reportable segment is further discussed below. +Completion Services: Completion Services segment cost of services increased by $352.8 million , or 28% , to $1.6 billion in 2018 from $1.3 billion in 2017 . As a percentage of segment revenue, total cost of services was 77% and 83% , in 2018 and 2017 , respectively, a decrease as a percentage of revenue of 6% . This decrease was driven by higher revenue and operational performance on a per fleet basis, partially offset by (i) net price inflation in our key input costs and (ii) increased maintenance costs associated with increased service intensity and higher-pressure jobs. In 2018 , we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017 , we had management adjustments of $11.6 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Excluding the above-mentioned management adjustments, Completion Services segment cost of services was $1.6 billion and $1.3 billion in 2018 and 2017 , or 77% and 82% of segment revenue, respectively, a decrease as a percentage of revenue of 5%. +Other Services: Other Services segment cost of services increased by $25.1 million , or 189% , to $38.4 million in 2018 from $13.3 million in 2017 . This change in cost of services was primarily due to a full year of costs incurred to ramp up our cementing division. In 2017 , we incurred management adjustments of $0.8 million in commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million in acquisition and integration costs associated with the acquisition of RockPile. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $38.4 million and $12.4 million in 2018 and 2017 , or 107% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 23%. +Depreciation and amortization. Depreciation and amortization expense increased by $99.9 million , or 63% , to $259.1 million in 2018 from $159.3 million in 2017 . This change was primarily attributable to depreciation of additional equipment purchased in 2018 to maintain existing fleets, the purchase of newbuild equipment, the +52 +assets acquired from RSI, a full-year depreciation of assets acquired in the RockPile acquisition and changes in the estimated useful lives of certain assets during the first half of 2018. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $20.7 million , or 22% , to $114.3 million in 2018 from $93.5 million in 2017 . This change in SG&A was primarily related to non-cash compensation expense and transactions related to the secondary offering we consummated in January 2018, compared with transaction costs incurred in 2017 associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 5% in 2018 compared with 6% in 2017 . Total management adjustments were $34.5 million in 2018 , driven by $17.2 million of non-cash stock compensation expense, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses. Management adjustments in 2017 were $34.5 million , driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Excluding these management adjustments, SG&A expense was $79.8 million and $59.0 million in 2018 and 2017 , respectively, which represents an increase of 35% . +(Gain) loss on disposal of assets. Gain on disposal of assets in 2018 decreased by $7.6 million , to a loss of $5.0 million in 2018 from a gain of $2.6 million in 2017 . This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment in 2017, together with the loss recognized on the sale of our idle real estate in Mathis, Texas in 2018 and the increase in early disposals of various hydraulic fracturing pump components in 2018. +Other income (expense), net. Other income (expense), net, in 2018 decreased by $14.9 million , or 106% , to expense of $0.9 million in 2018 from income of $14.0 million in 2017 . In 2018, other income (expense), net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire. In 2017, other income (expense), net was primarily due to a $7.8 million of indemnification settlements with Trican, $0.7 million from the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability. +Interest expense, net. Interest expense, net of interest income, decreased by $25.7 million , or 43% , to $33.5 million in 2018 from $59.2 million in 2017 . This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million in 2017, in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes, compared to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility. While we incurred higher interest expense on our debt facilities in 2018 compared to our debt facilities in 2017, primarily due to the higher principal balance under the 2018 Term Loan Facility, this increase was offset by lower amortization expense of our unamortized deferred financing costs. +Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2018 was 6.71% , as compared to (0.53)% in 2017. For 2018 , the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating income offset by a valuation allowance. For 2017 , the effective rate was primarily made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets. +53 +Net income. Net income was $59.3 million in 2018 , as compared with net loss of $36.1 million in 2017 . The increase from the net loss in 2017 is due to the changes in revenue and expenses discussed above. +54 +Year Ended December 31, 2017 Compared with Year Ended December 31, 2016 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2017 +2016 +2017 +2016 +$ +% +Completion Services +$ +1,527,287 +$ +410,854 +99 +% +98 +% +$ +1,116,433 +272 +% +Other Services +14,794 +9,716 +1 +% +2 +% +5,078 +52 +% +Revenue +1,542,081 +420,570 +100 +% +100 +% +1,121,511 +267 +% +Completion Services +1,269,263 +401,891 +82 +% +96 +% +867,372 +216 +% +Other Services +13,298 +14,451 +1 +% +3 +% +(1,153 +) +(8 +%) +Costs of services (excluding depreciation and amortization, shown separately) +1,282,561 +416,342 +83 +% +99 +% +866,219 +208 +% +Completion Services +258,024 +8,963 +17 +% +2 +% +249,061 +2,779 +% +Other Services +1,496 +(4,735 +) +0 +% +(1 +%) +6,231 +(132 +%) +Gross profit +259,520 +4,228 +17 +% +1 +% +255,292 +6,038 +% +Depreciation and amortization +159,280 +100,979 +10 +% +24 +% +58,301 +58 +% +Selling, general and administrative expenses +93,526 +53,155 +6 +% +13 +% +40,371 +76 +% +Gain on disposal of assets +(2,555 +) +(387 +) +0 +% +0 +% +(2,168 +) +560 +% +Impairment +— +185 +0 +% +0 +% +(185 +) +(100 +%) +Operating income (loss) +9,269 +(149,704 +) +1 +% +(36 +%) +158,973 +(106 +%) +Other income, net +13,963 +916 +1 +% +0 +% +13,047 +1,424 +% +Interest expense +(59,223 +) +(38,299 +) +(4 +%) +(9 +%) +(20,924 +) +55 +% +Total other expenses +(45,260 +) +(37,383 +) +(3 +%) +(9 +%) +(7,877 +) +21 +% +Income tax expense +(150 +) +— +0 +% +0 +% +(150 +) +— +% +Net loss +$ +(36,141 +) +$ +(187,087 +) +(2 +%) +(44 +%) +$ +150,946 +(81 +%) +Revenue. Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in 2017 increased by $1.1 billion , or 267% , to 1.5 billion from 420.6 million in 2016 . This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $1.1 billion , or 272% , to $1.5 billion in 2017 from $410.9 million in 2016 . This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of the Acquired Trican Operations, as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%. +Other Services: Other Services segment revenue increased by $5.1 million , or 52% , to 14.8 million in 2017 from 9.7 million in 2016 . This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested of our workover assets during the third and fourth quarters of 2017. +55 +Cost of services. Cost of services in 2017 increased by $866.2 million , or 208% , to $1.3 billion from $416.3 million in 2016 . This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue), (ii) price inflation in our key input costs, including labor, sand and sand trucking, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increase in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83%, which represented a decrease of 16% from 99% in 2016. Excluding the above-mentioned management adjustments, total cost of services was $1.3 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%. +Cost of services, as a percentage of total revenue is presented below: +Year Ended December 31, +Description +2017 +2016 +% Change +Segment cost of services as a percentage of segment revenue: +Completion Services +83 +% +98 +% +(15 +)% +Other Services +90 +% +149 +% +(59 +)% +Total cost of services as a percentage of total revenue +83 +% +99 +% +(16 +)% +The change in cost of services by reportable segment is further discussed below. +Completion Services: Completion Services segment cost of services increased by $867.4 million , or 216% , to $1.3 billion in 2017 from $401.9 million in 2016 . As a percentage of segment revenue, total cost of services was 83% and 98%, in 2017 and 2016, respectively, a decrease as a percentage of revenue of 15%. This change in cost of services was driven by (i) higher activity (as discussed above under Revenue), (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.2 billion and $379.1 million in 2017 and 2016, or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%. +56 +Other Services: Other Services segment cost of services decreased by $1.2 million, or 8%, to $13.3 million in 2017 from $14.5 million in 2016. This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017, we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016, we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016, or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%. +Depreciation and amortization. Depreciation and amortization expense increased by $58.3 million, or 58%, to $159.3 million in 2017 from $101.0 million in 2016. This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million, or 76%, to $93.5 million in 2017 from $53.2 million in 2016. This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016. Total management adjustments were $34.5 million in 2017, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016, respectively, which represents an increase of 124%. +Gain on disposal of assets. Gain on disposal of assets in 2017 increased by $2.2 million, or 560%, to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas. +Other income (expense), net. Other income (expense), net, in 2017 increased by $13.0 million, or 1,424%, to income of $14.0 million in 2017 from income of $0.9 million in 2016. This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability. +Interest expense, net. Interest expense, net of interest income, increased by $20.9 million, or 55%, to $59.2 million in 2017 from $38.3 million in 2016. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our 2017 Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates. +Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal +income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)%. The effective rate is primarily +made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a +result of market conditions and their corresponding impact on our business outlook, we determined that a valuation +allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The +57 +remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets. +Net loss. Net loss was $36.1 million in 2017 , as compared with net loss of $187.1 million in 2016 . This decrease in net loss from 2016 is due to the changes in revenue and expenses discussed above. +ENVIRONMENTAL MATTERS +We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note ( 18 ) ( Commitments and Contingencies ) of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +As of December 31, 2018 , we had $80.2 million of cash and $351.2 million of total debt, compared to $96.1 million of cash and $282.9 million of total debt as of December 31, 2017 . In 2018 , 2017 and 2016 , we had capital expenditures of $291.5 million , $189.6 million and $23.5 million , respectively, exclusive of the cash payment attributable to the asset acquisition from RSI on July 24, 2018 of $35.0 million, the acquisition of RockPile on July 3, 2017 of $116.6 million and the acquisition of the Acquired Trican Operations on March 16, 2016 of $203.9 million . +(Thousands of Dollars) +Year Ended December 31, +2018 +2017 +2016 +Net cash provided by (used) in operating activities +$ +350,311 +$ +79,691 +$ +(54,054 +) +Net cash used in investing activities +$ +(297,506 +) +$ +(250,776 +) +$ +(227,161 +) +Net cash provided by (used in) financing activities +$ +(68,554 +) +$ +218,122 +$ +276,633 +Significant sources and uses of cash during the year ended December 31, 2018 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities in 2018 of $350.3 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. +• +Investing activities: +– +Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note ( 7 ) Property and Equipment, net of Part II, “ Item 8. Financial Statements and Supplementary Data.” +– +$4.7 million in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Services segment. +• +Financing activities: +– +Cash provided by the 2018 Term Loan Facility, net of debt discount, was $348.2 million. +58 +Uses of cash: +• +Operating activities: +– +$13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018. +– +$7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below. +Investing activities: +– +Net cash used in investing activities of $297.5 million was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment. +• +Financing activities: +– +Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million. +– +Cash used to pay debt issuance costs associated with our debt facilities was $7.3 million . +– +Shares repurchased and retired related to our stock repurchase program totaled $104.9 million . +– +Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled $3.6 million . +– +$12.0 million related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value. +Significant sources and uses of cash during the year ended December 31, 2017 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of the Acquired Trican Operations. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8. Financial Statements and Supplementary Data.” +• +Investing activities: +– +Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note ( 7 ) Property and Equipment, net of Part II, “ Item 8. Financial Statements and Supplementary Data.” +59 +• +Financing activities: +– +Cash provided from IPO proceeds, $255.5 million . See Note (1)(a) Initial Public Offering of Part II, “ Item 8. Financial Statements and Supplementary Data.” +– +The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. statements. +– +An incremental term loan facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were primarily used to fund the acquisition of RockPile. +Uses of cash: +• +Investing activities: +– +Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement. +– +Cash used for capital expenditures of $164.4 million , associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment. +• +Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million . We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes. +Significant sources and uses of cash during the year ended December 31, 2016 +Sources of cash: +• +Investing activities: Total net proceeds of $0.7 million primarily related to the sale of assets from our idled drilling division within our Other Services segment. +• +Financing activities: Net cash provided from a capital contribution from shareholders of $200.0 million and the net proceeds from our 2016 Term Loan Facility of $91.2 million . +Uses of cash: +• +Operating activities: Net cash used in operating activities of $54.1 million was primarily attributable to competitive pricing pressure as a result of market conditions, combined with the acquisition, integration and commissioning costs of approximately $47.3 million associated with the acquisition of the Acquired Trican Operations. +• +Investing activities: +– +Cash consideration of $205.4 million associated with the acquisition of the Acquired Trican Operations. +– +Cash used for capital expenditures of $23.5 million associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets. +• +Financing activities: Cash used to repay and service our debt facilities, including prepayment penalties and capital leases but excluding interest, in 2016 was $8.8 million . +60 +Future sources and use of cash +Capital expenditures for 2019 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks and cementing units. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2019 will range between $130.0 million and $150.0 million . +Debt service for the year ended December 31, 2019 is projected to be $30.4 million , of which $5.5 million is related to capital leases. We anticipate our debt service will be funded by cash flows from operations. +On February 26, 2018, we announced that our board of directors authorized a 12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. Effective October 26, 2018, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to September 2019 from a previous expiration of February 2019. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. +Other factors affecting liquidity +Financial position in current market. As of December 31, 2018 , we had $ 80.2 million of cash and a total of $184.0 million available under our revolving credit facility. Furthermore, we have no material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments and stock repurchases. +Guarantee agreements. In the normal course of business, we have agreements with a financial institution under which $2.5 million of letters of credit were outstanding as of December 31, 2018 . +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. +61 +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2018 . +(Thousands of Dollars) +Contractual obligations +Total +2019 +2020-2022 +2023-2025 +2026+ +Long-term debt, including current portion (1) +$ +348,250 +$ +3,500 +$ +10,500 +$ +334,250 +$ +— +Estimated interest payments (2) +130,758 +21,386 +61,517 +47,855 +— +Capital lease obligations (3) +11,449 +5,484 +5,965 +— +— +Operating lease obligations (4) +73,535 +29,410 +28,500 +6,502 +9,123 +Purchase commitments (5) +137,667 +78,101 +57,966 +1,600 +— +Equity-method investment (6) +3,315 +3,315 +— +— +— +Legal contingency (7) +1,668 +1,668 +— +— +— +$ +706,642 +$ +142,864 +$ +164,448 +$ +390,207 +$ +9,123 +(1) +Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $7.5 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility. +(2) +Estimated interest payments are based on debt balances outstanding as of December 31, 2018 and include interest related to the 2018 Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate ( “ LIBOR ” ). +(3) +Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment and ancillary equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments. +(4) +Operating lease obligations, inclusive of early termination buyouts, are related to our real estate, rail cars with Anderson Rail Group, Compass Rail VIII, SMBC Rail Services, Trinity Industries Leasing Company, and CIT Rail LLC and light duty vehicles with Enterprise FM Trust. +(5) +Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +(6) +Equity-method investment is related to our research and development commitments with our equity-method investee. See Notes ( 18 ) Commitments and Contingencies and (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further details. +(7) +The legal contingency is primarily related to various employment related claims. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further details. +Principal Debt Agreements +2017 ABL Facility +Structure . As of March 31, 2018, our 2017 ABL Facility provided for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million. The 2017 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments. +Maturity . The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Interest . Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average +62 +excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when consolidated EBITDA as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%; provided that if consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above. +2018 Term Loan Facility +On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes. +Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2018 , there was $348.2 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00. +Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding. +Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. +Prepayments . The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane +63 +Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”). +Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2017 ABL Facility (the “ABL Facility Priority Collateral”). +Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility. +Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00. +“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments). +Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. +Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility). +Off-Balance Sheet Arrangements +We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities. +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect +64 +material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Recently Issued Accounting Standards +For discussion on the impact of accounting standards issued but not yet adopted to our consolidated and combined financial statements, see Note ( 24 ) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Critical Accounting Policies and Estimates +The preparation of our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Acquisition s of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our recently completed acquisitions during 2017 and 2016. +65 +Asset acquisitions +Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Acquisition s of Part II, “ Item 8 . Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018. +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies. +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note ( 2 ) (h) Goodwill and Indefinite-Lived Intangible Assets and ( 2 ) (i) Long-Lived Assets of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2018 , 2017 and 2016 . +Income Taxes +We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences +66 +between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of its tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated and combined financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated and combined financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated and combined financial statements. +See Note ( 17 ) Income Taxes of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2018 , 2017 and 2016 . +67 +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note ( 24 ) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +NON-GAAP FINANCIAL MEASURES +From time to time in our financial reports, we will use certain non-GAAP financial measures to provide supplemental information that we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitates review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. +Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services items that management does not consider in assessing ongoing performance. +68 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk during 2018 , except in regards to our dissolution of Keane Completions CN Corp. +As of December 31, 2018 , we held variable-rate debt, the exposure to which we manage with our interest-rate-related derivative instrument. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. +For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part II, “ Item 7 . Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2018 . +69 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +Keane Group, Inc. +Audited Consolidated and Combined Financial Statements +Reports of Independent Registered Public Accounting Firm +71 +Consolidated and Combined Balance Sheets +74 +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +76 +Consolidated and Combined Statements of Changes in Owners’ Equity +78 +Consolidated and Combined Statements of Cash Flows +79 +Notes to Consolidated and Combined Financial Statements +81 +70 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Keane Group, Inc.: +Opinion on the Consolidated and Combined Financial Statements +We have audited the accompanying consolidated and combined balance sheets of Keane Group Inc. and subsidiaries’ (the Company) as of December 31, 2018 and 2017, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +February 27, 2019 +71 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +Keane Group, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited Keane Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated and combined balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated and combined financial statements), and our report dated February 27, 2019 expressed an unqualified opinion on those consolidated and combined financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +72 +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Houston, Texas +February 27, 2019 +73 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Balance Sheets +(Amounts in thousands) +December 31, +2018 +December 31, +2017 +Assets +Current assets: +Cash and cash equivalents +$ +80,206 +$ +96,120 +Trade and other accounts receivable, net +210,428 +238,018 +Inventories, net +35,669 +33,437 +Assets held for sale +176 +— +Prepaid and other current assets +5,784 +8,519 +Total current assets +332,263 +376,094 +Property and equipment, net +531,319 +468,000 +Goodwill +132,524 +134,967 +Intangible assets +51,904 +57,280 +Other noncurrent assets +6,569 +6,775 +Total assets +$ +1,054,579 +$ +1,043,116 +Liabilities and Stockholders’ Equity +Liabilities +Current liabilities: +Accounts payable +$ +106,702 +$ +92,348 +Accrued expenses +101,539 +135,175 +Current maturities of capital lease obligations +4,928 +3,097 +Current maturities of long-term debt +2,776 +1,339 +Customer contract liabilities +60 +5,000 +Stock-based compensation - current +4,281 +4,281 +Other current liabilities +294 +914 +Total current liabilities +220,580 +242,154 +Capital lease obligations, less current maturities +5,581 +4,796 +Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities +337,954 +273,715 +Stock-based compensation - noncurrent +— +4,281 +Other noncurrent liabilities +3,283 +5,078 +Total noncurrent liabilities +346,818 +287,870 +Total liabilities +567,398 +530,024 +Stockholders’ equity +Common stock, par value $0.01 per share (authorized 500,000 shares, issued 104,188 shares) +1,038 +1,118 +Paid-in capital in excess of par value +455,447 +541,074 +Retained earnings (deficit) +31,494 +(27,372 +) +Accumulated other comprehensive loss +(798 +) +(1,728 +) +Total stockholders’ equity +487,181 +513,092 +74 +Total liabilities and stockholders’ equity +$ +1,054,579 +$ +1,043,116 +See accompanying notes to the consolidated and combined financial statements. +75 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +(Amounts in thousands, except for per unit amounts) +Twelve Months Ended +December 31, +2018 +2017 +2016 +Revenue +$ +2,137,006 +$ +1,542,081 +$ +420,570 +Operating costs and expenses: +Cost of services (1) +1,660,546 +1,282,561 +416,342 +Depreciation and amortization +259,145 +159,280 +100,979 +Selling, general and administrative expenses +114,258 +93,526 +53,155 +(Gain) loss on disposal of assets +5,047 +(2,555 +) +(387 +) +Impairment +— +— +185 +Total operating costs and expenses +2,038,996 +1,532,812 +570,274 +Operating income (loss) +98,010 +9,269 +(149,704 +) +Other income (expense): +Other income (expense), net +(905 +) +13,963 +916 +Interest expense (2) +(33,504 +) +(59,223 +) +(38,299 +) +Total other expenses +(34,409 +) +(45,260 +) +(37,383 +) +Income (loss) before income taxes +63,601 +(35,991 +) +(187,087 +) +Income tax expense (3) +(4,270 +) +(150 +) +— +Net income (loss) +59,331 +(36,141 +) +(187,087 +) +Net loss attributable to predecessor +— +(7,918 +) +— +Net loss attributable to Keane Group, Inc. +59,331 +(28,223 +) +(187,087 +) +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +(114 +) +96 +22 +Hedging activities +(880 +) +791 +(1,784 +) +Total comprehensive income (loss) +$ +58,337 +$ +(35,254 +) +$ +(188,849 +) +Net income (loss) per share (4) : +Basic net income(loss) per share +$ +0.54 +$ +(0.34 +) +$ +(2.14 +) +Diluted net income (loss) per share +$ +0.54 +$ +(0.34 +) +$ +(2.14 +) +Weighted-average shares outstanding: basic (3) +109,335 +106,321 +87,313 +Weighted-average shares outstanding: diluted (3) +109,660 +106,321 +87,313 +(1) +Cost of services during the years ended December 31, 2018 , 2017 , and 2016 excludes depreciation of $245.6 million , $150.6 million , and $94.7 million , respectively. Depreciation related to cost of services is presented within depreciation and amortization separately disclosed. +(2) +Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs incurred in connection with the early debt extinguishment of the Company’s 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company of its then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the Company’s early debt extinguishment of its term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein). +76 +(3) Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016. +(4) +The pro forma earnings per share amounts have been computed to give effect to the Organizational Transactions (as defined herein), including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Existing Owners’ (as defined herein) membership interests for the newly-created ownership interests. The earnings per share amounts for 2017 and 2016 have been computed to give effect to the Organizational Transactions, as if they had occurred on January 1, 2017, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Existing Owners’ membership interests for the newly-created ownership interests. +See accompanying notes to the consolidated and combined financial statements. +77 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Changes in Owners’ Equity +(Amounts in thousands) +Members’ equity +Common Stock +Paid-in Capital in Excess of Par Value +Retained Earnings (deficit) +Accumulated other comprehensive income (loss) +Total +Balance as of December 31, 2015 +$ +186,510 +$ +— +$ +— +$ +(101,684 +) +$ +(4,666 +) +$ +80,160 +Contribution of equity +222,646 +— +— +— +— +222,646 +Issuance of Class A and Class C Units +42,669 +— +— +— +— +42,669 +Unit awards amortization +1,985 +— +— +— +— +1,985 +Other comprehensive income +— +— +— +— +1,879 +1,879 +Net loss +— +— +— +(187,087 +) +— +(187,087 +) +Balance as of December 31, 2016 +$ +453,810 +$ +— +$ +— +$ +(288,771 +) +$ +(2,787 +) +$ +162,252 +Net loss prior to the Organizational Transactions +— +— +— +(7,918 +) +— +(7,918 +) +Effect of the Organizational Transactions +(453,810 +) +— +156,270 +297,540 +— +— +Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives +— +1,031 +245,902 +— +— +246,933 +Stock-based compensation recognized subsequent to the Organizational Transactions +— +— +10,578 +— +— +10,578 +Effect of RockPile acquisition +— +87 +130,203 +— +— +130,290 +Other comprehensive income +— +— +— +— +1,059 +1,059 +Deferred tax adjustment +— +— +(1,879 +) +— +— +(1,879 +) +Net loss subsequent to Organizational Transactions +— +— +— +(28,223 +) +— +(28,223 +) +Balance as of December 31, 2017 +$ +— +$ +1,118 +$ +541,074 +$ +(27,372 +) +$ +(1,728 +) +$ +513,092 +Stock-based compensation (1) +— +2 +21,458 +— +— +21,460 +Shares repurchased and retired related to stock-based compensation +— +(1 +) +(3,578 +) +— +— +(3,579 +) +Shares repurchased and retired related to stock repurchase program +— +(81 +) +(103,507 +) +(1,273 +) +— +(104,861 +) +Other comprehensive income +— +— +— +808 +930 +1,738 +Net income +— +— +— +59,331 +— +59,331 +Balance as of December 31, 2018 +$ +— +$ +1,038 +$ +455,447 +$ +31,494 +$ +(798 +) +$ +487,181 +(1) +Stock-based compensation during 2018 includes stock-based compensation expense recognized during the period of $17.2 million and the vested deferred stock awards of $4.3 million . Refer to Note ( 12 ) Stock-Based Compensation for further discussion of the Company’s stock-based compensation. +See accompanying notes to the consolidated and combined financial statements. +78 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Twelve Months Ended +December 31, +2018 +2017 +2016 +Cash flows from operating activities: +Net income (loss) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities +Depreciation and amortization +259,145 +159,280 +100,979 +Amortization of deferred financing fees +3,147 +5,241 +4,152 +(Gain) loss on disposal of assets +5,047 +(2,555 +) +(387 +) +Equity-based compensation +17,166 +10,578 +1,985 +Loss on debt extinguishment, including prepayment premiums +7,563 +31,084 +— +Loss on contingent consideration liability +13,254 +— +— +Loss on foreign currency translation +2,621 +— +— +Unrealized gain (loss) on derivatives +(880 +) +791 +(1,784 +) +Realized (gain) loss on derivatives +(697 +) +172 +3,641 +Gain on insurance proceeds recognized in other income +(14,892 +) +— +— +Loss on impairment of assets +— +— +185 +Accrued interest on loan—related party +— +— +471 +Other non-cash expenses +— +(322 +) +— +Changes in operating assets and liabilities +Decrease (increase) in trade and other accounts receivable, net +27,485 +(113,047 +) +(13,027 +) +Decrease (increase) in inventories +(2,725 +) +(15,475 +) +8,485 +Decrease (increase) in prepaid and other current assets +2,734 +20,294 +(5,994 +) +Decrease (increase) in other assets +362 +(336 +) +32 +Increase (decrease) in accounts payable +11,304 +(141 +) +14,214 +Decrease in customer contract liabilities +(4,940 +) +— +— +Increase (decrease) in accrued expenses +(32,318 +) +41,446 +19,735 +Increase (decrease) in other liabilities +(2,396 +) +(21,178 +) +346 +Net cash provided by (used) in operating activities +350,311 +79,691 +(54,054 +) +Cash flows from investing activities +Asset and business acquisitions +(35,003 +) +(116,576 +) +(203,900 +) +Purchase of property and equipment +(277,569 +) +(141,340 +) +(23,126 +) +Advances of deposit on equipment +(4,153 +) +(23,096 +) +(420 +) +Payments for leasehold improvements +(1,651 +) +(157 +) +— +Implementation of software +(883 +) +(687 +) +(453 +) +Proceeds from sale of assets +4,652 +30,565 +711 +Proceeds from insurance recoveries +18,247 +515 +22 +Equity-method investment +(1,146 +) +— +— +79 +KEANE GROUP, INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Payments received (advances) on note receivable +— +— +5 +Net cash used in investing activities +(297,506 +) +(250,776 +) +(227,161 +) +Cash flows from financing activities: +Proceeds from issuance of common stock +— +255,494 +— +Proceeds from the secured notes and term loan facilities +348,250 +285,000 +100,000 +Payments on the secured notes and term loan facilities +(284,952 +) +(289,902 +) +(5,647 +) +Payments on capital leases +(4,119 +) +(2,861 +) +(2,668 +) +Prepayment premiums on early debt extinguishment +— +(15,817 +) +— +Payment of debt issuance costs +(7,331 +) +(13,792 +) +(15,052 +) +Payment of contingent consideration liability +(11,962 +) +— +— +Shares repurchased and retired related to share repurchase program +(104,861 +) +— +— +Shares repurchased and retired related to stock-based compensation +(3,579 +) +— +— +Contributions +— +— +200,000 +Net cash provided by (used in) financing activities +(68,554 +) +218,122 +276,633 +Non-cash effect of foreign translation adjustments +(165 +) +163 +80 +Net increase (decrease) in cash, cash equivalents and restricted cash +(15,914 +) +47,200 +(4,502 +) +Cash, cash equivalents and restricted cash, beginning +96,120 +48,920 +53,422 +Cash, cash equivalents and restricted cash, ending +$ +80,206 +$ +96,120 +$ +48,920 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net +$ +24,528 +$ +30,104 +$ +25,516 +CVR settlement +19,918 +— +— +Income taxes +5,529 +— +— +Non-cash investing and financing activities: +Non-cash purchases of property and equipment +$ +9,821 +$ +25,193 +$ +9,364 +Non-cash reduction in capital lease obligations +114 +20 +1,281 +Non-cash additions to capital lease obligations +6,831 +2,739 +— +Non-cash issuance of acquisition shares +— +130,290 +— +Non-cash forgiveness of related party loan +— +— +22,646 +Non-cash issuance of Class A and C Units +— +— +42,669 +See accompanying notes to the consolidated and combined financial statements. +80 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 1 ) Basis of Presentation and Nature of Operations +Keane Group, Inc. (the “Company”, “KGI” or “Keane”) was formed on October 13, 2016 as a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company. +The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X. +The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, equity-based incentive plan awards and derivatives. +Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2018 and the results of its operations and cash flows for the years ended December 31, 2018 , 2017 and 2016 . Such adjustments are of a normal recurring nature. +The consolidated and combined financial statements include the accounts of Keane Group, Inc. and its consolidated subsidiaries: Keane Group Holdings, LLC; KGH Intermediate Holdco I, LLC; KGH Intermediate Holdco II, LLC; Keane Frac, LP; Keane Frac TX LLC; Keane Frac ND, LLC; Keane Frac GP, LLC and Keane Completions CN Corp. All intercompany transactions and balances have been eliminated. +The consolidated financial statements for the period from January 1, 2016 to March 15, 2016 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of the Acquired Trican Operations (as defined herein). The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of RockPile (as defined herein). +Earnings per share and weighted-average shares outstanding for the years ended December 31, 2017 and 2016 have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended December 31, 2017 and 2016 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company’s predecessor for accounting purposes, as there was no activity under Keane Group, Inc. prior to 2017. +81 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(a) Initial Public Offering +On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million . The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s term loan balance of $99.0 million and the associated prepayment premium of $13.8 million , and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million . The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value. +(b) Organizational Transactions +In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following: +• +Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company’s management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”); +• +Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and +• +The Company’s independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group. +The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes. +As a result of the Organizational Transactions and the IPO, (i) the Company became a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of 72,354,019 shares of the Company’s common stock were owned by Keane Investor and certain of the Company’s independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company’s controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock. +82 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 2 ) Summary of Significant Accounting Policies +(a) Business Combinations and Asset Acquisitions +Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850 using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition. +Asset acquisitions, as defined in ASU 2017-01, are measured based on their cost to the Company, including transaction costs. An asset acquisition’s cost or the consideration transferred by the Company is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller as well as transaction costs incurred. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition. +Refer to Note (3) Acquisition s for discussion of the acquisitions completed in 2018 , 2017 , and 2016 . +(b) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from certain dispositions or casualty events of more than $25.0 million per single transaction or $50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $25.0 million , under the 2017 ABL Facility (as defined herein), is considered to be restricted. The Company may, at management’s discretion, reinvest any part of such proceeds in assets (other than current assets) useful for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2017 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2017 ABL Facility. +The Company did no t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the year ended December 31, 2018 under the 2018 Term Loan Facility or 2017 ABL Facility. For the year ended December 31, 2017 , the Company had a qualifying insurance recovery of $0.5 million under the 2017 Term Loan Facility. +The Company did no t have any restricted cash as of December 31, 2018 and 2017 . +(c) Trade Accounts Receivable +Trade accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated and combined statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to +83 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current market conditions and the Company’s customers’ financial condition, the balance of receivables in dispute, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable were $210.1 million and $235.8 million at December 31, 2018 and 2017 , respectively. As of December 31, 2018 and 2017 , the Company had an allowance for doubtful accounts of $0.5 million . +(d) Inventories +Inventories are stated at the lower of cost or market (net realizable value). Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss) using the weighted average cost method for all inventories. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on our historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or not fitting our equipment are written-off. +(e) Revenue Recognition +The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09. +Revenue from the Company’s Completion Services and Other Services segments are earned as services are rendered, which is generally on a per stage or fixed monthly rate for the Company’s Completions Services segment and on a per job basis for the Other Services segment. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated and combined statements of operations and comprehensive income (loss). The Company does not incur contract acquisition and origination costs. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated and combined statements of operations and comprehensive income (loss) and net cash provided by operating activities in the consolidated and combined statements of cash flows. +The Company has elected the practical expedient to recognize revenue based upon the transactional value it has the right to invoice upon completion of each performance obligation per the contract terms, as the Company believes its right to consideration corresponds directly with the value transferred to the customer, and this expedient does not lend itself to the application of significant judgment. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a +84 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary. +The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations. +Revenue from the Company’s Completion Services and Other Services segments are recognized as follows: +Completion Services +The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue is recognized upon the completion of each performance obligation. The Company’s performance obligations under its Completion Services segment represent each stage frac’d or each stage perforated. Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Other Services +The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Disaggregation of Revenue +Revenue activities during the years ended December 31, 2018 , 2017 and 2016 were as follows: +Twelve Months Ended +December 31, +2018 +2017 +2016 +Revenue by segment: +Completion Services +$ +2,100,956 +$ +1,527,287 +$ +410,854 +Other Services +36,050 +14,794 +9,716 +Total revenue +$ +2,137,006 +$ +1,542,081 +$ +420,570 +Revenue by geography: +East +$ +790,026 +$ +566,891 +$ +181,629 +North +268,012 +235,391 +59,706 +South +1,078,968 +739,799 +179,235 +Total revenue +$ +2,137,006 +$ +1,542,081 +$ +420,570 +85 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Contract Balances +In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated and combined balance sheets. Payment terms after invoicing are typically 30 days or less. +(f) Property and Equipment +Property and equipment, inclusive of equipment under capital lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years . Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset and the term of the lease. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated and combined statements of operations and comprehensive income (loss). +Major classifications of property and equipment and their respective useful lives are as follows: +Land +Indefinite life +Building and leasehold improvements +13 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +Leasehold improvements are assigned a useful life equal to the term of the related lease. +In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour work, higher stage volumes, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately 50% . +In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the year ended December 31, 2018 of $15.0 million in the consolidated and combined statement of operations and comprehensive income. +As a result of a system upgrade to its fixed asset accounting module, in the third quarter of 2018, the Company changed its depreciation method from mid-month straight-line depreciation to days straight-line depreciation. The impact of this change in depreciation method to the Company’s consolidated and combined statement of operations and comprehensive income (loss) was immaterial. +Depreciation methods, useful lives and residual values are reviewed annually. +86 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(g) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized. +(h) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment analysis, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated to one reporting unit, Completion Services. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting segment, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated solely to its Completion Services segment. If the carrying amount of the reportable segment exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method. +In 2018 , the Company performed Step 0 of the goodwill impairment assessment by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recognized. The Company’s assessment was based on the following factors: forecasted growth in gross domestic product for 2019, equity markets remain near all-time highs, commodity prices are projected at levels that would favor continued investment in drilling and well completion, production cuts by members of the Organization of the Petroleum Exporting Countries (“OPEC”) and non-OPEC members, positive trends and forecasts for the oil and gas industry and the Company’s positive projected financial results for 2019 across all of its reporting units. +No goodwill impairment has been recognized since inception in 2013. +The Company’s indefinite-lived assets consist of the Company’s trade name. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. +There was no indefinite-lived asset impairment recognized during 2018 , 2017 or 2016 . +(i) Long-Lived Assets +The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash +87 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +flows that are independent of other asset groups to be at the service line level: hydraulic fracturing, wireline, cementing and drilling, except for an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment. +Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense. +The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. +In 2018 and 2017, for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized. The Company’s assessment was based on the following factors: there have been no significant decreases in the market price or use of the Company’s definite-lived assets, the Company continued to drive efficiencies, capabilities and utilization across all of its service lines, projected market and oil and gas industry conditions favor continued investment in drilling and well completion and the Company’s positive projected financial results for 2019 across all of its service lines. +In 2016, for the Company’s definite-lived assets, the Company recorded a $0.2 million impairment charge related to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset. +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets. +(j) Derivative Instruments and Hedging Activities +The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated and combined balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an +88 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated and combined balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings. +(k) Fair Value Measurement +Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• +Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• +Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• +Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +89 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(l) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”) and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement. +Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated and combined statements of cash flows. +The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by the Company withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For additional information, see Note ( 12 ) Stock-Based Compensation . +(m) Taxes +Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the years ended December 31, 2018 and 2017 . +Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax. +The Company is responsible for certain state income and franchise taxes, which include Colorado, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. +90 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. +The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense. +See Note ( 17 ) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2018 , 2017 and 2016 . +(n) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated and combined statements of operations and comprehensive income (loss). +Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). +(o) Equity-method investments +Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated and combined balance sheets. +As of December 31, 2018 and 2017 , the Company recognized $1.7 million and $0.6 million , respectively, for its only equity-method investment. +(p) Employee Benefits and Postemployment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated +(q) Leases +The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property and equipment on the consolidated and combined balance sheets. Operating lease expense is recorded on a straight-line basis over the lease term in the consolidated and combined statements of operation and +91 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +comprehensive income (loss). Landlord incentives are recorded as deferred rent and amortized as reductions to lease expense on a straight-line basis over the life of the applicable lease. +Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842). For further details on the impact of the adoption of this standard to the Company’s consolidated financial statements, see Note ( 24 ) New Accounting Pronouncements : (b) Recently Issued Accounting Standards . +(r) Research and development costs +Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Research and development costs incurred directly by the Company were $7.1 million , $3.7 million and $2.2 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +(s) Advertising costs +Advertising costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Advertising costs incurred by the Company were $0.3 million , $0.5 million and $0.4 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +(t) Pro-forma earnings per share +The earnings per share amounts for the years ended December 31, 2017 and 2016 have been computed to give effect to the Organizational Transactions, as if they had occurred at the beginning of the earliest period presented, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per share do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO. +(3) Acquisition s +(a) Trican +On March 16, 2016, the Company acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”) for total consideration of $248.1 million , comprised of $199.4 million in cash, $6.0 million in adjustments pursuant to terms of the acquisition agreement to Trican and $42.7 million in Class A and C Units in the Company (the “Trican Transaction”). +The Company accounted for the acquisition of the Acquired Trican Operations using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the acquisition have been recorded based on their fair values. The Company finalized the purchase price allocation in March 2017 and recorded the measurement period adjustments noted in the following table. +92 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table summarizes the fair value of the consideration transferred for the acquisition of the Acquired Trican Operations and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the acquisition date of the Acquired Trican Operations: +Total Purchase Consideration: +(Thousands of Dollars) +Preliminary Purchase Price Allocation +Adjustments +Final Purchase Price Allocation +Cash consideration +$ +199,400 +$ +— +$ +199,400 +Net working capital purchase price adjustment +6,000 +— +6,000 +Class A and C Units issued +42,669 +— +42,669 +Total consideration +$ +248,069 +$ +— +$ +248,069 +Accounts receivable +$ +37,377 +$ +— +$ +37,377 +Inventories +20,006 +(202 +) +19,804 +Prepaid expenses +7,170 +— +7,170 +Property and equipment +205,546 +(413 +) +205,133 +Intangible assets +3,880 +— +3,880 +Total identifiable assets acquired +273,979 +(615 +) +273,364 +Accounts payable +(12,630 +) +469 +(12,161 +) +Accrued expenses +(9,524 +) +(9,524 +) +Current maturities of capital lease obligations +(1,594 +) +— +(1,594 +) +Capital lease obligations, less current maturities +(2,386 +) +— +(2,386 +) +Other non-current liabilities +(1,372 +) +— +(1,372 +) +Total liabilities assumed +(27,506 +) +469 +(27,037 +) +Goodwill +1,596 +146 +1,742 +Total purchase price consideration +$ +248,069 +$ +— +$ +248,069 +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill was primarily attributable to expected synergies and the assembled workforce, and was allocated in its entirety to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible. +93 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following: +Estimated useful life +(in Years) +Fair value +(Thousands of Dollars) +Customer contracts +1.8 +$ +3,500 +Non-compete agreements +2.0 +50 +Fracking Fluids +4.8 +330 +Total intangible assets +$ +3,880 +Weighted average life of finite-lived intangibles +2.1 +For the valuation of the customer relationship intangible asset, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s cost of equity. +The non-compete agreements intangible asset was valued using the “lost income” approach including the probability of competing. Estimated cash flows were discounted at the weighted average cost of capital due to the low risk profile of this contract. The term of the non-compete agreement is two years from the closing date of the Trican Transaction. +As part of the acquisition of Trican’s U.S. Operations, the Company obtained the right to use certain proprietary fracking-related fluids, including MVP FracTM and TriVertTM (the “Fracking Fluids”), for its own pressure pumping services to its customers. The Fracking Fluids were valued using the “income-based relief-from-royalty” method. Under this method, revenues expected to be generated by the technology are multiplied by a selected royalty rate. The estimated after-tax royalty revenue stream is then discounted to present value using the Company’s cost of equity. +The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors. +The remaining amount of working capital purchase adjustment of $1.5 million , which was recorded as a payable on the date of acquisition, was reversed into income on the consolidated and combined statements of operations and comprehensive (loss) as part of the gain on the Trican indemnification settlement . This did not result in any adjustment to the purchase accounting, as the settlement occurred after the twelve-month measurement period was completed. See Note (19) Related Party Transactions for further details. +94 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following unaudited pro forma information assumes the acquisition of the Acquired Trican Operations occurred on January 1, 2015. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2016, or any operating efficiencies or inefficiencies that resulted from the acquisition of the Acquired Trican Operations. The information is not necessarily indicative of the results that would have been achieved had the Company controlled the Acquired Trican Operations during the period presented. The pro forma information does not include any integration or transactions costs that the Company incurred related to the acquisition in the periods following the period presented. +(Thousands of Dollars) +Unaudited +Year Ended +December 31, 2016 +Revenue +$ +464,036 +Net Income +$ +(217,313 +) +The Company’s consolidated and combined statement of operations and comprehensive loss include revenue (unaudited) of $191.0 million and gross profit (unaudited) of $10.4 million from the Acquired Trican Operations from the date of acquisition on March 16, 2016 to December 31, 2016. +(b) RockPile +On July 3, 2017 (the “RockPile Acquisition Date”), the Company acquired 100% of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the U.S. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment. +The acquisition of RockPile was completed for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in owners’ equity in the consolidated and combined balance sheet, was calculated using the closing price of the Company’s common stock on July 3, 2017, of $16.29 , discounted by 7.9% to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. +Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount did not exceed $2.30 . The “CVR Payment Amount” was the difference between (a) $19.00 and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty ( 20 ) trading days randomly selected by the Company during the thirty ( 30 ) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount was agreed to be reduced on a dollar for dollar basis if the sum of the following exceeds $165.0 million : +• +(i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus +• +(ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus +95 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +• +(iii) the Aggregate CVR Payment Amount. +In early April 2018, in accordance with the terms and conditions of the CVR Agreement, the Company calculated and paid the final Aggregate CVR Payment Amount, due to the RockPile Holders, of $19.9 million and recognized a loss of $13.2 million during the year ended December 31, 2018 in other income (expense), net in the consolidated statement of operations and comprehensive income. +The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The Company finalized the purchase price allocation in June 2018. Of the measurement period adjustments noted in the following table, $11.3 million were recorded in 2017 and $2.4 million were recorded in 2018. +The following table summarizes the fair value of the consideration transferred for the acquisition of RockPile and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the RockPile Acquisition Date: +Total Purchase Consideration: +Preliminary Purchase Price Allocation +Adjustments +Final Purchase Price Allocation +(Thousands of Dollars) +Cash consideration +$ +123,293 +$ +(6,717 +) +$ +116,576 +Equity consideration +130,290 +— +130,290 +Contingent consideration +11,962 +— +11,962 +Less: Cash acquired +(20,379 +) +20,379 +— +Total purchase consideration, less cash acquired +$ +245,166 +$ +13,662 +$ +258,828 +Trade and other accounts receivable +$ +57,117 +$ +1,484 +$ +58,601 +Inventories, net +2,853 +138 +2,991 +Prepaid and other current assets +13,630 +(717 +) +12,913 +Property and equipment, net +157,654 +8,653 +166,307 +Intangible assets +20,967 +(1,267 +) +19,700 +Notes receivable +250 +(250 +) +— +Other noncurrent assets +363 +(57 +) +306 +Total identifiable assets acquired +252,834 +7,984 +260,818 +Accounts payable +(38,999 +) +16,180 +(22,819 +) +Accrued expenses +(22,161 +) +(13,315 +) +(35,476 +) +Deferred revenue +(23,053 +) +698 +(22,355 +) +Other non-current liabilities +(827 +) +(2,412 +) +(3,239 +) +Total liabilities assumed +(85,040 +) +1,151 +(83,889 +) +Goodwill +77,372 +4,527 +81,899 +Total purchase price consideration +$ +245,166 +$ +13,662 +$ +258,828 +96 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The goodwill in this acquisition was primarily attributable to expected synergies and new customer relationships and was allocated in its entirety to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years . +Intangible assets related to the acquisition of RockPile consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Customer contracts +10.8 +$ +19,700 +Total +$ +19,700 +For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole. +For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component. +The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile’s operations with that of the Company, including retention bonuses and severance payments. Harmonization costs consist of expenses incurred in connection with aligning RockPile’s accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +(Thousands of Dollars) +Transaction Type +Year Ended +December 31, 2017 +Location +Deal costs +$ +513 +Cost of services +Deal costs +6,166 +Selling, general and administrative expenses +Integration +214 +Cost of services +Integration +1,124 +Selling, general and administrative expenses +Harmonization +656 +Selling, general and administrative expenses +$ +8,673 +The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events +97 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +that occurred after July 2, 2017 or any operating efficiencies or inefficiencies that resulted from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented. Pro forma net loss for the year ended December 31, 2017 includes $0.8 million of non-recurring retention bonuses associated with the acquisition, which were incurred after the closing and $1.8 million of compensation costs associated with the executives of RockPile whom the Company retained. In addition, the Company incurred $2.2 million of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing. +(Thousands of Dollars) +Unaudited +Year Ended December 31, +2017 +2016 +Revenue +$ +1,732,279 +$ +543,966 +Net loss +(49,348 +) +(203,383 +) +Net loss per share (basic and diluted) +$ +(0.44 +) +$ +(2.12 +) +Weighted-average shares outstanding (basic and diluted) +111,939 +96,112 +The Company’s consolidated and combined statement of operations and comprehensive income for 2017 includes revenue (unaudited) of $192.2 million and gross profit (unaudited) of $29.8 million , from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017. +(c) Asset Acquisition from Refinery Specialties, Incorporated +On July 24, 2018, the Company executed a purchase agreement with Refinery Specialties, Incorporated (“RSI”) to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $35.4 million , inclusive of an $0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds the Company received in connection with a fire that resulted in damage to a portion of one of the Company’s fleets (for further details see Note ( 7 ) Property and Equipment, net ) . The Company also assumed operating leases for light duty vehicles in connection with the RSI transaction and RSI entered into a non-compete arrangement in turn with the Company. In September 2018, the Company, and RSI reached an agreement to refund the Company $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $34.6 million , and the Company incurred $0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $35.0 million . +The Company accounted for this acquisition as an asset acquisition pursuant to ASU 2017-01 and allocated the purchase price of the acquisition plus the transactions costs amongst the acquired hydraulic horsepower and related support equipment, as the fair value of the acquired hydraulic horsepower and related support equipment represented substantially all of the fair value of the gross assets acquired in the asset acquisition with RSI. +98 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(4) Intangible Assets +The intangible assets balance in the Company’s consolidated and combined balance sheets represents the fair value, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2018 +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +8.3 +$ +67,600 +$ +(27,755 +) +$ +39,845 +Non-compete agreements +7.3 +700 +(362 +) +338 +Trade name +Indefinite life +10,200 +— +10,200 +Technology +1.8 +2,262 +(741 +) +1,521 +Total +$ +80,762 +$ +(28,858 +) +$ +51,904 +(Thousands of Dollars) +December 31, 2017 +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +9.1 +$ +68,600 +$ +(23,049 +) +$ +45,551 +Non-compete agreements +8.1 +750 +(360 +) +390 +Trade name +Indefinite life +10,200 +— +10,200 +Technology +2.1 +3,023 +(1,884 +) +1,139 +Total +$ +82,573 +$ +(25,293 +) +$ +57,280 +Amortization expense related to the intangible assets for the years ended December 31, 2018 , 2017 and 2016 was $6.3 million , $7.1 million and $5.7 million , respectively. +Amortization for the Company’s intangible assets, excluding the trade name that has an indefinite useful life and in-process software, over the next five years, is as follows: +Year-end December 31, +(Thousands of Dollars) +2019 +$ +5,402 +2020 +5,278 +2021 +4,996 +2022 +4,973 +2023 +4,973 +99 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(5) Goodwill +The changes in the carrying amount of goodwill for the years ended December 31, 2018 , 2017 and 2016 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2016 +$ +50,478 +Acquisitions +84,489 +Goodwill as of December 31, 2017 +134,967 +Acquisitions +(2,443 +) +Goodwill as of December 31, 2018 +$ +132,524 +The changes in the carrying amount of goodwill for the year ended December 31, 2018 and 2017 consisted of purchase price adjustments related to the acquisition of RockPile. For additional information, see Note (3) ( Acquisition s). There were no triggering events identified and no impairment recorded since inception and for the years ended December 31, 2018 , 2017 and 2016 . +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2018 and December 31, 2017 : +(Thousands of Dollars) +December 31, +2018 +December 31, +2017 +Sand, including freight +$ +14,697 +$ +11,551 +Chemicals and consumables +6,250 +7,940 +Materials and supplies +14,722 +13,946 +Total inventory, net +$ +35,669 +$ +33,437 +Inventories are reported net of obsolescence reserves of $1.0 million and $0.3 million as of December 31, 2018 and 2017 , respectively. The Company recognized $0.7 million , $0.3 million and $0.02 million of obsolescence expense during the years ended December 31, 2018 , 2017 and 2016 . +( 7 ) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2018 and December 31, 2017 : +(Thousands of Dollars) +December 31, +2018 +December 31, +2017 +Land +$ +4,771 +$ +5,186 +Building and leasehold improvements +32,134 +30,322 +Office furniture, fixtures and equipment +7,691 +6,338 +Machinery and equipment +1,041,212 +773,516 +1,085,808 +815,362 +Less accumulated depreciation +(562,813 +) +(372,617 +) +Construction in progress +8,324 +25,255 +Total property and equipment, net +$ +531,319 +$ +468,000 +100 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The machinery and equipment balance as of December 31, 2018 and 2017 included $10.0 million of hydraulic fracturing equipment under capital lease. The machinery and equipment balance as of December 31, 2018 and 2017 also included approximately $11.2 million and $5.1 million , respectively, of vehicles under capital leases. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was $9.3 million and $8.3 million as of December 31, 2018 and 2017 , respectively. Accumulated depreciation for the vehicles under capital leases was $7.9 million and $1.6 million as of December 31, 2018 and 2017 , respectively. +All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations and comprehensive income (loss). +The following summarizes the proceeds received and (gains) losses recognized on the disposal of certain assets for the years ended December 31, 2018 , 2017 and 2016 : +Year ended December 31, 2018 +During the year ended December 31, 2018 , the Company divested the following assets: +• +idle field operations facility in Mathis, Texas, acquired as part of the Acquired Trican Operations, for net proceeds of $1.1 million and a net loss of $2.7 million , within the Corporate segment; +• +early disposals of hydraulic fracturing pump components for a net loss of $3.5 million . The loss on these early disposals were offset by the salvage values of transmission cores from failed transmissions. These assets were within the Completion Services segment; and +• +various immaterial assets for net proceeds of $3.2 million and a net gain of $1.2 million . These assets primarily consisted of hydraulic tractors and light general-purpose vehicles within the Completion Services and Corporate segments. +As of December 31, 2018, the Company classified various immaterial assets, primarily consisting of tractors within the Completions segment, as assets held for sale, in anticipation of closing on the sale in the first quarter of 2019. The Company ceased depreciation of these assets. The Company did not recognize a loss upon classification of these assets as held for sale. +Year ended December 31, 2017 +During the year ended December 31, 2017 , the Company divested the following assets: +• +Idle facility in Searcy, Arkansas, acquired in the acquisition of the Acquired Trican Operations, for net proceeds of $0.5 million and a net loss of $0.6 million , within the Corporate segment; +• +Idle facility in Woodward, Oklahoma, acquired in the acquisition of the Acquired Trican Operations, for net proceeds of $2.4 million and a net gain of $0.5 million , within the Completion Services segment; +• +Air compressor units for net proceeds of $0.9 million and a net gain of $0.9 million , within the Other Services segment; +• +Twelve workover rigs, acquired in the acquisition of RockPile, for net proceeds of $16.7 million with no (gain) or loss, within the Other Services segment; +• +Hydraulic fracturing operating equipment for a net loss of $0.6 million , within the Completions segment; and +• +Idle coiled tubing assets for net proceeds of $10.0 million and a net gain of $3.5 million , within the Other Services segment. +101 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Year Ended December 31, 2016 +During the year ended December 31, 2016 , the Company divested various immaterial assets for net proceeds of $0.7 million and a net gain of $0.4 million , primarily within the Completions Services segment. +Casualty Loss +On July 1, 2018, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. The Company received $18.1 million of insurance proceeds for replacement cost of the damaged equipment, which offset the $3.2 million impairment loss recognized on the damaged equipment. The resulting gain of $14.9 million was recognized in other income (expense), net in the consolidated and combined statements of operations and comprehensive income. +( 8 ) Long-Term Debt +Long-term debt at December 31, 2018 and December 31, 2017 consisted of the following: +(Thousands of Dollars) +December 31, +2018 +December 31, +2017 +2017 Term Loan Facility +$ +— +$ +283,202 +2018 Term Loan Facility +348,250 +— +Capital leases +10,516 +7,918 +Less: Unamortized debt discount and debt issuance costs +(7,527 +) +(8,173 +) +Total debt, net of unamortized debt discount and debt issuance costs +351,239 +282,947 +Less: Current portion +(7,704 +) +(4,436 +) +Long-term debt, net of unamortized debt discount and debt issuance costs, including capital leases +$ +343,535 +$ +278,511 +Below is a summary of the Company’s credit facilities outstanding as of December 31, 2018 : +(Thousands of Dollars) +2017 ABL Facility (1) +2018 Term Loan Facility (1) +Original facility size +$ +300,000 +$ +350,000 +Outstanding balance +$ +— +$ +348,250 +Letters of credit issued +$ +2,500 +$ +— +Available borrowing base commitment +$ +183,985 +n/a +Interest Rate (2) +LIBOR or base rate plus applicable margin +LIBOR or base rate plus applicable margin +Maturity Date +December 22, 2022 +May 25, 2025 +(1) For detailed discussion on the Company’s outstanding credit facilities, see “Liquidity and Capital Resources” under Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +(2) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00% floor. +102 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Maturities of the 2018 Term Loan Facility for the next five years are presented below: +(Thousands of Dollars) +Year-end December 31, +2019 +$ +3,500 +2020 +3,500 +2021 +3,500 +2022 +3,500 +2023 +3,500 +$ +17,500 +Deferred Charges and Other Costs +Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges are capitalized and amortized using the effective interest method and netted against the carrying amount of the related borrowing. The amortization is recorded in interest expense in the consolidated and combined statements of operations and comprehensive income (loss). Amortization expense related to the capitalized deferred charges for the years ended December 31, 2018 , 2017 and 2016 was $3.1 million , $5.2 million , and $4.2 million , respectively. +On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility were $7.6 million . Deferred charges associated with the 2018 Term Loan Facility that were capitalized upon recognition of the 2018 Term Loan Facility were $9.0 million . Unamortized deferred charges associated with the 2018 Term Loan Facility were $7.5 million as of December 31, 2018 and are recorded in long-term debt, net of unamortized deferred charges and unamortized debt discount, less current maturities on the consolidated and combined balance sheets. +Deferred charges associated with the 2017 ABL Facility that were capitalized upon recognition of the 2017 ABL Facility were $4.7 million . The deferred financing costs related to the 2016 ABL Facility that remained unamortized when the 2016 ABL Facility was replaced with the 2017 ABL Facility was $1.0 million and is being amortized over the life of the 2017 ABL Facility. Unamortized deferred charges associated with the 2017 and 2016 ABL Facilities were $4.0 million and $5.0 million as of December 31, 2018 and 2017 , respectively, and are recorded in other noncurrent assets on the consolidated and combined balance sheets. +Unamortized deferred charges associated with the Company’s capital leases were $0.01 million and $0.02 million as of December 31, 2018 and 2017 . +Interest expense during the year ended December 31, 2017 included $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred charges, incurred in connection with the Company’s refinancing of its 2016 ABL Facility and the Company’s early debt extinguishment of its 2016 Term Loan Facility and the Senior Secured Notes in 2017. +Capital Leases +The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2019 and 2022. +The Company leases fracturing equipment under a capital lease with CIT. This lease has a lease term of 60 months and interest rate of 4.73% per annum. Total remaining principal balance outstanding on this lease as +103 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +of December 31, 2018 and 2017 was $2.6 million and $4.5 million , respectively. Total interest expense incurred on this lease was $0.2 million , $0.3 million and $0.3 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +The Company leased certain machinery and equipment under a capital lease with FNB that expired in 2018. Total remaining principal balance outstanding on this lease as of December 31, 2018 and 2017 was nil and $0.02 million , respectively. Total interest expense incurred on this lease was less than $0.01 million for the years ended December 31, 2018 , 2017 and 2016 . +As part of the acquisition of Trican’s U.S. Operations, the Company assumed capital leases for light weight vehicles with ARI Financial Services Inc. The lease terms on the vehicles range from 36 to 60 months and interest rates range from 2.25% to 3.75% . In 2018, the Company leased additional light weight vehicles with ARI Financial Services, Inc. The new vehicle leases have terms of 48 months and interest rates ranging from 3.48% and 4.98% . The total outstanding capital lease obligation on these leases as of December 31, 2018 and 2017 was $7.7 million and $3.0 million , respectively. Total interest expense incurred on these leases was $0.3 million , $0.04 million and $0.01 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +The Company leases light weight vehicles under capital leases with Enterprise Fleet Trust. The vehicle leases have terms of 48 months and an interest rate of 8.5% . The total outstanding capital lease obligation for the vehicles leased from Enterprise Fleet Trust as of December 31, 2018 and 2017 was $0.2 million and $0.3 million , respectively. Total interest incurred for the years ended December 31, 2018 , 2017 and 2016 was $0.02 million , $0.01 million and nil , respectively. +Depreciation of assets held under capital leases is included within depreciation expense. See Note ( 7 ) Property and Equipment, net for further details. +Future annual capital lease commitments, including the interest component but excluding the unamortized deferred charges component, as of December 31, 2018 for the next five years are listed below: +Year-end December 31, +(Thousands of Dollars) +2019 +$ +5,484 +2020 +2,652 +2021 +2,430 +2022 +883 +2023 +— +Subtotal +11,449 +Less amount representing interest +(933) +$ +10,516 +104 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(9) Significant Risks and Uncertainties +The Company operates in two reportable segments: Completion Services and Other Services, with significant concentration in the Completion Services segment. During the years ended December 31, 2018 , 2017 and 2016 , sales to Completion Services customers represented 98% , 99% and 98% of the Company’s consolidated revenue, respectively. During the years ended December 31, 2018 , 2017 and 2016 , sales to Completion Services customers represented 101% , 99% and 212% of the Company’s consolidated gross profit, respectively. +The Company depends on its customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which in turn, is affected by current and expected levels of oil and natural gas prices. Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove the industry into a downturn. Recent events have provided upward momentum for energy prices. With the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. active rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, the Company continued to experience increased demand for our services during 2018. +For the year ended December 31, 2018 , revenue from three customers individually represented more than 10% and collectively represented 39% of the Company’s consolidated revenue. For the year ended December 31, 2017 , no customer individually represented more than 10% of the Company’s consolidated revenue. For the year ended December 31, 2016 , revenue, three customers individually represented more than 10% and collectively represented 48% of the Company’s consolidated revenue. +For the year ended December 31, 2018 , purchases from two suppliers represented approximately 5% to 10% of the Company’s overall purchases. For the year ended December 31, 2017 , purchases from one supplier represented approximately 5% to 10% of the Company’s overall purchases, respectively. The costs for each of these suppliers were incurred within the Completion Services segment. +(10) Derivatives +Holdco II uses interest-rate-related derivative instruments to manage its variability of cash flows associated +with changes in interest rates on its variable-rate debt. +On May 25, 2018, the Company entered into the 2018 Term Loan Facility, which has an initial aggregate principal amount of $350 million , and repaid its pre-existing 2017 Term Loan Facility. The 2018 Term Loan Facility has a variable interest rate based on LIBOR, subject to a 1.0% floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately 50% of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility. +On June 22, 2018, the Company unwound its existing interest rate swaps and received $3.2 million in proceeds. The Company used the $3.2 million of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a 1% floor, and makes payments based on a fixed rate of 2.625% . The new interest rate swap is effective through March 31, 2025 and has a notional amount of $175.0 million . The new interest rate swap was designated in a new cash flow hedge relationship. +The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At the time hedge accounting was discontinued, the exiting interest rate swaps had $3.5 million of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive +105 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap. +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments +Derivatives +not +designated as +hedging +instruments +Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2018: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +— +— +— +— +— +Other current liability +(129 +) +— +(129 +) +— +(129 +) +Other noncurrent liability +(169 +) +— +(169 +) +— +(169 +) +As of December 31, 2017: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +324 +— +324 +— +324 +Other current liability +(254 +) +— +(254 +) +— +(254 +) +Other noncurrent liability +— +— +— +— +— +(1) +With all of the Company’s financial trading counterparties, agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) +There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2018 +2017 +2016 +Location +Amount of gain (loss) recognized in other comprehensive income on derivative +$ +(880 +) +$ +791 +$ +(1,784 +) +OCI +Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) (“AOCI”) into earnings +697 +(72 +) +(603 +) +Interest Expense +Amount of loss reclassified from AOCI into earnings as a result of originally forecasted transaction becoming probable of not occurring +— +(100 +) +(3,038 +) +Interest Expense +The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss). +There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2018 , $0.7 million of net gains will be reclassified from accumulated other comprehensive income into earnings within the next 12 months. +106 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under ASC 815, “Derivative Financial Instruments,” (in thousands of dollars): +Year Ended December 31, +Description +Location +2018 +2017 +2016 +Gains (loss) on interest contracts +Interest expense +$ +— +$ +(367 +) +$ +240 +See Note ( 11 ) ( Fair Value Measurements and Financial Information ) for further information related to the Company’s derivative instruments. +( 11 ) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and capital lease obligations. As of December 31, 2018 and 2017 , the carrying values of the Company’s financial instruments, included in its consolidated and combined balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 as of December 31, 2018 and 2017 . +Recurring Fair Value Measurement +At December 31, 2018 , the one financial instrument measured by the Company at fair value on a recurring bases was its interest rate derivative, and as of December 31, 2017 , the two financial instruments measured by the Company at fair value on a recurring basis were its interest rate derivatives and the Aggregate CVR Payment Amount related to the acquisition of RockPile. +The fair market value of the derivative financial instrument reflected on the consolidated and combined balance sheets as of December 31, 2018 and 2017 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +The fair market value of the Aggregate CVR Payment Amount reflected on the consolidated and combined balance sheet as of December 31, 2017 of $6.7 million was determined using a Monte Carlo option pricing model that considered various assumptions, including the Company’s stock price, the length of the holding period and discount for volatility. The maturity date of the CVR Agreement was April 3, 2018, with the final settlement amount calculated and paid at $19.9 million . +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2018 and 2017 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2018 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +$ +— +$ +— +$ +— +$ +— +Liabilities: +Aggregate CVR Payment +$ +— +$ +— +$ +— +$ +— +Interest rate derivatives +(298 +) +— +(298 +) +— +107 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Fair value measurements at reporting date using +December 31, 2017 +Level 1 +Level 2 +Level 3 +Assets: +Interest rate derivative +$ +70 +$ +— +$ +70 +$ +— +Liabilities: +Aggregate CVR Payment +6,665 +— +6,665 +— +Non-Recurring Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the Acquired Trican Operations, RockPile and RSI were recorded at their fair values on the date of acquisition. See Note (3) Acquisition s for further details. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +In 2018 and 2017 , the Company determined there were no events that would indicate the carrying amount of its indefinite-lived assets and long-lived assets may not be recoverable, and as such, no impairment charge was recognized. +In 2016, the Company recorded an impairment charge of $0.2 million associated with the non-compete agreement within its Other Services segment. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposit with financial institutions totaled $80.2 million and $96.1 million as of December 31, 2018 and 2017 , respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 days or less. Significant customers are those that individually account for greater than 10% of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2018 , trade receivables from three customers individually represented more than 10% and collectively represented 49% of the Company’s total accounts receivable. As of December 31, 2017 , trade receivables from one customer individually represented more than 10% of the Company’s total accounts receivable, accounting for 17% of total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2018 and 2017 , the Company had $0.5 million in allowance for doubtful accounts, based on specific identification. The Company did no t write-off any +108 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +bad debts during 2017 , but did write-off $0.6 million of bad debt in 2018 , in connection with its litigation with Halcon Operating Co., Inc. and Halcon Energy Properties. For further detail, see Note ( 18 ) Commitments and Contingencies . +( 12 ) Stock-Based Compensation +As of December 31, 2018 , the Company has four types of equity-based compensation under its Equity and Incentive Award Plan: (i) deferred stock awards for three executive officers, (ii) restricted stock awards issued to independent directors, (iii) restricted stock units issued to executive officers and key management employees and (iv) non-qualified stock options issued to executive officers. The Company has reserved 7,734,601 shares of its common stock for awards that may be issued under the Equity and Incentive Award Plan. +For details on the Company’s accounting policies for determining stock-based compensation expense, see Note ( 2 ) Summary of Significant Accounting Policies : (l) Stock-based compensation . Non-cash stock compensation expense is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). +The following table summarizes equity-based compensation costs for the years ended December 31, 2018 , 2017 and 2016 (in thousands of dollars): +Year Ended December 31, +2018 +2017 +2016 +Class B Interests +$ +— +$ +— +$ +1,984 +Deferred stock awards +4,280 +4,280 +— +Restricted stock awards +611 +399 +— +Restricted stock units +9,822 +4,766 +— +Non-qualified stock options +2,453 +1,133 +— +Equity-based compensation cost +$ +17,166 +$ +10,578 +$ +1,984 +Tax benefit (1) +(4,134 +) +(2,532 +) +— +Equity-based compensation cost, net of tax +$ +13,032 +$ +8,046 +$ +1,984 +(1) +Prior to 2017, the Company was organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to the Company’s members and included in their tax returns. +(a) 2016 Class B Interests - Management Incentive Plan +On March 16, 2016, the Company canceled all outstanding Class C units issued under its Class C Management Incentive Plan (the “Class C Plan”) and issued Class B units under the Keane Management Holdings LLC Management Incentive Plan (“Class B Plan”). Using an applicable conversion ratio specific to each participant, the Company issued 83,529 Class B units to former participants in the Class C Plan, of which 80,784 were fully vested upon issuance. The remaining 2,745 were subject to vesting based on the same time-based schedule that applied under a participant’s canceled Class C award agreement, subject to the participant’s continued employment, without regard to the achievement of any performance objectives that applied under the Class C units. In addition, on March 16, 2016, the Company issued 2,353 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The grant date fair value of the Class B units issued on March 16, 2016 was $98.97 . +The Company accounted for the exchange of Class C units for Class B units as a modification. In accordance with the requirements of ASC 718, “Compensation - Stock Compensation,” the Company calculated +109 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +incremental fair value on the difference between the fair value of the modified award and the fair value of the original award immediately prior to the modification. The incremental fair value related to vested units was recognized immediately as compensation expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards was recognized as compensation expense over the remaining vesting period. +During the second quarter of 2016, the Company issued 1,177 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $98.97 per Class B unit on the date of grant. +During the fourth quarter of 2016, the Company issued 6,471 Class B units to members of the board of directors of the Company (the “Board of Directors”) and 7,647 to other management personnel. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $73.20 per Class B unit on the date of grant. +The Company used the Option-Pricing Method to value Class B units. Since the Company’s equity was not publicly traded, expected volatility was estimated based on the volatility of similar entities with publicly traded equity. The risk-free rate for the expected term of the units was based upon the observed yields of U.S. Treasury financial instruments interpolated to match the expected time to liquidity. The Company also calculated the discount for lack of marketability using the Finnerty protective put model. The time to liquidity was based upon the expected time to a successful liquidity event. +As described in Note ( 1 ) Basis of Presentation and Nature of Operations , in order to effectuate the IPO, the Company completed the Organizational Transactions, which resulted in the Existing Owners contributing all of their direct and indirect equity interests in Keane Group to Keane Investor. +The Company recognized $2.0 million of non-cash compensation expense into income related to the Company’s Class B Plan in the year ended December 31, 2016 and nil in the years ended December 31, 2017 and 2018 . As all vested and unvested membership units were contributed to Keane Investor, which is not a subsidiary of the Company, on January 20, 2017, the Company did not recognize any additional non-cash compensation expense associated with unvested membership units. +(b) Deferred stock awards +Upon consummation of the IPO, the executive officers of the Company identified in the table below became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the “Compensation Committee”) of the Board of Directors approved, and each executive officer agreed, that in lieu of the executive officer’s cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company’s common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts +First +Second +James C. Stewart +$ +1,975,706 +$ +1,975,706 +Gregory L. Powell +$ +1,646,422 +$ +1,646,422 +M. Paul DeBonis Jr. +$ +658,569 +$ +658,569 +110 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017. +The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018. The second stock bonus vested January 1, 2019, with an original payout date of February 15, 2019, that was amended in February 2019 to a payout date of March 4, 2019. For the years ended December 31, 2018 and 2017 , the Company recognized $4.3 million of non-cash stock compensation expense into earnings. As of December 31, 2018 , total unamortized compensation cost related to unvested deferred stock awards was nil . +(c) Restricted stock awards +O n January 20, 2017, upon consummation of the IPO, the Class B units issued to the independent members of the Board of Directors under the Class B Plan were converted into 114,580 restricted shares of the Company’s common stock. +Restricted stock awards granted in 2017 and 2018 have a three-year vesting period and one-year vesting period, respectively, provided that the participant does not incur a termination before the applicable vesting date. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested. +This exchange of Class B units for restricted stock was treated as a modification of awards classified as equity under ASC 718, as the Company viewed the transaction as an exchange of the original award for a new award. To measure the compensation cost associated with the modification of the equity-classified awards, the Company calculated the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fair value immediately following the modification was $0.3 million , which is being expensed as non-cash stock compensation expense into earnings over the vesting period. +For the years ended December 31, 2018 and 2017 , the Company recognized $0.6 million and $0.4 million , respectively, of non-cash stock compensation expense into income. As of December 31, 2018 , total unamortized compensation cost related to unvested restricted stock awards was $0.7 million , which the Company expects to recognize over the remaining weighted-average period of 0.78 years . +Rollforward of restricted stock awards as of December 31, 2018 is as follows: +Number of Restricted Stock Awards +Weighted average grant date fair value +Total non-vested at December 31, 2017 +95,335 +$ +20.51 +Shares issued +42,936 +14.17 +Shares vested +(44,507 +) +20.93 +Shares forfeited +— +— +Non-vested balance at December 31, 2018 +93,764 +$ +17.40 +(d) Restricted stock units +Restricted stock units are stock awards that vest over a one- to three-year service period. +For the years ended December 31, 2018 and 2017 , the Company recognized $9.8 million and $4.8 million , respectively, of non-cash stock compensation expense into earnings. As of December 31, 2018 , total unamortized +111 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +compensation cost related to unvested restricted stock units was $20.3 million , which the Company expects to recognize over the remaining weighted-average period of 1.88 years . +Rollforward of restricted stock units as of December 31, 2018 is as follows: +Number of Restricted Stock Units +Weighted average grant date fair value +Total non-vested at December 31, 2017 +1,099,620 +$ +14.62 +Units issued +1,509,937 +14.97 +Units vested +(412,944 +) +14.55 +Actual units forfeited +(249,860 +) +15.22 +Non-vested balance at December 31, 2018 +1,946,753 +$ +14.83 +(e) Non-qualified stock options +Stock options granted in 2017 and 2018 have a three -year vesting period, provided that the participant does not incur a termination before the applicable vesting date. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the six -year anniversary from the grant date. +For the years ended December 31, 2018 and 2017 , the Company recognized $2.5 million and $1.1 million , respectively, of non-cash stock compensation expense into earnings. As of December 31, 2018 , total unamortized compensation cost related to unvested stock options was $4.6 million , which the Company expects to recognize over the remaining weighted-average period of 1.88 years. +Rollforward of stock options as of December 31, 2018 is as follows: +Number of Stock Options +Weighted average grant date fair value +Total outstanding at December 31, 2017 +589,977 +$ +6.16 +Options granted +647,768 +7.28 +Options exercised +— +— +Actual options forfeited +(18,728 +) +6.68 +Options expired +— +— +Total outstanding at December 31, 2018 +1,219,017 +$ +6.75 +There were 196,657 stock options exercisable or vested at December 31, 2018 . +112 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Assumptions used in calculating the fair value of the stock options granted during the year are summarized below: +2018 Options Granted +2017 Options Granted +Valuation assumptions: +Expected dividend yield +0 +% +0 +% +Expected equity volatility +46.3 +% +51.5 +% +Expected term (years) +6 +6 +Risk-free interest rate +2.7 +% +1.6 +% +Weighted average: +Exercise price per stock option +$ +15.31 +$ +19.00 +Market price per share +$ +15.31 +$ +14.49 +Weighted average fair value per stock option +$ +7.28 +$ +6.16 +( 13 ) Stockholders’ Equity +(a) Certificate of Incorporation +The Company was formed as a Delaware corporation on October 13, 2016. The Company’s certificate of incorporation provides for (i) the authorization of 500,000,000 shares of common stock with a par value of $0.01 per share and (ii) the authorization of 50,000,000 shares of undesignated preferred stock with a par value of $0.01 per share that may be issued from time to time by the Company’s Board of Directors in one or more series. +Each holder of the Company’s common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company’s common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions. +(b) Keane Group Holdings Recapitalization +As described in Note ( 1 ) Basis of Presentation and Nature of Operations , the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of 1,000,000 class A units, 176,471 class B units and 294,118 class C units, being converted to an aggregate of 87,428,019 shares of the Company’s common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate 87,428,019 shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled $453.8 million . The Company recorded $0.9 million of par value common stock and the remaining $452.9 million as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group’s retained deficit as of January 20, 2017 of $296.7 million . +113 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(c) Initial Public Offering +As described in Note ( 1 ) Basis of Presentation and Nature of Operations , on January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The net proceeds of the IPO to the Company was $255.5 million , which were used to fully repay Holdco II’s term loan balance of $99.0 million and the associated prepayment penalty of $13.8 million , and repay $50.0 million of its 12% secured notes due 2019 and the associated prepayment penalty of approximately $0.5 million . The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value. +(d) RockPile Acquisition +As described in Note (3) Acquisition s, the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of $116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights, as described in Note (3) Acquisition s . The fair value of the Acquisition Shares was calculated using the closing price of the Company’s common stock on July 3, 2017, of $16.29 , discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had 111,831,176 shares of common stock outstanding. +(e) Vesting of Stock Awards +During the year ended December 31, 2018 , 513,613 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of certain RSUs and deferred stock awards. Shares withheld during the period were immediately retired by the Company. +(f) Secondary Offerings +On January 17, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor, pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $ 18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor controlled 50.8% of the Company’s outstanding common stock. During the December 31, 2018 , the Company incurred $13.0 million of transaction costs on behalf of the selling stockholder, which were included within selling, general and administrative expenses in the consolidated and combined statement of operations and comprehensive income. +In February 2018, the Company filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, a selling stockholder sold 5,251,249 of the Company’s common stock at a price to the public of $11.02 per share. In conjunction with this offering, the Company repurchased 520,000 shares. The Company did not sell any common stock in, and did not receive any of the proceeds from, this offering. As a result of this offering, Keane Investor owned approximately 49.6% of the Company’s outstanding common stock, and the Company ceased being a “controlled company” within the meaning of the NYSE rules. +114 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(g) Stock Repurchase +During the year ended December 31, 2018 , the Company settled $105.0 million of total share repurchases of its common stock at an average price of $12.93 per share, representing a total of 8,111,764 common shares of the Company. As of December 31, 2018 , the Company had approximately $88.3 million remaining for future share repurchases under its existing stock repurchase program. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100.0 million . Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. Of the total amount of shares repurchased in 2018, 1,248,440 shares and 520,000 shares were repurchased from White Deer Energy (as defined herein) and Keane Investor, respectively. The shares repurchased from Keane Investor were not repurchased under the Company’s existing stock repurchase program. For further details of these related-party transactions, see Note (19) Related Party Transactions . +(14) Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss in the equity section of the consolidated and combined balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items +Interest rate +contract +AOCI +December 31, 2017 +$ +(2,507 +) +$ +779 +$ +(1,728 +) +Net income (loss) +2,621 +(697 +) +1,924 +Other comprehensive loss +(114 +) +(880 +) +(994 +) +December 31, 2018 +$ +— +$ +(798 +) +$ +(798 +) +The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended December 31, 2018 , 2017 and 2016 (in thousands of dollars): +Affected line item +in the consolidated and combined +statements of +operations and +comprehensive income (loss) +Year Ended December 31, +2018 +2017 +2016 +Interest rate derivatives, hedging +$ +697 +$ +(172 +) +$ +(3,641 +) +Interest expense +Foreign currency items +(2,621 +) +— +— +Other income +Total reclassifications +$ +(1,924 +) +$ +(172 +) +$ +(3,641 +) +(15) Earnings per Share +Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +115 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows: +Year Ended December 31, +2018 +2017 +2016 +Numerator: +Net income (loss) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +Denominator: +Basic weighted-average common shares outstanding (1) +109,335 +106,321 +87,313 +Dilutive effect of restricted stock awards granted to Board of Directors +17 +36 +— +Dilutive effect of deferred stock award granted to NEOs +214 +— +— +Dilutive effect of RSUs granted under stock incentive plans +94 +135 +— +Dilutive effect of options granted under stock incentive plans +— +— +— +Diluted weighted-average common shares outstanding (2) +109,660 +106,492 +87,313 +(1) +The basic weighted-average common shares outstanding for the years ended December 31, 2017 and 2016 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Company’s Existing Owners’ membership interests for the newly-created ownership interests. +(2) +As a result of the net loss incurred by the Company for the years ended December 31, 2017 and 2016 , the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Operating Leases +The Company has certain operating leases related to its real estate, rail cars and light duty vehicles. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on the Company by the leasing agreements with regard to asset dispositions or borrowing ability. Some lease arrangements include renewal and purchase options or escalation clauses. In addition, certain lease contracts include rent holidays, rent concessions and leasehold improvement incentives. Leasehold improvements made at the inception of a lease or during the lease term are amortized over the remaining period of 13 months to 40 years . +Rental expense for operations, excluding daily rentals and reimbursable rentals, was $13.1 million , $11.8 million and $9.2 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. During the years ended December 31, 2018 and 2017 , the Company recognized $1.2 million and $0.6 million , respectively, of rental expense related to non-cancelable sale-leasebacks on 68 Peterbilt tractors acquired during the RockPile acquisition that expire in 2020. Future minimum lease payments include $0.3 million related to the sale-leasebacks. +116 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Sublease proceeds for the year ended December 31, 2018 was $0.05 million , related to the subleased properties of the office space the Company vacated in 2017 and the Company’s Canadian operations. Sublease proceeds for the years ended December 31, 2017 and 2016 were $0.3 million , all of which related to the subleased properties of the Company’s Canadian operations. The Canadian sublease proceeds were recorded as a reduction of the Company’s Canadian operations’ exit costs liability. +Minimum lease commitments remaining under operating leases, excluding early termination buyouts, for the next five years are $58.0 million , as listed below: +Year-end December 31, +(Thousands of Dollars) +2019 +$ +26,327 +2020 +18,017 +2021 +5,688 +2022 +4,795 +2023 +3,172 +Total +$ +57,999 +The Company had three long-term operating leases in Canada that expired in 2018. +The Company assumed several real estate operating leases in connection with the acquisition of the Acquired Trican Operations. In an effort to consolidate its facilities and to reduce costs, the Company vacated eight of the combined properties and recorded a cease-use liability for the total amount of $8.1 million . Subsequent to the recording of the liability, the Company successfully negotiated exit agreements for four of the properties, resulting in net payments of $2.6 million . In December 2016, due to immediate need for office space, the Company decided to re-enter one of the leases acquired from Trican Well Service, L.P. (“Trican U.S.”) and renegotiated its terms. As a result, the amendment to the lease was accounted for as a new lease, and the cease-use liability associated with the lease in the amount of $2.4 million was reversed through the same line item in the statement of operations where it was previously recognized. In 2017, the Company vacated the outgrown facility and moved into the renegotiated office space and recorded a cease-use liability of $0.5 million . In 2018, the Company executed an early termination option for another property acquired from Trican U.S., resulting in a net payment of $0.2 million . +During the third quarter of 2017, the Company also assumed additional real estate operating leases in connection with the acquisition of Rockpile. As part of a further consolidation of operations, the Company vacated one of these facilities and recorded a cease-use liability of $0.7 million . +Exit costs, including accretion expense, are presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). +The following table presents the roll forward of the cease-use liability: +(Thousands of Dollars) +Beginning balance at January 1, 2018 +$ +1,270 +Exit costs +339 +Cash buyout of lease +(156 +) +Lease amortization and other adjustments +(727 +) +Ending balance at December 31, 2018 +$ +726 +117 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 17 ) Income Taxes +Keane Group Holdings, LLC was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. As a result of the IPO and related Organizational Transactions, Keane Group, Inc. was formed as a corporation to hold all of the operational assets of Keane Group. Because Keane Group, Inc. is a taxable entity, the Company established a provision for deferred income taxes as of January 20, 2017. Accordingly, a provision for federal and state corporate income taxes has been made only for the operations of Keane Group, Inc. from January 20, 2017 through December 31, 2018 in the accompanying consolidated and combined financial statements. +The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions: +(Thousands of Dollars) +Year Ended December 31, +2018 +2017 +2016 +Domestic +$ +66,260 +$ +(35,904 +) +$ +(187,308 +) +Foreign (1) +(2,659 +) +(87 +) +221 +$ +63,601 +$ +(35,991 +) +$ +(187,087 +) +(1) For further discussion on the loss from continuing operations before income taxes associated with the Company’s foreign operations, see Note (21) Wind-down of a Foreign Subsidiary . +The components of the Company’s income tax provision are as follows: +(Thousands of Dollars) +Year Ended December 31, +2018 +2017 +2016 +Current: +Federal +$ +— +$ +— +$ +— +State +5,387 +614 +— +Foreign +31 +— +— +Total current income tax provision +$ +5,418 +$ +614 +$ +— +Deferred: +Federal +(1,031 +) +(536 +) +— +State +(117 +) +72 +(114 +) +Foreign +— +— +— +Total deferred income tax provision +(1,148 +) +(464 +) +(114 +) +$ +4,270 +$ +150 +$ +(114 +) +118 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated and combined statements of operations and comprehensive (loss). The statutory federal tax rate for 2017 and 2016 was 35% prior to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduced the federal corporation rate from 35% to 21%, effective January 1, 2018. The Company’s effective tax rate for 2018 of 6.71% differs from the statutory rate, primarily due to state taxes, and the change in the valuation allowance. The Company’s effective tax rate for 2017 and 2016 was (0.53)% and 0.06% , respectively. +(Thousands of Dollars) +December 31, +2018 +% of Income Before Income Taxes +December 31, +2017 +% of Income Before Income Taxes +December 31, +2016 +% of Income Before Income Taxes +Income tax provision computed at the statutory federal rate +$ +13,356 +21.00 +% +$ +(9,795 +) +35.00 +% +$ +(65,480 +) +35.00 +% +Reconciling items: +State income taxes, net of federal tax benefit +1,408 +2.21 +% +(334 +) +1.19 +% +(114 +) +0.06 +% +Deferred tax asset valuation adjustment +(22,639 +) +(35.59 +)% +(32,593 +) +116.46 +% +— +— +% +Tax rate change +— +— +% +41,591 +(148.61 +)% +— +— +% +Permanent differences +5,237 +8.23 +% +630 +(2.25 +)% +Other +6,908 +10.86 +% +651 +(2.32 +)% +— +— +% +Flow through income not taxable +— +— +% +— +— +% +65,480 +(35.00 +)% +Income tax provision +$ +4,270 +6.71 +% +$ +150 +(0.53 +)% +$ +(114 +) +0.06 +% +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The Company adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent. +119 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2018 +2017 +2016 +Deferred tax assets: +Stock-based compensation +$ +3,979 +$ +2,467 +$ +— +Net operating loss carry-forwards +90,565 +70,745 +— +Accruals and other +4,524 +3,994 +— +Intangibles +— +— +231 +Gross deferred tax assets +99,068 +77,206 +231 +Valuation allowance +(41,779 +) +(65,347 +) +(139 +) +Total deferred tax assets +$ +57,289 +$ +11,859 +$ +92 +Deferred tax liability: +PP&E and intangibles +$ +(56,799 +) +$ +(11,319 +) +$ +— +Prepaids and other +(756 +) +(1,954 +) +— +Total deferred tax liability +(57,555 +) +(13,273 +) +— +Net deferred tax liability +$ +(266 +) +$ +(1,414 +) +$ +92 +As of December 31, 2018 , the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of $412.1 million . Of this amount, $105.3 million related to the Company’s current year federal tax loss, $72.4 million was generated in prior year after the IPO transaction and the remaining $234.4 million was generated prior to the IPO transaction. As part of the IPO transaction (immediately before), the existing owners of Keane Group contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC, who then contributed those interests to the Company in exchange for common stock of the Company. This event constituted a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the acquisition. As of December 31, 2018 , it is expected that the NOLs subject to IRC Section 382 will be available for use during the applicable carryforward period without becoming permanently lost by the Company. The Company’s Section 382 annual limitation is $19.2 million . This annual limitation is available to be carried forward to the following year if not utilized. As the Company realized a taxable loss for the year ended December 31, 2018 , the current year limitation of $19.2 million will be available for use in 2019. As such, the total annual limitation available for use in 2019 will be $56.5 million . The Company’s total NOL carryforward available to reduce federal taxable income in 2019 is $235.3 million . Carryforwards from tax years beginning before January 1, 2018 will begin to expire in 2031, while carryforwards from tax years beginning on or after January 1, 2018 can be carried forward indefinitely. +Included in the Company’s recording of its initial deferred taxes, pursuant to the Organizational Transactions, are deferred tax liabilities related to certain of the Company’s indefinite-lived intangible assets. The deferred tax liability related to these indefinite-lived intangible assets will only reverse at the time of ultimate sale or impairment. At the time of the IPO, due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles could not be considered a source of future taxable income for purposes of determining a valuation allowance, and as such, the deferred tax liability could not be used to support an equal amount of the deferred tax asset. This is often referred to as a “naked credit.” The Company recognized a deferred tax liability of $1.9 million associated with this naked credit upon the IPO. This is presented within other noncurrent liabilities in the consolidated and combined balance sheets. This amount will increase as additional tax amortization is recognized, but will only decrease if the indefinite-lived intangibles are sold, impaired or if the Company establishes indefinite-lived deferred tax assets such as NOLs with an indefinite life under the newly passed Tax Cuts and Jobs Act legislation (the “Tax Act”). In 2018, the Company finalized its analysis of the Tax Act and determined +120 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +that it could use the deferred tax liabilities related to indefinite lived intangibles as a source of income in determining the valuation allowance resulting in a reduction to its net deferred tax liability. +Total net deferred tax liability as of December 31, 2018 and 2017 was $0.3 million and $1.4 million , which was comprised of the naked credit and state tax deferred liabilities. +ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2018 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite lived intangibles. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of Keane Group, Inc., excluding deferred tax liabilities related to certain indefinite lived intangibles. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of December 31, 2018 and 2017 were $41.8 million and $65.3 million , respectively. +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2018 +$ +65,347 +Charge as debit to equity +(929 +) +Charge as (benefit) expense to income tax provision for current year activity +(22,639 +) +Charge as (benefit) expense to income tax provision for change in deferred tax rate +— +Changes to other comprehensive income (loss) +— +Valuation allowance as of December 31, 2018 +$ +41,779 +On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. +The Company evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on its consolidated and combined financial statements as of December 31, 2017. Accordingly, the Company recorded a provision to income taxes for the Company’s assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on the Company’s consolidated and combined financial statements. The Company finalized its analysis of the Tax Act in 2018 and will continue to monitor guidance on provisions of the Tax Act to be issued by taxing authorities to assess the impact on the Company’s consolidated and combined financial statements. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2018 , 2017 and 2016 . The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns and its accruals for tax +121 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2015 through December 31, 2017 for federal tax purposes and for the years ended December 31, 2014 through December 31, 2017 for state tax purposes. +( 18 ) Commitments and Contingencies +As of December 31, 2018 and 2017 , the Company had $4.2 million and $19.8 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $43.6 million and $82.5 million , as of December 31, 2018 and 2017 , respectively. +As of December 31, 2018 , the Company has committed $2.4 million and anticipates committing a further $3.3 million to research and development with its equity-method investee, which is expected to generate economic benefits in 2019. +As of December 31, 2018 , the Company has a letter of credit of $2.5 million under the 2017 ABL Facility, which secures its performance obligations related to the Company’s CIT capital lease. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $107.4 million , $150.0 million and $24.6 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2018 , 2017 and 2016 . +Aggregate minimum commitments under long-term raw material supply agreements for the next five years as of December 31, 2018 are listed below: +(Thousands of Dollars) +Year-end December 31, +2019 +$ +34,495 +2020 +32,803 +2021 +15,863 +2022 +9,300 +2023 +1,600 +$ +94,061 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. In accordance with GAAP, the Company accrues for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on the Company’s best estimate of the expected liability. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations. +122 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company was served with class and collective action claims alleging that the Company failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act (“FLSA”) and state laws. On December 27, 2016, two former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. In the first quarter of 2018, the parties agreed to settle the claims for $4.2 million , which was funded in the fourth quarter of 2018. +The Company was involved in a commercial dispute whereby a former customer commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC. The Company settled this claim for $1.6 million and wrote-off the associated $0.6 million of bad debt on its consolidated and combined balance sheet as of December 31, 2018 . +Additionally, in November 2017, the Company was served with two class or collective claims, captioned Omar Castro v. Keane and Vu Tran v. Keane, both alleging that the Company failed to pay a Texas class of workers an appropriate overtime rate in compliance with the FLSA and state laws. These two claims were consolidated on January 30, 2018 and captioned Vu Tran, et al. v. Keane. After the Company substantially completed its discovery, the Company recognized an estimated liability in the third quarter of 2018, as the occurrence of a loss was probable and reasonably estimable. In the first quarter of 2019, the parties agreed to settle this consolidated claim for $1.0 million . +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Regulatory Audits +In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it will conduct a routine audit of Keane Frac TX, LLC’s direct payment sales tax for the periods of January 2014 through May 2017. As of December 31, 2018, the audit is ongoing; however, the Company currently anticipates that the audit could result in an assessment of $0.8 million , which has been recorded in selling, general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). +(19) Related Party Transactions +Cerberus Operations and Advisory Company, an affiliate of the Company’s principal equity holder, provides certain consulting services to the Company. The Company paid $0.3 million , $0.3 million and $1.0 million during the years ended December 31, 2018 , 2017 and 2016 , respectively. +In connection with the Company’s reorganization, the Company engaged in transactions with affiliates. See Note ( 1 ) ( Basis of Presentation and Nature of Operations ) and Note ( 13 ) ( Stockholders’ Equity ) for a description of these transactions. +123 +In connection with the Company’s research and development initiatives, the Company has engaged in transactions with its equity-method investee. See Note ( 18 ) Commitments and Contingencies for a description of these commitments. As of December 31, 2018 , the Company has purchased $1.7 million of shares in its equity-method investee. +As part of the asset purchase agreement executed for our acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures incurred by the Company to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the asset purchase agreement. On June 12, 2017, the Company and Trican U.S. reached a settlement that resulted in proceeds to the Company of $2.1 million and net gain on settlement to the Company of $3.6 million . Trican, pursuant to its conditional rights under the Company’s Stockholders’ Agreement entered into in connection with the IPO, has appointed its President and Chief Executive Officer to serve as a member of the Board of Directors. +In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million . +On May 29, 2018, the Company repurchased 1,248,440 shares of its common stock from WDE RockPile Aggregate, LLC (“White Deer Energy”) for $ 16.02 per share or $20.0 million . At the time of the RockPile acquisition, the shares of the Company’s common stock that White Deer Energy acquired was valued at $15.00 per share. The Company recognized the entire transaction as treasury stock that was subsequently retired, whereby the RockPile acquisition value of the shares of $18.7 million was recorded against paid-in capital in excess of par value and the remaining $1.3 million was recorded against retained earnings on the consolidated balance sheet as of December 31, 2018 . +During 2018, the Company completed two secondary offerings on behalf of Keane Investor Holdings LLC. For further details, see Note ( 13 ) Stockholders’ Equity : (f) Secondary Offerings. +(20) Retirement Benefits and Nonretirement Postemployment Benefits +Defined Contribution Plan +The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions of up to 3.5% of compensation. Contributions made by the Company related to the years ended December 31, 2018 , 2017 , and 2016 were $6.7 million , $4.0 million and $1.4 million , respectively. +Severance +The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $0.6 million , $2.0 million and $1.6 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +(21) Wind-down of a Foreign Subsidiary +During the first quarter of 2015, the Company’s Canadian operations lost an open bid for the renewal of a customer contract that had been material to the foreign operations in prior years. Due to the loss of this contract, coupled with the unfavorable market conditions driven by low oil prices, management decided to exit wireline operations in Canada and implemented an exit strategy to dispose of the assets of the Canadian operations in multiple phases. +124 +The phases were as follows: +• +Phase 1 included completing the remainder of the customer contract during the first quarter of 2015. +• +Phase 2 included disposing of the physical assets of the Canadian operations by selling them to third parties or transferring them to Keane Frac, LP during the second quarter of 2015. +• +Phase 3 included repatriating $8.0 million CAD ( $6.7 million USD) of cash from Keane Completions CN Corp. +• +Phase 4 included settlement of the outstanding obligations of the Canadian operations. +• +Phase 5 included transitioning the $4.7 million CAD of goodwill related to the Completion Services segment from Keane Completions CN Corp. to Holdco II as of December 31, 2015. +• +Phase 6 included the repatriation of remaining cash and settlement of obligations. This movement decreased the investment in the foreign subsidiary by $2.7 million . +During the fourth quarter of 2018, the Company liquidated its Canadian subsidiary, upon which it recognized a loss of $2.6 million from AOCI into earnings in the consolidated and combined statement of operations and comprehensive income for the year ended December 31, 2018 . +All material costs associated with the wind-down of the Canadian subsidiary were identified and recognized during the year ended December 31, 2015. +The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which were presented as accrued liabilities on the consolidated and combined balance sheets, were as follows for the year ended December 31, 2018 and 2017 : +(Thousands of Dollars) +2018 +2017 +Beginning balance at January 1, +$ +49 +$ +233 +Charges incurred +(4 +) +— +Cash payments net of cash receipts +4 +(214 +) +Currency lease accretion and other adjustments +(49 +) +30 +Total lease obligations, ending balance +$ +— +$ +49 +(22) Business Segments +Management operates the Company in two reporting segments: Completion Services and Other Services. Management evaluates the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. All inter-segment transactions are eliminated in consolidation. +125 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with an operating segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2018 +2017 +2016 +Operations by business segment +Revenue: +Completion Services +$ +2,100,956 +$ +1,527,287 +$ +410,854 +Other Services +36,050 +14,794 +9,716 +Total revenue +$ +2,137,006 +$ +1,542,081 +$ +420,570 +Gross profit (loss): +Completion Services +$ +478,850 +$ +258,024 +$ +8,963 +Other Services +(2,390 +) +1,496 +(4,735 +) +Total gross profit +$ +476,460 +$ +259,520 +$ +4,228 +Operating income (loss): +Completion Services +$ +234,756 +$ +115,691 +$ +(80,563 +) +Other Services +(6,818 +) +(197 +) +(10,156 +) +Corporate and Other +(129,928 +) +(106,225 +) +(58,985 +) +Total operating income (loss) +$ +98,010 +$ +9,269 +$ +(149,704 +) +Depreciation and amortization: +Completion Services +$ +241,169 +$ +141,385 +$ +89,432 +Other Services +4,428 +5,757 +5,087 +Corporate and Other +13,548 +12,138 +6,460 +Total depreciation and amortization +$ +259,145 +$ +159,280 +$ +100,979 +(Gain) loss on disposal of assets +Completion Services +$ +2,925 +$ +948 +$ +(538 +) +Other Services +— +(4,064 +) +(44 +) +Corporate and Other +2,122 +561 +195 +Total (gain) on disposal of assets +$ +5,047 +$ +(2,555 +) +$ +(387 +) +Impairment: +Completion Services +$ +— +$ +— +$ +— +Other Services +— +— +185 +Corporate and Other +— +— +— +Total impairment +$ +— +$ +— +$ +185 +Exit Costs: +Completion Services +$ +506 +$ +— +$ +— +Other Services +— +— +— +Corporate and Other +$ +(167 +) +$ +1,221 +$ +5,696 +126 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Total exit costs +$ +339 +$ +1,221 +$ +5,696 +Income tax provision (1) : +Completion Services +$ +— +$ +— +$ +— +Corporate and Other +(4,270 +) +(150 +) +— +Total income tax: +$ +(4,270 +) +$ +(150 +) +$ +— +Net income (loss): +Completion Services +$ +234,756 +$ +115,691 +$ +(80,563 +) +Other Services +(6,818 +) +(197 +) +(10,156 +) +Corporate and Other +(168,607 +) +(151,635 +) +(96,368 +) +Total net income (loss) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +Capital expenditures (2) : +Completion Services +$ +281,081 +$ +185,329 +$ +21,736 +Other Services +9,510 +1,718 +487 +Corporate and Other +952 +2,582 +1,322 +Total capital expenditures +$ +291,543 +$ +189,629 +$ +23,545 +(1) Income tax provision as presented in the consolidated and combined statement of operations and comprehensive income (loss) does not include the provision for Texas margin tax for 2016. +(2) +Capital expenditures do not include leasehold improvements and net assets from the asset acquisition of RSI on July 24, 2018 of $35.0 million , the business acquisition of RockPile on July 3, 2017 of $116.6 million or the business acquisition of the Acquired Trican Operations on March 16, 2016 of $205.5 million . +(Thousands of Dollars) +December 31, +2018 +December 31, +2017 +Total assets by segment: +Completion Services +$ +894,467 +$ +863,419 +Other Services +20,974 +21,877 +Corporate and Other +139,138 +157,820 +Total assets +$ +1,054,579 +$ +1,043,116 +Total assets by geography: +United States +$ +1,054,550 +$ +1,041,596 +Canada +29 +1,520 +Total assets +$ +1,054,579 +$ +1,043,116 +Goodwill by segment: +Completion Services +$ +132,524 +$ +134,967 +Total goodwill +$ +132,524 +$ +134,967 +127 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(23) Selected Quarterly Financial Data +The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2018 and 2017 . The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. +Year Ended December 31, 2018 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +513,016 +$ +578,533 +$ +558,908 +$ +486,549 +Costs of services (excluding depreciation and amortization, shown separately) +403,408 +447,685 +436,799 +372,654 +Depreciation and amortization +60,051 +59,404 +68,287 +71,403 +Selling, general and administrative expenses +33,884 +24,125 +27,783 +28,466 +(Gain) loss on disposal of assets +769 +3,287 +1,113 +(122 +) +Total operating costs and expenses +498,112 +534,501 +533,982 +472,401 +Operating income +14,904 +44,032 +24,926 +14,148 +Other income (expense), net +(12,989 +) +16 +14,454 +(2,386 +) +Interest expense +(6,990 +) +(14,317 +) +(5,978 +) +(6,219 +) +Total other income (expenses) +(19,979 +) +(14,301 +) +8,476 +(8,605 +) +Income tax income (expense) +(3,168 +) +936 +(2,623 +) +585 +Net income (loss) +$ +(8,243 +) +$ +30,667 +$ +30,779 +$ +6,128 +128 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Year Ended December 31, 2017 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +240,153 +$ +323,136 +$ +477,302 +$ +501,490 +Costs of services (excluding depreciation and amortization, shown separately) +223,992 +278,384 +391,089 +389,096 +Depreciation and amortization +30,373 +32,739 +46,204 +49,964 +Selling, general and administrative expenses +17,986 +22,337 +28,592 +24,611 +(Gain) loss on disposal of assets +(434 +) +(5 +) +302 +(2,418 +) +Total operating costs and expenses +271,917 +333,455 +466,187 +461,253 +Operating income (loss) +(31,764 +) +(10,319 +) +11,115 +40,237 +Other expense (income), net +4 +3,701 +942 +9,316 +Interest expense +(40,361 +) +(4,349 +) +(7,195 +) +(7,318 +) +Total other income (expenses) +(40,357 +) +(648 +) +(6,253 +) +1,998 +Interest expense +(134 +) +(931 +) +(797 +) +1,712 +Net income (loss) +$ +(72,255 +) +$ +(11,898 +) +$ +4,065 +$ +43,947 +( 24 ) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures are required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s current revenue recognition processes or the Company’s consolidated and combined financial statements and did not require any retrospective adjustments to the consolidated and combined financial statements. +In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual periods beginning after December 15, 2017. The Company adopted the +129 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +provisions of ASU 2016-01 effective January 1, 2018. The adoption of these standards did not have an impact on the Company’s consolidated and combined financial statements, as the Company did not have any active hedge accounting relationships as of the adoption date. +During 2016, FASB issued ASU 2016-08, “Principal versus Agent,” ASU 2016-10, “Licenses of Intellectual Property (IP) and Identification of Performance Obligations” and ASU 2016-12, “Narrow Scope Improvements and Practical Expedients”. During 2017, FASB issued ASC 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. All these ASUs are designed to address various issues raised by the constituents to the Transition Resource Group and help minimize diversity in practice in applying ASU 2014-09. The Company adopted these standards concurrently with the adoption of ASU 2014-09 as of January 1, 2018. The adoption of these standards did not have a material impact on the Company’s consolidated and combined financial statements. +In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Asset Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. ASU 2016-16 is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustments will include recognition of the income tax consequences of intra-entity transfers of assets, other than inventory, that occur before the adoption date. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated and combined financial statements, as the Company has minimal intra-entity transfers of qualifying assets. +In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements. +In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements of Financial Instruments - Overall,” to make targeted improvements that addressed certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The targeted improvements address the discontinuation of, adjustments to and transition guidance for equity securities without a readily determinable fair value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities and the measurement of changes in fair value option liabilities denominated in a foreign currency. The Company adopted this standard as of July 1, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements. +In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2018. The Company early adopted this standard effective June 20, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period. +130 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(b) Recently Issued Accounting Standards +In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. Upon adoption of these standards, using the modified retrospective transition method, the Company is anticipating it will recognize a lease right of use asset and lease liability of approximately $61 million on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated statements of operations and comprehensive income (loss) or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. As such the Company has elected to account for the combined components of its customer contracts under ASC 606. +In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost,” and should be accounted for in accordance with ASC 842. ASU 2016-13 and ASU 2019-19 are effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated and combined financial statements. +In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows companies to reclassify from accumulated other comprehensive income (loss) to retained earnings, any stranded tax effects resulting from complying with the Tax Cuts and Jobs Act legislation passed in December 2017. ASU 2018 02 is effective for annual periods beginning after December 15, 2018, and the Company will implement the provisions of this ASU effective January 1, 2019. The Company does not expect the adoption of this standard to impact its consolidated and combined financial statements, as due to the Company’s valuation allowance, there is no net tax effect stranded within accumulated other comprehensive income (loss). +In July 2018, the FASB issued ASU 2018-09, “Codification Improvements,” which made clarifications, correction of errors and minor improvements to ASC 220, “Income Statement - Reporting Comprehensive Income - Overall,” ASC 470-50, “Debt Modifications and Extinguishments,” ASC 480-10, “Distinguishing Liabilities from Equity -Overall,” ASC 718-740, “Compensation - Stock Compensation - Income Taxes,” ASC 805-740, “Business Combinations - Income Taxes,” ASC 815-10, “Derivatives and Hedging - Overall,” ASC 820-10, “Fair Value Measurement - Overall,” ASC 940-405, “Financial Services - Brokers and Dealers - Liabilities,” and ASC 962-325, “Plan Accounting - Defined Contribution to Pension Plans - Investments - Other.” The transition and effective dates +131 +KEANE GROUP, INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +of ASU 2018-09 vary for each amendment. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements, as it only has qualifying transactions that would be impacted by the amendments to ASC 718-740. +In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. The Company does not currently have or anticipate having Level 3 fair value instruments. +In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements. +In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this standard permit use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815. ASU 2018-16 is effective for annual periods beginning after December 15, 2018. The adoption of this standard will not have an impact on the Company's consolidated and combined financial statements as the benchmark interest rate on its only existing interest rate swap is LIBOR. +In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” The amendments in this standard clarified that certain transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. ASU 2018-18 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated and combined financial statements. +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by +132 +this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2018 , based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2018 , our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +During the fourth quarter ended December 31, 2018, we identified and remediated material weaknesses in our internal control over financial reporting related to controls over system access and system journal entry posting. Specifically, we were not able to evidence review of third-party changes to our IT system nor provide evidence that approved manual journal entries outside of the system were the same entries posted in the general ledger. As automated process-level controls and system controls supporting the completeness and accuracy of information derived from our IT system were deemed ineffective, and we did not maintain appropriate controls over the manual journal entries approved outside of the system and the accuracy of such journal entries, we determined there was a reasonable possibility that a material misstatement to our consolidated financial statements would not have been prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represented material weaknesses in our internal control over financial reporting. +The remedial measures taken during the fourth quarter ended December 31, 2018 included implementing procedures and controls to provide adequate evidence demonstrating review and approval of third-party changes to our IT system and to evidence that approved manual journal entries are accurately entered into the general ledger. As of December 31, 2018, these material weaknesses have been fully remediated, and we have determined that our internal control over financial reporting is effective. Additionally, the control deficiencies described above did not result in any misstatements in our consolidated financial statements as of and for the year ended December 31, 2018. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +133 +134 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +135 +Item 11. Executive Compensation +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +136 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +137 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +138 +Item 14. Principal Accountant Fees and Services +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +139 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +Keane Group, Inc. +Audited Consolidated and Combined Financial Statements +Reports of Independent Registered Public Accounting Firm +71 +Consolidated and Combined Balance Sheets +74 +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +76 +Consolidated and Combined Statements of Changes in Owners’ Equity +78 +Consolidated and Combined Statements of Cash Flows +79 +Notes to Consolidated and Combined Financial Statements +81 +Financial Statement Schedules: +The schedules listed in Rule 5-04 of Regulation S-X (17 CFR 210.5-04) have been omitted because they are not applicable or the required information is shown in the consolidated and combined financial statements or notes thereto. +140 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Incorporated by Reference +Exhibit +Number +Exhibit Description +Filed/ +Furnished +Herewith +Form +File No. +Exhibit +Filing +Date +3.1 +Certificate of Incorporation of Keane Group, Inc., including Amendment of Certificate of Incorporation, dated October 13, 2016 +S-1 +333-215079 +3.1 +12/14/16 +3.2 +Bylaws of Keane Group, Inc. +10-K +001-37988 +3.2 +3/21/17 +4.1 +Amended and Restated Stockholders’ Agreement, dated as of July 3, 2017, by and among Keane Group, Inc. and the stockholders named therein +8-K +001-37988 +10.3 +7/3/17 +10.1 +Amended and Restated Asset-Based Revolving Credit Agreement, dated December 22, 2017, by and among Keane Group Holdings, LLC, as the Lead Borrower, Keane Frac LP and KS Drilling, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent +8-K +001-37988 +10.1 +12/28/17 +10.2 +Term Loan Agreement, dated May 25, 2018, by and among Keane Group Inc., as the Parent, Keane Group Holdings, LLC, as the Lead Borrower, the Subsidiary Guarantors party thereto, Barclays Bank PLC, as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto +8-K +001-37988 +10.1 +05/29/18 +10.4 +Keane Management Holdings LLC Management Incentive Plan† +S-1 +333-215079 +10.6 +12/14/16 +10.5 +Keane Group, Inc. Equity and Incentive Award Plan† +10-K +001-37988 +10.4 +3/21/17 +10.6 +Form of Keane Group, Inc. Executive Incentive Bonus Plan† +S-1 +333-215079 +10.8 +12/14/16 +10.7 +Form of Indemnification Agreement† +S-1 +333-215079 +10.9 +12/14/16 +10.8 +Form of Director Services Agreement† +S-1 +333-215079 +10.10 +12/14/16 +10.9 +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James C. Stewart† +S-1 +333-215079 +10.11 +12/14/16 +10.10 +Form of Second Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Gregory L. Powell† +S-1 +333-215079 +10.12 +12/14/16 +141 +10.11 +Form of Second Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and M. Paul DeBonis Jr.† +S-1 +333-215079 +10.13 +12/14/16 +10.12 +Employment Agreement, dated as of October 20, 2016, by and between Keane Group Holdings, LLC and Kevin M. McDonald† +S-1 +333-215079 +10.14 +12/14/16 +10.13 +Employment Agreement, dated as of February 1, 2016, by and between Keane Group Holdings, LLC and Ian J. Henkes† +S-1 +333-215079 +10.16 +12/14/16 +10.14 +Form of Amendment to Employment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Ian J. Henkes† +S-1 +333-215079 +10.18 +12/14/16 +10.15 +Form of Assignment Agreement, by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and Kevin M. McDonald† +S-1 +333-215079 +10.19 +12/14/16 +10.16 +Employment Agreement, dated February 20, 2017, by and between KGH Intermediate Holdco II, LLC and Phung Ngo-Burns† +8-K +001-37988 +10.1 +4/4/17 +10.17 +Employment Agreement, dated as of May 11, 2018, by and between Keane Group, Inc. and Robert W. Drummond† +8-K +001-37988 +10.1 +08/08/18 +10.18 +Keane Value Creation Plan† +S-1 +333-215079 +10.20 +12/14/16 +10.19 +Keane Group, Inc. Form of Restricted Stock Award† +8-K +001-37988 +10.3 +1/26/17 +10.20 +Keane Group, Inc. Form of Deferred Stock Award Agreement† +10-K +001-37988 +10.23 +3/21/17 +10.21 +Form of RSU Award Agreement† +10-Q +001-37988 +10.1 +8/3/17 +10.22 +Form of Non-Qualified Stock Option Award Agreement† +10-Q +001-37988 +10.2 +8/3/17 +10.23 +Keane Group, Inc. Non-Employee Director Compensation Plan† +10-Q +001-37988 +10.2 +8/1/18 +10.24 +Keane Group, Inc. Form of Restricted Stock Award Agreement for Non-Employee Directors† +10-Q +001-37988 +10.3 +8/1/18 +10.25 +Keane Group, Inc. Form of Restricted Stock Unit Award Agreement† +10-Q +001-37988 +10.4 +8/1/18 +10.26 +Keane Group, Inc. Form of Non-Qualified Stock Option Award Agreement† +10-Q +001-37988 +10.5 +8/1/18 +10.27 +Form of Amendment to Keane Group, Inc. Restricted Unit Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald† +10-Q +001-37988 +10.6 +8/1/18 +10.28 +Form of Amendment to Keane Group, Inc. Non-Qualified Stock Option Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald† +10-Q +001-37988 +10.7 +8/1/18 +142 +10.29 +Form of Keane Group, Inc. Equity and Incentive Award Plan Amendment to Deferred Stock Award Agreement† +* +21.1 +Schedule of Subsidiaries of Keane Group, Inc. +* +23.1 +Consent of KPMG LLP, Independent Registered Public Accounting Firm +* +31.1 +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +* +31.2 +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +* +32.1 +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +** +101.INS +XBRL Instance Document +* +101.SCH +XBRL Taxonomy Extension Schema Document +* +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +* +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +* +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +* +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +* +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** Furnished herewith. +Item 16. Form 10-K Summary +None. +143 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 27, 2019 . +Keane Group, Inc. +(Registrant) +By: +/s/ Robert W. Drummond +Robert W. Drummond +Chief Executive Officer and Director +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Robert W. Drummond +Chief Executive Officer and Director +(Principal Executive Officer) +February 27, 2019 +Robert W. Drummond +/s/ Gregory L. Powell +President and Chief Financial Officer +(Principal Financial Officer) +February 27, 2019 +Gregory L. Powell +/s/ Phung Ngo-Burns +Chief Accounting Officer +(Principal Accounting Officer) +February 27, 2019 +Phung Ngo-Burns +/s/ James C. Stewart +Executive Chairman +February 27, 2019 +James C. Stewart +/s/ Marc G. R. Edwards +Lead Director +February 27, 2019 +Marc G. R. Edwards +/s/ Lucas N. Batzer +Director +February 27, 2019 +Lucas N. Batzer +/s/ Dale M. Dusterhoft +Director +February 27, 2019 +Dale M. Dusterhoft +144 +/s/ Christian A. Garcia +Director +February 27, 2019 +Christian A. Garcia +/s/ Lisa A. Gray +Director +February 27, 2019 +Lisa A. Gray +/s/ Gary M. Halverson +Director +February 27, 2019 +Gary M. Halverson +/s/ Shawn Keane +Director +February 27, 2019 +Shawn Keane +/s/ Lenard B. Tessler +Director +February 27, 2019 +Lenard B. Tessler +/s/ Elmer D. Reed +Director +February 27, 2019 +Elmer D. Reed +/s/ Scott Wille +Director +February 27, 2019 +Scott Wille +145 \ No newline at end of file diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/filing_metadata.csv b/raw/filings/0001688476/2018/0001688476-19-000005/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..619ee171080be22ad3d12546d367ec7c04172ecd --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2019-02-27,2018-12-31,2019-02-27T21:20:00.000Z,0001688476-19-000005,a201810-kxdoc.htm,10-K,17043078,1,0,https://www.sec.gov/Archives/edgar/data/1688476/000168847619000005/a201810-kxdoc.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847619000005/,2018,2018,1 diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/item1.txt b/raw/filings/0001688476/2018/0001688476-19-000005/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..3f229ade1af83705c6a28b2b6ef7bebd60be4e31 --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/item1.txt @@ -0,0 +1,77 @@ +Item 1. Business +General description of the business +Founded in 1973, Keane Group, Inc. is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. Through organic growth and five opportunistic acquisitions between 2013 and 2018, we operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation, with approximately 1.4 million hydraulic horsepower spread across 29 hydraulic fracturing fleets, 34 wireline trucks, 24 cementing pumps and other ancillary assets. We distinguish ourselves through three key principles: (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all stakeholders. +In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with a platform to commence wireline operations in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we acquired the majority of the U.S. assets and assumed certain liabilities of Trican U.S. (the “Acquired Trican Operations”), resulting in the expansion of our hydraulic fracturing operations to include approximately 950,000 hydraulic horsepower, increased scale in key operating basins, an expansion in our customer base and significant cost reduction opportunities. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide engineering solutions. In July 2017, we acquired RockPile, resulting in an increase in our pumping capacity by more than 25% and an expansion of our presence in the Permian Basin and Bakken Formation. We also acquired a high-quality customer base, expanded our service offerings and capabilities within our Other Services segment and integrated certain members of RockPile’s high caliber management team. In 2018, we acquired approximately 90,000 hydraulic horsepower from RSI. Additionally, in 2018, we completed the purchase of approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets. +In December 2018, we completed the wind-down of Keane Completions CN Corp, which was formed when we acquired the wireline technologies division of Calmena Energy Services. +We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions and ancillary services; and Other Services, including our cementing division and ancillary services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +Other Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones of our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. +Ancillary services in the Other Services segment include our idled drilling services. +Business strategy +Our principal business objective is helping our customers maximize production, while delivering safe, high quality and efficient services. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in driving efficiencies, including our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2019 , see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +5 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. F or the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 48% of our consolidated revenue and 42% of our total accounts receivable for the fiscal year ended December 31, 2016. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the U.S., and the competitive landscape varies in each. Our major competitors for hydraulic fracturing services, which make up the majority of our revenues, include C&J Energy Services, Inc., FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. We also compete regionally with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +Intellectual property +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +6 +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. +Employees +As of December 31, 2018 , we had 2,833 employees, of which, approximately 79% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Environmental regulation +Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. +7 +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are +8 +subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service. +Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third- +9 +party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Safety and health regulation +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate of 0.37 in 2018, which is substantially less than the industry average of 1.54 from 2013 to 2017. We believe total recordable incident rate is a reliable measure of safety performance. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand. +Although it is not possible to estimate the financial and compliance impact of proposed rules, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims. +Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal +10 +losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +11 \ No newline at end of file diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/item13.txt b/raw/filings/0001688476/2018/0001688476-19-000005/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..934932b0b05b9e655253edffb877c8a6a071e2dd --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders, which is expected to be filed in April 2019. +138 \ No newline at end of file diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/item9a.txt b/raw/filings/0001688476/2018/0001688476-19-000005/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..86b4810559903d709318f2ba8616b5599c0e14ea --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by +132 +this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2018 , based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2018 , our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +During the fourth quarter ended December 31, 2018, we identified and remediated material weaknesses in our internal control over financial reporting related to controls over system access and system journal entry posting. Specifically, we were not able to evidence review of third-party changes to our IT system nor provide evidence that approved manual journal entries outside of the system were the same entries posted in the general ledger. As automated process-level controls and system controls supporting the completeness and accuracy of information derived from our IT system were deemed ineffective, and we did not maintain appropriate controls over the manual journal entries approved outside of the system and the accuracy of such journal entries, we determined there was a reasonable possibility that a material misstatement to our consolidated financial statements would not have been prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represented material weaknesses in our internal control over financial reporting. +The remedial measures taken during the fourth quarter ended December 31, 2018 included implementing procedures and controls to provide adequate evidence demonstrating review and approval of third-party changes to our IT system and to evidence that approved manual journal entries are accurately entered into the general ledger. As of December 31, 2018, these material weaknesses have been fully remediated, and we have determined that our internal control over financial reporting is effective. Additionally, the control deficiencies described above did not result in any misstatements in our consolidated financial statements as of and for the year ended December 31, 2018. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/rp_note.txt b/raw/filings/0001688476/2018/0001688476-19-000005/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2018/0001688476-19-000005/rpt_disclosure.txt b/raw/filings/0001688476/2018/0001688476-19-000005/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..08c681473b91595a0409ec8b35f0c675e1fbea89 --- /dev/null +++ b/raw/filings/0001688476/2018/0001688476-19-000005/rpt_disclosure.txt @@ -0,0 +1,83 @@ +Related Person Transactions +Certain Related Party Transactions +We paid COAC, an affiliate of +Cerberus, fees totaling approximately $0.3 million during 2018 for consulting services provided in connection with improving the Company’s operations. We may retain COAC to provide similar services in the future. +Several of our board members are employees of Cerberus, and funds managed by one or more affiliates of Cerberus indirectly own a substantial portion of our equity +through their ownership of Keane Investor. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, +approval or ratification of “Related Party Transactions” by the independent members of the Audit Committee. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship +or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed +$120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was +(1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family +member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or +principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s spouse, parents, stepparents, +children, stepchildren, siblings, mothers- and fathers-in-law, sons- and +daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s +home, other than a tenant or employee. +Prior to the Company entering into any Related Party Transaction, such Related Party Transaction will be reported to our +General Counsel who will report the same to the Audit Committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the Audit Committee, including a summary of +material facts. The Audit Committee will review the material facts of all Related Party Transactions which require the Audit Committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions +described below. If advance notice of a Related Party Transaction has been given to the Audit Committee and it is not possible to convene a meeting of the Audit Committee, then the chairman of the Audit Committee will consider whether the Related +Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the Audit +2019 Proxy Statement | 47 +Table of Contents +Committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the Audit Committee. In the event the Audit Committee does not ratify any such Related +Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the Audit Committee, or its chairman, as applicable, will +consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction +without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related +Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the Audit Committee (or, if it is not practicable for the company to wait for the Audit Committee to consider the matter, +the chairman of the Audit Committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related +Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the Audit Committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy +pursuant to the authority delegated in this paragraph. The Audit Committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the Audit Committee and will take, or recommend to +our board of directors, any action the Audit Committee deems appropriate. +No member of the Audit Committee or director of our board will participate in any +discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the Audit Committee member or board director will provide all material information concerning the Related Party Transaction to the Audit +Committee. +If a Related Party Transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to follow in its ongoing +dealings with the Related Party. Thereafter, the Audit Committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the Audit Committee’s guidelines and +that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s +interests in the transaction. As appropriate for the circumstances, the Audit Committee or its chairman, as applicable, will review and consider: +● +the Related Party’s interest in the Related Party Transaction; +● +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related +Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +● +whether the transaction is being undertaken in the ordinary course of business of the Company; +● +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the +Company than terms that could have been reached with an unrelated third party; +● +the purpose of, and the potential benefits to the Company of, the Related Party Transaction; +● +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +● +whether the proposed transaction includes any potential reputational risk issues for the Company which may arise as a +result of or in connection with the Related Party Transaction; +● +whether the proposed transaction would violate any requirements of the Company’s financing or other material +agreements; and +● +any other relevant information regarding the Related Party Transaction or the Related Party. +48 | Keane Group, Inc. +Table of Contents +The Audit Committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the +Audit Committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the Company. The Audit Committee, in its sole discretion, may impose such conditions as it deems appropriate +on the Company or the Related Party in connection with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The Audit Committee has determined that the following transactions will be deemed pre-approved or ratified and will not require +review or approval of the Audit Committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the Audit Committee. +● +Any employment by the Company of an executive officer of the Company or any of its subsidiaries if the related compensation +conforms with our Company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +● +Any compensation paid to a director of our board if the compensation is consistent with the Company’s bylaws and any +compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the Company require +review by our board of directors and/or approval of a Related Party Transaction, the Audit Committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of +directors for the board’s use in its consideration of a given Related Party Transaction. \ No newline at end of file diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/filing.txt b/raw/filings/0001688476/2019/0001688476-20-000017/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..fbd545a0d3987b93d45e4cd399d754cb09a32658 --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/filing.txt @@ -0,0 +1,7060 @@ +Document +false --12-31 FY 2019 0001688476 106627 0.01 0.01 500000000 500000000 104188000 212410000 0 0 0 0 0 0 61000000 P40Y P5Y P10Y P13M P3Y P13M 0 P3Y P1Y P2Y P3Y P3Y P3Y 26.41 19.09 0.732 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+us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMember +frac:WellSupportServicesMember +us-gaap:SubsequentEventMember +2020-03-09 +2020-03-09 +utreg:hp +iso4217:USD +xbrli:shares +frac:vote +xbrli:shares +iso4217:USD +xbrli:pure +frac:fleet +frac:executive_officer +frac:rig +frac:segment +frac:type +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, DC 20549 +FORM +10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2019 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _____ to _____ +Commission File Number 001-37988 +NexTier Oilfield Solutions Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware +38-4016639 +(State or other jurisdiction +of incorporation or organization) +(I.R.S. Employer +Identification No.) +3990 Rogerdale Rd +Houston +Texas +77042 +(Address of principal executive offices) +(Zip code) +( 713 ) 325-6000 +(Registrant’s telephone number, including area code) +Not Applicable. +(Former Name, Former Address, if Changed Since Last Report) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Trading Symbol +Name of Each Exchange On Which Registered +Common Stock, $0.01 par value +NEX +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 28, 2019 , was approximately $ 353.0 million . +As of March 9, 2020 , the registrant had 213,193,419 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2020 Annual Meeting of Stockholders, which will be filed with the United States Securities and Exchange Commission within 120 days of December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K. +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +15 +Item 1B. +Unresolved Staff Comments +38 +Item 2. +Properties +39 +Item 3. +Legal Proceedings +40 +Item 4. +Mine Safety Disclosures +40 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +42 +Item 6. +Selected Financial Data +45 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +47 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +67 +Item 8. +Financial Statements and Supplementary Data +68 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +128 +Item 9A. +Controls and Procedures +129 +Item 9B. +Other Information +130 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +131 +Item 11. +Executive Compensation +132 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +133 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +134 +Item 14. +Principal Accountant Fees and Services +135 +PART IV +Item 15. +Exhibits and Financial Schedules +136 +Item 16. +Form 10-K Summary +140 +Signatures +141 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• our business strategy; +• our plans, objectives, expectations and intentions; +• our future operating results; +• the competitive nature of the industry in which we conduct our business, including pricing pressures; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• the impact of pipeline capacity constraints; +• the impact of adverse weather conditions; +• the effects of government regulation; +• legal proceedings, liability claims and effect of external investigations; +• the effect of a loss of, or the financial distress of, one or more key customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• our ability to maintain the right level of commitments under our supply agreements; +• the market price and availability of materials or equipment; +• the impact of new technology; +• our ability to employ a sufficient number of skilled and qualified workers; +• our ability to obtain permits, approvals and authorizations from governmental and third parties; +• planned acquisitions and future capital expenditures; +• our ability to maintain effective information technology systems; +• our ability to maintain an effective system of internal controls over financial reporting; +• our ability to service our debt obligations; +• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital; +1 +• the market volatility of our stock; +• our ability or intention to pay dividends or to effectuate repurchases of our common stock; +• the impact of ownerships by Keane Investor and Cerberus; and +• the impact of our corporate governance structure. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +References Within This Annual Report +As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “NexTier,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our initial public offering (“IPO”), and, for periods as of and following the IPO, NexTier Oilfield Solutions Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term “RockPile” refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term “RSI” refers to Refinery Specialties, Incorporated; (viii) the term “Keane Investor” refers to Keane Investor Holdings LLC; (ix) the term “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds; (x) the term “C&J” refers to C&J Energy Services, Inc.; (xi) the term “C&J Merger” refers to the consummation of the transactions described in that certain Agreement and Plan of Merger, dated as of June 16, 2019 (the “Merger Agreement”), by and among the C&J, us and King Merger Sub Corp., one of our wholly owned subsidiaries. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by approximately 45,000 hydraulic horsepower. +2 +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +On January 25, 2017, we consummated an initial public offering. Our business prior to the IPO was conducted through Keane Group Holdings, LLC and its consolidated subsidiaries (“Keane Group”). To effectuate the IPO, we completed a series of transactions that resulted in a reorganization of our business, resulting in Keane Group, Inc. as a holding company with no material assets other than its ownership of Keane Group. The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of RockPile (as defined herein). The consolidated and combined financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +For further details, see Note ( 1 ) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisition s. +Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data disclosed in Part II, “ Item 6 . Selected Financial Data” and Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflect the consolidated business and operations of Keane Group. Financial results for 2016 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company’s predecessor for accounting purposes, as there was no activity under Keane Group, Inc. in 2016. +All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. +3 +PART I +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +In continuation of our growth through acquisition strategy - which, since 2013 has notably resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 1,040,000 hydraulic horsepower - on October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into one of our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” +Following the C&J Merger, we are organized into three reportable segments, consisting of: +• +Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; +• +Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services; and +• +Well Support Services, which consists of the following business lines: (1) rig services; (2) fluids management services; and (3) specialty well site services. +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for +4 +collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services unbundled from our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States and provide premium perforating services for both wireline and tubing-conveyed applications. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +Well Support Services segment +On March 9, we sold our Well Support Services Segment. For additional information on this transaction, see Note (24) Subsequent Events of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover. Maintenance services provided with our rig fleet were generally required throughout the life cycle of an oil or gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing +5 +and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services were generally less complicated than completion and workover related services and required less time to perform. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. These plugging and abandonment services generally required auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services was not significantly impacted by the demand for oil and gas because well operators are required within a specified period of time by state regulations to plug wells that are no longer productive. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. Included in our fleet of fluid trucks and trailers were specialized trucks and trailers that were optimized to transport condensate. We also owned private saltwater disposal wells. Demand and pricing for our fluids management services generally corresponded to demand for our rig services. +Business strategy +Our principal business objective is helping our customers win by safely unlocking affordable, reliable and plentiful sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in driving efficiencies, including our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2020 , see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2019, we had four customers who individually represented more than 10% of our consolidated revenue. These four customers collectively represented 55% of our consolidated revenue and 21% of our total accounts receivable for the fiscal year ended December 31, 2019. F or the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. We provide services in various geographic regions across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have from time to time been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., +6 +Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. Our major competitors for our Well Support Services include Key Energy Services, Basic Energy Services, Superior Energy Services, Precision Drilling, Forbes Energy Services, Pioneer Energy Services and Ranger Energy Services. We also compete regionally in each segment with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. For the year ended December 31, 2019, purchases from one supplier represented approximately 5% to 10% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art research and technology center staffed by a team of highly skilled engineers. Our efforts to date have been focused on developing innovative, fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, provide cost savings to our operations and add value for our customers. Our research and development initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +7 +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Employees +As of December 31, 2019 , we had 6,525 employees, of which, approximately 77% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Environmental, health and safety regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and +8 +analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”), and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into state waters or waters of the United States. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. CWA program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA, but subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require +9 +persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratorium on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +10 +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +11 +Recently, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities, which could have a material adverse effect on our business and results of operations. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for the oil and natural gas our customers produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climatic changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our assets and operations. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate of 0.68 in 2019, which is substantially less than the industry average of 1.07 from 2015 to 2018. We believe total recordable incident rate is a reliable measure of safety performance. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which requires the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely +12 +impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +In addition, some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +13 +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +14 +Item 1A. Risk Factors +RISK FACTORS +An investment in our securities involves a variety of risks. In addition to the other information included or incorporated by reference in this annual report, the following risk factors should be carefully considered, as they could have a significant adverse impact on our business, financial condition and results of operations. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. In addition, the global economic climate amplifies many of these risks. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Risks Related to Our Industry +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry predominately in the United States, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources located predominantly in the United States (“U.S.”). The willingness of our customers to undertake these activities depends largely upon prevailing industry and financial market conditions that are influenced by numerous factors over which we have no control, including: +• +prices and expectations about future prices for oil and natural gas; +• +domestic and foreign supply of, and demand for, oil and natural gas and related products; +• +the level of global and domestic oil and natural gas inventories; +• +the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the U.S. and the areas in which we operate; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the availability of adequate pipeline, storage and other transportation capacity; +• +lead times associated with acquiring equipment and products and availability of qualified personnel; +• +the rates at which new oil and natural gas reserves are discovered; +• +federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +• +the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• +geopolitical developments, political instability and recent (and potential future) armed hostilities in oil and natural gas producing countries; +• +actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil price and production controls; +15 +• +advances in exploration, development and production technologies or in technologies affecting energy consumption; +• +the price and availability of alternative fuels and energy sources; +• +disruptions due to natural disasters, unexpected or extreme weather conditions, public health crises (such as coronavirus) and similar factors; +• +merger and divestiture activity amongst oil and natural gas producers; +• +uncertainty in capital and commodities markets and the ability of oil and natural gas producers and oil and natural gas midstream operators to raise equity capital and debt financing; +• +investor and activist focus on corporate social responsibility and sustainability; and +• +U.S. federal, state and local and non-U.S. governmental regulations and taxes. +The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices, the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers, and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. During periods of declining oil and natural gas prices, or when pricing remains depressed, our customer base may experience significant declines in drilling, completion and production activities, which in turn may result in reduced utilization and increased competition and pricing pressure to varying degrees across our service lines and operating areas. +Historically, prices for crude oil and natural gas have been extremely volatile, and these prices are expected to experience continued volatility. For example, since 2014, crude oil prices have ranged from a high of $107.95 per barrel in 2014 to a low of $44.48 per barrel in late December 2018. During 2019, NYMEX crude oil prices ranged from approximately $46.31 to $66.24 per barrel, with natural gas prices ranging from $1.75 per million British thermal units (“MMbtu”) to $4.25 per MMbtu. Continued price volatility for oil and natural gas is expected during 2020. +Worldwide military, political and economic events, including initiatives by OPEC, affect both the demand for, and the supply of, oil and natural gas. Weather conditions, governmental regulation (both in the United States and elsewhere), levels of consumer demand, commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels), fuel conservation measures, the availability of pipeline capacity and other factors that will be beyond our control may also affect the supply of, demand for, and price of oil and natural gas. This, in turn, could result in lower demand for our services and cause lower pricing and utilization levels for our services. +16 +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. Our operations and the operations of our customers may be adversely affected by seasonal weather conditions, severe weather events and natural disasters. For example, periods of drought, hurricanes, tropical storms, heavy snow, ice or rain may result in customer delays and other disruptions to our services, including availability of key products such as sand and water. Repercussions of adverse weather conditions may include: +• +curtailment of services; +• +weather-related damage to facilities and equipment, resulting in delays in operations; +• +inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; +• +increase in the price of key products or insurance; and +• +loss of productivity. +Competition and availability of excess equipment within the oilfield services industry may adversely affect our ability to market and price our services. +The oilfield services industry is highly competitive. The principal competitive tactics in our markets are generally price, technical expertise, the availability and condition of equipment, work force capability, safety record, reputation and experience. Furthermore, as a result of this competition, available equipment in the markets in which one or more of our product lines competes at times may exceed the demand for such equipment. This excess supply of equipment may result from many factors, including without limitation, a low commodity price environment, increase in the construction of new equipment, or reactivation and improvement of existing equipment. Excess capacity may result in (1) substantial competition for a diminishing amount of demand and/or (2) significant price competition, which could have a material adverse effect on our results of operations, financial condition and prospects. +The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Some of our competitors may have greater resources and/or name recognition, which could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. In addition, our industry has experienced recent consolidation through mergers and acquisitions, which could lead to increased resources and capabilities for our competitors. There may also be new companies that enter our business, or re-enter our business with significantly reduced indebtedness following emergence from bankruptcy, or our existing and potential future customers may develop their own oilfield solutions. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate. +We periodically seek to increase prices of our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in raising or maintaining our existing prices. Even if we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Accordingly, high competition and excess equipment in the market can cause us to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the +17 +future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our services. +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• +equipment defects; +• +vehicle accidents; +• +fires, explosions and uncontrollable flows of gas or well fluids; +• +unusual or unexpected geological formations or pressures and industrial accidents; +• +blowouts; +• +cratering; +• +loss of well control; +• +collapse of the borehole; and +• +damaged or lost drilling and well completions equipment. +Catastrophic or significantly adverse events can occur at well sites where we conduct our operations, including blow outs resulting in explosions, fires, personal injuries, property damage, pollution, clean-up responsibility and regulatory responsibility. In response, we typically require indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid or be financially unable to meet their obligations, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and could have a material adverse effect on our business, financial condition, prospects and results of operations. +Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities and personnel to well sites. Our safety procedures may not always prevent such damages. Our insurance coverage or coverage of applicable vendors and service providers may be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations and cash flows. +In addition, our services could become a source of spills or releases of fluids, including chemicals used during activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability, reputation and relationships with customers, employees and regulators. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +18 +Competition among oilfield service and equipment providers is affected by each provider’s reputation for environmental impact, safety and quality. +Our activities are subject to a wide range of national, state and local environmental, occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these environmental, health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unsatisfactory, which could cause us to lose customers and substantial revenue. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, areas that are not in attainment with air quality standards, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including potential emissions affecting clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, +19 +limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of or restrictions in permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of or restrictions in permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues. +We are subject to requirements imposed by the EPA, U.S. Department of Transportation, U.S. Nuclear Regulatory Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution, and protect worker health and safety. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the requirement to comply with emission control and fuel quality regulations could result in increased costs. +In addition, as part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of nonhazardous and hazardous wastes. The generation, handling, transportation, and disposal of these fluids, substances, and wastes are regulated by a number of laws, including CERCLA, RCRA, the Clean Water Act, the SDWA and analogous state laws. Under RCRA, the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes are regulated. RCRA currently exempts many oil and gas exploration and production wastes from classification as hazardous waste. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations, and it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. +Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. Moreover, certain of these environmental laws impose joint and several, strict liability even though our conduct in performing such activities was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties was the basis for such liability. In addition, environmental laws and regulations are subject to frequent change and if existing laws, regulatory requirements or enforcement policies were to change in the future, we may be required to make significant unanticipated capital and operating expenditures. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. +20 +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substances Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +If the EPA or another federal or state agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. In December 2016, the EPA issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont, states in which we have no operations, have banned or are in the process of banning the use of high-volume hydraulic fracturing. Alternatively, some municipalities are considering or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations, if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. +Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +21 +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to emissions of greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Additionally, increasing political and social attention to global climate change has resulted in pressure upon shareholders, financial institutions and/or financial markets to modify their relationships with oil and gas companies and to limit investments and/or funding to such companies, which could increase our costs or otherwise adversely affect our business and results of operations. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations, including regulation of motor carriers by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements imposed by highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +We could be negatively impacted by the recent outbreak of coronavirus (COVID-19). +In light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), this public health concern could pose a risk to our employees, our customers, our vendors and the communities in which we operate, which could negatively impact our business. The extent to which the coronavirus (COVID-19) may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time. We may experience an impact to the timing and availability of key products from suppliers, customer shutdowns to prevent spread of the virus, employee impacts from illness, school closures and other community response measures, all of which could negatively impact our business. We continue to monitor the situation and may adjust our current policies and practices as more information and guidance become available. +Risks Related to Our Recent Merger +22 +We may not be able to retain customers or suppliers or customers or suppliers may seek to modify contractual obligations with us, which could have an adverse effect on our business and operations. Third parties may terminate or alter existing contracts or relationships with us. +As a result of the C&J Merger, we may experience impacts on relationships with customers and suppliers that may harm our business and results of operations. Certain customers or suppliers may seek to terminate or modify contractual obligations following the C&J Merger whether or not contractual rights are triggered as a result of the C&J Merger. There can be no guarantee that customers and suppliers will remain with or continue to have a relationship with us or do so on the same or similar contractual terms following the C&J Merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with us, then our business and results of operations may be harmed. Furthermore, we do not have long-term arrangements with many of our significant suppliers. If our suppliers were to seek to terminate or modify an arrangement with us, then we may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all. +Combining the businesses of legacy Keane and C&J may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated benefits of the C&J Merger, which may adversely affect our business results and negatively affect the value of our common stock. +The success of the C&J Merger will depend on, among other things, our ability to combine the legacy Keane and C&J in a manner that realizes cost savings and facilitates growth opportunities. However, we must successfully integrate the legacy Keane and C&J businesses in a manner that permits these benefits to be realized. In addition, we must achieve the cost savings and anticipated growth without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the C&J Merger may not be realized fully, or at all, or may take longer to realize than expected. +An inability to realize the full extent of the anticipated benefits of the C&J Merger and the other transactions contemplated by the C&J Merger Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results of the Company, which may adversely affect the value of our common stock. +In addition, the actual integration may result in additional and unforeseen expenses and may cost more than anticipated, and the anticipated benefits of the integration plan may not be realized. Actual cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, it may be unable to successfully integrate the operations of legacy Keane and C&J or realize the anticipated benefits of the integration of the two companies. +The failure to successfully integrate the businesses and operations of the Company and C&J in the expected time frame may adversely affect the Company ' s future results. +There can be no assurances that the businesses of the Company and C&J can be integrated successfully. It is possible that the integration process could result in the loss of key employees, the loss of customers, the disruption of ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of the two businesses in order to realize the anticipated benefits of the C&J Merger so the Company performs as expected: +• +combining the businesses operations and corporate functions of the Company and C&J, in a manner that permits the Company to achieve any cost savings or revenue synergies anticipated to result from the C&J Merger, the failure of which would result in the anticipated benefits of the C&J Merger not being realized in the time frame currently anticipated or at all; +• +reducing additional and unforeseen expenses to prevent integration costs from more than anticipated; +23 +• +avoiding delays in the integration process; +• +integrating personnel from the two companies and retaining key employees; +• +integrating the companies' technologies; +• +integrating and standardizing the offerings and services available to customers; +• +identifying and eliminating redundant and underperforming functions and assets; +• +harmonizing the companies' operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes; +• +maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors; +• +addressing possible differences in business backgrounds, corporate cultures and management philosophies; +• +consolidating the companies' administrative and information technology infrastructure; +• +coordinating distribution and marketing efforts; +• +managing the movement of certain positions to different locations; and +• +effecting actions that may be required in connection with obtaining regulatory approvals. +In addition, at times the attention of certain members of the Company's management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to the Company, which may disrupt the business of the Company. +Furthermore, the Company's board of directors and executive leadership of the Company consists of former directors and executive officers from each of the Company and C&J. Combining the boards of directors and management teams of each company into a single board and a single management team could require the reconciliation of differing priorities and philosophies. +Risks Related to Our Business +The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our completions business has historically had contracts with a portion of our customers that are annual to multi-year. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to +24 +volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and results of operations. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition, environmental and safety requirements or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, in 2018, we purchased approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, for approximately $129.4 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other service-related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a less demanding work environment. Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to adjust our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations. +Our commitments under supply agreements could exceed our requirements, exposing us to risks including price, timing of delivery and quality of products and services upon which our business relies. +25 +We have purchase commitments with certain vendors to supply a majority of the proppant that we may provide in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. +Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition. +We have established relationships with a limited number of suppliers of our raw materials (such as proppant, guar, chemicals or coiled tubing) and finished products (such as fluid-handling equipment). Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. Should any of our current suppliers be unable to provide the necessary raw materials or finished products or otherwise fail to deliver the products in a timely manner and in the quantities required, any resulting delays in the provision of services could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, increasing costs of certain raw materials, including guar or proppant, may negatively impact demand for our services or the profitability of our business operations. In the past, our industry faced sporadic shortages associated with hydraulic fracturing operations, such as proppant and guar, requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials, including proppants. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Litigation and other proceedings could have a negative impact on our business. +The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2019, 2018 and 2017. +26 +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. New York and Vermont, states in which we have no operations, have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +We may not be successful in identifying and making acquisitions. +Part of our strategy is to continue to expand our geographic scope and customer relationships, increase our access to technology and to grow our business, which is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• +failure to identify attractive targets; +• +incorrect assumptions regarding the future liabilities or future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• +failure to obtain financing on acceptable terms or at all; +• +restrictions in our debt agreements; +• +failure to successfully integrate the operations or management of any acquired operations or assets (particularly as we undertake the integration of the legacy Keane and C&J businesses); +• +failure to retain or attract key employees; +• +new or expanded areas of operational risk (such as offshore or international operations) and related costs and demands of any applicable regulatory compliance; and +• +diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices, as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations or management are combined. Any +27 +such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• +a failure of our due diligence process to identify significant risks or issues; +• +the loss of customers of the acquired company or our company; +• +negative impact on the brands or banners of the acquired company or our company; +• +a failure to maintain or improve the quality of our customer service; +• +difficulties assimilating the operations and personnel of the acquired company; +• +our inability to retain key personnel of the acquired company; +• +the incurrence of unexpected expenses and working capital requirements; +• +our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• +difficulty in maintaining internal controls, procedures and policies; +• +mistaken assumptions about the overall costs of equity or debt; and +• +unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. The foregoing obstacles could prove to be especially difficult in light of the C&J Merger since we are a newly combined company in the process of integrating the legacy Keane and C&J businesses. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +If labor costs increase or we fail to attract and retain qualified employees our business, results of operations, cash flows and financial condition may be adversely affected. +The labor markets in the industries in which we operate are competitive. We must attract, train and retain a large number of qualified employees while controlling related labor costs. We face significant competition for these employees from the industries in which we operate as well as from other industries. Tighter labor markets may make it even more difficult for us to hire and retain qualified employees and control labor costs. Our ability to attract +28 +qualified employees and control labor costs is subject to numerous external factors, including prevailing wage rates, employee preferences, employment law and regulation, environmental, health and safety regulation, labor relations and immigration policy. A significant increase in competition or cost increase arising from any of the aforementioned factors in may have a material adverse impact on our business, results of operations and financial condition. +A failure of our information technology systems, including the implementation of our new enterprise resource planning system, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting. +We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. A failure or prolonged interruption in our information technology systems, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows. +We are in the process of integrating our enterprise resource planning (“ERP”) systems from each of the legacy entities to the C&J Merger that assist with the collection, storage, management and interpretation of data from our business activities to support future growth and to integrate significant processes. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP system integration is complex and time-consuming and involves substantial expenditures on system software and integration activities, as well as changes to business processes and, possibly, adjustments to internal control over financial reporting. The integration of the ERP system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will continue to be beneficial to the extent anticipated. Any disruptions, delays or deficiencies in the integration of our ERP system, particularly ones that impact our financial reporting and accounting systems or our ability to provide services, send invoices, track payments or fulfill contractual obligations, could adversely affect our business, financial condition, results of operations and cash flows. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be impacted, which could cause us to fail to meet our reporting obligations. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. We use these technologies for internal purposes, including data storage (which may include personal identification information of our employees as well as our proprietary business information and that of our customers, suppliers, investors and other stakeholders), processing, and transmissions, as well as in our interactions with customers and suppliers. For example, we depend on digital technologies to perform many of our services and processes and to record operational and financial data. At the same time, cyber incidents, which could include, among other things, deliberate attacks, unintentional events, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to computer systems, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, as well as those of our customers, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period of time. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. In addition, these risks could harm our reputation and our relationships with customers, suppliers, employees, and other third- +29 +parties, and may result in claims against us, including liability under laws that protect the privacy of personal information. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +If we fail to maintain an effective system of internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business and result in material misstatements in our financial statements. +Effective internal controls are necessary for us to provide timely and reliable financial reports, prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). For example, Section 404 requires us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any deficiencies or material weaknesses identified by our management in our internal control over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results, prevent us from identifying future deficiencies and material weaknesses or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions, about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls could result in material misstatements in our financial statements and subject us to increased regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +The United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries and partners from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Although we currently have limited international operations, we may do business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Our employees, intermediaries, and partners may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees, intermediaries, or partners even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. We are committed to doing business in accordance with applicable anti-bribery laws and have implemented policies and procedures concerning compliance with such laws. Our existing safeguards and any future improvements, however, may prove to be less than effective, and our employees, intermediaries, and partners may engage in conduct for which we might be held responsible. Violations of the FCPA and other anti-bribery laws (either due to our acts, the acts of our intermediaries or partners, or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations. +30 +Risks Related to Owning Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2019, we had $337.6 million of debt outstanding, net of discounts and deferred financing costs (not including capital lease obligations). After giving effect to our borrowing base, we had approximately $303.8 million of availability under our 2019 ABL Facility (as defined herein). +Our substantial indebtedness could have important consequences to you. For example, it could: +• +adversely affect the market price of our common stock; +• +increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• +require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• +limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• +limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• +place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• +sales of assets; +• +sales of equity; or +• +negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +31 +Despite our indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2019 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 2019 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2019 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +In addition, in certain circumstances, our variable rate indebtedness uses the London Interbank Offer Rate (“LIBOR”) as a benchmark for establishing the interest rate. The LIBOR has been subject of national, international, +32 +and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in our financing costs and our ability to access capital. +Disruptions in the capital and credit markets, continued low commodity prices, our debt level and other factors may restrict our ability to raise capital on favorable terms, or at all. +Disruptions in the capital and credit markets, in particular with respect to companies in the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Continued low commodity prices, among other factors, have caused some lenders to increase interest rates, enact tighter lending standards which we may not satisfy as a result of our debt level or otherwise, refuse to refinance existing debt at maturity on favorable terms, or at all, and in certain instances have reduced or ceased to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms or at all, it could adversely affect our business, financial condition and results of operations. +Ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation under Section 382 of the Internal Revenue Code, and NOLs and other tax attributes is subject to reduction, causing less NOL or tax deductions to be available to offset future taxable income for U.S. federal income tax purpose. +Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses (“NOLs”) carried forward from prior years. As of December 31, 2019, we reported consolidated federal NOL carryforwards of approximately $787.6 million of which $721.3 million are pre-change NOL's subject to limitation. Our ability to utilize our NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of our stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three year period). We believe we experienced an ownership change in October 2019 as a result of the C&J Merger. We also believe we experienced an ownership change in January 2017 as a result of the implementation of the IPO. Thus our pre-change NOLs are subject to limitation under Section 382 of the Code as a result. Such limitation may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause a portion of our pre-change NOLs generated prior to 2018 to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes. +Risks Related to Owning Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price. +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including +• +the failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts; +• +changes in, or investors’ perception of, the oil field services industry, including hydraulic fracturing; +• +the activities of competitors; +• +future issuances and sales of our common stock, including in connection with acquisitions; +33 +• +our quarterly or annual earnings or those of other companies in our industry; +• +the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• +regulatory or legal developments in the U.S.; +• +litigation involving us, our industry, or both; and +• +general economic conditions. +In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted. +As of March 9, 2019, 213,193,419 shares of common stock were outstanding, of which approximately 19.1% of the shares were held by Cerberus through Keane Investor. If they sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price. +Because we do not currently pay dividends, our stockholders may not receive any return on investment, unless they sell their common stock for a price greater than that which they paid for it. +We do not currently pay dividends, and our stockholders do not have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we would be dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” +Under the Delaware General Corporation Law (the “DGCL”), our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +We may not execute our capital return program, including the repurchase of our common stock pursuant to our share repurchase program under the capital return program, and such programs may not have the desired effect. +In December 2019, our board of directors approved a capital return program under which we may expend a total of up to $100 million through December 31, 2020, through stock repurchases, dividends or other capital return strategies. As part of the capital return program, our board of directors approved a stock repurchase program of up to $50 million of the Company's common stock, subject to U.S. Securities and Exchange Commission regulations, stock market conditions, capital needs of the business and other factors. Since the inception of our share repurchase program through December 31, 2019, we have made no share repurchases. We can provide no assurance that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will +34 +enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves. +Although our board of directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Furthermore, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness. +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 286,806,581 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have 14,054,982 shares of our common stock available for award that may be issued under our equity incentive plans. Any common stock that we issue, including under our equity incentive plans or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +Keane Investor and Cerberus own a significant amount of our common stock and continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control. +Cerberus currently controls approximately 19.1% of our common stock. Even though Cerberus no longer controls a majority of our common stock, Cerberus continues to have significant influence over us, including the election of our directors, determination of our corporate and management policies and determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Two of our 12 directors are employees of, appointees of, or advisors to, members of Cerberus. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, the concentration of ownership held by Cerberus could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. +35 +Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation, our bylaws and our Stockholders’ Agreement, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• +on or after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”),the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• +on or after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• +the manner in which stockholders can remove directors from the board will be limited; +• +on or after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited; +• +from and after such date that the Designated Controlling Stockholder ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• +who may call stockholder meetings is limited; +• +requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our Company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• +requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• +our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +36 +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +In connection with the Keane IPO, Keane entered into a Stockholders’ Agreement with Keane Investor. This stockholders’ agreement was amended and restated in conjunction with the C&J Merger (as amended and restated, the “Stockholders’ Agreement”) and provides that, except as otherwise required by applicable law, from the date on which (a) Keane Investor or, in the event a Cerberus Holder no longer holds Company shares through Keane Investor, Cerberus Holder has beneficial ownership of at least 12.5% or greater of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors two individuals who satisfy the Director Requirements; and (b) Keane Investor or, in the event Cerberus Holder no longer holder company shares through Keane Investor, Cerberus Holder has beneficial ownership of less than 12.5% but at least 7.5% of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +37 +Item 1B. Unresolved Staff Comments +None. +38 +Item 2. Properties +Properties +We lease office space for our principal executive headquarters, which is located at 3990 Rogerdale Rd., Houston, Texas 77042, for our research and technology facility at 10771 Westpark Dr., Houston, Texas 77042 and for our engineering and technology center at 8301 New Trails Dr., The Woodlands, Texas. We also own property for our maintenance facility at 1214 Gas Plant Rd., San Angelo, Texas 76904. +In addition, we own or lease numerous other smaller facilities and administrative offices across the geographic regions in which we operate to support our ongoing operations, including district offices, local sales offices, yard facilities and temporary facilities to house employees in regions where infrastructure is limited. Our leased properties are subject to various lease terms and expirations. We believe that our existing facilities are adequate for our operations and our locations allow us to efficiently serve our customers. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility. +39 +Item 3. Legal Proceedings +Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of these known legal proceedings and claims cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters. +Litigation Related to the C&J Merger +In connection with the Merger Agreement and the transactions contemplated thereby the following complaints have been filed: (i) one putative class action complaint was filed in the United States District Court for the District of Colorado by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J and members of the C&J board of directors, (ii) two putative class action complaints were filed in the United States District Court for the District of Delaware by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J, members of the C&J board of directors, the Company and Merger Sub, (iii) one putative class action complaint was filed in the United States District Court for the Southern District of Texas by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against the Company and members of its board of directors, and (iv) one putative class action was filed in the Delaware Chancery Court by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against members of the Company's board of directors. The five stockholder actions are captioned as follows: Palumbos v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-02386 (D. Colo.), Wuollet v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01411 (D. Del.), Plumley v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01446 (D. Del.), Bushansky v. Keane Group, Inc. et al., Case No. 4:19-cb-02924 (S.D. Tex) and Woods v. Keane Group, Inc., et al., Case No. 2019-0590 (Del. Chan.) (collectively, the "Stockholder Actions"). +In general, the Stockholder Actions allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act, or aided and abetted in such alleged violations, because the Registration Statement on Form S-4 filed with the SEC on July 16, 2019 in connection with the proposed C&J Merger allegedly omitted or misstated material information. +The Stockholder Actions seek, among other things, injunctive relief preventing the consummation of the C&J Merger, unspecified damages and attorneys' fees. C&J, the Company and the other named defendants believe that no supplemental disclosures were required under applicable laws; however, to avoid the risk of the Stockholder Actions delaying the C&J Merger and to minimize the expense of defending the Stockholder Actions, and without admitting any liability or wrongdoing, C&J and the Company filed a Form 8-K on October 11, 2019 making certain supplemental disclosures in connection with the C&J Merger. Following those supplemental disclosures, plaintiffs in the Woods and Bushansky actions voluntarily dismissed their claims as moot on October 16, 2019 and October 29, 2019, respectively. The defendants have not yet answered or otherwise responded to the complaints in the remaining Stockholder Actions, but the Company continues to believe that the allegations therein lack merit and no supplemental disclosures were required under applicable law, and intends to defend itself vigorously. +Item 4. Mine Safety Disclosures +40 +Not applicable. +41 +PART II +Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +Market Information +From the consummation of our IPO in January of 2017 until October 30, 2019, our common stock traded on the New York Stock Exchange (“NYSE”) under the symbol “FRAC.” As of October 31, 2019, our common stock trades on the NYSE under the symbol “NEX”. On March 9, 2020, the last reported sales price of our common stock on the NYSE was $2.03 per share. +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (Basic Energy Services, Inc., FTS International, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., Quintana Energy Services, RPC, Inc., and Superior Energy Services, Inc.), since January 20, 2017. +The graph assumes $100 was invested on January 20, 2017 in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers, as we believe it is an appropriate benchmark for our line of business/industry. +Holders +42 +As of March 9, 2020, we had 213,193,419 shares of common stock issued and outstanding, held by approximately 8 registered holders. The number of registered holders does not include holders that have common stock held for them in “street name,” meaning that the stock is held for their accounts by a broker or other nominee. +Dividends +We have not paid any cash dividends on our common stock to date. However, we anticipate that our board of directors will consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +On December 11, 2019, we announced that our board of directors had authorized a stock repurchase program of up to $50 million of our outstanding common stock, with the intent of returning value to our shareholders, as we continue to expect further growth and profitability. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. The duration of the stock buy-back program was through December 31, 2020. +Purchases of Equity Securities +Issuer Purchases of Equity Securities +Settlement Period +(a) Total Number of Shares Purchased (3) +(b) Average Price Paid per Share +(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs +(d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)(2) +October 1, 2019 through October 31, 2019 +407,023 +$ +4.32 +— +$ +100,000,000 +November 1, 2019 through November 30, 2019 +36,952 +$ +4.61 +— +$ +100,000,000 +December 1, 2019 through December 31, 2019 +137,890 +$ +6.02 +— +$ +150,000,000 +Total +581,865 +$ +4.74 +— +$ +150,000,000 +(1) On February 26, 2018, we announced that our board of directors authorized a12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100.0 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. +(2) On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for up to $50.0 million through December 2020. +(3) Consists of shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date. +43 +44 +Item 6. Selected Financial Data +The selected financial data for the periods presented was derived from our audited consolidated and combined financial statements . The selected historical financial data presented below is not intended to replace our historical financial statements, and should be read in conjunction with Part I, “ Item 1A . Risk Factors,” Part II, “ Item 7 . Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report in order to understand those factors, such as the C&J Merger, which may affect the comparability of the Selected Financial Data. +Years Ended December 31, +2019 (1) +2018 +2017 (2) +2016 (3) +2015 +(in thousands of dollars, except per share amounts) +Statement of Operations Data: +Revenue +$ +1,821,556 +$ +2,137,006 +$ +1,542,081 +$ +420,570 +$ +366,157 +Cost of services (4) +1,403,932 +1,660,546 +1,282,561 +416,342 +306,596 +Depreciation and amortization +292,150 +259,145 +159,280 +100,979 +69,547 +Selling, general and administrative expenses +123,676 +113,810 +84,853 +36,615 +26,081 +Merger and integration +68,731 +448 +8,673 +16,540 +— +(Gain) loss on disposal of assets +4,470 +5,047 +(2,555 +) +(387 +) +(270 +) +Impairment +12,346 +— +— +185 +3,914 +Total operating costs and expenses +1,905,305 +2,038,996 +1,532,812 +570,274 +405,868 +Operating income (loss) +(83,749 +) +98,010 +9,269 +(149,704 +) +(39,711 +) +Other income (expense), net +453 +(905 +) +13,963 +916 +(1,481 +) +Interest expense (5) +(21,856 +) +(33,504 +) +(59,223 +) +(38,299 +) +(23,450 +) +Total other expenses +(21,403 +) +(34,409 +) +(45,260 +) +(37,383 +) +(24,931 +) +Income (loss) before income taxes +(105,152 +) +63,601 +(35,991 +) +(187,087 +) +(64,642 +) +Income tax expense +(1,005 +) +(4,270 +) +(150 +) +— +— +Net income (loss) +$ +(106,157 +) +$ +59,331 +$ +(36,141 +) +$ +(187,087 +) +$ +(64,642 +) +Per Share Data (6) +Basic net income (loss) per share +$ +(0.86 +) +$ +0.54 +$ +(0.34 +) +$ +(2.14 +) +$ +(0.74 +) +Diluted net income (loss) per share +(0.86 +) +0.54 +(0.34 +) +(2.14 +) +(0.74 +) +Weighted average number of shares: +basic +122,977 +109,335 +106,321 +87,313 +87,313 +Weighted average number of shares: +diluted +122,977 +109,660 +106,321 +87,313 +87,313 +45 +Years Ended December 31, +Statement of Cash Flows Data: +Cash flows from operating activities +$ +305,463 +$ +350,311 +$ +79,691 +$ +(54,054 +) +$ +37,521 +Cash flows from investing activities +(114,100 +) +(297,506 +) +(250,776 +) +(227,161 +) +(26,038 +) +Cash flows from financing activities +(16,746 +) +(68,554 +) +218,122 +276,633 +(10,518 +) +Other Financial Data: +Capital expenditures (7) +$ +193,187 +$ +291,543 +$ +189,629 +$ +23,545 +$ +27,246 +Balance Sheet Data (at end of period): +Total assets +$ +1,664,907 +$ +1,054,579 +$ +1,043,116 +$ +536,940 +$ +324,795 +Long-term debt (including current portion) (8) +337,623 +340,730 +275,055 +269,750 +207,067 +Total liabilities +778,135 +567,398 +530,024 +374,688 +244,635 +Total stockholders’ equity +886,772 +487,181 +513,092 +162,252 +80,160 +(1) +Commencing on November 1, 2019, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of C&J. +(2) +Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile. +(3) +Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations. +(4) +Excludes depreciation and amortization, shown separately. +(5) +Interest expense during the year ended December 31, 2019 includes $0.5 million in write-offs in connection with the modification of the 2017 ABL Facility. Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs, incurred in connection with the early debt extinguishment of our 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing of our then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the early debt extinguishment of our the term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein). +(6) +The pro forma earnings per unit amounts for 2017, 2016 and 2015 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of pro forma earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. +(7) +Capital expenditures do not include, for the year ended December 31, 2018, $35.0 million of capital expenditures related to the asset acquisition from RSI, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations. +(8) +Long-term debt includes $7.1 million , $7.5 million , $8.2 million and $18.4 million of unamortized debt discount and debt issuance costs for 2019 , 2018 , 2017 , and 2016 respectively, and excludes capital lease obligations. +46 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K. +Business Overview +NexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including (i) our 2017 acquisition of RockPile, a multi-basin provider of integrated well completion services in the U.S. whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs, and (ii) our 2018 asset acquisition from RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment. Our most recent strategic transaction was the October 31, 2019, merger transaction with C&J Energy Services, Inc. (“C&J Merger”), a publicly traded Delaware corporation. This history impacts the comparability of our operational results from year to year. See Part I, “ Item 1. Business” of this Annual Report for an overview of our history, including additional information on the acquisitions noted above, including the C&J Merger, our 2017 IPO, predecessor, and business environment. Additional information on these transactions can be found in Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Industry Overview +We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford and the Bakken/Rockies. These regions are expected to account for approximately 73% of all new horizontal wells anticipated to be drilled through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +In particular, we are one of the largest providers of completion services in the Permian Basin, the most prolific and cost-competitive oil and natural gas basin in the United States. The Permian and the Marcellus Shale/Utica Basins are expected to account for 56% of total active rigs in the United States through 2022. These basins have experienced a recovery in activity since the spring of 2016, with an 156% increase in rig count from their combined second quarter of 2016 low of 185 to 475 as of December 31, 2019 . Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below. +Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. +47 +While it is too early to determine the impact, the recent actions taken by OPEC are expected to have a material negative impact on crude oil prices. Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. We are closely monitoring the situation including potential activity responses by our E&P customers. +The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas: +Year Ended December 31, +2019 +2018 +2017 +Oil price - WTI (1) +$ +56.98 +$ +64.94 +$ +50.88 +Natural gas price - Henry Hub (2) +$ +2.57 +$ +3.17 +$ +2.99 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type +2019 +2018 +2017 +Oil +773 +841 +703 +Natural Gas +169 +190 +172 +Other +1 +1 +1 +Total +943 +1,032 +876 +Year Ended December 31, +Drilling Type +2019 +2018 +2017 +Horizontal +826 +900 +736 +Vertical +54 +63 +70 +Directional +63 +69 +70 +Total +943 +1,032 +876 +As of February 2020, global liquids demand is expected to average 101.7 million barrels per day in 2020. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of February 2020, natural gas demand in the United States is expected to average 86.24 billion cubic feet per day in 2020. +Operating Approach & Strategy +We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our three innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +48 +Our revenues and profits are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution. +Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide through service quality and efficiency gains are central to our efforts to support equipment utilization and grow our business. +However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. +Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers, which is heavily driven by the price of oil and natural gas. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization. +49 +Our Reportable Segments +As of December 31, 2019, we were organized into three reportable segments: +• +Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities. +• +Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. +• +Well Support Services, which consists of the following businesses and service lines: (1) rig services; (2) fluids management; and (3) other special well site services. +Completion Services +The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. As of December 31, 2019, we had approximately 45 hydraulic fracturing fleets, 118 wireline trucks and 80 pumpdown units capable of being deployed. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our Innovation Centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our Innovation Centers we manufacture the data control instruments used in our fracturing operations and the perforating guns and addressable switches used in our wireline operations; these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business. +Well Construction and Intervention Services +The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. The majority of revenue for this segment is generated by our cementing business. As of December 31, 2019, we had approximately 25 coiled tubing units and 101 cementing units capable of being deployed. +Well Support Services +Our Well Support Services segment was divested in a transaction that closed on March 9, 2020. It focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Since early 2017, in response to the highly competitive landscape and reflecting our returns-focused strategy, we had focused on operational rightsizing measures to better align these businesses with current market conditions. This strategy resulted in closing facilities and idling unproductive equipment. For example, we either sold or shut down numerous businesses or asset packages, which included the divestiture of the majority of our fluids management assets in both West and South Texas in the third quarter of 2019. As of December 31, 2019, we had approximately 276 workover rigs and 348 fluids management trucks capable of being deployed. The majority of revenue for this segment is generated by our rig services business, and we consider rig services and fluids management to be the primary businesses within this segment. +How we calculate utilization for each segment +Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully- +50 +utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. +In our Well Support Services segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month. +Our operating strategy is focused on maintaining high asset utilization levels to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the safety, quality and efficiency of our service execution and our alignment with customers who recognize the value that we provide are central to our efforts to support utilization and grow our business. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. For additional information about factors impacting our business and results of operations, please see “Industry Trends and Outlook” in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report. +RESULTS OF OPERATIONS +Th e following table sets forth our financial results for the year ended December 31, 2019 as compared to the year ended the year ended December 31, 2018. Our financial results for 2019 include the financial and operating results of the businesses acquired in the C&J Merger for the partial period beginning November 1, 2019 through December 31, 2019. +A comparison of our financial results for the year ended December 31, 2018 and for the year ended December 31, 2017 can be found in the " Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 27, 2019. +51 +Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2019 +2018 +2019 +2018 +$ +% +Completion Services +$ +1,709,934 +$ +2,100,956 +94 +% +98 +% +$ +(391,022 +) +(19 +%) +Well Construction and Intervention Services +63,039 +36,050 +3 +% +2 +% +26,989 +75 +% +Well Support Services +48,583 +— +3 +% +0 +% +48,583 +0 +% +Revenue +1,821,556 +2,137,006 +100 +% +100 +% +(315,450 +) +(15 +%) +Completion Services +1,308,089 +1,622,106 +72 +% +76 +% +(314,017 +) +(19 +%) +Well Construction and Intervention Services +55,227 +38,440 +3 +% +2 +% +16,787 +44 +% +Well Support Services +40,616 +— +2 +% +0 +% +40,616 +0 +% +Costs of services +1,403,932 +1,660,546 +77 +% +78 +% +(256,614 +) +(15 +%) +Depreciation and amortization +292,150 +259,145 +16 +% +12 +% +33,005 +13 +% +Selling, general and administrative expenses +123,676 +113,810 +7 +% +5 +% +9,866 +9 +% +Merger and integration +68,731 +448 +4 +% +0 +% +68,283 +15,242 +% +(Gain) loss on disposal of assets +4,470 +5,047 +0 +% +0 +% +(577 +) +(11 +%) +Impairment +12,346 +— +1 +% +0 +% +12,346 +0 +% +Operating income +(83,749 +) +98,010 +(5 +%) +5 +% +(181,759 +) +(185 +%) +Other income (expense), net +453 +(905 +) +0 +% +0 +% +1,358 +(150 +%) +Interest expense +(21,856 +) +(33,504 +) +(1 +%) +(2 +%) +11,648 +(35 +%) +Total other expenses +(21,403 +) +(34,409 +) +(1 +%) +(2 +%) +13,006 +(38 +%) +Income tax expense +(1,005 +) +(4,270 +) +0 +% +0 +% +3,265 +(76 +%) +Net income (loss) +$ +(106,157 +) +$ +59,331 +(6 +%) +3 +% +$ +(165,488 +) +(279 +%) +Revenue. Total revenue is comprised of revenue from our Completion Services, Well Construction and Intervention Services and Well Support Services segments. Revenue in 2019 decreased by $315.5 million , or 15% , to $1.8 billion from $2.1 billion in 2018 . The net decline was driven primarily by a decrease in rig count and fleet utilization, combined with pricing pressures from macroeconomic market conditions. This decrease in utilization was primarily from our customers shifting their focus to capital discipline through reduced activity levels and pricing. Despite pricing pressures, we retained our core customer base by aligning with high quality and efficient customers under dedicated agreements. This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue decreased by $391.0 million , or 19% , to $1.7 billion in 2019 from $2.1 billion in 2018 . The segment revenue decline was driven by lower fleet utilization and decreased activity levels year over year, in addition to continued pricing pressures from market conditions. This was offset by an increase in revenue attributable to the C&J Merger. +52 +Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $27.0 million , or 75% , to $63.0 million in 2019 from $36.1 million in 2018 . This increase in revenue was primarily attributable to the C&J Merger. +Well Support Services: Well Support Services segment revenue was $48.6 million in 2019 with no comparison period in 2018. This increase in revenue was solely attributable to the acquisition of the segment through the C&J Merger. +Cost of services. Cost of services in 2019 decreased by $256.6 million , or 15% , to $1.4 billion from $1.7 billion in 2018 . This change was driven by several factors including lower overall activity and fleet utilization, as discussed above under Revenue, in addition to the impact of cost optimization from cost management efforts and input cost deflation. +Equipment Utilization. Depreciation and amortization expense increased by $33.0 million , or 13% , to $292.2 million in 2019 from $259.1 million in 2018 . The change in depreciation and amortization was primarily related to additional equipment purchases from the RSI Acquisition in late 2018, maintenance spend for fleet readiness, and other equipment used for continuing to enhance safety and efficiency through our multi-faceted approach of surface, digital and downhole technologies. Loss on disposal of assets in 2019 decreased by $0.6 million , to a loss of $4.5 million in 2019 from a loss of $5.0 million in 2018 . The decrease in loss on disposal of assets is primarily related to a larger number of early failures of major components in 2018 compared to 2019, primarily due to higher activity and use of equipment in 2018. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $9.9 million , or 9% , to $123.7 million in 2019 from $113.8 million in 2018 . This change in SG&A was primarily related to non-cash compensation expense of $19.4 million and litigation contingencies of $3.8 million . +Merger and integration expense. Merger and integration expense increased by $68.3 million to $68.7 million in 2019 from $0.4 million in 2018 . The $68.7 million in merger and integration expense in 2019 was due to the C&J Merger, which consisted primarily of professional services, severance costs, and facility consolidation. The $0.4 million in 2018 is related to transaction cost associated with the RSI Acquisition. +Other income (expense), net. Other income (expense), net, in 2019 increased by $1.4 million , or 150% , to income of $0.5 million in 2019 from expense of $0.9 million in 2018 . In 2018, other expense, net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire. +Interest expense, net. Interest expense, net of interest income, decreased by $11.6 million , or 35% , to $21.9 million in 2019 from $33.5 million in 2018 . This change was primarily attributable to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility. +Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2019 was (0.96)% , as compared to 6.71% in 2018. For 2019 , the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating loss offset by a valuation allowance. For 2018 , the effective rate was primarily made up of state taxes and tax benefits derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets. +Industry Drivers of 2019 Operations +Between January and April 2019, the increase in oil prices incentivized many of our customers to significantly increase activity levels early in 2019. This resulted in E&P capital budget exhaustion and early +53 +achievement of E&P production targets, and in combination with normal year-end seasonality, resulted in softening demand for completions services by the fourth quarter of 2019. In addition, lackluster oil and gas prices in 2019 resulted in the E&P budgeting process to be more muted, causing many E&P companies to delay activity start-up into early 2020. Furthermore, the current market oversupply of fracturing equipment created a competitive pricing environment at year-end 2019 during E&P budgeting season, which resulted in pricing pressure in order win new work or extend existing dedicated agreements that were up for renewal. With that said, most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope. +We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient liquidity, preserve our conservative capital structure and closely monitor our discretionary spending. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our shareholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, and to ensure that we are strategically positioned to capitalize on constructive market dynamics. +Looking Ahead to 2020 +We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of this Annual Report for additional information about the known material risks that we face. +Fiscal 2020 Objectives +With recent commodity price volatility, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, in 2020, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering shareholder value and maintaining a disciplined capital deployment strategy. We expect to achieve our objective through: +• +partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation; +• +allocating our assets to maximize utilization and returns, including diversification of geographies and commodities; +• +maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies; +• +investing in technology to further drive efficiencies, enable differentiation of service offerings, and reduce our overall cost structure; +• +leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost; +• +leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence; maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency; +54 +• +maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment; +• +gaining scale, enhancing our service offering, and capturing targeted cost synergies from the C&J Merger; and +• +returning capital to shareholders in a disciplined fashion. +Completion Services +In our Completion Services segment, our strategy remains focused on deploying our market-ready fracturing fleets and bundling more of our wireline and pumpdown units with our deployed fracturing fleets and on a stand-alone basis. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. Additionally, we are focused on bundling more of our wireline and pumpdown units with our fracturing fleets to increase operational efficiencies and profitability. With that said, current market conditions remain challenging, and our primary focus remains to lower our overall cost structure by aligning with efficient, dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years. +Well Construction and Intervention Services +In our Well Construction and Intervention Services segment, our strategy remains focused on deploying our market-ready cementing equipment and two newbuild coiled tubing units that we will take delivery of in the first quarter of 2020. In our cementing business, even though market conditions remain challenged due to customers releasing drilling rigs and declining E&P capital spending in 2020, we remain focused on providing high-quality, timely service and deploying more of our stacked units with efficient customers with deep inventories of work in our core operating basins. We will stay focused on controlling costs, improving market share with an efficient customer base that plan to maintain stable drilling rig counts in 2020. In our coiled tubing business, we are focused on deploying two newbuild, large-diameter units into our core operating basins and increasing market share with large, efficient customers with deep inventories of completion-oriented work that will keep our new units highly utilized. +Well Support Services +We divested our Well Support Services segment on March 9, 2020, for total consideration of $93.7 million. +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +(Thousands of Dollars) +Year Ended December 31, +2019 +2018 +Cash +$ +255,015 +$ +80,206 +Debt, net of deferred financing costs and debt discount +$ +337,623 +$ +340,730 +55 +(Thousands of Dollars) +Year Ended December 31, +2019 +2018 +2017 +Net cash provided by operating activities +$ +305,463 +$ +350,311 +$ +79,691 +Net cash used in investing activities +$ +(114,100 +) +$ +(297,506 +) +$ +(250,776 +) +Net cash provided by (used in) financing activities +$ +(16,746 +) +$ +(68,554 +) +$ +218,122 +Significant sources and uses of cash during the year ended December 31, 2019 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities during the year ended December 31, 2019 of $305.5 million was a result of our thoroughness in receiving collections from our customers and controlling costs. We continue to focus on maintaining operational and spend efficiencies, resulting in positive working capital and net operating cash to support our capital expenditures and other investing activities. +Uses of cash: +• +Operating activities: +– +Net cash used in operating activities for the year ended December 31, 2019, included $61.9 million of merger and integration costs in connection with the C&J Merger. +• +Investing activities: +– +Net cash used in investing activities for the year ended December 31, 2019 consisted primarily of capital expenditures. This activity primarily related to our Completion Services segment. +• +Financing activities: +– +Cash used to repay our debt facilities, excluding leases and interest, during the year ended December 31, 2019 was $3.5 million . +– +Cash used to repay our finance leases during the year ended December 31, 2019 was $6.0 million . +– +Shares withheld and retired related to stock-based compensation during the year ended December 31, 2019 totaled $6.0 million . +Significant sources and uses of cash during the year ended December 31, 2018 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities in 2018 of $350.3 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. +• +Investing activities: +56 +– +Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note ( 7 ) Property and Equipment, net of Part II, “ Item 8. Financial Statements and Supplementary Data.” +– +$4.7 million in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Services segment. +• +Financing activities: +– +Cash provided by the 2018 Term Loan Facility, net of debt discount, was $348.2 million. +Uses of cash: +• +Operating activities: +– +$13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018. +– +$7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below. +Investing activities: +– +Net cash used in investing activities of $297.5 million was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment. +• +Financing activities: +– +Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million. +– +Cash used to pay debt issuance costs associated with our debt facilities was $7.3 million. +– +Shares repurchased and retired related to our stock repurchase program totaled $104.9 million. +– +Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled $3.6 million. +– +$12.0 million related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value. +Significant sources and uses of cash during the year ended December 31, 2017 +Sources of cash: +• +Operating activities: +– +Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of +57 +the Acquired Trican Operations. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8. Financial Statements and Supplementary Data.” +• +Investing activities: +– +Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note ( 7 ) Property and Equipment, net of Part II, “ Item 8. Financial Statements and Supplementary Data.” +• +Financing activities: +– +Cash provided from IPO proceeds, $255.5 million . See Note (1)(a) Initial Public Offering of Part II, “ Item 8. Financial Statements and Supplementary Data.” +– +The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. statements. +– +An incremental term loan facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were primarily used to fund the acquisition of RockPile. +Uses of cash: +• +Investing activities: +– +Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement. +– +Cash used for capital expenditures of $164.4 million , associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment. +• +Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million . We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes. +Future sources and use of cash +Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, proceeds from public offerings of our common stock and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry. +Our primary uses of cash are for operating costs, capital expenditures, debt service and our stock repurchase program. +Capital expenditures for 2020 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks, coil units, and cementing units. +Debt service for the year ended December 31, 2020 is projected to be $30.9 million , of which $3.5 million is related to capital leases. We anticipate our debt service will be funded by cash flows from operations. +58 +On December 11, 2019, the Company announced the board of directors approved a new $100 million capital return program, which includes a $50 million stock repurchase program through December 2020. No share repurchases were made under the share repurchase program in 2019. Although our board of directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. We anticipate any share repurchases will be funded by cash flows from operations. +Other factors affecting liquidity +Financial position in current market. As of December 31, 2019 , we had $ 255.0 million of cash and a total of $303.8 million available under our revolving credit facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments and stock repurchases. +Guarantee agreements. Under the 2019 ABL Facility $31.8 million of letters of credit were outstanding as of December 31, 2019 . +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. +59 +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2019 . +(Thousands of Dollars) +Contractual obligations +Total +2020 +2021-2022 +2023-2024 +2025+ +Long-term debt, including current portion (1) +$ +344,750 +$ +3,500 +$ +7,000 +$ +7,000 +$ +327,250 +Estimated interest payments (2) +115,729 +22,262 +43,572 +42,031 +7,864 +Finance lease obligations (3) +10,061 +4,977 +4,811 +273 +— +Operating lease obligations (4) +68,344 +26,068 +22,096 +9,259 +10,921 +Purchase commitments (5) +119,710 +93,985 +24,225 +1,500 +— +Equity-method investment (6) +1,302 +1,302 +— +— +— +Legal contingency +10,059 +10,059 +— +— +— +$ +669,955 +$ +162,153 +$ +101,704 +$ +60,063 +$ +346,035 +(1) +Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $7.1 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility. +(2) +Estimated interest payments are based on debt balances outstanding as of December 31, 2019 and include interest related to the 2018 Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate ( “ LIBOR ” ). +(3) +Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments. +(4) +Operating lease obligations are related to our real estate, rail cars, and light duty vehicles. +(5) +Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +(6) +Equity-method investment is related to our research and development commitments with our equity-method investee. See Notes ( 18 ) Commitments and Contingencies and (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further details. +. +Principal Debt Agreements +2019 ABL Facility +Origination . On the October 31, 2019, we, and certain of our other subsidiaries as additional borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017 (the “2017 ABL Facility”). +Structure . Our 2019 ABL Facility provides for a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments. +Maturity . The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Interest . Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the +60 +average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%, to a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%. +Financial Covenants . The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2019, the Company was in compliance with all covenants. +2018 Term Loan Facility +On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes. +Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2019 , there was $337.6 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00. +Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding. +Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. +Prepayments . The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor +61 +agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”). +Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”). +Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility. +Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00. +“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments). +Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2019, the Company was in compliance with all covenants. +Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility). +62 +Off-Balance Sheet Arrangements +We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities. +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Recently Issued Accounting Standards +For discussion on the impact of accounting standards issued but not yet adopted to our consolidated and combined financial statements, see Note ( 23 ) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Critical Accounting Policies and Estimates +The preparation of our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +63 +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Mergers and Acquisition s of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our recently completed merger and acquisition during 2019 and 2017, respectively. +Asset acquisitions +Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Mergers and Acquisition s of Part II, “ Item 8 . Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018. +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note ( 18 ) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies. +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value +64 +calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note ( 2 ) (h) Goodwill and Indefinite-Lived Intangible Assets and ( 2 ) (i) Long-Lived Assets with Definite Lives of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2019 , 2018 and 2017 . +Income Taxes +We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of +65 +foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated and combined financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated and combined financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated and combined financial statements. +See Note ( 17 ) Income Taxes of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2019 , 2018 and 2017 . +Leases +Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate in the lease. Establishing our lease obligations on our unaudited condensed consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our unaudited condensed consolidated financial statements. For further details about our leases, see Note (16) Leases of Part II, "Item 8. Financial Statements and Supplementary Data". +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note ( 23 ) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +66 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +Exchange Rate Risk . Our operations are currently conducted predominantly within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk during 2019 . +Interest Rate Risk. As of December 31, 2019 , we held variable-rate debt, the exposure to which we manage with our interest-rate-related derivative instrument. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. We are exposed to changes in interest rates on our floating rate borrowings under our 2019 ABL Facility and 2018 Term Loan. As of December 31, 2019, we had no debt outstanding under our 2019 ABL Facility and $337.6 million aggregate principal amount outstanding under the 2018 Term Loan. The impact of a 1.0% increase in interest rates under the terms of the 2019 ABL Facility would have no impact on interest expense for the 2019 year, and a 1.0% increase in interest rates under the terms of the 2018 Term Loan would have a $3.5 million impact on interest expense for the 2019 year. +Commodity Price Risk . Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. +For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part II, “ Item 7 . Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2019 . Customer Credit Risk . Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for doubtful accounts. +67 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +NexTier Oilfield Solutions Inc. +Audited Consolidated and Combined Financial Statements +Reports of Independent Registered Public Accounting Firm +69 +Consolidated Balance Sheets +72 +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +73 +Consolidated and Combined Statements of Changes in Stockholders’ Equity +74 +Consolidated and Combined Statements of Cash Flows +75 +Notes to Consolidated and Combined Financial Statements +77 +68 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on the Consolidated and Combined Financial Statements +We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated and combined statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 2 and 16 to the consolidated and combined financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), and related amendments. +Basis for Opinion +These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +March 12, 2020 +69 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited NexTier Oilfield Solutions Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission . In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated and combined statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and related notes (collectively, the consolidated and combined financial statements), and our report dated March 12, 2020 expressed an unqualified opinion on those consolidated and combined financial statements. +The Company acquired C&J Energy Services, Inc. during 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, C&J Energy Services, Inc.’s internal control over financial reporting associated with total assets of $708.5 million and total revenues of $196.7 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of C&J Energy Services, Inc. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance +70 +with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Houston, Texas +March 12, 2020 +71 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Balance Sheets +(Amounts in thousands) +December 31, +2019 +December 31, +2018 +Assets +Current assets: +Cash and cash equivalents +$ +255,015 +$ +80,206 +Trade and other accounts receivable, net +350,765 +210,428 +Inventories, net +61,641 +35,669 +Assets held for sale +141 +176 +Prepaid and other current assets +20,492 +5,784 +Total current assets +688,054 +332,263 +Operating lease right-of-use assets +54,503 +— +Finance lease right-of-use assets +9,511 +— +Property and equipment, net +709,404 +531,319 +Goodwill +137,458 +132,524 +Intangible assets +55,021 +51,904 +Other noncurrent assets +10,956 +6,569 +Total assets +$ +1,664,907 +$ +1,054,579 +Liabilities and Stockholders’ Equity +Liabilities +Current liabilities: +Accounts payable +$ +115,251 +$ +106,702 +Accrued expenses +234,895 +101,539 +Current maturities of long-term operating lease liabilities +23,473 +— +Current maturities of long-term finance lease liabilities +4,594 +4,928 +Current maturities of long-term debt +2,311 +2,776 +Stock-based compensation +— +4,281 +Other current liabilities +5,670 +354 +Total current liabilities +386,194 +220,580 +Long-term operating lease liabilities, less current maturities +35,123 +— +Long-term finance lease liabilities, less current maturities +4,844 +5,581 +Long-term debt, net of deferred financing costs and debt discount, less current maturities +335,312 +337,954 +Other noncurrent liabilities +16,662 +3,283 +Total noncurrent liabilities +391,941 +346,818 +Total liabilities +778,135 +567,398 +Stockholders’ equity +Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 212,410 and 104,188 shares, respectively) +2,124 +1,038 +Paid-in capital in excess of par value +966,762 +455,447 +Retained earnings (deficit) +( 73,333 +) +31,494 +Accumulated other comprehensive loss +( 8,781 +) +( 798 +) +Total stockholders’ equity +886,772 +487,181 +Total liabilities and stockholders’ equity +$ +1,664,907 +$ +1,054,579 +See accompanying notes to the consolidated and combined financial statements. +72 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Operations and Comprehensive (Loss) Income +(Amounts in thousands, except for per share amounts) +Year Ended +December 31, +2019 +2018 +2017 +Revenue +$ +1,821,556 +$ +2,137,006 +$ +1,542,081 +Operating costs and expenses: +Cost of services (1) +1,403,932 +1,660,546 +1,282,561 +Depreciation and amortization +292,150 +259,145 +159,280 +Selling, general and administrative expenses +123,676 +113,810 +84,853 +Merger and integration +68,731 +448 +8,673 +(Gain) loss on disposal of assets +4,470 +5,047 +( 2,555 +) +Impairment expense +12,346 +— +— +Total operating costs and expenses +1,905,305 +2,038,996 +1,532,812 +Operating income (loss) +( 83,749 +) +98,010 +9,269 +Other income (expense): +Other income (expense), net +453 +( 905 +) +13,963 +Interest expense +( 21,856 +) +( 33,504 +) +( 59,223 +) +Total other expenses +( 21,403 +) +( 34,409 +) +( 45,260 +) +Income (loss) before income taxes +( 105,152 +) +63,601 +( 35,991 +) +Income tax expense +( 1,005 +) +( 4,270 +) +( 150 +) +Net income (loss) +( 106,157 +) +59,331 +( 36,141 +) +Net loss attributable to predecessor +— +— +( 7,918 +) +Net income (loss) attributable to NexTier +( 106,157 +) +59,331 +( 28,223 +) +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +( 116 +) +( 114 +) +96 +Hedging activities +( 7,628 +) +( 880 +) +791 +Total comprehensive income (loss) +$ +( 113,901 +) +$ +58,337 +$ +( 35,254 +) +Net income (loss) per share: +Basic net income (loss) per share +$ +( 0.86 +) +$ +0.54 +$ +( 0.34 +) +Diluted net income (loss) per share +$ +( 0.86 +) +$ +0.54 +$ +( 0.34 +) +Weighted-average shares outstanding: basic +122,977 +109,335 +106,321 +Weighted-average shares outstanding: diluted +122,977 +109,660 +106,321 +(1) +Cost of services during the years ended December 31, 2019 , 2018 , and 2017 excludes depreciation of $ 276.8 million , $ 245.6 million , and $ 150.6 million , respectively. Depreciation related to cost of services is presented within depreciation and amortization separately. +See accompanying notes to the consolidated and combined financial statements. +73 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Changes in Stockholders’ Equity +(Amounts in thousands) +Members’ equity +Common Stock +Paid-in Capital in Excess of Par Value +Retained Earnings (deficit) +Accumulated other comprehensive income (loss) +Total +Balance as of December 31, 2016 +$ +453,810 +$ +— +$ +— +$ +( 288,771 +) +$ +( 2,787 +) +$ +162,252 +Net loss prior to the Organizational Transactions +— +— +— +( 7,918 +) +— +( 7,918 +) +Effect of the Organizational Transactions +( 453,810 +) +— +156,270 +297,540 +— +— +Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives +— +1,031 +245,902 +— +— +246,933 +Stock-based compensation recognized subsequent to the Organizational Transactions +— +— +10,578 +— +— +10,578 +Effect of RockPile acquisition +— +87 +130,203 +— +— +130,290 +Other comprehensive income +— +— +— +— +1,059 +1,059 +Deferred tax adjustment +— +— +( 1,879 +) +— +— +( 1,879 +) +Net loss subsequent to Organizational Transactions +— +— +— +( 28,223 +) +— +( 28,223 +) +Balance as of December 31, 2017 +$ +— +$ +1,118 +$ +541,074 +$ +( 27,372 +) +$ +( 1,728 +) +$ +513,092 +Stock-based compensation (1) +— +2 +21,458 +— +— +21,460 +Shares repurchased and retired related to stock-based compensation +— +( 1 +) +( 3,578 +) +— +— +( 3,579 +) +Shares repurchased and retired related to stock repurchase program +— +( 81 +) +( 103,507 +) +( 1,273 +) +— +( 104,861 +) +Other comprehensive income +— +— +— +808 +930 +1,738 +Net income +— +— +— +59,331 +— +59,331 +Balance as of December 31, 2018 +$ +— +$ +1,038 +$ +455,447 +$ +31,494 +$ +( 798 +) +$ +487,181 +New lease standard implementation +— +— +— +1,330 +— +1,330 +Stock-based compensation (1) +— +33 +33,226 +— +— +33,259 +Shares repurchased and retired related to stock-based compensation +— +( 6 +) +( 5,976 +) +— +— +( 5,982 +) +Other comprehensive income (loss) +— +— +— +— +( 7,983 +) +( 7,983 +) +Equity issued in connection with the C&J Merger +— +1,059 +484,065 +— +— +485,124 +Net loss +— +— +— +( 106,157 +) +— +( 106,157 +) +Balance as of December 31, 2019 +$ +— +$ +2,124 +$ +966,762 +$ +( 73,333 +) +$ +( 8,781 +) +$ +886,772 +(1) +Stock-based compensation during 2019 and 2018 includes stock-based compensation expense recognized during the period of $ 29.0 million and $ 17.2 million and the vested deferred stock awards of $ 4.3 million and $ 4.3 million , respectively. Refer to Note ( 12 ) Stock-Based Compensation for further discussion of the Company’s stock-based compensation. +See accompanying notes to the consolidated and combined financial statements. +74 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Year Ended +December 31, +2019 +2018 +2017 +Cash flows from operating activities: +Net income (loss) +$ +( 106,157 +) +$ +59,331 +$ +( 36,141 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities +Depreciation and amortization +292,150 +259,145 +159,280 +Amortization of deferred financing fees +1,360 +3,147 +5,241 +(Gain) loss on disposal of assets +4,470 +5,047 +( 2,555 +) +Stock-based compensation +28,977 +17,166 +10,578 +Loss on debt extinguishment/modification, including prepayment premiums +526 +7,563 +31,084 +Loss on contingent consideration liability +— +13,254 +— +Loss on foreign currency translation +— +2,621 +— +Unrealized gain (loss) on derivatives +( 7,628 +) +( 880 +) +791 +Realized (gain) loss on derivatives +( 239 +) +( 697 +) +172 +Gain on insurance proceeds recognized in other income +— +( 14,892 +) +— +Loss on impairment of assets +12,346 +— +— +Other non-cash expenses +— +— +( 322 +) +Changes in operating assets and liabilities +Decrease (increase) in trade and other accounts receivable, net +172,566 +27,485 +( 113,047 +) +Decrease (increase) in inventories +17,181 +( 2,725 +) +( 15,475 +) +Decrease in prepaid and other current assets +3,703 +2,734 +20,294 +Decrease (increase) in other assets +( 242 +) +362 +( 336 +) +Increase (decrease) in accounts payable +( 17,799 +) +11,304 +( 141 +) +Decrease in customer contract liabilities +— +( 4,940 +) +— +Increase (decrease) in accrued expenses +( 103,609 +) +( 32,318 +) +41,446 +Increase (decrease) in other liabilities +7,858 +( 2,396 +) +( 21,178 +) +Net cash provided by operating activities +305,463 +350,311 +79,691 +Cash flows from investing activities +Asset and business acquisitions, including cash acquired +68,807 +( 35,003 +) +( 116,576 +) +Purchase of property and equipment +( 200,385 +) +( 277,569 +) +( 141,340 +) +Advances of deposit on equipment +( 7,451 +) +( 4,153 +) +( 23,096 +) +Payments for leasehold improvements +— +( 1,651 +) +( 157 +) +Implementation of software +( 4,408 +) +( 883 +) +( 687 +) +Proceeds from sale of assets +29,114 +4,652 +30,565 +Proceeds from insurance recoveries +223 +18,247 +515 +Equity-method investment +— +( 1,146 +) +— +Net cash used in investing activities +( 114,100 +) +( 297,506 +) +( 250,776 +) +Cash flows from financing activities: +Proceeds from issuance of common stock +— +— +255,494 +75 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated and Combined Statements of Cash Flows +(Amounts in thousands) +Proceeds from the secured notes and term loan facilities +— +348,250 +285,000 +Payments on the secured notes and term loan facilities +( 3,500 +) +( 284,952 +) +( 289,902 +) +Payments on finance leases +( 6,035 +) +( 4,119 +) +( 2,861 +) +Prepayment premiums on early debt extinguishment +— +— +( 15,817 +) +Payment of debt issuance costs +( 1,229 +) +( 7,331 +) +( 13,792 +) +Payment of contingent consideration liability +— +( 11,962 +) +— +Shares repurchased and retired related to share repurchase program +— +( 104,861 +) +— +Shares repurchased and retired related to stock-based compensation +( 5,982 +) +( 3,579 +) +— +Net cash provided by (used in) financing activities +( 16,746 +) +( 68,554 +) +218,122 +Non-cash effect of foreign translation adjustments +192 +( 165 +) +163 +Net increase (decrease) in cash, cash equivalents and restricted cash +174,809 +( 15,914 +) +47,200 +Cash, cash equivalents and restricted cash, beginning +80,206 +96,120 +48,920 +Cash, cash equivalents and restricted cash, ending +$ +255,015 +$ +80,206 +$ +96,120 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net +$ +20,836 +$ +24,528 +$ +30,104 +CVR settlement +— +19,918 +— +Income taxes +1,726 +5,529 +— +Non-cash investing and financing activities: +Change in accrued capital expenditures +$ +( 17,274 +) +$ +2,930 +$ +21,549 +Non-cash additions to finance right-of use assets +6,269 +— +— +Non-cash additions to finance lease liabilities, including current maturities +( 6,286 +) +— +— +Non-cash additions to operating right-of-use assets +65,551 +— +— +Non-cash additions to operating lease liabilities, including current maturities +( 65,297 +) +— +— +Fair value of C&J assets acquired +806,218 +— +— +106,627 shares of NexTier common stock issued in exchange for C&J capital stock and replacement awards +( 485,124 +) +— +— +C&J liabilities assumed +( 321,094 +) +— +— +See accompanying notes to the consolidated and combined financial statements. +76 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 1 ) Basis of Presentation and Nature of Operations +On October 13, 2016, NexTier Oilfield Solutions Inc. (the “Company” or “NexTier”) was formed as Keane Group, Inc. ("Keane"), a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company. +On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisition s. +The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated. +The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, income taxes, stock-based incentive plan awards and derivatives. +Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2019 and 2018 and the results of its operations and cash flows for the years ended December 31, 2019 , 2018 and 2017 . Such adjustments are of a normal recurring nature. +The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of RockPile (as defined herein). The consolidated and combined financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +Earnings per share and weighted-average shares outstanding for the year ended December 31, 2017 have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended December 31, 2017 are the financial results of Keane and Keane Group, the Company’s predecessor for accounting purposes, as there was no activity under Keane prior to 2017. +77 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(a) Initial Public Offering +On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $ 19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $ 4.8 million for professional services and other direct IPO related activities, was $ 255.5 million . The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC’s (“Holdco II”) term loan balance of $ 99.0 million and the associated prepayment premium of $ 13.8 million , and to repay $ 50.0 million of its 12 % secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $ 0.5 million . The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value. +(b) Organizational Transactions +In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following: +• +Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company’s management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”); +• +Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and +• +The Company’s independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group. +The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes. +As a result of the Organizational Transactions and the IPO, (i) the Company became a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of 72,354,019 shares of the Company’s common stock were owned by Keane Investor and certain of the Company’s independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company’s controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock. +78 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 2 ) Summary of Significant Accounting Policies +(a) Business Combinations and Asset Acquisitions +Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 820, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in the Company’s results of operations from the date of acquisition. +Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller as well as transaction costs incurred. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition. +Refer to Note (3) Mergers and Acquisition s for discussion of the mergers and acquisitions completed in 2019 , 2018 , and 2017 . +(b) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from certain dispositions or casualty events of more than $ 25.0 million per single transaction or $ 50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $ 50.0 million , under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did no t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the year ended December 31, 2019 and 2018. +Cash balances related to the Company's captive insurance subsidiary, which totaled 20.1 million at December 31, 2019, are included in cash and cash equivalents in the consolidated balance sheets, and the Company expects to use these cash balances to fund the operations of the captive insurance subsidiaries and to settle future anticipated claims. +The Company did no t have any restricted cash as of December 31, 2019 and 2018 . +(c) Trade Accounts Receivable +Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated and combined statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current +79 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +market conditions as well as the financial condition of the Company’s customers, the balance of receivables in dispute, the current receivables aging and current payment patterns. Trade accounts receivable were $ 350.6 million and $ 210.1 million at December 31, 2019 and 2018 , respectively. As of December 31, 2019 , and 2018 , the Company had an allowance for doubtful accounts of $ 0.7 million and $ 0.5 million , respectively. +(d) Inventories +Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss) using the weighted average cost method for all inventories. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off. +(e) Revenue Recognition +The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09. +The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. To achieve this core principle, ASC 606 requires the Company to apply the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when or as the Company satisfies a performance obligation. The five-step model requires management to exercise judgment when evaluating contracts and recognizing revenue. +Identify the Contract and Determine Transaction Price +The Company typically provides its services (i) under term pricing agreements; (ii) under contracts that include dedicated fleet or unit arrangements; (iii) on a spot market basis; and (iv) under term contracts that include “take-or-pay” provisions. +Under term pricing agreements, the Company and customer agree to set pricing for a specified period of time. The agreed-upon pricing is subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These agreements typically do not feature provisions obligating either party to commit to a certain utilization level. Additionally, these agreements typically allow either party to terminate the agreement for its convenience without incurring a termination penalty. +Under dedicated unit arrangements, customers typically commit to targeted utilization levels based on a specified number of fracturing stages per calendar month or fulfilling the customer's requirements, in either instance at agreed-upon pricing. These agreements typically do not feature obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is typically subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These contracts also typically allow for termination for either party's convenience with a brief notice period and may feature a termination penalty in the event the customer terminates the contract for its convenience. +80 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Rates for services performed on a spot market basis are based on an agreed-upon spot market rate unique to each service line. +Under term contracts with “take-or-pay” provisions, the Company’s customers are typically obligated to pay on a monthly basis for a specified quantity of services, whether or not those services are actually utilized. To the extent customers use more than the specified contracted minimums, the Company will charge a pre-agreed amount for the provision of such additional services, which amounts are typically subject to periodic review. In addition, these contracts typically feature a termination penalty in the event the customer terminates the contract for its convenience. +"Take-or-pay" provisions are considered stand ready performance obligations. The Company recognizes "take-or-pay" revenues using a time-based measure of progress, as the Company cannot reasonably estimate if and when the customer will require the Company to provide the services; likewise, the customer benefits as the Company is standing by to provide such services. +Identify and Satisfy the Performance Obligations +The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 days of the invoice issuance. +A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job. +In the course of providing services to its customers, the Company may use consumables; for example, in the Company’s fracturing business, chemicals and proppants are used in the fracturing service for the customer. ASC 606 requires that goods or services promised to a customer be identified separately when they are distinct within the contract. However, the consumables are used to complete the service for the customer and are not beneficial to the customer on their own. As such, the consumables are not a separate performance obligation, but instead are combined with the other services within the context of the contract and accounted for as a single performance obligation. +Remaining Performance Obligations +The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary. For those contracts with a term of more than one year, the Company had approximately $ 31.0 million of unsatisfied performance obligations as of December 31, 2019, which will be recognized as services are performed over the remaining contractual terms. +The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations. +81 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Contract Balances +In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated balance sheets. Payment terms after invoicing are typically 30 days or less. +The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated and combined statements of operations and comprehensive income (loss) and net cash provided by operating activities in the consolidated and combined statements of cash flows. +The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see (21) Business Segments . +Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows: +Completion Services +The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated and combined statements of operations and comprehensive income (loss). +Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Well Construction and Intervention +The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment +82 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates, at times, or pursuant to pricing agreements. +Well Support Services Segment +Through its rig services line, the Company provides workover and well servicing rigs that are primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services are provided on an hourly basis at prices that approximate spot market rates. A field ticket is generated and revenue is recognized upon the earliest of the completion of a job or at the end of each day. A rig services job can last anywhere from a few hours to multiple days depending on the type of work being performed. The field ticket includes the base hourly rate charge and, if applicable, charges for additional personnel or equipment not contemplated in the base hourly rate. The field ticket may also include charges for the mobilization and set-up of equipment. +Through its fluids management service line, the Company primarily provides storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket. +Through its other special well site service line, the Company primarily provides fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided. +Disaggregation of Revenue +Revenue activities during the years ended December 31, 2019 , 2018 and 2017 were as follows: +Year Ended December 31, 2019 +Completion Services +WC&I +Well Support Services +Total +(In thousands) +Geography +Northeast +$ +479,685 +$ +5,193 +$ +— +$ +484,878 +Central +104,225 +5,741 +— +109,966 +West Texas +839,652 +24,575 +9,336 +873,563 +West +273,364 +27,530 +39,247 +340,141 +International +13,008 +— +— +13,008 +$ +1,709,934 +$ +63,039 +$ +48,583 +$ +1,821,556 +83 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Year Ended December 31, 2018 +Completion Services +WC&I +Well Support Services +Total +(In thousands) +Geography +Northeast +$ +790,026 +$ +— +$ +— +$ +790,026 +Central +61,083 +— +— +61,083 +West Texas +1,005,630 +12,256 +— +1,017,886 +West +244,217 +23,794 +— +268,011 +$ +2,100,956 +$ +36,050 +$ +— +$ +2,137,006 +Year Ended December 31, 2017 +Completion Services +WC&I +Well Support Services +Total +(In thousands) +Geography +Northeast +$ +566,931 +$ +— +$ +— +$ +566,931 +Central +103,857 +— +— +103,857 +West Texas +635,877 +— +— +635,877 +West +220,623 +7,526 +7,267 +235,416 +$ +1,527,288 +$ +7,526 +$ +7,267 +$ +1,542,081 +(f) Property and Equipment +Property and equipment, inclusive of equipment under capital lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years . Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the term of the lease. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated and combined statements of operations and comprehensive income (loss). +Major classifications of property and equipment and their respective useful lives are as follows: +Land +Indefinite life +Building and leasehold improvements +13 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use. +In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour +84 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +work, higher stage volumes, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately 50 % . +In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the year ended December 31, 2018 of $ 15.0 million in the consolidated and combined statement of operations and comprehensive income (loss). +The Company uses the days straight-line depreciation method. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets. +(g) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized. +(h) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services, Well Construction and Intervention and Well Support Services reporting units. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated across its Completion Services, Well Construction and Intervention, and Well Support Services segments. If the carrying amount of the reporting unit exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method. +In 2019 , the Company performed the qualitative analysis (step zero) of the goodwill impairment assessment by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recognized. +No goodwill impairment has been recognized in 2019, 2018 or 2017. +The Company’s indefinite-lived assets consist of the Company’s trade name. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. +The Company impaired its Keane trade name in 2019. For additional detailed information regarding the impairment of the Keane trade name, see Note (4) Intangible Assets . There was no indefinite-lived asset impairment recognized during 2018 or 2017 . +85 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(i) Long-Lived Assets with Definite Lives +The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash flows that are independent of other asset groups are: fracturing, wireline and pumpdown, cementing, coiled tubing, and well support services, except for an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment. +Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense. +The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. +In 2019 and 2018 , for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized. +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets. +(j) Derivative Instruments and Hedging Activities +The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive +86 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings. +(k) Fair Value Measurement +Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• +Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• +Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• +Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +87 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(l) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”), performance based RSU award (“PSUs”), and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement. +Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated and combined statements of cash flows. +The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For additional information, see Note ( 12 ) Stock-Based Compensation . +(m) Taxes +Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the years ended December 31, 2019 , 2018 and 2017. +Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax. As a result of the C&J Merger, the Company had foreign subsidiaries at December 2019 in Canada, Netherlands, Luxembourg and Ecuador. +The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax +88 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. +Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. +The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense. +See Note ( 17 ) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2019 , 2018 and 2017 . +(n) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated and combined statements of operations and comprehensive income (loss). +Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). +(o) Equity-method investments +Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated balance sheets and totaled $ 3.6 million and $ 1.7 million as of December 31, 2019 and 2018 , respectively. +(p) Employee Benefits and Postemployment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated . +89 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(q) Leases +Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and related amendments, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, using the modified retrospective method. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases. +In accordance with ASU 2016-02, the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases. +For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased. +For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease. +For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and records this amortization in rent expense on the consolidated and combined statements of operations and comprehensive loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated and combined statements of operations and comprehensive loss. For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the consolidated and combined statements of operations and comprehensive loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable. +In accordance with ASC 842, the Company has made the following elections for its lease accounting: +• +all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases; +• +for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and +• +for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606. +As part of the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not: +• +reassess whether any expired or existing contracts contained leases; +• +reassess the lease classification for any expired or existing leases; and +90 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +• +reassess initial direct costs for any existing leases. +For additional information, see Note (16) Leases . +(r) Research and development costs +Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Research and development costs incurred directly by the Company were $ 7.1 million , $ 7.1 million and $ 3.7 million for the years ended December 31, 2019 , 2018 and 2017 , respectively. +(s) Pro-forma earnings per share +The earnings per share amounts for the year ended December 31, 2017 have been computed to give effect to the Organizational Transactions, as if it had occurred on January 1, 2016, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per share do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO. +(t) Reclassifications +Certain reclassifications have been made to prior period amounts to conform to current period financial statement presentation. These reclassifications did not affect previously reported results of operations, stockholders' equity, comprehensive income or cash flows. +(3) Mergers and Acquisition s +(a) C&J Energy Services, Inc. +On October 31, 2019 (the “C&J Acquisition Date”), the Company completed the C&J Merger in accordance with the terms of the Agreement and Plan of Merger, dated as of June 16, 2019 (the "Merger Agreement"), by and among NexTier, C&J and King Merger Sub Corp., a wholly owned subsidiary of NexTier ("Merger Sub"), pursuant to which Merger Sub merged with and into C&J, with C&J surviving the merger as a wholly owned subsidiary of NexTier, and immediately following the C&J Merger, C&J was merged with and into King Merger Sub II LLC ("LLC Sub"), with LLC Sub continuing as the surviving entity as a wholly-owned subsidiary of NexTier and the successor in interest to C&J. +The C&J Merger was completed for total consideration of approximately $ 485.1 million , consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-merger services with a value of $ 3.2 million . +The Company accounted for the C&J Merger using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The majority of the measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired inventory and property and equipment is based on both available market data and a cost approach. The fair value of the financial assets acquired includes trade receivables with a fair value of $ 312.6 million . The gross amount due under the contracts is $ 322.8 million , of which $ 10.2 million is expected to be uncollectible. A liability of $ 40.2 million has been recognized for legal reserves and sales and use tax assessments. As of December 31, 2019, there has been no change in the amount recognized for the liability or any change in the range of outcomes or assumptions used to develop the estimates on October 31, 2019. +The preliminary purchase price has been allocated to the net assets acquired and liabilities assumed based upon their estimated fair values. The estimated fair values of certain assets and liabilities, including accounts receivable, taxes (including uncertain tax positions), and contingencies require significant judgments and estimates. C&J is subject to the legal and regulatory requirements, including but not limited to those related to environmental +91 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +matters and taxation. The Company has conducted a preliminary assessment of liabilities arising from these matters and has recognized provisional amounts in its initial accounting for the C&J Merger for all identified liabilities in accordance with the requirements of ASC Topic 805. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, valuation of pre-acquisition contingencies and final tax returns that provide underlying tax basis of assets acquired and liabilities assumed. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized. As a result, the provisional measurements below are preliminary and subject to change during the measurement period and such changes could be material. The Company will finalize the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate . The Company continues to assess the fair values of the assets acquired and liabilities assumed. +The following table summarizes the fair value of the consideration transferred in the C&J Merger and the preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the C&J Merger Date: +Total Purchase Consideration: +(Thousands of Dollars) +Equity consideration +$ +481,912 +Replacement awards attributable to pre-combination services +3,212 +Less: Cash acquired +$ +( 68,807 +) +Total purchase consideration +$ +416,317 +Trade and accounts receivable +$ +312,620 +Inventories +43,142 +Prepaid and other current assets +18,512 +Property and equipment +311,886 +Intangible assets +17,590 +Right of use assets +24,318 +Other noncurrent assets +4,409 +Total identifiable assets acquired +732,477 +Accounts payable +43,620 +Accrued expenses +236,959 +Short term lease liability +7,842 +Long term lease liability +15,517 +Non-current liabilities +17,156 +Total liabilities assumed +321,094 +Goodwill +4,934 +Total purchase consideration +$ +416,317 +The goodwill in this acquisition was primarily attributable to expected synergies and was allocated across the Company’s Completion Services, Well Construction and Intervention and Well Support Services reporting units. +92 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Intangible assets related to the C&J Merger consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Technology +3 +17,590 +Total +$ +17,590 +Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the C&J Merger. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate C&J’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +Merger and integration costs totaled $ 68.7 million for the year ended December 31, 2019 and are recorded within merger and integration costs on the Company’s Consolidated and Combined Statements of Operations and Comprehensive Income (Loss). T he following table summarizes merger and integration costs for the year ended December 31, 2019 . +(amounts in thousands) +Transaction Type +Year Ended +December 31, 2019 +Merger +$ +23,775 +Integration +44,956 +Total merger and integration costs +$ +68,731 +The following combined pro forma information assumes the C&J Merger occurred on January 1, 2018. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2019 or any operating efficiencies or inefficiencies that resulted from the C&J Merger. The information is not necessarily indicative of results that would have been achieved had the Company controlled C&J during the period presented. +(unaudited, amounts in thousands) +Year Ended December 31, 2019 +Year Ended December 31, 2018 +Revenue +$ +3,406,288 +$ +4,359,095 +Net income (loss) +( 196,577 +) +66,746 +Net income (loss) per share (basic) +$ +( 0.93 +) +$ +0.32 +Net income (loss) per share (diluted) +$ +( 0.93 +) +$ +0.31 +Weighted-average shares outstanding (basic) +211,376 +210,945 +Weighted-average shares outstanding (diluted) +211,376 +212,964 +The Company’s consolidated statement of operations and comprehensive income (loss) for 2019 includes revenue of $ 196.7 million and net loss of $ 21.4 million , from the C&J operations, from November 1, 2019 to December 31, 2019. +93 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(b) Asset Acquisition from Refinery Specialties, Incorporated +On July 24, 2018, the Company executed a purchase agreement with Refinery Specialties, Incorporated (“RSI”) to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $ 35.4 million , inclusive of an $ 0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds the Company received in connection with a fire that resulted in damage to a portion of one of the Company’s fleets (for further details see Note (7) Property and Equipment, net) . The Company also assumed operating leases for light duty vehicles in connection with the RSI transaction and RSI entered into a non-compete arrangement in turn with the Company. In September 2018, the Company, and RSI reached an agreement to refund the Company $ 0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $ 34.6 million , and the Company incurred $ 0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $ 35.0 million . +The Company accounted for this acquisition as an asset acquisition pursuant to ASU 2017-01 and allocated the purchase price of the acquisition plus the transactions costs amongst the acquired hydraulic horsepower and related support equipment, as the fair value of the acquired hydraulic horsepower and related support equipment represented substantially all of the fair value of the gross assets acquired in the asset acquisition with RSI. +(c) RockPile +On July 3, 2017 (the “RockPile Acquisition Date”), the Company acquired 100 % of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the U.S. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment. +The acquisition of RockPile was completed for cash consideration of $ 116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in stockholders’ equity in the consolidated balance sheet, was calculated using the closing price of the Company’s common stock on July 3, 2017, of $ 16.29 , discounted by 7.9 % to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. +Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount did not exceed $ 2.30 . The “CVR Payment Amount” was the difference between (a) $ 19.00 and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty ( 20 ) trading days randomly selected by the Company during the thirty ( 30 ) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount was agreed to be reduced on a dollar for dollar basis if the sum of the following exceeds $ 165.0 million : +• +(i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus +• +(ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus +• +(iii) the Aggregate CVR Payment Amount. +94 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +In early April 2018, in accordance with the terms and conditions of the CVR Agreement, the Company calculated and paid the final Aggregate CVR Payment Amount, due to the RockPile Holders, of $ 19.9 million and recognized a loss of $ 13.2 million during the year ended December 31, 2018 in other income (expense), net in the consolidated statement of operations and comprehensive income (loss). +The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The Company finalized the purchase price allocation in June 2018. Of the measurement period adjustments noted in the following table, $ 11.3 million were recorded in 2017 and $ 2.4 million were recorded in 2018. +The following table summarizes the fair value of the consideration transferred for the acquisition of RockPile and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the RockPile Acquisition Date: +Total Purchase Consideration: +Preliminary Purchase Price Allocation +Adjustments +Final Purchase Price Allocation +(Thousands of Dollars) +Cash consideration +$ +123,293 +$ +( 6,717 +) +$ +116,576 +Equity consideration +130,290 +— +130,290 +Contingent consideration +11,962 +— +11,962 +Less: Cash acquired +( 20,379 +) +20,379 +— +Total purchase consideration, less cash acquired +$ +245,166 +$ +13,662 +$ +258,828 +Trade and other accounts receivable +$ +57,117 +$ +1,484 +$ +58,601 +Inventories, net +2,853 +138 +2,991 +Prepaid and other current assets +13,630 +( 717 +) +12,913 +Property and equipment, net +157,654 +8,653 +166,307 +Intangible assets +20,967 +( 1,267 +) +19,700 +Notes receivable +250 +( 250 +) +— +Other noncurrent assets +363 +( 57 +) +306 +Total identifiable assets acquired +252,834 +7,984 +260,818 +Accounts payable +( 38,999 +) +16,180 +( 22,819 +) +Accrued expenses +( 22,161 +) +( 13,315 +) +( 35,476 +) +Deferred revenue +( 23,053 +) +698 +( 22,355 +) +Other non-current liabilities +( 827 +) +( 2,412 +) +( 3,239 +) +Total liabilities assumed +( 85,040 +) +1,151 +( 83,889 +) +Goodwill +77,372 +4,527 +81,899 +Total purchase price consideration +$ +245,166 +$ +13,662 +$ +258,828 +The goodwill in this acquisition was primarily attributable to expected synergies and new customer relationships and was allocated in its entirety to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years . +95 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Intangible assets related to the acquisition of RockPile consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) +Gross +Carrying +Amounts +Customer contracts +10.8 +$ +19,700 +Total +$ +19,700 +For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole. +For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component. +The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile’s operations with that of the Company, including retention bonuses and severance payments and expenses incurred in connection with aligning RockPile’s accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +(Thousands of Dollars) +Transaction Type +Year Ended +December 31, 2017 +Deal costs +$ +6,679 +Integration +1,994 +$ +8,673 +The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after July 2, 2017 or any operating efficiencies or inefficiencies that resulted from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented. Pro forma net loss for the year ended December 31, 2017 includes $ 0.8 million of non-recurring retention bonuses associated with the acquisition, which were incurred after the closing and $ 1.8 million of compensation costs associated with the RockPile executives retained by the Company. In addition, the Company incurred $ 2.2 million of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing. +96 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Unaudited +Year Ended December 31, +2017 +2016 +Revenue +$ +1,732,279 +$ +543,966 +Net loss +( 49,348 +) +( 203,383 +) +Net loss per share (basic and diluted) +$ +( 0.44 +) +$ +( 2.12 +) +Weighted-average shares outstanding (basic and diluted) +111,939 +96,112 +The Company’s consolidated and combined statement of operations and comprehensive income (loss) for 2017 includes revenue (unaudited) of $ 192.2 million from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017. +(4) Intangible Assets +The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2019 +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +$ +67,600 +$ +( 32,681 +) +$ +34,919 +Non-compete agreements +700 +( 408 +) +292 +Technology +22,054 +( 2,244 +) +19,810 +Total +$ +90,354 +$ +( 35,333 +) +$ +55,021 +(Thousands of Dollars) +December 31, 2018 +Gross +Carrying +Amounts +Accumulated +Amortization +Net +Carrying +Amount +Customer contracts +$ +67,600 +$ +( 27,755 +) +$ +39,845 +Non-compete agreements +700 +( 362 +) +338 +Trade name +10,200 +— +10,200 +Technology +2,262 +( 741 +) +1,521 +Total +$ +80,762 +$ +( 28,858 +) +$ +51,904 +Amortization expense related to the intangible assets for the years ended December 31, 2019 , 2018 and 2017 was $ 6.5 million , $ 6.3 million and $ 7.1 million , respectively. +In connection with the C&J Merger, the Company was re-branded as NexTier and does not expect to obtain any further benefits or receive any cash flows associated with the Keane indefinite-lived trade name. As a result, the Company impaired $ 10.2 million related to the Keane trade name as of December 31, 2019. The impairment is recorded in impairment expense in the consolidated and combined statements of operations and comprehensive income (loss). +97 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows: +Year-end December 31, +(Thousands of Dollars) +2020 +$ +( 11,239 +) +2021 +( 10,953 +) +2022 +( 9,867 +) +2023 +( 4,973 +) +2024 +( 4,973 +) +(5) Goodwill +The changes in the carrying amount of goodwill for the years ended December 31, 2019 , 2018 and 2017 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2017 +$ +134,967 +Purchase price adjustment +( 2,443 +) +Goodwill as of December 31, 2018 +132,524 +C&J Merger +4,934 +Goodwill as of December 31, 2019 +$ +137,458 +The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 consisted of amounts related to the C&J Merger and purchase price adjustments related to the acquisition of RockPile, respectively. For additional information, see Note (3) ( Mergers and Acquisition s). There were no triggering events identified and no impairment recorded since inception and for the years ended December 31, 2019 , 2018 and 2017 . +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2019 and December 31, 2018 : +(Thousands of Dollars) +December 31, +2019 +December 31, +2018 +Sand, including freight +$ +4,405 +$ +14,697 +Chemicals and consumables +11,408 +6,250 +Materials and supplies +45,828 +14,722 +Total inventory, net +$ +61,641 +$ +35,669 +Inventories are reported net of obsolescence reserves of $ 1.8 million and $ 1.0 million as of December 31, 2019 and 2018 , respectively. The Company recognized $ 0.8 million , $ 0.7 million and $ 0.3 million of obsolescence expense during the years ended December 31, 2019 , 2018 and 2017 . +98 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 7 ) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2019 and December 31, 2018 : +(Thousands of Dollars) +December 31, +2019 +December 31, +2018 +Land +$ +35,178 +$ +4,771 +Building and leasehold improvements +90,950 +32,134 +Office furniture, fixtures and equipment +10,678 +7,691 +Machinery and equipment +1,259,697 +1,041,212 +1,396,503 +1,085,808 +Less accumulated depreciation +( 723,060 +) +( 562,813 +) +Construction in progress +35,961 +8,324 +Total property and equipment, net +$ +709,404 +$ +531,319 +All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations and comprehensive income (loss). The following describes the total (gains) losses recognized on the disposal of certain assets of $ 4.5 million , $ 5.0 million and $( 2.6 ) million for the years ended December 31, 2019 , 2018 and 2017 : +For the year ended December 31, 2019 , the Company disposed of certain hydraulic fracturing components and iron for a net loss of $ 15.4 million , net of salvage value on failed transmissions. The Company also recognized a gain of $ 7.4 million related to the sale of certain hydraulic fracturing related equipment and a net gain of $ 3.5 million on various other immaterial asset disposals throughout the year. +For the year ended December 31, 2018 , the Company disposed of certain hydraulic fracturing components for a net loss of $ 3.5 million , net of salvage value on failed transmissions. The Company also divested of an idle field operations facility for a net loss of $ 2.7 million and recorded a net gain of $ 1.2 million on various other immaterial asset disposals throughout the year. +For the year ended December 31, 2017 , the Company disposed of idle coiled tubing assets for a net gain of $ 3.5 million and recorded a net loss of $ 0.9 million on various other immaterial asset disposals throughout the year. +Casualty Loss +On July 1, 2018, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. In 2018, the Company received $ 18.1 million of insurance proceeds for replacement cost of the damaged equipment, which offset the $ 3.2 million impairment loss recognized on the damaged equipment. The resulting gain of $ 14.9 million was recognized in other income (expense), net in the consolidated and combined statements of operations and comprehensive income (loss) for the year ended December 31, 2018. +99 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +( 8 ) Long-Term Debt +Long-term debt at December 31, 2019 and December 31, 2018 consisted of the following: +(Thousands of Dollars) +December 31, +2019 +December 31, +2018 +2018 Term Loan Facility +344,750 +348,250 +Less: Unamortized debt discount and debt issuance costs +( 7,127 +) +( 7,520 +) +Total debt, net of unamortized debt discount and debt issuance costs +337,623 +340,730 +Less: Current portion +( 2,311 +) +( 2,776 +) +Long-term debt, net of unamortized debt discount and debt issuance costs +$ +335,312 +$ +337,954 +Below is a summary of the Company’s credit facilities outstanding as of December 31, 2019 : +(Thousands of Dollars) +2019 ABL Facility +2018 Term Loan Facility +Original facility size +$ +450,000 +$ +350,000 +Outstanding balance +$ +— +$ +344,750 +Letters of credit issued +$ +31,840 +$ +— +Available borrowing base commitment +$ +303,837 +n/a +Interest Rate (1) +LIBOR or base rate plus applicable margin +LIBOR or base rate plus applicable margin +Maturity Date +October 31, 2024 +May 25, 2025 +(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00 % floor +Maturities of the 2018 Term Loan Facility for the next five years are presented below: +(Thousands of Dollars) +Year-end December 31, +2020 +$ +3,500 +2021 +3,500 +2022 +3,500 +2023 +3,500 +2024 +3,500 +$ +17,500 +Deferred Charges and Other Costs +Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility are capitalized. Deferred charges related to the 2018 Term Loan Facility are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2019 , 2018 and 2017 was $ 1.4 million , $ 3.1 million , and $ 5.2 million , respectively. +100 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $ 1.2 million . In connection with the modification of the 2017 ABL Facility, the Company wrote off $ 0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $ 3.7 million and $ 4.0 million as of December 31, 2019 and 2018 , respectively, and are recorded in other noncurrent assets on the consolidated balance sheets. +Term Loan Facility +On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $ 7.6 million . Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $ 9.0 million . Unamortized deferred charges associated with the 2018 Term Loan Facility were $ 7.1 million and $ 7.5 million as of December 31, 2019 and 2018 , respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets. +ABL Revolving Credit Facility +Interest expense during the year ended December 31, 2019 includes $ 0.5 million in write-offs in connection with the modification of the 2017 ABL Facility. Interest expense during the year ended December 31, 2017 included $ 15.8 million of prepayment penalties and $ 15.3 million in write-offs of deferred charges, incurred in connection with the Company’s refinancing of an older asset-based revolving credit facility (“2016 ABL Facility”) and the Company’s early debt extinguishment of an older term loan facility (“2016 Term Loan Facility”) and the Senior Secured Notes in 2017. +(9) Significant Risks and Uncertainties +The Company operates in three reportable segments: Completion Services, Well Construction and Intervention, and Well Support Services, with significant concentration in the Completion Services segment. During the years ended December 31, 2019 , 2018 and 2017 , sales to Completion Services customers represented 94 % , 98 % and 99 % of the Company’s consolidated revenue, respectively. +The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. The U.S. energy industry experienced a significant downturn in the second half of 2014 through early 2016, driven primarily by global oversupply and a decline in commodity prices. From early 2016 through late 2018, the U.S. generally experienced some recovery in commodity prices and drilling and completion activity. Over this time frame, the U.S. active rig count increased from a trough of 404 rigs in May 2016 to a peak of 1,083 rigs in December 2018, driving significant demand for the Company's completion services. From December 28, 2018 through December 31, 2019, U.S. active rig count decreased by approximately 26 % to 805 rigs. +While U.S. active rig count increased from its low in 2016, macro conditions remain range bound, and supply and demand for completion services remains challenged, resulting in adverse pricing, utilization impacts and ongoing commodity price volatility. In late 2019 and early 2020, and in response to the oversupply of hydraulic fracturing equipment, an increasing number of horsepower retirements were announced, removing a significant base of equipment from the market. Despite the continued challenging market conditions, the Company has been able to perform well, driven by a high level of efficiency achieved at the wellsite, a customer partnership model and investments in innovation. In response to these ongoing pressures, the Company's continued success is attributable +101 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +primarily to the Company's high level of efficiency achieved at the wellsite, as well as its high-quality customer base and dedicated contract model. +For the year ended December 31, 2019 , revenue from four customers individually represented more than 10% and collectively represented 55 % of the Company’s consolidated revenue. For the year ended December 31, 2018 , three customers individually represented more than 10% and collectively represented 39 % of the Company’s consolidated revenue. For the year ended December 31, 2017 , no customer individually represented more than 10% of the Company’s consolidated revenue. +For the year ended December 31, 2019 , purchases from one supplier represented 5 % of the Company’s overall purchases. For the year ended December 31, 2018 , purchases from two suppliers represented approximately 5 % to 10 % of the Company’s overall purchases. The costs for each of these suppliers were primarily incurred within the Completion Services segment. +(10) Derivatives +The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. +On May 25, 2018, the Company entered into the 2018 Term Loan Facility, which has an initial aggregate principal amount of $ 350 million , and repaid its pre-existing 2017 Term Loan Facility. The 2018 Term Loan Facility has a variable interest rate based on LIBOR, subject to a 1.0 % floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately 50 % of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility. +On June 22, 2018, the Company unwound its existing interest rate swaps and received $ 3.2 million in proceeds. The Company used the $ 3.2 million of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a 1 % floor, and makes payments based on a fixed rate of 2.625 % . The new interest rate swap is effective through March 31, 2025 and has a notional amount of $ 175.0 million . The new interest rate swap was designated in a new cash flow hedge relationship. +The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At the time hedge accounting was discontinued, the exiting interest rate swaps had $ 3.5 million of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap. +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +102 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments +Derivatives +not +designated as +hedging +instruments +Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2019: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +— +— +— +— +— +Other current liability +( 1,729 +) +— +( 1,729 +) +— +( 1,729 +) +Other noncurrent liability +( 5,559 +) +— +( 5,559 +) +— +( 5,559 +) +As of December 31, 2018: +Other current asset +$ +— +$ +— +$ +— +$ +— +$ +— +Other noncurrent asset +— +— +— +— +— +Other current liability +( 129 +) +— +( 129 +) +— +( 129 +) +Other noncurrent liability +( 169 +) +— +( 169 +) +— +( 169 +) +(1) +Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) +There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2019 +2018 +2017 +Location +Amount of gain (loss) recognized in other comprehensive income on derivative +$ +( 7,628 +) +$ +( 880 +) +$ +791 +OCI +Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) (“AOCI”) into earnings +239 +697 +( 72 +) +Interest Expense +Amount of loss reclassified from AOCI into earnings as a result of originally forecasted transaction becoming probable of not occurring +— +— +( 100 +) +Interest Expense +The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss). +There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2019 , $ 1.5 million of net losses will be reclassified from accumulated other comprehensive income (loss) into earnings within the next 12 months. +The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under ASC 815, “Derivative Financial Instruments,” (in thousands of dollars): +Year Ended December 31, +Description +Location +2019 +2018 +2017 +Gains (loss) on interest contracts +Interest expense +$ +— +$ +— +$ +( 367 +) +103 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +See Note ( 11 ) ( Fair Value Measurements and Financial Information ) for further information related to the Company’s derivative instruments. +( 11 ) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and finance lease obligations. As of December 31, 2019 , and 2018 , the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 as of December 31, 2019 and 2018 . +Recurring Fair Value Measurement +At December 31, 2019 , the financial instrument measured by the Company at fair value on a recurring bases was its interest rate derivative. +The fair market value of the derivative financial instrument reflected on the consolidated balance sheets as of December 31, 2019 , and 2018 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2019 , and 2018 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2019 +Level 1 +Level 2 +Level 3 +Liabilities: +Interest rate derivatives +$ +( 7,288 +) +$ +— +$ +( 7,288 +) +$ +— +Fair value measurements at reporting date using +December 31, 2018 +Level 1 +Level 2 +Level 3 +Liabilities: +Interest rate derivatives +( 298 +) +— +( 298 +) +— +Non-Routine Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the RockPile, RSI, and C&J transactions were recorded at their fair values on the date of acquisition. See Note (3) Mergers and Acquisition s for further details. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +104 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The Company’s cash balances on deposit with financial institutions totaled $ 255.0 million and $ 80.2 million as of December 31, 2019 and 2018 , respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2019 , trade receivables from one customer individually represented 10% more of the Company’s total accounts receivable. As of December 31, 2018 , trade receivables from three customers individually represented more than 10% and collectively represented 49 % of the Company’s total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2019 and 2018 , the Company had $ 0.7 million and $ 0.5 million in allowance for doubtful accounts, respectively, based on specific identification. The Company wrote-off $ 0.7 million of bad debts during the year ended 2019 . In 2018 , the Company wrote-off $ 0.6 million of bad debt in 2018 , in connection with its litigation with Halcon Operating Co., Inc. and Halcon Energy Properties. The Company did not write-off any bad debts during 2017. For further detail, see Note ( 18 ) Commitments and Contingencies . +( 12 ) Stock-Based Compensation +Effective as of October 31, 2019, the Company (i) amended and restated the Keane Group, Inc. Equity and Incentive Award Plan under the name NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”), and (ii) assumed and amended and restated the C&J Energy Services, Inc. 2017 Management Incentive Plan under the name NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan ( “Management Incentive Plan”, and collectively with the Equity and Incentive Award Plan, the “Equity Award Plans”). As part of the C&J Merger, the Company assumed the award agreements outstanding under the Management Incentive Plan on the terms set forth in the Merger agreement. +As of December 31, 2019 , the Company had four types of stock-based compensation under its Equity Award Plans: (i) deferred stock awards for three executive officers, (ii) restricted stock awards issued to independent directors and certain executives and employees, (iii) restricted stock units issued to executive officers and key management employees and (iv) non-qualified stock options issued to executive officers. The Company has approximately 5,899,928 shares of its common stock reserved and available for grant under the Equity and Incentive Award Plan and approximately 8,155,054 shares of its common stock reserved and available for grant under the Management Incentive Plan. +For details on the Company’s accounting policies for determining stock-based compensation expense, see Note ( 2 ) Summary of Significant Accounting Policies : (l) Stock-based compensation . Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss) however, for the year ended December 31, 2019, the Company presented $ 9.6 million within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions. +105 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following table summarizes stock-based compensation expense for the years ended December 31, 2019 , 2018 and 2017 (in thousands of dollars): +Year Ended December 31, +2019 +2018 +2017 +Deferred stock awards +— +4,280 +4,280 +Restricted stock awards +1,486 +611 +399 +Restricted stock units +20,426 +9,822 +4,766 +Non-qualified stock options +3,498 +2,453 +1,133 +Restricted stock performance-based stock unit awards +3,567 +— +— +Stock-based compensation +$ +28,977 +$ +17,166 +$ +10,578 +Tax benefit +$ +( 6,954 +) +( 4,134 +) +( 2,532 +) +Stock-based compensation, net of tax +22,023 +$ +13,032 +$ +8,046 +(a) Deferred stock awards +Upon consummation of the IPO, the executive officers of the Company identified in the table below became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the “Compensation Committee”) of the Board of Directors approved, and each executive officer agreed, that in lieu of the executive officer’s cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company’s common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts (In thousands) +First +Second +James C. Stewart +$ +1,976 +$ +1,976 +Gregory L. Powell +$ +1,646 +$ +1,646 +M. Paul DeBonis Jr. +$ +659 +$ +659 +The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $ 8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017. +The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018. The second stock bonus vested January 1, 2019, with an original payout date of February 15, 2019, that was amended in February 2019 to a payout date of March 4, 2019. For the years ended December 31, 2019 , 2018 and 2017 the Company recognized nil , $ 4.3 million and $ 4.3 million respectively of non-cash stock compensation expense into earnings. As of December 31, 2019 , there was no remaining unamortized compensation cost related to unvested deferred stock awards. +106 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(b) Restricted stock awards +During 2019, in connection with the C&J Merger, restricted stock awards granted to the independent members of the Company’s Board of Directors prior to the C&J Merger in 2018, and 2017, vested in accordance with existing change in control provisions. Additionally, the Company granted approximately 0.6 million replacement restricted stock awards to C&J employees in connection with the C&J Merger. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For the years ended December 31, 2019 , 2018 , and 2017 the Company recognized $ 1.5 million , $ 0.6 million , and $ 0.4 million respectively, of non-cash stock compensation expense. As of December 31, 2019 , total unamortized compensation cost related to unvested restricted stock awards was $ 0.7 million , which the Company expects to recognize over the remaining weighted-average period of 0.94 years . +Rollforward of restricted stock awards as of December 31, 2019 is as follows: +Number of Restricted Stock Awards +(In thousands) +Weighted average grant date fair value +Total non-vested at December 31, 2018 +94 +$ +17.40 +Shares issued +678 +4.99 +Shares vested +( 478 +) +7.70 +Shares forfeited +( 2 +) +4.55 +Non-vested balance at December 31, 2019 +292 +$ +4.55 +(c) Restricted stock units +During 2019, the Company granted approximately 1.6 million restricted stock units to executive officers and key management employees. Additionally, the Company granted approximately $ 0.9 million replacement restricted stock units in connection with the C&J Merger. Restricted stock units are stock awards that vest over a one to three year service period. +For the years ended December 31, 2019 , 2018 and 2017, the Company recognized $ 20.4 million , $ 9.8 million and $ 4.8 million , respectively, of non-cash stock compensation expense. As of December 31, 2019 , total unamortized compensation cost related to unvested restricted stock units was $ 19.1 million , which the Company expects to recognize over the remaining weighted-average period of 1.84 years . +107 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Rollforward of restricted stock units as of December 31, 2019 is as follows: +Number of Restricted Stock Units +(In thousands) +Weighted average grant date fair value +Total non-vested at December 31, 2018 +1,947 +$ +14.83 +Units issued +2,679 +8.57 +Units vested +( 1,700 +) +11.58 +Units forfeited +( 166 +) +13.89 +Non-vested balance at December 31, 2019 +2,760 +$ +10.82 +(d) Non-qualified stock options +During 2019, the Company granted approximately 0.5 million replacement stock options in connection with the C&J merger. When granted the stock options had a remaining vesting term of approximately one year or less. Stock options granted in 2018 and 2017 have a three -year vesting period, provided that the participant does not incur a termination before the applicable vesting date. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the six -year anniversary from the grant date. +For the years ended December 31, 2019 , 2018 and 2017 , the Company recognized $ 3.5 million , 2.5 million and $ 1.1 million , respectively, of non-cash stock compensation expense. As of December 31, 2019 , total unamortized compensation cost related to unvested stock options was $ 1.0 million , which the Company expects to recognize over the remaining weighted-average period of 1.15 years. +Rollforward of stock options as of December 31, 2019 is as follows: +Number of Stock Options +(In thousands) +Weighted average grant date fair value +Total outstanding at December 31, 2018 +1,219 +$ +6.75 +Options granted +549 +0.74 +Options exercised +— +— +Actual options forfeited +( 25 +) +6.77 +Options expired +— +— +Total outstanding at December 31, 2019 +1,743 +$ +4.86 +There were 1.4 million stock options exercisable or vested at December 31, 2019 . +108 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Assumptions used in calculating the fair value of the stock options granted during the year are summarized below: +2019 Options Granted +2018 Options Granted +2017 Options Granted +Valuation assumptions: +Expected dividend yield +0 +% +0 +% +0 +% +Expected equity volatility +49.6 +% +46.3 +% +51.5 +% +Expected term (years) +7.3 - 8.1 +6 +6 +Risk-free interest rate +1.7 +% +2.7 +% +1.6 +% +Weighted average: +Exercise price per stock option +$19.09 - $26.41 +$ +15.31 +$ +19.00 +Market price per share +$ +4.55 +$ +15.31 +$ +14.49 +Weighted average fair value per stock option +$ +0.74 +$ +7.28 +$ +6.16 +(e) Performance-based RSU awards +On March 25, 2019, the Company issued 0.3 million performance-based RSUs to executive officers under the Equity Plan, which had a grant date fair valued at $ 3.6 million . One half of performance-based RSUs were scheduled to vest at December 31, 2020 (the "two-year performance-based RSUs"), while the remaining half were scheduled to vest at December 31, 2021 (the "three-year performance-based RSUs"). Each vesting was subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period, which extends from January 1, 2019 to December 31, 2020 for the two-year performance-based RSUs and January 1, 2019 to December 31, 2021 for the three-year performance-based RSUs. The number of shares that could have been earned at the end of the vesting period ranged from 25 % to 200 % of the target award amount, if the threshold performance criteria was met. These performance-based RSUs were settled in the Company's common stock and are classified as equity awards. In connection with the Merger, the performance-based RSU’s immediately vested on the C&J Acquisition Date. The remaining compensation expense associated with these performance-based RSUs was amortized into earnings on the date of close. As of December 31, 2019, there was no remaining compensation cost related to performance-based RSUs. +Number of Performance-based RSU’s +(In thousands) +Weighted average grant date fair value +Total outstanding at December 31, 2018 +— +$ +— +Performance-based RSU’s issued +327 +11.00 +Performance-based RSU’s vested +( 327 +) +— +Performance-based RSU’s forfeited +— +— +Total outstanding at December 31, 2019 +— +$ +— +Assumptions used in calculating the fair value of the performance-based RSU’s granted during the year are summarized below: +109 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +2019 Performance-based RSU’s Granted +Valuation assumptions: +Expected dividend yield +0 +% +Expected equity volatility, including peers +40.2 % - 73.2% +Expected term (years) +1.8 - 2.8 +Risk-free interest rate +2.2% - 2.3% +( 13 ) Stockholders’ Equity +(a) Certificate of Incorporation +The Company was formed as a Delaware corporation on October 13, 2016. The Company’s certificate of incorporation provides for (i) the authorization of 500,000,000 shares of common stock with a par value of $ 0.01 per share and (ii) the authorization of 50,000,000 shares of undesignated preferred stock with a par value of $ 0.01 per share that may be issued from time to time by the Company’s Board of Directors in one or more series. +Each holder of the Company’s common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company’s common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions. +(b) Keane Group Holdings Recapitalization +As described in Note ( 1 ) Basis of Presentation and Nature of Operations , the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of 1,000,000 class A units, 176,471 class B units and 294,118 class C units, being converted to an aggregate of 87,428,019 shares of the Company’s common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate 87,428,019 shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled $ 453.8 million . The Company recorded $ 0.9 million of par value common stock and the remaining $ 452.9 million as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group’s retained deficit as of January 20, 2017 of $ 296.7 million . +(c) Initial Public Offering +As described in Note ( 1 ) Basis of Presentation and Nature of Operations , on January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $ 19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The net proceeds of the IPO to the Company was $ 255.5 million , which were used to fully repay Holdco II’s term loan balance of $ 99.0 million and the associated prepayment penalty of $ 13.8 million , and repay $ 50.0 million of its 12 % secured notes due 2019 and the associated prepayment penalty of approximately $ 0.5 million . The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding. +110 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value. +(d) RockPile Acquisition +As described in Note (3) Mergers and Acquisition s, the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of $ 116.6 million , subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights, as described in Note (3) Mergers and Acquisition s . The fair value of the Acquisition Shares was calculated using the closing price of the Company’s common stock on July 3, 2017, of $ 16.29 , discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had 111,831,176 shares of common stock outstanding. +(e) Vesting of Stock Awards +During the year ended December 31, 2019 , 1,962,809 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company. +(f) Secondary Offerings +On January 17, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor, pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $ 18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor controlled 50.8 % of the Company’s outstanding common stock. During the December 31, 2018, the Company incurred $ 13.0 million of transaction costs on behalf of the selling stockholder, which were included within selling, general and administrative expenses in the consolidated and combined statement of operations and comprehensive income (loss). +In February 2018, the Company filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, a selling stockholder sold 5,251,249 of the Company’s common stock at a price to the public of $ 11.02 per share. In conjunction with this offering, the Company repurchased 520,000 shares. The Company did not sell any common stock in, and did not receive any of the proceeds from, this offering. As a result of this offering, Keane Investor owned approximately 49.6 % of the Company’s outstanding common stock, and the Company ceased being a “controlled company” within the meaning of the NYSE rules. +(g) C&J Merger +As described in Note (3) Mergers and Acquisition s, the Company completed the C&J Merger on October 31, 2019 for total consideration of approximately $ 485.1 million , consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-Merger services with a value of $ 3.2 million . +111 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(h) Stock Repurchase +During the year ended December 31, 2018 , the Company settled $ 105.0 million of total share repurchases of its common stock at an average price of $ 12.93 per share, representing a total of 8,111,764 common shares of the Company. As of December 31, 2018 , the Company had approximately $ 150.0 million remaining for future share repurchases under its existing stock repurchase program. Of the total amount of shares repurchased in 2018, 1,248,440 shares and 520,000 shares were repurchased from White Deer Energy (as defined herein) and Keane Investor, respectively. The shares repurchased from Keane Investor were not repurchased under the Company’s existing stock repurchase program. For further details of these related-party transactions, see Note (19) Related Party Transactions . +On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for up to $ 50.0 million through December 2020. No share repurchases were made under the share repurchase program in 2019. +(14) Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items +Interest rate +contract +AOCI +December 31, 2018 +$ +— +$ +( 798 +) +$ +( 798 +) +Net income (loss) +— +( 239 +) +( 239 +) +Other comprehensive loss +( 116 +) +( 7,628 +) +( 7,744 +) +December 31, 2019 +$ +( 116 +) +$ +( 8,665 +) +$ +( 8,781 +) +The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended December 31, 2019 , 2018 and 2017 (in thousands of dollars): +Affected line item +in the consolidated and combined +statements of +operations and +comprehensive income (loss) +Year Ended December 31, +2019 +2018 +2017 +Interest rate derivatives, hedging +$ +239 +$ +697 +$ +( 172 +) +Interest expense +Foreign currency items (1) +— +( 2,621 +) +— +Other income +Total reclassifications +$ +239 +$ +( 1,924 +) +$ +( 172 +) +(1) During the fourth quarter of 2018, the Company liquidated its Canadian subsidiary, upon which it recognized a loss of $ 2.6 million from AOCI into earnings in the consolidated and combined statement of operations and comprehensive income for the year ended December 31, 2018 . +(15) Earnings per Share +Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +112 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows (in thousands): +Year Ended December 31, +2019 +2018 +2017 +Numerator: +Net income (loss) +$ +( 106,157 +) +$ +59,331 +$ +( 36,141 +) +Denominator: +Basic weighted-average common shares outstanding (1) +122,977 +109,335 +106,321 +Dilutive effect of restricted stock awards +43 +17 +36 +Dilutive effect of deferred stock award granted to NEOs +— +214 +— +Dilutive effect of RSUs granted under stock incentive plans +81 +94 +135 +Diluted weighted-average common shares outstanding (2) +123,101 +109,660 +106,492 +(1) +The basic weighted-average common shares outstanding for the year ended December 31, 2017 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Company’s Existing Owners’ membership interests for the newly-created ownership interests. +(2) +As a result of the net loss incurred by the Company for the years ended December 31, 2019 and 2017 , the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Leases +In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. The Company adopted these standards effective January 1, 2019, using the modified retrospective transition method. The Company recognized a lease right-of-use asset and lease liability of approximately $ 61.0 million on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated and combined statements of operations and comprehensive loss or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. +113 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +As such the Company has elected to account for the combined components of its customer contracts under ASC 606. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases. +The effect of the lease standards adoption on the unaudited condensed consolidated balance sheet as of January 1, 2019 is as follows (in thousands of dollars): +December 31, 2018 +January 1, 2019 +Balance sheet line item +As Previously Reported +ASU 2016-02 Adoption +As Adjusted +Operating lease right-of-use assets +$ +— +$ +60,946 +$ +60,946 +Finance lease right-of-use assets +— +7,864 +7,864 +Property and equipment, net +531,319 +( 7,864 +) +523,455 +Other noncurrent assets +6,569 +( 9 +) +6,560 +Accrued expenses and other current liabilities +( 101,833 +) +1,066 +( 100,767 +) +Current maturities of operating lease liabilities +— +( 25,211 +) +( 25,211 +) +Current maturities of finance lease liabilities +— +( 4,928 +) +( 4,928 +) +Current maturities of capital lease obligations +( 4,928 +) +4,928 +— +Long-term operating lease liabilities, less current maturities +— +( 35,512 +) +( 35,512 +) +Long-term finance lease liabilities, less current maturities +— +( 5,581 +) +( 5,581 +) +Capital lease obligations, less current maturities +( 5,581 +) +5,581 +— +Other noncurrent liabilities +( 3,283 +) +50 +( 3,233 +) +Retained earnings +31,494 +( 1,330 +) +30,164 +The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has both operating and finance leases for its light duty vehicles. +The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 year to 15 years , some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees. +114 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The components of the Company's lease costs are as follows: +(Thousands of Dollars) +Year ended +December 31, 2019 +Operating lease cost +$ +26,948 +Finance lease cost: +Amortization of right-of-use assets +3,356 +Interest on lease liabilities +625 +Total finance lease cost +3,981 +Short-term lease cost +1,184 +Variable lease cost (1) +15,654 +Sublease income +( 116 +) +Total lease cost +$ +47,651 +(1) Cost from variable amounts excluded from determination of lease liability. +Supplemental cash flows related to leases are as follows: +(Thousands of Dollars) +Year ended +December 31, 2019 +Cash paid for amounts included in the measurements of lease liabilities +Operating cash flows from operating leases +$ +25,318 +Operating cash flows from finance leases +565 +Financing cash flows from finance leases +6,035 +Weighted average remaining lease terms are as follows: +Year ended +December 31, 2019 +Operating leases +4.74 years +Finance leases +2.28 years +Weighted average discount rate on the Company's lease liabilities are as follows: +Year ended +December 31, 2019 +Operating leases +5.73 % +Finance leases +5.53 % +115 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Maturities of the Company's lease liabilities as of December 31, 2019 , per ASU 2016-02, were as follows: +(Thousands of Dollars) +Year ending December 31, +Operating leases +Finance leases +2020 +$ +26,068 +$ +4,977 +2021 +12,084 +3,168 +2022 +10,012 +1,643 +2023 +7,088 +273 +2024 +2,171 +— +Thereafter +10,921 +— +Total undiscounted remaining minimum lease payments +68,344 +10,061 +Less imputed interest +( 9,748 +) +( 623 +) +Total discounted remaining minimum lease payments +$ +58,596 +$ +9,438 +Prior to the adoption of the new lease accounting standard, m inimum lease commitments, excluding early termination buyouts, remaining under the Company's operating leases and capital leases, for the next five years as of December 31, 2018 were as follows: +(Thousands of Dollars) +Year ending December 31, +Operating leases +Capital leases +2019 +$ +26,327 +$ +5,484 +2020 +18,017 +2,652 +2021 +5,688 +2,430 +2022 +4,795 +883 +2023 +3,172 +— +Total +$ +57,999 +$ +11,449 +The Company did not make any lease reassessments or modifications nor did it recognize any gains or losses on sale-leaseback transactions during the year ended December 31, 2019 . +As of December 31, 2019 , the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties. +( 17 ) Income Taxes +NexTier Oilfield Solutions Inc. (formerly Keane Group, Inc.) was formed as a corporation as a result of the IPO and related Organizational Transactions on January 20, 2017. The Company established a provision for income taxes for operations beginning January 20, 2017. NexTier was formed to hold all of the operational assets of Keane Group Holdings, LLC, which was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns for periods prior to January 20, 2017. +The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions: +116 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2019 +2018 +2017 +Domestic +$ +( 106,879 +) +$ +66,260 +$ +( 35,904 +) +Foreign +1,727 +( 2,659 +) +( 87 +) +$ +( 105,152 +) +$ +63,601 +$ +( 35,991 +) +The components of the Company’s income tax provision are as follows: +(Thousands of Dollars) +Year Ended December 31, +2019 +2018 +2017 +Current: +State +$ +709 +$ +5,387 +$ +614 +Foreign +627 +31 +— +Total current income tax provision +$ +1,336 +$ +5,418 +$ +614 +Deferred: +Federal +$ +( 239 +) +$ +( 1,031 +) +$ +( 536 +) +State +( 92 +) +( 117 +) +72 +Total deferred income tax provision +( 331 +) +( 1,148 +) +( 464 +) +$ +1,005 +$ +4,270 +$ +150 +The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated and combined statements of operations and comprehensive (loss). The statutory federal tax rate for 2017 was 35% prior to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduced the federal corporation rate from 35% to 21%, effective January 1, 2018. The Company’s effective tax rate for 2019 of ( 0.96 )% differs from the statutory rate, primarily due to state taxes, and the change in the valuation allowance. The Company’s effective tax rate for 2018 was 6.71 % . +(Thousands of Dollars) +December 31, +2019 +December 31, +2018 +December 31, +2017 +Income tax provision computed at the statutory federal rate +$ +( 22,082 +) +$ +13,356 +$ +( 9,795 +) +Reconciling items: +State income taxes, net of federal tax benefit +( 1,463 +) +1,408 +( 334 +) +Deferred tax asset valuation adjustment +14,987 +( 22,639 +) +( 32,593 +) +Tax rate change +— +— +41,591 +Permanent differences +9,962 +5,237 +630 +Foreign withholding taxes +627 +— +— +Other +( 1,026 +) +6,908 +651 +Income tax provision +$ +1,005 +$ +4,270 +$ +150 +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The Company adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent. +117 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2019 +2018 +2017 +Deferred tax assets: +Stock-based compensation +$ +4,124 +$ +3,979 +$ +2,467 +Net operating loss carry-forwards +196,949 +90,565 +70,745 +Accruals and other +21,411 +4,524 +3,994 +PPE & Intangibles +1,474 +— +— +Gross deferred tax assets +223,958 +99,068 +77,206 +Valuation allowance +( 223,419 +) +( 41,779 +) +( 65,347 +) +Total deferred tax assets +$ +539 +$ +57,289 +$ +11,859 +Deferred tax liability: +PP&E and intangibles +$ +— +$ +( 56,799 +) +$ +( 11,319 +) +Prepaids and other +( 645 +) +( 756 +) +( 1,954 +) +Total deferred tax liability +( 645 +) +( 57,555 +) +( 13,273 +) +Net deferred tax liability +$ +( 106 +) +$ +( 266 +) +$ +( 1,414 +) +As of December 31, 2019 , NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $ 787.6 million , of which, $ 380.2 million , if not utilized, will begin to expire in the year 2031. The remaining $ 407.3 million of federal NOLS can be carried forward indefinitely. Of this amount, $ 71.6 million related to the Company’s current year federal tax loss. The Company has state NOLS of $ 306.4 million , which if not utilized, will expire in various years between 2025 and 2038. Additionally, the Company has $ 20.1 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2035. +As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $ 8.5 million . In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. As of December 31, 2019, it is expected that all of the Company’s pre-change NOLs of $ 398.7 million incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration. The Company’s pre-change NOLs subject to expiration comprise $275.8 million out of the total $ 398.7 million . +C&J Energy Services, Inc. had Pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $ 8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. total $ 322.6 million of which $ 104.4 million are subject to expiration, but not expected to expire as a result of the IRC Section 382 limitation. +ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s +118 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2019 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of NexTier Oilfield Solutions Inc., excluding deferred tax liabilities related to certain indefinite lived assets. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of December 31, 2019 , 2018, and 2017 were $ 223.4 million , $ 41.8 million and $ 65.3 million , respectively. +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2019 +$ +41,779 +Acquisition accounting +164,950 +Charge as (benefit) expense to income tax provision for current activities +14,987 +Changes to other comprehensive income (loss) +1,703 +Valuation allowance as of December 31, 2019 +$ +223,419 +On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. +The Company evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on its consolidated and combined financial statements as of December 31, 2017. Accordingly, the Company recorded a provision to income taxes for the Company’s assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on the Company’s consolidated and combined financial statements. The Company finalized its analysis of the Tax Act in 2018 and will continue to monitor guidance on provisions of the Tax Act to be issued by taxing authorities to assess the impact on the Company’s consolidated and combined financial statements. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2019 , 2018 and 2017 . The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2016 through December 31, 2018 for federal tax purposes and for the years ended December 31, 2015 through December 31, 2018 for state tax purposes. +( 18 ) Commitments and Contingencies +As of December 31, 2019 , and 2018 , the Company had $ 9.0 million , including deposits acquired through the C&J Merger, and $ 4.2 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $ 64.0 million and $ 43.6 million , as of December 31, 2019 , and 2018 , respectively. +As of December 31, 2019 , the Company had committed $ 1.3 million to research and development with its equity-method investee. For additional information, see Note ( 2 ) Summary of Significant Accounting Policies . +119 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +As of December 31, 2019 , the Company has a letter of credit of $ 31.8 million under the 2019 ABL Facility. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $ 160.0 million , $ 107.4 million and $ 150.0 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2019 , 2018 and 2017 . +Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2019 are listed below: +(Thousands of Dollars) +Year-end December 31, +2020 +$ +30,007 +2021 +14,925 +2022 +9,300 +2023 +1,500 +2024 +— +$ +55,732 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues and motor vehicle accidents. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its consolidated financial position, results of operations or liquidity. +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +120 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Regulatory Audits +In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it would conduct a routine audit of Keane Frac TX, LLC's direct payment sales tax for the periods of January 2014 through May 2017. The Company initially anticipated and recorded an estimate for a potential assessment of approximately $ 3.2 million during the first quarter of 2019. Subsequently, the Company made a $ 2.1 million prepayment in June 2019. The Company made an additional payment of $ 0.3 million in the third quarter of 2019 after receiving the notification of the audit result, concluding the audit. These amounts are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations and comprehensive income (loss). +Prior to the consummation of the C&J Merger, the Company and C&J had been notified by certain state taxing authorities that these taxing authorities would be conducting routine sales and use tax audits of certain wholly owned operating subsidiaries of the Company for tax periods ranging from January 2011 through December 2019. The Company has recorded estimates of potential assessments for each audit totaling in the aggregate approximatel y $ 32.6 million . For one audit, in particular, the Company disagrees with many aspects of the state’s preliminary report and intends to contest the state’s position through litigation, if necessary. In addition, this reserve does not take into account the potential for refund claims in which the Company has not recorded. +(19) Related Party Transactions +Cerberus Operations and Advisory Company and Cerberus Capital Management, L.P., affiliates of the Company’s principal equity holder, provide certain consulting services to the Company. The Company paid $ 4.1 million , $ 0.3 million and $ 0.3 million during the years ended December 31, 2019 , 2018 and 2017 , respectively. +In connection with the Organization Transaction, the Company engaged in transactions with affiliates. See Note ( 1 ) ( Basis of Presentation and Nature of Operations ) and Note ( 13 ) ( Stockholders’ Equity ) for a description of these transactions. +In connection with the Company’s research and development initiatives, the Company has engaged in transactions with its equity-method investee. For additional information, see Note ( 2 ) Summary of Significant Accounting Policies . As of December 31, 2019 , the Company has purchased $ 1.7 million of shares in its equity-method investee. +On May 29, 2018, the Company repurchased 1,248,440 shares of its common stock from WDE RockPile Aggregate, LLC (“White Deer Energy”) for $ 16.02 per share or $ 20.0 million . At the time of the RockPile acquisition, the shares of the Company’s common stock that White Deer Energy acquired was valued at $ 15.00 per share. The Company recognized the entire transaction as treasury stock that was subsequently retired, whereby the RockPile acquisition value of the shares of $ 18.7 million was recorded against paid-in capital in excess of par value and the remaining $ 1.3 million was recorded against retained earnings on the consolidated balance sheet as of December 31, 2018 . +During 2018, the Company completed two secondary offerings on behalf of Keane Investor Holdings LLC. For further details, see Note ( 13 ) Stockholders’ Equity : (f) Secondary Offerings. +(20) Retirement Benefits and Nonretirement Postemployment Benefits +Defined Contribution Plan +The Company sponsors two different 401(k) defined contribution retirement plans covering eligible employees. Through the first plan, the Company makes matching contributions of up to 3.5 % of compensation. Through the second plan, Eligible employees can make annual contributions to the plan up to the maximum amount allowed by current federal regulations, but no more than 80.0 % of compensation as noted in the plan document. Contributions made by the Company related to the years ended December 31, 2019 , 2018 , and 2017 were $ 8.1 million , $ 6.7 million and $ 4.0 million , respectively. +Severance +121 +The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $ 16.7 million , $ 0.6 million and $ 2.0 million for the years ended December 31, 2019 , 2018 and 2017 , respectively. +(21) Business Segments +In accordance with Accounting Standard Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available. +Due to the transformative nature of the C&J Merger, the CODM changed the way in which the Company is managed, including the level at which to make performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. As a result of this change in operating segments, the Company revised its reportable segments subsequent to the completion of the C&J Merger. The Company’s revised reportable segments are: (i) Completion Services, (ii) Well Construction and Intervention (“WC&I”) and (iii) Well Support Services. This segment structure reflects the financial information and reports used by the Company’s management, specifically including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions. As a result of the revised reportable segment structure, the Company has restated the corresponding items of segment information for all periods presented. +The following is a description of each reportable segment: +Completion Services +The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) wireline and pumpdown services; and (3) completion support services, which includes the Company's research and technology department. +Well Construction and Intervention Services +The Company’s WC&I Services segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. +Well Support Services +The Company’s Well Support Services segment consists of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. +122 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2019 +2018 +2017 +Operations by reportable segment +Revenue: +Completion Services +$ +1,709,934 +$ +2,100,956 +$ +1,527,287 +WC&I +63,039 +36,050 +14,794 +Well Support Services +48,583 +— +— +Total revenue +$ +1,821,556 +$ +2,137,006 +$ +1,542,081 +Adjusted gross profit (loss): +Completion Services (1) +$ +401,845 +$ +478,850 +$ +258,024 +WC&I (1) +7,812 +( 2,390 +) +1,496 +Well Support Services (1) +7,967 +— +— +Total adjusted gross profit +$ +417,624 +$ +476,460 +$ +259,520 +Operating income (loss): +Completion Services +$ +126,698 +$ +234,756 +$ +115,691 +WC&I +3,855 +( 6,818 +) +( 197 +) +Well Support Services +6,959 +— +— +Corporate and Other +( 221,261 +) +( 129,928 +) +( 106,225 +) +Total operating income (loss) +$ +( 83,749 +) +$ +98,010 +$ +9,269 +Depreciation and amortization: +Completion Services +$ +270,918 +$ +241,169 +$ +141,385 +WC&I +3,822 +4,428 +5,757 +Well Support Services +1,415 +— +— +Corporate and Other +15,995 +13,548 +12,138 +Total depreciation and amortization +$ +292,150 +$ +259,145 +$ +159,280 +Net income (loss): +Completion Services +$ +126,698 +$ +234,756 +$ +115,691 +WC&I +3,855 +( 6,818 +) +( 197 +) +Well Support Services +6,959 +— +— +Corporate and Other +( 243,669 +) +( 168,607 +) +( 151,635 +) +Total net income (loss) +$ +( 106,157 +) +$ +59,331 +$ +( 36,141 +) +Capital expenditures (2) : +Completion Services +$ +179,044 +$ +281,081 +$ +185,329 +WC&I +3,514 +9,510 +1,718 +Well Support Services +6,980 +— +— +Corporate and Other +3,649 +952 +2,582 +Total capital expenditures +$ +193,187 +$ +291,543 +$ +189,629 +123 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(1) +Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +(2) +Capital expenditures do not include the asset acquisition of RSI on July 24, 2018 of $ 35.0 million , the business acquisition of RockPile on July 3, 2017 of $ 116.6 million +(Thousands of Dollars) +December 31, +2019 +December 31, +2018 +Total assets by segment: +Completion Services +$ +1,091,965 +$ +894,467 +WC&I +106,493 +20,974 +Well Support Services +109,792 +— +Corporate and Other +356,657 +139,138 +Total assets +$ +1,664,907 +$ +1,054,579 +Goodwill by segment: +Completion Services +$ +136,425 +$ +132,524 +WC&I +372 +— +Well Support Services +661 +— +Corporate and Other +— +— +Total goodwill +$ +137,458 +$ +132,524 +124 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +(22) Selected Quarterly Financial Data +The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2019 and 2018 . The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. +Year Ended December 31, 2019 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +421,654 +$ +427,733 +$ +443,953 +$ +528,216 +Costs of services (excluding depreciation and amortization, shown separately) +337,646 +324,503 +333,438 +408,345 +Depreciation and amortization +71,476 +69,886 +68,708 +82,080 +Selling, general and administrative expenses +27,936 +26,463 +26,579 +42,698 +Merger and integration +— +6,108 +6,651 +55,972 +(Gain) loss on disposal of assets +481 +( 330 +) +679 +3,640 +Impairment +— +— +— +12,346 +Total operating costs and expenses +437,539 +426,630 +436,055 +605,081 +Operating income (loss) +( 15,885 +) +1,103 +7,898 +( 76,865 +) +Other income (expense), net +448 +( 43 +) +55 +( 7 +) +Interest expense +( 5,395 +) +( 5,477 +) +( 5,215 +) +( 5,769 +) +Total other expenses +( 4,947 +) +( 5,520 +) +( 5,160 +) +( 5,776 +) +Income tax income (expense) +( 974 +) +( 564 +) +820 +( 287 +) +Net income (loss) +$ +( 21,806 +) +$ +( 4,981 +) +$ +3,558 +$ +( 82,928 +) +125 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +Year Ended December 31, 2018 +(Unaudited) +Selected Financial Data: +First +Quarter +Second Quarter +Third Quarter +Fourth Quarter +Revenue +$ +513,016 +$ +578,533 +$ +558,908 +$ +486,549 +Costs of services (excluding depreciation and amortization, shown separately) +403,408 +447,685 +436,799 +372,654 +Depreciation and amortization +60,051 +59,404 +68,287 +71,403 +Selling, general and administrative expenses +33,884 +23,978 +27,482 +28,466 +Merger and integration +— +147 +301 +— +(Gain) loss on disposal of assets +769 +3,287 +1,113 +( 122 +) +Total operating costs and expenses +498,112 +534,501 +533,982 +472,401 +Operating income +14,904 +44,032 +24,926 +14,148 +Other expense (income), net +( 12,989 +) +16 +14,454 +( 2,386 +) +Interest expense +( 6,990 +) +( 14,317 +) +( 5,978 +) +( 6,219 +) +Total other income (expenses) +( 19,979 +) +( 14,301 +) +8,476 +( 8,605 +) +Income tax income (expense) +( 3,168 +) +936 +( 2,623 +) +585 +Net income (loss) +$ +( 8,243 +) +$ +30,667 +$ +30,779 +$ +6,128 +( 23 ) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows companies to reclassify from accumulated other comprehensive income to retained earnings, any stranded tax effects resulting from complying with the Tax Cuts and Jobs Act legislation passed in December 2017. ASU 2018-02 is effective for annual periods beginning after December 15, 2018. The Company implemented the provisions of this ASU effective January 1, 2019, with no impact to its unaudited condensed consolidated financial statements, as due to the Company's valuation allowance, there is no net tax effect stranded within accumulated other comprehensive loss. +In July 2018, the FASB issued ASU 2018-09, "Codification Improvements," which made clarifications, correction of errors and minor improvements to ASC 220, "Income Statement - Reporting Comprehensive Income - Overall," ASC 470-50, "Debt Modifications and Extinguishments," ASC 480-10, "Distinguishing Liabilities from Equity -Overall," ASC 718-740, "Compensation - Stock Compensation - Income Taxes," ASC 805-740, "Business Combinations - Income Taxes," ASC 815-10, "Derivatives and Hedging - Overall," ASC 820-10, "Fair Value Measurement - Overall," ASC 940-405, "Financial Services - Brokers and Dealers - Liabilities," and ASC 962-325, "Plan Accounting - Defined Contribution to Pension Plans - Investments - Other." The Company adopted this standard effective January 1, 2019, with no significant impact to its unaudited condensed consolidated financial statements, as the transactions it conducts that qualify under ASU 2018-09 are only impacted by the amendments to ASC 718-740. +In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this standard permit use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC +126 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +815. ASU 2018-16 is effective for annual periods beginning after December 15, 2018. The Company adopted this standard effective January 1, 2019, with no impact to its unaudited condensed consolidated financial statements, as the benchmark interest rate on its existing debt facility and interest rate swap is LIBOR. +In January 2019, the FASB issued ASU 2019-01, "Leases (Topic 842) - Codification Improvements." The amendments in this standard provide implementation guidance with regards to determining the fair value of an underlying leased asset by lessors that are not manufacturers or dealers, presentation of cash received from leases by lessors in sales-type or direct financing leases on the statement of cash flows and transition disclosures related to ASC 250, "Accounting Changes and Error Corrections." The amendments in this standard are effective January 1, 2020, except for those related to transition disclosures that are effective immediately on January 1, 2019. Early adoption was permitted. The Company adopted this standard effective January 1, 2019 with no impact to its unaudited condensed consolidated financial statements, as the Company does not have any leases for which lessor accounting is applied under ASC 842. +(b) Recently Issued Accounting Standards +In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses," which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, "Financial Instruments-Credit Losses-Measured at Amortized Cost," and should be accounted for in accordance with ASC 842. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarified certain amendments related to ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief," which clarifies certain aspects of the amendments in ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842) and ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses. +The Company adopted these new standards effective January 1, 2020. The Company is finalizing its assessment related to its trade accounts receivable based on a risk assessed portfolio approach, incorporating current and forecasted economic conditions as of January 1, 2020. The Company continues to finalize its estimated credit losses and establish processes and internal controls that may be required to comply with the new credit loss standard and related disclosure requirements. The Company does not expect the adoption of these standards to have a significant impact on its consolidated financial statements. +In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. The Company does not currently have or anticipate having Level 3 fair value instruments. +In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements. +In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The amendments in this standard clarified that certain +127 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated and Combined Financial Statements +transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. ASU 2018-18 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements. +In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update)". The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements. +In August 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer". ASU 2019-08 expands the scope of ASC Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. For entities that have adopted the amendments in ASU 2018-07, the amendments in ASU 2019-08 are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt the amendments in ASU 2019-08, but not before it adopts the amendments in ASU 2018-07. The Company does not expect the adoption of this standard to have an impact on its consolidated and combined financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period. +In December 2019, the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures. +(24) Subsequent Events +On March 9, 2020, the Company announced it had completed the divestiture of its Well Support Services segment for approximately $ 93.7 million of total consideration to Basic Energy Services, Inc. (“Basic”). The consideration consisted of (i) $ 59.4 million of cash consideration before transaction costs, escrowed amounts and subject to customary working capital adjustments and (ii) and $ 34.3 million of par value senior secured notes (“Notes”) previously issued by Basic. Under the terms of the agreement, the Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $ 34.3 million to NexTier after the Notes are held to the one year anniversary of March 9, 2021. +The Company is monitoring the recent reductions in commodity prices driven by the potential impact of the novel coronavirus and global supply and demand dynamics as potential triggering events that may indicate that the carrying value of certain assets may not be recoverable. The extent to which these events may impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess the financial impact. +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +128 +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2019 , based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by SEC guidance for newly acquired businesses, the scope of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has excluded the acquired business of C&J Energy Services, Inc. and its subsidiaries. We completed the C&J Merger on October 31, 2019, and the excluded business represents approximately $708.5 million of total assets and total revenues of approximately $196.7 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Based on our assessment, we believe that as of December 31, 2019 , our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +Effective January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)." The adoption of this standard and subsequently-issued related ASUs resulted in the recording of operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheet, with no related impact to our consolidated and combined statements of operations and comprehensive income (loss) or consolidated statements of cash flows. In connection with the adoption of these standards, we implemented internal controls to ensure we properly evaluate our contracts for applicability under ASU 2016-09 and properly apply ASU 2016-02 and subsequently-issued related ASUs in accounting for and reporting on all our qualifying leases. +On October 31, 2019, we completed the C&J Merger, which resulted in changes to internal controls over the consolidation and reporting of our financial results. As part of the Company’s ongoing integration activities, the Company’s financial reporting controls and procedures are in the process of being implemented at C&J. The two companies maintained separate accounting systems through 2019. The consolidated and combined financial +129 +statements presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +130 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +131 +Item 11. Executive Compensation +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +132 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +133 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +134 +Item 14. Principal Accountant Fees and Services +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +135 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +Nextier Oilfield Solutions Inc. +Audited Consolidated and Combined Financial Statements +Reports of Independent Registered Public Accounting Firm +69 +Consolidated Balance Sheets +72 +Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) +73 +Consolidated and Combined Statements of Changes in Stockholders’ Equity +74 +Consolidated and Combined Statements of Cash Flows +75 +Notes to Consolidated and Combined Financial Statements +77 +Financial Statement Schedules: +The schedules listed in Rule 5-04 of Regulation S-X (17 CFR 210.5-04) have been omitted because they are not applicable or the required information is shown in the consolidated and combined financial statements or notes thereto. +136 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Exhibit +Number +Exhibit Description +2.1 +Agreement and Plan of Merger, dated as of June 16, 2019, by and among C&J Energy Services, Inc., Keane Group, Inc. and King Merger Sub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2019). +3.1 +Certificate of Incorporation of Keane Group, Inc. dated October 13, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +3.2 +Certificate of Amendment to Certificate of Incorporation of Keane Group, Inc. dated October 31, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +3.3 +Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +4.1 +Second Amended and Restated Stockholders' Agreement, dated October 31, 2019, by and among Keane Group, Inc. and Keane Investor Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +4.2 * +Description of Registrants Securities. +10.1 +Second Amended and Restated Asset-Based Revolving Credit Agreement, dated October 31, 2019, by and among NexTier Oilfield Solutions Inc. (f/k/a Keane Group, Inc.), Keane Group Holdings, LLC, as the Lead Borrower, certain other subsidiaries of NexTier Oilfield Solutions Inc. as additional borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +10.2 +Term Loan Agreement, dated May 25, 2018, by and among Keane Group Inc., as the Parent, Keane Group Holdings, LLC, as the Lead Borrower, the Subsidiary Guarantors party thereto, Barclays Bank PLC, as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 29, 2018). +10.3 † +Keane Management Holdings LLC Management Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.4 * +NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan, amended and restated on October 31, 2019. +10.5 † +Form of Keane Group, Inc. Executive Incentive Bonus Plan (incorporated by referent to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.6 † +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 filed with the SEC on December 14, 2016). +10.7 † +Form of Director Services Agreement (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1filed on December 14, 2016). +10.8 † +Keane Group, Inc. Form of Restricted Stock Award (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 26, 2017). +10.9 † +Keane Group, Inc. Form of Deferred Stock Award Agreement (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +137 +10.10 † +Form of Keane Group, Inc. Equity and Incentive Award Plan Amendment to Deferred Stock Award Agreement(incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2019). +10.11 † +Form of RSU Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.12 † +Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.13 † +Keane Group, Inc. Form of Restricted Stock Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.14 † +Keane Group, Inc. Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.15 † +Keane Group, Inc. Form of Restricted Stock Unit Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10Q filed on May 7, 2019). +10.16 † +Keane Group, Inc. Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.17 † +Form of Amendment to Keane Group, Inc. Restricted Unit Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.18 † +Form of Amendment to Keane Group, Inc. Non-Qualified Stock Option Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.19 † +NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan, dated Effective October 31, 2019 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 1, 2019). +10.20 † +C&J Energy Services, Inc. 2017 Management Incentive Plan. (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on January 13, 2017). +10.21 † +First Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.22 †* +Second Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan. +10.23 † +Restricted Share Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.2 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.24 † +Restricted Share Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.3 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.25 † +Restricted Share Agreement (Non-Employee Directors) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.4 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.26 † +Nonqualified Stock Option Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.5 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.27 † +Nonqualified Stock Option Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.6 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.28 † +Performance Share Agreement under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.10 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.29 † +Performance Share Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.11 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +138 +10.30 † +Performance Share Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.12 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.31 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.13 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.32 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.14 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.33 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.15 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.34 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.16 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.35 †* +Form of RSU Award Agreement 2020 (Executive). +10.36 †* +Form of PSU Agreement 2020. +10.37 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Robert Drummond (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.38 † +Third Amended and Restated Employment Agreement, dated June 16, 2019, by and between Keane Group, Inc. and Greg Powell (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.39 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Kevin M. McDonald (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.40 †* +Amended and Restated Employment Agreement, dated as of November 1, 2019, by and between NexTier Oilfield Solutions Inc. and Ian J. Henkes. +10.41 † +First Amended and Restated Employment Agreement, dated December 16, 2019, by and between NexTier Oilfield Solutions Inc. and Kenny Pucheu (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2019). +10.42 † +Employment Agreement, effective as of December 11, 2018, by and between C&J Spec-Rent Services, Inc. and William Driver (incorporated by reference to Exhibit 10.25 of C&J Energy Services, Inc.’s Annual Report on Form 10-K filed with the SEC on February 27, 2019). +10.43 † +Amended and Restated Employment Agreement, effective as of December 11, 2018, by and between C&J Spec-Rent Services, Inc. and Sterling Renshaw (incorporated by reference to Exhibit 10.19 of C&J Energy Services, Inc.’s Annual Report on Form 10-K filed with the SEC on February 27, 2019). +10.44 † +Amended and Restated Employment Agreement, effective as of December 11, 2018, by and between C&J Spec-Rent Services, Inc. and Michael Galvan (incorporated by reference to Exhibit 10.18 of C&J Energy Services, Inc.’s Annual Report on Form 10-K filed with the SEC on February 27, 2019). +10.45 † +Employment Agreement, dated September 17, 2018, by and between C&J Spec-Rent Services, Inc. and Jan Kees van Gaalen (incorporated by reference to Exhibit 10.1 to the C&J Energy Services, Inc.’s Current Report on Form 8-K/A filed on September 18, 2018). +10.46 † +Form of Second Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and M. Paul DeBonis Jr. (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.47 † +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James C. Stewart (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.48 †* +Separation Agreement for James Stewart. +21.1 * +Schedule of Subsidiaries of NexTier Completion Solutions Inc. +23.1 * +Consent of KPMG LLP, Independent Registered Public Accounting Firm +139 +31.1 * +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +31.2 * +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +32.1 * +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** Furnished herewith. +Item 16. Form 10-K Summary +None. +140 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 12, 2020 . +NexTier Oilfield Solutions Inc. +(Registrant) +By: +/s/ Robert W. Drummond +Robert W. Drummond +Chief Executive Officer and Director +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +/s/ Robert W. Drummond +Chief Executive Officer and Director +(Principal Executive Officer) +March 12, 2020 +Robert W. Drummond +/s/ Kenneth Pucheu +Senior Vice President and Chief Financial Officer +(Principal Financial Officer) +March 12, 2020 +Kenneth Pucheu +/s/ Michael Galvan +Chief Accounting Officer and Treasurer +(Principal Accounting Officer) +March 12, 2020 +Michael Galvan +/s/ James C. Stewart +Director +March 12, 2020 +James C. Stewart +/s/ Stuart Brightman +Director +March 12, 2020 +Stuart Brightman +/s/ Marc G. R. Edwards +Director +March 12, 2020 +Marc G. R. Edwards +/s/ Gary M. Halverson +Director +March 12, 2020 +Gary M. Halverson +141 +/s/ John Kennedy +Director +March 12, 2020 +John Kennedy +/s/ Steven Mueller +Director +March 12, 2020 +Steven Mueller +/s/ Patrick Murray +Director +March 12, 2020 +Patrick Murray +/s/ Amy H. Nelson +Director +March 12, 2020 +Amy H. Nelson +/s/ Mel Riggs +Director +March 12, 2020 +Mel Riggs +/s/ Michael Roemer +Director +March 12, 2020 +Michael Roemer +/s/ Scott Wille +Director +March 12, 2020 +Scott Wille +142 \ No newline at end of file diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/filing_metadata.csv b/raw/filings/0001688476/2019/0001688476-20-000017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..eb90bd9da4d8194c31f2dc6f07b36dda2d80651a --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2020-03-12,2019-12-31,2020-03-12T10:28:18.000Z,0001688476-20-000017,a201910-kxdoc.htm,10-K,19222042,1,1,https://www.sec.gov/Archives/edgar/data/1688476/000168847620000017/a201910-kxdoc.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847620000017/,2019,2019,1 diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/item1.txt b/raw/filings/0001688476/2019/0001688476-20-000017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b025c7bcd90f497d595e540d1e38ca79ca1cefbc --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/item1.txt @@ -0,0 +1,103 @@ +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +In continuation of our growth through acquisition strategy - which, since 2013 has notably resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 1,040,000 hydraulic horsepower - on October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into one of our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” +Following the C&J Merger, we are organized into three reportable segments, consisting of: +• +Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; +• +Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services; and +• +Well Support Services, which consists of the following business lines: (1) rig services; (2) fluids management services; and (3) specialty well site services. +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for +4 +collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services unbundled from our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States and provide premium perforating services for both wireline and tubing-conveyed applications. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +Well Support Services segment +On March 9, we sold our Well Support Services Segment. For additional information on this transaction, see Note (24) Subsequent Events of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover. Maintenance services provided with our rig fleet were generally required throughout the life cycle of an oil or gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing +5 +and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services were generally less complicated than completion and workover related services and required less time to perform. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. These plugging and abandonment services generally required auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services was not significantly impacted by the demand for oil and gas because well operators are required within a specified period of time by state regulations to plug wells that are no longer productive. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. Included in our fleet of fluid trucks and trailers were specialized trucks and trailers that were optimized to transport condensate. We also owned private saltwater disposal wells. Demand and pricing for our fluids management services generally corresponded to demand for our rig services. +Business strategy +Our principal business objective is helping our customers win by safely unlocking affordable, reliable and plentiful sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• +developing and expanding our relationships with existing and new customers; +• +continuing our industry leading safety performance and focus on the environment; +• +investing further in driving efficiencies, including our robust maintenance program; +• +maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• +continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2020 , see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2019, we had four customers who individually represented more than 10% of our consolidated revenue. These four customers collectively represented 55% of our consolidated revenue and 21% of our total accounts receivable for the fiscal year ended December 31, 2019. F or the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. We provide services in various geographic regions across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have from time to time been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., +6 +Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. Our major competitors for our Well Support Services include Key Energy Services, Basic Energy Services, Superior Energy Services, Precision Drilling, Forbes Energy Services, Pioneer Energy Services and Ranger Energy Services. We also compete regionally in each segment with a significant number of smaller service providers. +We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. For the year ended December 31, 2019, purchases from one supplier represented approximately 5% to 10% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art research and technology center staffed by a team of highly skilled engineers. Our efforts to date have been focused on developing innovative, fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, provide cost savings to our operations and add value for our customers. Our research and development initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +7 +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Employees +As of December 31, 2019 , we had 6,525 employees, of which, approximately 77% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Environmental, health and safety regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and +8 +analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”), and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into state waters or waters of the United States. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. CWA program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA, but subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require +9 +persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratorium on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +10 +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +11 +Recently, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities, which could have a material adverse effect on our business and results of operations. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for the oil and natural gas our customers produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climatic changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our assets and operations. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieved a total recordable incident rate of 0.68 in 2019, which is substantially less than the industry average of 1.07 from 2015 to 2018. We believe total recordable incident rate is a reliable measure of safety performance. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which requires the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely +12 +impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +In addition, some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +13 +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +14 \ No newline at end of file diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/item13.txt b/raw/filings/0001688476/2019/0001688476-20-000017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..ea783f464e8e6cc3947a9335d9fbf73f67cc61b8 --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is expected to be filed in April 2020. +134 \ No newline at end of file diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/item9a.txt b/raw/filings/0001688476/2019/0001688476-20-000017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..664f6e0a50331b81b4a3db339eb92a260ae87497 --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2019 , based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by SEC guidance for newly acquired businesses, the scope of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has excluded the acquired business of C&J Energy Services, Inc. and its subsidiaries. We completed the C&J Merger on October 31, 2019, and the excluded business represents approximately $708.5 million of total assets and total revenues of approximately $196.7 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Based on our assessment, we believe that as of December 31, 2019 , our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +Effective January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)." The adoption of this standard and subsequently-issued related ASUs resulted in the recording of operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheet, with no related impact to our consolidated and combined statements of operations and comprehensive income (loss) or consolidated statements of cash flows. In connection with the adoption of these standards, we implemented internal controls to ensure we properly evaluate our contracts for applicability under ASU 2016-09 and properly apply ASU 2016-02 and subsequently-issued related ASUs in accounting for and reporting on all our qualifying leases. +On October 31, 2019, we completed the C&J Merger, which resulted in changes to internal controls over the consolidation and reporting of our financial results. As part of the Company’s ongoing integration activities, the Company’s financial reporting controls and procedures are in the process of being implemented at C&J. The two companies maintained separate accounting systems through 2019. The consolidated and combined financial +129 +statements presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/rp_note.txt b/raw/filings/0001688476/2019/0001688476-20-000017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2019/0001688476-20-000017/rpt_disclosure.txt b/raw/filings/0001688476/2019/0001688476-20-000017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5b8305bfe609d7f820383f1c40bf91793ad52bc3 --- /dev/null +++ b/raw/filings/0001688476/2019/0001688476-20-000017/rpt_disclosure.txt @@ -0,0 +1,87 @@ +Related Person Transactions +Certain Related Party +Transactions +We paid Cerberus Operations & Advising Company LLC and its affiliates (collectively “COAC”), fees totaling approximately +$2.2 million during 2020 for consulting services provided in connection with improving the Company’s operations and information technology services, including ongoing support, development, & maintenance. We may retain COAC to provide +similar services in the future. +One of our board members is an employee of Cerberus, and funds managed by one or more affiliates of Cerberus indirectly own a +substantial portion of our equity through their ownership of Keane Investor Holdings LLC. +Policy and Procedures for the Review, Approval or Ratification of +Transactions with Related Persons +Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) +and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the Audit Committee. For purposes of the Related Party Policy, a “Related Party Transaction” is any +transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved +will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. +70 +Table of Contents +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning +of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in +the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is +employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a +person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Prior to the Company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same +to the Audit Committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the Audit Committee, including a summary of material facts. The Audit Committee will +review the material facts of all Related Party Transactions which require the Audit Committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a +Related Party Transaction has been given to the Audit Committee and it is not possible to convene a meeting of the Audit Committee, then the chairman of the Audit Committee will consider whether the Related Party Transaction is appropriate and, if +it is, will approve the Related Party Transaction, with the Audit Committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the Audit Committee. In the event the Audit Committee does not ratify any such +Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the Audit Committee, or its chairman, as applicable, +will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction +without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related +Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the Audit Committee (or, if it is not practicable for the company to wait for the Audit Committee to consider the matter, +the chairman of the Audit Committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related +Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the Audit Committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy +pursuant to the authority delegated in this paragraph. The Audit Committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the Audit Committee and will take, or recommend to +our board of directors, any action the Audit Committee deems appropriate. +No member of the Audit Committee or director of our board will participate in any +discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the Audit Committee member or board director will provide all material information concerning the Related Party Transaction to the Audit +Committee. +If a Related Party Transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to follow in its ongoing +dealings with the Related Party. Thereafter, the Audit Committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the Audit Committee’s guidelines and +that the Related Party Transaction remains appropriate. +71 +Table of Contents +Review Criteria +All +Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the Audit +Committee or its chairman, as applicable, will review and consider: +· +the Related Party’s interest in the Related Party Transaction; +· +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related +Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +· +whether the transaction is being undertaken in the ordinary course of business of the Company; +· +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the +Company than terms that could have been reached with an unrelated third party; +· +the purpose of, and the potential benefits to the Company of, the Related Party Transaction; +· +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +· +whether the proposed transaction includes any potential reputational risk issues for the Company which may arise as a +result of or in connection with the Related Party Transaction; +· +whether the proposed transaction would violate any requirements of the Company’s financing or other material +agreements; and +· +any other relevant information regarding the Related Party Transaction or the Related Party. +The Audit Committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the Audit Committee, or its chairman, as applicable, +determines in good faith that, under all of the circumstances, the transaction is fair to the Company. The Audit Committee, in its sole discretion, may impose such conditions as it deems appropriate on the Company or the Related Party in connection +with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The Audit Committee has determined that the following transactions will be deemed pre-approved or ratified and will not require +review or approval of the Audit Committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the Audit Committee. +· +Any employment by the Company of an executive officer of the Company or any of its subsidiaries if the related compensation +conforms with our Company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and +· +Any compensation paid to a director of our board if the compensation is consistent with the Company’s Bylaws and any +compensation policies. +Notwithstanding anything 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0001688476 2019-10-01 2019-12-31 0001688476 srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember us-gaap:AccountingStandardsUpdate201613Member 2019-12-31 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, DC 20549 +FORM +10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2020 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _____ to _____ +Commission File Number 001-37988 +NexTier Oilfield Solutions Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware 38-4016639 +(State or other jurisdiction +of incorporation or organization) (I.R.S. Employer +Identification No.) +3990 Rogerdale Rd Houston Texas 77042 +(Address of principal executive offices) (Zip code) +( 713 ) 325-6000 +(Registrant’s telephone number, including area code) +Not Applicable. +(Former Name, Former Address, if Changed Since Last Report) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class Trading Symbol Name of Each Exchange On Which Registered +Common Stock, $0.01 par value NEX New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2020, was approximately $ 399.6 million. +As of February 22, 2021, the registrant had 215,159,686 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders, which will be filed with the United States Securities and Exchange Commission within 120 days of December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K. +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +17 +Item 1B. +Unresolved Staff Comments +41 +Item 2. +Properties +42 +Item 3. +Legal Proceedings +43 +Item 4. +Mine Safety Disclosures +43 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +44 +Item 6. +Selected Financial Data +46 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +48 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +69 +Item 8. +Financial Statements and Supplementary Data +70 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +125 +Item 9A. +Controls and Procedures +125 +Item 9B. +Other Information +126 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +128 +Item 11. +Executive Compensation +129 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +130 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +131 +Item 14. +Principal Accountant Fees and Services +132 +PART IV +Item 15. +Exhibits and Financial Schedules +133 +Item 16. +Form 10-K Summary +137 +Signatures +138 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• the impact of the current COVID-19 pandemic and the evolving response thereto, including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments, private businesses or others; +• changing regional, national or global economic conditions, including oil and gas supply and demand; +• our business strategy; +• our plans, objectives, expectations and intentions; +• the competitive nature of the industry in which we conduct our business, including pricing pressures; +• our future operating results; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• the impact of pipeline and storage capacity constraints; +• the impact of adverse weather conditions; +• the effects of government regulation; +• changes in tax laws; +• legal proceedings, liability claims and effect of external investigations; +• the effect of a loss of, or the financial distress of, one or more customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• our ability to maintain the right level of commitments under our supply agreements; +• the market price and availability of materials or equipment; +• the impact of new technology; +• our ability to employ a sufficient number of skilled and qualified workers; +• our ability to obtain permits, approvals and authorizations from governmental and third parties; +• planned acquisitions, divestitures and future capital expenditures; +• our ability to maintain effective information technology systems; +1 +• our ability to maintain an effective system of internal controls over financial reporting; +• our ability to service our debt obligations; +• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital; +• the market volatility of our stock; +• our ability or intention to pay dividends or to effectuate repurchases of our common stock; +• the impact of ownership by Cerberus (through Keane Investor); and +• the impact of our corporate governance structure. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +References Within This Annual Report +As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “NexTier,” “we,” “us” and “our” refer to NexTier Oilfield Solutions Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term “RockPile” refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term “RSI” refers to Refinery Specialties, Incorporated; (viii) the term “Keane Investor” refers to Keane Investor Holdings LLC; (ix) the term “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds; (x) the term “C&J” refers to C&J Energy Services, Inc.; (xi) the term “C&J Merger” refers to the consummation of the transactions described in that certain Agreement and Plan of Merger, dated as of June 16, 2019 (the “Merger Agreement”), by and among the C&J, us and King Merger Sub Corp., one of our wholly owned subsidiaries. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we +2 +calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by approximately 48,000 hydraulic horsepower. +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +The consolidated financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +For further details, see Note (1) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisitions. +All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. +3 +PART I +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +In continuation of our growth through acquisition strategy, since 2013 has notably resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 1,040,000 hydraulic horsepower, on October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into one of our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” +In March of 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. We believe this integration solution will assist our customers to reduce emissions at the wellsite and throughout their operations. This solution is focused on providing gas sourcing, compression, transport, decompression, treatment, and related services for our fracturing operations. We currently expect this additional integrated service to be available to our customers later in 2021. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +5 +Well Support Services segment +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover. Maintenance services provided with our rig fleet were generally required throughout the life cycle of an oil or gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services were generally less complicated than completion and workover related services and required less time to perform. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. These plugging and abandonment services generally required auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services was not significantly impacted by the demand for oil and gas because well operators are required within a specified period of time by state regulations to plug wells that are no longer productive. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. Included in our fleet of fluid trucks and trailers were specialized trucks and trailers that were optimized to transport condensate. We also owned private saltwater disposal wells. Demand and pricing for our fluids management services generally corresponded to demand for our rig services. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes shareholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services and power solutions that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform and evolving power solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +6 +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2021, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2020, we had two customer who individually represented more than 10% of our consolidated revenue. These two customers collectively represented 29% of our consolidated revenue and 11% of our total accounts receivable for the fiscal year ended December 31, 2020. For the year ended December 31, 2019, we had four customers who individually represented more than 10% of our consolidated revenue. These four customers collectively represented 55% of our consolidated revenue and 21% of our total accounts receivable for the fiscal year ended December 31, 2019. For the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have from time to time been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. This was exacerbated in 2020 due to the COVID-19 pandemic and other oil and gas market drivers. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution (such as duel fuel capabilities), and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a +7 +timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +For the year ended December 31, 2020, purchases from our largest supplier represented approximately 5% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art Innovation Center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our Innovation Center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Human Capital Resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2020, we achieved a total recordable +8 +incident rate of 0.42, which is substantially less than the 1.00 incident rate derived from an industry average from 2016 to 2019. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well as mental and behavioral health resources, including on-demand access to an Employee Assistance Program (EAP) for employees and their dependents. +In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the vast majority of our employees work from home for periods of time, while implementing additional safety measures for employees continuing critical on-site work. To maintain minimized exposure points, a flex-work program was developed and deployed in an effort to balance time in the office with remote work from home. To mitigate COVID-19 exposure further pro-active measures have been implemented including, among other things, additional hand sanitizer stations; temperature check kiosks at the entrance to our corporate headquarters; eliminating guests to campuses; shifting all meetings to a virtual format; closing meeting rooms and common/shared areas in the office such as cafeterias and fitness rooms; mandatory face mask wearing (unless the person is eating or alone at work station); installation of signage for CDC guideline distancing and other reminders, and established absence management and tracing protocols to reduce transmission risk. Frequent and consistent communication efforts reinforce the importance of these health and safety measures. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture where employees are empowered to drive their career progression, supporting professional development and providing an on-demand learning platform. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +9 +General +As of December 31, 2020, we had 1,969 employees, of which, approximately 73% were compensated on an hourly basis. This was approximately a 70% decrease from the 6,525 employees we had on December 31, 2019, and reflects the Company’s ongoing initiative to streamline its cost structure to ensure the Company has the most appropriate model in place to navigate the current market conditions stemming from, among other things, the impacts of COVID-19 and the resulting unforeseeable business circumstances, and to position the Company for success as the market recovers. +Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Material Government Regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and +10 +natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 117th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA, but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require +11 +the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +12 +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +13 +Recently, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities, which could have a material adverse effect on our business and results of operations. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for the oil and natural gas our customers produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climatic changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our assets and operations. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which requires the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission +14 +(“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in +15 +our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +16 +Item 1A. Risk Factors +RISK FACTORS +An investment in our securities involves a variety of risks. In addition to the other information included or incorporated by reference in this annual report, the following risk factors should be carefully considered, as they could have a significant adverse impact on our business, financial condition and results of operations. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present material risks to our operations. In addition, the global economic and political climate amplifies many of these risks. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Summary of Risk Factors +A summary of significant risks that could materially adversely impact our business, financial condition or results of operations include: +Risks Related to Our Industry : +• Continuing coronavirus (COVID-19) impacts; +• Cyclical/seasonal business and dependence upon spending of our customers (which is volatile); +• Instability of crude oil and natural gas commodity prices; +• Adverse weather conditions impact demand services and influence costs; +• Competition and availability of equipment within the oilfield services industry affects use and price of services; +• The energy services industry’s inherent hazards; +• Competition among oilfield service and equipment providers, including impact of each provider’s reputation for environmental impact, safety and quality; +• Oilfield anti-indemnity provisions in many states that restrict or prohibit risk mitigation strategies, such as indemnification; +• New technologies developed by third parties impacting competitiveness; +• Laws and regulations regarding health, safety and protection of the environment increasing costs of doing business, penalties, damages or costs of remediation or implicate corrective measures; +• Legislative and regulatory initiatives prohibiting or impairing hydraulic fracturing operations; +• Laws and regulations addressing greenhouse gases and climate change; and +• Changes in transportation regulations increasing costs or administrative burdens. +Risks Related to Our Business +• Loss of customers; +• Detrimental performance by, or credit risk of, our customers; +• High capital costs of maintenance, upgrades, refurbishment and replacement of assets; +• Ability to employ a sufficient number of key employees, technical personnel and qualified workers; +• Overcommitments to certain supply agreement; +• Delays in deliveries, increases in costs or unavailability of key materials for our operations; +• Litigation and other proceedings, including claims for personal injury and property damage; +• Challenges obtaining or renewing permits or authorizations for our or our customers’ operations; +17 +• Successful identification and consummation of beneficial acquisitions; +• Time-consuming and costly integration of any acquisitions; +• Increased labor costs or failure to attract and retain qualified employees; +• Failure of our information technology systems; +• Cyber security risks; +• Failure of internal controls; and +• Violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +Risks Related to Our Indebtedness +• Our substantial level of indebtedness; +• Ability to incur additional debt, despite our current indebtedness levels; +• Restrictive covenants in our agreements governing our indebtedness; +• Our variable rate debt that is subject to interest rate fluctuations; +• Restriction on our ability to raise capital on favorable terms, or at all; and +• Potential reduction or expiration of our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes. +Risks Related to Our Common Stock +• The price of our common stock may be volatile or may decline regardless of our operating performance; +• You may not be able to resell your shares at or above the public offering price; +• The market price of our common stock could decline and our stockholders may be diluted if large blocks of stock become available in the market; +• We do not currently pay dividends; +• We have no requirement to execute on any capital return program; +• Stockholders may be diluted by the future issuance of additional common stock; +• Keane Investor and Cerberus own a significant amount of our common stock and continue to have significant influence over us; +• Stockholder actions and/or acquisition of the Company is impacted by restrictive provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law; and +• The Court of Chancery of the State of Delaware is the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders under our formation documents. +Discussion of Risk Factors +Risks Related to Our Industry +The COVID-19 pandemic has significantly reduced demand for our services and has adversely impacted our financial condition, results of operations and cash flows. +The COVID-19 pandemic is ongoing, and it is uncertain when it’s impact on the world will wane. The effects of the COVID-19 pandemic, including actions taken by businesses and governments, resulted in a significant and swift reduction in U.S. and international economic activity beginning in the first quarter of 2020. These effects have adversely affected the demand for oil and natural gas, which has resulted in a reduction in demand for our services. This demand reduction has had, and is expected to continue to have for the duration of such reduced demand for our services, an adverse impact on our revenue, which may be material. +18 +We are closely monitoring the effects of the pandemic on commodity demands, our customers, our suppliers, and on our operations and employees. These effects have included, and may continue to include, adverse revenue effects; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers. +The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate other risk factors that we identify in this Annual Report on Form 10-K. We may also continue to see an increase in the volume of litigation, including contract claims (some of which may result from force majeure claims) and employment related claims. +The COVID-19 pandemic could also have a material adverse effect on our business, results of operations and financial condition in a manner that is not currently known to us or that we do not currently believe presents significant risks to our operations. +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry predominately in the United States, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from predominantly United States (“U.S.”) onshore unconventional resources. The willingness of our customers to undertake these activities depends largely upon prevailing industry and financial market conditions that are influenced by numerous factors over which we have no control, including: +• the impacts of the COVID-19 pandemic; +• prices and expectations about future prices for oil and natural gas; +• domestic and foreign supply of, and demand for, oil and natural gas and related products; +• the level of global and domestic oil and natural gas inventories; +• the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the U.S. and the areas in which we operate; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the availability of adequate pipeline, storage and other transportation capacity; +• lead times associated with acquiring equipment and products and availability of qualified personnel; +• the rates at which new oil and natural gas reserves are discovered; +• federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +• the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• geopolitical developments, political instability and recent (and potential future) armed hostilities in oil and natural gas producing countries; +• actions of the Organization of the Petroleum Exporting Countries, its members and other state-controlled oil companies (“OPEC+”) relating to oil price and production controls; +19 +• advances in exploration, development and production technologies or in technologies affecting energy consumption; +• the price and availability of alternative fuels and energy sources; +• disruptions due to natural disasters, unexpected or extreme weather conditions, public health crises (such as coronavirus) and similar factors; +• merger and divestiture activity amongst oil and natural gas producers; +• uncertainty in capital and commodities markets and the ability of oil and natural gas producers and oil and natural gas midstream operators to raise equity capital and debt financing; +• investor and activist focus on corporate social responsibility and sustainability; and +• U.S. federal, state and local and non-U.S. governmental regulations and taxes. +As we have experienced since late March of 2020, the volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices, the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers, and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. During periods of declining oil and natural gas prices or when pricing remains depressed, such as during the COVID-19 pandemic, our customer base may experience significant declines in drilling, completion and production activities, which in turn may result in reduced utilization and increased competition and pricing pressure to varying degrees across our service lines and operating areas. +Historically, prices for crude oil and natural gas have been extremely volatile, and these prices are expected to experience continued volatility. For example, since 2015, crude oil prices have ranged from a high of $77.41 per barrel in 2018 to a low of ($36.98) per barrel in 2020. During 2020, NYMEX crude oil prices ranged from approximately $(36.98) to $63.27 per barrel, with natural gas prices ranging from $1.33 per million British thermal units (“MMbtu”) to $3.14 per MMbtu. Continued price volatility for oil and natural gas is expected during 2021. +Worldwide military, political and economic events, including initiatives by OPEC+, affect both the demand for, and the supply of, oil and natural gas. Weather conditions, governmental regulation (both in the United States and elsewhere), levels of consumer demand, commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels), fuel conservation measures, the availability of pipeline capacity and other factors that will be beyond our control may also affect the supply of, demand for, and price of oil and natural gas. This, in turn, could result in lower demand for our services and cause lower pricing and utilization levels for our services. +20 +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. Our operations and the operations of our customers may be adversely affected by seasonal weather conditions, severe weather events and natural disasters. For example, periods of drought, hurricanes, tropical storms, heavy snow, ice or rain may result in customer delays and other disruptions to our services, including availability of key products such as sand and water. Repercussions of adverse weather conditions may include: +• curtailment of services; +• weather-related damage to facilities and equipment, resulting in delays in operations; +• inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; +• increase in the price of key products or insurance; and +• loss of productivity. +Competition and availability of excess equipment within the oilfield services industry may adversely affect our ability to market and price our services. +The oilfield services industry is highly competitive. The principal competitive tactics in our markets are generally price, technical expertise, the availability and condition of equipment, work force capability, safety record, reputation and experience. Furthermore, as a result of this competition, available equipment in the markets in which one or more of our product lines competes at times may exceed the demand for such equipment. This excess supply of equipment may result from many factors, including without limitation, a low commodity price environment, increase in the construction of new equipment, or reactivation and improvement of existing equipment. Excess capacity may result in substantial competition for a diminishing amount of demand and/or significant price competition, which could have a material adverse effect on our results of operations, financial condition and prospects. +The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Some of our competitors may have greater resources and/or name recognition, which could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. In addition, our industry has experienced recent consolidation through mergers and acquisitions, which could lead to increased resources and capabilities for our competitors. There may also be new companies that enter our business, or re-enter our business with significantly reduced indebtedness following emergence from bankruptcy, or our existing and potential future customers may develop their own oilfield solutions. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate. +We periodically seek to increase prices of our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in raising or maintaining our existing prices. Even if we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Accordingly, high competition and excess equipment in the market can cause us to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the +21 +future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our services. +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• equipment defects; +• vehicle accidents; +• fires, explosions or uncontrollable flows of gas or well fluids; +• unusual or unexpected geological formations or pressures and industrial accidents; +• blowouts; +• cratering; +• loss of well control; +• collapse of the borehole; and +• damaged or lost drilling and well completions equipment. +Catastrophic or significantly adverse events can occur at well sites where we conduct our operations, including explosions, fires, personal injuries, property damage, pollution, clean-up responsibility and regulatory responsibility. In response, we typically seek indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid such provisions (or compliance with such provisions) or be financially unable to meet their obligations, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and could have a material adverse effect on our business, financial condition, prospects and results of operations. +Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities and personnel to well sites. Our safety procedures may not always prevent such damages. Our insurance coverage or coverage of applicable vendors and service providers may be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations and cash flows. +In addition, our services could become a source of spills or releases of fluids, including chemicals used during activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability, reputation and relationships with customers, employees and regulators. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +22 +Competition among oilfield service and equipment providers is affected by each provider’s reputation for environmental impact, safety and quality. +Our activities are subject to a wide range of national, state and local environmental, occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these environmental, health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unsatisfactory, which could cause us to lose customers and substantial revenue. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts, whether enacted/amended in the future or currently in existence, may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. +Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to emissions of greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use +23 +of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Additionally, increasing political and social attention to global climate change has resulted in pressure upon shareholders, financial institutions and/or financial markets to modify their relationships with oil and gas companies and to limit investments and/or funding to such companies, which could increase our costs or otherwise adversely affect our business and results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, areas that are not in attainment with air quality standards, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including potential emissions affecting clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of or restrictions in permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of or restrictions in permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition. Given the recent administration change in the United States, we expect that the regulations around the oil and gas industry may increase and/or become stricter, which may further any potential material adverse impact on our financial condition. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards (including standards put in place related to the COVID-19 pandemic), we could lose business from our customers, many of whom have an increased focus on environmental, health and safety issues. +We are subject to requirements imposed by the EPA, U.S. Department of Transportation, U.S. Nuclear Regulatory Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution, and protect worker health and safety. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the requirement to comply with emission control and fuel quality regulations could result in increased costs. +24 +In addition, as part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of nonhazardous and hazardous wastes. The generation, handling, transportation, and disposal of these fluids, substances, and wastes are regulated by a number of laws, including CERCLA, RCRA, the Clean Water Act, the SDWA and analogous state laws. Under RCRA, the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes are regulated. RCRA currently exempts many oil and gas exploration and production wastes from classification as hazardous waste. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations, and it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. +Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. Moreover, certain of these environmental laws impose joint and several, strict liability even though our conduct in performing such activities was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties was the basis for such liability. In addition, environmental laws and regulations are subject to frequent change and if existing laws, regulatory requirements or enforcement policies were to change in the future, we may be required to make significant unanticipated capital and operating expenditures. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substances Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +If the EPA or another federal or state agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. In December 2016, the EPA issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +25 +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont, states in which we have no operations, have banned or are in the process of banning the use of high-volume hydraulic fracturing. Alternatively, some municipalities are considering or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations, if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations, including regulation of motor carriers by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements imposed by highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +Risks Related to Our Business +The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our completions business has historically had contracts with a portion of our customers that are annual to multi-year. +Disruption caused by business and governmental responses to the COVID-19 pandemic has created increased vulnerability to loss of customers or loss of long-term contracts as demand for oilfield services has +26 +decreased and competition for the available jobs has increased. We may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and results of operations. +We have seen an increase in the time accounts receivable are outstanding since the onset of the COVID-19 pandemic, and the effects of the COVID-19 pandemic also may have a material adverse impact on the ability of the Company to collect its accounts receivable in a timely manner, or at all, as customers face higher liquidity and solvency risks and may be unable to continue to operate as a going concern in the future. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition, environmental and safety requirements or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, in 2018, we purchased approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, for approximately $129.4 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other service-related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a less demanding work environment. In addition, since the onset of the COVID-19 pandemic, we may not have sufficient employees who are able to work at job sites, due to illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers, or health and safety protocols. +27 +Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to adjust our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel (including due to illness related to COVID-19) may have a material adverse effect on our business, financial condition, prospects or results of operations. +Our commitments under supply agreements could exceed our requirements, exposing us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant that we may provide in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases, our need for the raw materials and products we supply as part of these services also decreases. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. We may not be able to reduce, extend, eliminate or otherwise address near-term obligations to our satisfaction, which could result in an adverse effect on our financial condition. +Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition. +We have established relationships with a limited number of suppliers of our raw materials (such as proppant, guar, chemicals or coiled tubing) and finished products (such as fluid-handling equipment). Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. Should any of our current suppliers be unable to provide the necessary raw materials or finished products or otherwise fail to deliver the products in a timely manner and in the quantities required, any resulting delays in the provision of services could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, increasing costs of certain raw materials, including guar or proppant, may negatively impact demand for our services or the profitability of our business operations. In the past, our industry faced sporadic shortages associated with hydraulic fracturing operations, such as proppant and guar, requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials, including proppants. +28 +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Litigation and other proceedings could have a negative impact on our business. +The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2020, 2019 and 2018. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. New York and Vermont, states in which we have no operations, have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +29 +We may not be successful in identifying and making acquisitions. +Part of our strategy is to continue to expand our geographic scope and customer relationships, increase our access to technology and to grow our business, which is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• failure to identify attractive targets; +• incorrect assumptions regarding the future liabilities or future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• failure to obtain financing on acceptable terms or at all; +• restrictions in our debt agreements; +• failure to successfully integrate the operations or management of any acquired operations or assets; +• failure to retain or attract key employees; +• new or expanded areas of operational risk (such as offshore, international operations, or power production services) and related costs and demands of any applicable regulatory compliance; and +• diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices, as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations or management are combined. Any such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, such as the C&J Merger in 2019, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• a failure of our due diligence process to identify significant risks or issues; +• the loss of customers of the acquired company or our company; +• customers or suppliers may seek to modify contractual obligations with us; +• negative impact on the brands or banners of the acquired company or our company; +• a failure to maintain or improve the quality of our customer service; +• difficulties assimilating the operations and personnel of the acquired company; +30 +• our inability to retain key personnel of the acquired company; +• the incurrence of unexpected expenses and working capital requirements; +• our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• difficulty in maintaining internal controls, procedures and policies; +• mistaken assumptions about the overall costs of equity or debt; and +• unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +If labor costs increase or we fail to attract and retain qualified employees our business, results of operations, cash flows and financial condition may be adversely affected. +The labor markets in the industries in which we operate are competitive. We must attract, train and retain a large number of qualified employees while controlling related labor costs. We face significant competition for these employees from the industries in which we operate as well as from other industries. Tighter labor markets may make it even more difficult for us to hire and retain qualified employees and control labor costs. Our ability to attract qualified employees and control labor costs is subject to numerous external factors, including prevailing wage rates, employee preferences, employment law and regulation, environmental, health and safety regulation, labor relations and immigration policy. A significant increase in competition or cost increase arising from any of the aforementioned factors in may have a material adverse impact on our business, results of operations and financial condition. +A failure of our information technology systems, including our enterprise resource planning system and our digital hub, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting. +We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. A failure or prolonged interruption in our information technology systems, including our digital logistics platform, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows. +In 2020, we integrated our enterprise resource planning (“ERP”) systems from each of the legacy entities to the C&J Merger that assist with the collection, storage, management and interpretation of data from our business activities to support future growth and to integrate significant processes. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP system integration is complex and involves changes to business processes and, possibly, adjustments to internal control over financial reporting. The integration of the ERP system +31 +is complete, but refinements and work around inter-related system and processes is ongoing. These efforts and the recently implemented ERP system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will continue to be beneficial to the extent anticipated. Any disruptions, delays or deficiencies in our ERP system, particularly ones that impact our financial reporting and accounting systems or our ability to provide services, send invoices, track payments or fulfill contractual obligations, could adversely affect our business, financial condition, results of operations and cash flows. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be impacted, which could cause us to fail to meet our reporting obligations. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. We use these technologies for internal purposes, including data storage (which may include personal identification information of our employees as well as our proprietary business information and that of our customers, suppliers, investors and other stakeholders), processing, and transmissions, as well as in our interactions with customers and suppliers. For example, we depend on digital technologies to perform many of our services and processes and to record operational and financial data. At the same time, cyber incidents, which could include, among other things, deliberate attacks, unintentional events, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to computer systems, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, as well as those of our customers, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period of time. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. In addition, these risks could harm our reputation and our relationships with customers, suppliers, employees, and other third-parties, and may result in claims against us, including liability under laws that protect the privacy of personal information. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +Disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage our reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose us to claims from customers, suppliers, financial institutions, regulators, employees and others, which, individually or in the aggregate could have a material adverse effect on our financial condition and results of operations. +If we fail to maintain an effective system of internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business and result in material misstatements in our financial statements. +Effective internal controls are necessary for us to provide timely and reliable financial reports, prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). For example, Section 404 requires us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any deficiencies or material weaknesses identified by our management in our +32 +internal control over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results, prevent us from identifying future deficiencies and material weaknesses or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions, about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls could result in material misstatements in our financial statements and subject us to increased regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +The United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries and partners from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Although we currently have limited international operations, we may do business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Our employees, intermediaries, and partners may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees, intermediaries, or partners even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. We are committed to doing business in accordance with applicable anti-bribery laws and have implemented policies and procedures concerning compliance with such laws. Our existing safeguards and any future improvements, however, may prove to be less than effective, and our employees, intermediaries, and partners may engage in conduct for which we might be held responsible. Violations of the FCPA and other anti-bribery laws (either due to our acts, the acts of our intermediaries or partners, or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations. +Risks Related to Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2020, we had $335.5 million of debt outstanding, net of discounts and deferred financing costs (not including finance lease obligations). After giving effect to our borrowing base, we had approximately $73.5 million of availability under our 2019 ABL Facility (as defined herein). +Our substantial indebtedness could have important consequences. For example, it could: +• adversely affect the market price of our common stock; +• increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +33 +• limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• sales of assets; +• sales of equity; or +• negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +Despite our indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2019 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 2019 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could +34 +cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2019 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +In addition, in certain circumstances, our variable rate indebtedness uses the London Interbank Offer Rate (“LIBOR”) as a benchmark for establishing the interest rate. The LIBOR has been subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in our financing costs and our ability to access capital. +Disruptions in the capital and credit markets, continued low commodity prices, our debt level and other factors may restrict our ability to raise capital on favorable terms, or at all. +Disruptions in the capital and credit markets(which have and may continue to be impact by COVID-19), in particular with respect to companies in the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Continued low commodity prices, among other factors, have caused some lenders to increase interest rates, enact tighter lending standards which we may not satisfy as a result of our debt level or otherwise, refuse to refinance existing debt at maturity on favorable terms, or at all, and in certain instances have reduced or ceased to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms or at all, it could adversely affect our business, financial condition and results of operations. +Ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation under Section 382 of the Internal Revenue Code, and NOLs and other tax attributes is subject to reduction, causing less NOL or tax deductions to be available to offset future taxable income for U.S. federal income tax purpose. +Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses (“NOLs”) carried forward from prior years. As of December 31, 2020, we reported consolidated federal NOL carryforwards of approximately $1.2 billion of which $804.6 million are pre-change NOL's subject to limitation. Our ability to utilize our NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of our stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three year period). We believe we experienced an ownership change in October 2019 as a result of the C&J Merger. We also believe we experienced an ownership change in January 2017 as a result of the implementation of the IPO. Thus our pre-change +35 +NOLs are subject to limitation under Section 382 of the Code as a result. Such limitation may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause a portion of our pre-change NOLs generated prior to 2018 to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes. +Risks Related to Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price. +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including +• the failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts; +• changes in, or investors’ perception of, the oil field services industry, including hydraulic fracturing; +• the activities of competitors; +• future issuances and sales of our common stock, including in connection with acquisitions; +• our quarterly or annual earnings or those of other companies in our industry; +• the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• regulatory or legal developments in the U.S.; +• litigation involving us, our industry, or both; and +• general economic conditions. +In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +Because we do not currently pay dividends, our stockholders may not receive any return on investment, unless they sell their common stock for a price greater than that which they paid for it. +We do not currently pay dividends, and our stockholders do not have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we would be dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” +Under the Delaware General Corporation Law (the “DGCL”), our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we +36 +do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +We may not have an active capital return program, and such programs may not have the desired effect. +In December 2019, our board of directors approved a capital return program under which we had the authority to expend up to $100 million through December 31, 2020, through stock repurchases, dividends or other capital return strategies. While, as part of the capital return program, our board of directors had approved a stock repurchase program of up to $50 million of the Company's common stock, in light of events of 2020, no share repurchases or other capital return programs were made prior to the expiration of the capital return program. We can provide no assurance any similar programs will be implemented in the future, or that if implemented, that we will repurchase our common stock pursuant to such share repurchase program. +Although our board of directors has approved share repurchase programs in the past, they generally have not obligated us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, would depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. Any future repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Furthermore, a share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although share repurchase programs are intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness. +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 284,840,314 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. As of December 31, 2020, we have 15,584,151 shares of our common stock available for award that may be issued under our equity incentive plans. Any common stock that we issue, including under our equity incentive plans or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +Keane Investor and Cerberus own a significant amount of our common stock and continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control. +Cerberus currently controls approximately 18.7% of our common stock. Even though Cerberus no longer controls a majority of our common stock, Cerberus continues to have significant influence over us, including the election of our directors, determination of our corporate and management policies and determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Two of our nine directors are employees of, +37 +appointees of, or advisors to, members of Cerberus. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, the concentration of ownership held by Cerberus could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. +In addition, if Cerberus through Keane Investor decides to sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price. +Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation, our bylaws and our Stockholders’ Agreement, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• on or after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”),the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• on or after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• the manner in which stockholders can remove directors from the board will be limited; +• on or after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited; +• from and after such date that the Designated Controlling Stockholder ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• who may call stockholder meetings is limited; +38 +• requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our Company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +In connection with the Keane IPO, Keane entered into a Stockholders’ Agreement with Keane Investor. This stockholders’ agreement was amended and restated in conjunction with the C&J Merger (as amended and restated, the “Stockholders’ Agreement”) and provides that, except as otherwise required by applicable law, from the date on which (a) Keane Investor or, in the event a Cerberus Holder no longer holds Company shares through Keane Investor, Cerberus Holder has beneficial ownership of at least 12.5% or greater of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors two individuals who satisfy the Director Requirements; and (b) Keane Investor or, in the event Cerberus Holder no longer holder company shares through Keane Investor, Cerberus Holder has beneficial ownership of less than 12.5% but at least 7.5% of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim +39 +governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +40 +Item 1B. Unresolved Staff Comments +None. +41 +Item 2. Properties +Properties +We lease office space for our principal executive headquarters, which is located at 3990 Rogerdale Rd., Houston, Texas 77042, for our research and technology facility at 10771 Westpark Dr., Houston, Texas 77042 and for our engineering and technology center at 8301 New Trails Dr., The Woodlands, Texas. We also own property for our maintenance facility at 1214 Gas Plant Rd., San Angelo, Texas 76904. +In addition, we own or lease numerous other smaller facilities and administrative offices across the geographic regions in which we operate to support our ongoing operations, including district offices, local sales offices, yard facilities and temporary facilities to house employees in regions where infrastructure is limited. Our leased properties are subject to various lease terms and expirations. We believe that our existing facilities are adequate for our operations and our locations allow us to efficiently serve our customers. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility. +42 +Item 3. Legal Proceedings +Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of these known legal proceedings and claims cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters. +Litigation Related to the C&J Merger +In connection with the Merger Agreement and the transactions contemplated thereby the following complaints were filed: (i) one putative class action complaint was filed in the United States District Court for the District of Colorado by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J and members of the C&J board of directors, (ii) two putative class action complaints were filed in the United States District Court for the District of Delaware by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J, members of the C&J board of directors, the Company and Merger Sub, (iii) one putative class action complaint was filed in the United States District Court for the Southern District of Texas by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against the Company and members of its board of directors, and (iv) one putative class action was filed in the Delaware Chancery Court by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against members of the Company's board of directors. The five stockholder actions are captioned as follows: Palumbos v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-02386 (D. Colo.), Wuollet v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01411 (D. Del.), Plumley v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01446 (D. Del.), Bushansky v. Keane Group, Inc. et al., Case No. 4:19-cb-02924 (S.D. Tex) and Woods v. Keane Group, Inc., et al., Case No. 2019-0590 (Del. Chan.) (collectively, the "Stockholder Actions"). +In general, the Stockholder Actions allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act, or aided and abetted in such alleged violations, because the Registration Statement on Form S-4 filed with the SEC on July 16, 2019 in connection with the proposed C&J Merger allegedly omitted or misstated material information. +The Stockholder Actions seek, among other things, injunctive relief preventing the consummation of the C&J Merger, unspecified damages and attorneys' fees. C&J, the Company and the other named defendants believe that no supplemental disclosures were required under applicable laws; however, to avoid the risk of the Stockholder Actions delaying the C&J Merger and to minimize the expense of defending the Stockholder Actions, and without admitting any liability or wrongdoing, C&J and the Company filed a Form 8-K on October 11, 2019 making certain supplemental disclosures in connection with the C&J Merger. Following those supplemental disclosures, plaintiffs in the Woods and Bushansky actions voluntarily dismissed their claims as moot on October 16, 2019 and October 29, 2019, respectively. The Company subsequently agreed to pay $125,000 to plaintiff’s counsel for attorneys’ fees and expenses in full satisfaction of the claim for attorneys’ fees and expenses in the Woods action, and the remaining cases were settled and dismissed as well. No shareholder litigation is currently pending arising out of the C&J Merger. +Item 4. Mine Safety Disclosures +Not applicable. +43 +PART II +Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities +Market Information +Our common stock trades on the NYSE under the symbol “NEX”. On February 22, 2021, the last reported sales price of our common stock on the NYSE was $4.16 per share. +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (Nine Energy Services, Inc., FTS International, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., U.S. Well Services, Inc., and RPC, Inc.), since January 20, 2017. +The graph assumes $100 was invested on January 20, 2017 in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers, as we believe it is an appropriate benchmark for our line of business/industry. +44 +Holders +As of February 22, 2021, we had 215,159,686 shares of common stock issued and outstanding, held by approximately 9 registered holders. The number of registered holders does not include holders that have common stock held for them in “street name,” meaning that the stock is held for their accounts by a broker or other nominee. +Dividends +We have not paid any cash dividends on our common stock to date. However, our board of directors may consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely any payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +On December 11, 2019, we announced that our board of directors had authorized a stock repurchase program of up to $50 million of our outstanding common stock. The program did not obligate us to purchase any particular number of shares of common stock during any period, and no shares were repurchased under the program prior to its expiration on December 31, 2020. +Purchases of Equity Securities +Issuer Purchases of Equity Securities +Settlement Period +(a) Total Number of Shares Purchased (2) +(b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs +(d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1) +October 1, 2020 through October 31, 2020 4,922 $ 1.97 — $ 50,000,000 +November 1, 2020 through November 30, 2020 1,165 $ 1.95 — $ 50,000,000 +December 1, 2020 through December 31, 2020 129,216 $ 3.60 — $ 50,000,000 +Total 135,303 $ 3.52 — $ 50,000,000 +(1) On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for up to $50.0 million through December 31, 2020. This share repurchase program expired on December 31, 2020 with no shares having been repurchased under the program. +(2) Consists of shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date. +45 +Item 6. Selected Financial Data +The selected financial data for the periods presented was derived from our audited consolidated financial statements. The selected historical financial data presented below is not intended to replace our historical financial statements, and should be read in conjunction with Part I, “ Item 1A . Risk Factors,” Part II, “ Item 7 . Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated financial statements included in Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report in order to understand those factors, such as the C&J Merger, which may affect the comparability of the Selected Financial Data. +Year Ended December 31, +2020 +2019 (1) +2018 +2017 (2) +2016 (3) +(in thousands of dollars, except per share amounts) +Statement of Operations Data: +Revenue +$ 1,202,581 $ 1,821,556 $ 2,137,006 $ 1,542,081 $ 420,570 +Cost of services (4) +1,032,574 1,403,932 1,660,546 1,282,561 416,342 +Depreciation and amortization +302,051 292,150 259,145 159,280 100,979 +Selling, general and administrative expenses +144,147 123,676 113,810 84,853 36,615 +Merger and integration +32,539 68,731 448 8,673 16,540 +(Gain) loss on disposal of assets +(14,461) 4,470 5,047 (2,555) (387) +Impairment +37,008 12,346 — — 185 +Total operating costs and expenses 1,533,858 1,905,305 2,038,996 1,532,812 570,274 +Operating income (loss) (331,277) (83,749) 98,010 9,269 (149,704) +Other income (expense), net 6,516 453 (905) 13,963 916 +Interest expense (5) +(20,652) (21,856) (33,504) (59,223) (38,299) +Total other expenses (14,136) (21,403) (34,409) (45,260) (37,383) +Income (loss) before income taxes (345,413) (105,152) 63,601 (35,991) (187,087) +Income tax expense +(1,470) (1,005) (4,270) (150) — +Net income (loss) $ (346,883) $ (106,157) $ 59,331 $ (36,141) $ (187,087) +Per Share Data (6) +Basic net income (loss) per share +$ (1.62) $ (0.86) $ 0.54 $ (0.34) $ (2.14) +Diluted net income (loss) per share +(1.62) (0.86) 0.54 (0.34) (2.14) +Weighted average number of shares: +basic +213,795 122,977 109,335 106,321 87,313 +Weighted average number of shares: +diluted +213,795 122,977 109,660 106,321 87,313 +Statement of Cash Flows Data: +46 +Cash flows provided by (used in) operating activities $ 68,885 $ 305,463 $ 350,311 $ 79,691 $ (54,054) +Cash flows used in investing activities (37,844) (114,100) (297,506) (250,776) (227,161) +Cash flows provided by (used in) financing activities (9,825) (16,746) (68,554) 218,122 276,633 +Other Financial Data: +Balance Sheet Data (at end of period): +Total assets +$ 1,157,888 $ 1,664,907 $ 1,054,579 $ 1,043,116 $ 536,940 +Long-term debt (including current portion) (7) +335,540 337,623 340,730 275,055 269,750 +Total liabilities +600,600 778,135 567,398 530,024 374,688 +Total stockholders’ equity +557,288 886,772 487,181 513,092 162,252 +(1) Commencing on November 1, 2019, our consolidated financial statements also include the financial position, results of operations and cash flows of C&J. +(2) Commencing on July 3, 2017, our consolidated financial statements also include the financial position, results of operations and cash flows of RockPile. +(3) Commencing on March 16, 2016, our consolidated financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations. +(4) Excludes depreciation and amortization, shown separately. +(5) Interest expense during the year ended December 31, 2019 includes $0.5 million in write-offs in connection with the modification of the 2017 ABL Facility. Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs, incurred in connection with the early debt extinguishment of our 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing of our then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the early debt extinguishment of our the term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein). +(6) The pro forma earnings per unit amounts for 2017, 2016 and 2015 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of pro forma earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. +(7) Long-term debt includes $5.7 million, $7.1 million, $7.5 million, $8.2 million and $18.4 million of unamortized debt discount and debt issuance costs for 2020, 2019, 2018, 2017, and 2016 respectively, and excludes capital lease obligations. +47 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K. +48 +Business Overview +NexTier Oilfield Solutions Inc. is a predominantly U.S. land oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including (i) our 2017 acquisition of RockPile, a multi-basin provider of integrated well completion services in the U.S. whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs, (ii) our 2018 asset acquisition from RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment, (iii) our 2019 transaction with C&J Energy Services, Inc. (“C&J Merger”), a publicly traded Delaware corporation. This history impacts the comparability of our operational results from year to year. See Part I, “ Item 1. Business” of this Annual Report for an overview of our history, including additional information on the acquisitions noted above, including the C&J Merger, and business environment. Additional information on these transactions can be found in Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Industry Overview and Drivers in 2020 +We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford and the Bakken/Rockies. The high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Thus, our financial performance is affected by rig and well counts in North America, as well as oil and natural gas prices, which are summarized in the tables below. Also influencing our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. +The dual supply and demand shock that emerged in the first quarter of 2020 in response to increasing macro uncertainty related to the COVID-19 pandemic and significantly lower crude oil prices (partly resulting from production decisions from OPEC+) had immediate negative impacts on commodity prices and market conditions, which translated into lower completions activity in 2020. Crude oil prices have improved from their 2020 lows, which if maintained, we believe could drive a healthy level of investment and activity in U.S. shale, especially in 2022, if macro-economic conditions continue to improve. +There has been some attrition through consolidation and other events that have made some progress in realigning frac supply with demand. However, while well completion activity levels are improving, frac supply remains in excess of demand. Against this backdrop, pricing for our services remains highly competitive, as excess frac capacity pursues limited new opportunities. We continued to see pricing pressure and do not expect pricing to return to normal levels in the near future. In addition, horsepower intensity for each fleet continues to grow as our industry adopts more complex completion techniques; and we believe that when horsepower returns, it will likely be utilized across fewer fleets. +We have focused on reducing our marketed fleet to a level that we believe is more in-line with long term demand and with our strategy to harvest the investments made in our traditional fleets, while growing the portion of our fleet that offers better pricing and a lower emissions profile. Since the merger, we have announced a reduction of approximately 650,000 horsepower that can be considered as permanently out of the market. The major components from the decommissioned fleets have and will continue to be used over time as part of our maintenance inventory. Once consumed, we intend to cut up the frames and permanently remove them from our marketed base of equipment. +The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas: +49 +Year Ended December 31, +2020 2019 2018 +Oil price - WTI (1) +$ 39.23 $ 56.98 $ 64.94 +Natural gas price - Henry Hub (2) +$ 2.04 $ 2.57 $ 3.17 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type 2020 2019 2018 +Oil 346 773 841 +Natural Gas 85 169 190 +Other 2 1 1 +Total 433 943 1,032 +Year Ended December 31, +Drilling Type 2020 2019 2018 +Horizontal 384 826 900 +Vertical 20 54 63 +Directional 29 63 69 +Total 433 943 1,032 +As of January 2021, global liquids demand is expected to average 97.7 barrels per day in 2021. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of January 2021, natural gas demand in the United States is expected to average 80.73 cubic feet per day in 2021. +The regions in which we operate, including the Permian, Marcellus Shale / Utica Basins and Eagle Ford, among others, are expected to account for a majority of all new horizontal wells anticipated to be drilled through 2021. As of December 31, 2020, rigs in these basins accounted for approximately 67% of the total, and were up approximately 47% as compared to low total U.S. rig count noted on August 14, 2020. +In January 2021, a new U.S. President took office. He has made statements regarding the desire to support alternative energy sources, reduce U.S. emissions of greenhouse gases and generally address climate change. This new administration has implemented executive orders in pursuit of those goals and has indicated a desire to reverse certain business and energy industry policies of the prior President. At this time, it is unclear what impact the new administration’s actions and policy platform may have on our business, our customers and our industry. +Operating Approach & Strategy +We believe that there is competitive value in providing integrated solutions that align the incentives of operators and service providers. We are pursuing opportunities to leverage our investment in our digital program and diesel substitution technologies (such as duel fuel capabilities), to provide a service strategy targeted at achieving emissions reductions, both for us and our customers. NexTier has been developing and building its digital program for some time, and we have now applied our digital platform to all of our operating fleets. We’ve also announced the expected addition in 2021 of a natural gas treatment and delivery solution that will power NexTier’s fleet with field gas or compressed natural gas. This addition seeks to address wellsites where there is not a reliable nearby gas supply, and thus, the full benefit and value of dual fuel or other lower emissions technologies may not otherwise be +50 +fully realized. To address this situation, we are developing an integrated natural gas treatment and delivery solution designed to provide gas sourcing, compression, transport, decompression, treatment, and related services for our fracing operations. This integrated strategy will provide our customers with a streamlined approach to driving more sustainable, cost effective operations at the wellsite. +We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +Our revenues are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution. +Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide are central to our efforts to support equipment utilization and grow our business. +However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. +Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization. +51 +Our Reportable Segments +Prior to the C&J Merger, the Company was organized as two reportable segments. Between the C&J Merger and the divestiture of our well support services business in March of 2020, our business was organized into three reportable segments. Additional information on these transactions can be found in Note (21) Business Segment s. As of December 31, 2020, we were organized into two reportable segments, described below. This history impacts the comparability of our operational results from year to year. +• Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities. +• Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. +Completion Services +The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. As of December 31, 2020, we had approximately 37 marketable hydraulic fracturing fleets, 116 wireline trucks and 80 pumpdown units capable of being deployed. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our Innovation Centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our Innovation Centers we manufacture the data control instruments used in our fracturing operations and the perforating guns and addressable switches used in our wireline operations; these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business. +Well Construction and Intervention Services +The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. The majority of revenue for this segment is generated by our cementing business. As of December 31, 2020, we had approximately 25 coiled tubing units and 101 cementing units capable of being deployed. +Historical Segment: Well Support Services +On March 9, 2020, we completed a divestiture of the entities and assets comprising our Well Support Services. This segment had focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Our financials for the full year ended December 31, 2020 include operating results of the Well Support Services business prior to its divestiture. +How we calculate utilization for each segment +Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method +52 +for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. +In our Well Support Services segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month. +53 +RESULTS OF OPERATIONS +Th e following table sets forth our financial results for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Our financial results for 2019 include the financial and operating results of the businesses acquired in the C&J Merger for the partial period beginning November 1, 2019 through December 31, 2019. +A comparison of our financial results for the year ended December 31, 2019 and for the year ended December 31, 2018 can be found in the " Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 12, 2020. +Year Ended December 31, 2020 Compared with Year Ended December 31, 2019 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2020 2019 2020 2019 $ % +Completion Services $ 1,046,314 $ 1,709,934 87 % 94 % $ (663,620) (39 %) +Well Construction and Intervention Services 98,338 63,039 8 % 3 % 35,299 56 % +Well Support Services 57,929 48,583 5 % 3 % 9,346 19 % +Revenue +1,202,581 1,821,556 100 % 100 % (618,975) (34 %) +Completion Services 893,785 1,308,089 74 % 72 % (414,304) (32 %) +Well Construction and Intervention Services 93,198 55,227 8 % 3 % 37,971 69 % +Well Support Services 45,591 40,616 4 % 2 % 4,975 12 % +Costs of services +1,032,574 1,403,932 86 % 77 % (371,358) (26 %) +Depreciation and amortization +302,051 292,150 25 % 16 % 9,901 3 % +Selling, general and administrative expenses +144,147 123,676 12 % 7 % 20,471 17 % +Merger and integration +32,539 68,731 3 % 4 % (36,192) (53 %) +(Gain) loss on disposal of assets +(14,461) 4,470 (1 %) 0 % (18,931) (424 %) +Impairment +37,008 12,346 3 % 1 % 24,662 200 % +Operating loss (331,277) (83,749) (28 %) (5 %) (247,528) 296 % +Other income, net 6,516 453 1 % 0 % 6,063 1,338 % +Interest expense (20,652) (21,856) (2 %) (1 %) 1,204 (6 %) +Total other expenses +(14,136) (21,403) (1 %) (1 %) 7,267 (34 %) +Income tax expense (1,470) (1,005) 0 % 0 % (465) 46 % +Net loss $ (346,883) $ (106,157) (29 %) (6 %) $ (240,726) 227 % +Revenue. Total revenue is comprised of revenue from our Completion Services, Well Construction and Intervention Services and Well Support Services segments. Revenue in 2020 decreased by $619.0 million, or 34%, to $1.2 billion from $1.8 billion in 2019. This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue decreased by $663.6 million, or 39%, to $1.0 billion in 2020 from $1.7 billion in 2019. The segment revenue decrease was primarily attributable to a decrease in our average number of fully utilized fracturing fleets, combined with decreases in our wireline and pump down services. The decreases in all service lines were driven by less activity and price reductions as a result of the +54 +continuing impacts from the unforeseen and sudden decline in commodity prices as well as the COVID-19 pandemic that began to impact operations in late first quarter of 2020. Price reductions were slightly offset by efficiency gains delivered at the well site. +Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $35.3 million, or 56%, to $98.3 million in 2020 from $63.0 million in 2019. This increase in revenue is primarily attributable to the C&J Merger, partially offset by less utilization and price reductions given as a result of continuing negative impacts from unprecedented declines in the market and the COVID-19 pandemic that began to impact operations in late first quarter 2020. +Well Support Services: Well Support Services segment revenue increased by $9.3 million or 19% to $57.9 million in 2020 from $48.6 million in 2019. In March of 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplementary Data”. +Cost of services. Cost of services in 2020 decreased by $371.4 million, or 26%, to $1.0 billion from $1.4 billion in 2019. This change was driven by several factors including decreased overall activity and fleet utilization, as discussed above under Revenue , combined with increased market driven severance and facility closure costs resulting from a suppressed market environment and COVID-19 pandemic impact that began to impact operations in late first quarter of 2020. +Equipment Utilization. Depreciation and amortization expense increased by $9.9 million, or 3%, to $302.1 million in 2020 from $292.2 million in 2019. The change in depreciation and amortization was primarily related to the assets acquired during the C&J Merger. (Gain) loss on disposal of assets in 2020 had a variance of $18.9 million, compared to a gain of $14.5 million in 2020 from a loss of $4.5 million in 2019. This change was primarily driven by the sale of our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplementary Data”. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $20.5 million, or 17%, to $144.1 million in 2020 from $123.7 million in 2019, primarily as a direct result of the increased labor force and footprint from the Merger. +Merger and integration expense. Merger and integration expense decreased by $36.2 million to $32.5 million in 2020 from $68.7 million in 2019. The $32.5 million in merger and integration expense in 2020 is lower due to the C&J Merger closing in 2019 and a reduction in associated costs in 2020. These costs consisted primarily of professional services, severance costs, and facility consolidation. +Other income, net. Other income, net, in 2020 increased by $6.0 million, or 1,338%, to $6.5 million in 2020 from $0.5 million in 2019. This change was primarily due to a $6.0 million gain on a financial investment we acquired in 2020. +Interest expense, net. Interest expense, net of interest income, decreased by $1.2 million, or 6%, to $20.7 million in 2020 from $21.9 million in 2019. This change was primarily attributable to a reduction in the Company’s finance leases and lower interest rates in 2020. +Effective tax rate. Our effective tax rate on continuing operations in 2020 was (0.43)% for $1.4 million of recorded income tax expense, as compared to (0.96)% for $1.0 million of recorded income tax expense in 2019. For 2020, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, foreign withholding taxes and a change in valuation allowance. For 2019, the effective rate was primarily made up of state taxes and tax benefits derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets. +55 +2021 Strategy +We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A. of this Annual Report for additional information about the known material risks that we face. +Operating During a Pandemic +In response to the COVID-19 pandemic, we have implemented measures to focus on the safety of our partners, employees, and the communities in which we operate, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following: +Taking Care of our Partners and Employees . The safety of our partners and employees continues to be a primary focus. As the COVID-19 pandemic has developed, we have taken numerous steps to help customers and employees comply with current health-expert recommendations, including limitation of social functions and non-essential travel, hygiene protocol education, telecommuting as job responsibilities permit, protocols and procedures focused on establishing a safe work environment, protocol for employees who test positive for COVID-19, and a response and mitigation monitoring process. +Expense Management . With the reduction in revenue, we implemented cost saving initiatives, including (i) adjusting active frac fleet count to align with changing demand; (ii) consolidating our footprint; (iii) delaying non-essential maintenance projects; (iv) reducing or suspending other discretionary spending; (v) restructuring our organization in a way that maximizes our managerial talent with a streamlined team; (vi) reductions of salaries or cash retainers, as applicable, by 20% for our directors and executive officers; and (vi) reducing employee-related costs, including furloughing personnel, pay reductions by 15-20%, and moderating headcount. While many of these cost savings initiatives continue, with the increase in activity, we have been able to put most of our furloughed personnel back to work, and we have begun rolling out a portion of pay reinstatement, with the focus on field level personnel. We recognize that the COVID-19 pandemic and responses thereto also impact our suppliers. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +Balance Sheet, Cash Flow and Liquidity Management . We have taken actions to increase liquidity and strengthen our financial position. As a result of these actions, our cash and cash equivalents balance as of December 31, 2020 was $276.0 million . For additional information on our liquidity and capital resources, see “Liquidity and Capital Resources.” +Fiscal 2021 Objectives +With commodity prices continuing to be volatile, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering shareholder value and maintaining a disciplined capital deployment strategy. +We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient liquidity, preserve our conservative capital structure and closely +56 +monitor our discretionary spending. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our shareholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, lower emissions, and to ensure that we are strategically positioned to capitalize on constructive market dynamics. +Completion Services +In our Completion Services segment, our strategy remains focused on deploying our market-ready fracturing fleets and integrating more of our wireline and pumpdown units with our deployed fracturing fleets and on a stand-alone basis. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. Additionally, we are focused on integrating more of our wireline and pumpdown units with our fracturing fleets to increase operational efficiencies and profitability. With that said, current market conditions remain challenging, and our primary focus remains to lower our overall cost structure by aligning with efficient, dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years. +Furthermore, as discussed in Item 1. Business and Item 7. MD&A Overview, as part of our lower emissions initiatives, we are focused on optimizing gas substitution across our fleet, enabled by digital capabilities like NexHub and MDT controls, and the launch of our power solutions business. We believe that natural gas-powered technologies and digital assisted logistics will be a key method of transitioning to lower emissions operations, which strategy we anticipate will be a key driver of returns. +Well Construction and Intervention Services +In our Well Construction and Intervention Services segment, after significantly reducing our footprint during the second and third quarters of 2020 as we seek to position ourselves for strong operational and financial performance in regions that will support both near-term and long-term levels of activity, our strategy remains focused on deploying our market-ready cementing and coil tubing equipment in focused basins where we expect to generate returns. In our cementing business, even though market conditions remain challenged due to customers releasing drilling rigs and declining E&P capital spending, we remain focused on providing high-quality, timely service and deploying more of our stacked units with efficient customers in our focused basins. In our coiled tubing business, we are focused on market share growth, high quality customer service, and deploying additional market ready units at a low cost in response to increases in demand from our customers. We will stay focused on controlling costs and improving market share with an efficient customer base that plan to maintain stable drilling rig counts and levels of activity in 2021. +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +(Thousands of Dollars) +Year Ended December 31, +2020 2019 +Cash +$ 275,990 $ 255,015 +Debt, net of deferred financing costs and debt discount +$ 335,540 $ 337,623 +57 +(Thousands of Dollars) +Year Ended December 31, +2020 2019 2018 +Net cash provided by operating activities $ 68,885 $ 305,463 $ 350,311 +Net cash used in investing activities $ (37,844) $ (114,100) $ (297,506) +Net cash used in financing activities $ (9,825) $ (16,746) $ (68,554) +Significant sources and uses of cash during the year ended December 31, 2020 +Sources of cash: +• Operating activities: +– Net cash generated by operating activities during the year ended December 31, 2020 of $68.9 million. We continue to closely monitor our discretionary spending to focus on working capital and net operating cash to support our capital expenditures and other investing activities. +• Financing activities: +– In the first quarter of 2020, the Company drew down $175 million on the 2019 ABL Facility. This borrowing was to provide the Company better flexibility while managing its cash position during the ongoing COVID-19 pandemic. +Uses of cash: +• Investing activities: +– Net cash used in investing activities for the year ended December 31, 2020 consisted primarily of capital expenditures, net of the cash received as part of the sale of the Well Support Services business segment. +• Financing activities: +– Cash used to repay our debt facilities (other than described below), excluding finance leases and interest, during the year ended December 31, 2020 was $3.5 million. +– In the first quarter of 2020, the Company drew down $175 million on the 2019 ABL Facility. This borrowing was to provide the Company better flexibility while managing its cash position during the ongoing COVID-19 pandemic. The borrowing on the 2019 ABL Facility was repaid in full during the second quarter of 2020. +– Cash used to repay our finance leases during the year ended December 31, 2020 was $3.8 million. +– Shares withheld and retired related to stock-based compensation during the year ended December 31, 2020 totaled $2.6 million. +Significant sources and uses of cash during the year ended December 31, 2019 +58 +Sources of cash: +• Operating activities: +– Net cash generated by operating activities in 2019 of $305.5 million was a result of the thoroughness in receiving collections from our customers and controlling costs. +Uses of cash: +• Operating activities: +– Net cash used in operating activities for the year ended December 31, 2019, included $61.9 million of merger and integration costs in connection with the C&J merger. +Investing activities: +– Net cash used in investing activities for the year ended December 31, 2019 consisted primarily of capital expenditures. This activity primarily related to our Completion Services segment. +• Financing activities: +– Cash used to repay our debt facilities, excluding leases and interest, during the year ended December 31, 2019 was $3.5 million. +– Cash used to repay our finance leases during the year ended December 31, 2019 was $6.0 million. +– Shares withheld and retired related to share-based compensation during the year ended December 31, 2019 totaled $6.0 million. +Significant sources and uses of cash during the year ended December 31, 2018 +Sources of cash: +• Operating activities: +– Net cash generated by operating activities in 2018 of $350.3 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. +• Investing activities: +– Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note ( 7) Property and Equipment, net of Part II, “ Item 8. Financial Statements and Supplementary Data.” +– $4.7 million in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Service segment. +59 +• Financing activities: +– Cash provided by the 2018 Term Loan Facility, net of debt discount was $348.2 million. +Uses of cash: +• Operating activities: +– $13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018 +– $7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below. +• Investing activities: +– Net cash used in investing activities of $297.5 million was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment. +• Financing activities: +– Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million. +– Cash used to pay debt issuance costs associated with our debt facilities was $7.3 million. +– Shares repurchased and retired related to our stock repurchase program totaled $104.9 million. +– Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled $3.6 million. +– $12.0 million related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value. +Future sources and use of cash +Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, proceeds from public offerings of our common stock and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry. +Our primary uses of cash are for operating costs, capital expenditures and debt service. +Capital expenditures for the first half of 2021 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks, coil units, and cementing units, with the remaining spend expected to be on our gas powered equipment and power solutions service. +Debt service for the year ended December 31, 2021 is projected to be $23.4 million, of which $0.8 million is related to finance leases. We anticipate our debt service will be funded by cash flows from operations. +60 +Other factors affecting liquidity +Financial position in current market. As of December 31, 2020, we had $276.0 million of cash and a total of $73.5 million available under our revolving credit facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, and working capital investments. +Guarantee agreements. Under the 2019 ABL Facility $28.5 million of letters of credit were outstanding as of December 31, 2020. +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, such as during the continuance of the COVID-19 pandemic, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2020. +(Thousands of Dollars) +Contractual obligations +Total 2021 2022-2023 2024-2025 2026+ +Long-term debt, including current portion (1) +$ 341,250 $ 3,500 $ 7,000 $ 330,750 $ — +Estimated interest payments (2) +75,721 17,365 34,105 24,251 — +Finance lease obligations (3) +1,172 653 519 — — +Operating lease obligations (4) +50,846 20,856 16,639 4,190 9,161 +Purchase commitments (5) +72,908 46,788 24,930 1,190 — +Legal contingency +9,733 9,733 — — — +$ 551,630 $ 98,895 $ 83,193 $ 360,381 $ 9,161 +(1) Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $5.7 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility. +(2) Estimated interest payments are based on debt balances outstanding as of December 31, 2020 and include interest related to the 2018 Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate ( “ LIBOR ” ). +(3) Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments. +(4) Operating lease obligations are related to our real estate, rail cars, and light duty vehicles. +(5) Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +Principal Debt Agreements +While there were numerous governmental assistance programs in 2020 to provide loans to qualifying companies facing challenges due to COVID-19, the Company did not seek any loans under these programs. Thus, our principal debt arrangements continue to be the 2019 ABL Facility and the 2018 Term Loan Facility described below. +2019 ABL Facility +Origination . On October 31, 2019, we, and certain of our other subsidiaries as additional +61 +borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017. +Structure . Our 2019 ABL Facility provides for a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments. +Maturity . The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Interest . Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%, to a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%. +Financial Covenants . The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2020, the Company was in compliance with all covenants and the circumstances that would require testing of the consolidated fixed charge coverage ratio had not occurred. +2018 Term Loan Facility +On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes. +Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2020, there was $341.3 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loa n Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence +62 +thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immed iately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00. +Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding. +Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. We currently expect our interest rate to be higher in 2021 than in past years due to our current qualification at the higher end of our applicable margin range. +Prepayments . The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”). +Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”). +Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility. +Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan +63 +Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00. +“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments). +Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2020, the Company was in compliance with all covenants. +Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility). +Off-Balance Sheet Arrangements +We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities. +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +64 +Recently Issued Accounting Standards +For discussion on the impact of accounting standards issued but not yet adopted to our consolidated financial statements, see Note (23) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Critical Accounting Policies and Estimates +The preparation of our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our recently completed merger and acquisition during 2019. +Asset acquisitions +Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018. +65 +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies. +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting units or asset groups, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note (2)(f) Long-Lived Assets with Definite Lives and (2)(h) Goodwill and Indefinite-Lived Intangible Assets of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2020, 2019 and 2018. +Income Taxes +We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted +66 +market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated financial statements. +See Note (17) Income Taxes of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2020, 2019 and 2018. +Leases +Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate in the lease. Establishing our lease obligations on our consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our consolidated +67 +financial statements. For further details about our leases, see Note (16) Leases of Part II, "Item 8. Financial Statements and Supplementary Data". +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (23) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +68 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +Exchange Rate Risk . Our operations are currently conducted predominantly within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk during 2020. +Interest Rate Risk. As of December 31, 2020, we held variable-rate debt, the exposure to which we manage with our interest-rate-related derivative instrument. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. We are exposed to changes in interest rates on our floating rate borrowings under our 2019 ABL Facility and 2018 Term Loan. As of December 31, 2020, we had no debt outstanding under our 2019 ABL Facility and $341.3 million aggregate principal amount outstanding under the 2018 Term Loan. The impact of a 1.0% increase in interest rates under the terms of the 2019 ABL Facility would have no impact on interest expense for the 2020 year, and a 1.0% increase in interest rates under the terms of the 2018 Term Loan would have a $3.5 million impact on interest expense for the 2020 year. +Commodity Price Risk . Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. +For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part II, “ Item 7 . Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2020. +Customer Credit Risk . Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for credit losses. +69 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +71 +Consolidated Balance Sheets +76 +Consolidated Statements of Operations and Comprehensive Income (Loss) +77 +Consolidated Statements of Changes in Stockholders’ Equity +78 +Consolidated Statements of Cash Flows +79 +Notes to Consolidated Financial Statements +81 +70 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Notes 2 and 16 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842 ), and the related amendments. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +71 +Valuation of goodwill for the Completion Services reporting unit +As described in Notes 2 and 5 to the consolidated financial statements, at the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, and when events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. During the first quarter of 2020, a significant decline in the Company’s share price, which resulted in the Company’s market capitalization dropping below the book value of equity, as well as reductions in commodity prices driven by the potential impact of the COVID-19 pandemic and global supply and demand dynamics, were deemed triggering events that led the Company to test for goodwill impairment. Subsequently, during the third quarter of 2020, sustained reductions in commodity prices and continuing market economic disruptions were deemed triggering events that led the Company to test for goodwill impairment. If the carrying value of a reporting unit exceeds its fair value, the Company recognizes an impairment expense in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. The Company recognized an impairment expense of $32.2 million during the first quarter of 2020 and no impairment expense during the third quarter of 2020, related to the Completion Services reporting unit. The goodwill balance at December 31, 2020 was $104.2 million, of which the entire balance related to the Completion Services reporting unit. +We identified the evaluation of the goodwill impairment analysis for the Completions Services reporting unit as a critical audit matter. Subjective and challenging auditor judgment was required in evaluating the following key assumptions used in the valuation of the Completions Services reporting unit: (a) estimates of projected revenue growth, gross profit rates, SG&A rates, and capital expenditures, (b) the weighted average cost of capital (WACC) discount rate, (c) forward-looking market multiples consisting of enterprise value to revenues and to EBITDA multiples of peer companies and enterprise value to revenues and to book value of invested capital of actual control transactions for comparable companies (collectively, the market multiples), and (d) the implied control premium utilized in the market capitalization reconciliation. Changes in these key assumptions may have a significant effect on the Company’s assessment of the carrying value of goodwill. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment process, including controls over the development of the key assumptions. We evaluated the Company’s key assumptions used in the goodwill impairment assessment by: (1) comparing the Company’s projected revenue growth, gross profit rates, SG&A rates, and capital expenditures assumptions to historical actual results, peer companies’ analyst reports and peer companies’ historical financial information, and to relevant industry benchmark data; (2) evaluating the market multiples used by the Company for each reporting unit by comparing them to comparable company market multiples; (3) evaluating that the comparable companies used by the Company were representative of each reporting units’ operations by reviewing the comparable companies’ profiles and that the comparable companies used in the analysis were consistent with historical impairment assessments; and (4) assessing the Company’s ability to accurately estimate projected revenue growth, gross profit rates, SG&A rates, and capital expenditures by comparing historical forecasts to actual results. +In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: +• evaluating the Company’s WACC discount rate by comparing it against a WACC discount rate range that was independently developed using publicly available market data for comparable entities +• evaluating the Company’s selected market multiples by comparing them to publicly available market data for comparable entities +• assessing the implied control premium determined based on the aggregate fair value of the Company’s reporting units, in relation to the Company’s market capitalization as of March 31, 2020 and September 30, 2020 +• performing sensitivity analyses over the key assumptions to assess their impact on the Company’s determination of the fair value of the Completion Services reporting unit. +72 +Recoverability of Long-Lived Assets +As described in Note 2 to the consolidated financial statements, the Company evaluates property and equipment and definite-lived intangible assets (long-lived assets) on a quarterly basis to identify events or changes in circumstances, referred to as triggering events, that indicate the carrying value of certain long-lived assets may not be recoverable or upon the occurrence of a triggering event. During the first quarter of 2020, reductions in commodity prices driven by the potential impact of the COVID-19 pandemic and global supply and demand dynamics were deemed a triggering event that led the Company to test long-lived assets for impairment. Subsequently, during the third quarter of 2020, sustained reductions in commodity prices and continuing market economic disruptions were deemed a triggering event that led the Company to test long-lived assets for impairment. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset group, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related asset group. The Company determined that the estimated undiscounted future net cash flows for all assets groups was greater than the carrying amount of their related assets in the first quarter of 2020 and in the third quarter of 2020 and no impairment loss was recorded. As of December 31, 2020, the property and equipment, net balance was $470.7 million and the definite-lived intangible asset, net balance was $51.2 million. +We identified the assessment of the recoverability of long-lived assets as a critical audit matter. Subjective and challenging auditor judgment was required in evaluating the estimated undiscounted cash flows used in the long-lived assets impairment analysis, specifically the estimates of projected revenue growth, gross profit rates, SG&A rates, and capital expenditures. Changes in these key assumptions may have a significant effect on the Company’s assessment of the recoverability of long-lived assets. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s long-lived asset impairment process. This included controls over the development of the key assumptions used in the estimated undiscounted cash flows, including estimates of projected revenue growth, gross profit rates, SG&A rates, and capital expenditures. We evaluated the Company’s key assumptions used in the long-lived asset impairment assessment by comparing the Company’s projected revenue growth, gross profit rates, SG&A rates, and capital expenditures assumptions to historical actual results, peer companies’ analyst reports and peer companies’ historical financial information, and to relevant industry benchmark data. We assessed the Company’s ability to accurately estimate projected revenue growth, gross profit rates, SG&A rates, and capital expenditures by comparing historical forecasts to actual results. +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +February 24, 2021 +73 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited NexTier Oilfield Solutions Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 2021 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become +74 +inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Houston, Texas +February 24, 2021 +75 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Balance Sheets +(Amounts in thousands) +December 31, +2020 December 31, +2019 +Assets +Current assets: +Cash and cash equivalents +$ 275,990 $ 255,015 +Trade and other accounts receivable, net +122,584 350,765 +Inventories, net +30,068 61,641 +Assets held for sale +126 141 +Prepaid and other current assets +58,011 20,492 +Total current assets +486,779 688,054 +Operating lease right-of-use assets +37,157 54,503 +Finance lease right-of-use assets +1,132 9,511 +Property and equipment, net 470,711 709,404 +Goodwill +104,198 137,458 +Intangible assets 51,182 55,021 +Other noncurrent assets +6,729 10,956 +Total assets +$ 1,157,888 $ 1,664,907 +Liabilities and Stockholders’ Equity +Liabilities +Current liabilities: +Accounts payable +$ 61,259 $ 115,251 +Accrued expenses +134,230 234,895 +Customer contract liabilities 266 60 +Current maturities of long-term operating lease liabilities +18,551 23,473 +Current maturities of long-term finance lease liabilities +606 4,594 +Current maturities of long-term debt +2,252 2,311 +Other current liabilities +2,993 5,610 +Total current liabilities +220,157 386,194 +Long-term operating lease liabilities, less current maturities +24,232 35,123 +Long-term finance lease liabilities, less current maturities +504 4,844 +Long-term debt, net of deferred financing costs and debt discount, less current maturities +333,288 335,312 +Other noncurrent liabilities +22,419 16,662 +Total noncurrent liabilities +380,443 391,941 +Total liabilities +600,600 778,135 +Stockholders’ equity +Common stock, par value $ 0.01 per share (authorized 500,000 shares, issued and outstanding 214,440 and 212,410 shares, respectively) +2,144 2,124 +Paid-in capital in excess of par value +989,995 966,762 +Retained deficit ( 421,741 ) ( 73,333 ) +Accumulated other comprehensive loss +( 13,110 ) ( 8,781 ) +Total stockholders’ equity +557,288 886,772 +Total liabilities and stockholders’ equity +$ 1,157,888 $ 1,664,907 +See accompanying notes to the consolidated financial statements. +76 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Operations and Comprehensive Income (Loss) +(Amounts in thousands, except for per share amounts) +Year Ended December 31, +2020 2019 2018 +Revenue $ 1,202,581 $ 1,821,556 $ 2,137,006 +Operating costs and expenses: +Cost of services (1) +1,032,574 1,403,932 1,660,546 +Depreciation and amortization 302,051 292,150 259,145 +Selling, general and administrative expenses 144,147 123,676 113,810 +Merger and integration 32,539 68,731 448 +(Gain) loss on disposal of assets ( 14,461 ) 4,470 5,047 +Impairment expense 37,008 12,346 — +Total operating costs and expenses +1,533,858 1,905,305 2,038,996 +Operating income (loss) +( 331,277 ) ( 83,749 ) 98,010 +Other income (expense): +Other income (expense), net 6,516 453 ( 905 ) +Interest expense ( 20,652 ) ( 21,856 ) ( 33,504 ) +Total other expenses +( 14,136 ) ( 21,403 ) ( 34,409 ) +Income (loss) before income taxes +( 345,413 ) ( 105,152 ) 63,601 +Income tax expense ( 1,470 ) ( 1,005 ) ( 4,270 ) +Net income (loss) ( 346,883 ) ( 106,157 ) 59,331 +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments ( 241 ) ( 116 ) ( 114 ) +Hedging activities ( 6,422 ) ( 7,628 ) ( 880 ) +Total comprehensive income (loss) $ ( 353,546 ) $ ( 113,901 ) $ 58,337 +Net income (loss) per share: +Basic net income (loss) per share $ ( 1.62 ) $ ( 0.86 ) $ 0.54 +Diluted net income (loss) per share $ ( 1.62 ) $ ( 0.86 ) $ 0.54 +Weighted-average shares outstanding: basic 213,795 122,977 109,335 +Weighted-average shares outstanding: diluted 213,795 122,977 109,660 +(1) Cost of services during the years ended December 31, 2020, 2019, and 2018 excludes depreciation of $ 283.8 million , $ 276.8 million, and $ 245.6 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately. +See accompanying notes to the consolidated financial statements. +77 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders’ Equity +(Amounts in thousands) +Common Stock Paid-in Capital in Excess of Par Value Retained Earnings (deficit) Accumulated other comprehensive income (loss) Total +Balance as of December 31, 2017 $ 1,118 $ 541,074 $ ( 27,372 ) $ ( 1,728 ) $ 513,092 +Stock-based compensation (1) +2 21,458 — — 21,460 +Shares repurchased and retired related to stock-based compensation ( 1 ) ( 3,578 ) — — ( 3,579 ) +Shares repurchased and retired related to stock repurchase program ( 81 ) ( 103,507 ) ( 1,273 ) — ( 104,861 ) +Other comprehensive income — — 808 930 1,738 +Net income — — 59,331 — 59,331 +Balance as of December 31, 2018 $ 1,038 $ 455,447 $ 31,494 $ ( 798 ) $ 487,181 +New lease standard implementation — — 1,330 — 1,330 +Stock-based compensation (1) +33 33,226 — — 33,259 +Shares repurchased and retired related to stock-based compensation ( 6 ) ( 5,976 ) — — ( 5,982 ) +Other comprehensive loss — — — ( 7,983 ) ( 7,983 ) +Equity issued in connection with the C&J Merger 1,059 484,065 — — 485,124 +Net loss — — ( 106,157 ) — ( 106,157 ) +Balance as of December 31, 2019 $ 2,124 $ 966,762 $ ( 73,333 ) $ ( 8,781 ) $ 886,772 +Credit loss standard implementation — — ( 1,525 ) — ( 1,525 ) +Stock-based compensation 27 25,799 — — 25,826 +Shares repurchased and retired related to stock-based compensation ( 7 ) ( 2,566 ) — — ( 2,573 ) +Other comprehensive loss — — — ( 4,329 ) ( 4,329 ) +Net loss — — ( 346,883 ) — ( 346,883 ) +Balance as of December 31, 2020 $ 2,144 $ 989,995 $ ( 421,741 ) $ ( 13,110 ) 557,288 +(1) Stock-based compensation during 2019 and 2018 includes stock-based compensation expense recognized during the period of $ 29.0 million and $ 17.2 million, respectively, and the vested deferred stock awards of $ 4.3 million and $ 4.3 million, respectively. Refer to Note (12) Stock-Based Compensation for further discussion of the Company’s stock-based compensation. +See accompanying notes to the consolidated financial statements. +78 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Year Ended December 31, +2020 2019 2018 +Cash flows from operating activities: +Net income (loss) $ ( 346,883 ) $ ( 106,157 ) $ 59,331 +Adjustments to reconcile net income (loss) to net cash provided by operating activities +Depreciation and amortization 302,051 292,150 259,145 +Amortization of deferred financing fees 2,217 1,360 3,147 +(Gain) loss on disposal of assets ( 14,461 ) 4,470 5,047 +Stock-based compensation 25,826 28,977 17,166 +Loss on debt extinguishment/modification, including prepayment premiums — 526 7,563 +Loss on contingent consideration liability — — 13,254 +Loss on foreign currency translation — — 2,621 +Unrealized loss on derivative recognized in other comprehensive loss ( 6,422 ) ( 7,628 ) ( 880 ) +Gain on financial instrument and derivatives, net ( 2,815 ) ( 239 ) ( 697 ) +Gain on insurance proceeds recognized in other income — — ( 14,892 ) +Loss on impairment of assets 37,008 12,346 — +Changes in operating assets and liabilities +Decrease in trade and other accounts receivable, net 183,083 172,566 27,485 +Decrease (increase) in inventories 19,167 17,181 ( 2,725 ) +Decrease in prepaid and other current assets 5,160 3,703 2,734 +Decrease (increase) in other assets 25,306 ( 242 ) 362 +Increase (decrease) in accounts payable ( 61,658 ) ( 17,799 ) 11,304 +Increase (decrease) in customer contract liabilities 206 — ( 4,940 ) +Decrease in accrued expenses ( 84,129 ) ( 103,609 ) ( 32,318 ) +Increase (decrease) in other liabilities ( 14,771 ) 7,858 ( 2,396 ) +Net cash provided by operating activities 68,885 305,463 350,311 +Cash flows from investing activities +Asset and business acquisitions, including cash acquired 53,666 68,807 ( 35,003 ) +Purchase of property and equipment ( 113,506 ) ( 200,385 ) ( 277,569 ) +Advances of deposit on equipment ( 1,908 ) ( 7,451 ) ( 4,153 ) +Payments for leasehold improvements — — ( 1,651 ) +Implementation of software ( 8,813 ) ( 4,408 ) ( 883 ) +Proceeds from sale of assets 32,659 29,114 4,652 +Proceeds from insurance recoveries 58 223 18,247 +Equity-method investment — — ( 1,146 ) +Net cash used in investing activities ( 37,844 ) ( 114,100 ) ( 297,506 ) +Cash flows from financing activities: +79 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Proceeds from the asset-based revolver and term loan facilities 175,000 — 348,250 +Payments on the asset-based revolver and secured notes and term loan facilities ( 178,500 ) ( 3,500 ) ( 284,952 ) +Payments on finance leases ( 3,752 ) ( 6,035 ) ( 4,119 ) +Payment of debt issuance costs — ( 1,229 ) ( 7,331 ) +Payment of contingent consideration liability — — ( 11,962 ) +Shares repurchased and retired related to share repurchase program — — ( 104,861 ) +Shares repurchased and retired related to stock-based compensation ( 2,573 ) ( 5,982 ) ( 3,579 ) +Net cash used in financing activities ( 9,825 ) ( 16,746 ) ( 68,554 ) +Non-cash effect of foreign translation adjustments ( 241 ) 192 ( 165 ) +Net increase (decrease) in cash, cash equivalents and restricted cash 20,975 174,809 ( 15,914 ) +Cash, cash equivalents and restricted cash, beginning 255,015 80,206 96,120 +Cash, cash equivalents and restricted cash, ending $ 275,990 $ 255,015 $ 80,206 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net $ 21,114 $ 20,836 $ 24,528 +CVR settlement — — 19,918 +Income taxes 1,206 1,726 5,529 +Non-cash investing and financing activities: +Change in accrued capital expenditures $ ( 13,812 ) $ ( 17,274 ) $ 2,930 +Non-cash additions to equity security investment 5,263 +Non-cash additions to finance right-of use assets — 6,269 — +Non-cash additions to finance lease liabilities, including current maturities — ( 6,286 ) — +Non-cash additions to operating right-of-use assets 9,057 65,551 — +Non-cash additions to operating lease liabilities, including current maturities ( 8,898 ) ( 65,297 ) — +Fair value of C&J assets acquired — 806,218 — +106,627 shares of NexTier common stock issued in exchange for C&J capital stock and replacement awards +— ( 485,124 ) — +C&J liabilities assumed — ( 321,094 ) — +See accompanying notes to the consolidated financial statements. +80 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(1) Basis of Presentation and Nature of Operations +The accompanying consolidated financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated. +The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, income taxes, stock-based incentive plan awards and derivatives. +Management believes the consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2020 and 2019 and the results of its operations and cash flows for the years ended December 31, 2020, 2019 and 2018. Such adjustments are of a normal recurring nature. +On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisitions. +The consolidated financial statements for 2018 and for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +(2) Summary of Significant Accounting Policies +(a) Business Combinations and Asset Acquisitions +Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 820, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in the Company’s results of operations from the date of acquisition. +Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is +81 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition. +The Company did not complete any mergers or acquisitions in 2020. Refer to Note (3) Mergers and Acquisitions for discussion of the mergers and acquisitions completed in 2019 and 2018. +(b) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from certain dispositions or casualty events of more than $ 25.0 million per single transaction or $ 50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $ 50.0 million, under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did no t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the years ended December 31, 2020 and 2019. +Cash balances related to the Company's captive insurance subsidiary, which totaled $ 5.7 million at December 31, 2020, are included in cash and cash equivalents in the consolidated balance sheets, and the Company expects to use these cash balances to fund the operations of the captive insurance subsidiaries and to settle future anticipated claims. +The Company had less than $ 0.1 million restricted cash as of December 31, 2020 and none as of December 31, 2019. +(c) Trade Accounts Receivable +Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. As a result of the adoption of ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on January 1, 2020 the Company evaluates its accounts receivable through a continuous process of assessing its portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, and financial condition of customers. Based on our review of these factors, we establish or adjust allowances for specific customers. Trade accounts receivable were $ 125.3 million and $ 350.6 million at December 31, 2020 and 2019, respectively. As of December 31, 2020 , and 2019, the Company had an allowance for credit losses of $ 2.7 million and $ 0.7 million, respectively. +(d) Inventories +Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated statements of operations and comprehensive income (loss) using the weighted average cost method for non-manufacturing inventory and standard cost method for manufacturing inventory. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and +82 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off. +(e) Revenue Recognition +The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09. +The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 days of the invoice issuance. +A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job. +Remaining Performance Obligations +The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary. For those contracts with a term of more than one year, the Company had approximately $ 29.8 million of unsatisfied performance obligations as of December 31, 2020, which will be recognized as services are performed over the remaining contractual terms. +The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations. +Contract Balances +In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated balance sheets. Payment terms after invoicing are typically 30 days or less. +The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the +83 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +consolidated statements of operations and comprehensive income (loss) and net cash provided by operating activities in the consolidated statements of cash flows. +The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see (21) Business Segments . +Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows: +Completion Services +The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated statements of operations and comprehensive income (loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated statements of operations and comprehensive income (loss). +Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Well Construction and Intervention +The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates, at times, or pursuant to pricing agreements. +Historical Segment: Well Support Services Segment +On March 9, 2020, the Company completed the divestiture of its Well Support Services Segment. For additional information, see Note (21) Business Segments. Through its rig services line, the Company had provided workover and well servicing rigs that were primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services were provided on an hourly basis at prices that approximate spot market rates. A field ticket was generated and revenue is recognized upon the earliest of +84 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +the completion of a job or at the end of each day. A rig services job can last anywhere from a few hours to multiple days depending on the type of work being performed. The field ticket includes the base hourly rate charge and, if applicable, charges for additional personnel or equipment not contemplated in the base hourly rate. The field ticket may also include charges for the mobilization and set-up of equipment. +Through its fluids management service line, the Company used to provide storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket. +Through its other special well site service line, the Company used to provide fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided. +Disaggregation of Revenue +Revenue activities during the years ended December 31, 2020, 2019 and 2018 were as follows: +Year Ended December 31, 2020 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 270,612 $ 21,290 $ — $ 291,902 +Central 131,833 7,478 — 139,311 +West Texas 477,758 58,111 8,373 544,242 +West 122,970 11,459 49,556 183,985 +International 43,141 — — 43,141 +$ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +Year Ended December 31, 2019 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 479,685 $ 5,193 $ — $ 484,878 +Central 104,225 5,741 — 109,966 +West Texas 839,652 24,575 9,336 873,563 +West 273,364 27,530 39,247 340,141 +International 13,008 — — 13,008 +$ 1,709,934 $ 63,039 $ 48,583 $ 1,821,556 +85 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year Ended December 31, 2018 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 790,026 $ — $ — $ 790,026 +Central 61,083 — — 61,083 +West Texas 1,005,630 12,256 — 1,017,886 +West 244,217 23,794 — 268,011 +$ 2,100,956 $ 36,050 $ — $ 2,137,006 +(f) Long-Lived Assets with Definite Lives +Property and equipment, inclusive of equipment under finance lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated statements of operations and comprehensive income (loss). +Major classifications of property and equipment and their respective useful lives are as follows: +Land Indefinite life +Building and leasehold improvements +13 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use. +In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour work, higher stage volumes, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately 50 %. In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the year ended December 31, 2018 of $ 15.0 million in the consolidated statement of operations and comprehensive income (loss). +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years. +Property and equipment and definite-lived intangible assets (“Long-lived Assets”) are evaluated on a quarterly basis to identify events or changes in circumstances, referred to as triggering events that indicate the carrying value of certain property and equipment may not be recoverable or upon the occurrence of a triggering +86 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +event. An impairment loss is recorded in the period in which it is determined that the carrying amount of Long-lived Asset is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the service line level. The Company's asset groups consist of fracturing services, wireline, cementing, and coiled tubing, except for an entity level asset group for Long-lived Assets that do not have identifiable independent cash flows. Estimates of undiscounted future net cash flows of assets groups are projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows take into account known market conditions as of the assessment date, and management’s anticipated business outlook. A terminal period is used to reflect an estimate of stable, perpetual growth. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset groups, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related asset groups. The impairment loss is then allocated across the asset group's major classifications. +During the first quarter of 2020, management determined the reductions in commodity prices driven by the potential impact of the novel COVID-19 pandemic and global supply and demand dynamics coupled with the sustained decrease in the Company’s share price were deemed triggering events. As a result of the triggering event, recoverability testing was performed and it was determined that the estimated undiscounted future net cash flow for all asset groups was greater than the carrying amount of their related assets and no impairment loss was recorded. +During the third quarter of 2020, the Company assessed and determined the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, recoverability testing was performed and it was determined that the estimated undiscounted future net cash flows for all asset groups was greater than the carrying amount of their related assets and no impairment loss was recorded. +The Company did no t recognize any impairment charges related to the Company’s long-lived assets for the years ended December 31, 2018, 2019, or 2020. +(g) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized. +(h) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services, Well Construction and Intervention and Well Support Services reporting units. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. If the carrying amount of the reporting unit exceeds its fair +87 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +value, the Company recognizes an impairment expense in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. +The Company performed the qualitative analysis of the goodwill impairment assessment by reviewing relevant qualitative factors. In the first and third quarter of 2020, the Company determined there were triggering events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, quantitative detail impairment testing was conducted. +As a result, the Company recognized $ 32.6 million in goodwill impairment expense during 2020, of which $ 32.2 million related to the Completions Service reporting unit and $ 0.4 million representing the entire goodwill balance for the Well Construction and Intervention reporting unit. No goodwill impairment expense was recognized in 2019 or 2018. See Note ( 5 ) Goodwill . +The Company’s indefinite-lived assets consisted of the Company’s Keane trade name. The Company assessed its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. The Company fully impaired its Keane trade name in 2019. For additional detailed information regarding the impairment of the Keane trade name, see Note (4) Intangible Assets . There was no indefinite-lived asset impairment recognized during 2018. +(i) Derivative Instruments and Hedging Activities +The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings. +In addition, we evaluate the terms of our operating agreements and other contracts, if any, to determine whether they contain embedded components that are required to be bifurcated and accounted for separately as +88 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +derivative financial instruments. For additional detailed information regarding reportable segments, see Note (10) Derivatives . +(j) Fair Value Measurement +Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +(k) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”), performance based RSU award (“PSUs”), and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement. +Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax +89 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated statements of cash flows. +The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For additional information, see Note (12) Stock-Based Compensation. +(l) Taxes +Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated financial statements for the years ended December 31, 2020, 2019 and 2018. +Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax. As a result of the C&J Merger, the Company had foreign subsidiaries as of December 2020 in Canada, The Netherlands, Luxembourg and Ecuador. With the exception of the Canadian subsidiary, all other subsidiaries are dormant and have no active operations as of December 31, 2020. +The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. +Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. +The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense. +See Note (17) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2020, 2019 and 2018. +(m) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). +Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). +(n) Equity-method investments +90 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated balance sheets. The Company did not have any equity-method investments as of December 31, 2020. As of December 31, 2019, the Company had $ 3.6 million in equity-method investments. +(o) Employee Benefits and Post-Employment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated . +(p) Leases +Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and related amendments, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, using the modified retrospective method. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases. +In accordance with ASU 2016-02, the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases. +For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased. +For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease. +For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and records this amortization in rent expense on the consolidated statements of operations and comprehensive loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of operations and comprehensive loss. For operating leases, the Company recognizes one single lease cost, comprised of the lease +91 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +payments and amortization of any associated initial direct costs, within rent expense on the consolidated statements of operations and comprehensive loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable. +In accordance with ASC 842, the Company has made the following elections for its lease accounting: +• all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases; +• for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and +• for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606. +As part of the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not: +• reassess whether any expired or existing contracts contained leases; +• reassess the lease classification for any expired or existing leases; and +• reassess initial direct costs for any existing leases. +For additional information, see Note (16) Leases. +(q) Research and development costs +Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). Research and development costs incurred directly by the Company were $ 4.8 million, $ 7.1 million and $ 7.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. +(r) Reclassifications +Certain reclassifications have been made to prior period amounts to conform to current period financial statement presentation. These reclassifications did not affect previously reported results of operations, stockholders' equity, comprehensive income or cash flows. +(3) Mergers and Acquisitions +(a) C&J Energy Services, Inc. +On October 31, 2019, the Company completed the C&J Merger in accordance with the terms of the Agreement and Plan of Merger, dated as of June 16, 2019 (the "Merger Agreement"), by and among NexTier, C&J and King Merger Sub Corp., a wholly owned subsidiary of NexTier ("Merger Sub"), pursuant to which Merger Sub merged with and into C&J, with C&J surviving the merger as a wholly owned subsidiary of NexTier, and immediately following the C&J Merger, C&J was merged with and into King Merger Sub II LLC ("LLC Sub"), with LLC Sub continuing as the surviving entity as a wholly-owned subsidiary of NexTier and the successor in interest to C&J. +The C&J Merger was completed for total consideration of approximately $ 485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-merger services with a value of $ 3.2 million. +92 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The Company accounted for the C&J Merger using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The majority of the measurements of assets acquired and liabilities assumed, were based on inputs that were not observable in the market and thus represented Level 3 inputs. The fair value of acquired inventory and property and equipment was based on both available market data and a cost approach. The fair value of the financial assets acquired included trade receivables with a fair value of $ 312.6 million. The gross amount due under the contracts was $ 322.8 million, of which $ 10.2 million was expected to be uncollectible. A liability of $ 40.2 million was recognized for legal reserves and sales and use tax assessments. +The following table summarizes the fair value of the consideration transferred in the C&J Merger and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the C&J Merger Date: +Total Purchase Consideration: +(Thousands of Dollars) +Equity consideration $ 481,912 +Replacement awards attributable to pre-combination services 3,212 +Less: Cash acquired ( 68,807 ) +Total purchase consideration $ 416,317 +Trade and accounts receivable +$ 312,620 +Inventories +43,142 +Prepaid and other current assets +18,512 +Property and equipment +311,886 +Intangible assets +17,590 +Right of use assets +24,318 +Other noncurrent assets +4,409 +Total identifiable assets acquired +732,477 +Accounts payable +43,620 +Accrued expenses +236,959 +Short term lease liability +7,842 +Long term lease liability +15,517 +Non-current liabilities +17,156 +Total liabilities assumed +321,094 +Goodwill +4,934 +Total purchase consideration $ 416,317 +The goodwill in this acquisition was primarily attributable to expected synergies and was allocated across the Company’s Completion Services, Well Construction and Intervention and Well Support Services reporting units. +93 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Intangible assets related to the C&J Merger consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) Gross +Carrying +Amounts +Technology 3 17,590 +Total $ 17,590 +Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the C&J Merger. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate C&J’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +Merger and integration costs totaled $ 32.5 million and $ 68.7 million for the years ended December 31, 2020 and 2019, respectively, and are recorded within merger and integration costs on the Company’s consolidated statements of operations and comprehensive income (loss). The following table summarizes merger and integration costs for the years ended December 31, 2020 and 2019. +(amounts in thousands) +Transaction Type Year Ended +December 31, 2020 Year Ended +December 31, 2019 +Merger +$ 7,586 $ 23,775 +Integration +24,953 44,956 +Total merger and integration costs +$ 32,539 $ 68,731 +The following combined pro forma information assumes the C&J Merger occurred on January 1, 2018. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2019 or any operating efficiencies or inefficiencies that resulted from the C&J Merger. The information is not necessarily indicative of results that would have been achieved had the Company controlled C&J during the period presented. +(unaudited, amounts in thousands) +Year Ended December 31, 2019 Year Ended December 31, 2018 +Revenue +$ 3,406,288 $ 4,359,095 +Net income (loss) +( 196,577 ) 66,746 +Net income (loss) per share (basic) +$ ( 0.93 ) $ 0.32 +Net income (loss) per share (diluted) +$ ( 0.93 ) $ 0.31 +Weighted-average shares outstanding (basic) +211,376 210,945 +Weighted-average shares outstanding (diluted) +211,376 212,964 +The Company’s consolidated statement of operations and comprehensive income (loss) for 2019 includes revenue of $ 196.7 million and net loss of $ 21.4 million, from the C&J operations, from November 1, 2019 to December 31, 2019. +(b) Asset Acquisition from Refinery Specialties, Incorporated +On July 24, 2018, the Company executed a purchase agreement with Refinery Specialties, Incorporated (“RSI”) to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately +94 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +$ 35.4 million, inclusive of an $ 0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds the Company received in connection with a fire that resulted in damage to a portion of one of the Company’s fleets (for further details see Note (7) Property and Equipment, net) . The Company also assumed operating leases for light duty vehicles in connection with the RSI transaction and RSI entered into a non-compete arrangement in turn with the Company. In September 2018, the Company, and RSI reached an agreement to refund the Company $ 0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $ 34.6 million, and the Company incurred $ 0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $ 35.0 million. +The Company accounted for this acquisition as an asset acquisition pursuant to ASU 2017-01 and allocated the purchase price of the acquisition plus the transactions costs amongst the acquired hydraulic horsepower and related support equipment, as the fair value of the acquired hydraulic horsepower and related support equipment represented substantially all of the fair value of the gross assets acquired in the asset acquisition with RSI. +(4) Intangible Assets +The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2020 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 67,600 $ ( 37,607 ) $ 29,993 +Non-compete agreements +700 ( 455 ) 245 +Technology +29,378 ( 8,434 ) 20,944 +Total +$ 97,678 $ ( 46,496 ) $ 51,182 +(Thousands of Dollars) +December 31, 2019 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 67,600 $ ( 32,681 ) $ 34,919 +Non-compete agreements +700 ( 408 ) 292 +Technology +22,054 ( 2,244 ) 19,810 +Total +$ 90,354 $ ( 35,333 ) $ 55,021 +Amortization expense related to the intangible assets for the years ended December 31, 2020, 2019 and 2018 was $ 12.6 million, $ 6.5 million and $ 6.3 million, respectively. +In connection with the C&J Merger, the Company was re-branded as NexTier and did not expect to obtain any further benefits or receive any cash flows associated with the Keane indefinite-lived trade name. As a result, the Company impaired $ 10.2 million related to the Keane trade name as of December 31, 2019. The impairment is recorded in impairment expense in the consolidated statements of operations and comprehensive income (loss). +Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows: +95 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year-end December 31, (Thousands of Dollars) +2021 $ ( 14,213 ) +2022 ( 13,132 ) +2023 ( 7,382 ) +2024 ( 5,786 ) +2025 ( 5,312 ) +(5) Goodwill +Goodwill is allocated across three reporting units: Completion Services, Well Construction and Intervention Services and Well Support Services reporting units. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, or when events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. +Judgment is used in assessing whether goodwill should be tested for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, market changes, and other external events may require more frequent assessments. +During the first quarter of 2020, a significant decline in the Company's share price, which resulted in the Company's market capitalization dropping below the book value of equity, as well as reductions in commodity prices driven by the potential impact of the COVID-19 pandemic and global supply and demand dynamics were deemed triggering events that led to a test for goodwill impairment. The impairment testing methodologies for the first quarter 2020 are discussed below. +Income approach +The income approach impairment testing methodology is based on a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. For the Completions Services and Well Construction and Intervention reporting units, the future cash flows were projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows took into account known market conditions as of March 31, 2020, and management’s anticipated business outlook. A terminal period was used to reflect an estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 2.5 %. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital (“WACC”) of 19.9 % for the Completions reporting unit and 22.4 % for the Well Construction and Intervention reporting unit. These assumptions were derived from both observable and unobservable inputs and combined reflect management’s judgments and assumptions. +Market approach +T he market approach impairment testing methodology is based upon the guideline public company method and the guideline transaction method. The application of the guideline public company method was based upon selected public companies operating within the same industry as the Company. Based on this set of comparable competitor data, operational multiples were derived for the reporting units weighted based on management’s assessment of reliability. The forward-looking selected market multiples for the guideline public company method were enterprise value to revenue and enterprise value to EBITDA multiples, with multiples ranging from 0.5 x to 0.6 x for revenues and from 3.3 x to 6.2 x for EBITDA. The application of the guideline transaction method was based upon valuation multiples derived from actual control transactions for comparable companies. Based on this, valuation multiples are derived from historical data of selected transactions, then evaluated and adjusted, if necessary, based on the strengths and weaknesses of the subject reporting unit relative to each acquired guideline company. The forward-looking selected market multiples for the guideline transaction method were enterprise value to revenue and enterprise value to book value of invested capital, with multiples ranging from 0.7 x to 2.1 x for revenues and from 0.6 x to 1.3 x for book value of invested capital. +96 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The fair value determined under the market approach is sensitive to these market multiples, and a decline in any of the multiples could reduce the estimated fair value of the reporting unit below its carrying value. Earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach. +Reconciliation of value and goodwill impairment conclusion +The estimated fair value determined under the income approach was consistent with the estimated fair value determined under the market approach. The concluded fair value for both reporting units consisted of a weighted average, with a 40.0 % weighted under the income approach and 60.0 % weight under the market approach. Market data in support of the implied control premium were used in this reconciliation to corroborate the estimated reporting unit fair values with the Company's overall market-indicated value. The results of the impairment testing for goodwill resulted in the Company recognizing an impairment expense of $ 32.6 million during the first quarter of 2020, consisting of $ 32.2 million related to the Completions Services reporting unit and $ 0.4 million representing the entire balance of goodwill for the Well Construction and Intervention reporting unit. +During the third quarter of 2020, the Company assessed and deemed the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, the Company performed a test for goodwill impairment using the same methodologies used in the first quarter of 2020; however, no impairment of goodwill was recorded. +During the Company’s annual testing as of October 31, 2020, it was determined that there were no events that would indicate the carrying value of goodwill may not be recoverable or that a potential impairment exists. +The changes in the carrying amount of goodwill for the years ended December 31, 2020, 2019 and 2018 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2018 $ 132,524 +C&J Merger +4,934 +Goodwill as of December 31, 2019 137,458 +Disposition of Well Support Services reporting unit ( 660 ) +Impairment expense ( 32,600 ) +Goodwill as of December 31, 2020 $ 104,198 +The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 consisted of amounts related to the disposition of the Well Support Services reporting unit, impairment expense, and the C&J Merger, respectively. For additional information, see Note (3) ( Mergers and Acquisition s) and Note (21) ( Business Segments ). As discussed above, in 2020 the Company recognized impairment expense of $ 32.6 million. There were no triggering events and no impairment expense recorded for the years ended 2019 and 2018. +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2020 and December 31, 2019: +(Thousands of Dollars) +December 31, +2020 December 31, +2019 +Sand, including freight $ 5,096 $ 4,405 +Chemicals and consumables 2,993 11,408 +Materials and supplies 21,979 45,828 +Total inventory, net $ 30,068 $ 61,641 +97 +Inventories are reported net of obsolescence reserves of $ 4.4 million and $ 1.8 million as of December 31, 2020 and 2019, respectively. The Company recognized $ 2.6 million, $ 0.8 million and $ 0.7 million of obsolescence expense during the years ended December 31, 2020, 2019 and 2018. Additionally, during the year ended December 31, 2020, the Company recognized a $ 2.7 million write-down in inventory carrying value down to its net realizable value. +98 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(7) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2020 and December 31, 2019: +(Thousands of Dollars) +December 31, +2020 December 31, +2019 +Land +$ 14,397 $ 35,178 +Building and leasehold improvements +78,078 90,950 +Office furniture, fixtures and equipment +11,400 10,678 +Machinery and equipment +1,284,163 1,259,697 +1,388,038 1,396,503 +Less accumulated depreciation +( 929,290 ) ( 723,060 ) +Construction in progress +11,963 35,961 +Total property and equipment, net +$ 470,711 $ 709,404 +Casualty Loss +On July 1, 2018, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. In 2018, the Company received $ 18.1 million of insurance proceeds for replacement cost of the damaged equipment, which offset the $ 3.2 million impairment loss recognized on the damaged equipment. The resulting gain of $ 14.9 million was recognized in other income (expense), net in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2018. +99 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(8) Long-Term Debt +Long-term debt at December 31, 2020 and December 31, 2019 consisted of the following: +(Thousands of Dollars) +December 31, +2020 December 31, +2019 +2018 Term Loan Facility +341,250 $ 344,750 +Less: Unamortized debt discount and debt issuance costs ( 5,710 ) $ ( 7,127 ) +Total debt, net of unamortized debt discount and debt issuance costs +335,540 337,623 +Less: Current portion +( 2,252 ) $ ( 2,311 ) +Long-term debt, net of unamortized debt discount and debt issuance costs +$ 333,288 $ 335,312 +Below is a summary of the Company’s credit facilities outstanding as of December 31, 2020: +(Thousands of Dollars) +2019 ABL Facility 2018 Term Loan Facility +Original facility size +$ 450,000 $ 350,000 +Outstanding balance +$ — $ 341,250 +Letters of credit issued +$ 28,490 $ — +Available borrowing base commitment +$ 73,463 +n/a +Interest Rate (1) +LIBOR or base rate plus applicable margin +LIBOR or base rate plus applicable margin +Maturity Date +October 31, 2024 +May 25, 2025 +(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00 % floor +Maturities of the 2018 Term Loan Facility for the next five years are presented below: +Year-end December 31, (Thousands of Dollars) +2021 $ 3,500 +2022 3,500 +2023 3,500 +2024 3,500 +2025 327,250 +$ 341,250 +Deferred Charges and Other Costs +Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility (defined below) are capitalized. Deferred charges related to the 2018 Term Loan Facility (defined below) are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2020, 2019 and 2018 was $ 2.2 million, $ 1.4 million, and $ 3.1 million, respectively. +100 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +ABL Revolving Credit Facility +On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $ 1.2 million. In connection with the modification of the 2017 ABL Facility, the Company wrote off $ 0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $ 3.1 million and $ 3.7 million as of December 31, 2020 and 2019, respectively, and are recorded in other noncurrent assets on the consolidated balance sheets. During the first quarter of 2020, the Company provided notice to the lenders to borrow a total of $ 175 million under the 2019 ABL Facility. The interest rates for the $ 150.0 million LIBOR borrowing and $ 25.0 million Base Rate borrowing were 2.125 % and 3.75 %, respectively. During the second quarter of 2020, the Company repaid the $ 150.0 million LIBOR borrowing and the $ 25.0 million Base Rate borrowing and did not incur any penalties. +Term Loan Facility +On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $ 7.6 million. Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $ 9.0 million. Unamortized deferred charges associated with the 2018 Term Loan Facility were $ 5.7 million and $ 7.1 million as of December 31, 2020 and 2019, respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets. +(9) Significant Risks and Uncertainties +Subsequent to the sale of the Well Support Services segment, the Company operates in two reportable segments: Completion Services and Well Construction and Intervention, with significant concentration in the Completion Services segment. During the years ended December 31, 2020, 2019 and 2018, sales to Completion Services customers represented 87 %, 94 % and 98 % of the Company’s consolidated revenue, respectively. +The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. The U.S. energy industry experienced a significant downturn in the second half of 2014 through early 2016, driven primarily by global oversupply and a decline in commodity prices. From early 2016 through late 2018, the U.S. generally experienced some recovery in commodity prices and drilling and completion activity. Over this time frame, the U.S. active rig count increased from a trough of 404 rigs in May 2016 to a peak of 1,083 rigs in December 2018, driving significant demand for the Company's completion services. From December 28, 2018 through December 31, 2019, U.S. active rig count decreased by approximately 26 % to 805 rigs as market conditions tightened and competition within the completions industry increased. +In late 2019 and early 2020, and in response to the oversupply of hydraulic fracturing equipment, an increasing number of horsepower retirements were announced, removing a significant base of equipment from the market. Despite some of these announcements, the oversupply of hydraulic fracturing equipment persisted, resulting in a continuation of highly competitive market conditions into 2020. +In late first quarter of 2020, the industry faced sudden and unprecedented circumstances, including major shocks to both supply and demand. COVID-19 has resulted in significant demand destruction for oil products, driven by a significant slowdown in economic activity throughout the U.S. and abroad. This resulted in a rapid and significant decline in crude oil prices and an increasingly utilized storage network, limiting distribution outlets and optionality for production and further exacerbating price declines. U.S. exploration and production companies responded with drastic reductions in budgets and outright completion stoppages. From the end of the fourth quarter of 2019 to the end of the fourth quarter of 2020, U.S. active rig count decreased by 56 %, from 805 to 351 rigs. +101 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +This backdrop drastically impacted the demand for U.S. completions services and resulted in increased uncertainty throughout much of 2020. While activity has modestly improved relative to the trough in activity experienced in late May / early June 2020, and supply / demand dynamics are improving, the market remains highly competitive. The magnitude, cadence, and resilience of activity improvement is uncertain and dependent on a range of factors including COVID-19 demand resolution. +For the year ended December 31, 2020, revenue from two customers individually represented more than 10% and collectively represented 29 % of the Company’s consolidated revenue. For the year ended December 31, 2019, four customers individually represented more than 10% and collectively represented 55 % of the Company’s consolidated revenue. For the year ended December 31, 2018, three customers individually represented more than 10% and collectively represented 39 % of the Company’s consolidated revenue. +For the years ended December 31, 2020 and 2019, purchases from one supplier represented approximately 5 % of the Company’s overall purchases, and were primarily incurred within the Completion Services segment. +(10) Derivatives +The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. +On March 9, 2020, the Company sold its Well Support Services segment to Basic Energy Services, Inc. (“Basic”) for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, (“WSS Notes”) previously issued by Basic. On July 29, 2020, the Company agreed to use the escrowed amount in the final settlement of the working capital reconciliation. Under the terms of the agreement, the WSS Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $ 34.4 million to NexTier after the WSS Notes are held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole is issued under a fund guarantee by Ascribe III Investments LLC, a private equity investment firm with approximately $ 1.0 billion in assets under management. In the event of a Basic restructuring or a credit rating downgrade in conjunction with a change in control prior to the one-year anniversary, the make-whole guarantee accelerates the WSS Notes to par value of $ 34.4 million. NexTier is entitled to semi-annual interest payments on the WSS Notes based on the 10.75 % annual coupon throughout the holding period. The Company identified the make-whole guarantee as an embedded derivative and bifurcated the valuation of the WSS Note and the make-whole guarantee. The Company elected the fair value option for the WSS Notes at the inception of the transaction. The fair value on the date of the transaction for the make-whole derivative and WSS Notes was $ 12.2 million and $ 22.2 million, respectively, and resulted in a gain on divestiture of $ 8.7 million. The fair value of the WSS Notes and the make-whole guarantee are measured at the end of each reporting period. Unrealized gains and losses recognized in relation to the change in fair value of these instruments are recognized in net income (loss) in the consolidated statements of operations and comprehensive income (loss). The fair value of the WSS Notes and make-whole guarantee are recorded in Other Current Assets on the consolidated balance sheets. See Note (21) Business Segments for further discussion. +On May 25, 2018, the Company entered into the 2018 Term Loan Facility, which has an initial aggregate principal amount of $ 350 million, and repaid its pre-existing 2017 Term Loan Facility. The 2018 Term Loan Facility has a variable interest rate based on LIBOR, subject to a 1.0 % floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately 50 % of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility. +On June 22, 2018, the Company unwound its existing interest rate swaps and received $ 3.2 million in proceeds. The Company used the $ 3.2 million of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a 1 % floor, and makes payments based on a fixed rate of 2.625 %. The new interest rate swap is effective through March 31, 2025 and has a notional amount of $ 175.0 million. The new interest rate swap was designated in a new cash flow hedge relationship. +102 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At the time hedge accounting was discontinued, the exiting interest rate swaps had $ 3.5 million of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap. +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments Derivatives +not +designated as +hedging +instruments Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2020: +Other current asset +$ — $ 27,243 $ 27,243 $ — $ 27,243 +Other current liability +( 2,861 ) — ( 2,861 ) — ( 2,861 ) +Other noncurrent liability +( 8,260 ) — ( 8,260 ) — ( 8,260 ) +As of December 31, 2019: +Other current liability +( 1,729 ) — ( 1,729 ) — ( 1,729 ) +Other noncurrent liability +( 5,559 ) — ( 5,559 ) — ( 5,559 ) +(1) Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2020 2019 2018 Location +Amount of loss recognized in other comprehensive income on derivative $ ( 6,422 ) $ ( 7,628 ) $ ( 880 ) OCI +Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) (“AOCI”) into earnings ( 2,334 ) 239 697 Interest Expense +The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated statements of operations and comprehensive income (loss). +There were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2020, $ 2.7 million of net losses will be reclassified from accumulated other comprehensive loss into earnings within the next 12 months. +The Company recognized a loss on the change in fair market value of the WSS Notes and make-whole derivative of $ 0.9 million for the year ended December 31, 2020 which is recorded within other income (expense) on the consolidated statements of operations and comprehensive income (loss). No loss was recorded in the year ended December 31, 2019. +See Note (11) (Fair Value Measurements and Financial Information) for further information related to the Company’s derivative instruments. +103 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(11) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and finance lease obligations. As of December 31, 2020, and 2019, the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values. +Recurring Fair Value Measurement +As of December 31, 2020, the Company has four financial instruments measured at fair value on a recurring basis which are its interest rate derivative, make-whole derivative, WSS Notes (see Note (10) Derivatives above), and equity security investment. The equity security investment is composed primarily of common equity shares in a publicly traded company, acquired at a fair value of $ 5.3 million. The make-whole derivative, WSS Notes, and the equity security investment are presented within other current assets in the consolidated balance sheets, while the interest rate derivative is presented within other current liabilities and other noncurrent liabilities in the consolidated balance sheets. As of December 31, 2019, the Company had one financial instrument measured on a recurring basis, which was its interest rate derivative. +The fair market value of the derivative financial instruments reflected on the consolidated balance sheets as of December 31, 2020, and 2019 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2020, and 2019 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2020 Level 1 Level 2 Level 3 +Assets: +Make-whole derivative $ 27,243 $ — $ 27,243 $ — +WSS Note 6,322 — 6,322 — +Equity security investment 11,263 11,263 — — +Liabilities: +Interest rate derivatives +$ ( 11,121 ) $ — $ ( 11,121 ) $ — +Fair value measurements at reporting date using +December 31, 2019 Level 1 Level 2 Level 3 +Liabilities: +Interest rate derivatives $ ( 7,288 ) $ — $ ( 7,288 ) $ — +Non-Routine Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the RSI, and C&J transactions were recorded at their fair values on the date of acquisition. See Note (3) Mergers and Acquisitions for further details. +104 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposit with financial institutions totaled $ 276.0 million and $ 255.0 million as of December 31, 2020 and 2019, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2020, trade receivables from one customer individually represented 17 % of the Company’s total accounts receivable. As of December 31, 2019, trade receivables from one customer individually represented more than 10% of the Company’s total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2020 and 2019, the Company had $ 2.7 million, including the increase of $ 1.5 million from the adoption of ASU 2016-13, and $ 0.7 million in allowance for credit losses, respectively. During 2020, the Company had $ 0.5 million of activity related to the current period bad debt expense, net of write-offs. Additionally, the Company had $ 2.0 million of recoveries from previously written-off receivables, net of the bad debt expense. During the years ended December 31, 2019 and 2018, the Company recorded bad debt expense of $ 0.6 million. +(12) Stock-Based Compensation +Effective as of October 31, 2019, the Company (i) amended and restated the Keane Group, Inc. Equity and Incentive Award Plan under the name NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”), and (ii) assumed and amended and restated the C&J Energy Services, Inc. 2017 Management Incentive Plan under the name NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan ( “Management Incentive Plan”, and collectively with the Equity and Incentive Award Plan, the “Equity Award Plans”). As part of the C&J Merger, the Company assumed the award agreements outstanding under the Management Incentive Plan on the terms set forth in the Merger agreement. +As of December 31, 2020, the Company had four types of stock-based compensation under its Equity Award Plans: (i) restricted stock awards issued to independent directors and certain executives and employees, (ii) restricted stock units issued to executive officers and key management employees, (iii) non-qualified stock options issued to executive officers and (iv) performance-based restricted stock units issued to executive officers and key management employees. The Company has approximately 9,098,304 shares of its common stock reserved and available for grant under the Equity and Incentive Award Plan and approximately 6,485,847 shares of its common stock reserved and available for grant under the Management Incentive Plan. +For details on the Company’s accounting policies for determining stock-based compensation expense, see Note (2) Summary of Significant Accounting Policies: (k) Stock-based compensation. Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the consolidated statements of operations and comprehensive income (loss) however, for the year ended December 31, 2020 and 2019, the Company presented $ 2.7 million and $ 9.6 million, respectively, within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions. +105 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following table summarizes stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 (in thousands of dollars): +Year Ended December 31, +2020 2019 2018 +Deferred stock awards +— — 4,280 +Restricted stock awards +1,589 1,486 611 +Restricted stock units +19,201 20,426 9,822 +Non-qualified stock options +894 3,498 2,453 +Restricted stock performance-based stock unit awards +4,142 3,567 — +Stock-based compensation +$ 25,826 $ 28,977 $ 17,166 +Tax benefit +$ ( 5,557 ) ( 6,954 ) ( 4,134 ) +Stock-based compensation, net of tax +20,269 $ 22,023 $ 13,032 +(a) Deferred stock awards +Upon consummation of the IPO, the executive officers of the Company identified in the table below became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the “Compensation Committee”) of the Board of Directors approved, and each executive officer agreed, that in lieu of the executive officer’s cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company’s common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below: +Bonus Amounts (In thousands) +First Second +James C. Stewart +$ 1,976 $ 1,976 +Gregory L. Powell +$ 1,646 $ 1,646 +M. Paul DeBonis Jr. +$ 659 $ 659 +The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $ 8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017. +The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018. The second stock bonus vested January 1, 2019, with an original payout date of February 15, 2019, that was amended in February 2019 to a payout date of March 4, 2019. For the year ended December 31, 2018, the Company recognized $ 4.3 million of non-cash stock compensation expense into earnings, while no compensation related to these awards was recorded during the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019 there was no remaining unamortized compensation cost related to unvested deferred stock awards. +(b) Restricted stock awards +For the years ended December 31, 2020, 2019, and 2018 the Company recognized $ 1.6 million, $ 1.5 million, and $ 0.6 million respectively, of non-cash stock compensation expense. As of December 31, 2020, total unamortized compensation cost related to unvested restricted stock awards was $ 0.6 million, which the Company expects to recognize over the remaining weighted-average period of 0.44 years. +106 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Rollforward of restricted stock awards as of December 31, 2020 is as follows: +Number of Restricted Stock Awards +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2019 292 $ 4.55 +Shares issued 687 2.16 +Shares vested ( 349 ) 3.93 +Shares forfeited ( 7 ) 4.55 +Non-vested balance at December 31, 2020 623 $ 2.27 +(c) Restricted stock units +For the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 19.2 million, $ 20.4 million and $ 9.8 million, respectively, of non-cash stock compensation expense. As of December 31, 2020, total unamortized compensation cost related to unvested restricted stock units was $ 15.9 million, which the Company expects to recognize over the remaining weighted-average period of 1.79 years. +Rollforward of restricted stock units as of December 31, 2020 is as follows: +Number of Restricted Stock Units +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2019 2,760 $ 10.82 +Units issued 4,208 4.77 +Units vested ( 2,121 ) 9.88 +Units forfeited ( 760 ) 5.19 +Non-vested balance at December 31, 2020 4,087 $ 6.12 +(d) Non-qualified stock options +For the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 0.9 million, 3.5 million and $ 2.5 million, respectively, of non-cash stock compensation expense. As of December 31, 2020, total unamortized compensation cost related to unvested stock options was $ 0.1 million, which the Company expects to recognize over the remaining weighted-average period of 0.21 years. +Rollforward of stock options as of December 31, 2020 is as follows: +Number of Stock Options +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2019 1,743 $ 4.86 +Options granted — — +Options exercised — — +Actual options forfeited ( 2 ) 7.35 +Options expired — — +Total outstanding at December 31, 2020 1,741 $ 4.86 +There were 1.7 million stock options exercisable or vested at December 31, 2020. +107 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Assumptions used in calculating the fair value of the stock options granted during the year are summarized below: +2019 Options Granted 2018 Options Granted 2017 Options Granted +Valuation assumptions: +Expected dividend yield 0 % 0 % 0 % +Expected equity volatility 49.6 % 46.3 % 51.5 % +Expected term (years) +7.3 - 8.1 +6 6 +Risk-free interest rate 1.7 % 2.7 % 1.6 % +Weighted average: +Exercise price per stock option +$ 19.09 - $ 26.41 +$ 15.31 $ 19.00 +Market price per share $ 4.55 $ 15.31 $ 14.49 +Weighted average fair value per stock option $ 0.74 $ 7.28 $ 6.16 +(e) Performance-based RSU awards +During the first quarter of 2020, the Company issued 1,033,936 of performance-based RSUs to executive officers under its Equity Award Plans, which were fair valued at $ 8.5 million using a Monte Carlo simulation method. 50 % of the performance-based RSUs vest after two years (the "two-year performance-based RSUs"), while the remaining 50 % vest after three years (the "three-year performance-based RSUs"). Each vesting is subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period. The number of shares that may be earned at the end of the vesting period ranges from 50 % to 200 % of the target award amount, if the threshold performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of December 31, 2020, total unamortized compensation cost related to unvested performance-based RSUs was $ 4.4 million, which the Company expects to recognize over the weighted-average period of 2.00 years. +During the second quarter of 2020, the Company issued 405,541 of performance-based RSUs to executive officers under its Equity Award Plans, with an estimated value of $ 1.2 million, based on a 100% target value. The performance RSUs issued by the Company have service and performance conditions. The number of shares that may be earned at the end of the vesting period ranges from 0 % to 150 % of the target award amount, if the performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of December 31, 2020, total unamortized compensation cost related to unvested performance-based RSUs was $ 0.8 million, which the Company expects to recognize over the weighted-average period of 1.00 years. +Number of Performance-based RSU’s +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2019 — $ — +Performance-based RSU’s issued 1,439 6.75 +Performance-based RSU’s vested ( 123 ) 1.65 +Performance-based RSU’s forfeited ( 48 ) 9.25 +Total outstanding at December 31, 2020 1,268 $ 7.15 +Assumptions used in calculating the fair value of the first quarter performance-based RSU’s granted during the year are summarized below: +108 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +2020 Performance based RSU’s Granted +Valuation assumptions: +Expected dividend yield +0 % +Expected equity volatility, including peers +31.7 % - 97.4 % +Expected term (years) +2 - 3 +Risk-free interest rate +0.8 % - 1.6 % +(13) Stockholders’ Equity +(a) Vesting of Stock Awards +During the year ended December 31, 2020, 2,170,659 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company. +(b) Secondary Offerings +On January 17, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor, pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $ 18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor controlled 50.8 % of the Company’s outstanding common stock. During the December 31, 2018, the Company incurred $ 13.0 million of transaction costs on behalf of the selling stockholder, which were included within selling, general and administrative expenses in the consolidated statement of operations and comprehensive income (loss). +In February 2018, the Company filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, a selling stockholder sold 5,251,249 of the Company’s common stock at a price to the public of $ 11.02 per share. In conjunction with this offering, the Company repurchased 520,000 shares. The Company did not sell any common stock in, and did not receive any of the proceeds from, this offering. As a result of this offering, Keane Investor owned approximately 49.6 % of the Company’s outstanding common stock, and the Company ceased being a “controlled company” within the meaning of the NYSE rules. +(c) C&J Merger +As described in Note (3) Mergers and Acquisitions, the Company completed the C&J Merger on October 31, 2019 for total consideration of approximately $ 485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-Merger services with a value of $ 3.2 million. +(d) Stock Repurchase +During the year ended December 31, 2018, the Company settled $ 105.0 million of total share repurchases of its common stock at an average price of $ 12.93 per share, representing a total of 8,111,764 common shares of the Company. Of the total amount of shares repurchased in 2018, 1,248,440 shares and 520,000 shares were repurchased from White Deer Energy (as defined herein) and Keane Investor, respectively. The shares repurchased from Keane Investor were not repurchased under the Company’s existing stock repurchase program. For further details of these related-party transactions, see Note (19) Related Party Transactions . +On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for up to $ 50.0 million through December 2020. No share repurchases were made under the share repurchase program in the years ended December 31, 2020 or 2019. +109 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(14) Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items Interest rate +contract AOCI +December 31, 2019 $ ( 116 ) $ ( 8,665 ) $ ( 8,781 ) +Net income (loss) — 2,334 2,334 +Other comprehensive loss ( 241 ) ( 6,422 ) ( 6,663 ) +December 31, 2020 $ ( 357 ) $ ( 12,753 ) $ ( 13,110 ) +The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended December 31, 2020, 2019 and 2018 (in thousands of dollars): +Year Ended December 31, Affected line item +in the consolidated +statements of +operations and +comprehensive income (loss) +2020 2019 2018 +Interest rate derivatives, hedging +$ ( 2,334 ) $ 239 $ 697 Interest expense +Foreign currency items (1) +— — ( 2,621 ) Other income +Total reclassifications +$ ( 2,334 ) $ 239 $ ( 1,924 ) +(1) During the fourth quarter of 2018, the Company liquidated its Canadian subsidiary, upon which it recognized a loss of $ 2.6 million from AOCI into earnings in the consolidated statement of operations and comprehensive income for the year ended December 31, 2018. +(15) Earnings per Share +Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +110 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows (in thousands): +Year Ended December 31, +2020 2019 2018 +Numerator: +Net income (loss) $ ( 346,883 ) $ ( 106,157 ) $ 59,331 +Denominator: +Basic weighted-average common shares outstanding (1) +213,795 122,977 109,335 +Dilutive effect of restricted stock awards 199 43 17 +Dilutive effect of deferred stock award granted to NEOs — — 214 +Dilutive effect of RSUs granted under stock incentive plans 39 81 94 +Dilutive effect of performance-based restricted stock awards granted under the Equity Plan 1,041 — — +Diluted weighted-average common shares outstanding (2) +215,074 123,101 109,660 +(1) As a result of the net loss incurred by the Company for the years ended December 31, 2020 and 2019, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Leases +In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. The Company adopted these standards effective January 1, 2019, using the modified retrospective transition method. The Company recognized a lease right-of-use asset and lease liability of approximately $ 61.0 million on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated statements of operations and comprehensive loss or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. As such the Company has elected to account for the combined components of its customer contracts under ASC 606. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases. +The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has both operating and finance leases for its light duty vehicles. +111 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 to 14 years, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees. +The components of the Company's lease costs are as follows: +(Thousands of Dollars) +Year ended +December 31, 2020 +Year ended +December 31, 2019 +Operating lease cost $ 15,702 $ 26,948 +Finance lease cost: +Amortization of right-of-use assets 2,027 3,356 +Interest on lease liabilities 269 625 +Total finance lease cost 2,296 3,981 +Short-term and Variable lease cost (1) +7,469 16,838 +Sublease income +— ( 116 ) +Total lease cost +$ 25,467 $ 47,651 +(1) Cost from variable amounts excluded from determination of lease liability. +Supplemental cash flows related to leases are as follows: +(Thousands of Dollars) +Year ended +December 31, 2020 +Year ended +December 31, 2019 +Cash paid for amounts included in the measurements of lease liabilities +Operating cash flows from operating leases $ 21,049 $ 25,318 +Operating cash flows from finance leases 240 565 +Financing cash flows from finance leases 3,752 6,035 +Weighted average remaining lease terms are as follows: +Year ended +December 31, 2020 +Year ended +December 31, 2019 +Operating leases 4.72 years 4.74 years +Finance leases 1.88 years 2.28 years +Weighted average discount rate on the Company's lease liabilities are as follows: +Year ended +December 31, 2020 +Year ended +December 31, 2019 +Operating leases 8.65 % 5.73 % +Finance leases 5.79 % 5.53 % +112 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Maturities of the Company's lease liabilities as of December 31, 2020, per ASU 2016-02, were as follows: +(Thousands of Dollars) +Year ending December 31, +Operating leases +Finance leases +2021 $ 20,856 $ 653 +2022 9,751 422 +2023 6,888 97 +2024 2,324 — +2025 1,866 — +Thereafter 9,161 — +Total undiscounted remaining minimum lease payments 50,846 1,172 +Less imputed interest ( 8,063 ) ( 62 ) +Total discounted remaining minimum lease payments $ 42,783 $ 1,110 +The Company did not make any lease reassessments or modifications nor did it recognize any gains or losses on sale-leaseback transactions during the year ended December 31, 2020. +As of December 31, 2020, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties. +(17) Income Taxes +The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions: +(Thousands of Dollars) +Year Ended December 31, +2020 2019 2018 +Domestic $ ( 357,250 ) $ ( 106,879 ) $ 66,260 +Foreign 11,837 1,727 ( 2,659 ) +$ ( 345,413 ) $ ( 105,152 ) $ 63,601 +The components of the Company’s income tax provision are as follows: +(Thousands of Dollars) +Year Ended December 31, +2020 2019 2018 +Current: +State $ ( 297 ) $ 709 $ 5,387 +Foreign 1,858 627 31 +Total current income tax provision $ 1,561 $ 1,336 $ 5,418 +Deferred: +Federal $ ( 158 ) $ ( 239 ) $ ( 1,031 ) +State 53 ( 92 ) ( 117 ) +Foreign 14 — — +Total deferred income tax provision ( 91 ) ( 331 ) ( 1,148 ) +$ 1,470 $ 1,005 $ 4,270 +113 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated statements of operations and comprehensive (loss). The Company’s effective tax rate for 2020 of ( 0.43 )% differs from the statutory rate, primarily due to state taxes, foreign withholding taxes, and a change in the valuation allowance. The Company’s effective tax rate for 2019 was ( 0.96 )%. +(Thousands of Dollars) +December 31, +2020 December 31, +2019 December 31, +2018 +Income tax provision computed at the statutory federal rate $ ( 72,537 ) $ ( 22,082 ) $ 13,356 +Reconciling items: +State income taxes, net of federal tax benefit ( 12,222 ) ( 1,463 ) 1,408 +Deferred tax asset valuation adjustment 82,557 14,987 ( 22,639 ) +Permanent differences 4,589 9,962 5,237 +Foreign withholding taxes 1,870 627 — +Other ( 2,787 ) ( 1,026 ) 6,908 +Income tax provision $ 1,470 $ 1,005 $ 4,270 +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. +(Thousands of Dollars) +Year Ended December 31, +2020 2019 2018 +Deferred tax assets: +Stock-based compensation $ 4,972 $ 4,124 $ 3,979 +Net operating loss and other carry-forwards 284,151 196,949 90,565 +Accruals and other 15,535 21,411 4,524 +PPE & Intangibles — 1,474 — +Gross deferred tax assets 304,658 223,958 99,068 +Valuation allowance ( 294,101 ) ( 223,419 ) ( 41,779 ) +Total deferred tax assets $ 10,557 $ 539 $ 57,289 +Deferred tax liability: +PP&E and intangibles $ ( 8,317 ) $ — $ ( 56,799 ) +Prepaids and other ( 2,240 ) ( 645 ) ( 756 ) +Total deferred tax liability ( 10,557 ) ( 645 ) ( 57,555 ) +Net deferred tax liability $ — $ ( 106 ) $ ( 266 ) +As of December 31, 2020, NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $ 1.2 billion, of which, $ 380.2 million, if not utilized, will begin to expire in the year 2031. The remaining federal NOLS can be carried forward indefinitely. The total deferred tax asset for net operating loss and other carryforwards also includes approximately $ 42.1 million of interest expense carryovers with indefinite life. Of the federal NOLs that can be carried forward indefinitely, $ 352.2 million is related to the Company’s current year federal tax loss. The Company has state NOLS of $ 480.1 million, which if not utilized, will expire in various years between 2025 and 2038. Additionally, the Company has $ 20.3 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2035. +As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation +114 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $ 8.5 million. In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. As of December 31, 2020, it is expected that all of the Company’s pre-change NOLs of $ 398.8 million incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration. The Company’s pre-change NOLs subject to expiration comprise $ 275.8 million out of the total $ 398.8 million. +C&J Energy Services, Inc. had Pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $ 8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. including built-in loss through December 31, 2020, total $ 405.8 million of which $ 104.4 million are subject to expiration, but not expected to expire as a result of the IRC Section 382 limitation. +ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2020 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of NexTier Oilfield Solutions Inc., excluding deferred tax liabilities related to certain indefinite lived assets. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of December 31, 2020, 2019, and 2018 were $ 294.1 million, $ 223.4 million and $ 41.8 million, respectively. +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2020 $ 223,419 +Divestiture ( 13,450 ) +Charge as (benefit) expense to income tax provision for current activities 82,557 +Changes to other comprehensive income (loss) 1,575 +Valuation allowance as of December 31, 2020 $ 294,101 +On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. +The Company evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on its consolidated financial statements as of December 31, 2017. Accordingly, the Company recorded a provision to income taxes for the Company’s assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on the Company’s consolidated financial +115 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +statements. The Company finalized its analysis of the Tax Act in 2018 and will continue to monitor guidance on provisions of the Tax Act to be issued by taxing authorities to assess the impact on the Company’s consolidated financial statements. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2020, 2019 and 2018. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2017 through December 31, 2019 for federal tax purposes and for the years ended December 31, 2016 through December 31, 2019 for state tax purposes. +(18) Commitments and Contingencies +As of December 31, 2020, and 2019, the Company had $ 4.9 million and $ 9.0 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $ 23.4 million and $ 64.0 million, as of December 31, 2020, and 2019, respectively. +As of December 31, 2020, the Company has a letter of credit of $ 28.5 million under the 2019 ABL Facility. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $ 77.6 million, $ 160.0 million and $ 107.4 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2020, 2019 and 2018. +Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2020 are listed below: +(Thousands of Dollars) +Year-end December 31, +2021 $ 23,418 +2022 17,430 +2023 7,500 +2024 1,190 +2025 — +$ 49,538 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues and motor vehicle accidents. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its consolidated financial position, results of operations or liquidity. +116 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Regulatory Audits +Prior to the consummation of the C&J Merger, the Company and C&J had been notified by certain state taxing authorities that these taxing authorities would be conducting routine sales and use tax audits of certain wholly owned operating subsidiaries of the Company for tax periods ranging from January 2011 through December 2019. The Company has recorded estimates of potential assessments for each audit totaling in the aggregate approximatel y $ 33.0 million . For one audit, in particular, the Company disagrees with many aspects of the state’s preliminary report and intends to contest the state’s position through litigation, if necessary. In addition, this reserve does not take into account the potential for refund claims in which the Company has not recorded. +(19) Related Party Transactions +Cerberus Operations and Advisory Company, Cerberus Capital Management, L.P. and Cerberus Technology Solutions LLC, affiliates of the Company’s principal equity holder, provide certain consulting services to the Company. The Company paid $ 2.2 million, $ 4.1 million and $ 0.3 million during the years ended December 31, 2020, 2019 and 2018, respectively. +In connection with the Organization Transaction, the Company engaged in transactions with affiliates. See Note (1) Basis of Presentation and Nature of Operations and Note (13) Stockholders’ Equity for a description of these transactions. +In connection with the Company’s research and development initiatives, the Company engaged in transactions with its equity-method investee. As of December 31, 2020, the Company had purchased $ 1.7 million of shares in its equity-method investee. In the first quarter of 2020, the Company had enough evidence to believe that it would not be able to recover its $ 1.7 million investment in its equity-method investee and completely impaired it. The impairment is recorded in impairment expense in the consolidated statement of operations and comprehensive income (loss). For additional information, see Note (2) Summary of Significant Accounting Policies +(20) Retirement Benefits and Nonretirement Postemployment Benefits +Defined Contribution Plan +The Company sponsors two different 401(k) defined contribution retirement plans covering eligible employees. The Company makes matching contributions of up to 3.5 % of eligible compensation, but suspended the Company matching contribution to the 401(k) plans as of May 1, 2020. Eligible employees can make annual contributions to one of the two plans for which they are eligible up to the maximum amount allowed by current federal regulations, as noted in the plan documents. Contributions made by the Company related to the years ended December 31, 2020, 2019, and 2018 were $ 4.5 million, $ 8.1 million and $ 6.7 million, respectively. +Severance +117 +The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $ 27.0 million, $ 16.7 million and $ 0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. +(21) Business Segments +In accordance with Accounting Standard Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available. +In 2019, due to the transformative nature of the C&J Merger, the CODM changed the way in which the Company is managed, including the level at which to make performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. On March 9, 2020 the Company announced it had completed the divestiture of its Well Support Services (“WSS”) segment. As a result of the changes to operating segments, the Company revised its reportable segments subsequent to the completion of the C&J Merger and prior to the WSS divestiture, the Company’s revised reportable segments were: (i) Completion Services and (ii) Well Construction and Intervention (“WC&I”) and (iii) Well Support Services. Subsequent to the WSS divestiture, the Company’s reportable segments were (i) Completion Services, and (ii) Well Construction and Intervention Services. This segment structure reflects the financial information and reports used by the Company’s management, specifically including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions. As a result of the revised reportable segment structure subsequent to the C&J merger, the Company has restated the corresponding items of segment information for all periods presented. +The following is a description of each reportable segment: +Completion Services +The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) wireline and pumpdown services; and (3) completion support services, which includes the Company's research and technology department. +Well Construction and Intervention Services +The Company’s WC&I Services segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. +Historical Segment: Well Support Services +The Company’s Well Support Services segment consisted of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. On March 9, 2020, the Company completed the divestiture of its Well Support Services segment for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, ("WSS Notes") previously issued by Basic. This resulted in a gain on divestiture of $ 8.7 million. The gain is recorded within (Gain) Loss on Disposal of Assets on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Income per share for the three months ended March 31, 2020 attributable to the divested Well Support Services segment was less than $ 0.01 . On July 29, 2020, the Company received the escrowed cash amount in final settlement for working capital reconciliation. +118 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2020 2019 2018 +Operations by reportable segment +Revenue: +Completion Services $ 1,046,314 $ 1,709,934 $ 2,100,956 +WC&I 98,338 63,039 36,050 +Well Support Services 57,929 48,583 — +Total revenue $ 1,202,581 $ 1,821,556 $ 2,137,006 +Adjusted gross profit (loss): +Completion Services (1) +$ 168,276 $ 401,845 $ 479,077 +WC&I (1) +9,731 7,812 ( 2,390 ) +Well Support Services (1) +12,338 7,967 — +Total adjusted gross profit $ 190,345 $ 417,624 $ 476,687 +Operating income (loss): +Completion Services $ ( 144,425 ) $ 126,698 $ 234,756 +WC&I ( 9,571 ) 3,855 ( 6,818 ) +Well Support Services 10,940 6,959 — +Corporate and Other ( 188,221 ) ( 221,261 ) ( 129,928 ) +Total operating income (loss) $ ( 331,277 ) $ ( 83,749 ) $ 98,010 +Depreciation and amortization: +Completion Services $ 264,247 $ 270,918 $ 241,169 +WC&I 18,045 3,822 4,428 +Well Support Services 1,527 1,415 — +Corporate and Other 18,232 15,995 13,548 +Total depreciation and amortization $ 302,051 $ 292,150 $ 259,145 +Net income (loss): +Completion Services $ ( 144,425 ) $ 126,698 $ 234,756 +WC&I ( 9,571 ) 3,855 ( 6,818 ) +Well Support Services 10,940 6,959 — +Corporate and Other ( 203,827 ) ( 243,669 ) ( 168,607 ) +Total net income (loss) $ ( 346,883 ) $ ( 106,157 ) $ 59,331 +(1) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +119 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year ended December 31, 2020 +Completion Services WC&I Well Support Services Total +Revenue $ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +Cost of Services 893,785 93,198 45,591 1,032,574 +Gross profit excluding depreciation and amortization 152,529 5,140 12,338 170,007 +Management adjustments associated with cost of services (1) +15,747 4,591 — 20,338 +Adjusted gross profit (2) +$ 168,276 $ 9,731 $ 12,338 $ 190,345 +(1) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +Year ended December 31, 2019 +Completion Services WC&I Well Support Services Total +Revenue $ 1,709,934 $ 63,039 $ 48,583 $ 1,821,556 +Cost of Services 1,308,089 55,227 40,616 1,403,932 +Gross profit excluding depreciation and amortization 401,845 7,812 7,967 417,624 +Management adjustments associated with cost of services — — — — +Adjusted gross profit (2) +$ 401,845 $ 7,812 $ 7,967 $ 417,624 +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +Year ended December 31, 2018 +Completion Services WC&I Well Support Services Total +Revenue $ 2,100,956 $ 36,050 $ — $ 2,137,006 +Cost of Services 1,622,106 38,440 — 1,660,546 +Gross profit excluding depreciation and amortization 478,850 ( 2,390 ) — 476,460 +Management adjustments associated with cost of services (3) +227 — — 227 +Adjusted gross profit (2) +$ 479,077 $ ( 2,390 ) $ — $ 476,687 +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +(3) Adjustments relate to integration costs recorded in costs of services as a result of the RSI asset acquisition in 2018. +120 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +December 31, +2020 December 31, +2019 +Total assets by segment: +Completion Services +$ 689,814 $ 1,091,965 +WC&I +62,959 106,493 +Well Support Services +— 109,792 +Corporate and Other +405,115 356,657 +Total assets +$ 1,157,888 $ 1,664,907 +Goodwill by segment: +Completion Services +$ 104,198 $ 136,425 +WC&I +— 372 +Well Support Services +— 661 +Corporate and Other +— — +Total goodwill +$ 104,198 $ 137,458 +(22) Selected Quarterly Financial Data +The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2020 and 2019. The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. +Year Ended December 31, 2020 +(Unaudited) +Selected Financial Data: First +Quarter Second Quarter Third Quarter Fourth Quarter +Revenue $ 627,625 $ 196,227 $ 163,675 $ 215,054 +Costs of services (excluding depreciation and amortization, shown separately) 512,226 178,771 150,066 191,511 +Depreciation and amortization 85,821 75,260 73,570 67,400 +Selling, general and administrative expenses 56,884 38,024 25,521 23,718 +Merger and integration 12,182 14,028 7,288 ( 959 ) +Gain on disposal of assets ( 7,962 ) ( 953 ) ( 3,027 ) ( 2,519 ) +Impairment 34,327 — 2,681 — +Total operating costs and expenses 693,478 305,130 256,099 279,151 +Operating loss ( 65,853 ) ( 108,903 ) ( 92,424 ) ( 64,097 ) +Other income (expense), net 416 2,259 ( 3,978 ) 7,819 +Interest expense ( 6,066 ) ( 5,353 ) ( 5,524 ) ( 3,709 ) +Total other income (expense) ( 5,650 ) ( 3,094 ) ( 9,502 ) 4,110 +Income tax expense ( 253 ) ( 491 ) ( 507 ) ( 219 ) +Net loss $ ( 71,756 ) $ ( 112,488 ) $ ( 102,433 ) $ ( 60,206 ) +121 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year Ended December 31, 2019 +(Unaudited) +Selected Financial Data: First +Quarter Second Quarter Third Quarter Fourth Quarter +Revenue $ 421,654 $ 427,733 $ 443,953 $ 528,216 +Costs of services (excluding depreciation and amortization, shown separately) 337,646 324,503 333,438 408,345 +Depreciation and amortization 71,476 69,886 68,708 82,080 +Selling, general and administrative expenses 27,936 26,463 26,579 42,698 +Merger and integration — 6,108 6,651 55,972 +(Gain) loss on disposal of assets 481 ( 330 ) 679 3,640 +Impairment — — — 12,346 +Total operating costs and expenses 437,539 426,630 436,055 605,081 +Operating income ( 15,885 ) 1,103 7,898 ( 76,865 ) +Other expense (income), net 448 ( 43 ) 55 ( 7 ) +Interest expense ( 5,395 ) ( 5,477 ) ( 5,215 ) ( 5,769 ) +Total other income (expenses) ( 4,947 ) ( 5,520 ) ( 5,160 ) ( 5,776 ) +Income tax income (expense) ( 974 ) ( 564 ) 820 ( 287 ) +Net income (loss) $ ( 21,806 ) $ ( 4,981 ) $ 3,558 $ ( 82,928 ) +(23) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses," which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, "Financial Instruments-Credit Losses-Measured at Amortized Cost," and should be accounted for in accordance with ASC 842. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarified certain amendments related to ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief," which clarifies certain aspects of the amendments in ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) and ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses." +The Company adopted these new standards effective January 1, 2020 and analyzed its trade accounts receivable based on a risk assessed portfolio approach, incorporating current and forecasted economic conditions as of January 1, 2020 which resulted in the increase of $ 1.5 million of allowances for expected credit losses related to our accounts receivable through a cumulative effect offset to retained earnings. +122 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020 and there was no impact to its consolidated financial statements. +In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements. +In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The amendments in this standard clarified that certain transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements. +In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update)". The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements. +In August 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer". ASU 2019-08 expands the scope of ASC Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period. +In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The Company early adopted this new accounting guidance, and there was no additional impact on its consolidated financial statements. +(b) Recently Issued Accounting Standards +In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-10 expands on the US GAAP guidance on contract modifications and hedge accounting related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. +123 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +In October 2020, the FASB issued ASU 2020-10 ‘Codification Improvements”. ASU 2020-10 improves the clarity and consistency of various provisions in the Codification. The Company does not expect ASU 2020-10 to have any impact on the its consolidated financial statements. +In August 2020, the FASB issued ASU 2020-06 "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). ASU 2020-06 simplifies the guidance on the issuer's accounting for convertible debt instruments and convertible preferred stock. The Company does not expect ASU 2020-06 to have any impact on the Company's consolidated financial statements. +In June 2020, the FASB issued ASU 2020-05, "Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities," which provides a limited deferral of the effective dates of "Revenue from Contracts with Customers (ASC 606)" and "Leases (ASC 842)" to provide immediate, near-term relief for certain entities for whom these updates are either currently effective or imminently effective. The Company does not expect ASU 2020-05 to have any impact on the Company's consolidated financial statements. +In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)," which is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. +In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)," which clarifies the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. This standard is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This standard is effective for fiscal years beginning after December 15, 2021 and the adoption is not expected to have any impact on the Company's consolidated financial statements. +In December 2019, the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures. +124 +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2020, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2020, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +Effective January 1, 2020, we adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which resulted in the increase of $1.5 million of allowances for expected credit losses related to our accounts receivable through a cumulative effect offset to retained earnings. In connection with the adoption of this standard, we implemented internal controls to ensure we properly evaluate our financial assets for applicability. +On October 31, 2019, we completed the C&J Merger, which resulted in changes to internal controls over the consolidation and reporting of our financial results. In the second quarter of 2020, the Company completed the implementation of a single ERP system. We also continue to further simplify, harmonize and automate processes and migrate data, including from ancillary systems. In connection with the implementation, harmonization, and migrations and the resulting business process changes, we have reviewed and continue to execute, where appropriate, the re-design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting. These transitions have not materially affected, and we do not expect them to materially affect, our internal controls over financial reporting. The consolidated financial statements +125 +presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +126 +PART III +127 +Item 10. Directors, Executive Officers and Corporate Governance +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +128 +Item 11. Executive Compensation +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +129 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +130 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +131 +Item 14. Principal Accountant Fees and Services +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +132 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +71 +Consolidated Balance Sheets +76 +Consolidated Statements of Operations and Comprehensive Income (Loss) +77 +Consolidated Statements of Changes in Stockholders’ Equity +78 +Consolidated Statements of Cash Flows +79 +Notes to Consolidated Financial Statements +81 +Financial Statement Schedules: +The schedules listed in Rule 5-04 of Regulation S-X (17 CFR 210.5-04) have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. +133 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Exhibit +Number Exhibit Description +2.1 +Agreement and Plan of Merger, dated as of June 16, 2019, by and among C&J Energy Services, Inc., Keane Group, Inc. and King Merger Sub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2019). +3.1 +Certificate of Incorporation of Keane Group, Inc. dated October 13, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +3.2 +Certificate of Amendment to Certificate of Incorporation of Keane Group, Inc. dated October 31, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +3.3 +Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +3.4 +First Amendment to Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 2, 2020). +4.1 +Second Amended and Restated Stockholders' Agreement, dated October 31, 2019, by and among Keane Group, Inc. and Keane Investor Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +4.2 +Description of Registrants Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.1 +Second Amended and Restated Asset-Based Revolving Credit Agreement, dated October 31, 2019, by and among NexTier Oilfield Solutions Inc. (f/k/a Keane Group, Inc.), Keane Group Holdings, LLC, as the Lead Borrower, certain other subsidiaries of NexTier Oilfield Solutions Inc. as additional borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +10.2 +Term Loan Agreement, dated May 25, 2018, by and among Keane Group Inc., as the Parent, Keane Group Holdings, LLC, as the Lead Borrower, the Subsidiary Guarantors party thereto, Barclays Bank PLC, as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 29, 2018). +10.3 † +Keane Management Holdings LLC Management Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.4 † +NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan, amended and restated on October 31, 2019 (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.5 †* +Amendment No. 1 to NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan. +10.6 † +Form of Keane Group, Inc. Executive Incentive Bonus Plan (incorporated by referent to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.7 † +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 filed with the SEC on December 14, 2016). +10 . 8 † +Form of Director Services Agreement (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1filed on December 14, 2016). +134 +10.9 † +Keane Group, Inc. Form of Restricted Stock Award (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 26, 2017). +10.10 † +Keane Group, Inc. Form of Deferred Stock Award Agreement (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +10.11 † +Form of Keane Group, Inc. Equity and Incentive Award Plan Amendment to Deferred Stock Award Agreement (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2019). +10.12 † +Form of RSU Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.13 † +Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.14 † +Keane Group, Inc. Form of Restricted Stock Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.15 † +Keane Group, Inc. Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.16 † +Keane Group, Inc. Form of Restricted Stock Unit Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10Q filed on May 7, 2019). +10.17 † +Keane Group, Inc. Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.18 † +Form of Amendment to Keane Group, Inc. Restricted Unit Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.19 † +Form of Amendment to Keane Group, Inc. Non-Qualified Stock Option Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.20 † +NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan, dated Effective October 31, 2019 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 1, 2019). +10.21 † +C&J Energy Services, Inc. 2017 Management Incentive Plan. (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on January 13, 2017). +10.22 † +First Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.23 † +Second Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.24 † +Restricted Share Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.2 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.25 † +Restricted Share Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.3 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.26 † +Nonqualified Stock Option Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.5 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.27 † +Nonqualified Stock Option Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.6 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.28 † +Performance Share Agreement under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.10 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +135 +10.29 † +Performance Share Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.11 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.30 † +Performance Share Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.12 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.31 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.13 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.32 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.14 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.33 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.15 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.34 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.16 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.35 † +Form of RSU Award Agreement 2020 (Executive) (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.36 † +Form of PSU Agreement 2020 (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.37 †* +Form of RSU Award Agreement 2021. +10.38 †* +Form of PSU Award Agreement 2021. +10.39 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Robert Drummond (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.40 † +Third Amended and Restated Employment Agreement, dated June 16, 2019, by and between Keane Group, Inc. and Greg Powell (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.41 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Kevin M. McDonald (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 16, 2019). +10.42 † +Amended and Restated Employment Agreement, dated as of November 1, 2019, by and between NexTier Oilfield Solutions Inc. and Ian J. Henkes (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.43 † +Second Amended and Restated Employment Agreement, dated January 13, 2021, by and between NexTier Oilfield Solutions Inc. and Kenny Pucheu (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 15, 2021). +10.45 † +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group, Inc. and James C. Stewart (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +1 0 . 4 6 † +Separation Agreement for James Stewart (incorporated by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.47 † +Employment Agreement, dated February 20, 2017, by and between KGH Intermediate Holdco II, LLC and Phung Ngo-Burns (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2017). +10.48 † +Amendment to Employment Agreement of Phung Ngo-Burns, dated March 20, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 24, 2020). +10.49 †* +Amendment No.2 to NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan. +10.50 †* +Amendment No.1 to NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan. +136 +21.1 * +Schedule of Subsidiaries of NexTier Oilfield Solutions Inc. +23.1 * +Consent of KPMG LLP, Independent Registered Public Accounting Firm +31.1 * +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +31.2 * +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +32.1 * +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +101.INS XBRL Instance Document +101.SCH XBRL Taxonomy Extension Schema Document +101.CAL XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB XBRL Taxonomy Extension Label Linkbase Document +101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF XBRL Taxonomy Extension Definition Linkbase Document +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** Furnished herewith. +Item 16. Form 10-K Summary +None. +137 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 24, 2021. +NexTier Oilfield Solutions Inc. +(Registrant) +By: /s/ Robert W. Drummond +Robert W. Drummond +Chief Executive Officer and Director +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +138 +Signature Title Date +/s/ Robert W. Drummond Chief Executive Officer and Director +(Principal Executive Officer) February 24, 2021 +Robert W. Drummond +/s/ Kenneth Pucheu Executive Vice President and Chief Financial Officer +(Principal Financial Officer) February 24, 2021 +Kenneth Pucheu +/s/ Phung Ngo-Burns Chief Accounting Officer and Treasurer +(Principal Accounting Officer) February 24, 2021 +Phung Ngo-Burns +/s/ James C. Stewart Director February 24, 2021 +James C. Stewart +/s/ Stuart Brightman Director February 24, 2021 +Stuart Brightman +/s/ Gary M. Halverson Director February 24, 2021 +Gary M. Halverson +/s/ Patrick Murray Director February 24, 2021 +Patrick Murray +/s/ Amy H. Nelson Director February 24, 2021 +Amy H. Nelson +/s/ Mel Riggs Director February 24, 2021 +Mel Riggs +/s/ Michael Roemer Director February 24, 2021 +Michael Roemer +/s/ Scott Wille Director February 24, 2021 +Scott Wille +139 \ No newline at end of file diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/filing_metadata.csv b/raw/filings/0001688476/2020/0001688476-21-000039/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c0925d9eb7e9e0b700f1ca5f9fe7068a019125a6 --- /dev/null +++ b/raw/filings/0001688476/2020/0001688476-21-000039/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2021-02-24,2020-12-31,2021-02-24T21:59:14.000Z,0001688476-21-000039,frac-20201231.htm,10-K,16601766,1,1,https://www.sec.gov/Archives/edgar/data/1688476/000168847621000039/frac-20201231.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847621000039/,2020,2020,1 diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/item1.txt b/raw/filings/0001688476/2020/0001688476-21-000039/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f87fe7eb50f0ea47c186ce138e4421c16bf2098c --- /dev/null +++ b/raw/filings/0001688476/2020/0001688476-21-000039/item1.txt @@ -0,0 +1,114 @@ +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +In continuation of our growth through acquisition strategy, since 2013 has notably resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 1,040,000 hydraulic horsepower, on October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into one of our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” +In March of 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. We believe this integration solution will assist our customers to reduce emissions at the wellsite and throughout their operations. This solution is focused on providing gas sourcing, compression, transport, decompression, treatment, and related services for our fracturing operations. We currently expect this additional integrated service to be available to our customers later in 2021. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +5 +Well Support Services segment +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover. Maintenance services provided with our rig fleet were generally required throughout the life cycle of an oil or gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services were generally less complicated than completion and workover related services and required less time to perform. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. These plugging and abandonment services generally required auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services was not significantly impacted by the demand for oil and gas because well operators are required within a specified period of time by state regulations to plug wells that are no longer productive. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. Included in our fleet of fluid trucks and trailers were specialized trucks and trailers that were optimized to transport condensate. We also owned private saltwater disposal wells. Demand and pricing for our fluids management services generally corresponded to demand for our rig services. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes shareholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services and power solutions that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase shareholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform and evolving power solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +6 +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value. +For further discussion on the business strategies we plan to continue executing in 2021, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2020, we had two customer who individually represented more than 10% of our consolidated revenue. These two customers collectively represented 29% of our consolidated revenue and 11% of our total accounts receivable for the fiscal year ended December 31, 2020. For the year ended December 31, 2019, we had four customers who individually represented more than 10% of our consolidated revenue. These four customers collectively represented 55% of our consolidated revenue and 21% of our total accounts receivable for the fiscal year ended December 31, 2019. For the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have from time to time been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. This was exacerbated in 2020 due to the COVID-19 pandemic and other oil and gas market drivers. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include FTS International, Inc., Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution (such as duel fuel capabilities), and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a +7 +timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +For the year ended December 31, 2020, purchases from our largest supplier represented approximately 5% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art Innovation Center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our Innovation Center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Human Capital Resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2020, we achieved a total recordable +8 +incident rate of 0.42, which is substantially less than the 1.00 incident rate derived from an industry average from 2016 to 2019. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well as mental and behavioral health resources, including on-demand access to an Employee Assistance Program (EAP) for employees and their dependents. +In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the vast majority of our employees work from home for periods of time, while implementing additional safety measures for employees continuing critical on-site work. To maintain minimized exposure points, a flex-work program was developed and deployed in an effort to balance time in the office with remote work from home. To mitigate COVID-19 exposure further pro-active measures have been implemented including, among other things, additional hand sanitizer stations; temperature check kiosks at the entrance to our corporate headquarters; eliminating guests to campuses; shifting all meetings to a virtual format; closing meeting rooms and common/shared areas in the office such as cafeterias and fitness rooms; mandatory face mask wearing (unless the person is eating or alone at work station); installation of signage for CDC guideline distancing and other reminders, and established absence management and tracing protocols to reduce transmission risk. Frequent and consistent communication efforts reinforce the importance of these health and safety measures. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture where employees are empowered to drive their career progression, supporting professional development and providing an on-demand learning platform. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +9 +General +As of December 31, 2020, we had 1,969 employees, of which, approximately 73% were compensated on an hourly basis. This was approximately a 70% decrease from the 6,525 employees we had on December 31, 2019, and reflects the Company’s ongoing initiative to streamline its cost structure to ensure the Company has the most appropriate model in place to navigate the current market conditions stemming from, among other things, the impacts of COVID-19 and the resulting unforeseeable business circumstances, and to position the Company for success as the market recovers. +Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Material Government Regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and +10 +natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 117th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA, but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require +11 +the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +12 +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +13 +Recently, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities, which could have a material adverse effect on our business and results of operations. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for the oil and natural gas our customers produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climatic changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our assets and operations. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which requires the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission +14 +(“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in +15 +our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +16 \ No newline at end of file diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/item13.txt b/raw/filings/0001688476/2020/0001688476-21-000039/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..19d515b37d0854843b2f63a0f0014348928c9dd9 --- /dev/null +++ b/raw/filings/0001688476/2020/0001688476-21-000039/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +This information is incorporated by reference to the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is expected to be filed in April 2021. +131 \ No newline at end of file diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/item9a.txt b/raw/filings/0001688476/2020/0001688476-21-000039/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..8affdda6ea4604a2cff57d959b22cdd5d9ec1eac --- /dev/null +++ b/raw/filings/0001688476/2020/0001688476-21-000039/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2020, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2020, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +Effective January 1, 2020, we adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which resulted in the increase of $1.5 million of allowances for expected credit losses related to our accounts receivable through a cumulative effect offset to retained earnings. In connection with the adoption of this standard, we implemented internal controls to ensure we properly evaluate our financial assets for applicability. +On October 31, 2019, we completed the C&J Merger, which resulted in changes to internal controls over the consolidation and reporting of our financial results. In the second quarter of 2020, the Company completed the implementation of a single ERP system. We also continue to further simplify, harmonize and automate processes and migrate data, including from ancillary systems. In connection with the implementation, harmonization, and migrations and the resulting business process changes, we have reviewed and continue to execute, where appropriate, the re-design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting. These transitions have not materially affected, and we do not expect them to materially affect, our internal controls over financial reporting. The consolidated financial statements +125 +presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/rp_note.txt b/raw/filings/0001688476/2020/0001688476-21-000039/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2020/0001688476-21-000039/rpt_disclosure.txt b/raw/filings/0001688476/2020/0001688476-21-000039/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..3902a17ddd5e2d31965c7161aa19e00e87dd054a --- /dev/null +++ b/raw/filings/0001688476/2020/0001688476-21-000039/rpt_disclosure.txt @@ -0,0 +1,89 @@ +Related Person Transactions +Certain Related Party Transactions +We +paid Cerberus Operations & Advising Company LLC (“Cerberus”) and its affiliates (collectively “COAC”), fees totaling approximately $0.6 million during 2021 for consulting services provided in connection with +improving the Company’s operations and information technology services, including ongoing support, development, and maintenance. We may retain COAC to provide similar services in the future. This amount includes fees paid to Cerberus pursuant +to a services agreement with respect to Mr. Wille in consideration for his service on the Board. Mr. Wille is an employee of Cerberus, and funds managed by one or more affiliates of Cerberus indirectly own a substantial portion of our +equity through their ownership of Keane Investor Holdings LLC. +As part of the acquisition of Alamo, the Company agreed to provide post-closing in-kind services to Alamo Frac Holdings, LLC, valued by the Company at $30 million in the aggregate. Mr. McKie, an executive officer, owns 20% of the equity interests of Alamo Frac Holdings, LLC. During +the year ended December 31, 2021, the Company provided in-kind services to Alamo Frac Holdings, LLC valued at $6.3 million. The Company has a remaining customer contract liability related to these services of $23.7 million as of December 31, 2021. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Our Board has adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party +Transactions” by the independent members of the Audit Committee. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements +or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate +57 +Table of Contents +amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as +defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at +any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than 5% beneficial +interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or +entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a 5% or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s +spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and +daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s +home, other than a tenant or employee. +Prior to the Company entering into any Related Party Transaction, such Related Party Transaction will be reported to our +General Counsel. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the Audit Committee, including a summary of material facts. The Audit Committee will review the +material facts of all Related Party Transactions which require the Audit Committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party +Transaction has been given to the Audit Committee and it is not possible to convene a meeting of the Audit Committee, then the chairman of the Audit Committee will consider whether the Related Party Transaction is appropriate and, if it is, will +approve the Related Party Transaction, with the Audit Committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the Audit Committee. In the event the Audit Committee does not ratify any such Related +Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the Audit Committee, or its chairman, as applicable, will +consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction +without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the Company’s directors, executive officers or Chief Accounting Officer become aware of a Related +Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the Audit Committee (or, if it is not practicable for the company to wait for the Audit Committee to consider the matter, +the chairman of the Audit Committee) and the Audit Committee will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and +circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the Audit Committee will report to the committee at its next regularly scheduled meeting any actions +taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The Audit Committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the Audit +Committee and will take, or recommend to our Board, any action the Audit Committee deems appropriate. +No member of the Audit Committee or director of our Board +will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the Audit Committee member or director will provide all material information concerning the Related Party Transaction +to the Audit Committee. +If a Related Party Transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to follow in +its ongoing dealings with the Related Party. Thereafter, the Audit Committee, on at least an annual basis, will review and assess ongoing relationships with the Related +58 +Table of Contents +Party to ensure that they are in compliance with the Audit Committee’s guidelines and that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in +accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the Audit Committee or its chairman, as applicable, will review +and consider: +· +the Related Party’s interest in the Related Party Transaction; +· +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related +Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +· +whether the transaction is being undertaken in the ordinary course of business of the Company; +· +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the +Company than terms that could have been reached with an unrelated third party; +· +the purpose of, and the potential benefits to the Company of, the Related Party Transaction; +· +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +· +whether the proposed transaction includes any potential reputational risk issues for the Company which may arise as a +result of or in connection with the Related Party Transaction; +· +whether the proposed transaction would violate any requirements of the Company’s financing or other material +agreements; and +· +any other relevant information regarding the Related Party Transaction or the Related Party. +The Audit Committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the Audit Committee, or its chairman, as applicable, +determines in good faith that, under all of the circumstances, the transaction is fair to the Company. The Audit Committee, in its sole discretion, may impose such conditions as it deems appropriate on the Company or the Related Party in connection +with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The Audit Committee has determined that the following transactions will be deemed pre-approved or ratified and will not require +review or approval of the Audit Committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the Audit Committee. +· +Any employment by the Company of an executive officer of the Company or any of its subsidiaries if the related compensation +conforms with our Company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our Board; and +· +Any compensation paid to a director of our Board if the compensation is consistent with the Company’s Bylaws and any +compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the Bylaws of the Company require +review by our Board and/or approval of a Related Party Transaction, the Audit Committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our Board for the +Board’s use in its consideration of a given Related Party Transaction. +59 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/filing.txt b/raw/filings/0001688476/2021/0001688476-22-000061/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e847ba8ff31028eb68d4f8c1934fd01ac4c3b13 --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/filing.txt @@ -0,0 +1,2543 @@ +nex-20211231 +false 2021 FY 0001688476 http://fasb.org/us-gaap/2021-01-31#AccountingStandardsUpdate201613Member 0001688476 2021-01-01 2021-12-31 0001688476 2021-06-30 iso4217:USD 0001688476 2022-02-18 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Oilfield Solutions Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware 38-4016639 +(State or other jurisdiction +of incorporation or organization) (I.R.S. Employer +Identification No.) +3990 Rogerdale Rd Houston Texas 77042 +(Address of principal executive offices) (Zip code) +( 713 ) 325-6000 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class Trading Symbol Name of Each Exchange On Which Registered +Common Stock, $0.01 par value NEX New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2021, was approximately $ 818.5 million. +As of February 18, 2022, the registrant had 243,794,695 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed with the United States Securities and Exchange Commission within 120 days of December 31, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Auditor Name: KPMG LLP Auditor Location: Houston, Texas Auditor Firm ID: 185 +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +17 +Item 1B. +Unresolved Staff Comments +41 +Item 2. +Properties +42 +Item 3. +Legal Proceedings +43 +Item 4. +Mine Safety Disclosures +43 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +44 +Item 6. +Reserved +46 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +47 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +67 +Item 8. +Financial Statements and Supplementary Data +68 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +123 +Item 9A. +Controls and Procedures +123 +Item 9B. +Other Information +124 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +125 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +127 +Item 11. +Executive Compensation +128 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +129 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +130 +Item 14. +Principal Accountant Fees and Services +131 +PART IV +Item 15. +Exhibits and Financial Schedules +132 +Item 16. +Form 10-K Summary +136 +Signatures +138 +CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “estimate,” “predict,” “potential,” “outlook,” “reflect,” “forecast,” “future,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: +• the continued impact of the COVID-19 pandemic (including as a result of the emergence of new variants and strains of the virus, such as Delta and Omicron) and the evolving response thereto by governments, private businesses or others to contain the spread of the virus and its variants or to treat its impact; +• changing regional, national or global economic conditions, including oil and gas supply and demand; +• our business strategy; +• our plans, objectives, expectations and intentions; +• the competitive nature of the industry in which we conduct our business, including pricing pressures; +• our future operating results; +• crude oil and natural gas commodity prices; +• demand for services in our industry; +• the impact of pipeline and storage capacity constraints; +• the impact of adverse weather conditions; +• the effects of government regulation; +• changes in tax laws; +• legal proceedings, liability claims and effect of external investigations; +• the effect of a loss of, or the financial distress of, one or more customers; +• our ability to obtain or renew customer contracts; +• the effect of a loss of, or interruption in operations of, one or more key suppliers; +• our ability to maintain the right level of commitments under our supply agreements; +• the market price and availability of materials or equipment; +• the impact of new technology; +• our ability to employ a sufficient number of skilled and qualified workers; +• our ability to obtain permits, approvals and authorizations from governmental and third parties; +• planned acquisitions, divestitures and future capital expenditures; +1 +• our ability to maintain effective information technology systems; +• our ability to maintain an effective system of internal controls over financial reporting; +• our ability to service our debt obligations; +• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital; +• the market volatility of our stock; +• our ability or intention to pay dividends or to effectuate repurchases of our common stock; +• the impact of ownership by Cerberus (through Keane Investor); and +• the impact of our corporate governance structure. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +References Within This Annual Report +As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “NexTier,” “we,” “us” and “our” refer to NexTier Oilfield Solutions Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “RSI” refers to Refinery Specialties, Incorporated; (iv) the term “Keane Investor” refers to Keane Investor Holdings LLC; (v) the term “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds; (vi) the term “C&J” refers to C&J Energy Services, Inc.; (vii) the term “C&J Merger” refers to the consummation of the transactions described in that certain Agreement and Plan of Merger, dated as of June 16, 2019, by and among the C&J, us and King Merger Sub Corp., one of our wholly owned subsidiaries; (viii) the term “Alamo” refers to Alamo Pressure Pumping, LLC and its wholly owned subsidiaries; and (ix) the term “Alamo Acquisition” refers to the consummation of the transactions described in that certain Purchase agreement (the “Purchase Agreement”), by and among the Company and Alamo Frac Holdings, LLC. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not +2 +deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by approximately 63,000 hydraulic horsepower. +As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +The consolidated financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing United States (“U.S.”) Generally Accepted Accounting Principals (“GAAP”), which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +The condensed consolidated financial statements for the period from January 1, 2019 to August 31, 2021 reflect only the historical results of the Company prior to the completion of the Alamo Acquisition. +For further details, see Note (1) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” For more details regarding the C&J Merger and the Alamo Acquisition, refer to Note (3) Mergers and Acquisitions. +All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. +3 +PART I +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +On October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” Since 2013, our growth through acquisition strategy has resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 2.1 million hydraulic horsepower. +In March of 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services. +On August 31, 2021, we completed the acquisition of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. In 2021, we launched our new Power Solutions business, which focuses on gas sourcing, compression, transport, decompression, treatment and related services for our fracturing operations. We believe this integration solution will assist our customers to reduce emissions at the wellsite and throughout their operations. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +Well Support Services segment +5 +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes stockholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services and power solutions that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase stockholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform and evolving power solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create stockholder value. +For further discussion on the business strategies we plan to continue executing in 2022, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +6 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2021, revenue from one customer individually represented approximately 14% of the Company’s consolidated revenue. This customer represented $193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% and collectively represented 29% of the Company’s consolidated revenue. These two customers represented $188.6 million and $160.5 million, respectively, of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2019, four customers individually represented more than 10% and collectively represented 55% of the Company’s consolidated revenue. These four customers represented $346.9 million, $242.1 million, $213.4 million, and $194.7 million, respectively, of our consolidated revenue in the Completions Services segment. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have, from time to time, been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. This was exacerbated in 2020 and 2021 due to the COVID-19 pandemic and other oil and gas market drivers. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., ProFrac Services, and U.S. Well Services. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution (such as duel fuel capabilities), and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +7 +For the year ended December 31, 2021, purchases from our largest supplier represented approximately 5% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art innovation center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across the majority of our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have common law and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Human capital resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +8 +General +As of December 31, 2021, we had 3,340 employees, of which, approximately 82% were compensated on an hourly basis. This was approximately a 70% increase from the 1,969 employees we had on December 31, 2020. Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2021, we achieved a total recordable incident rate of 0.84, which is less than the 0.90 incident rate derived from an industry average from 2017 to 2020. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well as mental and behavioral health resources, including on-demand access to an Employee Assistance Program for employees and their dependents. +In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the vast majority of our employees work from home for periods of time, while implementing additional safety measures for employees continuing critical on-site work. To maintain minimized exposure points, a flex-work program was developed and deployed in an effort to balance time in the office with remote work from home. To mitigate COVID-19 exposure further pro-active measures have been implemented including, among other things, additional hand sanitizer stations; temperature check kiosks at the entrance to our corporate headquarters; eliminating guests to campuses; shifting all meetings to a virtual format; closing meeting rooms and common/shared areas in the office such as cafeterias and fitness rooms; mandatory face mask wearing (unless the person is eating or alone at work station); installation of signage for CDC guideline distancing and other reminders, and established absence management and tracing protocols to reduce transmission risk. Frequent and consistent communication efforts reinforce the importance of these health and safety measures. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture where employees are empowered to drive their career progression, supporting professional development and providing an on-demand learning platform. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +9 +Material government regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +10 +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 117th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +11 +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency—potentially in coordination with other responsible agencies—will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +12 +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas wells. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +While the long-term trajectory of future greenhouse regulations remains unsettled, the current administration has clearly articulated a goal of reducing greenhouse gas emissions and use. For example in January of 2021, President Biden issued an Executive Order that, among other things, declared climate change to be a crisis requiring significant short-term global reduction in greenhouse gas emissions and net-zero global emissions by mid-century or before. The order instructs every government agency to make combatting climate change an essential element of its agenda. In response, in November 2021, EPA proposed further regulation of methane emissions from the oil and gas sector, including new performance standards for certain new and existing sources. In October 2021, the Department of the Interior released a climate adaptation and resilience plan, outlining how it intends to address climate change risks, impacts, and vulnerabilities, including transitioning to a clean energy economy. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely +13 +impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which required the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted +14 +with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not currently anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +15 +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +16 +Item 1A. Risk Factors +RISK FACTORS +An investment in our securities involves a variety of risks. In addition to the other information included or incorporated by reference in this annual report, the following risk factors should be carefully considered, as they could have a significant adverse impact on our business, financial condition and results of operations. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present material risks to our operations. In addition, the global economic and political climate amplifies many of these risks. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Summary of Risk Factors +A summary of significant risks that could materially adversely impact our business, financial condition or results of operations include: +Risks Related to Our Industry : +• Continuing COVID-19 impacts; +• Cyclical/seasonal business and dependence upon spending of our customers (which is volatile); +• Instability of crude oil and natural gas commodity prices; +• Adverse weather conditions impact demand services and influence costs; +• Competition and availability of equipment within the oilfield services industry affects use and price of services; +• The energy services industry’s inherent hazards; +• Competition among oilfield service and equipment providers, including impact of each provider’s reputation for environmental impact, safety and quality; +• Oilfield anti-indemnity provisions in many states that restrict or prohibit risk mitigation strategies, such as indemnification; +• New technologies developed by third parties impacting competitiveness; +• Laws and regulations regarding health, safety and protection of the environment increasing costs of doing business, penalties, damages or costs of remediation or implicate corrective measures; +• Legislative and regulatory initiatives prohibiting or impairing hydraulic fracturing operations; +• Laws and regulations addressing greenhouse gases and climate change; and +• Changes in transportation regulations increasing costs or administrative burdens. +Risks Related to Our Business +• Loss of customers; +• Detrimental performance by, or credit risk of, our customers; +• High capital costs of maintenance, upgrades, refurbishment and replacement of assets; +• Ability to employ a sufficient number of key employees, technical personnel and qualified workers; +• Overcommitments to certain supply agreement; +• Delays in deliveries, increases in costs or unavailability of key materials for our operations; +• Litigation and other proceedings, including claims for personal injury and property damage; +17 +• Challenges obtaining or renewing permits or authorizations for our or our customers’ operations; +• Successful identification and consummation of beneficial acquisitions; +• Time-consuming and costly integration of any acquisitions; +• Increased labor costs or failure to attract and retain qualified employees; +• Failure of our information technology systems; +• Cyber security risks; +• Failure of internal controls; and +• Violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +Risks Related to Our Indebtedness +• Our substantial level of indebtedness; +• Ability to incur additional debt, despite our current indebtedness levels; +• Restrictive covenants in our agreements governing our indebtedness; +• Our variable rate debt that is subject to interest rate fluctuations; +• Restriction on our ability to raise capital on favorable terms, or at all; and +• Potential reduction or expiration of our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes. +Risks Related to Our Common Stock +• The price of our common stock may be volatile or may decline regardless of our operating performance; +• Our shareholders may not be able to resell their shares at or above the public offering price; +• The market price of our common stock could decline and our stockholders may be diluted if large blocks of stock become available in the market; +• We do not currently pay dividends; +• We have no requirement to execute on any capital return program; +• Stockholders may be diluted by the future issuance of additional common stock; +• Keane Investor and Cerberus own a significant amount of our common stock and continue to have influence over us; +• Stockholder actions and/or acquisition of the Company is impacted by restrictive provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law; and +• The Court of Chancery of the State of Delaware is the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders under our formation documents. +Discussion of Risk Factors +Risks Related to Our Industry +The ongoing COVID-19 pandemic significantly reduced demand for our services and adversely impacted our financial condition, results of operations and cash flows. +The COVID-19 pandemic is ongoing, and it is uncertain when its impact on the world will wane. The effects of the COVID-19 pandemic, including actions taken by businesses and governments, resulted in a significant and swift reduction in U.S. and international economic activity beginning in the first quarter of 2020. These effects adversely affected the demand for oil and natural gas, which resulted in a reduction in demand for our services. +18 +The pandemic is continuously evolving, and the extent to which our operating and financial results will continue to be affected will depend on various factors beyond our control, such as the ultimate duration, severity and sustained geographic resurgence of the virus; the emergence of new variants and strains of the virus (including Delta and Omicron); and the success of actions to contain the spread of the virus and its variants, or treat its impact, such as the availability and acceptance of vaccines and treatments. +We are closely monitoring the effects of the pandemic on commodity demands, our customers, our suppliers, and on our operations and employees. These effects have included, and may continue to include, adverse revenue effects; supply chain disruptions; inflationary impacts on cost of goods and services sold, customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers. +The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate other risk factors that we identify in this Annual Report on Form 10-K. We may also continue to see an increase in the volume of litigation, including contract claims (some of which may result from force majeure claims) and employment related claims. +The COVID-19 pandemic could also have a material adverse effect on our business, results of operations and financial condition in a manner that is not currently known to us or that we do not currently believe presents significant risks to our operations. +Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry predominately in the United States, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control. +Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from predominantly U.S. onshore unconventional resources. The willingness of our customers to undertake these activities depends largely upon prevailing industry and financial market conditions that are influenced by numerous factors over which we have no control, including: +• the impacts of the COVID-19 pandemic; +• prices and expectations about future prices for oil and natural gas; +• domestic and foreign supply of, and demand for, oil and natural gas and related products; +• the level of global and domestic oil and natural gas inventories; +• the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the U.S. and the areas in which we operate; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the availability of adequate pipeline, storage and other transportation capacity; +• lead times associated with acquiring equipment and products and availability of qualified personnel; +• the rates at which new oil and natural gas reserves are discovered; +• federal, state and local regulation of hydraulic fracturing and other oilfield service activities, such as water disposal, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; +19 +• the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; +• geopolitical developments, political instability and recent (and potential future) armed hostilities in oil and natural gas producing countries; +• actions of the Organization of the Petroleum Exporting Countries, its members and other state-controlled oil companies (“OPEC+”) relating to oil price and production controls; +• advances in exploration, development and production technologies or in technologies affecting energy consumption; +• the price and availability of alternative fuels and energy sources; +• disruptions due to natural disasters, unexpected or extreme weather conditions, public health crises (such as coronavirus) and similar factors; +• merger and divestiture activity amongst oil and natural gas producers; +• uncertainty in capital and commodities markets and the ability of oil and natural gas producers and oil and natural gas midstream operators to raise equity capital and debt financing; +• investor and public sentiment related to corporate social responsibility and sustainability; and +• U.S. federal, state and local and non-U.S. governmental regulations and taxes. +As we have experienced since late March of 2020, the volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices, the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers, and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. During periods of declining oil and natural gas prices or when pricing remains depressed, such as during the COVID-19 pandemic, our customer base may experience significant declines in drilling, completion and production activities, which in turn may result in reduced utilization and increased competition and pricing pressure to varying degrees across our service lines and operating areas. +Historically, prices for crude oil and natural gas have been extremely volatile, and these prices are expected to experience continued volatility. For example, since 2016, crude oil prices have ranged from a low of ($36.98) in 2020 to a high of $85.64 per barrel in 2021. During 2021, NYMEX crude oil prices ranged from approximately $47.47 to $85.64 per barrel, with natural gas prices ranging from $2.43 per million British thermal units (“MMbtu”) to $23.86 per MMbtu. Continued price volatility for oil and natural gas is expected during 2022. +20 +Worldwide military, political and economic events, including initiatives by OPEC+, affect both the demand for, and the supply of, oil and natural gas. Weather conditions, governmental regulation (both in the United States and elsewhere), levels of consumer demand, commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels), fuel conservation measures, the availability of pipeline capacity and other factors that will be beyond our control may also affect the supply of, demand for, and price of oil and natural gas. This, in turn, could result in lower demand for our services and cause lower pricing and utilization levels for our services. +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our business could be materially adversely affected by adverse weather conditions. Our operations and the operations of our customers may be adversely affected by seasonal weather conditions, severe weather events and natural disasters. For example, periods of drought, hurricanes, tropical storms, heavy snow, ice or rain may result in customer delays and other disruptions to our services, including availability of key products such as sand and water. Repercussions of adverse weather conditions may include: +• curtailment of services; +• weather-related damage to facilities and equipment, resulting in delays in operations; +• inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; +• increase in the price of key products or insurance; and +• loss of productivity. +Competition and availability of excess equipment within the oilfield services industry may adversely affect our ability to market and price our services. +The oilfield services industry is highly competitive. The principal competitive tactics in our markets are generally price, technical expertise, the availability and condition of equipment, work force capability, safety record, reputation and experience. Furthermore, as a result of this competition, available equipment in the markets in which one or more of our product lines competes at times may exceed the demand for such equipment. This excess supply of equipment may result from many factors, including without limitation, a low commodity price environment, increase in the construction of new equipment, or reactivation and improvement of existing equipment. Excess capacity may result in substantial competition for a diminishing amount of demand and/or significant price competition, which could have a material adverse effect on our results of operations, financial condition and prospects. +The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Some of our competitors may have greater resources and/or name recognition, which could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. In addition, our industry has experienced recent consolidation through mergers and acquisitions, which could lead to increased resources and capabilities for our competitors. There may also be new companies that enter our business, or re-enter our business with significantly reduced indebtedness following emergence from bankruptcy, or our existing and potential future customers may develop their own oilfield solutions. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate. +We periodically seek to increase prices of our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in raising or maintaining our existing prices. Even if we are able to increase our prices, we may not be able to do so at a +21 +rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Accordingly, high competition and excess equipment in the market can cause us to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our services. +Our operations are subject to hazards inherent in the energy services industry. +Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to: +• equipment defects; +• vehicle accidents; +• fires, explosions or uncontrollable flows of gas or well fluids; +• unusual or unexpected geological formations or pressures and industrial accidents; +• blowouts; +• cratering; +• loss of well control; +• collapse of the borehole; and +• damaged or lost drilling and well completions equipment. +Catastrophic or significantly adverse events can occur at well sites where we conduct our operations, including explosions, fires, personal injuries, property damage, pollution, clean-up responsibility and regulatory responsibility. In response, we typically seek indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid such provisions (or compliance with such provisions) or be financially unable to meet their obligations, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and could have a material adverse effect on our business, financial condition, prospects and results of operations. +Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities, and personnel to well sites. Our safety procedures may not always prevent such damages. Our insurance coverage or coverage of applicable vendors and service providers may be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations, and cash flows. +In addition, our services could become a source of spills or releases of fluids, including chemicals used during activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or activities, such as potable aquifers. These risks could +22 +expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability, reputation and relationships with customers, employees and regulators. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +Competition among oilfield service and equipment providers is affected by each provider’s reputation for environmental impact, safety and quality. +Our activities are subject to a wide range of national, state and local environmental, occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these environmental, health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unsatisfactory, which could cause us to lose customers and substantial revenue. +Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts, whether enacted/amended in the future or currently in existence, may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. Further, some of our competitors and suppliers have a substantial amount of intellectual property related to new technologies. We cannot guarantee that our processes and products do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others, including, without limitation, situations in which our products, processes or technologies may be covered by patent applications filed by other parties in the U.S. or abroad. +Existing or future laws and regulations and indirect consequences related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +23 +Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to emissions of greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition. +Additionally, increasing political and social attention to global climate change has resulted in pressure upon stockholders, financial institutions and/or financial markets to modify their relationships with oil and gas companies and to limit investments and/or funding to such companies, which could increase our costs or otherwise adversely affect our business and results of operations. +We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, areas that are not in attainment with air quality standards, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including potential emissions affecting clean air, including methane, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of or restrictions in permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of or restrictions in permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition. Given the recent administration change in the United States, we expect that the regulations around the oil and gas industry may increase and/or become stricter, which may further any potential material adverse impact on our financial condition. For example, the EPA’s recently proposed changes to the standards of performance and emissions guidelines for new, reconstructed, and modified sources in the oil and natural gas sector could require additional monitoring, upgraded control equipment, and/or modified operations at current oil and natural gas operations. +24 +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards (including standards put in place related to the COVID-19 pandemic), we could lose business from our customers, many of whom have an increased focus on environmental, health and safety issues. +We are subject to requirements imposed by the EPA, U.S. Department of Transportation, U.S. Nuclear Regulatory Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution, and protect worker health and safety. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the requirement to comply with emission control and fuel quality regulations could result in increased costs. +In addition, as part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of nonhazardous and hazardous wastes. The generation, handling, transportation, and disposal of these fluids, substances, and wastes are regulated by a number of laws, including CERCLA, RCRA, the Clean Water Act, the SDWA and analogous state laws. Under RCRA, the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes are regulated. RCRA currently exempts many oil and gas exploration and production wastes from classification as hazardous waste. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations, and it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. +Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. Moreover, certain of these environmental laws impose joint and several, strict liability even though our conduct in performing such activities was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties was the basis for such liability. In addition, environmental laws and regulations are subject to frequent change and if existing laws, regulatory requirements or enforcement policies were to change in the future, we may be required to make significant unanticipated capital and operating expenditures. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. +Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm. +During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substances Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations. +If the EPA, DOI, or another federal or state agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. In December 2016, the EPA issued a study of the potential impacts of +25 +hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations. +Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations. +We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont, states in which we have no operations, have banned or are in the process of banning the use of high-volume hydraulic fracturing. Alternatively, some municipalities are considering or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations, if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations, including regulation of motor carriers by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements imposed by highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what +26 +extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +Risks Related to Our Business +The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations. +Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our completions business has historically had contracts with a limited number of our customers that are annual to multi-year. +Disruption caused by continued business and governmental responses to the COVID-19 pandemic has created increased vulnerability to loss of customers or loss of long-term contracts as demand for oilfield services has decreased and competition for the available jobs has increased. We may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. +Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and results of operations. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition, environmental and safety requirements or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other service-related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations. +We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. +27 +The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a less demanding work environment. In addition, since the onset of the COVID-19 pandemic, we may not have sufficient employees who are able to work at job sites, due to illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers, or health and safety protocols. +Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to adjust our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel (including due to illness related to COVID-19) may have a material adverse effect on our business, financial condition, prospects or results of operations. +Our commitments under supply agreements could exceed our requirements, exposing us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant that we may provide in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases, our need for the raw materials and products we supply as part of these services also decreases. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. We may not be able to reduce, extend, eliminate or otherwise address near-term obligations to our satisfaction, which could result in an adverse effect on our financial condition. +Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition. +We have established relationships with a limited number of suppliers of our raw materials (such as proppant, chemicals, cement, steel, or coiled tubing) and finished products (such as fluid-handling equipment). Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as proppant and hydrochloric acid, as well as oil and natural gas based derivatives, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. Should any of our current suppliers be unable to provide the necessary raw materials or finished products or otherwise fail to deliver the products in a timely manner and in the quantities required, any resulting delays in the provision of services could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, increasing costs of certain raw materials, including proppant, may negatively impact demand +28 +for our services or the profitability of our business operations. In the past, our industry faced sporadic shortages associated with hydraulic fracturing operations, such as proppant and other raw materials, requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials, including proppants. +We may be subject to litigation and other proceedings, including claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. Additionally, because our business is related to fossil fuel production, there is an increasing risk that we may be subject to generalized lawsuits which attempt to hold companies in the fossil fuel industry liable for alleged local impacts of climate change. Such legal theories are still developing, making it difficult to assess the likelihood or scope of potential liabilities. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks, including losses related to alleged climate claim damages. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Litigation and other proceedings could have a negative impact on our business. +The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2021, 2020 and 2019. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +29 +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. New York and Vermont, states in which we have no operations, have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +We may not be successful in identifying and making acquisitions. +Part of our strategy is to continue to expand our scope and customer relationships, increase our access to technology and to grow our business, which is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons: +• failure to identify attractive targets; +• incorrect assumptions regarding the future liabilities or future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; +• failure to obtain financing on acceptable terms or at all; +• restrictions in our debt agreements; +• failure to successfully integrate the operations or management of any acquired operations or assets; +• failure to retain or attract key employees; +• new or expanded areas of operational risk (such as offshore, international operations, or power production services) and related costs and demands of any applicable regulatory compliance; and +• diversion of management’s attention from existing operations or other priorities. +Our acquisition strategy requires that we successfully integrate acquired companies into our business practices, as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations or management are combined. Any such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations. +30 +If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, such as the Alamo Acquisition in 2021 and the C&J Merger in 2019, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• a failure of our due diligence process to identify significant risks or issues; +• the loss of customers of the acquired company or our company; +• customers or suppliers may seek to modify contractual obligations with us; +• negative impact on the brands or banners of the acquired company or our company; +• a failure to maintain or improve the quality of our customer service; +• difficulties assimilating the operations and personnel of the acquired company; +• our inability to retain key personnel of the acquired company; +• the incurrence of unexpected expenses and working capital requirements; +• our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• difficulty in maintaining internal controls, procedures and policies; +• mistaken assumptions about the overall costs of equity or debt; and +• unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition. +If labor costs increase or we fail to attract and retain qualified employees our business, results of operations, cash flows and financial condition may be adversely affected. +The labor markets in the industries in which we operate are competitive. We must attract, train and retain a large number of qualified employees while controlling related labor costs. We face significant competition for these employees from the industries in which we operate as well as from other industries. Tighter labor markets may make it even more difficult for us to hire and retain qualified employees and control labor costs. Our ability to attract qualified employees and control labor costs is subject to numerous external factors, including prevailing wage rates, employee preferences, employment law and regulation, environmental, health and safety regulation, labor relations +31 +and immigration policy. A significant increase in competition or cost increase arising from any of the aforementioned factors in may have a material adverse impact on our business, results of operations and financial condition. +A failure of our information technology systems, including our enterprise resource planning system and our digital hub, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting. +We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. A failure or prolonged interruption in our information technology systems, including our digital logistics platform, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. We use these technologies for internal purposes, including data storage (which may include personal identification information of our employees as well as our proprietary business information and that of our customers, suppliers, investors and other stakeholders), processing, and transmissions, as well as in our interactions with customers and suppliers. For example, we depend on digital technologies to perform many of our services and processes and to record operational and financial data. At the same time, cyber incidents, which could include, among other things, deliberate attacks, unintentional events, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to computer systems, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, as well as those of our customers, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period of time. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. In addition, these risks could harm our reputation and our relationships with customers, suppliers, employees, and other third-parties, and may result in claims against us, including liability under laws that protect the privacy of personal information. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +Disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage our reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose us to claims from customers, suppliers, financial institutions, regulators, employees and others, which, individually or in the aggregate could have a material adverse effect on our financial condition and results of operations. +If we fail to maintain an effective system of internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business and result in material misstatements in our financial statements. +Effective internal controls are necessary for us to provide timely and reliable financial reports, prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain our internal controls may not +32 +be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). For example, Section 404 requires us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any deficiencies or material weaknesses identified by our management in our internal control over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results, prevent us from identifying future deficiencies and material weaknesses or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions, about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls could result in material misstatements in our financial statements and subject us to increased regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business. +We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +The United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries and partners from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Although we currently have limited international operations, we may do business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Our employees, intermediaries, and partners may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees, intermediaries, or partners even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. We are committed to doing business in accordance with applicable anti-bribery laws and have implemented policies and procedures concerning compliance with such laws. Our existing safeguards and any future improvements, however, may prove to be less than effective, and our employees, intermediaries, and partners may engage in conduct for which we might be held responsible. Violations of the FCPA and other anti-bribery laws (either due to our acts, the acts of our intermediaries or partners, or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations. +Risks Related to Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2021, we had $374.9 million of debt outstanding, net of discounts and deferred financing costs (not including finance lease obligations). After giving effect to our borrowing base, we had approximately $205.6 million of availability under our 2019 ABL Facility (as defined herein). +Our substantial indebtedness could have important consequences. For example, it could: +• adversely affect the market price of our common stock; +• increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +33 +• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: +• sales of assets; +• sales of equity; or +• negotiations with our lenders to restructure the applicable debt. +Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +Despite our indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our leverage. +We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2019 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 2019 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit +34 +the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2019 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +In addition, in certain circumstances, our variable rate indebtedness uses the London Interbank Offer Rate (“LIBOR”) as a benchmark for establishing the interest rate. The LIBOR has been subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in our financing costs and our ability to access capital. On March 5, 2021, the ICE Benchmark Administration, which administers LIBOR, and the FCA announced that all LIBOR settings will either cease to be provided by any administrator, or no longer be representative immediately after December 31, 2021, for all non-U.S. dollar LIBOR settings and one-week and two-month U.S. dollar LIBOR settings, and immediately after June 30, 2023 for the remaining U.S. dollar LIBOR settings (the “LIBOR Announcement”). +These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although on July 29, 2021, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, formally recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred replacement rate for LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments, or whether the COVID-19 pandemic will have further effect on LIBOR transition plans. In addition, SOFR or other replacement rates may fail to gain market acceptance. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. +For certain U.S. dollar borrowings, our Senior Secured Debt Facilities currently bear interest at variable interest rates that use LIBOR. No modification has been made yet to our Senior Secured Debt Facilities as it pertains to USD borrowings as a result of the LIBOR Announcement, though changes will be required in the future. Currently, it is anticipated that the new benchmark for these USD borrowings will be SOFR. The shift to SOFR from LIBOR is complex and may adversely affect our business, financial condition, results of operations, liquidity +35 +and cash flows. The consequences of these developments cannot be entirely predicted, but could include an increase in our financing costs and our ability to access capital. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or materially affect our interest expense. +Disruptions in the capital and credit markets, continued low commodity prices, our debt level and other factors may restrict our ability to raise capital on favorable terms, or at all. +Disruptions in the capital and credit markets (which have and may continue to be impact by COVID-19), in particular with respect to companies in the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Continued low commodity prices, among other factors, have caused some lenders to increase interest rates, enact tighter lending standards which we may not satisfy as a result of our debt level or otherwise, refuse to refinance existing debt at maturity on favorable terms, or at all, and in certain instances have reduced or ceased to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms or at all, it could adversely affect our business, financial condition and results of operations. +Ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation under Section 382 of the Internal Revenue Code, and NOLs and other tax attributes is subject to reduction, causing less NOL or tax deductions to be available to offset future taxable income for U.S. federal income tax purpose. +Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses (“NOLs”) carried forward from prior years. As of December 31, 2021, we reported consolidated federal NOL carryforwards of approximately $1.5 billion of which $842.1 million are pre-change NOL's subject to limitation. Our ability to utilize our NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of our stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three year period). We believe we experienced an ownership change in October 2019 as a result of the C&J Merger. We also believe we experienced an ownership change in January 2017 as a result of the implementation of the IPO. Thus our pre-change NOLs are subject to limitation under Section 382 of the Code as a result. Such limitation may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause a portion of our pre-change NOLs generated prior to 2018 to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes. +Risks Related to Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and our stockholders may not be able to resell their shares at or above the public offering price. +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including: +• the failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts; +• changes in, or investors’ perception of, the oil field services industry, including hydraulic fracturing; +• the activities of competitors; +• future issuances and sales of our common stock, including in connection with acquisitions; +36 +• our quarterly or annual earnings or those of other companies in our industry; +• the public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• regulatory or legal developments in the U.S.; +• litigation involving us, our industry, or both; and +• general economic conditions, including increased levels of inflation. +In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +Because we do not currently pay dividends, our stockholders may not receive any return on investment, unless they sell their common stock for a price greater than that which they paid for it. +We do not currently pay dividends, and our stockholders do not have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. +In addition, we are a holding company that does not conduct any business operations of our own. As a result, we would be dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” +Under the Delaware General Corporation Law (the “DGCL”), our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +We may not have an active capital return program, and such programs may not have the desired effect. +Although our board of directors has approved share repurchase programs in the past, they generally have not obligated us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, would depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. Any future repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Furthermore, a share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although share repurchase programs are intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness. +37 +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +We have 243,794,695 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. As of December 31, 2021, we have 7,844,941 shares of our common stock available for award that may be issued under our equity incentive plans. Any common stock that we issue, including under our equity incentive plans or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +Keane Investor and Cerberus own a significant amount of our common stock and continue to have influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control. +Cerberus currently controls approximately 16.3% of our common stock. Even though Cerberus no longer controls a majority of our common stock, Cerberus continues to have influence over us, including the election of our directors, determination of our corporate and management policies and determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Two of our ten directors are employees of, appointees of, or advisors to, members of Cerberus. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, the concentration of ownership held by Cerberus could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. +In addition, if Cerberus through Keane Investor decides to sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price. +Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation, our bylaws and our Stockholders’ Agreement, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +38 +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows: +• on or after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”),the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; +• on or after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; +• the manner in which stockholders can remove directors from the board will be limited; +• on or after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited; +• from and after such date that the Designated Controlling Stockholder ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; +• who may call stockholder meetings is limited; +• requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our Company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder; +• requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and +• our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +39 +In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations. +In connection with the Keane IPO, Keane entered into a Stockholders’ Agreement with Keane Investor. This stockholders’ agreement was amended and restated in conjunction with the C&J Merger (as amended and restated, the “Stockholders’ Agreement”) and provides that, except as otherwise required by applicable law, from the date on which (a) Keane Investor or, in the event a Cerberus Holder no longer holds Company shares through Keane Investor, Cerberus Holder has beneficial ownership of at least 12.5% or greater of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors two individuals who satisfy the Director Requirements; and (b) Keane Investor or, in the event Cerberus Holder no longer holder company shares through Keane Investor, Cerberus Holder has beneficial ownership of less than 12.5% but at least 7.5% of the aggregate number of company shares then outstanding, Keane Investor or, in the event Cerberus Holder no longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the board of directors one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +40 +Item 1B. Unresolved Staff Comments +None. +41 +Item 2. Properties +Properties +We lease office space for our principal executive headquarters, which is located at 3990 Rogerdale Rd., Houston, Texas 77042, and for our engineering and technology center at 8301 New Trails Dr., The Woodlands, Texas. We also own property for our maintenance facilities at 1214 Gas Plant Rd., San Angelo, Texas 76904. +In addition, we own or lease numerous other smaller facilities and administrative offices across the geographic regions in which we operate to support our ongoing operations, including district offices, local sales offices, yard facilities and temporary facilities to house employees in regions where infrastructure is limited. Our leased properties are subject to various lease terms and expirations. We believe that our existing facilities are adequate for our operations and our locations allow us to efficiently serve our customers. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility. +42 +Item 3. Legal Proceedings +The information in response to this item is incorporated herein by reference from Note ( 18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. +Item 4. Mine Safety Disclosures +Not applicable. +43 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Market Information +Our common stock trades on the NYSE under the symbol “NEX”. On February 18, 2022, the last reported sales price of our common stock on the NYSE was $7.19 per share. +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total stockholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (Nine Energy Services, Inc., FTS International, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., U.S. Well Services, Inc., and RPC, Inc.), since January 20, 2017. +The graph assumes $100 was invested on January 20, 2017 in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers, as we believe it is an appropriate benchmark for our line of business/industry. +44 +Holders +As of February 18, 2022, we had 243,794,695 shares of common stock issued and outstanding, held by approximately 12 registered holders. The number of registered holders does not include holders that have common stock held for them in “street name,” meaning that the stock is held for their accounts by a broker or other nominee. +Dividends +We have not paid any cash dividends on our common stock to date. However, our board of directors may consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely any payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +Purchases of Equity Securities +Issuer Purchases of Equity Securities +Settlement Period +(a) Total Number of Shares Purchased (1) +(b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs +October 1, 2021 through October 31, 2021 1,986 $ 4.85 — $ — +November 1, 2021 through November 30, 2021 — $ — — $ — +December 1, 2021 through December 31, 2021 230,365 $ 3.59 — $ — +Total 232,351 $ 3.60 — $ — +(1) Consists of shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date. +45 +Item 6. Reserved +46 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K. +47 +Business Overview +NexTier Oilfield Solutions Inc. is a predominantly U.S. land oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including (i) our 2019 transaction with C&J, a publicly traded Delaware corporation, and (ii) our 2021 acquisition of Alamo, a pressure pumper focused in the Permian. This history impacts the comparability of our operational results from year to year. See Part I, “ Item 1. Business” of this Annual Report for an overview of our history, including additional information on certain of the acquisitions noted above, including the C&J Merger and the Alamo Acquisition, and business environment. Additional information on the C&J Merger and the Alamo Acquisition can also be found in Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Industry Overview and Drivers in 2021 +We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford, Haynesville and the Bakken/Rockies. The high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Thus, our financial performance is affected by rig and well counts in North America, as well as oil and natural gas prices, which are summarized in the tables below. Also influencing our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. +During 2021, global crude markets continued to recover from the COVID-19 pandemic induced dual supply and demand shock that emerged in the first quarter of 2020. Crude prices were significantly higher in 2021, the result of both higher demand relative to the 2020 trough as well as a generally undersupplied market. This translated into higher completions activity in 2021 relative to 2020. Crude oil prices have improved from their 2020 lows, which if maintained, we believe could drive a healthy level of investment and activity in U.S. shale, if macro-economic conditions continue to improve. +There has been some attrition through consolidation and other events that have made some progress in realigning frac supply with demand. We believe frac supply utilization improved significantly by the end of 2021 and may be nearing 90% as we enter 2022. Against this backdrop, pricing for our services has improved considering demand for our services has remained strong. Contributing to the tightness, horsepower intensity for each fleet continues to grow as our industry adopts more complex completion techniques; as horsepower demand returns, we believe existing supply will be fully utilized across fewer fleets. +We have focused on reducing our marketed fleet to a level that we believe is more in-line with long term demand and with our strategy to harvest the investments made in our traditional fleets, while growing the portion of our fleet that offers better pricing and a lower emissions profile. Subsequent to the C&J merger, through 2020 we significantly reduced our horsepower down to 1.8 million. During the third quarter of 2021, the acquisition of Alamo added approximately 0.5 million additional horsepower to our fleet, which was then partially offset in the fourth quarter of 2021 through the international sale and decommisioning of approximately 0.2 million additional horsepower. The major components from the decommissioned fleets have and will continue to be used over time as part of our maintenance inventory. Once consumed, we intend to cut up the frames and permanently remove them from our marketed base of equipment. Our nameplate capacity at the end of 2021 totaled approximately 2.1 million horsepower. +The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas: +48 +Year Ended December 31, +2021 2020 2019 +Oil price - WTI (1) +$ 68.14 $ 39.23 $ 56.98 +Natural gas price - Henry Hub (2) +$ 3.89 $ 2.04 $ 2.57 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type 2021 2020 2019 +Oil 380 346 773 +Natural Gas 97 85 169 +Other 1 2 1 +Total 478 433 943 +Year Ended December 31, +Drilling Type 2021 2020 2019 +Horizontal 431 384 826 +Vertical 22 20 54 +Directional 25 29 63 +Total 478 433 943 +As of January 2022, global liquids demand is expected to average 100.5 million barrels per day in 2022. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of January 2022, natural gas demand in the United States is expected to average 82.77 billion cubic feet per day in 2022. +The regions in which we operate, including the Permian, Marcellus Shale / Utica Basins, Haynesville and Eagle Ford, among others, are expected to account for a majority of all new horizontal wells anticipated to be drilled through 2022. As of December 31, 2021, rigs in these basins accounted for approximately 73% of the total, and were up approximately 51% as compared to low total U.S. rig count noted on January 8, 2021. +The current U.S. administration has expressed support for alternative energy sources, reduction of greenhouse gas emissions, the use and dependence on fossil fuels, and efforts addressing climate change. At this time, it remains unclear what impact new actions and policy platforms of the administration may have on our business, our customers, and our industry. +Operating Approach & Strategy +We believe that there is competitive value in providing integrated solutions that align the incentives of operators and service providers. We are pursuing opportunities to leverage our investment in our digital program and diesel substitution technologies (such as duel fuel capabilities), to provide a service strategy targeted at achieving emissions reductions, both for us and our customers. NexTier has been developing and building its digital program for some time, and we have now applied our digital platform to all of our operating fleets. We also launched our new Power Solutions business in 2021, which provides a natural gas treatment and delivery service that will power NexTier’s fleet with field gas or compressed natural gas. This addition seeks to address wellsites where there is not a reliable nearby gas supply, and thus, the full benefit and value of dual fuel or other lower emissions technologies +49 +may not otherwise be fully realized. To address this situation, we developed an integrated natural gas treatment and delivery solution designed to provide gas sourcing, compression, transport, decompression, treatment, and distribution services for our fracing operations. This integrated strategy will provide our customers with a streamlined approach to driving more sustainable, cost-effective operations at the wellsite. +We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +Our revenues are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution. +Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide are central to our efforts to support equipment utilization and grow our business. +However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. +Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization. +50 +Our Reportable Segments +Prior to the C&J Merger, the Company was organized as two reportable segments. Between the C&J Merger and the divestiture of our well support services business in March of 2020, our business was organized into three reportable segments. Additional information on these transactions can be found in Note (21) Business Segment s. As of December 31, 2021, we were organized into two reportable segments, described below. This history impacts the comparability of our operational results from year to year. +• Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities. +• Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services; and (2) coiled tubing services. +Completion Services +The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. As of December 31, 2021, we had approximately 2.1 million of fracturing hydraulic horsepower, 101 wireline trucks and 76 pumpdown units capable of being deployed. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our innovation centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our innovation centers we manufacture the data control instruments used in our fracturing operations and assemble the perforating guns and addressable switches used in our wireline operations; some of these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business. +Well Construction and Intervention Services +The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. The majority of revenue for this segment is generated by our cementing business. As of December 31, 2021, we had approximately 17 coiled tubing units and 74 cementing units capable of being deployed. +Historical Segment: Well Support Services +On March 9, 2020, we completed a divestiture of the entities and assets comprising our Well Support Services. This segment had focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Our financials for the full year ended December 31, 2020 include operating results of the Well Support Services business prior to its divestiture. +How we calculate utilization for each segment +Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total +51 +available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. +In our Well Support Services segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month. +52 +RESULTS OF OPERATIONS +Th e following table sets forth our financial results for the year ended December 31, 2021 as compared to the year ended December 31, 2020. +A comparison of our financial results for the year ended December 31, 2020 and for the year ended December 31, 2019 can be found in the " Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on February 24, 2021. +Year Ended December 31, 2021 Compared with Year Ended December 31, 2020 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2021 2020 2021 2020 $ % +Completion Services $ 1,324,888 $ 1,046,314 93 % 87 % $ 278,574 27 % +Well Construction and Intervention Services 98,553 98,338 7 % 8 % 215 0 % +Well Support Services — 57,929 0 % 5 % (57,929) (100 %) +Revenue +1,423,441 1,202,581 100 % 100 % 220,860 18 % +Completion Services 1,165,881 893,785 82 % 74 % 272,096 30 % +Well Construction and Intervention Services 89,440 93,198 6 % 8 % (3,758) (4 %) +Well Support Services — 45,591 0 % 4 % (45,591) (100 %) +Costs of services +1,255,321 1,032,574 88 % 86 % 222,747 22 % +Depreciation and amortization +184,164 302,051 13 % 25 % (117,887) (39 %) +Selling, general and administrative expenses +109,404 144,147 8 % 12 % (34,743) (24 %) +Merger and integration +8,709 32,539 1 % 3 % (23,830) (73 %) +(Gain) loss on disposal of assets +(28,898) (14,461) (2 %) (1 %) (14,437) 100 % +Impairment +— 37,008 0 % 3 % (37,008) (100 %) +Operating loss (105,259) (331,277) (7 %) (28 %) 226,018 (68 %) +Other income, net 12,131 6,516 1 % 1 % 5,615 86 % +Interest expense (24,609) (20,652) (2 %) (2 %) (3,957) 19 % +Total other expenses +(12,478) (14,136) (1 %) (1 %) 1,658 (12 %) +Income tax expense (1,686) (1,470) 0 % 0 % (216) 15 % +Net loss $ (119,423) $ (346,883) (8 %) (29 %) $ 227,460 (66 %) +Revenue. Total revenue is comprised of revenue from our Completion Services, Well Construction and Intervention Services and Well Support Services segments. Revenue in 2021 increased by $220.9 million, or 18%, to $1.4 billion from $1.2 billion in 2020. This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $278.6 million, or 27%, to $1.3 billion in 2021 from $1.0 billion in 2020. The segment revenue increase was primarily driven by increases in our fracturing service line, partially offset by decreases in wireline and pumpdown services. The fracturing increase is mostly due to a higher number of fully utilized fleets deployed, increased logistics services, the acquisition of Alamo, and modest pricing recovery. The wireline and pumpdown decrease is primarily attributable to less activity +53 +in our Northeast and West regions from the strategic decision to reallocate our equipment and resources to regions we believe will be more profitable as the market continues to recover from the COVID-19 pandemic. +Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $0.2 million, or 0%, to $98.6 million in 2021 from $98.3 million in 2020. This slight increase in revenue is driven by increased activity and utilization in our cementing services, mostly offset by reductions in coil tubing activity. We made the strategic decision to reduce our geographic coil tubing footprint and will continue to focus on select regions we believe will provide the best opportunities for profitable growth. +Well Support Services: Well Support Services segment revenue decreased by $57.9 million or (100%) to $0.0 million in 2021 from $57.9 million in 2020. In March of 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplementary Data”. +Cost of services. Cost of services in 2021 increased by $222.7 million, or 22%, to $1.3 billion from $1.0 billion in 2020. This increase is primarily due to increased activity as explained in Revenue above, combined with higher sand and freight costs from increased logistics services in our Completion Services segment, increased repair and maintenance expenses related to start-up costs of fleet re-deployments, and input costs inflation. +Equipment Utilization. Depreciation and amortization expense decreased by $117.9 million, or (39%), to $184.2 million in 2021 from $302.1 million in 2020. The change in depreciation and amortization was primarily due to more equipment nearing the end of its useful lives and changes in the estimated useful life of certain of our equipment in the first quarter of 2021, which consisted mostly of increases to the expected life of our fracturing equipment, partially offset by the additional equipment received in the Alamo Acquisition. (Gain) loss on disposal of assets in 2021 increased $14.4 million, to a gain of $28.9 million in 2021 compared to a gain of $14.5 million in 2020. This change was primarily driven by the Company’s divesting of diesel-powered frac equipment and other non-core assets to fund conversions of equipment to be powered by natural gas. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, decreased by $34.7 million, or (24%), to $109.4 million in 2021 from $144.1 million in 2020, primarily due to the $24.9 million accrual reduction for our regulatory audit estimate, reduction in property taxes, business transformation results to structurally drive out costs and increase efficiencies in our support functions, partially offset by increased bonus incentive plans and the acquisition of Alamo. +Merger and integration expense. Merger and integration expense decreased by $23.8 million, or (73%), to $8.7 million in 2021 from $32.5 million in 2020. The decrease in merger and integration expense in 2021 is primarily due to the completion of the C&J Merger associated costs in 2020, which consisted mostly of professional services, severance costs, and facility consolidation, partially offset by Alamo Acquisition costs in 2021. +Other income, net. Other income, net, in 2021 increased by $5.6 million, or 86%, to $12.1 million in 2021 from $6.5 million in 2020. This change was primarily due to a $10.4 million gain recognized as a result of the insurance proceeds received for an accidental fire in the Permian Basin, which resulted in a complete loss of equipment, partially offset by a $6.0 million gain on a financial investment the Company acquired in 2020. +Interest expense, net. Interest expense, net of interest income, increased by $4.0 million, or 19%, to $24.6 million in 2021 from $20.7 million in 2020. This change was primarily attributable to an increase in the Company’s finance leases as part of the Alamo Acquisition. +Effective tax rate. Our effective tax rate on continuing operations in 2021 was (1.43)% for $1.7 million of recorded income tax expense, as compared to (0.43)% for $1.4 million of recorded income tax expense in 2020. For 2021, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, foreign withholding taxes and a change in valuation allowance. For 2020, the effective rate was primarily made up of state taxes and tax benefits derived from the current period operating income offset by a valuation allowance. As a result +54 +of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets. +2022 Strategy +We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A. of this Annual Report for additional information about the known material risks that we face. +Operating During a Pandemic +In response to the COVID-19 pandemic, we have implemented measures to focus on the safety of our partners, employees, and the communities in which we operate, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following: +Taking Care of our Partners and Employees . The safety of our partners and employees continues to be a primary focus. As the COVID-19 pandemic has developed, we have taken numerous steps to help customers and employees comply with current health-expert recommendations, including limitation of social functions and non-essential travel, hygiene protocol education, telecommuting as job responsibilities permit, protocols and procedures focused on establishing a safe work environment, protocol for employees who test positive for COVID-19, and a response and mitigation monitoring process. +Expense Management . With the reduction in revenue during the year ended December 31, 2020 and early 2021, we implemented cost saving initiatives, including (i) adjusting active frac fleet count to align with changing demand; (ii) consolidating our footprint; (iii) delaying non-essential maintenance projects; (iv) reducing or suspending other discretionary spending; (v) restructuring our organization in a way that maximizes our managerial talent with a streamlined team; (vi) reductions of salaries or cash retainers, as applicable, by 20% for our directors and executive officers; and (vi) reducing employee-related costs, including furloughing personnel, pay reductions by 15-20%, and moderating headcount. While many of these cost savings initiatives continue, with the increase in activity, we have been able to put most of our furloughed personnel back to work, and we have begun rolling out a portion of pay reinstatement, with the focus on field level personnel. We recognize that the COVID-19 pandemic and responses thereto also impact our suppliers. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +Balance Sheet, Cash Flow and Liquidity Management . We have taken actions to protect liquidity and maintain a strong financial position. As a result of these actions, our cash and cash equivalents balance as of December 31, 2021 was $110.7 million . For additional information on our liquidity and capital resources, see “Liquidity and Capital Resources.” +Fiscal 2022 Objectives +With commodity prices continuing to be volatile, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering stockholder value and maintaining a disciplined capital deployment strategy. +55 +We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient liquidity, preserve our conservative capital structure and closely monitor our discretionary spending. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our stockholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, lower emissions, and to ensure that we are strategically positioned to capitalize on constructive market dynamics. +Completion Services +In our Completion Services segment, our strategy remains focused on deploying our market-ready fracturing fleets and integrating more of our wireline and pumpdown units with our deployed fracturing fleets and on a stand-alone basis. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. As part of this effort, we continuously evaluate new technologies with enhanced capabilities and greater operating efficiency to replace aging equipment within our fracturing fleet as it becomes obsolete or retired. In connection with such ongoing evaluation, we may from time to time enter into agreements for the purchase or lease of such replacement equipment. Additionally, we are also focused on integrating more of our wireline and pumpdown units with our fracturing fleets to increase operational efficiencies and profitability. Notwithstanding the foregoing, current market conditions remain challenging, and our primary focus remains to lower our overall cost structure by aligning with efficient, dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years. Subsequent to the Alamo Acquisition, all of Alamo operations have been included within the Completion Services segment. +Furthermore, as discussed in Item 1 . Business and Item 7. MD&A Overview, as part of our lower emissions initiatives, we are focused on optimizing gas substitution across our fleet, enabled by digital capabilities like NexHub and MDT controls, and the launch of our power solutions business. We believe that natural gas-powered technologies and digital assisted logistics will be a key method of transitioning to lower emissions operations, which strategy we anticipate will be a key driver of returns. +Well Construction and Intervention Services +In our Well Construction and Intervention Services segment, after significantly reducing our footprint during the second and third quarters of 2020 as we seek to position ourselves for strong operational and financial performance in regions that will support both near-term and long-term levels of activity, our strategy remains focused on deploying our market-ready cementing and coil tubing equipment in focused basins where we expect to generate returns. In our cementing business, even though market conditions remain challenged due to customers releasing drilling rigs and declining E&P capital spending, we remain focused on providing high-quality, timely service and deploying more of our stacked units with efficient customers in our focused basins. In our coiled tubing business, we are focused on market share growth, high quality customer service, and deploying additional market ready units at a low cost in response to increases in demand from our customers. We will stay focused on controlling costs and improving market share with an efficient customer base that plan to maintain stable drilling rig counts and levels of activity in 2022. +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +56 +(Thousands of Dollars) +Year Ended December 31, +2021 2020 +Cash +$ 110,695 $ 275,990 +Debt, net of deferred financing costs and debt discount +$ 374,885 $ 335,540 +(Thousands of Dollars) +Year Ended December 31, +2021 2020 2019 +Net cash provided by (used in) operating activities $ (50,787) $ 68,885 $ 305,463 +Net cash used in investing activities $ (163,201) $ (37,844) $ (114,100) +Net cash provided by (used in) financing activities $ 48,286 $ (9,825) $ (16,746) +Significant sources and uses of cash during the year ended December 31, 2021 +Sources of cash: +• Financing activities: +– Net cash provided by financing activities for the year ended December 31, 2021 was $48.3 million, which was is an increase of $58.1 million compared to the year ended December 31, 2020. This change was primarily due to the $43.2 million the Company received through our 2021 Equipment Loans and $17.8 million from financing liabilities. +Uses of cash: +• Operating activities: +– Net cash used in operating activities during the year ended December 31, 2021 was $50.8 million, which resulted in a change of $119.7 million compared to the year ended December 31, 2020. The change is primarily due to an increase in commodity prices, additional maintenance expenses related to startup costs required for fleet re-deployments, and inflation. For further discussion, see “Results of Operations”. +• Investing activities: +– Net cash used in investing activities for the year ended December 31, 2021 was $163.2 million, which resulted in increase of $125.4 million compared to the year ended December 31, 2020. The change is primarily due to an increase in purchase of property plant and equipment, deposits on equipment and implementation of software of $64.3 million, a $156.1 million change related to acquisition of business and payment of consideration liability, partially offset by an increase of $37.8 million in proceeds from disposal of assets, $34.4 million in cash received from the WSS notes and $22.9 million in proceeds from insurance recoveries. +Significant sources and uses of cash during the year ended December 31, 2020 +57 +Sources of cash: +• Operating activities: +– Net cash generated by operating activities during the year ended December 31, 2020 of $68.9 million, which was down $236.6 million from 2019. The decrease is primarily due to a decrease in our average number of fully utilized fracturing fleets, combined with decreases in our wireline and pumpdown services. The decreases in all service lines were driven by less activity and price reductions as a result of the continuing impacts from the unforeseen and sudden decline in commodity prices as well as the COVID-19 pandemic that began to impact operations in late first quarter of 2020. For further discussion of these drivers, see “Results of Operations”. +• Financing activities: +– In the first quarter of 2020, the Company drew down $175 million on the 2019 ABL Facility. This borrowing was to provide the Company better flexibility while managing its cash position during the ongoing COVID-19 pandemic. +Uses of cash: +• Investing activities: +– Net cash used in investing activities for the year ended December 31, 2020 consisted primarily of capital expenditures, net of the cash received as part of the sale of the Well Support Services business segment. +• Financing activities: +– Cash used to repay our debt facilities (other than described below), excluding finance leases and interest, during the year ended December 31, 2020 was $3.5 million. +– In the first quarter of 2020, the Company drew down $175 million on the 2019 ABL Facility. This borrowing was to provide the Company better flexibility while managing its cash position during the ongoing COVID-19 pandemic. The borrowing on the 2019 ABL Facility was repaid in full during the second quarter of 2020. +– Cash used to repay our finance leases during the year ended December 31, 2020 was $3.8 million. +– Shares withheld and retired related to stock-based compensation during the year ended December 31, 2020 totaled $2.6 million. +Significant sources and uses of cash during the year ended December 31, 2019 +Sources of cash: +• Operating activities: +– Net cash generated by operating activities in 2019 of $305.5 million, which was down $44.8 million from 2018. The decrease was driven primarily by a decline in rig count and fleet utilization, combined with pricing pressures from macroeconomic market conditions, and offset by thoroughness in receiving collections from our customers and controlling costs. +58 +Uses of cash: +• Operating activities: +– Net cash used in operating activities for the year ended December 31, 2019, included $61.9 million of merger and integration costs in connection with the C&J Merger. +Investing activities: +– Net cash used in investing activities for the year ended December 31, 2019 consisted primarily of capital expenditures. This activity primarily related to our Completion Services segment. +• Financing activities: +– Cash used to repay our debt facilities, excluding leases and interest, during the year ended December 31, 2019 was $3.5 million. +– Cash used to repay our finance leases during the year ended December 31, 2019 was $6.0 million. +– Shares withheld and retired related to share-based compensation during the year ended December 31, 2019 totaled $6.0 million. +Future sources and use of cash +Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, proceeds from public offerings of our common stock and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry. +Our primary uses of cash are for operating costs, capital expenditures, including acquisitions, and debt service. +We expect capital expenditures in 2022 to be lower than 2021. We remain firmly committed to capital discipline, and putting the Company on course for sustained positive cash flow starting in 2022 is a top priority. +Debt service for the year ended December 31, 2022 is projected to be $53.2 million, of which $13.0 million is related to finance leases. We anticipate our debt service will be funded by cash flows from operations. +Other factors affecting liquidity +Financial position in current market. As of December 31, 2021, we had $110.7 million of cash and a total of $205.6 million available under our 2019 ABL Facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity to cover out estimated short-term (i.e., the next 12 months) and long-term (i.e., beyond the next 12 months) funding needs, including for capital expenditures, debt service, and working capital investments. +Guarantee agreements. Under the 2019 ABL Facility $23.2 million of letters of credit were outstanding as of December 31, 2021. +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 to 60 days or less. In weak economic environments, such as during the continuance of the +59 +COVID-19 pandemic, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2021. +(Thousands of Dollars) +Contractual obligations +Total 2022 2023-2024 2025-2026 2027+ +Long-term debt, including current portion (1) +$ 379,604 $ 14,738 $ 31,220 $ 333,646 $ — +Estimated interest payments (2) +58,002 16,273 34,286 7,443 — +Finance lease obligations (3) +41,222 13,001 27,298 923 — +Operating lease obligations (4) +34,992 8,709 9,057 5,205 12,021 +Purchase commitments (5) +94,305 87,955 6,350 — — +Legal contingency 5,223 5,223 — — — +$ 613,348 $ 145,899 $ 108,211 $ 347,217 $ 12,021 +(1) Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $4.7 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility and Equipment Loan. +(2) Estimated interest payments are based on debt balances outstanding as of December 31, 2021 and include interest related to the 2018 Term Loan Facility and the 2021 Equipment Loans. Interest rates used for variable rate debt are based on the prevailing current LIBOR. +(3) Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles and frac equipment. +(4) Operating lease obligations are related to our real estate, rail cars, and light duty vehicles. +(5) Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year. +Principal Debt Agreements +While there were numerous governmental assistance programs in 2020 to provide loans to qualifying companies facing challenges due to COVID-19, the Company did not seek any loans under these programs. Thus, our principal debt arrangements continue to be the 2021 Equipment Loan, 2019 ABL Facility and the 2018 Term Loan Facility described below. +2021 Equipment Loans +Origination . On August 20, 2021, we entered into a Master Loan and Security Agreement (the “Master Agreement”) with Caterpillar Financial Services Corporation. +Structure . Our Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $46.5 million (the “2021 Equipment Loans”). The 2021 Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. +Maturity . All tranches under the Master Agreement mature on June 1, 2025. +Interest . Term notes entered into under the Master Agreement will bear interest at a rate of 5.25%. +2019 ABL Facility +Origination . On October 31, 2019, we, and certain of our other subsidiaries as additional +60 +borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017. +Structure . Our 2019 ABL Facility provides for a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments. +Maturity . The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Interest . Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%. +Financial Covenants . The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2021 , the Company was in compliance with all covenants and the circumstances that would require testing of the consolidated fixed charge coverage ratio had not occurred. +2018 Term Loan Facility +On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes. +Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2021, there was $337.8 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loa n Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immed iately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00. +Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments. +61 +Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding. +Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. As of December 31, 2021, there was a $337.8 million principal amount of term loans outstanding (the "2018 Term Loans") at an interest rate of LIBOR plus an applicable margin, which is currently at 4.50%. The 2018 Term Loan Facility is subject to customary fees, guarantees of subsidiaries, events of default, restrictions and covenants, including certain restricted payments. As of December 31, 2021, the Company was in compliance with all covenants. +Prepayments . The 2018 Term Loan Facility is re quired to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility were originally guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that have and will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”). +Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”). +Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility. +Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion +62 +of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00. +“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments). +Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2020, the Company was in compliance with all covenants. +Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility). +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Recently Issued Accounting Standards +For discussion on the impact of accounting standards issued but not yet adopted to our consolidated financial statements, see Note (22) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Critical Accounting Estimates +The preparation of our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis +63 +for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Mergers and Acquisitions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our recently completed merger and acquisitions during 2019 and 2021. +Asset acquisitions +Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. +64 +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies. +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, including definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting units or asset groups, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note (2)(f) Long-Lived Assets with Definite Lives and (2)(h) Goodwill and Indefinite-Lived Intangible Assets of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2021, 2020 and 2019. +Income Taxes +We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning +65 +strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +See Note (17) Income Taxes of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2021, 2020 and 2019. +Leases +Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate in the lease. Establishing our lease obligations on our consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our consolidated financial statements. For further details about our leases, see Note (16) Leases of Part II, “ Item 8 . Financial Statements and Supplementary Data”. +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (22) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +66 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +Exchange Rate Risk . Our operations are currently conducted predominantly within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk during 2021. +Interest Rate Risk. As of December 31, 2021, we held variable-rate debt, the exposure to which we manage with our interest-rate-related derivative instruments. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. We are exposed to changes in interest rates on our floating rate borrowings under our 2019 ABL Facility and 2018 Term Loan. As of December 31, 2021, we had no debt outstanding under our 2019 ABL Facility and $337.8 million aggregate principal amount outstanding under the 2018 Term Loan. The impact of a 1.0% increase in interest rates under the terms of the 2019 ABL Facility would have no impact on interest expense for the 2021 year, and a 1.0% increase in interest rates under the terms of the 2018 Term Loan would have a $3.5 million impact on interest expense for the 2021 year. +Commodity Price Risk . Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant and chemicals. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (proppant and chemicals) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. +For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part II, “ Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2021 and Part II, “ Item 8 . Financial Statements and Supplementary Data” in Note (2)(i) Derivative Instruments and Hedging Activities and Note (10) Derivatives . +Customer Credit Risk . Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for credit losses. +67 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +69 +Consolidated Balance Sheets +74 +Consolidated Statements of Operations and Comprehensive Loss +75 +Consolidated Statements of Changes in Stockholders’ Equity +76 +Consolidated Statements of Cash Flows +77 +Notes to Consolidated Financial Statements +79 +68 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Acquisition-date fair value of customer relationship intangible assets +As discussed in Note 3 to the consolidated financial statements, on August 31, 2021, the Company completed the acquisition of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries. The +69 +Company accounted for the acquisition using the acquisition method of accounting. As a result of the transaction, the Company recorded $23.0 million for the fair value of acquired customer relationship intangible assets associated with the generation of future earnings from the acquirees existing customers, as of the acquisition date. The fair value of the customer relationship intangible assets was determined by the Company using a discounted cash flow model. +We identified the evaluation of the acquisition-date fair value of acquired customer relationship intangible assets as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating the key assumptions used in the discounted cash flow model used to estimate the acquisition-date fair value, including forecasted revenue attributable to the customer relationships, gross profits rates, capital expenditures, and the discount rate. A change to those assumptions could have had a significant impact on the fair value of the customer relationships. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s acquisition-date fair value determination of the customer relationship intangible assets, including controls over the development of the key assumptions of forecasted revenue attributable to the customer relationships, gross profits rates, and capital expenditures and the discount rate. We evaluated the forecasted revenue attributable to the customer relationships, gross profit rates, and capital expenditures by comparing to the acquired entities’ actual historical results and by comparing to peer companies’ analyst estimates, historical financial information, and relevant industry data. We assessed the Company’s ability to accurately estimate forecasted revenues, gross profit rates and capital expenditures by comparing the forecasted amounts to the acquired entities’ actual results subsequent to the acquisition. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in evaluating the discount rate by comparing it against a discount rate that was independently developed using publicly available market data for comparable entities. +Evaluation of long-lived assets for impairment triggering events +As discussed in Note 2(f) to the consolidated financial statements, the Company evaluates property and equipment and definite-lived intangible assets (collectively, long-lived assets) on a quarterly basis to identify events or changes in circumstances, referred to as triggering events, that indicate the carrying value of a long-lived asset may not be recoverable or upon the occurrence of a triggering event. An impairment loss is recorded in the period in which it is determined that the carrying amount of a long-lived asset is not recoverable. As of December 31, 2021, the carrying value of property and equipment, net and definite-lived intangible assets, net was $620.9 million and $65.0 million, respectively. +We identified the evaluation of long-lived assets for impairment triggering events as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data for impairment indicators. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process of identifying and assessing potential triggering events, including controls over the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data. We evaluated the Company’s identification and assessment of triggering events by evaluating current period operations, financial results and historical projections, including consideration of current industry and market considerations. We compared relevant industry data used by the Company to external sources, including market index data and peer data. We evaluated the Company’s analysis over the factors and considered whether the Company omitted any significant internal or external elements in its evaluation. +70 +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +February 23, 2022 +71 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited NexTier Oilfield Solutions Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2022 expressed an unqualified opinion on those consolidated financial statements. +The Company acquired Alamo Pressure Pumping, LLC during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Alamo Pressure Pumping, LLC’s internal control over financial reporting associated with total assets of $413.6 million and total revenues of $ 172.1 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Alamo Pressure Pumping, LLC. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, +72 +accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Houston, Texas +February 23, 2022 +73 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Balance Sheets +(Amounts in thousands) +December 31, +2021 December 31, +2020 +Assets +Current assets: +Cash and cash equivalents +$ 110,695 $ 275,990 +Trade and other accounts receivable, net +301,740 122,584 +Inventories, net +38,094 30,068 +Assets held for sale +1,555 126 +Prepaid and other current assets +55,625 58,011 +Total current assets +507,709 486,779 +Operating lease right-of-use assets +21,767 37,157 +Finance lease right-of-use assets +41,537 1,132 +Property and equipment, net 620,865 470,711 +Goodwill +192,780 104,198 +Intangible assets 64,961 51,182 +Other noncurrent assets +7,962 6,729 +Total assets +$ 1,457,581 $ 1,157,888 +Liabilities and Stockholders’ Equity +Liabilities +Current liabilities: +Accounts payable +$ 190,963 $ 61,259 +Accrued expenses +213,923 134,230 +Customer contract liabilities 23,729 266 +Current maturities of long-term operating lease liabilities +7,452 18,551 +Current maturities of long-term finance lease liabilities +11,906 606 +Current maturities of long-term debt +13,384 2,252 +Other current liabilities +10,346 2,993 +Total current liabilities +471,703 220,157 +Long-term operating lease liabilities, less current maturities +20,446 24,232 +Long-term finance lease liabilities, less current maturities +26,873 504 +Long-term debt, net of deferred financing costs and debt discount, less current maturities +361,501 333,288 +Other noncurrent liabilities +30,041 22,419 +Total noncurrent liabilities +438,861 380,443 +Total liabilities +910,564 600,600 +Stockholders’ equity +Common stock, par value $ 0.01 per share (authorized 500,000 shares, issued and outstanding 242,019 and 214,440 shares, respectively) +2,420 2,144 +Paid-in capital in excess of par value +1,094,020 989,995 +Retained deficit ( 541,164 ) ( 421,741 ) +Accumulated other comprehensive loss +( 8,259 ) ( 13,110 ) +Total stockholders’ equity +547,017 557,288 +Total liabilities and stockholders’ equity +$ 1,457,581 $ 1,157,888 +See accompanying notes to the consolidated financial statements. +74 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Operations and Comprehensive Loss +(Amounts in thousands, except for per share amounts) +Year Ended December 31, +2021 2020 2019 +Revenue $ 1,423,441 $ 1,202,581 $ 1,821,556 +Operating costs and expenses: +Cost of services (1) +1,255,321 1,032,574 1,403,932 +Depreciation and amortization 184,164 302,051 292,150 +Selling, general and administrative expenses 109,404 144,147 123,676 +Merger and integration 8,709 32,539 68,731 +(Gain) loss on disposal of assets ( 28,898 ) ( 14,461 ) 4,470 +Impairment expense — 37,008 12,346 +Total operating costs and expenses +1,528,700 1,533,858 1,905,305 +Operating loss ( 105,259 ) ( 331,277 ) ( 83,749 ) +Other expense: +Other income, net 12,131 6,516 453 +Interest expense ( 24,609 ) ( 20,652 ) ( 21,856 ) +Total other expenses +( 12,478 ) ( 14,136 ) ( 21,403 ) +Loss before income taxes ( 117,737 ) ( 345,413 ) ( 105,152 ) +Income tax expense ( 1,686 ) ( 1,470 ) ( 1,005 ) +Net Loss ( 119,423 ) ( 346,883 ) ( 106,157 ) +Other comprehensive loss, net of tax: +Foreign currency translation adjustments 407 ( 241 ) ( 116 ) +Hedging activities 1,703 ( 6,422 ) ( 7,628 ) +Total comprehensive loss $ ( 117,313 ) $ ( 353,546 ) $ ( 113,901 ) +Net loss per share: +Basic net loss per share $ ( 0.53 ) $ ( 1.62 ) $ ( 0.86 ) +Diluted net loss per share $ ( 0.53 ) $ ( 1.62 ) $ ( 0.86 ) +Weighted-average shares outstanding: basic 224,401 213,795 122,977 +Weighted-average shares outstanding: diluted 224,401 213,795 122,977 +(1) Cost of services during the years ended December 31, 2021, 2020, and 2019 excludes depreciation of $ 166.4 million , $ 283.8 million, and $ 276.8 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately. +See accompanying notes to the consolidated financial statements. +75 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders’ Equity +(Amounts in thousands) +Common Stock Paid-in Capital in Excess of Par Value Retained Earnings (deficit) Accumulated other comprehensive income (loss) Total +Balance as of December 31, 2018 $ 1,038 $ 455,447 $ 31,494 $ ( 798 ) $ 487,181 +New lease standard implementation — — 1,330 — 1,330 +Stock-based compensation (1) +33 33,226 — — 33,259 +Shares repurchased and retired related to stock-based compensation ( 6 ) ( 5,976 ) — — ( 5,982 ) +Other comprehensive loss — — — ( 7,983 ) ( 7,983 ) +Equity issued in connection with the C&J Merger 1,059 484,065 — — 485,124 +Net loss — — ( 106,157 ) — ( 106,157 ) +Balance as of December 31, 2019 $ 2,124 $ 966,762 $ ( 73,333 ) $ ( 8,781 ) $ 886,772 +Credit loss standard implementation — — ( 1,525 ) — ( 1,525 ) +Stock-based compensation (1) +27 25,799 — — 25,826 +Shares repurchased and retired related to stock-based compensation ( 7 ) ( 2,566 ) — — ( 2,573 ) +Other comprehensive loss — — — ( 4,329 ) ( 4,329 ) +Net loss — — ( 346,883 ) — ( 346,883 ) +Balance as of December 31, 2020 $ 2,144 $ 989,995 $ ( 421,741 ) $ ( 13,110 ) $ 557,288 +Stock-based compensation 19 24,658 — — 24,677 +Shares repurchased and retired related to stock-based compensation ( 3 ) ( 2,696 ) — — ( 2,699 ) +Equity issued in connection with Alamo Acquisition 260 82,063 — — 82,323 +Other comprehensive income — — — 4,851 4,851 +Net loss — — ( 119,423 ) — ( 119,423 ) +Balance as of December 31, 2021 $ 2,420 $ 1,094,020 $ ( 541,164 ) $ ( 8,259 ) 547,017 +(1) Stock-based compensation during 2019 includes stock-based compensation expense recognized during the period of $ 29.0 million and the vested deferred stock awards of $ 4.3 million. Refer to Note (12) Stock-Based Compensation for further discussion of the Company’s stock-based compensation. +See accompanying notes to the consolidated financial statements. +76 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Year Ended December 31, +2021 2020 2019 +Cash flows from operating activities: +Net loss $ ( 119,423 ) $ ( 346,883 ) $ ( 106,157 ) +Adjustments to reconcile net loss to net cash provided by (used in) operating activities +Depreciation and amortization 184,164 302,051 292,150 +Amortization of deferred financing fees 2,066 2,217 1,360 +(Gain) loss on disposal of assets ( 28,898 ) ( 14,461 ) 4,470 +Stock-based compensation 24,677 25,826 28,977 +Loss on debt extinguishment/modification, including prepayment premiums — — 526 +Unrealized gain (loss) on derivative recognized in other comprehensive loss 1,703 ( 6,422 ) ( 7,628 ) +(Gain) loss on financial instrument and derivatives, net 1,799 ( 2,815 ) ( 239 ) +Gain on insurance proceeds recognized in other income ( 10,409 ) — — +Loss on impairment of assets — 37,008 12,346 +Changes in operating assets and liabilities +Decrease (increase) in trade and other accounts receivable, net ( 128,535 ) 183,083 172,566 +Decrease (increase) in inventories ( 9,978 ) 19,167 17,181 +Decrease (increase) in prepaid and other current assets ( 10,894 ) 5,160 3,703 +Decrease (increase) in other assets 24,807 25,306 ( 242 ) +Increase (decrease) in accounts payable 18,693 ( 61,658 ) ( 17,799 ) +Increase (decrease) in customer contract liabilities ( 6,537 ) 206 — +Increase (decrease) in accrued expenses 34,860 ( 84,129 ) ( 103,609 ) +Increase (decrease) in other liabilities ( 28,882 ) ( 14,771 ) 7,858 +Net cash provided by (used in) operating activities ( 50,787 ) 68,885 305,463 +Cash flows from investing activities +Business acquisitions, including cash received ( 95,082 ) 53,666 68,807 +Purchase of property and equipment ( 184,496 ) ( 113,506 ) ( 200,385 ) +Advances of deposit on equipment ( 961 ) ( 1,908 ) ( 7,451 ) +Implementation of software ( 3,021 ) ( 8,813 ) ( 4,408 ) +Proceeds from sale of assets 70,432 32,659 29,114 +Proceeds from insurance recoveries 22,947 58 223 +Proceeds from settlement of WSS Notes and make-whole derivative 34,350 — — +Payment of consideration liability ( 7,370 ) — — +Net cash used in investing activities ( 163,201 ) ( 37,844 ) ( 114,100 ) +Cash flows from financing activities: +Proceeds from the asset-based revolver and equipment loan 43,329 175,000 — +77 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Payments on the asset-based revolver, term loan facilities, and equipment loan ( 4,976 ) ( 178,500 ) ( 3,500 ) +Payments on finance leases ( 4,155 ) ( 3,752 ) ( 6,035 ) +Payment of debt issuance costs ( 277 ) — ( 1,229 ) +Proceeds from financing liabilities 17,759 — — +Payments for financing liabilities ( 695 ) — — +Shares repurchased and retired related to stock-based compensation ( 2,699 ) ( 2,573 ) ( 5,982 ) +Net cash provided by (used in) financing activities 48,286 ( 9,825 ) ( 16,746 ) +Non-cash effect of foreign translation adjustments 407 ( 241 ) 192 +Net increase (decrease) in cash, cash equivalents and restricted cash ( 165,295 ) 20,975 174,809 +Cash, cash equivalents and restricted cash, beginning 275,990 255,015 80,206 +Cash, cash equivalents and restricted cash, ending $ 110,695 $ 275,990 $ 255,015 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest expense, net $ 23,242 $ 21,114 $ 20,836 +Income taxes 217 1,206 1,726 +Non-cash investing and financing activities: +Change in accrued capital expenditures $ ( 71,897 ) $ ( 13,812 ) $ ( 17,274 ) +Non-cash additions to equity security investment — 5,263 — +Non-cash additions to finance right-of use assets 42,592 — 6,269 +Non-cash additions to finance lease liabilities, including current maturities ( 42,592 ) — ( 6,286 ) +Non-cash additions to operating right-of-use assets 9,047 9,057 65,551 +Non-cash additions to operating lease liabilities, including current maturities ( 7,416 ) ( 8,898 ) ( 65,297 ) +Fair value of C&J assets acquired — — 806,218 +106,627 shares of NexTier common stock issued in exchange for C&J capital stock and replacement awards +— — ( 485,124 ) +C&J liabilities assumed — — ( 321,094 ) +26,000,000 shares of NexTier common stock issued in exchange for Alamo ownership +( 82,323 ) — — +Total contingent consideration ( 45,944 ) — — +Non contingent consideration ( 7,370 ) — — +See accompanying notes to the consolidated financial statements. +78 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(1) Basis of Presentation and Nature of Operations +The accompanying consolidated financial statements were prepared using United States (“U.S.”) Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated. +The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, income taxes, stock-based incentive plan awards and derivatives. +Management believes the consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2021 and 2020 and the results of its operations and cash flows for the years ended December 31, 2021, 2020 and 2019. Such adjustments are of a normal recurring nature. +On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisitions. +The consolidated financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill. +In addition, on March 9, 2020, the Company completed the divestiture of its Well Support Services Segment (“WSS Sale”). For more details regarding the WSS Sale, refer to Note (21) Business Segments . +On August 31, 2021 the Company completed its acquisition (“Alamo Acquisition”) of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries (“Alamo”). For more details regarding the Alamo Acquisition, refer to Note (3) Mergers and Acquisitions . +The consolidated financial statements for the period from January 1, 2019 to August 31, 2021 reflect only the historical results of the Company prior to the completion of the Alamo Acquisition. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the Alamo Acquisition be designated as the acquirer for accounting purposes. The Company and Alamo determined that the Company was the accounting acquirer. Accordingly, consideration given by the Company to complete the Alamo Acquisition was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the Alamo Acquisition, with any excess purchase price allocated to goodwill. +79 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(2) Summary of Significant Accounting Policies +(a) Business Combinations and Asset Acquisitions +Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 820, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in the Company’s results of operations from the date of acquisition. +Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition. +Refer to Note (3) Mergers and Acquisitions for discussion of the mergers and acquisitions completed in 2021 and 2019. +(b) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months. +Net cash received from certain dispositions or casualty events of more than $ 25.0 million per single transaction or $ 50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $ 50.0 million, under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did no t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the years ended December 31, 2021 and 2020. +The Company had less than $ 0.1 million of restricted cash as of December 31, 2021 and December 31, 2020, respectively. +(c) Trade Accounts Receivable +Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. As a result of the adoption of ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on January 1, 2020 the Company evaluates its accounts receivable through a continuous process of assessing its portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, and financial condition of customers. Based on our review of these factors, we establish or adjust allowances for specific customers. Trade accounts receivable were $ 303.6 million and $ 125.3 million at December 31, 2021 and 2020, +80 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +respectively. As of December 31, 2021 , and 2020, the Company had an allowance for credit losses of $ 1.9 million and $ 2.7 million, respectively. +(d) Inventories +Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated statements of operations and comprehensive loss using the weighted average cost method for non-manufacturing inventory and standard cost method for manufacturing inventory. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off. +(e) Revenue Recognition +Revenues are accounted for in accordance with ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. +The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 to 60 days of the invoice issuance. +A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job. +Remaining Performance Obligations +The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with Accounting Standards Codification 606 “Revenue from Contracts with Customers” (“ASC 606”), the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. For those contracts with a term of more than one year, the Company had approximately $ 27.0 million of unsatisfied performance obligations as of December 31, 2021, which will be recognized as services are performed over the remaining contractual terms. +The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations. +81 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Contract Balances +In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As of December 31, 2021, the Company’s customer contract liability balance is related to the post close service agreement as a result of the Alamo Acquisition. Payment terms after invoicing are typically 30 to 60 days or less. +The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations and comprehensive loss and net cash provided by operating activities in the consolidated statements of cash flows. +The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see (21) Business Segments . +Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows: +Completion Services +The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated statements of operations and comprehensive loss. To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated statements of operations and comprehensive loss. +Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Well Construction and Intervention +The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services +82 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +performed and resources provided on an hourly basis at agreed-upon spot market rates, at times, or pursuant to pricing agreements. +Historical Segment: Well Support Services +On March 9, 2020, the Company completed the divestiture of its Well Support Services segment. For additional information, see Note (21) Business Segments. Through its rig services line, the Company had provided workover and well servicing rigs that were primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services were provided on an hourly basis at prices that approximate spot market rates. A field ticket was generated and revenue is recognized upon the earliest of the completion of a job or at the end of each day. +Through its fluids management service line, the Company used to provide storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket. +Through its other special well site service line, the Company used to provide fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided. +Disaggregation of Revenue +Revenue activities during the years ended December 31, 2021, 2020 and 2019 were as follows: +Year Ended December 31, 2021 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 248,652 $ 21,881 $ — $ 270,533 +Central 263,427 — — 263,427 +West Texas 680,716 72,565 — 753,281 +West 95,072 4,107 — 99,179 +International 37,021 — — 37,021 +$ 1,324,888 $ 98,553 $ — $ 1,423,441 +83 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year Ended December 31, 2020 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 270,612 $ 21,290 $ — $ 291,902 +Central 131,833 7,478 — 139,311 +West Texas 477,758 58,111 8,373 544,242 +West 122,970 11,459 49,556 183,985 +International 43,141 — — 43,141 +$ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +Year Ended December 31, 2019 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 479,685 $ 5,193 $ — $ 484,878 +Central 104,225 5,741 — 109,966 +West Texas 839,652 24,575 9,336 873,563 +West 273,364 27,530 39,247 340,141 +International 13,008 — — 13,008 +$ 1,709,934 $ 63,039 $ 48,583 $ 1,821,556 +(f) Long-Lived Assets with Definite Lives +Property and equipment, inclusive of equipment under finance lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated statements of operations and comprehensive loss. +Major classifications of property and equipment and their respective useful lives are as follows: +Land Indefinite life +Building and leasehold improvements +13 months – 40 years +Machinery and equipment +13 months – 10 years +Office furniture, fixtures and equipment +3 years – 5 years +84 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use. +In the first quarter of 2021, the Company reassessed the estimated useful lives of select machinery and equipment, concluding that due to a decrease in service intensity for select machinery and equipment driven by operational parameters required to maximize natural gas substitution and longer major component lives attributable to equipment health monitoring and predictive maintenance from our proprietary digital NexHub platform and data science efforts, the useful lives of select machinery and equipment should be increased by 1-2 years depending on the specific asset class. In accordance with ASC 250, “Accounting Changes and Error Corrections” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2021. This change resulted in a decrease in depreciation expense and decrease in net loss during the twelve months ended December 31, 2021 of $ 30.6 million, in the consolidated statement of operations and comprehensive loss. +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years. +Property and equipment and definite-lived intangible assets (“Long-lived Assets”) are evaluated on a quarterly basis to identify events or changes in circumstances, referred to as triggering events that indicate the carrying value of a Long-lived Asset may not be recoverable or upon the occurrence of a triggering event. An impairment loss is recorded in the period in which it is determined that the carrying amount of a Long-lived Asset is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the service line level. The Company's asset groups consist of fracturing services, wireline, cementing, and coiled tubing, except for an entity level asset group for Long-lived Assets that do not have identifiable independent cash flows. Estimates of undiscounted future net cash flows of assets groups are projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows take into account known market conditions as of the assessment date, and management’s anticipated business outlook. A terminal period is used to reflect an estimate of stable, perpetual growth. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset groups, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related asset groups. The impairment loss is then allocated across the asset group's major classifications. +During the first quarter of 2020, management determined the reductions in commodity prices driven by the potential impact of the novel COVID-19 pandemic and global supply and demand dynamics coupled with the sustained decrease in the Company’s share price were deemed triggering events. As a result of the triggering event, recoverability testing was performed and it was determined that the estimated undiscounted future net cash flow for all asset groups was greater than the carrying amount of their related assets and no impairment loss was recorded. +During the third quarter of 2020, the Company assessed and determined the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, recoverability testing was performed and it was determined that the estimated undiscounted future net cash flows for all asset groups was greater than the carrying amount of their related assets and no impairment loss was recorded. +The Company did no t recognize any impairment charges related to the Company’s long-lived assets for the years ended December 31, 2021, 2020, or 2019. +(g) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs +85 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or materially increase the efficiency, productivity, functionality or life of a fixed asset are capitalized. +(h) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services, Well Construction and Intervention and Well Support Services reporting units. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the Company recognizes an impairment expense in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. +The Company performs the qualitative analysis of the goodwill impairment assessment by reviewing relevant qualitative factors. In the first and third quarter of 2020, the Company determined there were triggering events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, quantitative detail impairment testing was conducted. +As a result, the Company recognized $ 32.6 million in goodwill impairment expense during 2020, of which $ 32.2 million related to the Completions Service reporting unit and $ 0.4 million representing the entire goodwill balance for the Well Construction and Intervention reporting unit. No goodwill impairment expense was recognized in 2021 or 2019. See Note ( 5 ) Goodwill . +(i) Derivative Instruments and Hedging Activities +The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive loss until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, +86 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive loss. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings. +In addition, we evaluate the terms of our operating agreements and other contracts, if any, to determine whether they contain embedded components that are required to be bifurcated and accounted for separately as derivative financial instruments. For additional detailed information regarding reportable segments, see Note (10) Derivatives . +(j) Fair Value Measurement +Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +87 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(k) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”), performance based RSU award (“PSUs”), and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement. +Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated statements of cash flows. +The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For additional information, see Note (12) Stock-Based Compensation. +(l) Taxes +Upon consummation of a series of organizational transactions (the “Organizational Transactions”) and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019. +Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax. As a result of the C&J Merger, the Company had foreign subsidiaries as of December 2020 in Canada, The Netherlands, Luxembourg and Ecuador. With the exception of the Canadian subsidiary, all other subsidiaries are dormant and have no active operations as of December 31, 2021. +The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, +88 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. +Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. +The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense. +See Note (17) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2021, 2020 and 2019. +(m) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated statements of operations and comprehensive loss. +Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss. +(n) Equity-method investments +Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated balance sheets. The Company did not have any equity-method investments as of December 31, 2021 or December 31, 2020. +(o) Employee Benefits and Post-Employment Benefits +Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated . +(p) Leases +Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and related amendments, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, using the modified retrospective method. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated +89 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases. +In accordance with ASU 2016-02, the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases. +For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased. +For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease. +For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and records this amortization in rent expense on the consolidated statements of operations and comprehensive loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of operations and comprehensive loss. For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the consolidated statements of operations and comprehensive loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable. +In accordance with ASC 842, the Company has made the following elections for its lease accounting: +• all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases; +• for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and +• for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606. +As part of the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not: +• reassess whether any expired or existing contracts contained leases; +• reassess the lease classification for any expired or existing leases; and +• reassess initial direct costs for any existing leases. +For additional information, see Note (16) Leases. +90 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(q) Research and development costs +Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss. Research and development costs incurred directly by the Company were $ 5.0 million, $ 4.8 million and $ 7.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.. +(3) Mergers and Acquisitions +(a) Alamo Acquisition +On August 31, 2021 (the “Alamo Acquisition Date”), the Company completed the Alamo Acquisition in accordance with the terms of the Purchase Agreement, dated as of August 4, 2021 (the “Purchase Agreement”), by and among the Company, NexTier Completion Solutions Inc., Alamo Frac Holdings, LLC, Alamo and the “owner group” identified therein. The Company acquired 100 % of Alamo. +The Alamo Acquisition was completed for cash consideration of $ 100.0 million, equity consideration of 26 million shares of the Company’s common stock valued at $ 82.3 million, post-closing services valued at $ 30 million, an estimated $ 15.9 million of contingent consideration, $ 7.4 million of non-contingent consideration, and a net working capital settlement of $ 0.5 million that was finalized in the fourth quarter of 2021 and is to be paid to the Company in early 2022. The contingent consideration includes the Tier II Upgrade Payment, and the Earnout Payments, which are contingent upon the achievement of certain performance targets, as described in the Purchase Agreement. +The Company accounted for the Alamo Acquisition using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The measurements of some assets acquired and liabilities assumed, such as intangible assets and the earnout were based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired property and equipment were based on both available market date and a cost approach. +The following table summarizes the fair value of the consideration transferred in the Alamo Acquisition and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the Alamo Acquisition Date: +91 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Total Purchase Consideration: +Preliminary Purchase Price Allocation Adjustments Final Purchase Price Allocation +(Thousands of Dollars) +Cash consideration (1) +$ 100,000 $ — $ 100,000 +Equity consideration 82,323 — $ 82,323 +Post close services 30,000 — $ 30,000 +Contingent consideration 15,944 — $ 15,944 +Non contingent consideration 7,370 — $ 7,370 +Net working capital adjustment — ( 482 ) $ ( 482 ) +Total purchase consideration $ 235,637 $ ( 482 ) $ 235,155 +Cash +$ 7,419 $ — $ 7,419 +Trade and accounts receivable +50,619 — $ 50,619 +Inventories +1,726 — $ 1,726 +Prepaid and other current assets +19,654 — $ 19,654 +Assets held for sale 3,282 — $ 3,282 +Property and equipment 114,705 ( 816 ) $ 113,889 +Intangible assets 27,113 — $ 27,113 +Finance lease right-of-use assets 35,813 ( 468 ) $ 35,345 +Other noncurrent assets 1,676 — $ 1,676 +Total identifiable assets acquired +262,007 ( 1,284 ) 260,723 +Accounts payable +39,101 — $ 39,101 +Accrued expenses +38,000 — $ 38,000 +Current maturities of long-term finance lease liabilities 10,125 — $ 10,125 +Long-term finance lease liabilities 25,688 ( 468 ) $ 25,220 +Non-current liabilities +971 — $ 971 +Total liabilities assumed +113,885 ( 468 ) 113,417 +Goodwill +87,515 334 $ 87,849 +Total purchase consideration $ 235,637 $ ( 482 ) $ 235,155 +(1) Includes $ 32.3 million of payments for indebtedness on behalf of Alamo. +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. All the goodwill recognized for the Alamo acquisition is recognized in the Completions segment and is tax deductible with an amortization period of 15 years. The goodwill in this acquisition was primarily attributable to Alamo's organized workforce and potential synergies. +Intangible assets related to the Alamo Acquisition consisted of the following: +92 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +Weighted average remaining amortization period (Years) Gross Carrying Amounts +Trademarks 1.5 $ 2,409 +Non-compete agreements 3 1,677 +Customer relationships 7.33 23,027 +Total $ 27,113 +For the valuation of the customer relationship intangible assets within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset changes. Under this method, the Company calculated earnings derived from the existing customer relationships and then deducted portions of the earnings that could be attributed to supporting assets that contribute to the generation of said earnings. Estimated cash flows were discounted at the cost of equity based on the assumption that the intangible asset would be financed with 100% equity. For the valuation of the trademarks intangible asset within the Completions Services segment, management used the relief from royalty method to reflect the after tax royalty savings attributable to owning the intangible asset. Management used the return on asset method to determine an implied royalty rate since a royalty rate was not available in the Company’s industry. For the valuation of the non-compete agreements intangible asset within the Completions Services segment, management used the incremental cash flow (“with/without”) method. +The Company has recognized $ 19.0 million in indemnification assets related to an ongoing sales & use tax audit and other indemnified liabilities under the Purchase Agreement. +The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the Alamo Acquisition. Merger costs consist of legal and professional fees. Integration costs consist of expenses incurred to integrate Alamo’s operations with that of the Company, including retention bonuses and severance payments. The expenses for all these transactions were expensed as incurred and are presented in Merger and integration in the consolidated statements of operations and comprehensive loss. +(Thousands of Dollars) +Transaction Type Year Ended December 31, 2021 +Merger $ 5,592 +Integration 3,117 +Total merger and integration costs $ 8,709 +The following combined pro forma information assumes the Alamo Acquisition occurred on January 1, 2020. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2021 or any operating efficiencies or inefficiencies that resulted from the Alamo Acquisition. The information is not necessarily indicative of results that would have been achieved had the company controlled Alamo during the period presented. Pro forma adjustments related to the elimination of historical interest expense for debt paid off as part of the Alamo Acquisition were $ 2.7 million and $ 6.9 million for the year ended December 31, 2021 and 2020, respectively. +93 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(unaudited, amounts in Thousands of Dollars) +Year Ended December 31 +2021 2020 +Revenue $ 1,633,866 $ 1,451,342 +Net loss ( 105,400 ) ( 331,283 ) +Net loss per share (basic) ( 0.44 ) ( 1.38 ) +Net loss per share (diluted) ( 0.44 ) ( 1.38 ) +The Company’s condensed consolidated statement of operations and comprehensive loss for the year ended December 31, 2021 includes revenue of $ 172.1 million and net income of $ 20.0 million from the Alamo operations. +(b) C&J Energy Services, Inc. +On October 31, 2019, the Company completed the C&J Merger in accordance with the terms of the Agreement and Plan of Merger, dated as of June 16, 2019 (the "Merger Agreement"), by and among NexTier, C&J and King Merger Sub Corp., a wholly owned subsidiary of NexTier ("Merger Sub"), pursuant to which Merger Sub merged with and into C&J, with C&J surviving the merger as a wholly owned subsidiary of NexTier, and immediately following the C&J Merger, C&J was merged with and into King Merger Sub II LLC ("LLC Sub"), with LLC Sub continuing as the surviving entity as a wholly-owned subsidiary of NexTier and the successor in interest to C&J. +The C&J Merger was completed for total consideration of approximately $ 485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-merger services with a value of $ 3.2 million. +The Company accounted for the C&J Merger using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The majority of the measurements of assets acquired and liabilities assumed, were based on inputs that were not observable in the market and thus represented Level 3 inputs. The fair value of acquired inventory and property and equipment was based on both available market data and a cost approach. The fair value of the financial assets acquired included trade receivables with a fair value of $ 312.6 million. The gross amount due under the contracts was $ 322.8 million, of which $ 10.2 million was expected to be uncollectible. A liability of $ 40.2 million was recognized for legal reserves and sales and use tax assessments. +The following table summarizes the fair value of the consideration transferred in the C&J Merger and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the C&J Merger Date: +94 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Total Purchase Consideration: +(Thousands of Dollars) +Equity consideration $ 481,912 +Replacement awards attributable to pre-combination services 3,212 +Less: Cash acquired ( 68,807 ) +Total purchase consideration $ 416,317 +Trade and accounts receivable +$ 312,620 +Inventories +43,142 +Prepaid and other current assets +18,512 +Property and equipment +311,886 +Intangible assets +17,590 +Right of use assets +24,318 +Other noncurrent assets +4,409 +Total identifiable assets acquired +732,477 +Accounts payable +43,620 +Accrued expenses +236,959 +Short term lease liability +7,842 +Long term lease liability +15,517 +Non-current liabilities +17,156 +Total liabilities assumed +321,094 +Goodwill +4,934 +Total purchase consideration $ 416,317 +The goodwill in this acquisition was primarily attributable to expected synergies and was allocated across the Company’s Completion Services, Well Construction and Intervention and Well Support Services reporting units. +Intangible assets related to the C&J Merger consisted of the following: +(Thousands of Dollars) +Weighted average remaining +amortization period +(Years) Gross +Carrying +Amounts +Technology 3 17,590 +Total $ 17,590 +Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the C&J Merger. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate C&J’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred. +Merger and integration costs related to the C&J Merger totaled $ 32.5 million and $ 68.7 million for the years ended December 31, 2020 and 2019, respectively, and are recorded within merger and integration costs on the Company’s consolidated statements of operations and comprehensive loss. The following table summarizes merger and integration costs for the years ended December 31, 2020 and 2019. There were no merger and integration costs related to the C&J Merger during the year ended December 31, 2021. +95 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(amounts in thousands) +Transaction Type Year Ended +December 31, 2020 Year Ended +December 31, 2019 +Merger +$ 7,586 $ 23,775 +Integration +24,953 44,956 +Total merger and integration costs +$ 32,539 $ 68,731 +The following combined pro forma information assumes the C&J Merger occurred on January 1, 2018. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2019 or any operating efficiencies or inefficiencies that resulted from the C&J Merger. The information is not necessarily indicative of results that would have been achieved had the Company controlled C&J during the period presented. +(unaudited, amounts in thousands) +Year Ended December 31, 2019 Year Ended December 31, 2018 +Revenue +$ 3,406,288 $ 4,359,095 +Net income (loss) +( 196,577 ) 66,746 +Net income (loss) per share (basic) +$ ( 0.93 ) $ 0.32 +Net income (loss) per share (diluted) +$ ( 0.93 ) $ 0.31 +Weighted-average shares outstanding (basic) +211,376 210,945 +Weighted-average shares outstanding (diluted) +211,376 212,964 +The Company’s consolidated statement of operations and comprehensive income (loss) for 2019 includes revenue of $ 196.7 million and net loss of $ 21.4 million, from the C&J operations, from November 1, 2019 to December 31, 2019. +(4) Intangible Assets +The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2021 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 90,627 $ ( 44,063 ) $ 46,564 +Non-compete agreements +2,377 ( 611 ) 1,766 +Trademarks 2,409 ( 157 ) 2,252 +Technology +32,226 ( 17,847 ) 14,379 +Total +$ 127,639 $ ( 62,678 ) $ 64,961 +96 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +December 31, 2020 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 67,600 $ ( 37,607 ) $ 29,993 +Non-compete agreements +700 ( 455 ) 245 +Technology +29,378 ( 8,434 ) 20,944 +Total +$ 97,678 $ ( 46,496 ) $ 51,182 +Amortization expense related to the intangible assets for the years ended December 31, 2021, 2020 and 2019 was $ 16.4 million, $ 12.6 million and $ 6.5 million, respectively. +In connection with the C&J Merger, the Company was re-branded as NexTier and did not expect to obtain any further benefits or receive any cash flows associated with the Keane indefinite-lived trade name. As a result, the Company impaired $ 10.2 million related to the Keane trade name as of December 31, 2019. The impairment is recorded in impairment expense in the consolidated statements of operations and comprehensive loss. +Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows: +Year-end December 31, (Thousands of Dollars) +2022 $ ( 19,457 ) +2023 ( 12,336 ) +2024 ( 9,876 ) +2025 ( 8,452 ) +2026 ( 5,633 ) +(5) Goodwill +Goodwill is allocated across three reporting units: Completion Services, Well Construction and Intervention Services and Well Support Services reporting units. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, or when events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. +Judgment is used in assessing whether goodwill should be tested for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, market changes, and other external events may require more frequent assessments. +During the first quarter of 2020, a significant decline in the Company's share price, which resulted in the Company's market capitalization dropping below the book value of equity, as well as reductions in commodity prices driven by the potential impact of the COVID-19 pandemic and global supply and demand dynamics were deemed triggering events that led to a test for goodwill impairment. The impairment testing methodologies for the first quarter 2020 are discussed below. +Income approach +The income approach impairment testing methodology is based on a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. For the Completions Services and Well Construction and Intervention reporting units, the future cash flows were projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows took into account known market conditions as of March 31, 2020, and management’s +97 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +anticipated business outlook. A terminal period was used to reflect an estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 2.5 %. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital (“WACC”) of 19.9 % for the Completions reporting unit and 22.4 % for the Well Construction and Intervention reporting unit. These assumptions were derived from both observable and unobservable inputs and combined reflect management’s judgments and assumptions. +Market approach +T he market approach impairment testing methodology is based upon the guideline public company method and the guideline transaction method. The application of the guideline public company method was based upon selected public companies operating within the same industry as the Company. Based on this set of comparable competitor data, operational multiples were derived for the reporting units weighted based on management’s assessment of reliability. The forward-looking selected market multiples for the guideline public company method were enterprise value to revenue and enterprise value to EBITDA multiples, with multiples ranging from 0.5 x to 0.6 x for revenues and from 3.3 x to 6.2 x for EBITDA. The application of the guideline transaction method was based upon valuation multiples derived from actual control transactions for comparable companies. Based on this, valuation multiples are derived from historical data of selected transactions, then evaluated and adjusted, if necessary, based on the strengths and weaknesses of the subject reporting unit relative to each acquired guideline company. The forward-looking selected market multiples for the guideline transaction method were enterprise value to revenue and enterprise value to book value of invested capital, with multiples ranging from 0.7 x to 2.1 x for revenues and from 0.6 x to 1.3 x for book value of invested capital. +The fair value determined under the market approach is sensitive to these market multiples, and a decline in any of the multiples could reduce the estimated fair value of the reporting unit below its carrying value. Earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach. +Reconciliation of value and goodwill impairment conclusion +The estimated fair value determined under the income approach was consistent with the estimated fair value determined under the market approach. The concluded fair value for both reporting units consisted of a weighted average, with a 40.0 % weighted under the income approach and 60.0 % weight under the market approach. Market data in support of the implied control premium were used in this reconciliation to corroborate the estimated reporting unit fair values with the Company's overall market-indicated value. The results of the impairment testing for goodwill resulted in the Company recognizing an impairment expense of $ 32.6 million during the first quarter of 2020, consisting of $ 32.2 million related to the Completions Services reporting unit and $ 0.4 million representing the entire balance of goodwill for the Well Construction and Intervention reporting unit. +During the third quarter of 2020, the Company assessed and deemed the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, the Company performed a test for goodwill impairment using the same methodologies used in the first quarter of 2020; however, no impairment of goodwill was recorded. +During the Company’s annual testing as of October 31, 2020 and October 31, 2021, it was determined that there were no events that would indicate the carrying value of goodwill may not be recoverable or that a potential impairment exists. +98 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The changes in the carrying amount of goodwill for the years ended December 31, 2021, 2020 and 2019 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2019 $ 137,458 +Disposition of Well Support Services reporting unit ( 660 ) +Impairment expense ( 32,600 ) +Goodwill as of December 31, 2020 104,198 +Completions Acquisition 733 +Alamo Acquisition 87,849 +Goodwill as of December 31, 2021 $ 192,780 +The changes in the carrying amount of goodwill for the year ended December 31, 2021 consisted of amounts related to the completions acquisition and the Alamo acquisition. The changes in the carrying amount of goodwill for the year ended December 31, 2020 consisted of amounts related to the disposition of the Well Support Services reporting unit, and impairment expense. For additional information, see Note (3) (Mergers and Acquisitions) and Note (21) (Business Segments). As discussed above, in 2020 the Company recognized impairment expense of $ 32.6 million. There were no triggering events and no impairment expense recorded for the years ended 2021 and 2019. +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2021 and December 31, 2020: +(Thousands of Dollars) +December 31, +2021 December 31, +2020 +Sand, including freight $ 9,674 $ 5,096 +Chemicals and consumables 4,204 2,993 +Materials and supplies 24,216 21,979 +Total inventory, net $ 38,094 $ 30,068 +Inventories are reported net of obsolescence reserves of $ 6.3 million and $ 4.4 million as of December 31, 2021 and 2020, respectively. The Company recognized $ 1.9 million, $ 2.6 million and $ 0.8 million of obsolescence expense during the years ended December 31, 2021, 2020 and 2019. Additionally, during the year ended December 31, 2020, the Company recognized a $ 2.7 million write-down in inventory carrying value down to its net realizable value. +99 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(7) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2021 and December 31, 2020: +(Thousands of Dollars) +December 31, +2021 December 31, +2020 +Land +$ 13,317 $ 14,397 +Building and leasehold improvements +75,892 78,078 +Office furniture, fixtures and equipment +11,846 11,400 +Machinery and equipment +1,424,317 1,284,163 +1,525,372 1,388,038 +Less accumulated depreciation +( 951,170 ) ( 929,290 ) +Construction in progress +46,663 11,963 +Total property and equipment, net +$ 620,865 $ 470,711 +Casualty Loss +On May 9, 2021, one of the Company’s hydraulic fleets operating in the Permian Basin was involved in an accidental fire, which resulted in a complete loss of the equipment; no parties were injured as a result of this incident. During the year ended December 31, 2021 the Company recognized a total of $ 22.9 million in insurance proceeds, partially offset by the $ 12.5 million loss recognized on the damaged equipment and costs to remove the equipment. The resulting $ 10.4 million gain was recognized in other income (expense), net in the consolidated statements of operations and comprehensive loss. +100 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(8) Long-Term Debt +Long-term debt at December 31, 2021 and December 31, 2020 consisted of the following: +(Thousands of Dollars) +December 31, +2021 December 31, +2020 +2018 Term Loan Facility +337,750 $ 341,250 +2021 Equipment Loans 41,321 — +Other long-term debt 533 — +Less: Unamortized debt discount and debt issuance costs ( 4,719 ) ( 5,710 ) +Total debt, net of unamortized debt discount and debt issuance costs +374,885 335,540 +Less: Current portion +( 13,384 ) ( 2,252 ) +Long-term debt, net of unamortized debt discount and debt issuance costs +$ 361,501 $ 333,288 +Below is a summary of the Company’s credit facilities outstanding as of December 31, 2021: +(Thousands of Dollars) +2021 Equipment Loans 2019 ABL Facility 2018 Term Loan Facility +Original facility size +$ 46,500 $ 450,000 $ 350,000 +Outstanding balance +$ 41,321 $ — $ 337,750 +Letters of credit issued +$ — $ 23,200 $ — +Available borrowing base commitment +n/a $ 205,615 +n/a +Interest Rate (1) +5.25 % +LIBOR or base rate plus applicable margin +LIBOR or base rate plus applicable margin +Maturity Date +June 1, 2025 +October 31, 2024 +May 25, 2025 +(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00 % floor +Maturities of the 2018 Term Loan Facility and the 2021 Equipment Loans for the next five years are presented below: +Year-end December 31, (Thousands of Dollars) +2022 $ 14,738 +2023 15,430 +2024 15,790 +2025 333,646 +2026 — +$ 379,604 +Deferred Charges and Other Costs +Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility (defined below) are capitalized. Deferred charges related to the 2018 Term Loan Facility (defined below) and the 2021 Equipment Loans (defined below) are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2021, 2020 and 2019 was $ 2.1 million, $ 2.2 million, and $ 1.4 million, respectively. +101 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Equipment Loans +On August 20, 2021, the Company entered into the Master Loan and Security Agreement the (“Master Agreement”) with Caterpillar Financial Services Corporation. The Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $ 46.5 million the (“Equipment Loans”). The Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. On September 3, 2021 entered into a term note for $ 39.4 million the (“Note”) for an equipment financing loan. On December 30, 2021 the Company entered into a term note for $ 3.4 million for additional equipment financing. The Note will bear interest at a rate of 5.25 % per annum and has a maturity date of June 1, 2025. The Note will bear interest at a rate of 5.25 % per annum and has a maturity date of June 1, 2025. The Company will amortize $ 0.2 million in debt issuance costs and debt discount over the life of the loan. +ABL Revolving Credit Facility +On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $ 1.2 million. In connection with the modification of the 2017 ABL Facility, the Company wrote off $ 0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $ 2.3 million and $ 3.1 million as of December 31, 2021 and 2020, respectively, and are recorded in other noncurrent assets on the consolidated balance sheets. During the first quarter of 2020, the Company provided notice to the lenders to borrow a total of $ 175 million under the 2019 ABL Facility. The interest rates for the $ 150.0 million LIBOR borrowing and $ 25.0 million Base Rate borrowing were 2.125 % and 3.75 %, respectively as of the borrowing dates. During the second quarter of 2020, the Company repaid the $ 150.0 million LIBOR borrowing and the $ 25.0 million Base Rate borrowing and did not incur any penalties. +Term Loan Facility +On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $ 7.6 million. Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $ 9.0 million. Unamortized deferred charges associated with the 2018 Term Loan Facility were $ 4.5 million and $ 5.7 million as of December 31, 2021 and 2020, respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets. +(9) Significant Risks and Uncertainties +Subsequent to the sale of the Well Support Services segment, the Company operates in two reportable segments: Completion Services and Well Construction and Intervention, with significant concentration in the Completion Services segment. During the years ended December 31, 2021, 2020 and 2019, sales to Completion Services customers represented 93 %, 87 % and 94 % of the Company’s consolidated revenue, respectively. +The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. From December 28, 2018 through December 31, 2019, U.S. active rig count decreased by approximately 26 % to 805 rigs as market conditions tightened and competition within the completions industry increased. +In late 2019 and early 2020, and in response to the oversupply of hydraulic fracturing equipment, an increasing number of horsepower retirements were announced, removing a significant base of equipment from the market. Despite some of these announcements, the oversupply of hydraulic fracturing equipment persisted, resulting in a continuation of highly competitive market conditions into 2020. +102 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +In late first quarter of 2020, the industry faced sudden and unprecedented circumstances, including major shocks to both supply and demand. COVID-19 resulted in significant demand destruction for oil products, driven by a significant slowdown in economic activity throughout the U.S. and abroad. This resulted in a rapid and significant decline in crude oil prices and an increasingly utilized storage network, limiting distribution outlets and optionality for production and further exacerbating price declines. U.S. exploration and production companies responded with drastic reductions in budgets and outright completion stoppages. From the end of the fourth quarter of 2019 through mid-August 2020, the U.S. active rig count decreased by 70 %, from 805 to 244 rigs before recovering to 351 rigs by the end of 2020. In 2021, the U.S. active rig count recovery continued, increasing 67 % from 351 rigs at the end of 2020 to 586 rigs by the end of 2021. +This backdrop drastically impacted the demand for U.S. completions services and resulted in increased demand for our services throughout 2021 relative to 2020. By the end of 2021, we started to see signs of improving supply/demand dynamics for U.S. onshore completion services, which resulted in improved pricing and margins relative to earlier in 2021. The magnitude, cadence, and resilience of activity and margin improvement, including supply chain disruptions and inflationary pressures, is uncertain and dependent on a range of factors including COVID-19 demand resolution. +For the year ended December 31, 2021, revenue from one customer individually represented approximately 14 % of the Company’s consolidated revenue. This customer represented $ 193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% and collectively represented 29 % of the Company’s consolidated revenue. These two customers represented $ 188.6 million and $ 160.5 million, respectively, of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2019, four customers individually represented more than 10% and collectively represented 55 % of the Company’s consolidated revenue. These four customers represented $ 346.9 million, $ 242.1 million, $ 213.4 million, and $ 194.7 million, respectively, of our consolidated revenue in the Completions Services segment. +For the years ended December 31, 2021 and 2020, purchases from one supplier represented approximately 5 % of the Company’s overall purchases, and were primarily incurred within the Completion Services segment. +(10) Derivatives +The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. +On March 9, 2020, the Company sold its Well Support Services segment to Basic Energy Services, Inc. (“Basic”) for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, (“WSS Notes”) previously issued by Basic. On July 29, 2020, the Company agreed to use the escrowed amount in the final settlement of the working capital reconciliation. Under the terms of the agreement, the WSS Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $ 34.4 million to NexTier after the WSS Notes are held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole is issued under a fund guarantee by Ascribe III Investments LLC, a private equity investment firm with approximately $ 1.0 billion in assets under management. In the event of a Basic restructuring or a credit rating downgrade in conjunction with a change in control prior to the one-year anniversary, the make-whole guarantee accelerates the WSS Notes to par value of $ 34.4 million. NexTier is entitled to semi-annual interest payments on the WSS Notes based on the 10.75 % annual coupon throughout the holding period. The Company identified the make-whole guarantee as an embedded derivative and bifurcated the valuation of the WSS Note and the make-whole guarantee. The Company elected the fair value option for the WSS Notes at the inception of the transaction. The fair value on the date of the transaction for the make-whole derivative and WSS Notes was $ 12.2 million and $ 22.2 million, respectively, and resulted in a gain on divestiture of $ 8.7 million. The fair value of the WSS Notes and the make-whole guarantee are measured at the end of each reporting period. Unrealized gains and losses recognized in relation to the change in fair value of these instruments are recognized in net loss in the consolidated statements of operations and comprehensive loss. The fair +103 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +value of the WSS Notes and make-whole guarantee are recorded in Other Current Assets on the consolidated balance sheets. See Note (21) Business Segments for further discussion. +On March 31, 2021, the Company received a $ 34.4 million cash payment from Ascribe in full settlement of the WSS Notes and the make-whole guarantee. At the time of the cash payment, the WSS Notes and make-whole guarantee had a fair value of $ 33.6 million, resulting in a realized gain on settlement of $ 0.8 million. This gain is recorded within other income (expense) on the consolidated statements of operations and comprehensive loss. +On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into the 2018 Term Loan Facility. The 2018 Term Loan Facility has an initial aggregate principal amount of $ 350.0 million and proceeds were used to repay the Company's pre-existing 2017 term loan facility. The 2018 Term Loan Facility has a variable interest rate based on the LIBOR, subject to a 1.0 % floor. In June 2018, the Company executed a new off-market interest rate swap effective through March 31, 2025 to hedge 50 % of its expected LIBOR exposure matching the swap to the 1-month LIBOR, 1 % floor, of the 2018 Term Loan Facility, and terminated the pre-existing interest rate swaps. After completing all appropriate accounting treatment, including the $ 3.5 million of deferred gains in accumulated other comprehensive loss for the pre-existing interest rate, the new interest rate swap was designated in a new cash flow hedge relationship. +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments Derivatives +not +designated as +hedging +instruments Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2021: +Other current liability +( 2,787 ) — ( 2,787 ) — ( 2,787 ) +Other noncurrent liability +( 3,747 ) — ( 3,747 ) — ( 3,747 ) +As of December 31, 2020: +Other current asset +$ — $ 27,243 $ 27,243 $ — $ 27,243 +Other current liability +( 2,861 ) — ( 2,861 ) — ( 2,861 ) +Other noncurrent liability +( 8,260 ) — ( 8,260 ) — ( 8,260 ) +(1) Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2021 2020 2019 Location +Amount of loss recognized in other comprehensive income on derivative $ 1,703 $ ( 6,422 ) $ ( 7,628 ) OCI +Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings ( 2,741 ) ( 2,334 ) 239 Interest Expense +The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated statements of operations and comprehensive loss. +104 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +There were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2021, $ 3.0 million of net losses will be reclassified from accumulated other comprehensive loss into earnings within the next 12 months. +The Company recognized a loss on the change in fair market value of the WSS Notes and make-whole derivative of $ 0.9 million for the year ended December 31, 2020 which is recorded within other income (expense) on the consolidated statements of operations and comprehensive loss. +See Note (11) Fair Value Measurements and Financial Information for further information related to the Company’s derivative instruments. +(11) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and finance lease obligations. As of December 31, 2021, and 2020, the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values. +Recurring Fair Value Measurement +As of December 31, 2021, the Company has three financial instruments measured at fair value on a recurring basis which are its interest rate derivative (see Note (10) Derivatives above), the equity security investment, and the Earnout Payments. The equity security investment is composed primarily of common equity shares in a publicly traded company, acquired at a fair value of $ 5.3 million. The equity security investment is presented within other current assets in the consolidated balance sheets, while the interest rate derivative and the Earnout Payments are presented within other current liabilities and other noncurrent liabilities in the consolidated balance sheets. As of December 31, 2020, the Company had four financial instrument measured on a recurring basis, which was its interest rate derivative, make-whole derivative, WSS Note (see Note (10) Derivatives above) and equity security investment. +The fair market value of the derivative financial instruments reflected on the consolidated balance sheets as of December 31, 2021, and 2020 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2021, and 2020 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2021 Level 1 Level 2 Level 3 +Assets: +Equity security investment $ 7,743 $ 7,743 $ — $ — +Liabilities: +Earnout Payments ( 11,795 ) — — ( 11,795 ) +Interest rate derivative $ ( 6,534 ) $ — $ ( 6,534 ) $ — +105 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Fair value measurements at reporting date using +December 31, 2020 Level 1 Level 2 Level 3 +Assets: +Make-whole derivative $ 27,243 $ — $ 27,243 $ — +WSS Note 6,322 — 6,322 $ — +Equity security investment 11,263 11,263 — $ — +Liabilities: +Interest rate derivatives $ ( 11,121 ) $ — $ ( 11,121 ) $ — +Non-Routine Fair Value Measurement +The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the C&J and Alamo transactions were recorded at their fair values on the date of acquisition. See Note (3) Mergers and Acquisitions for further details. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposit with financial institutions totaled $ 110.7 million and $ 276.0 million as of December 31, 2021 and 2020, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 to 60 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2021, trade receivables from one customer individually represented 17 % of the Company’s total accounts receivable. As of December 31, 2020, trade receivables from one customer individually represented 17 % of the Company’s total accounts receivable. +The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2021, the Company had $ 1.9 million in allowance for credit losses. As of December 31, 2020, the Company had $ 2.7 million in allowance for credit losses, including the increase of $ 1.5 million from the adoption of ASU 2016-13. +The Company recognized $ 2.0 million of bad debt expense, net of recoveries during the year ended December 31, 2021. During the year ended December 31, 2020, the Company had $ 2.0 million of recoveries from previously written-off receivables, net of bad debt expense. During the year ended December 31, 2019, the Company recorded bad debt expense of $ 0.6 million. +106 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(12) Stock-Based Compensation +Effective as of October 31, 2019, the Company (i) amended and restated the Keane Group, Inc. Equity and Incentive Award Plan under the name NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”), and (ii) assumed and amended and restated the C&J Energy Services, Inc. 2017 Management Incentive Plan under the name NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan ( “Management Incentive Plan”, and collectively with the Equity and Incentive Award Plan, the “Equity Award Plans”). As part of the C&J Merger, the Company assumed the award agreements outstanding under the Management Incentive Plan on the terms set forth in the Merger agreement. +As of December 31, 2021, the Company had four types of stock-based compensation under its Equity Award Plans: (i) restricted stock awards issued to independent directors and certain executives and employees, (ii) restricted stock units issued to executive officers and key management employees, (iii) non-qualified stock options issued to executive officers and (iv) performance-based restricted stock units issued to executive officers and key management employees. The Company has approximately 7,844,941 shares of its common stock reserved and available for grant under the Equity and Incentive Award Plan. +For details on the Company’s accounting policies for determining stock-based compensation expense, see Note (2) Summary of Significant Accounting Policies: (k) Stock-based compensation. Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the consolidated statements of operations and comprehensive loss however, for the year ended December 31, 2020, the Company presented $ 2.7 million within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions. +The following table summarizes stock-based compensation expense for the years ended December 31, 2021, 2020 and 2019 (in thousands of dollars): +Year Ended December 31, +2021 2020 2019 +Restricted stock awards +1,364 1,589 1,486 +Restricted stock units +14,674 19,201 20,426 +Non-qualified stock options +76 894 3,498 +Restricted stock performance-based stock unit awards +8,563 4,142 3,567 +Stock-based compensation +$ 24,677 $ 25,826 $ 28,977 +Tax benefit +( 4,751 ) ( 5,557 ) ( 6,954 ) +Stock-based compensation, net of tax +$ 19,926 $ 20,269 $ 22,023 +(a) Restricted stock awards +For the years ended December 31, 2021, 2020, and 2019 the Company recognized $ 1.4 million, $ 1.6 million, and $ 1.5 million respectively, of non-cash stock compensation expense. As of December 31, 2021, total unamortized compensation cost related to unvested restricted stock awards was $ 0.5 million, which the Company expects to recognize over the remaining weighted-average period of 0.45 years. +107 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Rollforward of restricted stock awards as of December 31, 2021 is as follows: +Number of Restricted Stock Awards +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2020 623 $ 2.27 +Shares issued 256 5.67 +Shares vested ( 669 ) 2.70 +Shares forfeited — — +Non-vested balance at December 31, 2021 210 $ 5.67 +(b) Restricted stock units +For the years ended December 31, 2021, 2020 and 2019, the Company recognized $ 14.7 million, $ 19.2 million and $ 20.4 million, respectively, of non-cash stock compensation expense. As of December 31, 2021, total unamortized compensation cost related to unvested restricted stock units was $ 21.9 million, which the Company expects to recognize over the remaining weighted-average period of 1.76 years. +Rollforward of restricted stock units as of December 31, 2021 is as follows: +Number of Restricted Stock Units +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2020 4,087 $ 6.12 +Units issued 5,909 4.08 +Units vested ( 1,682 ) 6.8 +Units forfeited ( 725 ) 4.54 +Non-vested balance at December 31, 2021 7,589 $ 4.53 +(c) Non-qualified stock options +For the years ended December 31, 2021, 2020 and 2019, the Company recognized $ 0.1 million, 0.9 million and $ 3.5 million, respectively, of non-cash stock compensation expense. As of December 31, 2021, the Company did no t have any unamortized compensation cost related to unvested stock options. +Rollforward of stock options as of December 31, 2021 is as follows: +Number of Stock Options +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2020 1,741 $ 4.86 +Options granted — — +Options exercised — — +Actual options forfeited — — +Options expired — — +Total outstanding at December 31, 2021 1,741 $ 4.86 +There were 1.7 million stock options exercisable or vested at December 31, 2021. +108 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Assumptions used in calculating the fair value of the stock options granted during the year are summarized below: +2019 Options Granted 2018 Options Granted 2017 Options Granted +Valuation assumptions: +Expected dividend yield 0 % 0 % 0 % +Expected equity volatility 49.6 % 46.3 % 51.5 % +Expected term (years) +7.3 - 8.1 +6 6 +Risk-free interest rate 1.7 % 2.7 % 1.6 % +Weighted average: +Exercise price per stock option +$ 19.09 - $ 26.41 +$ 15.31 $ 19.00 +Market price per share $ 4.55 $ 15.31 $ 14.49 +Weighted average fair value per stock option $ 0.74 $ 7.28 $ 6.16 +(d) Performance-based RSU awards +During the first and second quarter of 2021, the Company issued 550,899 and 1,473,736 of performance based RSUs to executive officers under its Equity Award Plans, which were fair valued at $ 3.2 million and $ 13.7 million using a Monte Carlo simulation method. Each vesting is subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period. The number of shares that may be earned at the end of the vesting period ranges from — % to 200 % of the target award amount, if the performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of December 31, 2021, total unamortized compensation cost related to unvested performance-based RSUs was $ 14.2 million, which the Company expects to recognize over the weighted-average period of 1.91 years. +Number of Performance-based RSU’s +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2020 1,268 $ 7.15 +Performance-based RSU’s issued 2,220 7.91 +Performance-based RSU’s vested ( 590 ) 3.36 +Performance-based RSU’s forfeited ( 50 ) 6.27 +Total outstanding at December 31, 2021 2,848 $ 8.56 +Assumptions used in calculating the fair value of the first quarter performance-based RSU’s granted during the year are summarized below: +2021 Performance based RSU’s Granted +Valuation assumptions: +Expected dividend yield +0 % +Expected equity volatility, including peers +55.2 % - 147.9 % +Expected term (years) +3 +Risk-free interest rate +0.2 % - 0.3 % +109 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(13) Stockholders’ Equity +(a) Vesting of Stock Awards +During the year ended December 31, 2021, 2,162,825 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company. +(b) C&J Merger +As described in Note (3) Mergers and Acquisitions, the Company completed the C&J Merger on October 31, 2019 for total consideration of approximately $ 485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of common stock issued to C&J stockholders with a value of $ 481.9 million and (ii) replacement share based compensation awards attributable to pre-Merger services with a value of $ 3.2 million. +(c) Alamo Acquisition +As described in Note (3) Mergers and Acquisitions, the Company completed the Alamo Acquisition on August 31, 2021 for total consideration of approximately $ 235.6 million, consisting of equity consideration in the form of 26 million shares of the Company’s common stock issue to Alamo ownership with a value of $ 82.3 million. +(14) Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items Interest rate +contract AOCI +December 31, 2020 $ ( 357 ) $ ( 12,753 ) $ ( 13,110 ) +Net income (loss) — 2,741 2,741 +Other comprehensive loss 407 1,703 2,110 +December 31, 2021 $ 50 $ ( 8,309 ) $ ( 8,259 ) +The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended December 31, 2021, 2020 and 2019 (in thousands of dollars): +Year Ended December 31, Affected line item +in the consolidated +statements of +operations and +comprehensive loss +2021 2020 2019 +Interest rate derivatives, hedging +$ ( 2,741 ) $ ( 2,334 ) $ 239 Interest expense +(15) Loss per Share +Basic loss per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +Diluted loss per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +110 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows (in thousands): +Year Ended December 31, +2021 2020 2019 +Numerator: +Net loss $ ( 119,423 ) $ ( 346,883 ) $ ( 106,157 ) +Denominator: +Basic weighted-average common shares outstanding (1) +224,401 213,795 122,977 +Dilutive effect of restricted stock awards 145 199 43 +Dilutive effect of RSUs granted under stock incentive plans 1,140 39 81 +Dilutive effect of performance-based restricted stock awards granted under the Equity Plan 625 1,041 — +Diluted weighted-average common shares outstanding 226,311 215,074 123,101 +(1) As a result of the net loss incurred by the Company for the years ended December 31, 2021, 2020 and 2019, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Leases +The Company adopted the new leases standard (ASC 842) effective January 1, 2019, using the modified retrospective transition method. The Company recognized a lease right-of-use asset and lease liability of approximately $ 61.0 million on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated statements of operations and comprehensive loss or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. As such the Company has elected to account for the combined components of its customer contracts under the revenue recognition standard. In connection with the adoption of this standard, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under the new lease standard and that the Company properly applies the standard in accounting for and reporting on all its qualifying leases. +The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has finance leases for its light duty vehicles and frac pumps. The Company acquired the majority of its finance leases as part of the Alamo Acquisition and inherited Alamo’s lease classification as of the time of the acquisition. +The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 to 13 years, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees. +111 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The components of the Company's lease costs are as follows: +(Thousands of Dollars) +Year ended +December 31, 2021 +Year ended +December 31, 2020 +Operating lease cost $ 19,607 $ 15,702 +Finance lease cost: +Amortization of right-of-use assets 1,418 2,027 +Interest on lease liabilities 584 269 +Total finance lease cost 2,002 2,296 +Short-term and Variable lease cost (1) +6,537 7,469 +Sublease income +— — +Total lease cost +$ 28,146 $ 25,467 +(1) Cost from variable amounts excluded from determination of lease liability. +Supplemental cash flows related to leases are as follows: +(Thousands of Dollars) +Year ended +December 31, 2021 +Year ended +December 31, 2020 +Cash paid for amounts included in the measurements of lease liabilities +Operating cash flows from operating leases $ 14,507 $ 21,049 +Operating cash flows from finance leases 538 240 +Financing cash flows from finance leases 4,155 3,752 +Weighted average remaining lease terms are as follows: +Year ended +December 31, 2021 +Year ended +December 31, 2020 +Operating leases 6.98 years 4.72 years +Finance leases 2.98 years 1.88 years +Weighted average discount rate on the Company's lease liabilities are as follows: +Year ended +December 31, 2021 +Year ended +December 31, 2020 +Operating leases 6.83 % 8.65 % +Finance leases 4.00 % 5.79 % +112 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Maturities of the Company's lease liabilities as of December 31, 2021, per ASU 2016-02, were as follows: +(Thousands of Dollars) +Year ending December 31, +Operating leases +Finance leases +2022 $ 8,709 $ 13,001 +2023 5,560 17,256 +2024 3,497 10,042 +2025 2,929 923 +2026 2,275 — +Thereafter 12,022 — +Total undiscounted remaining minimum lease payments 34,992 41,222 +Less imputed interest ( 7,094 ) ( 2,443 ) +Total discounted remaining minimum lease payments 27,898 $ 38,779 +During the year ended December 31, 2021, the Company entered into two separate agreements with a supplier to sell some diesel-fueled equipment in exchange for credits used to purchase Tier 4 DGB conversion and conversion kits. As part of the agreement, the Company would lease back the equipment for 18 months. The Company determined that the first agreement did not meet the criteria to be classified as a sale-leaseback transaction and was deemed a failed sale-leaseback. This resulted in the recognition of a finance liability of $ 15.8 million classified in other current liabilities and other non-current liabilities in the consolidated balance sheets. The second agreement met the criteria to be classified as a sale-leaseback transaction and resulted in the recognition of a right-of-use asset and a finance lease liability of $ 3.0 million and a finance liability of $ 1.9 million. +As of December 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties. +(17) Income Taxes +The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions: +(Thousands of Dollars) +Year Ended December 31, +2021 2020 2019 +Domestic $ ( 157,713 ) $ ( 357,250 ) $ ( 106,879 ) +Foreign 39,976 11,837 1,727 +$ ( 117,737 ) $ ( 345,413 ) $ ( 105,152 ) +The components of the Company’s income tax provision are as follows: +113 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2021 2020 2019 +Current: +State $ ( 54 ) $ ( 297 ) $ 709 +Foreign 1,677 1,858 627 +Total current income tax provision $ 1,623 $ 1,561 $ 1,336 +Deferred: +Federal $ 55 $ ( 158 ) $ ( 239 ) +State 8 53 ( 92 ) +Foreign — 14 — +Total deferred income tax provision 63 ( 91 ) ( 331 ) +$ 1,686 $ 1,470 $ 1,005 +The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated statements of operations and comprehensive loss. State income tax benefit is offset by state deferred tax asset calculation adjustment which negates the expected state income tax benefit impact on the financials. The Company’s effective tax rate for 2021 of ( 1.43 )% differs from the statutory rate, primarily due to state taxes, foreign withholding taxes, and a change in the valuation allowance. The Company’s effective tax rate for 2020 was ( 0.43 )%. +(Thousands of Dollars) +December 31, +2021 December 31, +2020 December 31, +2019 +Income tax provision computed at the statutory federal rate $ ( 24,724 ) $ ( 72,537 ) $ ( 22,082 ) +Reconciling items: +State income taxes, net of federal tax benefit ( 1,959 ) ( 12,222 ) ( 1,463 ) +Deferred tax asset valuation adjustment 25,306 82,557 14,987 +Permanent differences 2,796 4,589 9,962 +Foreign withholding taxes 1,683 1,870 627 +Other ( 1,416 ) ( 2,787 ) ( 1,026 ) +Income tax provision $ 1,686 $ 1,470 $ 1,005 +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax +114 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +rates. +(Thousands of Dollars) +Year Ended December 31, +2021 2020 2019 +Deferred tax assets: +Stock-based compensation $ 6,247 $ 4,972 $ 4,124 +Net operating loss and other carry-forwards 364,882 284,151 196,949 +Accruals and other 14,472 15,535 21,411 +PPE & Intangibles — — 1,474 +Gross deferred tax assets 385,601 304,658 223,958 +Valuation allowance ( 318,260 ) ( 294,101 ) ( 223,419 ) +Total deferred tax assets $ 67,341 $ 10,557 $ 539 +Deferred tax liability: +PP&E and intangibles $ ( 65,163 ) $ ( 8,317 ) $ — +Prepaids and other ( 2,241 ) ( 2,240 ) ( 645 ) +Total deferred tax liability ( 67,404 ) ( 10,557 ) ( 645 ) +Net deferred tax liability $ ( 63 ) $ — $ ( 106 ) +As of December 31, 2021, NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $ 1.5 billion, of which, $ 380.2 million, if not utilized, will begin to expire in the year 2031. The remaining federal NOLS can be carried forward indefinitely. The total deferred tax asset for net operating loss and other carryforwards also includes approximately $ 40.9 million of interest expense carryovers with indefinite life. Of the federal NOLs that can be carried forward indefinitely, $ 350.8 million is related to the Company’s current year federal tax loss. The Company has state NOLS of $ 617.0 million, which if not utilized, will expire in various years between 2025 and 2038. Additionally, the Company has $ 18.0 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2034. +As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $ 8.5 million. In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. As of December 31, 2021, it is expected that all of the Company’s pre-change NOLs of $ 398.8 million incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration. The Company’s pre-change NOLs subject to expiration comprise $ 275.8 million out of the total $ 398.8 million. +C&J Energy Services, Inc. had Pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $ 8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. including built-in loss through December 31, 2021, total $ 443.3 million of which $ 104.4 million are subject to expiration, but not expected to expire as a result of the IRC Section 382 limitation. +ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset +115 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2021 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of NexTier Oilfield Solutions Inc., excluding deferred tax liabilities related to certain indefinite lived assets. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of December 31, 2021, 2020, and 2019 were $ 318.3 million, $ 294.1 million and $ 223.4 million, respectively. +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2021 $ 294,101 +Charge as (benefit) expense to income tax provision for current activities 25,306 +Changes to other comprehensive loss ( 1,147 ) +Valuation allowance as of December 31, 2021 $ 318,260 +The Company may be subject to the Global Intangible Low-Taxed Income (“GILTI”) as a result of its foreign operations. The Company accounts for any U.S. taxable income inclusion under GILTI as a permanent book/tax difference. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2021, 2020 and 2019. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2018 through December 31, 2020 for federal tax purposes and for the years ended December 31, 2017 through December 31, 2020 for state tax purposes. +(18) Commitments and Contingencies +As of December 31, 2021, and 2020, the Company had $ 1.0 million and $ 4.9 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $ 54.1 million and $ 23.4 million, as of December 31, 2021, and 2020, respectively. +As of December 31, 2021, the Company has a letter of credit of $ 23.2 million under the 2019 ABL Facility. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $ 47.8 million, $ 77.6 million and $ 160.0 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2021, 2020 and 2019. +116 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2021 are listed below: +(Thousands of Dollars) +Year-end December 31, +2022 $ 33,886 +2023 5,160 +2024 1,190 +2025 — +2026 — +$ 40,236 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues and motor vehicle accidents. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its consolidated financial position, results of operations or liquidity. +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Regulatory Audits +Prior to the consummation of the C&J Merger, the Company and C&J had been notified by certain state taxing authorities that these taxing authorities would be conducting routine sales and use tax audits of certain wholly owned operating subsidiaries of the Company for tax periods ranging from January 2011 through December 2019. As of December 31, 2020, the Company had recorded estimates of potential assessments for each audit totaling in the aggregate approximately $ 33.0 million. For one audit, in particular, the Company disagreed with many aspects of the state’s assessment and began to contest the state’s position through administrative procedures. During the first quarter of 2021, the Company obtained additional information that resulted in a reduction of the Company's accrual related to this tax audit by $ 13.3 million. During the second quarter of 2021, the Company further reduced the accrual related to this tax audit by $ 8.8 million, after taking into account additional information obtained, including refund claims relating to such periods. The Company received a final settlement offer from Texas Attorney General Office on September 8, 2021 for $ 3.7 million, which resulted in an additional reduction to the accrual by $ 2.8 million. These reductions were recorded in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss. +117 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Alamo is subject to regulatory audits by state taxing jurisdictions it operates in. There was an ongoing tax audit when the Alamo Acquisition was completed. The Company evaluated the potential assessment and exposures for all taxing jurisdictions and recorded an estimate of $ 17.7 million. The estimate is included in the purchase price allocation disclosed under Note (3) Alamo Acquisition. +(19) Related Party Transactions +Cerberus Operations and Advisory Company, Cerberus Capital Management, L.P. and Cerberus Technology Solutions LLC, affiliates of the Company’s principal equity holder, provide certain consulting services to the Company. The Company paid $ 0.6 million, $ 2.2 million and $ 4.1 million during the years ended December 31, 2021, 2020 and 2019, respectively. +In connection with the Company’s research and development initiatives, the Company engaged in transactions with its equity-method investee. As of December 31, 2020, the Company had purchased $ 1.7 million of shares in its equity-method investee. In the first quarter of 2020, the Company had enough evidence to believe that it would not be able to recover its $ 1.7 million investment in its equity-method investee and completely impaired it. The impairment is recorded in impairment expense in the consolidated statement of operations and comprehensive loss. For additional information, see Note (2) Summary of Significant Accounting Policies. +As part of the Purchase Agreement, the Company agreed to provide certain post-closing services to Alamo Frac Holdings, LLC valued as $ 30.0 million in the aggregate . During the year ended December 30, 2021, the Company provided services to Alamo Frac Holdings, LLC of $ 6.3 million as part of the Purchase Agreement. The Company has a remaining customer contract liability related to these services of $ 23.7 million as of December 31, 2021. +(20) Retirement Benefits and Nonretirement Postemployment Benefits +Defined Contribution Plan +The Company sponsors two different 401(k) defined contribution retirement plans covering eligible employees. The Company makes matching contributions of up to 3.5 % of eligible compensation, but suspended the Company matching contribution to the 401(k) plans as of May 1, 2020. Eligible employees can make annual contributions to one of the two plans for which they are eligible up to the maximum amount allowed by current federal regulations, as noted in the plan documents. Due to the suspension of the matching contribution plan, the Company did no t make any contributions during the year ended December 31, 2021. Contributions made by the Company related to the years ended December 31, 2020, and 2019 were $ 4.5 million and $ 8.1 million, respectively. +Severance +The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $ 2.1 million, $ 27.0 million and $ 16.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. +(21) Business Segments +In accordance with ASC No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available. +In 2019, due to the transformative nature of the C&J Merger, the CODM changed the way in which the Company is managed, including the level at which to make performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. On March 9, 2020 the Company announced it had completed the divestiture of its Well Support Services (“WSS”) segment. As a result of the changes to +118 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +operating segments, the Company revised its reportable segments subsequent to the completion of the C&J Merger and prior to the WSS divestiture, the Company’s revised reportable segments were: (i) Completion Services and (ii) Well Construction and Intervention Services (“WC&I”) and (iii) Well Support Services. Subsequent to the WSS divestiture, the Company’s reportable segments were (i) Completion Services, and (ii) Well Construction and Intervention Services. This segment structure reflects the financial information and reports used by the Company’s management, specifically including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions. As a result of the revised reportable segment structure subsequent to the C&J merger, the Company has restated the corresponding items of segment information for all periods presented. +The following is a description of each reportable segment: +Completion Services +The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) wireline and pumpdown services; and (3) completion support services, which includes the Company's research and technology department. +Well Construction and Intervention Services +The Company’s WC&I segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. +Historical Segment: Well Support Services +The Company’s Well Support Services segment consisted of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. On March 9, 2020, the Company completed the divestiture of its Well Support Services segment for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, ("WSS Notes") previously issued by Basic. This resulted in a gain on divestiture of $ 8.7 million. The gain is recorded within (Gain) Loss on Disposal of Assets on the c onsolidated statements of operations and comprehensive loss. Income per share for the three months ended March 31, 2020 attributable to the divested Well Support Services segment was less than $ 0.01 . On July 29, 2020, the Company received the escrowed cash amount in final settlement for working capital reconciliation. +119 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2021 2020 2019 +Operations by reportable segment +Adjusted gross profit (loss): +Completion Services (1) +$ 165,867 $ 168,276 $ 401,845 +WC&I (1) +10,016 9,731 7,812 +Well Support Services (1) +— 12,338 7,967 +Total adjusted gross profit $ 175,883 $ 190,345 $ 417,624 +(1) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +Year ended December 31, 2021 +Completion Services WC&I Well Support Services Total +Revenue $ 1,324,888 $ 98,553 $ — $ 1,423,441 +Cost of Services 1,165,881 89,440 — 1,255,321 +Gross profit excluding depreciation and amortization 159,007 9,113 — 168,120 +Management adjustments associated with cost of services (1) +6,860 903 — 7,763 +Adjusted gross profit (2) +$ 165,867 $ 10,016 $ — $ 175,883 +(1) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +Year ended December 31, 2020 +Completion Services WC&I Well Support Services Total +Revenue $ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +Cost of Services 893,785 93,198 45,591 1,032,574 +Gross profit excluding depreciation and amortization 152,529 5,140 12,338 170,007 +Management adjustments associated with cost of services (1) +15,747 4,591 — 20,338 +Adjusted gross profit (2) +$ 168,276 $ 9,731 $ 12,338 $ 190,345 +(1) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +120 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year ended December 31, 2019 +Completion Services WC&I Well Support Services Total +Revenue $ 1,709,934 $ 63,039 $ 48,583 $ 1,821,556 +Cost of Services 1,308,089 55,227 40,616 1,403,932 +Gross profit excluding depreciation and amortization 401,845 7,812 7,967 417,624 +Management adjustments associated with cost of services (3) +— — — — +Adjusted gross profit (2) +$ 401,845 $ 7,812 $ 7,967 $ 417,624 +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +(3) Adjustments relate to integration costs recorded in costs of services as a result of the RSI asset acquisition in 2018. +(Thousands of Dollars) +December 31, +2021 December 31, +2020 +Total assets by segment: +Completion Services +$ 1,201,265 $ 689,814 +WC&I +60,195 62,959 +Well Support Services +— — +Corporate and Other +196,121 405,115 +Total assets +$ 1,457,581 $ 1,157,888 +Goodwill by segment: +Completion Services +$ 192,780 $ 104,198 +WC&I +— — +Well Support Services +— — +Corporate and Other +— — +Total goodwill +$ 192,780 $ 104,198 +(22) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard on January 1, 2021, and there was no impact on the financial statements. +121 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(b) Recently Issued Accounting Standards +In October 2021, the FASB issued ASU 2021-08 “Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. ASU 2021-08 requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard is effective beginning on December 15, 2022. The Company does not expect ASU 2021-08 to have any impact on its consolidated financial statements. +In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands on the US GAAP guidance on contract modifications and hedge accounting related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. +In October 2020, the FASB issued ASU 2020-10 “Codification Improvements”. ASU 2020-10 improves the clarity and consistency of various provisions in the Codification. This standard was effective for fiscal years beginning after December 15, 2020. ASU 2020-10 did not have any impact on the its consolidated financial statements. +In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)” (“ASU 2020-06”). ASU 2020-06 simplifies the guidance on the issuer's accounting for convertible debt instruments and convertible preferred stock. This standard was effective for fiscal years beginning after December 15, 2021. ASU 2020-06 did not have any impact on the Company's consolidated financial statements. +In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. +In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)”, which clarifies the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. This standard is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This standard is effective for fiscal years beginning after December 15, 2021 and the adoption is not expected to have any impact on the Company's consolidated financial statements. +122 +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by SEC guidance for newly acquired businesses, the scope of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, has excluded the acquired business of Alamo Pressure Pumping, LLC and its subsidiaries (which we refer to herein as “Alamo”). We completed the Alamo Acquisition on August 31, 2021, and the excluded business represents $413.6 million of total assets and total revenues of $172.1 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Based on our assessment, we believe that as of December 31, 2021, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +As disclosed in Note (3) Alamo Acquisition of Part II, “ Item 8. Financial Statements and Supplmental Data”, we acquired Alamo on August 31, 2021. As part of the Company’s ongoing integration activities, the Company’s financial reporting controls and procedures are in the process of being implemented at Alamo. The two companies maintained separate accounting systems through December 31, 2021. The consolidated financial statements presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +123 +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +Continuing Award Program for Qualified Retirees +On February 17, 2022, the compensation committee of our board of directors adopted and approved a Continuing Award Program to provide continued vesting for long-term and short-term incentive awards upon the retirement of Qualified Retirees (the “Continuing Award Program”). The Continuing Award Program is intended and designed to promote a smooth transition for eligible employees nearing retirement. The key highlights of the program are as follows: +• Eligible employees who are at least age 55 and who have at least 5 years of service with the Company (with at least three of the most recent years being with the Company) are eligible for the Continuing Award Program if their combined age and service equals 65. +• Eligible employees may notify the Company of their intended retirement no more than 1 year in advance of retirement and no less than 6 months in advance of their intended retirement. +• If eligible employees comply with the notice requirements and the Company accepts their application for retirement, the eligible employees will continue to vest in their long-term incentive awards through the end of the applicable vesting or performance period for any long-term incentive awards that were granted at least 6 months before their notice date (i.e., they are no longer required to perform services to continue to vest in such awards following retirement). +• Eligible employees who have at least 4 months of service during the short-term incentive plan year during which they retire will also remain eligible for their short-term incentive award for such year. +The remaining terms and conditions of the Company’s long-term and short-term incentive programs remain the same. Accordingly, any performance metrics will continue to apply and payment or settlement of any outstanding awards will occur at the same time and on the same conditions as if the employee had not retired. +The foregoing description of the Continuing Award Program does not purport to be complete and is qualified in its entirety by reference to the full text of the Continuing Award Program, which is filed as Exhibit 10.44 to this Annual Report on Form 10-K and is incorporated herein by reference. +Leadership Severance Program +On February 17, 2022, the compensation committee of our board of directors also adopted and approved a Leadership Severance Program (the “Severance Program”) to provide severance commitments to its named executive officers, as well as its other officers and vice presidents. Under the Severance Program, named executive officers will be eligible for 1.5 times their annual base salary and target short-term incentive award payable in 12 equal installments and 12 months of subsidized COBRA following a termination without Cause (as defined in the Severance Program) or by the executive for Good Reason (as defined in the Severance Program). The named executive officers will be eligible for a prorated short-term incentive award for the year of termination and will also be eligible to fully vest in any RSUs and vest in any PSUs based on actual performance. In the event that the termination of employment without Cause or by the executive for Good Reason occurs within 2 years following a Change in Control (as defined in the Severance Program), the multiple of annual base salary and target short-term incentive award will be increased to 2 times and subsidized COBRA coverage will be provided for 18 months. The named executive officers would also receive the target short-term incentive award for the year of termination and fully vest in any RSUs and vest in any PSUs based on the greater of target or actual performance. In the event of a named executive officer’s disability or death, the executive would be entitled to a prorated short-term incentive award for the year of disability or death and fully vest in any RSUs and vest in any PSUs based on target performance. +124 +The Severance Program provides similar severance commitments to other officers and vice presidents at reduced levels. All Severance Program benefits are subject to an eligible employee’s timely execution and non-revocation of a release and waiver agreement in favor of the Company and are subject to the Company’s clawback policy. +The foregoing description of the Severance Program does not purport to be complete and is qualified in its entirety by reference to the full text of the Severance Program, which is filed as Exhibit 10.45 to this Annual Report on Form 10-K and is incorporated herein by reference. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +None. +125 +PART III +126 +Item 10. Directors, Executive Officers and Corporate Governance +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2021. +127 +Item 11. Executive Compensation +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2021. +128 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2021. +129 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed than no later 120 days after December 31, 2021. +130 +Item 14. Principal Accountant Fees and Services +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2021. +131 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +69 +Consolidated Balance Sheets +74 +Consolidated Statements of Operations and Comprehensive Loss +75 +Consolidated Statements of Changes in Stockholders’ Equity +76 +Consolidated Statements of Cash Flows +77 +Notes to Consolidated Financial Statements +79 +Financial Statement Schedules: +The schedules listed in Rule 5-04 of Regulation S-X (17 CFR 210.5-04) have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. +132 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Exhibit +Number Exhibit Description +2.1 +Agreement and Plan of Merger, dated as of June 16, 2019, by and among C&J Energy Services, Inc., Keane Group, Inc. and King Merger Sub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2019). +2.2 +Purchase Agreement, dated August 4, 2021, by and among NexTier Completion Solutions Inc., NexTier Oilfield Solution Inc., Alamo Frac Holdings, LLC, Alamo Pressure Pumping, LLC and the Owner Group identified therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +3.1 +Certificate of Incorporation of Keane Group, Inc. dated October 13, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +3.2 +Certificate of Amendment to Certificate of Incorporation of Keane Group, Inc. dated October 31, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +3.3 +Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +3.4 +First Amendment to Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 2, 2020). +4.1 +Second Amended and Restated Stockholders' Agreement, dated October 31, 2019, by and among Keane Group, Inc. and Keane Investor Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +4.2 +Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.1 +Second Amended and Restated Asset-Based Revolving Credit Agreement, dated October 31, 2019, by and among NexTier Oilfield Solutions Inc. (f/k/a Keane Group, Inc.), Keane Group Holdings, LLC, as the Lead Borrower, certain other subsidiaries of NexTier Oilfield Solutions Inc. as additional borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +10.2 +Term Loan Agreement, dated May 25, 2018, by and among Keane Group Inc., as the Parent, Keane Group Holdings, LLC, as the Lead Borrower, the Subsidiary Guarantors party thereto, Barclays Bank PLC, as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 29, 2018). +10.3 +Master Loan and Security Agreement, dated August 20, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 7, 2021). +10.4 † +Keane Management Holdings LLC Management Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.5 † +NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan, dated effective October 31, 2019 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed on November 1, 2019). +10.6 † +Amendment No. 1 to NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +133 +10.7 † +NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (Amended and Restated 2021) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 5, 2021). +10.8 † +Form of Keane Group, Inc. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.9 † +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.10 † +Form of Director Services Agreement (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.11 † +Keane Group, Inc. Form of Restricted Stock Award (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 26, 2017). +10.12 † +Keane Group, Inc. Form of Deferred Stock Award Agreement (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed on March 21, 2017). +10.13 † +Form of Keane Group, Inc. Equity and Incentive Award Plan Amendment to Deferred Stock Award Agreement (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2019). +10.14 † +Form of RSU Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.15 † +Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.16 † +Keane Group, Inc. Form of Restricted Stock Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.17 † +Keane Group, Inc. Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.18 † +Keane Group, Inc. Form of Restricted Stock Unit Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2019). +10.19 † +Keane Group, Inc. Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.20 † +Form of Amendment to Keane Group, Inc. Restricted Unit Award Agreements with each of James Stewart, Greg Powell, Paul Debonis and Kevin McDonald (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.21 † +Form of Amendment to Keane Group, Inc. Non-Qualified Stock Option Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.22 † +C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on January 13, 2017). +10.23 † +First Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.24 † +Second Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.25 † +Restricted Share Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.2 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.26 † +Restricted Share Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.3 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.27 † +Nonqualified Stock Option Agreement (C&J Executive Employment Agreements) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.5 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +134 +10.28 † +Nonqualified Stock Option Agreement (Restrictive Covenants) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.6 to C&J Energy Services Inc.’s Annual Report on Form 8-K filed on February 6, 2017). +10.29 † +Performance Share Agreement under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.10 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.30 † +Performance Share Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.11 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.31 † +Performance Share Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.12 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.32 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.13 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.33 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.14 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.34 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.15 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.35 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier II) under 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.16 to C&J Energy Services Inc’s Annual Report on Form 10-K filed on February 27, 2019). +10.36 † +Form of RSU Award Agreement 2020 (Executive) (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.37 † +Form of PSU Agreement 2020 (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.38 † +Form of RSU Award Agreement 2021 (incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +10.39 † +Form of PSU Award Agreement 2021 (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +10.40 †* +Form of Stock Payment Award Agreement. +10.41 †* +Form of RSU Award Agreement 2022. +10.42 †* +Form of PSU Award Agreement 2022. +10.43 †* +Form of Performance Award Agreement 2022. +10.44 †* +Continuing Award Program for Qualified Retirees. +10.45 †* +Leadership Severance Program. +10.46 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Robert Drummond (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-4 filed on July 16, 2019). +10.47 † +Amended Form of Restricted Unit Award Agreement for R. Drummond (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). +10.48 † +Third Amended and Restated Employment Agreement, dated June 16, 2019, by and between Keane Group, Inc. and Greg Powell (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-4 filed on July 16, 2019). +10.49 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Kevin M. McDonald (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-4 filed on July 16, 2019). +135 +10.50 † +Amended and Restated Employment Agreement, dated as of November 1, 2019, by and between NexTier Oilfield Solutions Inc. and Ian J. Henkes (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.51 † +Second Amended and Restated Employment Agreement, dated January 13, 2021, by and between NexTier Oilfield Solutions Inc. and Kenny Pucheu (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on January 15, 2021). +10.52 † +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group Inc. and James C. Stewart (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.53 † +Separation Agreement for James Stewart (incorporated by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.54 † +Employment Agreement, dated February 20, 2017, by and between KGH Intermediate Holdco II, LLC and Phung Ngo-Burns (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 4, 2017). +10.55 † +Amendment to Employment Agreement of Phung Ngo-Burns, dated March 20, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 24, 2020). +10.56 † +Employment Agreement, dated August 4, 2021, by and between Alamo Pressure Pumping, LLC and Michael Joseph McKie (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2021). +10.57 † +Form of Earnout Agreement by and between NexTier Completion Solutions Inc. and Alamo Frac Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +10.58 +Form of Registration Rights Agreement by and between NexTier Oilfield Solutions Inc. and Alamo Frac Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +21.1 * +Schedule of Subsidiaries of NexTier Oilfield Solutions Inc. +23.1 * +Consent of KPMG LLP, Independent Registered Public Accounting Firm. +31.1 * +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2 * +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1 * +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS XBRL Instance Document +101.SCH XBRL Taxonomy Extension Schema Document +101.CAL XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB XBRL Taxonomy Extension Label Linkbase Document +101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF XBRL Taxonomy Extension Definition Linkbase Document +104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +Item 16. Form 10-K Summary +None. +136 +137 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 23, 2022. +NexTier Oilfield Solutions Inc. +(Registrant) +By: /s/ Robert W. Drummond +Robert W. Drummond +President, Chief Executive Officer and Director +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +138 +Signature Title Date +/s/ Robert W. Drummond President, Chief Executive Officer and Director +(Principal Executive Officer) February 23, 2022 +Robert W. Drummond +/s/ Kenneth Pucheu Executive Vice President and Chief Financial Officer +(Principal Financial Officer) February 23, 2022 +Kenneth Pucheu +/s/ Oladipo Iluyomade Vice President, Chief Accounting Officer and Treasurer +(Principal Accounting Officer) February 23, 2022 +Oladipo Iluyomade +/s/ James C. Stewart Director February 23, 2022 +James C. Stewart +/s/ Stuart Brightman Director February 23, 2022 +Stuart Brightman +/s/ Gary M. Halverson Director February 23, 2022 +Gary M. Halverson +/s/ Patrick Murray Director February 23, 2022 +Patrick Murray +/s/ Amy H. Nelson Director February 23, 2022 +Amy H. Nelson +/s/ Mel Riggs Director February 23, 2022 +Mel Riggs +/s/ Bernardo Rodriguez Director February 23, 2022 +Bernardo Rodriguez +/s/ Michael Roemer Director February 23, 2022 +Michael Roemer +/s/ Scott Wille Director February 23, 2022 +Scott Wille +139 \ No newline at end of file diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/filing_metadata.csv b/raw/filings/0001688476/2021/0001688476-22-000061/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e6fb74ce1d1e485ba080092f8d5835eba2dd5f56 --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2022-02-23,2021-12-31,2022-02-23T16:29:37.000Z,0001688476-22-000061,nex-20211231.htm,10-K,17057068,1,1,https://www.sec.gov/Archives/edgar/data/1688476/000168847622000061/nex-20211231.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847622000061/,2021,2021,1 diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/item1.txt b/raw/filings/0001688476/2021/0001688476-22-000061/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..1fe88a2941fe8ee8d2d6a785235adbfd9ae402e0 --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/item1.txt @@ -0,0 +1,108 @@ +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +On October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” Since 2013, our growth through acquisition strategy has resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 2.1 million hydraulic horsepower. +In March of 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of the following business lines: (1) cementing services and (2) coiled tubing services. +On August 31, 2021, we completed the acquisition of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. In 2021, we launched our new Power Solutions business, which focuses on gas sourcing, compression, transport, decompression, treatment and related services for our fracturing operations. We believe this integration solution will assist our customers to reduce emissions at the wellsite and throughout their operations. +Wireline Technologies. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. +In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. We offer a broad range of coiled tubing services to help customers accomplish a wide variety of goals in their horizontal completion, workover and well maintenance projects. The majority of our coiled tubing fleet consists of large diameter coil, meaning two inches or larger in diameter, which allows us to service wells with longer lateral lengths. Our coiled tubing services allow customers to complete projects quickly and safely across a wide spectrum of pressures, without having to shut in their wells. +Well Support Services segment +5 +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Rig Services . As part of our services that helped prolong the productive life of an oil or gas well, we operated one of the largest rig fleets in the United States. These rigs were involved in the routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. Our rig fleet was also used in the process of permanently shutting-in oil or gas wells that were at the end of their productive lives. +Fluids Management . We provided a full range of fluid services, including the storage, transportation and disposal of various fluids used in various phases including drilling, completion and workover of oil and gas wells. Our fleet of trucks and trailers and portable tanks enabled us to rapidly deploy our equipment across a broad geographic area. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes stockholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services and power solutions that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase stockholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform and evolving power solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create stockholder value. +For further discussion on the business strategies we plan to continue executing in 2022, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +6 +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2021, revenue from one customer individually represented approximately 14% of the Company’s consolidated revenue. This customer represented $193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% and collectively represented 29% of the Company’s consolidated revenue. These two customers represented $188.6 million and $160.5 million, respectively, of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2019, four customers individually represented more than 10% and collectively represented 55% of the Company’s consolidated revenue. These four customers represented $346.9 million, $242.1 million, $213.4 million, and $194.7 million, respectively, of our consolidated revenue in the Completions Services segment. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for excess capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each. Utilization and pricing for our services have, from time to time, been negatively affected by increases in supply relative to demand in our operating areas and geographic markets. This was exacerbated in 2020 and 2021 due to the COVID-19 pandemic and other oil and gas market drivers. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., ProFrac Services, and U.S. Well Services. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution (such as duel fuel capabilities), and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +7 +For the year ended December 31, 2021, purchases from our largest supplier represented approximately 5% of the Company’s overall purchases. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art innovation center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across the majority of our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have common law and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems. +Human capital resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +8 +General +As of December 31, 2021, we had 3,340 employees, of which, approximately 82% were compensated on an hourly basis. This was approximately a 70% increase from the 1,969 employees we had on December 31, 2020. Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices on a company-wide level. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2021, we achieved a total recordable incident rate of 0.84, which is less than the 0.90 incident rate derived from an industry average from 2017 to 2020. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well as mental and behavioral health resources, including on-demand access to an Employee Assistance Program for employees and their dependents. +In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the vast majority of our employees work from home for periods of time, while implementing additional safety measures for employees continuing critical on-site work. To maintain minimized exposure points, a flex-work program was developed and deployed in an effort to balance time in the office with remote work from home. To mitigate COVID-19 exposure further pro-active measures have been implemented including, among other things, additional hand sanitizer stations; temperature check kiosks at the entrance to our corporate headquarters; eliminating guests to campuses; shifting all meetings to a virtual format; closing meeting rooms and common/shared areas in the office such as cafeterias and fitness rooms; mandatory face mask wearing (unless the person is eating or alone at work station); installation of signage for CDC guideline distancing and other reminders, and established absence management and tracing protocols to reduce transmission risk. Frequent and consistent communication efforts reinforce the importance of these health and safety measures. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture where employees are empowered to drive their career progression, supporting professional development and providing an on-demand learning platform. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +9 +Material government regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +10 +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 117th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +11 +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency—potentially in coordination with other responsible agencies—will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +12 +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas wells. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas industry. +While the long-term trajectory of future greenhouse regulations remains unsettled, the current administration has clearly articulated a goal of reducing greenhouse gas emissions and use. For example in January of 2021, President Biden issued an Executive Order that, among other things, declared climate change to be a crisis requiring significant short-term global reduction in greenhouse gas emissions and net-zero global emissions by mid-century or before. The order instructs every government agency to make combatting climate change an essential element of its agenda. In response, in November 2021, EPA proposed further regulation of methane emissions from the oil and gas sector, including new performance standards for certain new and existing sources. In October 2021, the Department of the Interior released a climate adaptation and resilience plan, outlining how it intends to address climate change risks, impacts, and vulnerabilities, including transitioning to a clean energy economy. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely +13 +impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the new rule regarding respirable silica sand, which required the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted +14 +with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not currently anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +15 +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +16 \ No newline at end of file diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/item13.txt b/raw/filings/0001688476/2021/0001688476-22-000061/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..55beb25a7ea469e15d9fbabb56afac58da94527f --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +Incorporated herein by reference from the Company’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which will be filed than no later 120 days after December 31, 2021. +130 \ No newline at end of file diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/item9a.txt b/raw/filings/0001688476/2021/0001688476-22-000061/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b97be1a7d7f507c20d5511957ac6553fe61a85f0 --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/item9a.txt @@ -0,0 +1,12 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by SEC guidance for newly acquired businesses, the scope of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, has excluded the acquired business of Alamo Pressure Pumping, LLC and its subsidiaries (which we refer to herein as “Alamo”). We completed the Alamo Acquisition on August 31, 2021, and the excluded business represents $413.6 million of total assets and total revenues of $172.1 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Based on our assessment, we believe that as of December 31, 2021, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +As disclosed in Note (3) Alamo Acquisition of Part II, “ Item 8. Financial Statements and Supplmental Data”, we acquired Alamo on August 31, 2021. As part of the Company’s ongoing integration activities, the Company’s financial reporting controls and procedures are in the process of being implemented at Alamo. The two companies maintained separate accounting systems through December 31, 2021. The consolidated financial statements presented in this Annual Report on Form 10-K were prepared using information obtained from these separate accounting systems. +123 +Except as described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/rp_note.txt b/raw/filings/0001688476/2021/0001688476-22-000061/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2021/0001688476-22-000061/rpt_disclosure.txt b/raw/filings/0001688476/2021/0001688476-22-000061/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..3902a17ddd5e2d31965c7161aa19e00e87dd054a --- /dev/null +++ b/raw/filings/0001688476/2021/0001688476-22-000061/rpt_disclosure.txt @@ -0,0 +1,89 @@ +Related Person Transactions +Certain Related Party Transactions +We +paid Cerberus Operations & Advising Company LLC (“Cerberus”) and its affiliates (collectively “COAC”), fees totaling approximately $0.6 million during 2021 for consulting services provided in connection with +improving the Company’s operations and information technology services, including ongoing support, development, and maintenance. We may retain COAC to provide similar services in the future. This amount includes fees paid to Cerberus pursuant +to a services agreement with respect to Mr. Wille in consideration for his service on the Board. Mr. Wille is an employee of Cerberus, and funds managed by one or more affiliates of Cerberus indirectly own a substantial portion of our +equity through their ownership of Keane Investor Holdings LLC. +As part of the acquisition of Alamo, the Company agreed to provide post-closing in-kind services to Alamo Frac Holdings, LLC, valued by the Company at $30 million in the aggregate. Mr. McKie, an executive officer, owns 20% of the equity interests of Alamo Frac Holdings, LLC. During +the year ended December 31, 2021, the Company provided in-kind services to Alamo Frac Holdings, LLC valued at $6.3 million. The Company has a remaining customer contract liability related to these services of $23.7 million as of December 31, 2021. +Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons +Our Board has adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party +Transactions” by the independent members of the Audit Committee. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements +or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate +57 +Table of Contents +amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as +defined herein) has or will have a direct or indirect material interest. +The Related Party Policy defines “Related Party” as any person who is, or, at +any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than 5% beneficial +interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or +entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a 5% or greater beneficial interest. Immediate family members (each, a “Family Member”) includes a person’s +spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and +daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s +home, other than a tenant or employee. +Prior to the Company entering into any Related Party Transaction, such Related Party Transaction will be reported to our +General Counsel. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the Audit Committee, including a summary of material facts. The Audit Committee will review the +material facts of all Related Party Transactions which require the Audit Committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party +Transaction has been given to the Audit Committee and it is not possible to convene a meeting of the Audit Committee, then the chairman of the Audit Committee will consider whether the Related Party Transaction is appropriate and, if it is, will +approve the Related Party Transaction, with the Audit Committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the Audit Committee. In the event the Audit Committee does not ratify any such Related +Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the Audit Committee, or its chairman, as applicable, will +consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.” +Entering into a Related Party Transaction +without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the Company’s directors, executive officers or Chief Accounting Officer become aware of a Related +Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the Audit Committee (or, if it is not practicable for the company to wait for the Audit Committee to consider the matter, +the chairman of the Audit Committee) and the Audit Committee will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and +circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the Audit Committee will report to the committee at its next regularly scheduled meeting any actions +taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The Audit Committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the Audit +Committee and will take, or recommend to our Board, any action the Audit Committee deems appropriate. +No member of the Audit Committee or director of our Board +will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the Audit Committee member or director will provide all material information concerning the Related Party Transaction +to the Audit Committee. +If a Related Party Transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to follow in +its ongoing dealings with the Related Party. Thereafter, the Audit Committee, on at least an annual basis, will review and assess ongoing relationships with the Related +58 +Table of Contents +Party to ensure that they are in compliance with the Audit Committee’s guidelines and that the Related Party Transaction remains appropriate. +Review Criteria +All Related Party Transactions will be reviewed in +accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. As appropriate for the circumstances, the Audit Committee or its chairman, as applicable, will review +and consider: +· +the Related Party’s interest in the Related Party Transaction; +· +the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related +Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss; +· +whether the transaction is being undertaken in the ordinary course of business of the Company; +· +whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the +Company than terms that could have been reached with an unrelated third party; +· +the purpose of, and the potential benefits to the Company of, the Related Party Transaction; +· +a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; +· +whether the proposed transaction includes any potential reputational risk issues for the Company which may arise as a +result of or in connection with the Related Party Transaction; +· +whether the proposed transaction would violate any requirements of the Company’s financing or other material +agreements; and +· +any other relevant information regarding the Related Party Transaction or the Related Party. +The Audit Committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the Audit Committee, or its chairman, as applicable, +determines in good faith that, under all of the circumstances, the transaction is fair to the Company. The Audit Committee, in its sole discretion, may impose such conditions as it deems appropriate on the Company or the Related Party in connection +with approval of the Related Party Transaction. +Pre-Approved Related Party Transactions +The Audit Committee has determined that the following transactions will be deemed pre-approved or ratified and will not require +review or approval of the Audit Committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the Audit Committee. +· +Any employment by the Company of an executive officer of the Company or any of its subsidiaries if the related compensation +conforms with our Company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our Board; and +· +Any compensation paid to a director of our Board if the compensation is consistent with the Company’s Bylaws and any +compensation policies. +Notwithstanding anything 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OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2022 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _____ to _____ +Commission File Number 001-37988 +NexTier Oilfield Solutions Inc. +(Exact Name of Registrant as Specified in its Charter) +Delaware 38-4016639 +(State or other jurisdiction +of incorporation or organization) (I.R.S. Employer +Identification No.) +3990 Rogerdale Rd Houston Texas 77042 +(Address of principal executive offices) (Zip code) +( 713 ) 325-6000 +(Registrant’s telephone number, including area code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class Trading Symbol Name of Each Exchange On Which Registered +Common Stock, $0.01 par value NEX New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +_______________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging growth company +☐ +If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2022, was approximately $ 1,776.0 million. +As of February 13, 2023, the registrant had 233,680,244 shares of common stock outstanding. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed with the United States Securities and Exchange Commission within 120 days of December 31, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K. +Auditor Name: KPMG LLP Auditor Location: Houston, Texas Auditor Firm ID: 185 +TABLE OF CONTENTS +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +16 +Item 1B. +Unresolved Staff Comments +34 +Item 2. +Properties +35 +Item 3. +Legal Proceedings +36 +Item 4. +Mine Safety Disclosures +36 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +37 +Item 6. +Reserved +39 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +40 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +61 +Item 8. +Financial Statements and Supplementary Data +62 +Item 9. +Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +112 +Item 9A. +Controls and Procedures +112 +Item 9B. +Other Information +112 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +112 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +114 +Item 11. +Executive Compensation +115 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +116 +Item 13. +Certain Relationships and Related-Party Transactions and Director Independence +117 +Item 14. +Principal Accountant Fees and Services +118 +PART IV +Item 15. +Exhibits and Financial Schedules +119 +Item 16. +Form 10-K Summary +123 +Signatures +124 +CAUTIONARY STATEMENT REGARDING +FORWARD-LOOKING STATEMENTS AND INFORMATION +This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Statements of assumptions underlying or relating to our forward-looking statements are also forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “will,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “estimate,” “predict,” “potential,” “outlook,” “reflect,” “forecast,” “future,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, assumptions, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about and risks regarding the following: +• Our business strategy, plans, objectives, expectations and intentions; +• Our future operating results; +• Dependence on capital spending and well completion by the onshore oil and natural gas industry and demand for services in our industry; +• Crude oil and natural gas commodity prices and the volatility of these prices; +• Changing regional, national or global economic conditions, including oil and gas supply and demand and the impact of geopolitical conditions on those prices; +• The impact of adverse weather conditions; +• The competitive nature of the industry in which we conduct our business, including pricing pressures; +• The impact of pipeline and storage capacity constraints; +• The effects of government regulation, including regulations of hydraulic fracturing, regulations aimed at combating climate change, and the operating hazards of our business; +• The effect of a loss of, or the financial distress of, one or more customers and our ability to obtain or renew customer contracts; +• The effect of a loss of, or interruption in operations of, one or more key suppliers or materials, and the market price and availability of materials or equipment; +• Our ability to maintain the right level of commitments under our supply agreements; +• The impact of new technology on our business; +• Legal proceedings, liability claims and effect of external investigations; +• Our ability to obtain or renew permits, approvals and authorizations from governmental and third parties and to comply with applicable health, safety, and environmental regulations; +• Acquisitions, divestitures and future capital expenditures and the impact of those transactions and the related integration on our business; +• Environmental, social, and governance (“ESG”) matters, including investor and public perception of our industry; +• Our ability to employ a sufficient number of skilled and qualified workers, including our executive officers; +• Our ability to service our debt obligations and access capital; +• The market volatility of our stock; +• The impact of ownership by Cerberus (through Keane Investor); +• The impact of our stock buyback program; +• The impact of our corporate governance structure; +• Our ability to maintain effective information technology systems and the impact of cybersecurity incidents on our business; and +1 +• The impact of inflation on our business. +We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K or the factors and risks that may cause actual results to differ materially from the statements made. +You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations, assumptions and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “ Item 1A . Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. +This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate. +Market, industry or similar data presented herein involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “ Item 1A . Risk Factors” in this Annual Report on Form 10-K. +References Within This Annual Report +As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “NexTier,” “we,” “us” and “our” refer to NexTier Oilfield Solutions Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Keane Investor” refers to Keane Investor Holdings LLC; (iv) the term “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds; (v) the term “C&J” refers to C&J Energy Services, Inc.; (vi) the term “C&J Merger” refers to the consummation of the transactions described in that certain Agreement and Plan of Merger, dated as of June 16, 2019, by and among the C&J, us and King Merger Sub Corp., one of our wholly owned subsidiaries; (vii) the term “Alamo” refers to Alamo Pressure Pumping, LLC and its wholly owned subsidiaries; and (viii) the term “Alamo Acquisition” refers to the consummation of the transactions described in that certain Purchase agreement (the “Purchase Agreement”), by and among the Company and Alamo Frac Holdings, LLC. +As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by approximately 63,000 hydraulic horsepower. +BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K +The condensed consolidated financial statements for the period from January 1, 2020 to August 31, 2021 reflect only the historical results of the Company prior to the completion of the Alamo Acquisition. +For further details, see Note (1) Basis of Presentation and Nature of Operations of Part II, “ Item 8 . Financial Statements and Supplemental Data.” For more details regarding the Alamo Acquisition, refer to Note (3) Acquisitions. +2 +All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. +3 +PART I +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +On October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” Since 2013, our growth through acquisition strategy has resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 2.2 million hydraulic horsepower. +In March 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. +On August 31, 2021, we completed the acquisition of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries. +On August 3, 2022 the Company entered into and closed a definitive agreement to purchase substantially all assets (and assume certain lease liabilities) of the sand hauling, wellsite storage and last mile logistics businesses of Continental Intermodal Group LP (“CIG”) and its subsidiaries (the “CIG Acquisition”) from CIG, Continental Intermodal Group – Trucking, LLC (“Trucking”) and CIG Logistics LLC (together with Trucking and CIG, “CIG Sellers”). +We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of our cementing services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. In 2021, we launched our Power Solutions business, which focuses on gas sourcing, compression, transport, decompression, treatment and related services for our fracturing operations. We believe this integration solution assists our customers by reducing emissions at the wellsite and throughout their operations. As part of our wellsite integration strategy to provide and integrate a variety of services for our customers at the wellsite to maximize efficiencies and profitability, in 2022, we acquired sand hauling, wellsite storage, and last mile logistics assets from CIG Sellers and rebranded the entire last mile logistics operation as NexMile Logistics. The assets acquired were combined with the Company’s existing last mile logistics assets to create a leading player in the delivery and storage of proppant at the wellsite. We are committed to our Power Solutions, NexMile Logistics, and proppant management businesses and will look to further increase our investments in these services, in addition to the maintenance and investment in our core fracturing assets. +Wireline and Pumping Services. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. On August 1, 2022, we sold our coiled tubing assets to Gladiator Energy LLC. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements +5 +and Supplemental Data.” Prior to the sale, the Company provided a range of coiled tubing services used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services were typically short-term in nature, lasting anywhere from a few hours to multiple days. +Well Support Services segment +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes stockholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase stockholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform, last mile logistics business, and evolving Power Solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create stockholder value. +For further discussion on the business strategies we plan to continue executing in 2023, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. Significant customers are those that individually account for 10% or more of the Company's consolidated revenue. For the year ended December 31, 2022, revenue from one customer individually represented approximately 10% of the Company’s consolidated revenue. This customer represented $311.8 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2021, one customer individually represented 14% of the Company’s consolidated revenue. This customer represented $193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% and collectively represented $188.6 million or 16% and $160.5 million or 13% of our consolidated revenue in the Completions Services segment. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for fluctuation in capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the +6 +environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each region. Utilization and pricing for our services have, from time to time, been both positively and negatively affected by changes in supply and demand dynamics in our operating areas and geographic markets. The COVID-19 pandemic negatively impacted demand and pricing for our services in 2020 and 2021, which resulted in a rationalization of supply of frac equipment. Industry demand then recovered in 2022 and the industry was not able to fully meet this demand given supply reductions in 2020 and 2021. This resulted in an increase in pricing in 2022 as utilization tightened. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., and ProFrac Holding Corp. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution, as evidenced by the expected delivery in 2023 of our first electric fleet and the continued investments in dual fuel capabilities equipment, and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts, and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +For the year ended December 31, 2022, there were no suppliers that individually represented more than 5% of the Company’s overall purchases. For the years ended December 31, 2021 and 2020, there was one supplier that individually represented approximately 5% of the Company’s overall purchases, and such purchases were primarily incurred within the Completion Services segment. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art innovation center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across the majority of our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, +7 +rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have common law and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems or may be halted for short periods due to extreme heat conditions. +Human capital resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +General +As of December 31, 2022, we had 4,302 employees, of which, approximately 83% were compensated on an hourly basis. This was approximately a 29% increase from the 3,340 employees we had on December 31, 2021. Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any potentially adverse matters involving our employment practices on a company-wide level. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2022, we achieved a total recordable incident rate of 0.59, which is less than the 0.90 incident rate derived from an industry average from 2017 to 2021. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well +8 +as mental and behavioral health resources, including on-demand access to an Employee Assistance Program for employees and their dependents. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture by supporting our employees’ professional development, providing an on-demand learning platform, and empowering them to drive their career progression. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +Material government regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”) and its state equivalents, issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal +9 +injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for +10 +impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 118th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and +11 +continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. Also, in November 2022, the EPA issued a supplemental notice of proposed rulemaking aimed at comprehensive emissions reduction from both new and existing sources in the oil and natural gas industry. State implementation of a revised NAAQS or final emission performance standard could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency—potentially in coordination with other responsible agencies—will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. A 2016 EPA final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas wells. However, regulatory developments to ease or rescind these rules have created +12 +uncertainty as to their impact on the oil and gas industry, and EPA issued a supplemental notice of proposed rulemaking in November 2022 aimed at further addressing methane emissions. +While the long-term trajectory of future greenhouse regulations remains unsettled, the current administration has clearly articulated a goal of reducing greenhouse gas emissions and use. For example in January of 2021, President Biden issued an Executive Order that, among other things, declared climate change to be a crisis requiring significant short-term global reduction in greenhouse gas emissions and net-zero global emissions by mid-century or before. The order instructs every government agency to make combatting climate change an essential element of its agenda. In response, in November 2021, EPA proposed further regulation of methane emissions from the oil and gas sector, including new performance standards for certain new and existing sources. In October 2021, the Department of the Interior released a climate adaptation and resilience plan, outlining how it intends to address climate change risks, impacts, and vulnerabilities, including transitioning to a clean energy economy. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business, including the impact of the SEC’s proposed rules regarding climate related disclosures. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the rule regarding respirable silica sand, which required the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +13 +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. Our Wireline operations utilize materials regulated by the Bureau of Alcohol, Tobacco, Firearms, and Explosives. We are required to obtain permits and provide guarantees in the form of internal procedures to maintain compliance. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material or mishandling of explosives could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not currently anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +14 +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +15 +Item 1A. Risk Factors +RISK FACTORS +An investment in our securities involves a variety of risks. In addition to the other information included or incorporated by reference in this annual report, the following risk factors should be carefully considered, as they could have a significant adverse impact on our business, financial condition and results of operations. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present material risks to our operations. In addition, the global economic and political climate amplifies many of these risks. All forward-looking statements made by us or on our behalf are qualified by the risks described below. +Summary of Risk Factors +Risks Related to Our Industry +• Dependence upon domestic capital spending and well completions by the onshore oil and natural gas industry (which is volatile); +• Instability of oil and natural gas prices; +• Adverse weather conditions impact demand services and influence costs; +• The energy services industry’s inherent operating hazards; +Risks Related to Our Business +• Detrimental performance by, or credit risk of, our customers; +• High capital costs of maintenance, upgrades, refurbishment and replacement of assets; +• Delays in deliveries, increases in costs or unavailability of key materials for our operations; +• Over commitments to certain supply agreements; +• New technologies developed by third parties impacting competitiveness; and +• Litigation and other proceedings, including claims for personal injury and property damage. +Risks Related to Government Regulation, Laws and Compliance +• Laws and regulations regarding health, safety and protection of the environment increasing costs of doing business, penalties, damages or costs of remediation or implicate corrective measures; +• Challenges obtaining or renewing permits or authorizations for our or our customers’ operations; +• Existing or future laws, regulations, court orders or other initiatives limiting GHG methane emissions; +• Violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws; +• Changes in transportation regulations may increase our costs and negatively impact our results of operations; and +• Changes in tax rates, the adoption of new tax legislation and tax audits. +• Legislative and regulatory initiatives prohibiting or impairing hydraulic fracturing operations; +• Laws and regulations addressing greenhouse gases and climate change and investor and public perception of our compliance with such requirements; +Strategic Risks +• Successful identification and consummation of beneficial acquisitions, dispositions and investments; +• Time-consuming and costly integration of any acquisitions; +• Investor and public perception regarding our ESG practices could impact our reputation; and +• Ability to effectively and timely address our sustainability and reduce our carbon footprint. +16 +Risks Related to Human Capital +• Loss or unavailability of any of our executive officers or other key employees; and +• Ability to employ a sufficient number of key employees, technical personnel and qualified workers. +Risks Related to Our Indebtedness +• Our substantial level of indebtedness; +• Ability to incur additional debt, despite our current indebtedness levels; +• Restrictive covenants in our agreements governing our indebtedness; +• Our variable rate debt that is subject to interest rate fluctuations; and +• Potential reduction or expiration of our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes. +Risks Related to Our Common Stock +• The price of our common stock may be volatile or may decline regardless of our operating performance; +• Stockholders may be diluted by the future issuance of additional common stock; +• Keane Investor and Cerberus own a significant amount of our common stock and continue to have influence over us; +• Our stock buyback program may not be fully consummated or deliver expected results; +• Stockholder actions and/or acquisition of the Company is impacted by restrictive provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law; and +• The Court of Chancery of the State of Delaware is the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders under our formation documents. +General Risks +• Cyber security risks; +• Failure of our information technology systems; +• Sustained inflation could result in increased operating costs; +• Economic impact of epidemic diseases, such as COVID-19; and +• Adverse effects of global economic and geopolitical conditions. of our common stock may be volatile or may decline regardless of our operating performance; +The following discussion of “risk factors” identifies the most significant factors that may adversely affect our business, operations, financial position or future financial performance. This information should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and related notes, as well as other information included and incorporated by reference in this Form 10-K, and the other reports and materials we file with the SEC. These factors could cause future results to differ from those in forward-looking statements and from historical trends. +Risks Related to Our Industry +Our business depends on domestic capital spending and well completions activity by the onshore oil and natural gas industry and reductions in capital spending could have a material adverse effect on our liquidity, results of operations and financial condition. +Our business is cyclical and is directly affected by capital spending by our customers to explore for, develop and produce oil and natural gas in the United States. These expenditures are volatile and generally dependent on our customers’ views of future demand for oil and gas and future oil and gas prices, as well as our customers’ ability to access capital. Reduced capital spending by our customers may result in a decline in the demand for our services or adversely affect the price of our services. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices. +17 +Some of the items that may impact our customer’s capital spending include: +• Oil and natural gas prices; +• The inability of our customers to access capital on economically advantageous terms, which may be impacted by, among other things, a decrease of investors’ interest in hydrocarbon producers because of environmental and sustainability initiatives; +• Restrictions on our customers’ ability to bring their produced oil and natural gas to market due to infrastructure limitations; +• Changes in customers’ capital allocation, including an increased allocation to the production of renewable energy, leading to less focus on oil and natural gas production growth; +• The consolidation of our customers; and +• Adverse developments in the business or operations of our customers, including write-downs of oil and natural gas reserves and borrowing base reductions under customers’ credit facilities. +• Federal, state and local regulation and restriction of hydraulic fracturing and other oilfield service activities, such as water disposal and exploration and production activities; and +• Advances in exploration, development and production technologies or in technologies affecting energy consumption. +The volatility of oil and natural gas prices may adversely affect the demand for our services and negatively impact our results of operations. +The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices. Historically, prices for crude oil and natural gas have been extremely volatile, and these prices are expected to experience continued volatility. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. +Factors affecting the price of oil and natural gas include: +• The level of supply and demand for natural gas; +• The cost of exploring for, developing and producing oil and natural gas; +• The rates at which new oil and natural gas reserves are discovered; +• Worldwide political, military, and economic conditions; +• Actions of the Organization of the Petroleum Exporting Countries, its members and other state-controlled oil companies (“OPEC+”) relating to oil price and production controls; +• The level of oil and natural gas production in the U.S. and by other non-OPEC+ countries; +• Disruptions due to natural disasters, weather conditions, pandemics or epidemics and similar factors; and +• Increased demand for alternative energy and electric vehicles, including government initiatives to promote the use of sustainable, renewable energy sources and public sentiment around alternatives to oil and gas. +18 +Adverse weather conditions could impact demand for our services or materially impact our costs. +Our operations and the operations of our customers may be adversely affected by seasonal weather conditions, severe weather events and natural disasters. Many experts believe global climate change could increase the frequency and severity of extreme weather conditions. Extreme weather conditions such as drought, extreme heat, extreme winter weather, and hurricanes may result in the evacuation of personnel, stoppage of services, reduction in productivity, and activity disruptions at our facilities, in our supply chain, or at well-sites. Repercussions of severe or unseasonable weather conditions may also include decreases in demand for oil and natural gas during unseasonably warm winters. Any such extreme weather events may result in increased operating costs or decreases in revenue, which could adversely affect our financial condition, results of operations and cash flows. +Our operations involve a variety of operating hazards that could cause losses. +Drilling for and producing hydrocarbons, and the associated products and services that we provide , include dangers such as well blowouts, cratering, loss of well control, uncontrollable flows of gas or well fluids, explosions, accidents, equipment failure, fires, personal injuries, property damage (including surface and subsurface damage), borehole collapse, pollution, damage to geological formations and the discharge of hazardous substances into the environment. Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities, and personnel to well sites. Our safety procedures may not always prevent such damages. In response, we typically seek indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid such provisions (or compliance with such provisions) or be financially unable to meet their obligations, the coverage under the indemnity or insurance may be insufficient to cover the expenses, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and result in significant costs to our business. +In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations, and cash flows. +We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts, whether enacted/amended in the future or currently in existence, may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations. +Our services could become a source of spills or releases of fluids, including chemicals used during activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability, reputation and relationships with customers, employees and regulators. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future. +Risks Related to Our Business +19 +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, and results of operations. +Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment. +Our hydraulic fracturing fleets and other service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Currently the industry and our Company are experiencing delays on key maintenance major components and parts, brought about by global supply chain issues. As a result, there is an increased amount of equipment in the maintenance cycle compared to previous levels. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, environmental and safety requirements or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. Such demands on our capital could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations. The availability of parts and major components due to supply chain constraints and limited number of quality suppliers and service providers may impact our ability to timely maintain our equipment, which may adversely affect our financial condition and results of operations. +Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition. +Raw materials essential to our business (such as proppant, chemicals, cement, steel, or coiled tubing) and finished products (such as fluid-handling equipment) are normally readily available. However, high levels of demand for raw materials, such as proppant and hydrochloric acid, as well as oil and natural gas based derivatives, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. In the past, our industry faced sporadic shortages associated with hydraulic fracturing operations, such as proppant and other raw materials, requiring work stoppages, which adversely impacted the operating results of several competitors. Many of the raw materials essential to our business require the use of rail, storage, and trucking services to transport the materials to our jobsites. These services, particularly during times of high demand, may cause delays in the arrival of or otherwise constrain our supply of raw materials. These constraints could have a material adverse effect on our business and results of operations. +Our commitments under supply agreements could exceed our requirements, exposing us to risks including price, timing of delivery and quality of products and services upon which our business relies. +We have purchase commitments with certain vendors to supply a majority of the proppant that we may provide in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases, our need for the raw materials and products we supply as part of these services also decreases. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. We may not be able to reduce, extend, +20 +eliminate or otherwise address near-term obligations to our satisfaction, which could result in an adverse effect on our financial condition. +New technology may cause us to become less competitive and intellectual property related liability may have a material negative impact on our business and results of operations. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations. Further, some of our competitors and suppliers have a substantial amount of intellectual property related to new technologies. We cannot guarantee that our processes and products do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others, including, without limitation, situations in which our products, processes or technologies may be covered by patent applications filed by other parties in the U.S. or abroad. +We may be subject to litigation and other proceedings, including claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations. +Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims, pay practices, and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. Additionally, because our business is related to fossil fuel production, there is an increasing risk that we may be subject to generalized lawsuits which attempt to hold companies in the fossil fuel industry liable for alleged local impacts of climate change. Such legal theories are still developing, making it difficult to assess the likelihood or scope of potential liabilities. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks, including losses related to alleged climate claim damages. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations. +Risks Related to Government Regulation, Laws and Compliance +Failure on our part to comply with, and the costs of compliance with, applicable health, safety, and environmental requirements could have a material adverse effect on our business, results of operations, and financial condition. +We are subject to a variety of laws and regulations relating to health and safety and the environment. Among those laws and regulations are those covering hazardous materials and requiring emission performance standards for facilities. For example, our well service operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. We also store, transport, and use radioactive and explosive materials in certain of our operations. Applicable regulatory requirements include, but are not limited to, those concerning: +21 +• The containment and disposal of hazardous substances, oilfield waste, and other waste materials; +• The production, storage, transportation and use of explosive materials; +• The importation and use of radioactive materials; +• The use of underground storage tanks; +• The use of underground injection wells; and +• The protection of worker safety both onshore and offshore. +These and other requirements generally are becoming increasingly strict. The failure to comply with the requirements, many of which may be applied retroactively, may result in penalties, revocation of permits to conduct business and corrective action orders, including orders to investigate and/or clean up contamination which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. +Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, areas that are not in attainment with air quality standards, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including potential emissions affecting clean air, including methane, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. +Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of or restrictions in permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of or restrictions in permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. +Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition. We expect that the regulations around the oil and gas industry may increase and/or become stricter, which may further any potential material adverse impact on our financial condition. For example, the EPA’s recently proposed changes to the standards of performance and emissions guidelines for new, reconstructed, and modified sources in the oil and natural gas sector could require additional monitoring, upgraded control equipment, and/or modified operations at current oil and natural gas operations. +If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards (including standards put in place related to the COVID-19 pandemic), we could lose business from our customers, many of whom have an increased focus on environmental, health and safety issues. +22 +We are subject to requirements imposed by the EPA, U.S. Department of Transportation, U.S. Nuclear Regulatory Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution, and protect worker health and safety. +The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the requirement to comply with emission control and fuel quality regulations could result in increased costs. +In addition, as part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of nonhazardous and hazardous wastes. The generation, handling, transportation, and disposal of these fluids, substances, and wastes are regulated by a number of laws, including CERCLA, RCRA, the Clean Water Act, the SDWA and analogous state laws. Under RCRA, the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes are regulated. RCRA currently exempts many oil and gas exploration and production wastes from classification as hazardous waste. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations, and it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. +Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. Moreover, certain of these environmental laws impose joint and several, strict liability even though our conduct in performing such activities was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties was the basis for such liability. In addition, environmental laws and regulations are subject to frequent change and if existing laws, regulatory requirements or enforcement policies were to change in the future, we may be required to make significant unanticipated capital and operating expenditures. +Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. +Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business. +In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. Some states have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations. +We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations. +23 +Existing or future laws, regulations, court orders or other initiatives to limit greenhouse gas (“GHG”) emissions or relating to climate change may reduce demand for our products and services. +Continuing political and social attention to the issue of climate change has resulted in both existing and proposed national, regional and local legislation and regulatory measures to limit GHG emissions. The implementation of these agreements, including the Paris Agreement, and other existing or future regulatory mandates, may adversely affect the demand for our products and services, impose taxes on us or our customers, require us or our customers to reduce GHG emissions from our technologies or operations, or accelerate the obsolescence of our products or services. In the United States, the U.S. Environmental Protection Agency (“EPA”) has taken steps to regulate GHG emissions as air pollutants under the U.S. Clean Air Act of 1970, as amended. The EPA’s Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others, certain mobile and stationary GHG emission sources in the oil and natural gas industry, which in turn may include data from our equipment or operations. In addition, the U.S. government has proposed rules in the past setting GHG emission standards for, or otherwise aimed at reducing GHG emissions from, the oil and natural gas industry, including a November 2022 notice of proposed rulemaking. The imposition and enforcement of stringent GHG reduction requirements could severely and adversely impact the oil and gas industry and therefore significantly reduce the value of our business. +We could be adversely affected by violations laws and regulations governing international trade including the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws. +The United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries and partners from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Although we currently have limited international operations, we may do business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Our employees, intermediaries, and partners may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees, intermediaries, or partners even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. We are committed to doing business in accordance with applicable anti-bribery laws and have implemented policies and procedures concerning compliance with such laws. Our existing safeguards and any future improvements, however, may prove to be less than effective, and our employees, intermediaries, and partners may engage in conduct for which we might be held responsible. Violations of the FCPA and other anti-bribery laws (either due to our acts, the acts of our intermediaries or partners, or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operation. +Changes in transportation regulations may increase our costs and negatively impact our results of operations. +We are subject to various transportation regulations, including regulation of motor carriers by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements imposed by highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on +24 +specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations. +The Company could be subject to changes in its tax rates, the adoption of new tax legislation, tax audits, or exposure to additional tax liabilities that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. +We are subject to taxes in the U.S. and jurisdictions where we operate and our subsidiaries are organized. Due to economic and political conditions, tax rates in the U.S. and other jurisdictions may be subject to significant change. In addition, our tax returns are subject to examination by the U.S. and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of the examinations. An increase in tax rates, particularly in the U.S., changes in our ability to realize our deferred tax assets, or adverse outcomes resulting from examinations of our tax returns could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. +The adoption of any future federal, state, or local laws or implementing regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on our business, results of operations, and financial condition. +Various federal and state legislative and regulatory initiatives have been or could be undertaken that could result in additional requirements or restrictions being imposed on hydraulic fracturing operations or result in the failure to obtain or difficulty or delay in obtaining required permits, renewals or authorizations. For example, the United States may seek to adopt federal regulations or enact federal laws that would impose additional regulatory requirements on or even prohibit hydraulic fracturing in some areas. Legislation and/or regulations have been adopted in many U.S. states that require additional disclosure regarding chemicals used in the hydraulic fracturing process. Legislation, regulations, and/or policies have also been adopted at the state level that impose other types of requirements on hydraulic fracturing operations (such as limits on operations in the event of certain levels of seismic activity). Additional legislation and/or regulations have been adopted or are being considered at the state and local level that could impose further chemical disclosure or other regulatory requirements (such as prohibitions on hydraulic fracturing operations in certain areas) that could affect our operations. Four states (New York, Maryland, Vermont, and Washington) have banned the use of high volume hydraulic fracturing, Oregon has adopted a five-year moratorium, and Colorado has enacted legislation providing local governments with regulatory authority over hydraulic fracturing operations. Local jurisdictions in some states have adopted ordinances that restrict or in certain cases prohibit the use of hydraulic fracturing, although many of these ordinances have been challenged and some have been overturned. The adoption of any future federal, state or local laws or regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on our business, results of operations, and financial condition. +Strategic Risks +Our acquisitions, dispositions and investments may not result in anticipated benefits and may present risks not originally contemplated, which may have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. +We continually seek opportunities to maximize efficiency and value through various transactions, including purchases or sales of assets, businesses, investments, or joint venture interests. These transactions are intended to (but may not) result in the realization of savings, the creation of efficiencies, the offering of new products or services, the generation of cash or income, or the reduction of risk. Acquisition transactions may use cash on hand or be financed by additional borrowings or by the issuance of our common stock. These transactions may also affect our business, consolidated results of operations, and consolidated financial condition. +25 +These transactions also involve risks, and: +• Any acquisitions we attempt may not be completed on the terms announced, or at all; +• Any acquisitions may not result in an increase in income or provide an adequate return of capital or other anticipated benefits; +• Any acquisitions may not be successfully integrated into our operations and internal controls; +• The due diligence conducted prior to an acquisition may not uncover situations that could result in financial or legal exposure or that we may not appropriately quantify the exposure from known risks; +• Any disposition may not result in decreased earnings, revenue, or cash flow; +• Use of cash for acquisitions may not adversely affect our cash available for capital expenditures and other uses; or +• Any dispositions, investments, or acquisitions, including integration efforts, may not divert management resources. +Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. +Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, such as the Alamo Acquisition in 2021 and the C&J Merger in 2019, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to: +• A failure of our due diligence process to identify significant risks or issues; +• The loss of customers of the acquired company or our company; +• Customers or suppliers may seek to modify contractual obligations with us; +• Negative impact on the brands or banners of the acquired company or our company; +• A failure to maintain or improve the quality of our customer service; +• Difficulties assimilating the operations and personnel of the acquired company; +• Our inability to retain key personnel of the acquired company; +• The incurrence of unexpected expenses and working capital requirements; +• Our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; +• Difficulty in maintaining internal controls, procedures and policies; +• Mistaken assumptions about the overall costs of equity or debt; and +• Unforeseen difficulties operating in new product areas or new geographic areas. +Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. +26 +Investor and public perception related to the company’s environment, social, and governance (“ESG”) performance as well as current and future ESG reporting requirements may negatively affect our business, results of operations, and liquidity. +There is increased focus by governments and our customers, investors and other stakeholders on climate change, sustainability and energy transition matters. Negative attitudes toward or perceptions of our industry or fossil fuel products and their relationship to the environment have led governments, non-governmental organizations, and companies to implement initiatives to conserve energy and promote the use of alternative energy sources, which may reduce the demand for and production of oil and gas in areas of the world where our customers operate, and thus reduce future demand for our products and services. In addition, initiatives by investors and financial institutions to limit funding to companies in fossil fuel-related industries may adversely affect our liquidity or access to capital. +Increased scrutiny regarding our ESG practices could impact our reputation. +In December 2022, we released our corporate responsibility report for fiscal 2021, which highlights key achievements, metrics and newly defined sustainability goals as part of our sustainability strategic initiative. Our sustainability report also includes our policies and practices on a variety of ESG matters, including the value creation opportunities provided by our products; diversity, equity, and inclusion; employee health and safety; community giving; and human capital management. The publication of our sustainability report may result in increased investor, employee, and other stakeholder attention to our ESG initiatives, and such stakeholders may not be satisfied with our ESG practices or initiatives. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry, which could have a negative impact on the price of our securities and our access to and costs of capital. +Failure to effectively and timely address the need to operate more sustainably and with a lower carbon footprint and impact could adversely affect our business, results of operations and cash flows. +Our long-term success may depend on our ability to effectively lower the carbon impact of how we deliver our products and services to our customers. For example, part of our sustainability strategy has been to transition our fleet towards natural gas powered engines, and even electric operated fleets. If we fail or are perceived to not be effectively lowering our carbon impact, then we could potentially lose engagement with customers, investors and/or certain financial institutions. +Risks Related to Human Capital +The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. +We depend greatly on the efforts of our executive officers and other key employees to manage our operations. Experienced and well qualified talent for these positions is in increasingly high demand and the ability to timely replace personnel in these positions can be challenging. The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. +If labor costs increase or we fail to attract and retain qualified employees our business, results of operations and financial condition may be adversely affected. +The labor markets in the industries in which we operate are competitive. We must attract, train and retain a large number of qualified employees while controlling related labor costs. We face significant competition for these employees from the industries in which we operate as well as from other industries. Tighter labor markets may make it even more difficult for us to hire and retain qualified employees and control labor costs. Our ability to attract qualified employees and control labor costs is subject to numerous external factors, including prevailing wage rates, employee preferences, employment law and regulation, environmental, health and safety regulation, labor relations and immigration policy. A significant increase in competition or cost increase arising from any of the aforementioned factors in may have a material adverse impact on our business, results of operations and financial condition. +27 +Risks Related to Our Indebtedness +Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. +We have a significant amount of indebtedness. As of December 31, 2022, we had $361.4 million of debt outstanding, net of discounts and deferred financing costs (not including finance lease obligations). After giving effect to our borrowing base, we had approximately $415.3 million of availability under our 2019 ABL Facility (as defined herein). +Our indebtedness could have important consequences. For example, it could: +• Adversely affect the market price of our common stock; +• Increase our vulnerability to interest rate increases and general adverse economic and industry conditions; +• Require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; +• Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; +• Limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and +• Place us at a competitive disadvantage compared to our competitors that have less debt. +In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as: sales of assets; sales of equity; or negotiations with our lenders to restructure the applicable debt. Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options. +Despite our indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our leverage. +We and our subsidiaries may incur additional indebtedness in the future. The terms of the credit agreements that govern the 2019 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 2019 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them. +The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolution, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants. +The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future +28 +debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. +Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. +See Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations-Principal Debt Agreements” for further details. +Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital. +We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2019 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. +Ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation under Section 382 of the Internal Revenue Code, and NOLs and other tax attributes is subject to reduction, causing less NOL or tax deductions to be available to offset future taxable income for U.S. federal income tax purpose +Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses (“NOLs”) carried forward from prior years. As of December 31, 2022, we reported consolidated federal NOL carryforwards of approximately $1.1 billion of which $729.8 million are pre-change NOL’s subject to limitation. Our ability to utilize our NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of our stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three year period). We believe we experienced an ownership change in October 2019 as a result of the C&J Merger. We also believe we experienced an ownership change in January 2017 as a result of the implementation of the IPO. Thus our pre-change NOLs are subject to limitation under Section 382 of the Code as a result. Such limitation may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause a portion of our pre-change NOLs generated prior to 2018 to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes. +Risks Related to Our Common Stock +The price of our common stock may be volatile or may decline regardless of our operating performance, and our stockholders may not be able to resell their shares at or above the public offering price. +29 +The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, including: +• The failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts; +• changes in, or investors’ perception of, the oil field services industry, including hydraulic fracturing; +• The activities of competitors; +• Future issuances and sales of our common stock, including in connection with acquisitions; +• Our quarterly or annual earnings or those of other companies in our industry; +• The public’s reaction to our press releases, our other public announcements and our filings with the SEC; +• Regulatory or legal developments in the U.S.; +• Litigation involving us, our industry, or both; and +• General economic conditions, including increased levels of inflation. +In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. +Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise. +As of December 31, 2022, we had 266.3 million shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. As of December 31, 2022, we have 5,341,651 shares of our common stock available for award that may be issued under our equity incentive plans. Any common stock that we issue, including under our equity incentive plans or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders. +In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders. +Keane Investor and Cerberus own a significant amount of our common stock and their interests could be in conflict with the interest of our other shareholders. +Keane Investor Holdings currently controls approximately 13.8% of our common stock, which includes affiliates of Cerberus. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, certain instances may arise in which Cerberus may have an interest in pursuing or preventing acquisitions, d ivestitures or other transactions, including the issuance of additional equity or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. The concentration of ownership held by Cerberus could also delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. In addition, pursuant to the Second Amended and Restated Stockholder’s Agreement, dated October 31, 2019 (the “Stockholders’ Agreement”) Keane Investor (or Cerberus in certain instances) has certain board nomination rights based on its ownership of our +30 +common stock. Currently, two of our ten directors are employees of, appointees of, or advisors to, members of Cerberus. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence our ability to enter into corporate transactions. +In addition, if Cerberus through Keane Investor decides to sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price. +We cannot guarantee that our recently announced stock buyback program will be fully consummated or that such program will enhance the long-term value of our share price. +In October 2022, NexTier’ board of directors approved a shareholder return program, which includes authorization to repurchase up to $250 million of the Company’s common stock, which can be discontinued at any time. There is no obligation for the Company to continue to repurchase or to repurchase any specific dollar amount of stock. The stock buyback program could affect the price of our stock and increase volatility in the market. We cannot guarantee that this program will be fully consummated or that such program will enhance the long-term value of our share price. In addition, repurchase regulations and taxes may add additional payment burden to our stock buyback program. +Provisions in our certificate of incorporation, bylaws and our stockholders’ agreement could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Provisions in our certificate of incorporation, our bylaws ’may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions include advance notice requirements for stockholder proposals and super majority requirements by our stockholders to amend the bylaws or increase or decrease the number of directors. +Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control. +In connection with the Keane IPO, Keane entered into a Stockholders’ Agreement with Keane Investor. This stockholders’ agreement was amended and restated in conjunction with the C&J Merger (as amended and restated, the “Stockholders’ Agreement”) and provides that, except as otherwise required by applicable law, from the date on which (a) Keane Investor (or Cerberus Holder in certain instances), for so long as Cerberus Holder has beneficial ownership of at least 12.5% or greater of the aggregate number of Company shares then outstanding, shall have the right to designate to the board of directors two individuals; and (b) Keane Investor (or Cerberus Holder in +31 +certain instances), for so long as Cerberus Holder has beneficial ownership of less than 12.5% but at least 7.5% of the aggregate number of Company shares then outstanding, shall have the right to designate to the board of directors one individual. The ability of Keane Investor (or Cerberus Holder in certain instances) to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders. +Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations. +General Risks +Our business could be negatively affected by cybersecurity incidents. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities and interactions with customers and suppliers, and we rely heavily on information systems to conduct and protect our business. These information systems, including our digital logistics platform, are increasingly subject to cybersecurity incidents such as unauthorized access to data and systems, loss or destruction of data, computer viruses, or other malicious code, ransomware, hacking, social engineering, phishing, denial-of-service, and cyberattacks, and other similar events. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Cybersecurity threats have increased due to an increase in remote working arrangements. Cyber incidents arise from numerous sources, including fraud or malice on the part of third parties, accidental technological failure, electrical or telecommunication outages, failures of computer servers or other damage to our property or assets, human error, complications encountered as existing systems are maintained, repaired, replaced, or upgraded or outbreaks of hostilities or terrorist acts. A breach of our technology systems could lead to the loss and destruction of trade secrets, confidential information, proprietary data, intellectual property, customer and supplier data, and employee personal information, and could disrupt business operations, which may result in claims against us, including liability under laws that protect the privacy of personal information and could adversely affect our relationships with business partners and harm our brands, reputation, and financial results. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. +A failure of our information technology systems, including our enterprise resource planning system and our digital hub, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting. +We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, or similar events. A failure or prolonged interruption in our information +32 +technology systems, including our digital logistics platform, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows. +A period of sustained inflation across all the major markets in which we operate could result in higher operating costs. +Inflationary pressures typically result in increases to our operating expenses. While we take actions wherever possible to reduce the impact of the effects of inflation, in cases of sustained inflation across several of our major markets, it becomes increasingly difficult to effectively control the increase to our costs. In addition, the effects of inflation could result in the reduction of our clients’ budgets and spending plans. If we are unable to increase our pricing or take other actions to mitigate the effect of the resulting higher costs, our profitability and financial position could be negatively impacted. +Our business is subject to risks arising from epidemic diseases, such as the recent global outbreak of the coronavirus. +The COVID-19 pandemic has impacted worldwide economic activity. A pandemic, including COVID-19 or another public health epidemic, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities. +The continued spread of COVID-19, or a similar pandemic, could adversely affect commodity demands, our customers, our suppliers, and on our operations and employees. These effects have included, and may continue to include, adverse revenue effects; supply chain disruptions; inflationary impacts on cost of goods and services sold, customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers. +Global economic and geopolitical conditions could adversely affect our operations. +In recent years, we have been faced with very challenging global economic conditions. For instance, Russia’s invasion of Ukraine and sanctions against Russia also are causing disruptions to global economic conditions. It is unknown how long such disruptions will continue and whether such disruptions will become more severe. A deterioration in the global economic environment may result in a decrease in demand for our products and increased competition. +33 +Item 1B. Unresolved Staff Comments +None. +34 +Item 2. Properties +Properties +We lease office space for our principal executive headquarters, which is located at 3990 Rogerdale Rd., Houston, Texas 77042, and for our engineering and technology center at 8301 New Trails Dr., The Woodlands, Texas. We also own property for our maintenance facilities at 1214 Gas Plant Rd., San Angelo, Texas 76904. +In addition, we own or lease numerous other smaller facilities and administrative offices across the geographic regions in which we operate to support our ongoing operations, including district offices, local sales offices, yard facilities and temporary facilities to house employees in regions where infrastructure is limited. Our leased properties are subject to various lease terms and expirations. We believe that our existing facilities are adequate for our operations and our locations allow us to efficiently serve our customers. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility. +35 +Item 3. Legal Proceedings +The information in response to this item is incorporated herein by reference from Note ( 18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. +Item 4. Mine Safety Disclosures +Not applicable. +36 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Market Information +Our common stock trades on the NYSE under the symbol “NEX”. On February 13, 2023, the last reported sales price of our common stock on the NYSE was $9.53 per share. +Comparative Stock Performance Graph +The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act. +The graph below compares the cumulative total stockholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index (“S&P 500”), the Standard & Poor’s MidCap Index (“S&P MidCap”), the Oilfield Service Index (“OSX”), and a composite average of publicly traded peer companies (Nine Energy Services, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., and RPC, Inc.), for the five years ended December 31, 2022. During the year ended December 31, 2022, both FTS International, Inc. and US Well Services, Inc., which were previously included in our composite average of publicly traded peer companies, were acquired and were no longer publicly traded. As a result we have removed both companies from the composite average for the five-year period. We believe the S&P 500, S&P MidCap, and OSX are the most relevant and reliable indexes to use as a comparison to our total stockholder return on our common stock. In future filings, we will no longer provide a composite index of publicly traded peer companies, as we believe the previously mentioned indices provide more consistency between reporting periods. We also modified the presentation of the graph to present yearly, as opposed to quarterly, numbers and to include such yearly periods in a manner consistent with our fiscal year, which presentation we believe is more readily comparable to peer companies and increase the readability of the information. +The graph assumes $100 was invested at the market close on the last trading day for the fiscal year ended December 31, 2017 in our common stock, S&P 500, S&P MidCap, OSX, and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. +37 +Holders +As of February 13, 2023, we had 233,680,244 shares of common stock issued and outstanding, held by approximately 11 registered holders. The number of registered holders does not include holders that have common stock held for them in “street name,” meaning that the stock is held for their accounts by a broker or other nominee. +Dividends +We have not paid any cash dividends on our common stock to date. However, our board of directors may consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely any payment of dividends. +The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the board of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. +Purchases of Equity Securities +Issuer Purchases of Equity Securities +Settlement Period +(a) Total Number of Shares Purchased (1),(2) +(b) Average Price Paid per Share +(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2).(3) +(d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2) +October 1, 2022 through October 31, 2022 5,250 $ 8.65 — $ 250,000,000 +November 1, 2022 through November 30, 2022 6,925,720 10.14 6,925,720 179,773,704 +December 1, 2022 through December 31, 2022 4,377,802 9.40 4,377,802 138,635,187 +Total 11,308,772 $ 9.85 11,303,522 $ 138,635,187 +(1) Includes 5,250 shares that were withheld by us in the fourth quarter of 2022 at the average price per share of $8.65 to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date. +(2) On October 25, 2022, the Company announced the board of directors approved a new share repurchase program for up to $250.0 million through December 31, 2023. The share repurchase program may be executed from time to time in open market transactions, through block trades, in privately negotiated transactions, through derivative transactions, through 10b5-1 plans, or by other means. The amount, timing and terms of any share repurchases will be determined based on prevailing market conditions and other factors, including applicable black-out periods. The share repurchase program does not obligate NexTier to purchase any shares of common stock during any period and the program may be modified or suspended at any time at NexTier’s discretion This table includes only cash repurchases of shares as of December 31, 2022. The Company expects to fund the repurchases by using cash on hand cash flow to be generated through December 31, 2023. +(3) Reflects the number of settled, purchased shares. +38 +Item 6. Reserved +39 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K. +40 +Business Overview +NexTier Oilfield Solutions Inc. is a predominantly U.S. land oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including (i) our 2019 transaction with C&J, a publicly traded Delaware corporation, (ii) our 2021 acquisition of Alamo, a pressure pumper focused in the Permian, and (iii) our 2022 acquisition of last mile proppant logistics and wellsite storage assets from CIG Sellers. This history impacts the comparability of our operational results from year to year. See Part I, “ Item 1. Business” of this Annual Report for an overview of our history, including additional information on certain of the acquisitions noted above, including the C&J Merger and the Alamo Acquisition, and business environment. Additional information on the Alamo Acquisition and the CIG Acquisition can also be found in Note (3) Acquisitions of Part II, “ Item 8 . Financial Statements and Supplemental Data.” +Industry Overview and Drivers in 2022 +We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford, Haynesville and the Bakken/Rockies. The high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements. +Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Thus, our financial performance is affected by rig and well counts in North America, as well as oil and natural gas prices, which are summarized in the tables below. Also influencing our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. +During 2022, global crude markets recovered further from the COVID-19 pandemic induced dual supply and demand shock that emerged in the first quarter of 2020. Additionally, the Russian invasion of Ukraine increased uncertainty of global supply given the supply of crude oil and natural gas that is exported from Russia, which along with the COVID-19 recoveries, drove crude prices to their peak in the first half of 2022, before retreating in the second half. For the year, crude prices were supportive of higher completions activity in 2022 relative to 2021. Crude oil prices have improved from their 2020 lows, which if maintained, we believe could drive a healthy level of investment and activity in U.S. shale. +There has been some attrition through consolidation and other events that have made some progress in realigning frac supply with demand. We believe frac supply utilization was very tight in 2022 and remains so at the beginning of 2023. Against this backdrop, pricing for our services has improved considering demand for our services has remained strong. Contributing to the tightness, horsepower intensity for each fleet continues to grow as our industry adopts more complex completion techniques; as horsepower demand returns, we believe existing supply will be fully utilized across fewer fleets. +The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas: +41 +Year Ended December 31, +2022 2021 2020 +Oil price - WTI (1) +$ 94.90 $ 68.14 $ 39.23 +Natural gas price - Henry Hub (2) +$ 6.45 $ 3.89 $ 2.04 +(1) Oil price measured in dollars per barrel +(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu +The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31, +Product Type 2022 2021 2020 +Oil 574 380 346 +Natural Gas 147 97 85 +Other 2 1 2 +Total 723 478 433 +Year Ended December 31, +Drilling Type 2022 2021 2020 +Horizontal 659 431 384 +Vertical 25 22 20 +Directional 39 25 29 +Total 723 478 433 +As of January 2023, global liquids demand is expected to average 100.5 million barrels per day in 2023. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of January 2023, natural gas demand in the United States is expected to average 86.74 billion cubic feet per day in 2023. +The regions in which we operate, including the Permian, Marcellus Shale / Utica Basins, Haynesville and Eagle Ford, among others, are expected to account for a majority of all new horizontal wells anticipated to be drilled through 2023. As of December 31, 2022, rigs in these basins accounted for approximately 70% of the total, and were up approximately 29% as compared to low total U.S. rig count noted on January 7, 2022. +The current U.S. administration has expressed support for alternative energy sources, reduction of greenhouse gas emissions, the use and dependence on fossil fuels, and efforts addressing climate change. There is also increased focus by our customers, investors and other stakeholders on climate change, sustainability, and energy transition matters. We have been transitioning to new technologies providing for dual fuel fleets capable of using natural gas, in furtherance of our low cost, low emissions commitment. +Operating Approach & Strategy +We believe that there is competitive value in providing integrated solutions that align the incentives of operators and service providers. We are pursuing opportunities to leverage our investment in our digital program and diesel substitution technologies (such as duel fuel capabilities and electric fleet), to provide a service strategy targeted at achieving emissions reductions, both for us and our customers. NexTier has been developing and building its digital program for some time, and we have now applied our digital platform to all of our operating fleets. We launched our Power Solutions business in 2021, which provides a natural gas treatment and delivery service that will power NexTier’s fleet with field gas or compressed natural gas. This addition seeks to address wellsites where there is not a reliable nearby gas supply, and thus, the full benefit and value of dual fuel or other +42 +lower emissions technologies may not otherwise be fully realized. To address this situation, we developed an integrated natural gas treatment and delivery solution designed to provide gas sourcing, compression, transport, decompression, treatment, and distribution services for our fracing operations. This integrated strategy provides our customers with a streamlined approach to driving more sustainable, cost-effective operations at the wellsite. Additionally, as part of our wellsite integration strategy, in 2022, we acquired sand hauling, well storage, and last mile logistics assets from CIG Sellers and rebranded the entire last mile logistics operation as NexMile Logistics. The assets acquired were combined with the Company’s existing last mile logistics assets to create a leading player in the delivery and storage of proppant at the wellsite. We are committed to our Power Solutions, NexMile Logistics, and proppant management businesses and will look to further increase our investments in these services, in addition to the maintenance and investment in our core fracturing assets. +We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. +Our revenues are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution. +Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide are central to our efforts to support equipment utilization and grow our business. +However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. +Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled +43 +during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization. +44 +Our Reportable Segments +Prior to the divestiture of our well support services business in March 2020, our business was organized into three reportable segments. Additional information on this transaction can be found in Note (21) Business Segment s. We are organized into two reportable segments, described below. This history impacts the comparability of our operational results from 2020 to 2021. +• Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our R&T department. +• Well Construction and Intervention Services, which consists of our cementing services. +Completion Services +The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our innovation centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our innovation centers we manufacture the data control instruments used in our fracturing operations and assemble the perforating guns and addressable switches used in our wireline operations; some of these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business. +Well Construction and Intervention Services +The core services provided through our Well Construction and Intervention Services segment were cementing and previously coiled tubing services. After the sale of our coiled tubing assets to Gladiator Energy LLC on August 1, 2022, all of the revenue for this segment is generated by our cementing business. +Historical Segment: Well Support Services +On March 9, 2020, we completed a divestiture of the entities and assets comprising our Well Support Services. This segment had focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. +How we calculate utilization for each segment +Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity. +45 +In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. Prior to the sale on August 1, 2022, of our coiled tubing business, we measured certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. +In our Well Support Services segment, prior to the 2020 divestiture of the segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month. +46 +RESULTS OF OPERATIONS +Th e following table sets forth our financial results for the year ended December 31, 2022 as compared to the year ended December 31, 2021. +A comparison of our financial results for the year ended December 31, 2021 and for the year ended December 31, 2020 can be found in the " Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 23, 2022. +Year Ended December 31, 2022 Compared with Year Ended December 31, 2021 +Year Ended December 31, +(Thousands of Dollars) +As a % of Revenue +Variance +Description +2022 2021 2022 2021 $ % +Completion Services $ 3,091,220 $ 1,324,888 95 % 93 % $ 1,766,332 133 % +Well Construction and Intervention Services 153,602 98,553 5 % 7 % 55,049 56 % +Revenue +3,244,822 1,423,441 100 % 100 % 1,821,381 128 % +Completion Services 2,366,952 1,165,881 73 % 82 % 1,201,071 103 % +Well Construction and Intervention Services 123,143 89,440 4 % 6 % 33,703 38 % +Costs of services +2,490,095 1,255,321 77 % 88 % 1,234,774 98 % +Depreciation and amortization +229,259 184,164 7 % 13 % 45,095 24 % +Selling, general and administrative expenses +145,996 109,404 4 % 8 % 36,592 33 % +Merger and integration +63,435 8,709 2 % 1 % 54,726 628 % +Gain on disposal of assets (16,616) (28,898) (1 %) (2 %) 12,282 (43 %) +Operating income (loss) 332,653 (105,259) 10 % (7 %) 437,912 (416 %) +Other income, net 15,258 12,131 0 % 1 % 3,127 26 % +Interest expense, net (28,382) (24,609) (1 %) (2 %) (3,773) 15 % +Total other expenses +(13,124) (12,478) 0 % (1 %) (646) 5 % +Income tax expense (4,560) (1,686) 0 % 0 % (2,874) 170 % +Net income (loss) $ 314,969 $ (119,423) 10 % (8 %) $ 434,392 (364 %) +Revenue. Total revenue is comprised of revenue from our Completion Services and Well Construction and Intervention Services segments. Revenue in 2022 increased by $1.8 billion, or 128%, to $3.2 billion from $1.4 billion in 2021. This change in revenue by reportable segment is discussed below. +Completion Services: Completion Services segment revenue increased by $1.8 billion, or 133%, to $3.1 billion in 2022 from $1.3 billion in 2021. The segment revenue increase is primarily attributable to a strong increase in the number of deployed hydraulic fracturing fleets, additional well-site integration and commodities, including our Power Solutions natural gas fueling services, increases in wireline and pumpdown services, and a full year of legacy Alamo equipment compared to four months in 2021 . Improved market conditions and higher global commodity prices drove increased customer activity across all basins, and we realized strong pricing recovery in all services lines. +Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $55.0 million, or 56%, to $153.6 million in 2022 from $98.6 million in 2021. The increase in revenue is +47 +primarily due to higher customer activity, improved pricing, and increased utilization in our cementing and coil tubing services resulting from improved market conditions and higher global oil and gas commodity prices, offset by the reduction due to the sale of the coil tubing business in the third quarter of 2022. +Cost of services. Cost of services in 2022 increased by $1.2 billion, or 98%, to $2.5 billion from $1.3 billion in 2021. The increase is primarily due to significantly increased activity and utilization, as explained under the "Revenue" caption and its related segment sub-captions above. Pricing improvements coupled with operational efficiencies and process improvements to permanently drive costs out of the organization more than offset the impact of cost inflation, and led to overall costs increasing at a lower rate than revenue increased. +Equipment Utilization. Depreciation and amortization expense increased by $45.1 million, or 24%, to $229.3 million in 2022 from $184.2 million in 2021. The increase in depreciation and amortization is primarily due to additional equipment from the Alamo Acquisition in the third quarter of 2021, current year capital additions, and the CIG assets acquired in the third quarter of 2022. Gain on disposal of assets in 2022 decreased $12.3 million, to a gain of $16.6 million in 2022 compared to a gain of $28.9 million in 2021. This change was primarily driven by the Company’s higher levels of divesting in 2021 of diesel-powered frac equipment and other non-core assets to fund conversions of equipment to be powered by natural gas as compared to divestitures in 2022, which primarily consisted of the sale of our coiled tubing business in the third quarter of 2022. +Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $36.6 million, or 33%, to $146.0 million in 2022 from $109.4 million in 2021, primarily due to the $24.9 million accrual reduction in 2021 related to the settlement of a regulatory audit matter, combined with increased stock compensation in first quarter of 2022 and increased activity as a result of the Alamo Acquisition in the third quarter of 2021. +Merger and integration expense. Merger and integration expense increased by $54.7 million, or 628%, to $63.4 million in 2022 from $8.7 million in 2021. The increase in merger and integration expense is primarily related to the Alamo Acquisition earnout, which was triggered by Alamo achieving certain EBITDA targets pursuant to the Purchase Agreement. +Other income, net. Other income, net, in 2022 increased by $3.1 million, or 26%, to $15.3 million in 2022 from $12.1 million in 2021. This change was primarily due to the gain on the sale of our equity security investment of $2.1 million recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss). +Interest expense, net. Interest expense, net of interest income, increased by $3.8 million, or 15%, to $28.4 million in 2022 from $24.6 million in 2021. This change was primarily attributable to an increase in the Company’s finance leases acquired as part of the Alamo Acquisition in the third quarter of 2021. +Effective tax rate. Our effective tax rate on continuing operations in 2022 was 1.43% for $4.6 million of recorded income tax expense, as compared to (1.43)% for $1.7 million of income tax expense in 2021. For 2022, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, permanent differences and a change in valuation allowance. For 2021, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, foreign withholding taxes, permanent differences, and a change in valuation allowance. As of December 31, 2022, we continued to maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. We continue to evaluate all available evidence to determine the +48 +likelihood of utilizing our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets. +Material Changes to our Consolidated Balance Sheet +The following table presents the major indicators of our financial condition and liquidity. +(Thousands of Dollars) +December 31, 2022 December 31, 2021 +Cash and cash equivalents $ 218,476 $ 110,695 +Total current assets, excluding cash and cash equivalents 507,539 397,014 +Total current liabilities, excluding current maturities of long-term debt and leases +513,396 438,961 +Current maturities of long-term debt +14,004 13,384 +Long-term debt, net of deferred financing costs and debt discount, less current maturities +$ 347,425 $ 361,501 +Cash and cash equivalents was $218.5 million as of December 31, 2022, an increase of $107.8 million, or 97%, compared to $110.7 million as of December 31, 2021. The increase in cash and cash equivalents during the year ended December 31, 2022, was primarily driven by the improved profitability with strong cash collections, discipline on capital allocation due to market conditions, and higher global commodity prices that have increased customer activity across all basins and have enabled strong pricing recovery in all services lines. This was offset by cash flows used in investing activities including the purchases of property and equipment and the CIG Acquisition and cash flows used in financing activities including the payments on our debt obligations, finance lease, and our share repurchase program. +Total current assets, excluding cash and cash equivalents, was $507.5 million as of December 31, 2022, an increase of $110.5 million, or 28%, compared to $397.0 million as of December 31, 2021. Total current liabilities, excluding current maturities of long-term debt and leases, was $513.4 million as of December 31, 2022, an increase of $74.4 million, or 17%, compared to $439.0 million as of December 31, 2021. The increase in both total current assets, excluding cash and cash equivalents, and total current liabilities, excluding current maturities of long-term debt and leases, was due to increases in customer receivables, higher levels of inventories, increases in accounts payables and accrued expenses, and the increase in the Alamo earnout. +Long-term debt, net of deferred financing costs and debt discount, less current maturities was $347.4 million as of December 31, 2022, a decrease of $14.1 million, or 4%, as compared to $361.5 million as of December 31, 2021. The decrease in debt, net of deferred financing costs and debt discount was primarily driven by the principal payments made throughout the period. +Fiscal 2023 Strategy +We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A. of this Annual Report for additional information about the known material risks that we face. +Fiscal 2023 Objectives +With commodity prices continuing to be volatile, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering stockholder value and maintaining a disciplined capital deployment strategy. +49 +We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our stockholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, lower emissions, and to ensure that we are strategically positioned to capitalize on constructive market dynamics. We foresee the macroeconomics setup in 2023 to be just as strong for our industry as it was in 2022 and that the demand for fracturing fleets will likely continue to exceed the supply available in the market. Even during this strong macroeconomic environment in our industry, our strategy remains to lead the industry in disciplined behavior and use our returns to reward our shareholders. +Completion Services +In our Completion Services segment, our strategy remains focused on continuing to meet our customers’ demands while increasing the integration with more of our wireline and pumpdown units, Power Solutions services, and last mile logistics with our deployed fracturing fleets. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. As part of this effort, we continuously evaluate new technologies with enhanced capabilities and greater operating efficiency to replace aging equipment within our fracturing fleet as it becomes obsolete or retired. We also expect the delivery of our first electric fleet in the first half of the year, which will increase our investments in diesel substitution technologies. Additionally, we plan to continue to fund high return growth project that will increase the penetration of our wellsite integration strategy, mostly through additional investments in Power Solutions services and last mile logistics. +Furthermore, as discussed in Item 1 . Business and Item 7. MD&A Overview, as part of our lower emissions initiatives, we are focused on optimizing gas substitution across our fleet, enabled by digital capabilities like NexHub and MDT controls, and the continued development of our Power Solutions business. We believe that natural gas-powered technologies and digital assisted logistics will be a key method of transitioning to lower emissions operations, which strategy we anticipate will be a key driver of returns. +Well Construction and Intervention Services +In our cementing business, we remain focused on providing high-quality, timely service and deploying more of our assets with efficient customers in our focused basins. We will stay focused on controlling costs and improving market share with an efficient customer base that plan to maintain stable drilling rig counts and levels of activity in 2023, while spending the necessary capital to maintain our equipment in optimal conditions. +LIQUIDITY AND CAPITAL RESOURCES +Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. +(Thousands of Dollars) +Year Ended December 31, +2022 2021 +Cash +$ 218,476 $ 110,695 +Debt, net of deferred financing costs and debt discount +$ 361,429 $ 374,885 +50 +(Thousands of Dollars) +Year Ended December 31, +2022 2021 +Net cash provided by (used in) operating activities $ 454,391 $ (50,787) +Net cash used in investing activities $ (186,234) $ (163,201) +Net cash (used in) provided by financing activities $ (161,494) $ 48,286 +Significant sources and uses of cash during the year ended December 31, 2022 +Sources of cash: +• Operating activities: +• Net cash provided by operating activities for the year ended December 31, 2022 was $454.4 million. This was primarily driven by improved profitability with strong cash collections, discipline on capital allocation, improved market conditions, and higher global commodity prices, which drove increased customer activity across all basins, as well as realized strong pricing recovery in all services lines. Pricing improvements, coupled with operational efficiencies, and process improvements to permanently drive costs out of the organization more than offset the impact of cost inflation and led to overall costs increasing at a lower rate than revenue. +Uses of cash: +• Investing activities: +• Net cash used in investing activities for the year ended December 31, 2022 was $186.2 million. The activity consists primarily of purchases of property and equipment of $215.4 million, advances of deposit on equipment of $4.9 million, asset acquisition of $26.7 million, and implementation of software of $4.8 million, offset by proceeds from disposal of assets of $50.2 million and proceeds from insurance recoveries of $15.4 million. +• Financing activities: +• Net cash used in financing activities during the year ended December 31, 2022 was $161.5 million. The activity consists primarily of payments made related to repayment of the 2018 Term Loan Facility and the Equipment Loan of $14.7 million, repayment of our finance leases of $13.9 million, repayment of our financing liabilities of $7.6 million, repayment of the contingent consideration liability related to the Alamo Acquisition earnout of $6.3 million, repurchase and retirement of shares related to stock-based compensation of $7.5 million, and repurchase and retirement of shares related to share repurchase program of $111.4 million. +Significant sources and uses of cash during the year ended December 31, 2021 +Sources of cash: +• Financing activities: +• Net cash provided by financing activities for the year ended December 31, 2021 was $48.3 million, which was an increase of $58.1 million compared to the year ended December 31, 2020. This change was primarily due to the $43.2 million the Company received through our 2021 Equipment Loans and $17.8 million from financing liabilities. +51 +Uses of cash: +• Operating activities: +• Net cash used in operating activities during the year ended December 31, 2021 was $50.8 million, which resulted in a change of $119.7 million compared to the year ended December 31, 2020. The change is primarily due to an increase in commodity prices, additional maintenance expenses related to startup costs required for fleet re-deployments, and inflation. +• Investing activities: +• Net cash used in investing activities for the year ended December 31, 2021 was $163.2 million, which resulted in increase of $125.4 million compared to the year ended December 31, 2020. The change is primarily due to an increase in purchase of property plant and equipment, deposits on equipment and implementation of software of $64.3 million, a $156.1 million change related to acquisition of business and payment of consideration liability, partially offset by an increase of $37.8 million in proceeds from disposal of assets, $34.4 million in cash received from the WSS notes and $22.9 million in proceeds from insurance recoveries. +Future sources and use of cash +Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, issuance of our common stock for acquisitions, and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry. +Our primary uses of cash are for operating costs, capital expenditures, including acquisitions, our shareholder return program, and debt service. +In 2023, we expect capital expenditures to be approximately $350.0 million. We expect a higher spend in the first half of the year and declining in the second half due to the expected delivery of our first electric fleet, the front loaded investments in wellsite integration services including Power Solutions and last mile logistics, as well as further investments to increase our capitalized component spare parts. +Debt service for the year ended December 31, 2023 is projected to be $54.5 million, of which $13.2 million is related to finance leases. We anticipate our debt service will be funded by cash flows from operations. +As of December 31, 2022, we had $138.6 million remaining in the $250.0 million share repurchase program announced on October 25, 2022, which the Company expects to fully execute by December 31, 2023. +Other factors affecting liquidity +Financial position in current market. As of December 31, 2022, we had $218.5 million of cash and a total of $415.3 million available under our 2019 ABL Facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity to cover our estimated short-term (i.e., the next 12 months) and long-term (i.e., beyond the next 12 months) funding needs, including for capital expenditures, debt service, working capital investments, and our shareholder return program. +Guarantee agreements. Under the 2019 ABL Facility $22.6 million of letters of credit were outstanding as of December 31, 2022. +52 +Customer receivables . In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 to 60 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. We currently believe that the current strong macroeconomic environment for our industry will continue through 2023 and that we will not experience increased delays or failures of customers’ payments. +Contractual Obligations +In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2022. +(Thousands of Dollars) +Contractual obligations +Total 2023 2024-2025 2026-2027 2028+ +Long-term debt, including current portion (1) +$ 364,865 $ 15,429 $ 349,436 $ — $ — +Estimated interest payments (2) +52,694 22,734 29,960 — — +Finance lease obligations (3) +33,025 20,770 12,255 — — +Operating lease obligations (4) +22,487 6,811 7,715 3,985 3,976 +Purchase commitments (5) +291,619 271,415 20,204 — — +Legal contingency 374 374 — — — +$ 765,064 $ 337,533 $ 419,570 $ 3,985 $ 3,976 +(1) Long-term debt represents our obligations under our 2018 Term Loan Facility and Equipment Loan, exclusive of interest payments. In addition, these amounts exclude $3.4 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility and Equipment Loan. +(2) Estimated interest payments are based on debt balances outstanding as of December 31, 2022 and include interest related to the 2018 Term Loan Facility and the 2021 Equipment Loans. Interest rates used for variable rate debt are based on the prevailing current LIBOR. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023. +(3) Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles and frac equipment. +(4) Operating lease obligations are related to our real estate, rail cars, and light duty vehicles. +(5) Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in most cases, carried forward to the next year. +53 +Principal Debt Agreements +Our principal debt arrangements continue to be the 2021 Equipment Loan, 2019 ABL Facility and the 2018 Term Loan Facility described below. +2021 Equipment Loans +Origination . On August 20, 2021, we entered into a Master Loan and Security Agreement (the “Master Agreement”) with Caterpillar Financial Services Corporation. +Structure . Our Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $46.5 million (the “2021 Equipment Loans”). The 2021 Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. +Maturity . All tranches under the Master Agreement mature on June 1, 2025. +Interest . Term notes entered into under the Master Agreement will bear interest at a rate of 5.25%. +2019 ABL Facility +Origination . On October 31, 2019, we, and certain of our other subsidiaries as additional borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017. +Structure . Our 2019 ABL Facility provides for a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments. +Maturity . The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively. +Interest . Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023. +Financial Covenants . The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2022 , the Company was in compliance with all covenants and the circumstances that would require testing of the consolidated fixed charge coverage ratio had not occurred. +2018 Term Loan Facility +54 +On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes. +Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2022, there was $334.3 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loa n Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immed iately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00. +Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments. +Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding. +Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. As of December 31, 2021, there was a $334.3 million principal amount of term loans outstanding (the "2018 Term Loans") at an interest rate of LIBOR plus an applicable margin, which is currently at 3.50%. The 2018 Term Loan Facility is subject to customary fees, guarantees of subsidiaries, events of default, restrictions and covenants, including certain restricted payments. As of December 31, 2022, the Company was in compliance with all covenants. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023. +Prepayments . The 2018 Term Loan Facility is re quired to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments. +Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility were originally guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that have and will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”). +55 +Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”). +Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility. +Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00. +“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments). +Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2022, the Company was in compliance with all covenants. +Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility). +Related Party Transactions +Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is (x) any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as defined below) has or will have a direct or indirect material interest, or (y) any transaction that would be required to be disclosed by the Company pursuant to Item 404(a) of Regulation S-K, as amended. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction. +The Related Party Policy defines “Related Party” (x) as any person who is, or, at any time since the beginning of the Company’s last fiscal year for which the Company has filed an Annual Report on Form 10-K and +56 +proxy statement (if applicable), was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest of any class of the Company’s voting securities, (3) an Immediate Family Member (as defined below) of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest of any class of the Company’s voting securities, or (y) any “related person” as defined in Item 404(a) of Regulation S-K, as amended. The Related Party defines “Immediate Family Members” to include a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee. +For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Recently Issued Accounting Standards +For discussion on the impact of accounting standards issued but not yet adopted to our consolidated financial statements, see Note (22) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Critical Accounting Estimates +The preparation of our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. +A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included within Part II, “ Item 8 . Financial Statements and Supplementary Data.” +Business combinations +We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Acquisitions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our completed acquisition during 2021. +Asset acquisitions +Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets +57 +acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Acquisitions of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our recently completed asset acquisition during 2022. +Legal and environmental contingencies +From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies. +Valuation of long-lived assets, indefinite-lived assets and goodwill +We assess our long-lived assets, including definite-lived intangible assets and property and equipment, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings. +We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting units or asset groups, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value, and current operations, financial results, and historical projections. The expected future cash flows used for determination of recoverability and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges. +See Note (2)(f) Long-Lived Assets with Definite Lives and (2)(h) Goodwill and Indefinite-Lived Intangible Assets of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2022, 2021 and 2020. +Income Taxes +We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to +58 +differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. +We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. +The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. +The Inflation Reduction Act ("IRA") was signed into law on August 16, 2022. Among other provisions, the IRA includes a 15% corporate alternative minimum tax (“CAMT”) applied to corporations with adjusted financial statement income over $1B and a 1% excise tax on corporate stock repurchases made by publicly traded companies after December 31, 2022. The IRA includes various energy tax credit provisions as well. The Company will not be an applicable corporation for purposes of the CAMT in 2023, but will be subject to the 1% excise tax on any stock repurchases starting in 2023. The Company will continue to monitor the impact of the IRA on its financial statements. +See Note (17) Income Taxes of Part II, “ Item 8 . Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2022, 2021 and 2020. +Leases +Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate +59 +in the lease. Establishing our lease obligations on our consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our consolidated financial statements. For further details about our leases, see Note (16) Leases of Part II, “ Item 8 . Financial Statements and Supplementary Data”. +New Accounting Pronouncements +For discussion on the potential impact of new accounting pronouncements issued but not yet adopted and those adopted during the current year, see Note (22) New Accounting Pronouncements of Part II, “ Item 8 . Financial Statements and Supplementary Data.” +60 +Item 7A. Quantitative and Qualitative Disclosure About Market Risk +Exchange Rate Risk . Our operations are currently conducted predominantly within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk during 2022. +Interest Rate Risk. As of December 31, 2022, we held variable-rate debt, the exposure to which we manage with our interest-rate-related derivative instruments. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. We are exposed to changes in interest rates on our floating rate borrowings under our 2019 ABL Facility and 2018 Term Loan. As of December 31, 2022, we had no debt outstanding under our 2019 ABL Facility and $334.3 million aggregate principal amount outstanding under the 2018 Term Loan. The impact of a 1.0% increase in interest rates under the terms of the 2019 ABL Facility would have no impact on interest expense for the 2022 year, and a 1.0% increase in interest rates under the terms of the 2018 Term Loan would have a $3.4 million impact on interest expense for the 2022 year. +Commodity Price Risk . Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant and chemicals. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (proppant and chemicals) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. +For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part II, “ Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” for the discussion of contractual commitments and obligations as of December 31, 2022 and Part II, “ Item 8 . Financial Statements and Supplementary Data” in Note (2)(i) Derivative Instruments and Hedging Activities and Note (10) Derivatives . +Customer Credit Risk . Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for credit losses. +61 +Item 8. Financial Statements and Supplementary Data +INDEX TO FINANCIAL STATEMENTS +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +63 +Consolidated Balance Sheets +67 +Consolidated Statements of Operations and Comprehensive Income (Loss) +68 +Consolidated Statements of Changes in Stockholders’ Equity +69 +Consolidated Statements of Cash Flows +70 +Notes to Consolidated Financial Statements +72 +62 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 16, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +63 +Evaluation of long-lived assets for impairment triggering events +As discussed in Note 2(f) to the consolidated financial statements, the Company evaluates property and equipment and definite-lived intangible assets (collectively, long-lived assets) annually or upon the occurrence of events or changes in circumstances, referred to as triggering events, that indicate the carrying value of a long-lived asset may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of a long-lived asset is not recoverable. As of December 31, 2022, the carrying value of property and equipment, net and definite-lived intangible assets, net was $679.5 million and $50.6 million, respectively. +We identified the evaluation of long-lived assets for impairment triggering events as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data for impairment indicators. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process of identifying and assessing potential triggering events, including controls over the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data. We evaluated the Company’s identification and assessment of triggering events by evaluating current period operations, financial results and historical projections, including consideration of current industry and market considerations. We compared relevant industry data used by the Company to external sources, including market index data and peer data. We evaluated the Company’s analysis over the factors and considered whether the Company omitted any significant internal or external elements in its evaluation. +/s/ KPMG LLP +We have served as the Company’s auditor since 2011. +Houston, Texas +February 16, 2023 +64 +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +NexTier Oilfield Solutions Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited NexTier Oilfield Solutions Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 16, 2023 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +65 +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Houston, Texas +February 16, 2023 +66 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Balance Sheets +(Amounts in thousands) +December 31, +2022 December 31, +2021 +Assets +Current assets: +Cash and cash equivalents +$ 218,476 $ 110,695 +Trade and other accounts receivable, net +397,197 301,740 +Inventories, net +66,395 38,094 +Assets held for sale +— 1,555 +Prepaid and other current assets +43,947 55,625 +Total current assets +726,015 507,709 +Operating lease right-of-use assets +18,659 21,767 +Finance lease right-of-use assets +43,714 41,537 +Property and equipment, net 679,513 620,865 +Goodwill +192,780 192,780 +Intangible assets, net 50,586 64,961 +Other noncurrent assets +15,901 7,962 +Total assets +$ 1,727,168 $ 1,457,581 +Liabilities and Stockholders’ Equity +Liabilities +Current liabilities: +Accounts payable +$ 202,936 $ 190,963 +Accrued expenses +281,715 213,923 +Customer contract liabilities 19,377 23,729 +Current maturities of long-term operating lease liabilities +6,083 7,452 +Current maturities of long-term finance lease liabilities +19,855 11,906 +Current maturities of long-term debt +14,004 13,384 +Other current liabilities +9,368 10,346 +Total current liabilities +553,338 471,703 +Long-term operating lease liabilities, less current maturities +13,267 20,446 +Long-term finance lease liabilities, less current maturities +11,925 26,873 +Long-term debt, net of deferred financing costs and debt discount, less current maturities +347,425 361,501 +Other noncurrent liabilities +11,294 30,041 +Total noncurrent liabilities +383,911 438,861 +Total liabilities +937,249 910,564 +Stockholders’ equity +Common stock, par value $ 0.01 per share ( 500,000 shares authorized; 233,995 shares and 242,019 shares issued and outstanding, respectively) +2,340 2,420 +Paid-in capital in excess of par value +1,007,492 1,094,020 +Retained deficit ( 226,195 ) ( 541,164 ) +Accumulated other Comprehensive Income (Loss) 6,282 ( 8,259 ) +Total stockholders’ equity +789,919 547,017 +Total liabilities and stockholders’ equity +$ 1,727,168 $ 1,457,581 +See accompanying notes to the consolidated financial statements. +67 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Operations and Comprehensive Income (Loss) +(Amounts in thousands, except for per share amounts) +Year Ended December 31, +2022 2021 2020 +Revenue $ 3,244,822 $ 1,423,441 $ 1,202,581 +Operating costs and expenses: +Cost of services (1) +2,490,095 1,255,321 1,032,574 +Depreciation and amortization 229,259 184,164 302,051 +Selling, general and administrative expenses 145,996 109,404 144,147 +Merger and integration 63,435 8,709 32,539 +Gain on disposal of assets ( 16,616 ) ( 28,898 ) ( 14,461 ) +Impairment expense — — 37,008 +Total operating costs and expenses +2,912,169 1,528,700 1,533,858 +Operating income (loss) 332,653 ( 105,259 ) ( 331,277 ) +Other expense: +Other income, net 15,258 12,131 6,516 +Interest expense, net ( 28,382 ) ( 24,609 ) ( 20,652 ) +Total other expenses +( 13,124 ) ( 12,478 ) ( 14,136 ) +Income (loss) before income taxes 319,529 ( 117,737 ) ( 345,413 ) +Income tax expense ( 4,560 ) ( 1,686 ) ( 1,470 ) +Net income (loss) 314,969 ( 119,423 ) ( 346,883 ) +Other Comprehensive Income (Loss), net of tax: +Foreign currency translation adjustments 1,118 407 ( 241 ) +Hedging activities 12,067 1,703 ( 6,422 ) +Total Comprehensive Income (Loss) +$ 328,154 $ ( 117,313 ) $ ( 353,546 ) +Net income (loss) per share: +Basic net income (loss) per share $ 1.29 $ ( 0.53 ) $ ( 1.62 ) +Diluted net income (loss) per share $ 1.26 $ ( 0.53 ) $ ( 1.62 ) +Weighted-average shares outstanding: basic 243,360 224,401 213,795 +Weighted-average shares outstanding: diluted 249,346 224,401 213,795 +(1) Cost of services during the years ended December 31, 2022, 2021, and 2020 excludes depreciation of $ 212.6 million , $ 166.4 million, and $ 283.8 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately. +See accompanying notes to the consolidated financial statements. +68 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders’ Equity +(Amounts in thousands) +Common Stock Paid-in Capital in Excess of Par Value Retained Deficit Accumulated other comprehensive income (loss) Total +Balance as of December 31, 2019 $ 2,124 $ 966,762 $ ( 73,333 ) $ ( 8,781 ) $ 886,772 +Credit loss standard implementation — — ( 1,525 ) — ( 1,525 ) +Stock-based compensation 27 25,799 — — 25,826 +Shares repurchased and retired related to stock-based compensation ( 7 ) ( 2,566 ) — — ( 2,573 ) +Other Comprehensive Income (Loss) +— — — ( 4,329 ) ( 4,329 ) +Net loss — — ( 346,883 ) — ( 346,883 ) +Balance as of December 31, 2020 $ 2,144 $ 989,995 $ ( 421,741 ) $ ( 13,110 ) $ 557,288 +Stock-based compensation 19 24,658 — — 24,677 +Shares repurchased and retired related to stock-based compensation ( 3 ) ( 2,696 ) — — ( 2,699 ) +Equity issued in connection with Alamo Acquisition 260 82,063 — — 82,323 +Other Comprehensive Income (Loss) +— — — 4,851 4,851 +Net loss — — ( 119,423 ) — ( 119,423 ) +Balance as of December 31, 2021 $ 2,420 $ 1,094,020 $ ( 541,164 ) $ ( 8,259 ) $ 547,017 +Stock-based compensation 39 29,556 — — 29,595 +Shares repurchased and retired related to stock-based compensation ( 9 ) ( 7,491 ) — — ( 7,500 ) +Equity issued in connection with CIG Acquisition 5 4,202 — — 4,207 +Shares repurchased and retired related to stock repurchase program ( 115 ) ( 112,795 ) — — ( 112,910 ) +Other Comprehensive Income (Loss) +— — — 14,541 14,541 +Net income — — 314,969 — 314,969 +Balance as of December 31, 2022 $ 2,340 $ 1,007,492 $ ( 226,195 ) $ 6,282 $ 789,919 +See accompanying notes to the consolidated financial statements. +69 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Year Ended December 31, +2022 2021 2020 +Cash flows from operating activities: +Net income (loss) $ 314,969 $ ( 119,423 ) $ ( 346,883 ) +Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities +Depreciation and amortization 229,259 184,164 302,051 +Amortization of deferred financing fees 2,189 2,066 2,217 +Gain on disposal of assets ( 16,616 ) ( 28,898 ) ( 14,461 ) +Stock-based compensation 33,117 24,677 25,826 +Unrealized gain (loss) on derivative recognized in other comprehensive income (loss) — 1,703 ( 6,422 ) +(Gain) loss on financial instrument and derivatives, net ( 6,388 ) 1,799 ( 2,815 ) +Gain on insurance proceeds recognized in other income ( 8,564 ) ( 10,409 ) — +Loss on impairment of assets — — 37,008 +Payment of contingent consideration ( 27,014 ) — — +Changes in operating assets and liabilities +(Increase) decrease in trade and other accounts receivable, net ( 95,477 ) ( 128,535 ) 183,083 +(Increase) decrease in inventories ( 36,253 ) ( 9,978 ) 19,167 +Decrease (increase) in prepaid and other current assets 23,769 ( 10,894 ) 5,160 +(Increase) decrease in other assets ( 8,962 ) 24,807 25,306 +(Decrease) increase in accounts payable ( 34,260 ) 18,693 ( 61,658 ) +(Decrease) increase in customer contract liabilities ( 4,352 ) ( 6,537 ) 206 +Increase (decrease) in accrued expenses 99,667 34,860 ( 84,129 ) +Decrease in other liabilities ( 10,693 ) ( 28,882 ) ( 14,771 ) +Net cash provided by (used in) operating activities 454,391 ( 50,787 ) 68,885 +Cash flows from investing activities +Asset and business acquisitions ( 26,694 ) ( 95,082 ) 53,666 +Purchase of property and equipment ( 215,418 ) ( 184,496 ) ( 113,506 ) +Advances of deposit on equipment ( 4,854 ) ( 961 ) ( 1,908 ) +Implementation of software ( 4,846 ) ( 3,021 ) ( 8,813 ) +Proceeds from disposal of assets 50,227 70,432 32,659 +Proceeds from insurance recoveries 15,351 22,947 58 +Proceeds from settlement of WSS Notes and make-whole derivative — 34,350 — +Payment of consideration liability — ( 7,370 ) — +Net cash used in investing activities ( 186,234 ) ( 163,201 ) ( 37,844 ) +Cash flows from financing activities: +Proceeds from the asset-based revolver and equipment loan — 43,329 175,000 +70 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(Amounts in thousands) +Payments on the asset-based revolver, term loan facilities, and equipment loan ( 14,738 ) ( 4,976 ) ( 178,500 ) +Payments on finance leases ( 13,872 ) ( 4,155 ) ( 3,752 ) +Payment of debt issuance costs ( 110 ) ( 277 ) — +Payment of contingent consideration ( 6,343 ) — — +Shares repurchased and retired related to share repurchase program ( 111,365 ) — — +Shares repurchased and retired related to stock-based compensation ( 7,500 ) ( 2,699 ) ( 2,573 ) +Proceeds from financing liabilities — 17,759 — +Payments for financing liabilities ( 7,566 ) ( 695 ) — +Net cash (used in) provided by financing activities ( 161,494 ) 48,286 ( 9,825 ) +Non-cash effect of foreign translation adjustments 1,118 407 ( 241 ) +Net increase (decrease) in cash, cash equivalents and restricted cash 107,781 ( 165,295 ) 20,975 +Cash, cash equivalents and restricted cash, beginning 110,695 275,990 255,015 +Cash, cash equivalents and restricted cash, ending $ 218,476 $ 110,695 $ 275,990 +Supplemental disclosure of cash flow information: +Cash paid during the period for: +Interest $ 26,332 $ 23,242 $ 21,114 +Income taxes 1,716 217 1,206 +Non-cash investing and financing activities: +Change in accrued capital expenditures $ ( 46,268 ) $ ( 71,897 ) $ ( 13,812 ) +Non-cash additions to equity security investment — — 5,263 +Non-cash additions to finance right-of use assets 7,115 42,592 — +Non-cash additions to finance lease liabilities, including current maturities ( 6,874 ) ( 42,592 ) — +Non-cash additions to operating right-of-use assets 8,088 9,047 9,057 +Non-cash additions to operating lease liabilities, including current maturities ( 8,004 ) ( 7,416 ) ( 8,898 ) +500,000 shares of NexTier common stock issued for CIG Acquisition +$ ( 4,207 ) $ — $ — +26,000,000 shares of NexTier common stock issued in exchange for Alamo ownership +— ( 82,323 ) — +Total contingent consideration — ( 45,944 ) — +Non contingent consideration — ( 7,370 ) — +See accompanying notes to the consolidated financial statements. +71 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(1) Basis of Presentation and Nature of Operations +The accompanying consolidated financial statements were prepared using United States (“U.S.”) Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated. +The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; acquisition accounting; contingent liabilities; the valuation of property and equipment and intangible assets; income taxes; stock-based incentive plan awards; and derivatives. +Management believes the consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2022 and 2021 and the results of its operations and cash flows for the years ended December 31, 2022, 2021 and 2020. Such adjustments are of a normal recurring nature. +On March 9, 2020, the Company completed the divestiture of its Well Support Services Segment (“WSS Sale”). For more details regarding the WSS Sale, refer to Note (21) Business Segments . +On August 31, 2021, the Company completed its acquisition (“Alamo Acquisition”) of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries (“Alamo”). Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the Alamo Acquisition. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate Alamo’s operations, aligning accounting processes and procedures, integrating its enterprise resource planning system with those of the Company, and any Earnout Payments. All of these costs are recorded within merger and integration costs on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). For more details regarding the Alamo Acquisition, refer to Note (3) Acquisitions . +On August 1, 2022, the Company completed the sale of its coiled tubing assets to Gladiator Energy LLC (“Gladiator”). For more details regarding sale of the coiled tubing assets, refer to Note (21) Business Segments . +The consolidated financial statements for the period from January 1, 2020 to August 31, 2021 reflect only the historical results of the Company prior to the completion of the Alamo Acquisition. +(2) Summary of Significant Accounting Policies +(a) Business Combinations and Asset Acquisitions +Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 820, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in the Company’s results of operations from the date of acquisition. +Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the +72 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition. +Refer to Note (3) Acquisitions for discussion of the acquisitions completed in 2022 and 2021. +(b) Cash and Cash Equivalents +The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight interest-bearing demand deposit accounts with no set terms. +Net cash received from certain dispositions or casualty events of more than $ 25.0 million per single transaction or $ 50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $ 50.0 million, under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did no t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the years ended December 31, 2022 and 2021. +(c) Trade Accounts Receivable +Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company evaluates its accounts receivable through a continuous process of assessing its portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, and financial condition of customers. Based on our review of these factors, we establish or adjust allowances for specific customers. Trade accounts receivable were $ 398.6 million and $ 303.6 million at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had an allowance for credit losses of $ 1.4 million and $ 1.9 million, respectively. +(d) Inventories +Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the Consolidated Statements of Operations and Comprehensive Income (Loss) using the weighted average cost method for non-manufacturing inventory and standard cost method for manufacturing inventory. +The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off. +(e) Revenue Recognition +73 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Revenues are accounted for in accordance with Accounting Standards Codification 606 “Revenue from Contracts with Customers” (“ASC 606”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. +The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 to 60 days of the invoice issuance. +A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job. +Remaining Performance Obligations +The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. The Company has identified one contract with a remaining term of more than one year, for which the Company had approximately $ 19.4 million of unsatisfied performance obligations as of December 31, 2022, which will be recognized as services are performed over the remaining contractual terms. +The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations. +Contract Balances +In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As of December 31, 2022, the Company’s customer contract liability balance is related to the post close service agreement as a result of the Alamo Acquisition. Payment terms after invoicing are typically 30 to 60 days or less. +The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the Consolidated Statements of Operations and Comprehensive Income (Loss) and net cash provided by operating activities in the consolidated statements of cash flows. +The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see (21) Business Segments . +Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows: +Completion Services +74 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the Consolidated Statements of Operations and Comprehensive Income (Loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the Consolidated Statements of Operations and Comprehensive Income (Loss). +Once a stage has been completed or products and services have been provided, a field ticket is created that includes charges for the service performed and the chemicals, proppant, and compressed natural gas consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Well Construction and Intervention +The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue. +Prior to the sale of the coiled tubing assets on August 1, 2022, the Company provided a range of coiled tubing services used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services were typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue was recognized upon completion of each day’s work based upon a completed field ticket. The field ticket included charges for the services performed and the consumables used during the course of service. The field ticket may have also included charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous consumables. The Company typically would charge the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates or pursuant to pricing agreements. +Historical Segment: Well Support Services +On March 9, 2020, the Company completed the divestiture of its Well Support Services segment. For additional information, see Note (21) Business Segments. Through its rig services line, the Company had provided workover and well servicing rigs that were primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services were provided on an hourly basis at prices that approximate spot market rates. A field ticket was generated and revenue is recognized upon the earliest of the completion of a job or at the end of each day. +Through its fluids management service line, the Company used to provide storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket. +Through its other special well site service line, the Company used to provide fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided. +75 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Disaggregation of Revenue +Revenue activities during the years ended December 31, 2022, 2021 and 2020 were as follows: +Year Ended December 31, 2022 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 441,168 $ 29,464 $ — $ 470,632 +Central 590,444 — — 590,444 +West Texas 1,881,561 118,726 — 2,000,287 +West 168,153 5,412 — 173,565 +International 9,894 — — 9,894 +$ 3,091,220 $ 153,602 $ — $ 3,244,822 +Year Ended December 31, 2021 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 248,652 $ 21,881 $ — $ 270,533 +Central 263,427 — — 263,427 +West Texas 680,716 72,565 — 753,281 +West 95,072 4,107 — 99,179 +International 37,021 — — 37,021 +$ 1,324,888 $ 98,553 $ — $ 1,423,441 +Year Ended December 31, 2020 +Completion Services WC&I Well Support Services Total +(In thousands) +Geography +Northeast $ 270,612 $ 21,290 $ — $ 291,902 +Central 131,833 7,478 — 139,311 +West Texas 477,758 58,111 8,373 544,242 +West 122,970 11,459 49,556 183,985 +International 43,141 — — 43,141 +$ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +(f) Long-Lived Assets with Definite Lives +Property and equipment, inclusive of equipment under finance lease, are generally stated at cost. +Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Management determines the estimate of the +76 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. +Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). +Major classifications of property and equipment and their respective useful lives are as follows: +Land Indefinite life +Building and leasehold improvements +13 months – 40 years +Machinery and equipment +13 months – 25 years +Office furniture, fixtures and equipment +3 years – 5 years +Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use. Depreciation methods, useful lives and residual values are reviewed annually. +In the first quarter of 2021, the Company reassessed the estimated useful lives of select machinery and equipment, concluding that due to a decrease in service intensity for select machinery and equipment driven by operational parameters required to maximize natural gas substitution and longer major component lives attributable to equipment health monitoring and predictive maintenance from our proprietary digital NexHub platform and data science efforts, the useful lives of select machinery and equipment should be increased by 1-2 years depending on the specific asset class. In accordance with ASC 250, “Accounting Changes and Error Corrections” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2021. This change resulted in a decrease in depreciation expense and decrease in net income (loss) during the twelve months ended December 31, 2021 of $ 30.6 million, in the consolidated statement of operations and comprehensive income (loss). +Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years. +Property and equipment and definite-lived intangible assets (“Long-lived Assets”) are evaluated annually or upon the occurrence of events or changes in circumstances, referred to as triggering events, that indicate the carrying value of a Long-lived Asset may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of a Long-lived Asset is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the service line level. The Company's asset groups consist of fracturing services, wireline, research and technology, cementing, and coiled tubing, except for an entity level asset group for Long-lived Assets that do not have identifiable independent cash flows. Estimates of undiscounted future net cash flows of assets groups are projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows take into account known market conditions as of the assessment date, and management’s anticipated business outlook. A terminal period is used to reflect an estimate of stable, perpetual growth. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset groups, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related asset groups. The impairment loss is then allocated across the asset group's major classifications. +The Company did no t recognize any impairment charges related to the Company’s Long-Lived assets for the years ended December 31, 2022, 2021, or 2020. +77 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(g) Major Maintenance Activities +The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or materially increase the efficiency, productivity, functionality or life of a fixed asset are capitalized. +(h) Goodwill and Indefinite-Lived Intangible Assets +Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services and Well Construction and Intervention. +Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the Company recognizes an impairment expense in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. +The Company performs the qualitative analysis of the goodwill impairment assessment by reviewing relevant qualitative factors. In the first and third quarter of 2020, the Company determined there were triggering events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, quantitative detail impairment testing was conducted. +As a result, the Company recognized $ 32.6 million in goodwill impairment expense during 2020, of which $ 32.2 million related to the Completions Service reporting unit and $ 0.4 million representing the entire goodwill balance for the Well Construction and Intervention reporting unit. No goodwill impairment expense was recognized during the years ended December 31, 2022 and 2021. See Note ( 5 ) Goodwill . +(i) Derivative Instruments and Hedging Activities +The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings. +The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive +78 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. +The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings. +In addition, we evaluate the terms of our operating agreements and other contracts, if any, to determine whether they contain embedded components that are required to be bifurcated and accounted for separately as derivative financial instruments. For additional detailed information regarding reportable segments, see Note (10) Derivatives . +(j) Fair Value Measurement +Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: +• Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities. +• Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. +Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. +79 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(k) Stock-based compensation +The Company recognizes compensation expense for restricted stock awards ("RSAs"), restricted stock units to be settled in common stock (“RSUs”), performance-based RSU awards (“PSUs”), non-qualified stock options (“stock options”), and performance unit awards (“PUs”) based on the fair value of the awards at the date of grant. The fair value of RSAs and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense. +Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. +The PUs are settled in cash and therefore are recorded as liability-classified awards. The PUs are remeasured at fair value every reporting period and the Company recognizes compensation cost for the changes in fair value pro-rated for the portion of the requisite service period rendered. +Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated statements of cash flows. +The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested. +For additional information, see Note (12) Stock-Based Compensation. +(l) Taxes +A provision for U.S. federal income tax has been provided in the consolidated financial statements for the years ended December 31, 2022, 2021 and 2020. +As a result of the C&J Merger, the Company had foreign subsidiaries as of December 2020 in Canada, The Netherlands, Luxembourg and Ecuador. With the exception of the Canadian subsidiary, all other subsidiaries are dormant and had no active operations as of December 31, 2022 and 2021. +The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. +80 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. +The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense. +See Note (17) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2022, 2021 and 2020. +(m) Commitments and Contingencies +The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). +Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). +(n) Leases +In accordance with Accounting Standards Codification 842 “Leases” (“ASC 842”), the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases. +For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased. +For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease. +For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term, and records this amortization in rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). However, if the lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain to exercise an option to purchase the underlying asset, the Company amortizes the right-of-of use asset to the end of the life of the underlying asset. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). +For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable. +In accordance with ASC 842, the Company has made the following elections for its lease accounting: +81 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +• all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases; +• for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and +• for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606. +For additional information, see Note (16) Leases. +(o) Research and development costs +Research and development costs are expensed as incurred as general and administrative expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Research and development costs incurred directly by the Company were $ 3.6 million, $ 5.0 million and $ 4.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. +(3) Acquisitions +(a) Asset Acquisition from Continental Intermodal Group LP +On August 3, 2022 the Company entered into and closed a definitive agreement to purchase substantially all assets (and assume certain lease liabilities) of the sand hauling, wellsite storage and last mile logistics businesses of Continental Intermodal Group LP (“CIG”) and its subsidiaries (the “CIG Acquisition”) from CIG, Continental Intermodal Group – Trucking, LLC (“Trucking”) and CIG Logistics LLC (together with Trucking and CIG, “CIG Sellers”). +The CIG Acquisition was completed for a purchase price of $ 31.3 million. At the time of close, the Company paid a total of $ 32.1 million, which included: (i) approximately $ 27.9 million in cash paid at closing to the CIG Sellers plus (ii) 500,000 shares of common stock. The $ 32.1 million transferred to CIG at the time of close included a deposit of $ 0.8 million for a transition services agreement for costs of services to be provided during the transition period. Accordingly, the purchase price of $ 31.3 million does not include the deposit of $ 0.8 million. The Company accounted for this acquisition as an asset acquisition pursuant to ASC 805. The purchase price of the acquisition was allocated amongst the acquired assets as the fair value of the acquired machinery and equipment assets represented substantially all of the fair value of the gross assets acquired. Additionally, the Company established a right of use asset and an operating lease liability of $ 0.9 million for the assumed lease liability. The Company incurred $ 0.9 million in transaction and integration costs related to the CIG Acquisition, which are presented in Merger and integration in the Consolidated Statements of Operations and Comprehensive Income (Loss). +(b) Alamo Acquisition +On August 31, 2021 (the “Alamo Acquisition Date”), the Company completed the Alamo Acquisition in accordance with the terms of the Purchase Agreement, dated as of August 4, 2021 (the “Purchase Agreement”), by and among the Company, NexTier Completion Solutions Inc., Alamo Frac Holdings, LLC, Alamo and the Owner Group identified therein. The Company acquired 100 % of Alamo. +82 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The Alamo Acquisition was completed for cash consideration of $ 100.0 million, equity consideration of 26 million shares of the Company’s common stock valued at $ 82.3 million, post-closing services valued at $ 30 million, an estimated $ 15.9 million of contingent consideration, $ 7.4 million of non-contingent consideration, and a net working capital settlement of $ 0.5 million that was finalized in the fourth quarter of 2021 and was paid to the Company in the first quarter of 2022. The contingent consideration included the Tier II Upgrade Payment, and the Earnout Payments, which were contingent upon the achievement of certain performance targets, as described in the Purchase Agreement. The earnout period ended in the fourth quarter of 2022, the performance targets were achieved, and the Company has agreed with Alamo Frac Holdings, LLC and the Owner Group to cumulative Earnout Payments of $ 73.8 million, of which $ 33.4 million has been paid as of December 31, 2022. The Company expects to pay the additional $ 40.4 million in 2023. The total increase in fair value of the Earnout Payments was $ 62.0 million and $ 2.4 million during the years ended December 31, 2022 and 2021, respectively. +The Company accounted for the Alamo Acquisition using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The measurements of some assets acquired and liabilities assumed, such as intangible assets and the earnout were based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired property and equipment were based on both available market date and a cost approach. +The following table summarizes the fair value of the consideration transferred in the Alamo Acquisition and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the Alamo Acquisition Date: +83 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Total Purchase Consideration: +Final Purchase Price Allocation +(Thousands of Dollars) +Cash consideration (1) +$ 100,000 +Equity consideration 82,323 +Post close services 30,000 +Contingent consideration 15,944 +Non contingent consideration 7,370 +Net working capital adjustment ( 482 ) +Total purchase consideration $ 235,155 +Cash +$ 7,419 +Trade and accounts receivable +50,619 +Inventories +1,726 +Prepaid and other current assets +19,654 +Assets held for sale 3,282 +Property and equipment 113,889 +Intangible assets 27,113 +Finance lease right-of-use assets 35,345 +Other noncurrent assets 1,676 +Total identifiable assets acquired +260,723 +Accounts payable +39,101 +Accrued expenses +38,000 +Current maturities of long-term finance lease liabilities 10,125 +Long-term finance lease liabilities 25,220 +Non-current liabilities +971 +Total liabilities assumed +113,417 +Goodwill +87,849 +Total purchase consideration $ 235,155 +(1) Includes $ 32.3 million of payments for indebtedness on behalf of Alamo. +Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. All the goodwill recognized for the Alamo Acquisition is recognized in the Completions segment and is tax deductible with an amortization period of 15 years. The goodwill in this acquisition was primarily attributable to Alamo's organized workforce and potential synergies. +Intangible assets related to the Alamo Acquisition consisted of the following: +84 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +Weighted average remaining amortization period (Years) Gross Carrying Amounts +Trademarks 1.5 $ 2,409 +Non-compete agreements 3 1,677 +Customer relationships 7.33 23,027 +Total $ 27,113 +For the valuation of the customer relationship intangible assets within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset changes. Under this method, the Company calculated earnings derived from the existing customer relationships and then deducted portions of the earnings that could be attributed to supporting assets that contribute to the generation of said earnings. Estimated cash flows were discounted at the cost of equity based on the assumption that the intangible asset would be financed with 100% equity. For the valuation of the trademarks intangible asset within the Completions Services segment, management used the relief from royalty method to reflect the after tax royalty savings attributable to owning the intangible asset. Management used the return on asset method to determine an implied royalty rate since a royalty rate was not available in the Company’s industry. For the valuation of the non-compete agreements intangible asset within the Completions Services segment, management used the incremental cash flow (“with/without”) method. +The Company recognized $ 19.0 million in indemnification assets related to an ongoing sales and use tax audit and other indemnified liabilities under the Alamo Acquisition Purchase Agreement. During the year ended December 31, 2022, the Company obtained additional information that resulted in a reduction of the Company's accrual and offsetting indemnification receivable related to the sales and use tax audit by $ 2.9 million. +The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the Alamo Acquisition. Merger costs consist of legal and professional fees. Integration costs consist of expenses incurred to integrate Alamo’s operations with that of the Company, including retention bonuses and severance payments. The expenses for all these transactions were expensed as incurred and are presented in Merger and integration in the Consolidated Statements of Operations and Comprehensive Income (Loss). +(Thousands of Dollars) +Transaction Type Year Ended December 31, 2022 Year Ended December 31, 2021 +Merger $ 62,009 $ 5,592 +Integration 401 3,117 +Total merger and integration costs $ 62,410 $ 8,709 +The following combined pro forma information assumes the Alamo Acquisition occurred on January 1, 2020. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2021 or any operating efficiencies or inefficiencies that resulted from the Alamo Acquisition. The information is not necessarily indicative of results that would have been achieved had the company controlled Alamo during the period presented. Pro forma adjustments related to the elimination of historical interest expense for debt paid off as part of the Alamo Acquisition were $ 2.7 million and $ 6.9 million for the years ended December 31, 2021 and 2020, respectively. +85 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(unaudited, amounts in Thousands of Dollars) +Year Ended December 31 +2021 2020 +Revenue $ 1,633,866 $ 1,451,342 +Net loss ( 105,400 ) ( 331,283 ) +Net loss per share (basic) ( 0.44 ) ( 1.38 ) +Net loss per share (diluted) ( 0.44 ) ( 1.38 ) +The Company’s condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021 includes revenue of $ 172.1 million and net income of $ 20.0 million from the Alamo operations. +(4) Intangible Assets +The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following: +(Thousands of Dollars) +December 31, 2022 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 90,627 $ ( 51,646 ) $ 38,981 +Non-compete agreements +2,377 ( 1,294 ) 1,083 +Trademarks 2,409 ( 2,142 ) 267 +Technology +37,216 ( 26,961 ) 10,255 +Total +$ 132,629 $ ( 82,043 ) $ 50,586 +(Thousands of Dollars) +December 31, 2021 +Gross +Carrying +Amounts Accumulated +Amortization Net +Carrying +Amount +Customer contracts +$ 90,627 $ ( 44,063 ) $ 46,564 +Non-compete agreements +2,377 ( 611 ) 1,766 +Trademarks 2,409 ( 157 ) 2,252 +Technology +32,226 ( 17,847 ) 14,379 +Total +$ 127,639 $ ( 62,678 ) $ 64,961 +Amortization expense related to the intangible assets for the years ended December 31, 2022, 2021 and 2020 was $ 20.2 million, $ 16.4 million and $ 12.6 million, respectively. +Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows: +86 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year-end December 31, (Thousands of Dollars) +2023 $ ( 13,549 ) +2024 ( 11,000 ) +2025 ( 8,879 ) +2026 ( 5,633 ) +2027 ( 4,656 ) +(5) Goodwill +Goodwill is allocated across two reporting units: Completion Services and Well Construction and Intervention Services reporting units. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, or when events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. +Judgment is used in assessing whether goodwill should be tested for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, market changes, and other external events may require more frequent assessments. +During the first quarter of 2020, a significant decline in the Company's share price, which resulted in the Company's market capitalization dropping below the book value of equity, as well as reductions in commodity prices driven by the potential impact of the COVID-19 pandemic and global supply and demand dynamics were deemed triggering events that led to a test for goodwill impairment. The impairment testing methodologies for the first quarter 2020 are discussed below. +Income approach +The income approach impairment testing methodology is based on a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. For the Completions Services and Well Construction and Intervention reporting units, the future cash flows were projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows took into account known market conditions as of March 31, 2020, and management’s anticipated business outlook. A terminal period was used to reflect an estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 2.5 %. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital (“WACC”) of 19.9 % for the Completions reporting unit and 22.4 % for the Well Construction and Intervention reporting unit. These assumptions were derived from both observable and unobservable inputs and combined reflect management’s judgments and assumptions. +Market approach +T he market approach impairment testing methodology is based upon the guideline public company method and the guideline transaction method. The application of the guideline public company method was based upon selected public companies operating within the same industry as the Company. Based on this set of comparable competitor data, operational multiples were derived for the reporting units weighted based on management’s assessment of reliability. The forward-looking selected market multiples for the guideline public company method were enterprise value to revenue and enterprise value to EBITDA multiples, with multiples ranging from 0.5 x to 0.6 x for revenues and from 3.3 x to 6.2 x for EBITDA. The application of the guideline transaction method was based upon valuation multiples derived from actual control transactions for comparable companies. Based on this, valuation multiples are derived from historical data of selected transactions, then evaluated and adjusted, if necessary, based on the strengths and weaknesses of the subject reporting unit relative to each acquired guideline company. The forward-looking selected market multiples for the guideline transaction method were enterprise value to revenue and enterprise value to book value of invested capital, with multiples ranging from 0.7 x to 2.1 x for revenues and from 0.6 x to 1.3 x for book value of invested capital. +87 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The fair value determined under the market approach is sensitive to these market multiples, and a decline in any of the multiples could reduce the estimated fair value of the reporting unit below its carrying value. Earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach. +Reconciliation of value and goodwill impairment conclusion +The estimated fair value determined under the income approach was consistent with the estimated fair value determined under the market approach. The concluded fair value for both reporting units consisted of a weighted average, with a 40.0 % weighted under the income approach and 60.0 % weight under the market approach. Market data in support of the implied control premium were used in this reconciliation to corroborate the estimated reporting unit fair values with the Company's overall market-indicated value. The results of the impairment testing for goodwill resulted in the Company recognizing an impairment expense of $ 32.6 million during the first quarter of 2020, consisting of $ 32.2 million related to the Completions Services reporting unit and $ 0.4 million representing the entire balance of goodwill for the Well Construction and Intervention reporting unit. +During the third quarter of 2020, the Company assessed and deemed the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, the Company performed a test for goodwill impairment using the same methodologies used in the first quarter of 2020; however, no impairment of goodwill was recorded. +During the Company’s annual testing as of October 31, 2022 and 2021, it was determined that there were no events that would indicate the carrying value of goodwill may not be recoverable or that a potential impairment exists. +The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 were as follows: +(Thousands of Dollars) +Goodwill as of December 31, 2020 $ 104,198 +Completions Acquisition 733 +Alamo Acquisition 87,849 +Goodwill as of December 31, 2021 $ 192,780 +There were no changes in the carrying amount of goodwill for the year ended December 31, 2022. For additional information, see Note (3) (Acquisitions) and Note (21) (Business Segments). +(6) Inventories, net +Inventories, net, consisted of the following at December 31, 2022 and December 31, 2021: +(Thousands of Dollars) +December 31, +2022 December 31, +2021 +Sand, including freight $ 15,901 $ 9,674 +Chemicals and consumables 6,854 4,204 +Materials and supplies 43,640 24,216 +Total inventory, net $ 66,395 $ 38,094 +Inventories are reported net of obsolescence reserves of $ 3.4 million and $ 6.3 million as of December 31, 2022 and 2021, respectively. The Company recognized no obsolescence expense during the year ended December 31, 2022. The Company recognized $ 1.9 million and $ 2.6 million of obsolescence expense during the years ended December 31, 2021 and 2020, respectively. +88 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(7) Property and Equipment, net +Property and Equipment, net consisted of the following at December 31, 2022 and December 31, 2021: +(Thousands of Dollars) +December 31, +2022 December 31, +2021 +Land +$ 13,699 $ 13,317 +Building and leasehold improvements +76,202 75,892 +Office furniture, fixtures and equipment +12,716 11,846 +Machinery and equipment +1,555,877 1,424,317 +1,658,494 1,525,372 +Less accumulated depreciation +( 1,002,684 ) ( 951,170 ) +Construction in progress +23,703 46,663 +Total property and equipment, net +$ 679,513 $ 620,865 +Casualty Loss +During the third quarter of 2022, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in a loss of fracturing equipment; no parties were injured as a result of this incident. As of December 31, 2022, the Company received a total of $ 15.4 million in insurance proceeds offsetting the $ 6.8 million loss recognized related to the damaged equipment and the costs to remove the equipment. The resulting gain of $ 8.6 million was recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss). +On May 9, 2021, one of the Company’s hydraulic fleets operating in the Permian Basin was involved in an accidental fire, which resulted in a complete loss of the equipment; no parties were injured as a result of this incident. During the year ended December 31, 2021 the Company recognized a total of $ 22.9 million in insurance proceeds, partially offset by the $ 12.5 million loss recognized on the damaged equipment and costs to remove the equipment. The resulting $ 10.4 million gain was recognized in other income (expense), net in the consolidated Statements of Operations and Comprehensive Income (Loss). +89 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(8) Long-Term Debt +Long-term debt at December 31, 2022 and December 31, 2021 consisted of the following: +(Thousands of Dollars) +December 31, +2022 December 31, +2021 +2018 Term Loan Facility +$ 334,250 $ 337,750 +2021 Equipment Loans 30,342 41,321 +Other long-term debt 273 533 +Less: Unamortized debt discount and debt issuance costs ( 3,436 ) ( 4,719 ) +Total debt, net of unamortized debt discount and debt issuance costs +361,429 374,885 +Less: Current portion +( 14,004 ) ( 13,384 ) +Long-term debt, net of unamortized debt discount and debt issuance costs +$ 347,425 $ 361,501 +Below is a summary of the Company’s credit facilities outstanding as of December 31, 2022: +(Thousands of Dollars) +2021 Equipment Loans 2019 ABL Facility 2018 Term Loan Facility +Original facility size +$ 46,500 $ 450,000 $ 350,000 +Outstanding balance +$ 30,342 $ — $ 334,250 +Letters of credit issued +$ — $ 22,550 $ — +Available borrowing base commitment n/a $ 415,273 +n/a +Interest Rate (1) +5.25 % +LIBOR or base rate plus applicable margin +LIBOR or base rate plus applicable margin +Maturity Date +June 1, 2025 +October 31, 2024 +May 25, 2025 +(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00 % floor +Maturities of the 2018 Term Loan Facility, the 2021 Equipment Loans, and the other long-term debt for the next five years are presented below: +Year-end December 31, (Thousands of Dollars) +2023 $ 15,429 +2024 15,790 +2025 333,646 +2026 — +2027 — +$ 364,865 +Deferred Charges and Other Costs +Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility (defined below) are capitalized. Deferred charges related to the 2018 Term Loan Facility (defined below) and the 2021 Equipment Loans (defined below) are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2022, 2021 and 2020 was $ 2.2 million, $ 2.1 million, and $ 2.2 million, respectively. +90 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Equipment Loans +On August 20, 2021, the Company entered into the Master Loan and Security Agreement the (“Master Agreement”) with Caterpillar Financial Services Corporation. The Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $ 46.5 million the (“Equipment Loans”). The Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. On September 3, 2021 entered into a term note for $ 39.4 million the (“Note”) for an equipment financing loan. On December 30, 2021 the Company entered into a term note for $ 3.4 million for additional equipment financing. The Note will bear interest at a rate of 5.25 % per annum and has a maturity date of June 1, 2025. The Company will amortize $ 0.2 million in debt issuance costs and debt discount over the life of the loan. +ABL Revolving Credit Facility +On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $ 1.2 million. In connection with the modification of the 2017 ABL Facility, the Company wrote off $ 0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $ 1.5 million and $ 2.3 million as of December 31, 2022 and 2021, respectively, and are recorded in other noncurrent assets on the consolidated balance sheets. During the first quarter of 2020, the Company provided notice to the lenders to borrow a total of $ 175 million under the 2019 ABL Facility. The interest rates for the $ 150.0 million LIBOR borrowing and $ 25.0 million Base Rate borrowing were 2.125 % and 3.75 %, respectively as of the borrowing dates. During the second quarter of 2020, the Company repaid the $ 150.0 million LIBOR borrowing and the $ 25.0 million Base Rate borrowing and did not incur any penalties. +Term Loan Facility +On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $ 7.6 million. Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $ 9.0 million. Unamortized deferred charges associated with the 2018 Term Loan Facility were $ 3.2 million and $ 4.5 million as of December 31, 2022 and 2021, respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets. +(9) Significant Risks and Uncertainties +Subsequent to the sale of the Well Support Services segment in the first quarter of 2020, the Company operates in two reportable segments: Completion Services and Well Construction and Intervention, with significant concentration in the Completion Services segment. During the years ended December 31, 2022, 2021 and 2020, sales to Completion Services customers represented 95 %, 93 % and 87 % of the Company’s consolidated revenue, respectively. +The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. +From the end of the fourth quarter of 2019 through mid-August 2020, the U.S. active rig count decreased by 70 %, from 805 to 244 rigs before recovering to 351 rigs by the end of 2020. In 2021, the U.S. active rig count recovery continued, increasing 67 % from 351 rigs at the end of 2020 to 586 rigs by the end of 2021. During 2022, activity growth continued, with the rig count growing another 33 % during the year to close 2022 at 779 active rigs. +91 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Significant customers are those that individually account for 10% or more of the Company's consolidated revenue or total accounts receivable. For the year ended December 31, 2022, one customer individually represented approximately 10 % of the Company’s consolidated revenue. This customer represented $ 311.8 million of our consolidated revenue in the Completions Services revenue. For the year ended December 31, 2021, one customer individually represented approximately 14 % of the Company’s consolidated revenue. This customer represented $ 193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10 % of the Company’s consolidated revenue. These two customers represented $ 188.6 million or 16 % and $ 160.5 million or 13 %, respectively, of our consolidated revenue in the Completions Services segment. +For the year ended December 31, 2022, there were no suppliers that individually represented more than 5% of the Company’s overall purchases. For the year ended December 31, 2021, one supplier individually represented approximately 5 % of the Company’s overall purchases, and was primarily incurred within the Completion Services segment. +(10) Derivatives +The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt. +On March 9, 2020, the Company sold its Well Support Services segment to Basic Energy Services, Inc. (“Basic”) for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, (“WSS Notes”) previously issued by Basic. On July 29, 2020, the Company agreed to use the escrowed amount in the final settlement of the working capital reconciliation. Under the terms of the agreement, the WSS Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $ 34.4 million to NexTier after the WSS Notes are held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole is issued under a fund guarantee by Ascribe III Investments LLC, a private equity investment firm with approximately $ 1.0 billion in assets under management. In the event of a Basic restructuring or a credit rating downgrade in conjunction with a change in control prior to the one-year anniversary, the make-whole guarantee accelerates the WSS Notes to par value of $ 34.4 million. NexTier is entitled to semi-annual interest payments on the WSS Notes based on the 10.75 % annual coupon throughout the holding period. The Company identified the make-whole guarantee as an embedded derivative and bifurcated the valuation of the WSS Note and the make-whole guarantee. The Company elected the fair value option for the WSS Notes at the inception of the transaction. The fair value on the date of the transaction for the make-whole derivative and WSS Notes was $ 12.2 million and $ 22.2 million, respectively, and resulted in a gain on divestiture of $ 8.7 million. The fair value of the WSS Notes and the make-whole guarantee are measured at the end of each reporting period. Unrealized gains and losses recognized in relation to the change in fair value of these instruments are recognized in net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the WSS Notes and make-whole guarantee are recorded in Other Current Assets on the consolidated balance sheets. See Note (21) Business Segments for further discussion. +On March 31, 2021, the Company received a $ 34.4 million cash payment from Ascribe in full settlement of the WSS Notes and the make-whole guarantee. At the time of the cash payment, the WSS Notes and make-whole guarantee had a fair value of $ 33.6 million, resulting in a realized gain on settlement of $ 0.8 million. This gain is recorded within other income (expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss). +On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into the 2018 Term Loan Facility. The 2018 Term Loan Facility has an initial aggregate principal amount of $ 350.0 million and proceeds were used to repay the Company's pre-existing 2017 term loan facility. The 2018 Term Loan Facility has a variable interest rate based on the LIBOR, subject to a 1.0 % floor. In June 2018, the Company executed a new off-market interest rate swap effective through March 31, 2025 to hedge 50 % of its expected LIBOR exposure matching the swap to the 1-month LIBOR, 1 % floor, of the 2018 Term Loan Facility, and terminated the pre-existing interest rate swaps. The new interest rate swap was designated in a new cash flow hedge relationship. +92 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below: +(Thousands of Dollars) +Derivatives +designated as +hedging +instruments Derivatives +not +designated as +hedging +instruments Gross Amounts +of Recognized +Assets and +Liabilities +Gross +Amounts +Offset in the +Balance +Sheet (1) +Net Amounts +Presented in +the Balance +Sheet (2) +As of December 31, 2022: +Other current asset +$ 3,870 $ — $ 3,870 $ — $ 3,870 +Other noncurrent asset +2,816 — 2,816 — 2,816 +As of December 31, 2021: +Other current liability +$ ( 2,787 ) $ — $ ( 2,787 ) $ — $ ( 2,787 ) +Other noncurrent liability +( 3,747 ) — ( 3,747 ) — ( 3,747 ) +(1) Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. +(2) There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged. +The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars): +Year Ended December 31, +2022 2021 2020 Location +Amount of gain (loss) recognized in other comprehensive income (loss) on derivative $ 12,067 $ 1,703 $ ( 6,422 ) OCI +Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings ( 1,356 ) ( 2,741 ) ( 2,334 ) Interest Expense +The gain (loss) recognized in other comprehensive income (loss) for the derivative instrument is presented within the hedging activities line item in the consolidated statements of operations and comprehensive income (loss). +There were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2022, $ 3.2 million of net gains will be reclassified from accumulated other comprehensive income (loss) into earnings within the next 12 months. +The Company recognized a loss on the change in fair market value of the WSS Notes and make-whole derivative of $ 0.9 million for the year ended December 31, 2020 which is recorded within other income (expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss). +See Note (11) Fair Value Measurements and Financial Information for further information related to the Company’s derivative instruments. +(11) Fair Value Measurements and Financial Information +The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, and long-term debt. As of December 31, 2022, and 2021, the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values. +Recurring Fair Value Measurement +93 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +As of December 31, 2022, the Company had one financial instrument measured at fair value on a recurring basis which is its interest rate derivative (see Note (10) Derivatives above). Additionally, during the year ended December 31, 2022, the Company held an equity security investment composed primarily of common equity shares and warrants in a publicly traded company, in addition to an immaterial balance related to contingent value rights ("CVRs"). As of December 31, 2022, the Company sold all of its common equity shares and warrants and its investment in the CVRs has matured and no longer holds any value. During the year ended December 31, 2022, the Company also measured the fair value of the Earnout Payments originating from the Alamo Acquisition on a recurring basis. The earnout period ended in the fourth quarter of 2022, the performance targets were achieved, and the Company has agreed with Alamo and the Owner Group to cumulative Earnout Payments of $ 73.8 million. +The financial instruments are presented in the consolidated balance sheets; the interest rate derivative is presented within other current assets and other noncurrent assets, the equity security investment was presented within other current assets, and the Earnout Payments are presented within accrued expenses. As of December 31, 2021, the Company had three financial instruments measured at fair value on a recurring basis, which was its interest rate derivative, the equity security investment, and the Earnout Payments. +The fair market value of the derivative financial instruments reflected on the consolidated balance sheets as of December 31, 2022, and 2021 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data. +The fair value of the equity security investment was measured at the end of each reporting period. Gains and losses recognized in relation to the change in fair value of the equity security investment were recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company sold all of its investment with a book value of $ 10.3 million during the year ended December 31, 2022 for $ 12.4 million, which resulted in a realized gain of $ 2.1 million. As of December 31, 2022, the remainder of the Company's investment, which consisted of the CVRs, matured and had no carrying value. +The fair value of the Earnout Payments was measured at the end of each reporting period through the end of the earnout period, which occurred in the fourth quarter of 2022. Gains and losses recognized in relation to the change in fair value of the Earnout Payments were recognized in Merger and integration in the Consolidated Statements of Operations and Comprehensive Income (Loss). See Note (3) Acquisitions for further discussion. +The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2022, and 2021 (in thousands of dollars): +Fair value measurements at reporting date using +December 31, 2022 Level 1 Level 2 Level 3 +Assets: +Interest rate derivative $ 6,686 $ — $ 6,686 $ — +Fair value measurements at reporting date using +December 31, 2021 Level 1 Level 2 Level 3 +Assets: +Equity security investment $ 7,743 $ 7,743 $ — $ — +Liabilities: +Earnout Payments ( 11,795 ) — — ( 11,795 ) +Interest rate derivatives $ ( 6,534 ) $ — $ ( 6,534 ) $ — +Non-Routine Fair Value Measurement +The fair values of indefinite-lived assets and Long-Lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and +94 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. +Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs. +Credit Risk +The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables. +The Company’s cash balances on deposit with financial institutions totaled $ 218.5 million and $ 110.7 million as of December 31, 2022 and 2021, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition. +The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features. +The majority of the Company’s trade receivables have payment terms of 30 to 60 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2022, trade receivables from two customers individually represented 11 % and 10 % or $ 30.9 million and $ 29.8 million of the Company’s total accounts receivable. As of December 31, 2021, trade receivables from one customer individually represented 17 % or $ 42.2 million of the Company’s total accounts receivable. +The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. +During the years ended December 31, 2022 and 2020, the Company had $ 0.1 million and $ 2.0 million, respectively, of recoveries from previously written-off receivables, net of bad debt expense. The Company recognized $ 2.0 million of bad debt expense, net of recoveries during the year ended December 31, 2021. +(12) Stock-Based Compensation +As of December 31, 2022, the Company had five types of stock-based compensation under its Equity Award Plans: (i) RSAs issued to independent directors and certain executives and employees, (ii) RSUs issued to executive officers and key management employees, (iii) non-qualified stock options issued to executive officers, and (iv) PSUs issued to executive officers and key management employees, and (v) and PUs issued to executive officers and key management employees. The Company has approximately 5,341,651 shares of its common stock reserved and available for grant under the NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”). +For details on the Company’s accounting policies for determining stock-based compensation expense, see Note (2) Summary of Significant Accounting Policies: (k) Stock-based compensation. Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). However, for the year ended December 31, 2020, the Company presented $ 2.7 million within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions. +The following table summarizes stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020 (in thousands of dollars): +95 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year Ended December 31, +2022 2021 2020 +Liability-classified awards +Cash-settled awards $ 3,522 $ — $ — +Equity-classified awards +Restricted stock awards +1,248 1,364 1,589 +Restricted stock time-based unit awards 19,914 14,674 19,201 +Non-qualified stock options +— 76 894 +Restricted stock performance-based stock unit awards +8,433 8,563 4,142 +Stock-based compensation cost $ 33,117 $ 24,677 $ 25,826 +Tax Benefit (1) +( 4,407 ) ( 4,751 ) ( 5,557 ) +Stock-based compensation cost, net of tax $ 28,710 $ 19,926 $ 20,269 +(1) The Company is in a valuation allowance position and any tax benefit for stock-based compensation will be offset by the change in valuation allowance. +(a) Cash settled awards +During the first quarter of 2022, the Company issued 1,009,737 PUs to executive officers under its Equity and Incentive Awards Plan. These PUs will be settled in cash at the end of the performance period, December 31, 2024, and are classified as liability awards, which are remeasured at fair value at each reporting period. The fair value of the awards to be settled at the end of the performance period was $ 10.2 million as of December 31, 2022. The Company recognizes compensation cost for the changes in fair value pro-rated for the portion of the requisite service period rendered. During the year ended December 31, 2022, the Company recognized $ 3.5 million in compensation costs related to these awards. +(b) Restricted stock awards +For the years ended December 31, 2022, 2021, and 2020 the Company recognized $ 1.2 million, $ 1.4 million, and $ 1.6 million respectively, of non-cash stock compensation expense. As of December 31, 2022, total unamortized compensation cost related to unvested restricted stock awards was $ 0.5 million, which the Company expects to recognize over the remaining weighted-average period of 0.5 years. +Rollforward of restricted stock awards as of December 31, 2022 is as follows: +Number of Restricted Stock Awards +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2021 210 $ 5.67 +Shares issued 130 9.49 +Shares vested ( 123 ) 5.67 +Shares forfeited — — +Non-vested balance at December 31, 2022 217 $ 7.96 +(c) Restricted stock units +For the years ended December 31, 2022, 2021 and 2020, the Company recognized $ 19.9 million, $ 14.7 million and $ 19.2 million, respectively, of non-cash stock compensation expense. As of December 31, 2022, total unamortized compensation cost related to unvested restricted stock units was $ 19.1 million, which the Company expects to recognize over the remaining weighted-average period of 1.63 years. +96 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Rollforward of restricted stock units as of December 31, 2022 is as follows: +Number of Restricted Stock Units +(In thousands) Weighted average grant date fair value +Total non-vested at December 31, 2021 7,589 $ 4.53 +Units issued 3,146 5.68 +Units vested ( 3,342 ) 4.83 +Units forfeited ( 561 ) 4.25 +Non-vested balance at December 31, 2022 6,832 $ 4.94 +(d) Non-qualified stock options +For the year ended December 31, 2022, the Company did not recognize any non-cash stock compensation expense. For the years ended December 31, 2021 and 2020, the Company recognized $ 0.1 million and $ 0.9 million, respectively, of non-cash stock compensation expense. As of December 31, 2022, the Company did no t have any unamortized compensation cost related to unvested stock options. +Rollforward of stock options as of December 31, 2022 is as follows: +Number of Stock Options +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2021 1,741 $ 4.86 +Options granted — — +Options exercised — — +Actual options forfeited ( 73 ) 6.85 +Options expired — — +Total outstanding at December 31, 2022 1,668 $ 4.53 +There were 1.7 million stock options exercisable or vested at December 31, 2022. +Assumptions used in calculating the fair value of the stock options during the year granted are summarized below: +2019 Options Granted 2018 Options Granted +Valuation assumptions: +Expected dividend yield 0 % 0 % +Expected equity volatility 49.6 % 46.3 % +Expected term (years) +7.3 - 8.1 +6 +Risk-free interest rate 1.7 % 2.7 % +Weighted average: +Exercise price per stock option +$ 19.09 - $ 26.41 +$ 15.31 +Market price per share $ 4.55 $ 15.31 +Weighted average fair value per stock option $ 0.74 $ 7.28 +97 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(e) Performance-based RSU awards +For the years ended December 31, 2022 and 2021, the Company issued under its Equity Award Plans to executive officers 289,708 and 2,024,635 of performance based RSUs, respectively. Using a Monte Carlo simulation method, the fair value of the awards issued for the years ended December 31, 2022 and 2021 was $ 2.7 million and $ 16.9 million, respectively. Each vesting is subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period. The number of shares that may be earned at the end of the vesting period ranges from 0 % to 200 % of the target award amount, if the performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of December 31, 2022, total unamortized compensation cost related to unvested performance-based RSUs was $ 7.9 million, which the Company expects to recognize over the weighted-average period of 1.21 years. For the years ended December 31, 2022, 2021 and 2020, the Company recognized $ 8.4 million, $ 8.6 million and $ 4.1 million, respectively, of compensation expense related to the performance-based RSU awards. +Number of Performance-based RSU’s +(In thousands) Weighted average grant date fair value +Total outstanding at December 31, 2021 2,848 $ 8.56 +Performance-based RSU’s issued 290 9.18 +Performance-based RSU’s vested ( 453 ) 8.52 +Performance-based RSU’s forfeited ( 71 ) 5.89 +Total outstanding at December 31, 2022 2,614 $ 8.71 +Assumptions used in calculating the fair value of the performance-based RSU’s granted are summarized below: +2022 Performance based RSU’s Granted 2021 Performance based RSU’s Granted +Valuation assumptions: +Expected dividend yield +0 % 0 % +Expected equity volatility, including peers +57.8 % - 131.2 % +55.2 % - 147.9 % +Expected term (years) +3 3 +Risk-free interest rate +0.1 % - 2.0 % +0.2 % - 0.3 % +(13) Stockholders’ Equity +(a) Vesting of Stock Awards +During the year ended December 31, 2022, 3,049,260 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company. +(b) Alamo Acquisition +As described in Note (3) Acquisitions, the Company completed the Alamo Acquisition on August 31, 2021 for total consideration of approximately $ 235.6 million, consisting of equity consideration in the form of 26,000,000 shares of the Company’s common stock issued to Alamo Frac Holdings, LLC and the Owner Group with an estimated value of $ 82.3 million. +98 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(c) Asset Acquisition from Continental Intermodal Group LP +As described in Note (3) Acquisitions, the Company completed the CIG Acquisition purchased on August 3, 2022. The aggregate consideration for the purchase consisted of approximately $ 32.1 million, which includes: (i) approximately $ 27.9 million in cash paid at closing to the CIG Sellers, plus (ii) 500,000 shares of the Company’s common stock. +(d) Share Repurchase Program +On October 25, 2022, the Company announced the board of directors approved a new share repurchase program for up to $ 250.0 million through December 31, 2023. The share repurchase program may be executed from time to time in open market transactions, through block trades, in privately negotiated transactions, through derivative transactions, through 10b5-1 plans, or by other means. The amount, timing and terms of any share repurchases will be determined based on prevailing market conditions and other factors, including applicable black-out periods. The share repurchase program does not obligate NexTier to purchase any shares of common stock during any period and the program may be modified or suspended at any time at NexTier’s discretion. +During the year ended December 31, 2022, the Company repurchased 11,471,591 shares of its common stock for $ 112,909,879 at an average price of $ 9.85 . As of December 31, 2022, the Company has settled 11,303,522 of total share repurchases for $ 111,364,813 . +(14) Accumulated Other Comprehensive Income (Loss) +Accumulated other comprehensive income (loss) in the equity section of the consolidated balance sheets includes the following: +(Thousands of Dollars) +Foreign currency +items Interest rate +contract AOCI +December 31, 2021 $ 50 $ ( 8,309 ) $ ( 8,259 ) +Net income (loss) — 1,356 1,356 +Other comprehensive income (loss) 1,118 12,067 13,185 +December 31, 2022 $ 1,168 $ 5,114 $ 6,282 +The following table summarizes reclassifications out of accumulated other comprehensive income (loss) into earnings during years ended December 31, 2022, 2021 and 2020 (in thousands of dollars): +Year Ended December 31, Affected line item +in the consolidated +statements of +operations and +comprehensive income (loss) +2022 2021 2020 +Interest rate derivatives, hedging +$ ( 1,356 ) $ ( 2,741 ) $ ( 2,334 ) Interest expense +(15) Earnings per Share +Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of income or (loss) per share calculations until vested. +Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive. +99 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +A reconciliation of the numerators and denominators used for the basic and diluted net income or (loss) per share computations is as follows (in thousands): +Year Ended December 31, +2022 2021 2020 +Numerator: +Net income (loss) $ 314,969 $ ( 119,423 ) $ ( 346,883 ) +Denominator: +Basic weighted-average common shares outstanding (1) +243,360 224,401 213,795 +Dilutive effect of restricted stock awards granted to Board of Directors 136 145 199 +Dilutive effect of time-based restricted stock awards 4,604 1,140 39 +Dilutive effect of performance-based restricted stock awards 1,246 625 1,041 +Diluted weighted-average common shares outstanding (1) +249,346 226,311 215,074 +(1) As a result of the net loss incurred by the Company for the years ended December 31, 2021 and 2020, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share. +(16) Leases +The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has finance leases for its light duty vehicles and frac pumps. The Company acquired the majority of its finance leases as part of the Alamo Acquisition and inherited Alamo’s lease classification as of the time of the acquisition. +The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 to 8 years, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees. +100 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The components of the Company's lease costs are as follows: +(Thousands of Dollars) +Year ended +December 31, 2022 +Year ended +December 31, 2021 +Operating lease cost $ 4,072 $ 19,607 +Finance lease cost: +Amortization of right-of-use assets 5,414 1,418 +Interest on lease liabilities 1,954 584 +Total finance lease cost 7,368 2,002 +Short-term and Variable lease cost (1) +7,414 6,537 +Total lease cost $ 18,854 $ 28,146 +(1) Cost from variable amounts excluded from determination of lease liability. +Supplemental cash flows related to leases are as follows: +(Thousands of Dollars) +Year ended +December 31, 2022 +Year ended +December 31, 2021 +Cash paid for amounts included in the measurements of lease liabilities +Operating cash flows from operating leases $ 7,410 $ 14,507 +Operating cash flows from finance leases 1,954 538 +Financing cash flows from finance leases 13,872 4,155 +Weighted average remaining lease terms are as follows: +Year ended +December 31, 2022 +Year ended +December 31, 2021 +Operating leases 4.80 years 6.98 years +Finance leases 2.46 years 2.98 years +Weighted average discount rate on the Company's lease liabilities are as follows: +Year ended +December 31, 2022 +Year ended +December 31, 2021 +Operating leases 6.18 % 6.83 % +Finance leases 4.04 % 4.00 % +101 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Maturities of the Company's lease liabilities as of December 31, 2022, per ASU 2016-02, were as follows: +(Thousands of Dollars) +Year ending December 31, +Operating leases +Finance leases +2023 $ 6,811 $ 20,770 +2024 4,904 10,943 +2025 2,811 1,312 +2026 2,116 — +2027 1,869 — +Thereafter 3,976 — +Total undiscounted remaining minimum lease payments 22,487 33,025 +Less imputed interest ( 3,137 ) ( 1,245 ) +Total discounted remaining minimum lease payments $ 19,350 $ 31,780 +During the year ended December 31, 2021, the Company entered into two separate agreements with a supplier to sell some diesel-fueled equipment in exchange for credits used to purchase Tier 4 DGB conversion and conversion kits. As part of the agreement, the Company would lease back the equipment for 18 months. The Company determined that the first agreement did not meet the criteria to be classified as a sale-leaseback transaction and was deemed a failed sale-leaseback. This resulted in the recognition of a finance liability of $ 15.8 million classified in other current liabilities and other non-current liabilities in the consolidated balance sheets. The second agreement met the criteria to be classified as a sale-leaseback transaction and resulted in the recognition of a right-of-use asset and a finance lease liability of $ 3.0 million and a finance liability of $ 1.9 million. +As of December 31, 2022, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties. +(17) Income Taxes +The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions: +(Thousands of Dollars) +Year Ended December 31, +2022 2021 2020 +Domestic $ 317,213 $ ( 157,713 ) $ ( 357,250 ) +Foreign 2,316 39,976 11,837 +$ 319,529 $ ( 117,737 ) $ ( 345,413 ) +The components of the Company’s income tax provision are as follows: +102 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2022 2021 2020 +Current: +State $ 4,549 $ ( 54 ) $ ( 297 ) +Foreign — 1,677 1,858 +Total current income tax provision $ 4,549 $ 1,623 $ 1,561 +Deferred: +Federal $ 10 $ 55 $ ( 158 ) +State 1 8 53 +Foreign — — 14 +Total deferred income tax provision 11 63 ( 91 ) +$ 4,560 $ 1,686 $ 1,470 +The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its Consolidated Statements of Operations and Comprehensive Income (Loss). State income tax expense, net of federal benefit includes the current state income tax, return to accrual adjustments for filed returns and the state deferred tax impact before changes in valuation allowance which are stated separately. The Company’s effective tax rate for 2022 of 1.43 % differs from the statutory rate, primarily due to state taxes, permanent differences and a change in the valuation allowance. The Company’s effective tax rate for 2021 was ( 1.43 )%. +(Thousands of Dollars) +December 31, +2022 December 31, +2021 December 31, +2020 +Income tax provision computed at the statutory federal rate $ 67,101 $ ( 24,724 ) $ ( 72,537 ) +Reconciling items: +State income taxes, net of federal tax benefit 14,599 ( 1,959 ) ( 12,222 ) +Deferred tax asset valuation adjustment ( 79,934 ) 25,306 82,557 +Permanent differences 2,909 2,796 4,589 +Foreign withholding taxes — 1,683 1,870 +Other ( 115 ) ( 1,416 ) ( 2,787 ) +Income tax provision $ 4,560 $ 1,686 $ 1,470 +Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. +103 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(Thousands of Dollars) +Year Ended December 31, +2022 2021 2020 +Deferred tax assets: +Stock-based compensation $ 6,722 $ 6,247 $ 4,972 +Net operating loss and other carry-forwards 278,983 364,882 284,151 +Accruals and other 20,059 14,472 15,535 +Gross deferred tax assets 305,764 385,601 304,658 +Valuation allowance ( 235,213 ) ( 318,260 ) ( 294,101 ) +Total deferred tax assets $ 70,551 $ 67,341 $ 10,557 +Deferred tax liability: +PP&E and intangibles $ ( 68,643 ) $ ( 65,163 ) $ ( 8,317 ) +Prepaids and other ( 1,982 ) ( 2,241 ) ( 2,240 ) +Total deferred tax liability ( 70,625 ) ( 67,404 ) ( 10,557 ) +Net deferred tax liability $ ( 74 ) $ ( 63 ) $ — +The Company estimated $ 112.3 million of federal NOLs can be utilized to offset current year federal taxable income. As of December 31, 2022, NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $ 1.1 billion, of which, $ 267.9 million, if not utilized, will begin to expire in the year 2036. The remaining federal NOLs can be carried forward indefinitely. The total deferred tax asset for net operating loss and other carryforwards also includes approximately $ 36.7 million of interest expense carryovers with indefinite life. The Company has total state NOLs of $ 481.1 million, of which $ 172.8 million if not utilized, will expire in various years between 2024 and 2039. Additionally, the Company has $ 14.8 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2036. +As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $ 8.5 million. In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. $ 112.3 million of the Company’s pre-change NOLs are expected to be utilized in the current year. As of December 31, 2022, it is expected that the $ 163.5 million of the Company’s $ 286.5 million remaining pre-change NOLs incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration. +C&J Energy Services, Inc. had pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $ 8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. including built-in loss through December 31, 2022, total $ 443.3 million of which $ 104.4 million are subject to expiration, but are not expected to expire as a result of the IRC Section 382 limitation. +ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s +104 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2022 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The Company intends to continue maintaining a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowance. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The valuation allowances as of December 31, 2022, 2021, and 2020 were $ 235.2 million, $ 318.3 million and $ 294.1 million, respectively. +Changes in the valuation allowance for deferred tax assets were as follows: +(Thousands of Dollars) +Valuation allowance as of the beginning of January 1, 2022 $ 318,260 +Charge as (benefit) expense to income tax provision for current activities ( 79,934 ) +Changes to other comprehensive income (loss) ( 3,113 ) +Valuation allowance as of December 31, 2022 $ 235,213 +The Company may be subject to the Global Intangible Low-Taxed Income (“GILTI”) as a result of its foreign operations. The Company accounts for any U.S. taxable income inclusion under GILTI as a permanent book/tax difference. +There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2022, 2021 and 2020. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2019 through December 31, 2021 for federal tax purposes and for the years ended December 31, 2018 through December 31, 2021 for state tax purposes. +(18) Commitments and Contingencies +As of December 31, 2022, and 2021, the Company had $ 4.9 million and $ 1.0 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $ 225.5 million and $ 54.1 million, as of December 31, 2022, and 2021, respectively. +As of December 31, 2022, the Company has a letter of credit of $ 22.6 million under the 2019 ABL Facility. +In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $ 208.4 million, $ 47.8 million and $ 77.6 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2022, 2021 and 2020. +105 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2022 are listed below: +(Thousands of Dollars) +Year-end December 31, +2023 $ 45,876 +2024 16,244 +2025 3,960 +2026 — +2027 — +$ 66,080 +Litigation +From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues and motor vehicle accidents. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its consolidated financial position, results of operations or liquidity. +Environmental +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Regulatory Audits +The Company is subject to routine audits by taxing authorities. As of December 31, 2020, the Company had recorded estimates of potential assessments for each audit totaling in the aggregate approximately $ 33.0 million. For one audit, in particular, the Company disagreed with many aspects of the state’s assessment and began to contest the state’s position through administrative procedures. The Company received a final settlement offer from Texas Attorney General Office on September 8, 2021 for $ 3.7 million, which resulted in a reduction to the accrual of $ 24.9 million during the year ended December 31, 2021. This aggregate reduction was recorded in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) of 2021. +106 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +As of December 31, 2022 and 2021, the Company had recorded estimates of potential assessments, the majority of which is related to an estimate of $ 14.8 million and $ 17.7 million, respectively, of potential assessment and exposures for all taxing jurisdictions related to the Alamo Acquisition. As of December 31, 2022 and 2021, the Company also has an offsetting indemnification receivable of $ 14.8 million and $ 17.7 million, respectively, from the Owner Group, recorded pursuant to the Purchase Agreement, in prepaids and other current assets in the Consolidated Balance Sheet. Both the estimated liability and indemnification receivable were recorded in the purchase price allocation at the time of the Alamo Acquisition in 2021. During the year ended December 31, 2022, the Company obtained additional information that resulted in a reduction of the Company's accrual and offsetting indemnification receivable related to this audit by $ 2.9 million. +(19) Related Party Transactions +Cerberus Operations and Advisory Company, Cerberus Capital Management, L.P. and Cerberus Technology Solutions LLC, affiliates of the Company’s principal equity holder, provide certain consulting services to the Company. The Company paid $ 0.5 million, $ 0.6 million and $ 2.2 million during the years ended December 31, 2022, 2021 and 2020, respectively. +In connection with the Company’s research and development initiatives, the Company engaged in transactions with its equity-method investee. As of December 31, 2020, the Company had purchased $ 1.7 million of shares in its equity-method investee. In the first quarter of 2020, the Company had enough evidence to believe that it would not be able to recover its $ 1.7 million investment in its equity-method investee and completely impaired it. The impairment is recorded in impairment expense in the Consolidated Statement of Operations and Comprehensive Income (Loss). For additional information, see Note (2) Summary of Significant Accounting Policies. +As part of the Purchase Agreement, the Company agreed to provide certain post-closing services to Alamo Frac Holdings, LLC valued at $ 30.0 million in the aggregate. During the year ended December 31, 2022, the Company provided services to Alamo Frac Holdings, LLC of $ 4.4 million as part of the Purchase Agreement. The Company has a remaining customer contract liability related to these services of $ 19.4 million as of December 31, 2022. +(20) Retirement Benefits and Nonretirement Postemployment Benefits +Defined Contribution Plan +The Company has sponsored two different 401(k) defined contribution retirement plans covering eligible employees at various times due to acquisition. These plans are the NexTier Oilfield Solutions 401(k) Plan and the Alamo Employee 401(k) Plan. As of June 1, 2022, the plans were consolidated into one plan. The Company made matching contributions of up to 3.5 % of eligible compensation in the NexTier Oilfield Solutions 401(k) Plan in 2020 but suspended the Company matching contribution as of May 1, 2020. As of January 1, 2022, the Company reinstated the Company matching contribution in the NexTier Oilfield Solutions 401(k) Plan and increased the Company matching contributions to 4 % of eligible compensation. +Eligible employees can make annual contributions to the plan for which they are eligible up to the maximum amount allowed by current federal regulations, as noted in the plan documents. Contributions made by the Company related to the years ended December 31, 2022, 2020, were $ 18.6 million, and $ 4.5 million, respectively. The company did not make any contributions during the year ended December 31, 2021. +Severance +The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $ 2.0 million, $ 2.1 million and $ 27.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. +107 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(21) Business Segments +In accordance with ASC No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available. +The following is a description of each reportable segment: +Completion Services +The Company’s Completion Services segment consists of the following businesses and service lines: (1) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our R&T department. +Well Construction and Intervention Services +Following the sale of the Company’s coiled tubing assets, the Company’s WC&I Services segment consists of the cementing services service line. +On August 1, 2022, the Company sold its coiled tubing assets to Gladiator Energy LLC for a cash purchase price of $ 21.6 million, which resulted in a gain on sale of assets of $ 11.6 million. The divestiture of non-core assets is consistent with the Company’s strategy to repurpose capital towards the highest return projects that fit the Company’s strategy around wellsite integration, while also strengthening liquidity. +Historical Segment: Well Support Services +The Company’s Well Support Services segment consisted of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. On March 9, 2020, the Company completed the divestiture of its Well Support Services segment for $ 93.7 million of total proceeds, including $ 59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $ 53.3 million received at close, and $ 34.4 million of par value Senior Secured Notes, with 10.75 % coupon rate, ("WSS Notes") previously issued by Basic. This resulted in a gain on divestiture of $ 8.7 million. The gain is recorded within (Gain) Loss on Disposal of Assets on the Consolidated Statements of Operations and Comprehensive Income (Loss) . Income per share for the three months ended March 31, 2020 attributable to the divested Well Support Services segment was less than $ 0.01 . On July 29, 2020, the Company received the escrowed cash amount in final settlement for working capital reconciliation. +108 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment. +Year Ended December 31, +2022 2021 2020 +Operations by reportable segment +Adjusted gross profit (loss): +Completion Services (1) +$ 724,268 $ 165,867 $ 168,276 +WC&I (1) +30,459 10,016 9,731 +Well Support Services (1) +— — 12,338 +Total adjusted gross profit $ 754,727 $ 175,883 $ 190,345 +(1) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. Adjusted gross profit is defined as revenue less cost of services, further adjusted to eliminate items in cost of services that management does not consider in assessing ongoing performance. +Year ended December 31, 2022 +Completion Services WC&I Total +Revenue $ 3,091,220 $ 153,602 $ 3,244,822 +Cost of Services 2,366,952 123,143 2,490,095 +Gross profit excluding depreciation and amortization 724,268 30,459 754,727 +Management adjustments associated with cost of services (1) +— — — +Adjusted gross profit (2) +$ 724,268 $ 30,459 $ 754,727 +(1) Adjustments relate to market-driven severance, leased facility closures, and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply of crude oil. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +Year ended December 31, 2021 +Completion Services WC&I Total +Revenue $ 1,324,888 $ 98,553 $ 1,423,441 +Cost of Services 1,165,881 89,440 1,255,321 +Gross profit excluding depreciation and amortization 159,007 9,113 168,120 +Management adjustments associated with cost of services (1) +6,860 903 7,763 +Adjusted gross profit (2) +$ 165,867 $ 10,016 $ 175,883 +(1) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +109 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +Year ended December 31, 2020 +Completion Services WC&I Well Support Services Total +Revenue $ 1,046,314 $ 98,338 $ 57,929 $ 1,202,581 +Cost of Services 893,785 93,198 45,591 1,032,574 +Gross profit excluding depreciation and amortization 152,529 5,140 12,338 170,007 +Management adjustments associated with cost of services (1) +15,747 4,591 — 20,338 +Adjusted gross profit (2) +$ 168,276 $ 9,731 $ 12,338 $ 190,345 +(1) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply. +(2) Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company’s segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. +(Thousands of Dollars) +December 31, +2022 December 31, +2021 +Total assets by segment: +Completion Services +$ 1,404,557 $ 1,201,265 +WC&I +38,150 60,195 +Corporate and Other +284,461 196,121 +Total assets +$ 1,727,168 $ 1,457,581 +Goodwill by segment: +Completion Services +$ 192,780 $ 192,780 +WC&I +— — +Corporate and Other — — +Total goodwill +$ 192,780 $ 192,780 +110 +NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES +Notes to the Consolidated Financial Statements +(22) New Accounting Pronouncements +(a) Recently Adopted Accounting Standards +In July 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-05 "Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments" ("ASU 2021-05"). ASU 2021-05 allows a lessor to classify and account for a lease with variable lease payments that doesn't depend on an index or rate as an operating lease if both: a) The lease would’ve been classified as a sales-type lease or a direct-financing lease in accordance with the lease classification guidance in Topic 842; and b) The lessor would’ve otherwise recognized a day-one loss. This standard was effective for fiscal years beginning after December 15, 2021. The Company adopted this standard on January 1, 2022, and there was no material impact on the financial statements. +In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)” (“ASU 2020-06”). ASU 2020-06 simplifies the guidance on the issuer's accounting for convertible debt instruments and convertible preferred stock. The Company adopted this standard on January 1, 2022, and there was no material impact on the financial statements. +(b) Recently Issued Accounting Standards +In December 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-06 “Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. ASU 2022-06 provides optional expedients that permit an entity to not apply otherwise applicable US GAAP to contracts or transactions that are modified or otherwise affected due to reference rate reform. ASU defers the sunset date of ASC 848 from December 31,2022, which was previously addressed in ASU 2020-04 and ASU 2021-01, to December 31, 2024. Entities that apply ASC 848 can continue to do so until December 31,2024. The Company is currently working to transition from LIBOR to an alternate reference rate in 2023. +In October 2021, the FASB issued ASU 2021-08 “Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. ASU 2021-08 requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard is effective beginning on December 15, 2022. The Company does not expect ASU 2021-08 to have any impact on its consolidated financial statements. +111 +Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2022, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +None. +112 +PART III +113 +Item 10. Directors, Executive Officers and Corporate Governance +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2022. +114 +Item 11. Executive Compensation +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2022. +115 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2022. +116 +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed than no later 120 days after December 31, 2022. +117 +Item 14. Principal Accountant Fees and Services +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2022. +118 +PART IV +Item 15. Exhibits and Financial Schedules +The following documents are filed as part of this report: +Financial Statements +NexTier Oilfield Solutions Inc. +Audited Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +63 +Consolidated Balance Sheets +67 +Consolidated Statements of Operations and Comprehensive Income (Loss) +68 +Consolidated Statements of Changes in Stockholders’ Equity +69 +Consolidated Statements of Cash Flows +70 +Notes to Consolidated Financial Statements +72 +Financial Statement Schedules: +The schedules listed in Rule 5-04 of Regulation S-X (17 CFR 210.5-04) have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. +119 +Exhibits +The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). +EXHIBIT INDEX +Exhibit +Number Exhibit Description +2.1 +Agreement and Plan of Merger, dated as of June 16, 2019, by and among C&J Energy Services, Inc., Keane Group, Inc. and King Merger Sub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2019). +2.2 +Purchase Agreement, dated August 4, 2021, by and among NexTier Completion Solutions Inc., NexTier Oilfield Solution Inc., Alamo Frac Holdings, LLC, Alamo Pressure Pumping, LLC and the Owner Group identified therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +3.1 +Certificate of Incorporation of Keane Group, Inc. dated October 13, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +3.2 +Certificate of Amendment to Certificate of Incorporation of Keane Group, Inc. dated October 31, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +3.3 * +Bylaws, dated October 27, 2020. +4.1 +Second Amended and Restated Stockholders' Agreement, dated October 31, 2019, by and among Keane Group, Inc. and Keane Investor Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +4.2 +Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.1 +Second Amended and Restated Asset-Based Revolving Credit Agreement, dated October 31, 2019, by and among NexTier Oilfield Solutions Inc. (f/k/a Keane Group, Inc.), Keane Group Holdings, LLC, as the Lead Borrower, certain other subsidiaries of NexTier Oilfield Solutions Inc. as additional borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative and collateral agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 31, 2019). +10.2 +Term Loan Agreement, dated May 25, 2018, by and among Keane Group Inc., as the Parent, Keane Group Holdings, LLC, as the Lead Borrower, the Subsidiary Guarantors party thereto, Barclays Bank PLC, as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 29, 2018). +10.3 +Master Loan and Security Agreement, dated August 20, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 7, 2021). +10.4 † +Keane Management Holdings LLC Management Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.5 † +NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan, dated effective October 31, 2019 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed on November 1, 2019). +10.6 † +Amendment No. 1 to NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +10.7 † +NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (Amended and Restated 2021) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 5, 2021). +10.8 † +Form of Keane Group, Inc. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +120 +10.9 † +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.10 † +Form of Director Services Agreement (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.11 † +Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 3, 2017). +10.12 † +Keane Group, Inc. Form of Restricted Stock Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.13 † +Keane Group, Inc. Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.14 † +Form of Amendment to Keane Group, Inc. Restricted Unit Award Agreements with each of James Stewart, Greg Powell, Paul Debonis and Kevin McDonald (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.15 † +Form of Amendment to Keane Group, Inc. Non-Qualified Stock Option Award Agreements with each of James Stewart, Greg Powell, Paul DeBonis and Kevin McDonald (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2018). +10.16 † +C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on January 13, 2017). +10.17 † +First Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to C&J Energy Services Inc.’s Current Report on Form 8-K filed on February 6, 2017). +10.18 † +Second Amendment to the C&J Energy Services, Inc. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020) +10.19 † +Performance Share Agreement under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.10 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.20 † +Performance Share Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.11 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.21 † +Performance Share Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.12 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.22 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.13 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.23 † +Restricted Share Unit Agreement (C&J Employment Agreement - Tier II) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.14 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.24 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier I) under the 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.15 to C&J Energy Services Inc.’s Annual Report on Form 10-K filed on February 27, 2019). +10.25 † +Cash Retention Award Agreement (C&J Employment Agreement - Tier II) under 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.16 to C&J Energy Services Inc’s Annual Report on Form 10-K filed on February 27, 2019). +10.26 † +Form of PSU Award Agreement 2020 (Executive) (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.27 † +Form of RSU Agreement 2020 (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.28 † +Form of RSU Award Agreement 2021 (incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +121 +10.29 † +Form of PSU Award Agreement 2021 (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K filed on February 24, 2021). +10.30 † +Form of Stock Payment Award Agreement (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2022). +10.31 † +Form of RSU Award Agreement 2022 (incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2022). +10.32 † +Form of PSU Award Agreement 2022 (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2022). +10.33 † +Form of Performance Award Agreement 2022 (incorporated by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2022). +10.34 †* +NexTier Oilfield Solutions Inc. Form of Restricted Stock Unit Award Agreement. +10.35 †* +NexTier Oilfield Solutions Inc. Form of Restricted Stock Unit Performance Award Agreement. +10.36 †* +Continuing Award Program for Qualified Retirees, Amended and Restated February 9, 2023. +10.37 † +Leadership Severance Program (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2022). +10.38 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Robert Drummond (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-4 filed on July 16, 2019). +10.39 † +Amended Form of Restricted Unit Award Agreement for R. Drummond (incorporated by reference to Exhibit 10.1 Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). +10.40 † +Amended and Restated Employment Agreement, dated July 12, 2019, by and between Keane Group, Inc. and Kevin M. McDonald (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-4 filed on July 16, 2019). +10.41 † +Amended and Restated Employment Agreement, dated as of November 1, 2019, by and between NexTier Oilfield Solutions Inc. and Ian J. Henkes (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.42 † +Second Amended and Restated Employment Agreement, dated January 13, 2021, by and between NexTier Oilfield Solutions Inc. and Kenny Pucheu (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on January 15, 2021). +10.43 † +Form of Third Amended and Restated Employment Agreement by and among KGH Intermediate Holdco II, LLC, Keane Group Inc. and James C. Stewart (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on December 14, 2016). +10.44 † +Separation Agreement for James Stewart (incorporated by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). +10.45 † +Employment Agreement, dated February 20, 2017, by and between KGH Intermediate Holdco II, LLC and Phung Ngo-Burns (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 4, 2017). +10.46 † +Amendment to Employment Agreement of Phung Ngo-Burns, dated March 20, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 24, 2020). +10.47 † +Employment Agreement, dated August 4, 2021, by and between Alamo Pressure Pumping, LLC and Michael Joseph McKie (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2021). +10.48 † +Form of Earnout Agreement by and between NexTier Completion Solutions Inc. and Alamo Frac Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +10.49 +Form of Registration Rights Agreement by and between NexTier Oilfield Solutions Inc. and Alamo Frac Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 4, 2021). +10.50 +Registration Rights Agreement, dated August 3, 2022, by and between NexTier Oilfield Solutions Inc. and Continental Intermodal Group LP (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 3, 2022). +122 +21.1 * +Schedule of Subsidiaries of NexTier Oilfield Solutions Inc. +23.1 * +Consent of KPMG LLP, Independent Registered Public Accounting Firm. +31.1 * +Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2 * +Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1 ** +Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS XBRL Instance Document +101.SCH XBRL Taxonomy Extension Schema Document +101.CAL XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB XBRL Taxonomy Extension Label Linkbase Document +101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF XBRL Taxonomy Extension Definition Linkbase Document +104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +† Indicates a management contract or compensatory plan or arrangement. +* Filed herewith. +** The certification attached as Exhibit 32.1 furnished herewith is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the registrant under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing except to the extent the registrant specifically incorporates it by reference. +Item 16. Form 10-K Summary +None. +123 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 16, 2023. +NexTier Oilfield Solutions Inc. +(Registrant) +By: /s/ Robert W. Drummond +Robert W. Drummond +President, Chief Executive Officer and Director +(Principal Executive Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature Title Date +/s/ Robert W. Drummond President, Chief Executive Officer and Director +(Principal Executive Officer) February 16, 2023 +Robert W. Drummond +/s/ Kenneth Pucheu Executive Vice President and Chief Financial Officer +(Principal Financial Officer) February 16, 2023 +Kenneth Pucheu +/s/ Oladipo Iluyomade Vice President, Chief Accounting Officer and Treasurer +(Principal Accounting Officer) February 16, 2023 +Oladipo Iluyomade +/s/ James C. Stewart Director February 16, 2023 +James C. Stewart +/s/ Stuart M. Brightman Director February 16, 2023 +Stuart M. Brightman +/s/ Gary M. Halverson Director February 16, 2023 +Gary M. Halverson +/s/ Patrick Murray Director February 16, 2023 +Patrick Murray +124 +/s/ Amy H. Nelson Director February 16, 2023 +Amy H. Nelson +/s/ Melvin G. Riggs Director February 16, 2023 +Melvin G. Riggs +/s/ Bernardo J. Rodriguez Director February 16, 2023 +Bernardo J. Rodriguez +/s/ Michael Roemer Director February 16, 2023 +Michael Roemer +/s/ Scott R. Wille Director February 16, 2023 +Scott Wille +/s/ Leslie A. Beyer Director February 16, 2023 +Leslie A. Beyer +125 \ No newline at end of file diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/filing_metadata.csv b/raw/filings/0001688476/2022/0001688476-23-000051/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..3f60eb95194958acbe0a34aeb820ac9e85e07528 --- /dev/null +++ b/raw/filings/0001688476/2022/0001688476-23-000051/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001688476,NEX,NEXTIER OILFIELD SOLUTIONS INC.,10-K,2023-02-16,2022-12-31,2023-02-16T21:17:17.000Z,0001688476-23-000051,nex-20221231.htm,10-K,15366428,1,1,https://www.sec.gov/Archives/edgar/data/1688476/000168847623000051/nex-20221231.htm,https://www.sec.gov/Archives/edgar/data/1688476/000168847623000051/,2022,2022,1 diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/item1.txt b/raw/filings/0001688476/2022/0001688476-23-000051/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..324d7fe3ee68f08679a16edc1cadf6556a3f1574 --- /dev/null +++ b/raw/filings/0001688476/2022/0001688476-23-000051/item1.txt @@ -0,0 +1,111 @@ +Item 1. Business +General description of the business +NexTier Oilfield Solutions Inc. is a predominately U.S. land focused oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We provide our services through our operating subsidiaries to exploration and production (“E&P”) customers. Our integrated solutions approach is focused on delivering efficiency, and our ongoing commitment to innovation helps our customers capitalize on technological advancements. NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. +We were formed under the name Keane Group, Inc. as a Delaware corporation on October 13, 2016, to be a holding corporation as part of an organizational restructuring of Keane Group Holdings, LLC, which was formed March 1, 2011, and its subsidiaries, for the purpose of facilitating the initial public offering of shares of common stock of the Company in 2017. On January 25, 2017, we consummated an initial public offering (“IPO”). To effectuate the IPO, we completed a series of transactions reorganizing our business, resulting in the Company being a holding company with no material assets other than its ownership of Keane Group. In connection with the restructuring, the Keane Group entities became wholly owned subsidiaries of the Company. +On October 31, 2019, we completed a merger transaction with C&J Energy Services, Inc., a publicly traded Delaware corporation. Pursuant to this transaction, C&J was ultimately merged with and into our wholly owned merger subsidiary, with our subsidiary continuing as the surviving entity. On the effective date of the C&J Merger, we changed our name to “NexTier Oilfield Solutions Inc.” Since 2013, our growth through acquisition strategy has resulted in the growth of the location and scale of our operational footprint, expansion of our customer base, addition of wireline operations, increase in our pumping capacity and expansion of our hydraulic fracturing operations by more than an additional 2.2 million hydraulic horsepower. +In March 2020, we divested the legal entities and the majority of the assets that comprised our Well Support Services segment. +On August 31, 2021, we completed the acquisition of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries. +On August 3, 2022 the Company entered into and closed a definitive agreement to purchase substantially all assets (and assume certain lease liabilities) of the sand hauling, wellsite storage and last mile logistics businesses of Continental Intermodal Group LP (“CIG”) and its subsidiaries (the “CIG Acquisition”) from CIG, Continental Intermodal Group – Trucking, LLC (“Trucking”) and CIG Logistics LLC (together with Trucking and CIG, “CIG Sellers”). +We are currently organized into two reportable segments, consisting of: +• Completion Services, which consists of the following business lines: (1) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our research and technology (“R&T”) department; and +• Well Construction and Intervention Services (“WC&I”), which consists of our cementing services. +4 +Completion Services segment +Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business. +Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. In late 2020, we began evolving our completion service offerings to develop an integrated natural gas treatment and delivery solution. In 2021, we launched our Power Solutions business, which focuses on gas sourcing, compression, transport, decompression, treatment and related services for our fracturing operations. We believe this integration solution assists our customers by reducing emissions at the wellsite and throughout their operations. As part of our wellsite integration strategy to provide and integrate a variety of services for our customers at the wellsite to maximize efficiencies and profitability, in 2022, we acquired sand hauling, wellsite storage, and last mile logistics assets from CIG Sellers and rebranded the entire last mile logistics operation as NexMile Logistics. The assets acquired were combined with the Company’s existing last mile logistics assets to create a leading player in the delivery and storage of proppant at the wellsite. We are committed to our Power Solutions, NexMile Logistics, and proppant management businesses and will look to further increase our investments in these services, in addition to the maintenance and investment in our core fracturing assets. +Wireline and Pumping Services. Our wireline services involve the use of a truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We offer our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied. In addition, we offer wireline and pumping services that are not integrated with our fracturing services. We are one of the leading providers of perforating, pumpdown, pipe recovery, pressure pumping, and wellsite make-up and pressure testing services. We are highly experienced in safely servicing deep, high-pressure, high-temperature wells in some of the most active onshore basins in the United States. Our in-house manufacturing capabilities through our R&T department allow us to manage costs and lead times with regard to hardware and perforating guns, switches and accessories, providing us with a competitive advantage and enabling higher returns. +Well Construction and Intervention Services segment +Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annulus isolation and hydraulic seal, while protecting fresh water zones from our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature, high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers’ wells. We are one of the largest providers of specialty cementing services in the United States. Our operations are supported by multiple full-service laboratory facilities with advanced capabilities. +Coiled Tubing. On August 1, 2022, we sold our coiled tubing assets to Gladiator Energy LLC. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements +5 +and Supplemental Data.” Prior to the sale, the Company provided a range of coiled tubing services used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services were typically short-term in nature, lasting anywhere from a few hours to multiple days. +Well Support Services segment +On March 9, 2020 we sold our Well Support Services Segment. For additional information on this transaction, see Note (21) Business Segments of Part II, “ Item 8 . Financial Statements and Supplemental Data.” Prior to the sale, our Well Support Services segment focused on post-completion activities at the well site, and includes rig services, such as workover, fluids management, and other specialty well site services. The majority of revenue for this segment was generated by our rig services business, and we considered our rig services and fluids management businesses to be our primary service lines within this reportable segment. +Business strategy +As part of our integration under the NexTier name, introspection by the resulting management team refined our business mission as one to responsibly grow and continuously improve our business in a way that maximizes stockholder value by taking care of our people, our customers, our communities and the environment. Our principal business objective is to deliver integrated, environmentally conscious completion services that help enable our customers to safely and affordably unlock sources of energy. We believe that by successfully deploying this strategy, we can deliver industry leading returns and increase stockholder value. We maintain a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through: +• developing and expanding our relationships with existing and new customers; +• continuing our exemplary safety performance; +• investing further in driving efficiencies and environmental stewardship, including through our digital platform, last mile logistics business, and evolving Power Solutions offering; +• maintaining a conservative balance sheet to preserve operational and strategic flexibility; and +• continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create stockholder value. +For further discussion on the business strategies we plan to continue executing in 2023, see Part II, “ Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Customers +Our customers primarily include major integrated and large independent oil and natural gas E&P companies. Significant customers are those that individually account for 10% or more of the Company's consolidated revenue. For the year ended December 31, 2022, revenue from one customer individually represented approximately 10% of the Company’s consolidated revenue. This customer represented $311.8 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2021, one customer individually represented 14% of the Company’s consolidated revenue. This customer represented $193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% and collectively represented $188.6 million or 16% and $160.5 million or 13% of our consolidated revenue in the Completions Services segment. +Competition and Sales +The markets in which we operate are highly competitive with significant potential for fluctuation in capacity. Projects are often awarded on a bid basis, which tends to increase the highly competitive nature of the +6 +environment in which we operate. We provide services in various geographic regions, predominately across the U.S., and the competitive landscape varies in each region. Utilization and pricing for our services have, from time to time, been both positively and negatively affected by changes in supply and demand dynamics in our operating areas and geographic markets. The COVID-19 pandemic negatively impacted demand and pricing for our services in 2020 and 2021, which resulted in a rationalization of supply of frac equipment. Industry demand then recovered in 2022 and the industry was not able to fully meet this demand given supply reductions in 2020 and 2021. This resulted in an increase in pricing in 2022 as utilization tightened. See additional discussion in Part II, “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our major competitors for both our Completions Services and Well Construction and Intervention Services segments include Halliburton Company, Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc., and ProFrac Holding Corp. We also compete regionally in each segment with a significant number of smaller service providers. +Historically, our core competitive factors in the markets we serve have been our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. While these factors continue to dominate, we believe that our customers have begun to look beyond these core requirements to prefer suppliers that can provided integrated solutions that align the incentives of operators and service providers. +While we seek to be competitive in our pricing, we believe many of our customers have elected to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment. NexTier has also been developing and building its digital program for some time. We believe our digital program, continued investment in diesel substitution, as evidenced by the expected delivery in 2023 of our first electric fleet and the continued investments in dual fuel capabilities equipment, and our integrated natural gas treatment and delivery solution are important to achieving emissions reductions initiatives, both for us and our customers, and provide a competitive differentiating factor. +Raw materials +We purchase a wide variety of raw materials, parts, and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. +For the year ended December 31, 2022, there were no suppliers that individually represented more than 5% of the Company’s overall purchases. For the years ended December 31, 2021 and 2020, there was one supplier that individually represented approximately 5% of the Company’s overall purchases, and such purchases were primarily incurred within the Completion Services segment. +Research & technology and intellectual property +We have invested in technological advancement, including the development of a state-of-the-art innovation center staffed by a team of highly skilled digital professionals and engineers. Our innovation efforts have been focused on fit-for-purpose solutions designed to enhance our service offerings, increase efficiencies, lower our operating costs, optimize capital expenditures and add value for our customers. This includes developing an innovative digital infrastructure, NexHub, which is an internal, real-time, digital platform that allows around-the-clock remote operations support across the majority of our active fleets. Driven by artificial intelligent logistics and digital operations engineering, NexHub provides key benefits of remote operations to allow for less employees at the well-site, extended equipment life through equipment health monitoring with machine learning and generated alerts, +7 +rapid response and adjustment to changing wellsite and equipment conditions, enhanced service quality, and powers data driven decisions. +Our research and development and digital initiatives generate recurring cost savings for our integrated completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Several of these investments provide value-added products and services that, in addition to producing revenue, are creating increasing demand from key customers. In our day-to-day operations, we utilize equipment and products manufactured by our vertically integrated businesses which are managed through our innovation center, and we may also sell such equipment and products to third-party customers in the global energy services industry. We believe that our focus on innovation, with the objective of reducing costs and improving sustainability of our operations, provides a strategic benefit through the ability to fund, develop, and implement new technologies and quickly respond to changes in customer requirements and industry demand. +We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have common law and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems or may be halted for short periods due to extreme heat conditions. +Human capital resources +NexTier is committed to conducting our activities in a safe and responsible manner, while fostering a culture to treat every person with respect and dignity. We seek to attract, retain and develop high quality talent who can drive the success of our business while emulating our core values. +General +As of December 31, 2022, we had 4,302 employees, of which, approximately 83% were compensated on an hourly basis. This was approximately a 29% increase from the 3,340 employees we had on December 31, 2021. Our employees are neither covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any potentially adverse matters involving our employment practices on a company-wide level. +Health and Safety +In our industry, a strong safety record is key to attracting and retaining top-tier customers and employees. We believe we are among the safest service providers in the industry. In 2022, we achieved a total recordable incident rate of 0.59, which is less than the 0.90 incident rate derived from an industry average from 2017 to 2021. We believe total recordable incident rate is a reliable measure of safety performance. +We offer comprehensive health and welfare, disability, and retirement benefits to eligible employees. The core health and welfare benefits are supplemented with discount programs for health-related goods and services, a variety of voluntary benefits and paid time off programs. Health benefits include low-cost telehealth services as well +8 +as mental and behavioral health resources, including on-demand access to an Employee Assistance Program for employees and their dependents. +Growth and Development +Hiring, developing and retaining quality employees is important to maximize the success of our operations. We actively foster a learning culture by supporting our employees’ professional development, providing an on-demand learning platform, and empowering them to drive their career progression. Competency assessments drive skill development plans and succession plans drive leadership development plans. To further support these objectives, we have designed human resources programs to: +• Enhance the company culture through employee experiences, policies and practices aimed at making the workplace more safe, healthy and inclusive; +• Align leader and team member behaviors to our purpose; +• Facilitate talent acquisition to create a high-performing and diverse workforce; +• Reward employees through competitive pay and benefits; +• Develop employees at all levels through learning strategies focused on new skills required to support operational excellence and advancement within the Company; and +• Evolve and invest in technology and other resources that enable employees to learn and grow more effectively. +Material government regulation +Our operations are subject to stringent and complex federal, state and local laws, rules and regulations relating to the oil and natural gas industry including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”) and its state equivalents, issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, and restricting permits or other authorizations, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict compliance with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations. +The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health without regard to fault. In addition, companies that incur CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal +9 +injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment. +The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”), and analogous state laws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state laws under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA. The impact of future revisions to environmental laws and regulations cannot be predicted. Moreover, stricter standards for waste handling and disposal may be imposed on the oil and natural gas industry in the future. Removal of RCRA’s exemption for exploration and production wastes has the potential to significantly increase waste disposal costs, which in turn will result in increased operating costs and could adversely impact our business and results of operations. Naturally Occurring Radioactive Materials (“NORM”) may contaminate extraction and processing equipment used in the oil and natural gas industry. The waste resulting from such contamination is regulated by federal and state laws. Standards have been developed for: worker protection; treatment, storage, and disposal of NORM and NORM waste; management of NORM-contaminated waste piles, containers and tanks; and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. It is possible that we may incur costs or liabilities associated with elevated levels of NORM. +The Federal Water Pollution Control Act (the “Clean Water Act”) and comparable state statutes impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States or state waters. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. The Clean Water Act also prohibits the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Clean Water Act program predictability and consistency have been uncertain for several years due to regulatory changes concerning clarity as to the scope of ‘waters of the United States’ federally regulated under the Act and litigation over those changes. The process for obtaining permits required by the Clean Water Act and analogous state laws has the potential to delay the development of natural gas and oil projects. Also, spill prevention, control and countermeasure regulations imposed under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a hydrocarbon tank spill, rupture or leak. +In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Moreover, the Oil Pollution Act of 1990 (“OPA”) imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States. A responsible party includes the owner or operator of an onshore facility. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the OPA, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges. +From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks. +There has been increasing public controversy regarding hydraulic fracturing and its use of fracturing fluids, including potential impacts of the process on drinking water supplies, on the use of water and the potential for +10 +impacts to surface water, groundwater and the general environment. Companion bills entitled the Fracturing Responsibility and Awareness of Chemicals Act (“FRAC Act”) were first introduced in the United States Congress in 2009 and successor bills have been reintroduced in the House of Representatives on multiple occasions, most recently in July 2019. The 116th Congress did not act on that legislation before the session adjourned on January 3, 2021; it is possible that a version of the FRAC Act could be introduced for consideration by the 118th Congress. If the FRAC Act and other similar legislation were to pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program established by the SDWA but are subject to regulation by state oil and gas commissions. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratoria on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation. +If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. +In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies may recommend additional requirements or restrictions on hydraulic fracturing operations. +Any regulation that restricts the ability to dispose of produced waters or increases the cost of doing business could cause curtailed or decreased demand for our services and have a material adverse effect on our business. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and make it more difficult or costly to perform hydraulic fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. +The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and +11 +continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations conducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA. Also, in November 2022, the EPA issued a supplemental notice of proposed rulemaking aimed at comprehensive emissions reduction from both new and existing sources in the oil and natural gas industry. State implementation of a revised NAAQS or final emission performance standard could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. +Exploration and production activities on federal lands may be subject to review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency—potentially in coordination with other responsible agencies—will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. The NEPA review process has the potential to delay the permitting and subsequent development of oil and natural gas projects. +Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters. +More stringent laws and regulations relating to climate change may be adopted in the future and could cause us to incur additional operating costs or reduce the demand for our services. The EPA has determined that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”) present an endangerment to the environment because emissions of such gases are, according to the EPA and many scientists, contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, EPA has adopted regulations that restrict emissions of GHGs under existing provisions of the CAA, including rules that require preconstruction and operating permit reviews for GHG emissions from certain large stationary sources. +The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified GHG sources, including, among others, certain oil and natural gas production facilities, on an annual basis. A 2016 EPA final rule package included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas wells. However, regulatory developments to ease or rescind these rules have created +12 +uncertainty as to their impact on the oil and gas industry, and EPA issued a supplemental notice of proposed rulemaking in November 2022 aimed at further addressing methane emissions. +While the long-term trajectory of future greenhouse regulations remains unsettled, the current administration has clearly articulated a goal of reducing greenhouse gas emissions and use. For example in January of 2021, President Biden issued an Executive Order that, among other things, declared climate change to be a crisis requiring significant short-term global reduction in greenhouse gas emissions and net-zero global emissions by mid-century or before. The order instructs every government agency to make combatting climate change an essential element of its agenda. In response, in November 2021, EPA proposed further regulation of methane emissions from the oil and gas sector, including new performance standards for certain new and existing sources. In October 2021, the Department of the Interior released a climate adaptation and resilience plan, outlining how it intends to address climate change risks, impacts, and vulnerabilities, including transitioning to a clean energy economy. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. However, almost one-half of the states have established or joined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services. +Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business, including the impact of the SEC’s proposed rules regarding climate related disclosures. +We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and of comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the rule regarding respirable silica sand, which required the oil and gas industry to implement engineering controls and work practices to limit exposures below the new limits by June 23, 2021. +Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation (“DOT”) and various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period and requiring onboard black box recorder devices or limits on vehicle weight and size, and setting minimum training standards for new drivers seeking a commercial driver’s license. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. +13 +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimensions of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Some of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the United States Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. Our Wireline operations utilize materials regulated by the Bureau of Alcohol, Tobacco, Firearms, and Explosives. We are required to obtain permits and provide guarantees in the form of internal procedures to maintain compliance. We believe that we have obtained these licenses and approvals as necessary and applicable. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, injunctions prohibiting some or all of our operations, assessment of administrative and civil penalties, and even criminal prosecution. In addition, releases of radioactive material or mishandling of explosives could result in substantial remediation costs and potentially expose us to third-party property damage or personal injury claims. +We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to fortuitous environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations. +We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act. +Overall, we do not currently anticipate that compliance with existing environmental laws and regulations will have a material effect on our financial condition or results of operations. It is possible, however, that substantial costs for compliance or penalties for non-compliance may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify. +Insurance +14 +Our operations are subject to hazards inherent in the oil and natural gas industry, including blowouts, explosions, cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. +Additionally, our business involves, and is subject to hazards associated with, the transportation of heavy equipment and materials, as well as heavily regulated explosive and radioactive materials. Regularly having a significant number of both commercial and non-commercial motor vehicles on the road creates a high risk of vehicle accidents. The occurrence of a serious accident involving our employees, equipment and/or services, could result in our being named as a defendant to a lawsuit asserting significant claims, and we may also be liable to indemnify certain third-parties, specifically including its customers, for large claims for damages in situations where our employees, equipment and/or services were involved. +Despite our efforts to maintain high safety standards, we from time to time have experienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations. +We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions. +Availability of filings +Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/. +We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. +15 \ No newline at end of file diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/item13.txt b/raw/filings/0001688476/2022/0001688476-23-000051/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..63472cf126967acfe8c067f8def23450b539bbbb --- /dev/null +++ b/raw/filings/0001688476/2022/0001688476-23-000051/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related-Party Transactions and Director Independence +Incorporated herein by reference from the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders, which will be filed than no later 120 days after December 31, 2022. +117 \ No newline at end of file diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/item9a.txt b/raw/filings/0001688476/2022/0001688476-23-000051/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..ffec037bea42689f57b32ef5b5e0e946a508a6f5 --- /dev/null +++ b/raw/filings/0001688476/2022/0001688476-23-000051/item9a.txt @@ -0,0 +1,10 @@ +Item 9A. Controls and Procedures +Disclosure Controls and Procedures +Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). +Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to our financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. +Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, based upon criteria set forth in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of December 31, 2022, our internal control over financial reporting is effective. +The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. +Changes in Internal Control Over Financial Reporting +There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/rp_note.txt b/raw/filings/0001688476/2022/0001688476-23-000051/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001688476/2022/0001688476-23-000051/rpt_disclosure.txt b/raw/filings/0001688476/2022/0001688476-23-000051/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0f92bc48abcd6c43787cbec08383a7fc61606189 --- /dev/null +++ b/raw/filings/0001688476/2022/0001688476-23-000051/rpt_disclosure.txt @@ -0,0 +1,8 @@ +Pre-Approved Related Party Transactions +The Audit Committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the Audit Committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the Audit Committee. +• +Any employment by the Company of an executive officer of the Company or any of its subsidiaries if the related compensation conforms with our Company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our Board; and +• +Any compensation paid to a director of our Board if the compensation is consistent with the Company’s Bylaws and any compensation policies. +Notwithstanding anything to the contrary in the Related Party Policy, in the event the Bylaws of the Company require review by our Board and/or approval of a Related Party Transaction, the Audit Committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our Board for the Board’s use in its consideration of a given Related Party Transaction. +73 \ No newline at end of file diff --git a/raw/filings/0001694028/2019/0001694028-20-000019/item1.txt b/raw/filings/0001694028/2019/0001694028-20-000019/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..4773b9224bbaa5c95d66f7e26bddac67959e2849 --- /dev/null +++ b/raw/filings/0001694028/2019/0001694028-20-000019/item1.txt @@ -0,0 +1,155 @@ +Item 1. Business +Our Company +We are an independent provider of hydraulic fracturing services and goods to onshore oil and natural gas exploration and production (“E&P”) companies in North America. We provide our services primarily in the Permian Basin, the Eagle Ford Shale, the Denver-Julesburg Basin (the “DJ Basin”), the Williston Basin, the San Juan Basin and the Powder River Basin. +We have grown organically from one active hydraulic fracturing fleet in December 2011 to 24 active fleets in February 2020. +Our founders and existing management were pioneers in the development of data-driven hydraulic fracturing technologies for application in shale plays. Prior to founding Liberty Holdings, the majority of our management team founded and built Pinnacle Technologies, Inc. (“Pinnacle Technologies”) into a leading fracturing technology company. In 1992, Pinnacle Technologies developed the first commercial hydraulic fracture mapping technologies, analytical tools that played a major role in launching the shale revolution. Our extensive experience with fracture technologies and customized fracture design has enabled us to develop new technologies and processes that provide our customers with real time solutions that significantly enhance their completions. These technologies include hydraulic fracture propagation models, reservoir engineering tools, large, proprietary shale production databases and multi-variable statistical analysis techniques. Taken together, these technologies have enabled us to be a leader in hydraulic fracture design innovation and application. +We believe the following characteristics distinguish us from our competitors and are the foundations of our business: forming ongoing partnerships of trust and innovation with our customers; developing and utilizing technology to maximize well performance; and promoting a people-centered culture focused on our employees, customers and suppliers. We have developed strong relationships with our customers by investing significant time in fracture design collaboration, which substantially enhances their production economics. Our technological innovations have become even more critical as E&P companies have increased the completion complexity and fracture intensity of horizontal wells. We are proactive in developing innovative solutions to industry challenges, including developing: (i) our proprietary databases of U.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; and (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate. We foster a people-centered culture built around honoring our commitments to customers, partnering with our suppliers and hiring, training and retaining people that we believe to be the best talent in our field, enabling us to be one of the safest and most efficient hydraulic fracturing companies in the United States. +Recent Developments +In January 2020, we put our 24 th fleet into production for a long-term existing customer. This fleet will utilize our Liberty Quiet Fleet® technology and have dual fuel capability. We expect our 25 th fleet to be deployed later in 2020. +Initial Public Offering and Corporate Reorganization Transaction +Liberty Inc. was incorporated as a Delaware corporation on December 21, 2016, to become a holding corporation for Liberty LLC and its subsidiaries upon completion of a corporate reorganization (as detailed below, the “Corporate Reorganization”) and planned initial public offering of the Company (“IPO”). Liberty Inc. has no material assets other than its ownership in Liberty LLC. +On January 17, 2018, we completed our IPO of 14,640,755 shares of our Class A common stock, par value $0.01 per share (the “Class A Common Stock”) at a public offering price of $17.00 per share, of which 14,340,214 shares were offered by us and 300,541 shares were offered by the selling shareholder. We received approximately $ 220.0 million in net proceeds after deducting approximately $23.8 million of underwriting discounts and commissions and other offering costs. We did not receive any proceeds from the sale of the shares of Class A Common Stock by the selling shareholder. +1 +Table of Contents +We are a holding company with no direct operations. In connection with the IPO, we completed the Corporate Reorganization, including the following series of transactions: +• Liberty Holdings contributed all of its assets to Liberty LLC in exchange for units in Liberty LLC (the “Liberty LLC Units”); +• Liberty Holdings liquidated and distributed to its then-existing owners (the “Legacy Owners”) Liberty LLC Units pursuant to the terms of the limited liability company agreement of Liberty Holdings and the Master Reorganization Agreement dated as of January 11, 2018, by and among the Company, Liberty Holdings, Liberty LLC, and the other parties named therein (the “Master Reorganization Agreement”); +• certain of the Legacy Owners directly or indirectly contributed all or a portion of their Liberty LLC Units to Liberty Inc. in exchange for 55,685,027 shares of our Class A Common Stock, and 1,258,514 shares of restricted stock. Subsequent to the initial exchange, 1,609,122 shares of Class A Common Stock were redeemed for an aggregate purchase price of $25.9 million upon the exercise of the underwriters' overallotment option; +• Liberty Inc. issued the Legacy Owners that continued to own Liberty LLC Units (the “Liberty Unit Holders”) an aggregate amount of 48,207,372 shares of our Class B common stock, par value $0.01 per share (the “Class B Common Stock” and, together with the Class A Common Stock, the “Common Stock”); and +• Liberty Inc. contributed the net proceeds it received from the IPO to Liberty LLC in exchange for additional Liberty LLC Units such that Liberty Inc. held a total number of Liberty LLC Units equal to the number of shares of Class A Common Stock outstanding immediately following the IPO. +The below structure chart shows our organization upon the completion of our IPO. This chart is provided for illustrative purposes only and does not represent all legal entities affiliated with us. +Each share of Class B Common Stock has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally. Holders of Class A Common Stock and Class B Common Stock will vote together as a single +2 +Table of Contents +class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our amended and restated certificate of incorporation. We do not intend to list our Class B Common Stock on any exchange. +Under the Second Amended and Restated Limited Liability Company Agreement of Liberty LLC (the “Liberty LLC Agreement”), each Liberty Unit Holder has, subject to certain limitations, the right (the “Redemption Right”) to cause Liberty LLC to acquire all or a portion of its Liberty LLC Units for, at Liberty LLC’s election, (i) shares of our Class A Common Stock at a redemption ratio of one share of Class A Common Stock for each Liberty LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions or (ii) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Liberty Inc. (instead of Liberty LLC) will have the right (the “Call Right”) to, for administrative convenience, acquire each tendered Liberty LLC Unit directly from the redeeming Liberty Unit Holder for, at its election, (i) one share of Class A Common Stock or (ii) an equivalent amount of cash. In addition, upon a change of control of Liberty Inc., Liberty Inc. has the right to require each holder of Liberty LLC Units (other than Liberty Inc.) to exercise its Redemption Right with respect to some or all of such unit holder’s Liberty LLC Units. In connection with any redemption of Liberty LLC Units pursuant to the Redemption Right or the Call Right, the corresponding number of shares of Class B Common Stock will be canceled. +In connection with the IPO, Liberty Inc. entered into two tax receivable agreements, (the “TRAs”) with the Liberty Unit Holders and the selling shareholder (each such person and any permitted transferee, a “TRA Holder” and together, the “TRA Holders”). +The first of the TRAs, which Liberty Inc. entered into with the Liberty Unit Holders, generally provides for the payment by Liberty Inc. to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that Liberty Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of Liberty Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s Liberty LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Right or Liberty Inc.’s Call Right and (ii) imputed interest deemed to be paid by Liberty Inc. as a result of, and additional tax basis arising from, any payments Liberty Inc. makes under such TRAs. +The second of the TRAs, which Liberty Inc. entered into with the selling shareholder, generally provides for the payment by Liberty Inc. to such TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that Liberty Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of, as applicable to such TRA Holder, (i) any net operating losses available to Liberty Inc. as a result of the Corporate Reorganization and (ii) imputed interest deemed to be paid by Liberty Inc. as a result of any payments Liberty Inc. makes under such TRAs. For further discussion regarding the potential acceleration of payments under the TRAs and its potential impact, please read “Risk Factors—Risks Related to Our Class A Common Stock.” +Because Liberty Inc. is a holding company with no operations of its own, Liberty Inc.’s ability to make payments under the TRAs is dependent on the ability of Liberty LLC to make distributions to Liberty Inc. in an amount sufficient to cover its obligations under the TRAs. See “Risk Factors—Risks Related to Our Class A Common Stock—Liberty Inc. is a holding company. Liberty Inc.’s only material asset is its equity interest in Liberty LLC, and Liberty Inc. is accordingly dependent upon distributions from Liberty LLC to pay taxes, make payments under the TRAs and cover its corporate and other overhead expenses.” If Liberty Inc. experiences a change of control (as defined under the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs terminate early (at Liberty Inc.’s election or as a result of its breach), Liberty Inc. would be required to make a substantial, immediate lump-sum payment. +Cyclical Nature of Industry +We operate in a highly cyclical industry. The key factor driving demand for our services is the level of drilling activity by E&P companies, which in turn depends largely on the current and anticipated economics of new well completions. Global supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. E&P companies tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted in increased supplies and reduced prices which in turn tend to reduce demand for oilfield services. For these reasons, the results of our operations may fluctuate from quarter to quarter and from year to year, and these fluctuations may distort comparisons of results across periods. +3 +Table of Contents +Seasonality +Our results of operations have historically reflected seasonal tendencies relating to holiday seasons, inclement weather and the conclusion of our customers’ annual drilling and completion capital expenditure budgets. Our most notable declines typically occur in the fourth quarter of the year for the reasons described above. Additionally, some of the areas in which we have operations, including the DJ Basin, Powder River Basin and Williston Basin, are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain and frost law enforcement, we may be unable to move our equipment between locations, thereby reducing our ability to provide services and generate revenues. The exploration activities of our customers may also be affected during such periods of adverse weather conditions. Additionally, extended drought conditions in our operating regions could impact our ability or our customers’ ability to source sufficient water or increase the cost for such water. +Intellectual Property +Over the last several years we have significantly invested in our research and technology capabilities. Our efforts to date have been focused on developing innovative, fit-for-purpose solutions designed to enhance our core service offerings, increase completion efficiencies, provide cost savings to our operations and add value for our customers. +As a result of these efforts, we introduced several new products and progressed on differentiating technologies that we believe will provide a competitive advantage as our customers focus on extracting oil and natural gas in the most economical and efficient ways possible, including, for example, our Liberty Quiet Fleet®, which materially reduces noise levels compared to conventional fracturing fleets. These investments are delivering value added products and services that support our customers and create increasing demand for our services. +We seek patent and trademark protections for our technology when we deem it prudent, and we aggressively pursue protection of these rights when warranted. We believe our patents, trademarks, and other protections for our proprietary technologies are adequate for the conduct of our business and that no single patent or trademark is critical to our business. In addition, we rely, to a great extent, on the technical expertise and know-how of our personnel to maintain our competitive position, and we take commercially reasonable measures to protect trade secrets and other confidential and/or proprietary information relating to the technologies we develop. +Risk Management and Insurance +Our operations are subject to significant hazards often found in the oil and natural gas industry, such as, but not limited to, accidents, including accidents related to trucking operations provided in connection with our services, blowouts, explosions, craterings, fires, natural gas leaks, oil and produced water spills and releases of hydraulic fracturing fluids or other well fluids into the environment. These conditions can cause: +• disruption in operations; +• substantial repair or remediation costs; +• personal injury or loss of human life; +• significant damage to or destruction of property and equipment; +• environmental pollution, including groundwater contamination; +• unusual or unexpected geological formations or pressures and industrial accidents; +• impairment or suspension of operations; and +• substantial revenue loss. +In addition, our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. +Claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used or trucking services provided in connection therewith may result in our being named as a defendant in lawsuits asserting large claims. +We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against or the failure of an insurer to meet its insurance obligations could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if +4 +Table of Contents +available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive. +We enter into Master Service Agreements (“MSAs”) with substantially all of our customers for our hydraulic fracturing services. Such MSAs delineate our and our customer’s respective indemnification obligations with respect to the services we provide. Generally, under our MSAs relating to our hydraulic fracturing services, we assume responsibility for pollution or contamination originating above the surface from our equipment or handling. However, our customers assume responsibility for all other pollution or contamination that may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling and completion fluids. The assumed responsibilities include the control, removal and clean-up of any pollution or contamination. In such cases, we may be exposed to additional liability if we are grossly negligent or commit willful acts causing the pollution or contamination. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death, in the case of our hydraulic fracturing operations, to the extent that their employees are injured by such operations, unless the loss is a result of our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from the gross negligence or willful misconduct of our customer. The same principles apply to mutual indemnification for loss or destruction of property or equipment. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we may be unsuccessful in enforcing contractual terms, incur an unforeseen liability that is not addressed by the scope of the contractual provisions or be required to enter into an MSA with terms that vary from our standard allocations of risk, as described above. Consequently, we may incur substantial losses that could materially and adversely affect our financial condition and results of operations. +Employees +As of December 31, 2019, we had 2,571 employees and no unionized labor. We believe we have good relations with our employees. +Our Services +We primarily provide hydraulic fracturing services and goods to onshore oil and natural gas E&P companies operating in unconventional oil and natural gas reservoirs and requiring technically and operationally advanced services. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. Our customers benefit from our expertise in fracturing horizontal wells in shales and other unconventional geological formations. +The process of hydraulic fracturing involves pumping a pressurized stream of fracturing fluid—typically a mixture of water, chemicals and proppant—into a well casing or tubing in order to cause the underground formation to fracture or crack. These fractures release trapped hydrocarbon particles and provide a conductive channel for the oil or natural gas to flow freely to the wellbore for collection. The propping agent, or proppant,—typically sand—becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons from the reservoir to the well. The fracturing fluid is engineered to lose viscosity, or “break,” and is subsequently flowed back from the formation, leaving the proppant suspended in the mineral fractures. Once our customer has flushed the fracturing fluids from the well using a controlled flow-back process, the customer manages fluid and water recycling or disposal. +Our hydraulic fracturing fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. Our hydraulic fracturing units consist primarily of high-pressure hydraulic pumps, diesel engines, transmissions, radiators and other supporting equipment that are typically mounted on trailers. We refer to the group of units and other equipment, such as blenders, data vans, sand storage, tractors, manifolds and high pressure fracturing iron, which are necessary to perform a typical hydraulic fracturing job, as a “fleet,” and the personnel assigned to each fleet as a “crew.” As of February 2020, we had 24 active fleets. +An important element of our hydraulic fracturing services is our focus on providing custom-tailored completions solutions to our customers to maximize their well results. Our technologically innovative approach involves our review of a series of continually updated, proprietary databases of U.S. unconventional wells to which we apply our multi-variable data analysis, allowing us to gain differential insight into fracture design. The innovative completions solutions we provide to our customers help them complete more productive and cost efficient wells in shorter times with less environmental impact on their surroundings while increasing the useful lives of our equipment. +In addition to custom-tailored completions solutions, we also develop custom fluid systems, proppant logistics solutions, perforating strategies and pressure analysis techniques for our customers. An example of this is a hydraulic fracturing fluid that we developed for use in our DJ Basin operations called Liberty Spirit ™ , a specifically designed fracturing fluid system that enables material reductions in completion costs in the DJ Basin without compromising job execution or well results. +5 +Table of Contents +We provide our services in several of the most active basins in the United States, including the Permian Basin, the Eagle Ford Shale, the DJ Basin, the Williston Basin, the San Juan Basin and the Powder River Basin. The map below represents our current areas of operations: +Properties and Equipment +Properties +Our corporate headquarters are located at 950 17 th Street, Suite 2400, Denver, Colorado 80202. We lease our general office space at our corporate headquarters. The lease expires in December 2024. We currently own or lease the following additional principal properties: +District Facility Location Size Leased or Owned Expiration of Lease +Odessa, TX 77,500 sq. ft on 47 acres Owned N/A +Henderson, CO 50,000 sq. ft on 13 acres Leased December 31, 2034 +Williston, ND 30,000 sq. ft on 15 acres Owned N/A +Gillette, WY 32,757 sq. ft on 15 acres Leased December 31, 2034 +Cibolo, TX 90,000 sq. ft on 34 acres Owned N/A +We also lease several smaller facilities, which leases generally have terms of one to three years. We believe that our existing facilities are adequate for our operations and their locations allow us to efficiently serve our customers. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility. +Equipment +As of February 2020, we have 24 hydraulic fracturing fleets. Eleven of our fleets currently utilize our Liberty Quiet Fleet® technology, approximately 28% of our capacity has dual fuel capability, and approximately 22% of our capacity utilizes the latest Tier 4 diesel engines. +Our hydraulic fracturing fleets are comprised of high-quality, heavy-duty equipment designed to reduce operational downtime and maintenance costs, while enhancing our ability to provide reliable, consistent service. Each hydraulic fracturing fleet includes the necessary blending units, manifolds, data vans and other ancillary equipment needed to provide a high level of service to our customers. +Our newbuild fleets are manufactured to a custom Liberty specification that identifies the input components, including such key parts as engines, transmissions and pumps and control systems. These components have been selected with our lowest total cost of ownership philosophy in mind. We have built a strong partnership with each of the key component suppliers that we believe will help ensure timely access to necessary components, early opportunities to adopt the latest technology, and high-level technical support. For example, our close partnership with Caterpillar Inc. enabled us to have ready access to their technical team as we worked through the development of the Liberty Quiet Fleet® technology and to be on the early test site for their new low-emission Tier 4 diesel and dynamic gas blending engines. This relationship ensured that the end product was delivered without compromise to engine performance, reliability or maintainability. We have also a built a strong relationship +6 +Table of Contents +with the assembler of the core equipment for our fracturing fleets. We believe the collaborative partnerships we have developed with our vendors should give us ready access to sufficient fabrication capacity for our growth. +Our Acquisitions +On February 22, 2017, we acquired all membership interests of Titan Frac Services LLC, a wholly owned subsidiary of TPIH Group Inc., for $65.0 million in cash. +Marketing and Customers +Our sales and marketing activities typically are performed through our local sales representatives in each geographic region, and are supported by our corporate headquarters. For the years ended December 31, 2019, 2018 and 2017, our top five customers collectively accounted for approximatel y 35% , 42% and 53% of our revenues, respectively. No customer accounted for more than 10% of our revenues for the year ended December 31, 2019. For the year ended December 31, 2018, Extraction Oil & Gas, Inc. accounted for more than 10% of our revenues. Extraction Oil & Gas, Inc. and SM Energy Company each accounted for more than 10% of our revenues for the year ended December 31, 2017. +Suppliers +We have a dedicated supply chain team that manages sourcing and logistics to ensure flexibility and continuity of supply in a cost effective manner across our areas of operation. We have built long-term relationships with multiple industry leading suppliers of proppant, chemicals and hydraulic fracturing equipment and have started to internally design and assemble key pump and maintenance parts. In addition, we have built a strong relationship with the assembler of our custom-designed hydraulic fracturing fleets and believe we will continue to have timely access to new, high capability fleets as we continue to grow. +We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe that we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, we may not always be able to do so. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. As a result, we may be unable to mitigate any future supply shortages and our results of operations, prospects and financial condition could be adversely affected. +Competition +The markets in which we operate are highly competitive. We provide services in various geographic regions across the United States, and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. Our hydraulic fracturing services compete with large, integrated companies such as Halliburton Company and Schlumberger Limited as well as other companies including BJ Services Company, Calfrac Well Services Ltd., FTS International, Inc., NexTier Oilfield Solutions Inc., Patterson-UTI Energy, Inc., ProPetro Services, Inc., RPC, Inc. and U.S. Well Services, Inc. In addition, our industry is highly fragmented and we compete regionally with a significant number of smaller service providers. +We believe that the principal competitive factors in the markets we serve are technical expertise, equipment capacity, work force competency, efficiency, safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment. +Our operations are organized into a single business segment, which consists of hydraulic fracturing services and goods, and we have one reportable geographical business segment, the United States. Operating segments are defined under generally accepted accounting principles in the United States of America ( “ GAAP ” ) as components of an enterprise that engage in activities (i) from which it may earn revenues and incur expenses and (ii) for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating resources and assessing performance. +7 +Table of Contents +Environmental and Occupational Safety and Health Matters +Our operations in support of oil and natural gas exploration, development and production activities pursued by our customers are subject to stringent federal, tribal, regional, state and local laws and regulations governing occupational safety and health, the discharge of materials into the environment and environmental protection. Numerous governmental entities, including the U.S. Environmental Protection Agency (“EPA”), the U.S. Occupational Safety and Health Administration (“OSHA”), and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them, often requiring difficult and costly actions, including the incurrence of potentially significant capital or operating expenditures to mitigate or prevent the releases of materials from our equipment, facilities or from customer locations where we provide our services. These laws and regulations may, among other things, (i) require the acquisition of permits or other authorizations for conducting regulated activities; (ii) limit or prohibit our operations on certain lands lying within wilderness, wetlands and other protected areas; (iii) require remedial measures to mitigate pollution from former and ongoing operations; (iv) impose restrictions on the types, quantities and concentrations of various substances that can be released into the environment or injected in formations in connection with oil and natural gas drilling and production activities; (v) impose specific safety and health criteria addressing worker protection; and (vi) impose substantial liabilities for pollution resulting from our operations. Any failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or cancellations in the permitting, performance or development of projects or operations; and the issuance of orders enjoining performance of some or all of our operations in a particular area. +The trend in environmental regulation is to place more restrictions and limitations on activities that may adversely affect the environment, and thus any new laws and regulations, amendment of existing laws and regulations, reinterpretation of legal requirements or increased government enforcement with respect to environmental matters that result in more stringent and costly completion activities, pollution control equipment, waste handling, storage transport, disposal, or remediation requirements could have a material adverse effect on our financial position and results of operations. We may be unable to pass on such increased compliance costs to our customers. Moreover, accidental releases or spills may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third-party claims for injuries to persons or damages to properties or natural resources. Our customers may also incur increased costs, or restrictions, delays or cancellations in permitting or operating activities as a result of more stringent environmental laws and regulations, which may result in a curtailment of exploration, development or production activities that would reduce the demand for our services. Historically, our worker health and safety as well as our environmental compliance costs have not had a material adverse effect on our results of operations; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on our business and operating results. +The following is a summary of the more significant existing environmental and occupational safety and health laws, as amended from time to time, to which our business is subject and for which compliance may have a material adverse impact on our capital expenditures, results of operations or financial position. +Worker Health and Safety +We are subject to the requirements of the federal Occupational Safety and Health Act, and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and the public. These worker health and safety laws and regulations are subject to amendment including, for example, rulemaking adopted by OSHA in 2016 imposing more stringent permissible exposure limits for worker exposure to respirable crystalline silica, and any failure to comply with these laws could lead to the assertion of third-party claims against us, civil or criminal fines and changes in the way we operate our facilities, any of which could have an adverse effect on our financial position. +8 +Table of Contents +Motor Carrier Operations +In connection with the services we provide, we operate as a motor carrier and therefore are subject to regulation by the U.S. Department of Transportation (“DOT”) and analogous state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding and marking; financial reporting; and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may increase our costs as well as affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations that govern the amount of time a driver may drive in any specific period and requiring onboard electronic logging devices or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by DOT. Intrastate motor carrier operations are subject to state safety regulations that often mirror federal regulations but may be more stringent. Such matters as weight and dimension of motor carrier-related equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, such as, for example, taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us would be enacted. +Radioactive Materials +Certain of our operations utilize equipment that contains sealed, low-grade radioactive sources. Our activities involving the use of radioactive materials are regulated by the U.S. Nuclear Regulatory Commission (“NRC”) and state regulatory agencies under agreement with the NRC. Standards implemented by these regulatory agencies require us to obtain licenses or other approvals for the use of such radioactive materials. Additionally, these regulatory agencies impose certain requirements concerning worker protection with respect to radioactive sources and may otherwise issue regulations regarding the handling and storage of this equipment that may result in increased costs. The violation of these laws and regulations may result in the denial or revocation of licenses or other approvals, issuance of corrective action orders, injunctions prohibiting some or all of our operations in a particular area, and assessment of sanctions, including administrative, civil and criminal penalties. +Hazardous Substances and Wastes and Naturally Occurring Radioactive Materials +The federal Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes, regulate the generation, treatment, storage, transportation, disposal and clean-up of hazardous and non-hazardous wastes. Pursuant to rules issued by the EPA, individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of oil or natural gas, if properly handled, are currently exempt from regulation as hazardous waste under RCRA and, instead, are regulated under RCRA’s less stringent non-hazardous waste provisions, state laws or other federal laws. However, it is possible that certain oil and gas drilling and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. For example, in response to a federal consent decree issued in 2016, the EPA was required during 2019 to determine whether certain Subtitle D criteria regulations required revision in a manner that could result in oil and natural gas wastes being regulated as RCRA hazardous wastes. In April 2019, the EPA made a determination that such revision of the regulations was unnecessary. A loss of the RCRA exclusion for drilling fluids, produced waters and related wastes could result in an increase in our and the oil and natural gas exploration and production industry’s costs to manage and dispose of generated hazardous wastes, which could have a material adverse effect on our results of operations and financial position. Additionally, other wastes handled at exploration and production sites or generated in the course of providing well services may not fall within this exclusion. In the course of our operations, we generate some amounts of ordinary industrial wastes that may be regulated as hazardous wastes. +Moreover, there have been public concerns expressed about naturally occurring radioactive materials (“NORM”) being detected in flow back water resulting from hydraulic fracturing that may contaminate extraction and processing equipment used in the oil and natural gas industry. NORM is subject primarily to individual state radiation control regulations while NORM handling and management activities are governed by regulations promulgated by OSHA. These state and federal regulations impose certain requirements concerning worker protection with respect to NORM as well as the treatment, storage, and disposal of NORM and NORM waste, management of NORM-contaminated waste piles, containers and tanks, and limitations on the relinquishment of NORM contaminated land for unrestricted use under RCRA and state laws. Concern over NORM in general, or NORM in groundwater in particular, could result in further regulation in the treatment, storage, handling and discharge of flow back water generated from oil and natural gas activities, including hydraulic fracturing, or handling of NORM-impacted +9 +Table of Contents +equipment that, if implemented, could increase our or our customers’ costs or liabilities associated with elevated levels of NORM as well as limit drilling by our customers, which developments may reduce demand for our services. +The federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as the “Superfund” law, and comparable state statutes impose liability, without regard to fault or legality of the original conduct, on classes of persons that are considered to have contributed to the release of a hazardous substance into the environment. Such classes of persons include the current and past owners or operators of sites where a hazardous substance was released, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, these persons may be subject to joint and several, strict liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources even if the liability results from conduct that was lawful at the time it occurred or is due to the conduct, or conditions caused by, prior operators or third parties. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We own, lease, or operate numerous properties and facilities that for many years have been used for industrial activities, including oil and natural gas-related operations. Hazardous substances, wastes, or hydrocarbons may have been released on or under the properties owned or leased by us, or on or under other locations where such substances have been taken for recycling or disposal. In addition, some of these properties have been operated by third parties or by previous owners whose treatment and disposal or release of hazardous substances, wastes, or hydrocarbons, was not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes and remediate contaminated property (including groundwater contamination), including instances where the prior owner or operator caused the contamination, or perform remedial plugging of disposal wells or waste pit closure operations to prevent future contamination. +Water Discharges and Discharges into Belowground Formations +The Federal Water Pollution Control Act, also known as the Clean Water Act (“CWA”) and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and hazardous substances, into state waters and waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Spill prevention, control and countermeasure plan requirements imposed under the CWA require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. The CWA also prohibits the discharge of dredge and fill material in regulated waters, including wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers (“Corps”). The CWA and analogous state laws also may impose substantial civil and criminal penalties for non-compliance including spills and other non-authorized discharges. +In 2015, the EPA and the Corps under the Obama Administration published a final rule outlining their position on federal jurisdictional reach over waters of the United States, including wetlands. In 2017, the EPA and the Corps under the Trump Administration agreed to reconsider the 2015 rule and, thereafter, on October 22, 2019, the agencies published a final rule made effective on December 23, 2019, rescinding the 2015 rule. On January 23, 2020, the two agencies issued a final rule re-defining the CWA's jurisdiction over waters of the United States, which redefinition is narrower than found in the 2015 rule. Upon being published in the Federal Register and the passage of 60 days thereafter, the January 23, 2020 final rule will become effective, at which point the United States will be covered under a single regulatory scheme as it relates to federal jurisdictional reach over waters of the United States. However, there remains the expectation that the January 23, 2020 final rule also will be legally challenged in federal district court. To the extent that any challenge to the January 23, 2020 final rule is successful and the 2015 rule or a revised rule expands the scope of the CWA's jurisdiction in areas where we or our oil and natural gas exploration and production customers conduct operations, we or our customers could incur increased costs and our customers could incur delays or cancellations in permitting or projects, which could reduce demand for our products and services. +The Oil Pollution Act of 1990 (“OPA”) amends the CWA and sets minimum standards for prevention, containment and cleanup of oil spills. OPA applies to vessels, offshore facilities, and onshore facilities, including exploration and production facilities that may affect waters of the United States. Under OPA, responsible parties including owners and operators of onshore facilities may be held strictly liable for oil cleanup costs and natural resource damages as well as a variety of public and private damages that may result from oil spills. The OPA also requires owners or operators of certain onshore facilities to prepare facility response plans for responding to a worst-case discharge of oil into waters of the United States. +Our oil and natural gas producing customers dispose of flowback and produced water or certain other oilfield fluids gathered from oil and natural gas producing operations in accordance with permits issued by government authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are +10 +Table of Contents +subject to change based on concerns of the public or governmental authorities regarding such disposal activities. One such concern relates to seismic events near underground disposal wells used for the disposal by injection of flowback and produced water or certain other oilfield fluids resulting from oil and natural gas activities. In 2016, the United States Geological Survey identified six states with more significant rates of induced seismicity that could be attributed to injection of oilfield fluids into underground disposal wells, including Oklahoma, Kansas, Texas, Colorado, New Mexico, and Arkansas. Since that time, the United States Geological Survey indicates that these rates have decreased in these states, although concern continues to exist over quakes arising from induced seismic activities. In response to concerns between use of underground disposal wells and the occurrence of seismic events, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Texas and Oklahoma have issued rules for produced water disposal wells that impose certain permitting restrictions, operating restrictions and/or reporting requirements on disposal wells in proximity to faults. Additionally, from time to time, states may develop and implement plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations, as has occurred in Oklahoma. For example, in late 2016, the Oil and Gas Conservation Division of the Oklahoma Corporation Commission (“OCC”) and the Oklahoma Geological Survey released well completion seismicity guidance, which requires operators to take certain prescriptive actions, including an operator’s planned mitigation practices, following certain unusual seismic activity within 1.25 miles of hydraulic fracturing operations. In recent years the OCC’s Oil and Gas Conservation Division has issued orders limiting future increases in the volume of oil and natural gas produced water injected belowground into the Arbuckle formation in an effort to reduce the number of earthquakes in the state. Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. These developments could result in additional regulation and restrictions on the use of injection wells by our customers to dispose of flowback and produced water and certain other oilfield fluids. Increased regulation and attention given to seismicity events suspected of having been induced by injection of oilfield fluids into underground disposal wells also could lead to greater opposition to, and litigation concerning, oil and natural gas activities utilizing injection wells for waste disposal. Any of these developments may result in our customers having to limit disposal well volumes, disposal rates or locations, or require our customers or third party disposal well operators that are used to dispose of customer produced water to shut down disposal wells, which developments could adversely affect our customers’ business and result in a corresponding decrease in the need for our services, which would could have a material adverse effect on our business, financial condition, and results of operations. +Air Emissions +Certain of our operations also result in emissions of regulated air pollutants. The federal Clean Air Act (“CAA”) and analogous state and local laws require permits for certain facilities that have the potential to emit substances into the atmosphere that could adversely affect environmental quality. These laws and their implementing regulations also impose generally applicable limitations on air emissions and require adherence to maintenance, work practice, reporting and record keeping, and other requirements. Failure to obtain a permit or to comply with permit or other regulatory requirements could result in the imposition of sanctions, including administrative, civil and criminal penalties. In addition, we or our customers could be required to shut down or retrofit existing equipment, leading to additional expenses and operational delays. +Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards, are expected to be made more stringent over time as a result of stricter ambient air quality standards and other air quality protection goals adopted by the EPA. Compliance with these or other new or amended regulations could, among other things, require installation of new emission controls on some of our equipment, result in longer permitting timelines, and significantly increase our capital expenditures and operating costs, which could adversely impact on our business. For example, in 2015, the EPA lowered the National Ambient Air Quality Standard, (“NAAQS”) for ozone from 75 to 70 parts per billion for both the 8-hour primary and secondary standards. Since that time, the EPA issued area designations with respect to ground-level ozone and final requirements that apply to state, local, and tribal air agencies for implementing the 2015 NAAQS for ground-level ozone. Reclassification of areas or imposition of more stringent standards may make it more difficult to construct new or modified sources of air pollution in newly designated non-attainment areas. Additionally, states are expected to implement more stringent requirements as a result of the revised NAAQS for ozone, which could result in stricter permitting requirements, delay or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant. Compliance with this and other air pollution control and permitting requirements has the potential to delay the development of oil and natural gas projects and increase costs for us and our customers. Moreover, our business could be materially affected if our customers’ operations are significantly affected by these or other similar requirements. These requirements could increase the cost of doing business for us and our customers, reduce the demand for the oil and natural gas our customers produce, and thus have an adverse effect on the demand for our services. +11 +Table of Contents +Climate Change +Climate change continues to attract considerable public, governmental and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of greenhouse gases (“GHGs”) as well as to restrict or eliminate such future emissions. As a result, our operations as well as the operations of our customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs. +The U.S. Congress (“Congress”) and the EPA, in addition to some state and regional efforts, have in recent years considered legislation or regulations to reduce emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. In the absence of federal GHG-limiting legislations, the EPA has determined that GHG emissions present a danger to public health and the environment and has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources, implement CAA emission standards directing the reduction of methane from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the DOT, implement GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, there exists the United Nations-sponsored “Paris Agreement,” which is a non-binding agreement for nations to limit their GHG emissions through individually-determined reduction goals every five years after 2020, although the United States has announced its withdrawal from such agreement, effective November 4, 2020. +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, in the form of pledges made by certain candidates seeking the office of the President of the United States in 2020. Critical declarations made by one or more presidential candidates include proposals to ban hydraulic fracturing of oil and natural gas wells and ban new leases for production of minerals on federal properties. Other actions to limit oil and natural gas production activities that could be pursued by presidential candidates may include more restrictive requirements for the establishment of pipeline infrastructure or the permitting of liquified natural gas export facilities, as well as the rescission of the United States’ withdrawal from the Paris Agreement in November 2020. Litigation risks are also increasing, as a number of cities, local governments, and other plaintiffs have sought to bring suit against the largest oil and natural gas E&P companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore are responsible for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts. +There are also increasing financial risks for fossil fuel producers, as stockholders and bondholders currently invested in fossil fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related sectors. Institutional investors who provide financing to fossil fuel energy companies also have become more attentive to sustainability lending practices and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending and investment practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change not to provide funding for fossil fuel producers. Limitation of investments in and financings for fossil fuel energy could result in the restriction, delay, or cancellation of drilling programs or development of production activities. +The adoption and implementation of any international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for oil and natural gas, which could reduce demand for our products and services. Additionally, political, litigation, and financial risks may result in our oil and natural gas customers restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or impairing their ability to continue to operate in an economic manner, which also could reduce demand for our products and services. One or more of these developments could have a material adverse effect on our business, financial condition and results of operation. Finally, increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our operations. +12 +Table of Contents +Endangered Species +The federal Endangered Species Act (“ESA”) restricts activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migratory birds under the federal Migratory Bird Treaty Act (“MBTA”). Customer oil and natural gas operations may be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife, which may limit their ability to operate in protected areas. Permanent restrictions imposed to protect endangered and threatened species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. Moreover, the U.S. Fish and Wildlife Service (“FWS”) may make determinations on the listing of species as endangered or threatened under the ESA and litigation with respect to the listing or non-listing of certain species as endangered or threatened may result in more fulsome protections for non-protected or lesser-protected species. For example, in 2015, the FWS decided to list the northern long-eared bat, whose range covers more than two-thirds of the states in the eastern and north-central regions of the U.S., as threatened rather than the more protective designation, endangered. However, a federal court decision issued in January 2020 found that the FWS failed to conduct a sufficient analysis that could have resulted in the bat being declared as endangered and the court remanded the listing decision to the FWS for a new determination on the species’ protected status. Current ESA listings and the designation of previously unprotected species or re-designation of lesser-protected species as threatened or endangered in areas where we or our customers operate could cause us or our customers to incur increased costs arising from species protection or mitigation measures and could result in restrictions, delays or cancellations in our or our customers’ performance of operations, which could adversely affect or reduce demand for our services. +Hydraulic Fracturing +We perform hydraulic fracturing services for our customers. Hydraulic fracturing is an important and common practice that is used to stimulate production of natural gas and/or oil from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppant and chemical additives under pressure into the formation to fracture the surrounding rock and stimulate production. +Hydraulic fracturing typically is regulated by state oil and natural gas commissions or similar agencies, but the EPA has conducted investigations or asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act (“SDWA”) Underground Injection Control (“UIC”) program over certain aspects of the process. For example, in late 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances. Additionally, the EPA has asserted regulatory authority under the SDWA UIC program over hydraulic fracturing activities involving the use of diesel fuel and issued permitting guidance covering such activities, as well as published an Advanced Notice of Proposed Rulemaking regarding Toxic Substances Control Act reporting of the chemical substances and mixtures used in hydraulic fracturing. The EPA also published final CAA regulations in 2012 and 2016 governing performance standards, including standards for the capture of emissions of methane and volatile organic compounds (“VOCs”) released during oil and natural gas hydraulic fracturing. However, in September 2019, the EPA proposed an amendment to the methane and VOC standards that would remove the methane-specific requirements that currently apply in favor of relying on the emission limits for VOCs. Moreover, in 2016, the EPA published an effluent limit guideline final rule prohibiting the discharge of produced water from onshore unconventional oil and natural gas extraction facilities to publicly owned wastewater treatment plants. The BLM published a final rule in 2015 that imposed new or more stringent standards for performing hydraulic fracturing on federal and Native American lands but the BLM rescinded the 2015 rule in later 2017; however, litigation challenging the BLM’s decisions to rescind the 2015 rule remains pending in federal district court. +From time to time, legislation has been introduced, but not enacted, in Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. However, concern over the threat of climate change has resulted in the making of pledges by certain candidates seeking the office of the President of the United States in 2020 to ban hydraulic fracturing of oil and natural gas wells. Additionally, presidential candidate Senator Bernie Sanders (D-VT) introduced a bill in the Senate on January 28, 2020 that, if enacted as proposed, would ban hydraulic fracturing nationwide by 2025. +Additionally, various state and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permit requirements, operational restrictions, disclosure requirements, well construction and temporary or permanent bans on hydraulic fracturing in certain areas. For example, Texas, Colorado and North Dakota, among others, have adopted regulations that impose new or more stringent permitting, disclosure, disposal, and well construction requirements on hydraulic fracturing operations. In April 2019, the Governor of Colorado signed Senate Bill 19-181 (“SB 181”) into law, which legislation, among other things, revises the mission of the state oil and gas agency from fostering energy development in the state to instead focusing on regulating the industry in a manner that is protective of public health and safety and the environment, as well as authorizing cities and counties to regulate oil and natural gas operations, +13 +Table of Contents +including hydraulic fracturing activities, within their jurisdiction. States could also elect to place certain prohibitions on hydraulic fracturing, following the approach taken by the States of Maryland, New York and Vermont. Local land use restrictions, such as city ordinances, may restrict drilling in general and/or hydraulic fracturing in particular. Also, non-governmental organizations may seek to restrict hydraulic fracturing; notwithstanding the adoption of Colorado SB 181 in 2019, one or more interest groups have already filed new ballot initiatives with the state in January 2020, in hopes of extending drilling setbacks from oil and natural gas development. +If new federal, state or local laws, regulations, presidential executive orders or ballot initiatives that significantly restrict or ban some or all of hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling and injection activities and prohibit or make it more difficult or costly to perform hydraulic fracturing. Any such laws, regulations or ballot initiatives limiting or prohibiting hydraulic fracturing could result in decreased oil and natural gas exploration and production activities and, therefore, adversely affect demand for our services and our business. Such laws, regulations, presidential executive orders or ballot initiatives could also materially increase our costs of compliance and doing business as well as result in decreased oil and natural gas activities and, therefore, adversely affect demand for our products and services. +Available Information +We file or furnish annual, quarterly and current reports, proxy statements and other documents with the U.S Security and Exchange Commission (the “SEC”) under the Exchange Act. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. +Our Class A Common Stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “LBRT.” Our reports, proxy statements and other information filed with the SEC can also be inspected and copied at the offices of the NYSE, at 20 Broad Street, New York, New York 10005. +We also make available free of charge through our website, www.libertyfrac.com, electronic copies of certain documents that we file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. +14 +Table of Contents \ No newline at end of file